Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - AmREIT Monthly Income & Growth Fund III LtdFinancial_Report.xls
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltdamreitmigiii115318_ex31-1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltdamreitmigiii115318_ex31-2.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltdamreitmigiii115318_ex32-2.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltdamreitmigiii115318_ex32-1.htm

Table of Contents




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

 

 

 

 

 

 

Form 10-Q

 

 

 


 

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2011

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from _________ to _________

 

 

Commission file number: 000-52619

 

 

 

 

 

 

 

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD.

(Exact Name of Registrant as specified in its charter)


 

 

 

Texas

 

20-2964630

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

8 Greenway Plaza, Suite 1000
Houston, TX

 

77046

(Address of principal executive offices)

 

(Zip Code)

(713) 850-1400
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 

 

 

 

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x



TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

PAGE

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

ITEM 1.

FINANCIAL STATEMENTS.

 

1

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

15

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

19

 

ITEM 4.

CONTROLS AND PROCEDURES.

 

19

PART II - OTHER INFORMATION

 

 

 

ITEM 6.

EXHIBITS.

 

20

SIGNATURES

 

21

EXHIBIT INDEX

 

22



Table of Contents



PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2011 and December 31, 2010
(in thousands, except for unit data)

 

 

 

 

 

 

 

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Real estate investments at cost:

 

 

 

 

 

 

 

Land

 

$

13,988

 

$

18,446

 

Buildings

 

 

29,856

 

 

47,308

 

Tenant improvements

 

 

798

 

 

957

 

 

 

 

44,642

 

 

66,711

 

Less accumulated depreciation and amortization

 

 

(6,682

)

 

(8,372

)

 

 

 

37,960

 

 

58,339

 

 

 

 

 

 

 

 

 

Investment in non-consolidated entities

 

 

22,919

 

 

22,190

 

Acquired lease intangibles, net

 

 

375

 

 

1,285

 

Net real estate investments

 

 

61,254

 

 

81,814

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

1,984

 

 

2,646

 

Tenant receivables, net

 

 

518

 

 

471

 

Accounts receivable - related party

 

 

69

 

 

163

 

Deferred costs, net

 

 

342

 

 

463

 

Other assets

 

 

364

 

 

642

 

TOTAL ASSETS

 

$

64,531

 

$

86,199

 

 

 

 

 

 

 

 

 

LIABILITIES AND CAPITAL

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Notes payable

 

$

34,567

 

$

50,372

 

Notes payable - related party

 

 

3,194

 

 

2,556

 

Accounts payable and other liabilities

 

 

810

 

 

1,235

 

Accounts payable - related party

 

 

56

 

 

30

 

Acquired below-market lease intangibles, net

 

 

66

 

 

181

 

Security deposits

 

 

134

 

 

164

 

TOTAL LIABILITIES

 

 

38,827

 

 

54,538

 

 

 

 

 

 

 

 

 

Capital:

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

 

 

General partner

 

 

 

 

 

Limited partners, 2,833 units outstanding at September 30, 2011 and December 31, 2010

 

 

25,704

 

 

30,385

 

TOTAL PARTNERS' CAPITAL

 

 

25,704

 

 

30,385

 

 

 

 

 

 

 

 

 

Non-controlling interest

 

 

 

 

1,276

 

TOTAL CAPITAL

 

 

25,704

 

 

31,661

 

TOTAL LIABILITIES AND CAPITAL

 

$

64,531

 

$

86,199

 

See Notes to Consolidated Financial Statements.

1


Table of Contents


AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for unit and per unit data)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income from operating leases

 

$

1,002

 

$

979

 

$

2,857

 

$

3,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

30

 

 

21

 

 

80

 

 

75

 

General and administrative - related party

 

 

91

 

 

121

 

 

256

 

 

334

 

Asset management fees - related party

 

 

111

 

 

154

 

 

376

 

 

463

 

Impairment

 

 

2,096

 

 

 

 

2,096

 

 

 

Property expense

 

 

271

 

 

265

 

 

812

 

 

789

 

Property management fees - related party

 

 

37

 

 

45

 

 

103

 

 

131

 

Legal and professional

 

 

65

 

 

60

 

 

320

 

 

173

 

Depreciation and amortization

 

 

374

 

 

472

 

 

1,112

 

 

1,317

 

Total operating expenses

 

 

3,075

 

 

1,138

 

 

5,155

 

 

3,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(2,073

)

 

(159

)

 

(2,298

)

 

(35

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

2

 

 

3

 

 

5

 

 

7

 

Interest expense

 

 

(586

)

 

(582

)

 

(1,745

)

 

(1,741

)

Equity in losses from non-consolidated entities

 

 

(360

)

 

(558

)

 

(953

)

 

(3,285

)

Margin tax expense

 

 

(18

)

 

 

 

(30

)

 

(16

)

Total other expense

 

 

(962

)

 

(1,137

)

 

(2,723

)

 

(5,035

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

 

(3,035

)

 

(1,296

)

 

(5,021

)

 

(5,070

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from real estate operations

 

 

(6

)

 

(30

)

 

(48

)

 

(69

)

Gain on sale of real estate

 

 

 

 

 

 

1,734

 

 

 

Income (loss) from discontinued operations

 

 

(6

)

 

(30

)

 

1,686

 

 

(69

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(3,041

)

 

(1,326

)

 

(3,335

)

 

(5,139

)

 

Net (income) loss attributable to non-controlling interest

 

 

2

 

 

12

 

 

(675

)

 

27

 

Net loss attributable to partners

 

$

(3,039

)

$

(1,314

)

$

(4,010

)

$

(5,112

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average units outstanding

 

 

2,833

 

 

2,833

 

 

2,833

 

 

2,833

 

Net loss per unit

 

$

(1,072.71

)

$

(463.82

)

$

(1,415.46

)

$

(1,804.45

)

See Notes to Consolidated Financial Statements.

2


Table of Contents



 

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CAPITAL

For the nine months ended September 30, 2011

(in thousands)

(unaudited)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital

 

 

 

 

 

 

 

General Partner

 

Limited Partners

 

Non-controlling
interest

 

Total

 

 

Balance at December 31, 2010

 

$

 

$

30,385

 

$

1,276

 

$

31,661

 

Net loss(1)

 

 

 

 

(4,010

)

 

675

 

 

(3,335

)

Distributions

 

 

 

 

(671

)

 

 

 

(671

)

Distributions to non-controlling interest

 

 

 

 

 

 

(1,951

)

 

(1,951

)

 

Balance at September 30, 2011

 

$

 

$

25,704

 

$

 

$

25,704

 


 

 

 

 

(1)

The allocation of net loss includes a curative allocation to increase the General Partner capital account by $40 for the nine months ended September 30, 2011. The cumulative curative allocation since inception of the Partnership is $362. The Partnership Agreement provides that no Partner shall be required to fund a deficit balance in their capital account.

See Notes to Consolidated Financial Statements.

3


Table of Contents


AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(3,335

)

$

(5,139

)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Impairment

 

 

2,096

 

 

 

Bad debt expense

 

 

8

 

 

154

 

Equity in losses from non-consolidated entities

 

 

953

 

 

3,285

 

Gain on sale of real estate

 

 

(1,734

)

 

 

Depreciation and amortization

 

 

1,224

 

 

1,815

 

Amortization of above- and below-market leases, net

 

 

(30

)

 

(87

)

Amortization of loan acquisition costs

 

 

45

 

 

56

 

Increase in tenant receivables

 

 

(89

)

 

(295

)

(Increase) decrease in accounts receivable - related party

 

 

94

 

 

(29

)

Increase in deferred costs

 

 

(107

)

 

(89

)

Decrease in other assets

 

 

63

 

 

(79

)

Decrease in accounts payable and other liabilities

 

 

(389

)

 

(146

)

Increase in accounts payable - related party

 

 

659

 

 

506

 

(Decrease) increase in security deposits

 

 

(6

)

 

(12

)

Net cash used in operating activities

 

 

(548

)

 

(60

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Improvements to real estate

 

 

(148

)

 

(102

)

Proceeds from property sale

 

 

4,493

 

 

 

Investments in non-consolidated entities

 

 

(1,842

)

 

(424

)

Distributions from non-consolidated entities

 

 

160

 

 

897

 

Net cash provided by (used in) investing activities

 

 

2,663

 

 

371

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments on notes payable

 

 

(130

)

 

(123

)

Proceeds from notes payable - related party

 

 

 

 

400

 

Payments on notes payable - related party

 

 

 

 

(1,400

)

Loan acquisition costs

 

 

(30

)

 

 

Distributions

 

 

(671

)

 

 

Distributions to non-controlling interest

 

 

(1,946

)

 

 

Net cash used in financing activities

 

 

(2,777

)

 

(1,123

)

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(662

)

 

(812

)

Cash and cash equivalents, beginning of period

 

 

2,646

 

 

3,297

 

Cash and cash equivalents, end of period

 

$

1,984

 

$

2,485

 

 

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

1,728

 

$

2,199

 

Taxes

 

$

91

 

$

39

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Net proceeds from sale of investment property

 

 

 

 

 

 

 

Land

 

$

3,808

 

$

 

Building and tenant improvements, net of accumulated depreciation

 

 

13,594

 

 

 

Receivables

 

 

34

 

 

 

Acquired lease intangibles, net

 

 

746

 

 

 

Deferred costs and other assets

 

 

374

 

 

 

Notes Payable

 

 

(15,675

)

 

 

Acquired below-market lease intangibles and other liabilities

 

 

(122

)

 

 

Gain on sale of real estate

 

 

1,734

 

 

 

 

 

$

4,493

 

$

 

During 2011, $638,000 in accounts payable - related party was reclassified to notes payable - related party.

During 2011, we reclassified $5,000 from non-controlling interest to accounts payable - related party. This represents the final distribution to be made to the non-controlling interest in our Market at Lake Houston property for the sale of the Market at Lake Houston property.

See Notes to Consolidated Financial Statements.

4


Table of Contents


AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011
(unaudited)

 

1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

AmREIT Monthly Income & Growth Fund III, Ltd., a Texas limited partnership (hereinafter referred to as the “Partnership,” “MIG III,” “we,” “us” or “our”), was formed on April 19, 2005 to acquire, develop and operate, directly or indirectly through joint venture arrangements, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use developments. The general partner of the Partnership is AmREIT Monthly Income & Growth III Corporation, a Texas corporation (the “General Partner”), which is a wholly-owned subsidiary of AmREIT, Inc., a Securities and Exchange Commission (“SEC”) reporting, non-traded Maryland corporation that has elected to be taxed as a real estate investment trust (“AmREIT”). The General Partner maintains its principal place of business in Houston, Texas.

As of September 30, 2011, our investments included three wholly-owned properties comprising approximately 225,000 square feet of gross leasable area and seven properties in which we own a non-controlling interest through joint ventures comprising approximately 1,142,000 square feet of gross leasable area.

The U.S. economy is still experiencing weakness from recent economic conditions, which resulted in increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit markets. Our results of operations may be sensitive to changes in overall economic conditions that impact tenant leasing practices. Adverse economic conditions affecting tenant income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters, could reduce overall tenant leasing or cause tenants to shift their leasing practices. In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, could result in a general decline in rents or an increased incidence of defaults under existing leases. Recently, high levels of unemployment have persisted, and rental rates and valuations for retail space have not fully recovered to pre-recession levels and may not for a number of years. It is difficult to determine the breadth and duration of the financial market problems and the many ways in which they may affect our tenants and our business in general. A significant additional deterioration in the U.S. economy or the bankruptcy or insolvency of one or more of our significant tenants could cause our current plans to meet our projected cash shortfalls as discussed below to be insufficient.

Further, recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. Although U.S. lawmakers passed legislation to raise the federal debt ceiling, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States (the “U.S.”) from “AAA” to “AA+” in August 2011. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, and despite the recent European agreement intended to help resolve the Euro crisis, the impact of the current crisis in Europe with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations is inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. These developments and the government’s credit concerns in general, could cause interest rates and borrowing costs to rise, which may further negatively impact our ability to access the debt markets.

Projected cash sources (including cash on hand) and uses for the Partnership indicate periods of cash shortfalls during the year ended December 31, 2011. However, we believe that we will be able to generate sufficient liquidity to satisfy any cash shortfalls through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) deferral of fees paid to our General Partner and its affiliates, (3) financings of unencumbered properties and (4) sales of certain of our investments in non-consolidated entities. No assurance can be given that we will be able to generate such liquidity. In the event that we are unable to generate sufficient liquidity, we may be forced to sell one or more properties at a time when it is disadvantageous to do so, potentially resulting in losses on the disposition of those properties. Based on the foregoing, it is possible that investors may not recover all of their original investment.

5


Table of Contents


In addition, we have significant debt maturing in the fourth quarter 2011. Our Olmos Creek mortgage of $11.2 million matured on November 1, 2011 and remains outstanding as of the date of this report. This debt is non-recourse; however, the lender can take possession of the Olmos Creek property as full settlement of the debt. The lender has not demanded immediate delivery of the property or accelerated payment at this time; however, we have not made progress in our discussions with the lender to refinance or extend the debt. Instead, the lender has communicated to us that they are pursuing a sale of the debt (including the right to the property). The status of current discussions with the lender creates uncertainty in our ability to retain and operate the property. We assessed the Olmos Creek property for impairment and recorded an impairment of $2.1 million in order to reflect it at its estimated fair value. See also Notes 2 and 11.

Effective July 15, 2009, we suspended all distributions in an effort to (1) conserve cash, (2) protect our limited partners’ invested capital, (3) improve our ability to fund capital improvements, tenant improvements and leasing commissions and (4) meet our obligations, including debt service. We currently do not expect to distribute net sales proceeds or any net cash flows from operations to our partners until we enter the liquidation phase, which is scheduled for October 31, 2012. However, we may seek to postpone liquidation if we believe such liquidation is not in the best interests of the partners at that time.

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. The consolidated financial statements include our accounts as well as the accounts of any wholly- or majority-owned subsidiaries in which we have a controlling financial interest. Investments in joint ventures and partnerships where we have the ability to exercise significant influence but do not exercise financial and operating control are accounted for using the equity method (see Note 3). The significant accounting policies of our non-consolidated entities are consistent with those of our subsidiaries in which we have a controlling financial interest. As applicable, we consolidate certain joint ventures and partnerships in which we own less than a 100% equity interest if the entity is a variable interest entity and we are the primary beneficiary as defined by U.S. generally accepted accounting standards (“GAAP”). As of September 30, 2011, we do not have any interests in variable interest entities. All significant inter-company accounts and transactions have been eliminated in consolidation.

The consolidated financial statements included in this Quarterly Report on Form 10-Q (“Report”) have been prepared pursuant to the rules and regulations of the SEC and are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 2010 are derived from our audited financial statements as of that date. In our opinion, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted of normal recurring items. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from these statements pursuant to the SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.

6


Table of Contents


RECEIVABLES AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

Tenant Receivables - Included in tenant receivables are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels and current economic trends. Bad debt expenses and any related recoveries are included in property expense. As of September 30, 2011 and December 31, 2010, our allowance for uncollectible accounts related to our tenant receivables was $440,000 and $448,000, respectively.

Accounts Receivable - Related Party - Included in accounts receivable - related party are short-term cash advances provided to certain of our affiliated investment entities primarily for their working capital needs. These cash advances are due upon demand.

IMPAIRMENT

We review for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through operations. Due to the uncertainty of our future ability to continue to retain and operate our Olmos Creek property (see Note 1), an impairment test was performed on this property. We determined that this property was impaired based upon our estimate of its fair value if sold, which was $9.6 million. Accordingly, we recorded an impairment of approximately $2.1 million. See also “Fair Value Measurements” below.

REAL ESTATE DISPOSITION AND DISCONTINUED OPERATIONS

During the first quarter of 2011, we sold our Market at Lake Houston property to AmREIT. See Note 9 for additional disclosure. This disposed property has been reflected as discontinued operations in the accompanying consolidated statement of operations. The following is a summary of our income (loss) from discontinued real estate operations for the three and nine months ended September 30, 2011 and 2010 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income from operating leases

 

$

 

$

529

 

$

333

 

$

1,592

 

Total revenues

 

 

 

 

529

 

 

333

 

 

1,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

 

 

3

 

 

6

 

 

6

 

Property expense

 

 

 

 

129

 

 

81

 

 

383

 

Property management fees - related party

 

 

 

 

18

 

 

12

 

 

54

 

Legal and professional

 

 

 

 

6

 

 

12

 

 

12

 

Depreciation and amortization

 

 

 

 

168

 

 

112

 

 

501

 

Total operating expenses

 

 

 

 

324

 

 

223

 

 

956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

205

 

 

110

 

 

636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

(235

)

 

(141

)

 

(698

)

Margin tax expense

 

 

(6

)

 

 

 

(17

)

 

(7

)

Total other expense

 

 

(6

)

 

(235

)

 

(158

)

 

(705

)

Loss from real estate operations

 

 

(6

)

 

(30

)

 

(48

)

 

(69

)

Gain on sale of real estate

 

 

 

 

 

 

1,734

 

 

 

Income (loss) from discontinued operations

 

$

(6

)

$

(30

)

$

1,686

 

$

(69

)

7


Table of Contents


INCOME TAXES

No provision for U.S. federal income taxes is included in the accompanying consolidated financial statements. As a partnership, we are not subject to federal income tax, and the federal tax effect of our activities is passed through to our partners.We are, however, subject to taxation under the Texas Margin Tax, which is computed by applying the applicable tax rate (1% for the Partnership) to the profit margin, which, generally, will be determined for us as total revenue less a 30% standard deduction. For the nine months ended September 30, 2011 and 2010, we recorded tax provisions of approximately $30,000 and $16,000, respectively, for the Texas Margin Tax ($17,000 and $7,000, respectively, related to discontinued operations).

FAIR VALUE MEASUREMENTS

GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. GAAP requires the use of observable market data, when available, in making fair value measurements. Observable inputs are inputs that the market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of ours. When market data inputs are unobservable, we utilize inputs that we believe reflect our best estimate of the assumptions market participants would use in pricing the asset or liability. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified that are within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:

 

 

 

 

Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Partnership has the ability to access.

 

 

 

 

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

 

 

 

 

Level 3 Inputs – Unobservable inputs for the asset or liability, which are typically based on the Partnership’s own assumptions, as there is little, if any, related market activity.

Recurring Fair Value Measurements and Financial Instruments - Our consolidated financial instruments consist of cash and cash equivalents, tenant receivables, accounts receivable – related party, notes payable, notes payable – related party, accounts payable – related party, and accounts payable and other liabilities. The carrying values of all of these financial instruments, except for our notes payable, are representative of the fair values due to the short-term nature of the instruments. See Note 5 for fair value disclosures of our notes payable.

Non-Recurring Fair Value Measurements, Impairment – As discussed above, we impaired our Olmos Creek property during the third quarter of 2011. We determined the fair value of the property was approximately $9.6 million. We have determined that this non-recurring fair value measurement falls within Level 3 of the fair value hierarchy.

 

3. INVESTMENT IN NON-CONSOLIDATED ENTITIES

Since inception, we have made the following investments in five entities through which we own an interest in seven properties and account for under the equity method of accounting:

8


Table of Contents



 

 

 

 

In March 2006, we acquired a 50% interest in 5433 Westheimer, LP, which owns an office building with a gross leasable area of 134,000 square feet and a 152-room hotel in Houston, Texas. In November 2008, we acquired an additional 7.5% interest in 5433 Westheimer, LP from our third party, joint-venture partner for $800,000. The remaining 42.5% is owned by that same party. The property is not consolidated into our financial statements as we and our joint venture partner share equally in decision making rights through our equal ownership in the general partner. This property is currently being marketed for sale. We believe the sales proceeds will exceed the $32 million in debt encumbering the real property owned by 5433 Westheimer, LP prior to its maturity on December 31, 2011, and our share of the proceeds will exceed our investment balance. We have guaranteed $16 million of their debt.

 

 

 

 

In December 2006, we acquired a 20% interest in PTC/BSQ Holding Company LLC, which owns three multi-tenant retail properties located in Plano, Texas with a combined gross leasable area of 395,000 square feet. The remaining 80% is owned by an unaffiliated third party. During the second quarter of 2011, we invested $1.8 million (our funding requirement of 20%) in this holding company in order to acquire the vacant anchor building within the Preston Towne Crossing shopping center.

 

 

 

 

In December 2006, we acquired a 50% interest in AmREIT Casa Linda, LP, which owns a multi-tenant retail property located in Dallas, Texas with a combined gross leasable area of 325,000 square feet. The remaining 50% is owned by AmREIT Monthly Income and Growth Fund IV, LP (“MIG IV”), an affiliate of our General Partner.

 

 

 

 

In August 2007, we acquired a 30% interest in AmREIT Woodlake, LP, which owns a multi-tenant retail property located in Houston, Texas with a combined gross leasable area of 206,000 square feet. The remaining 70% interest was held by affiliated AmREIT entities, MIG IV and AmREIT Realty Investment Corporation (“ARIC”). In July 2010, we and our affiliated partners of AmREIT Woodlake, LP entered into a joint venture with a third-party institutional partner wherein the partner acquired a 90% interest in the joint venture. As a result of this transaction, we now hold a 3% interest in Woodlake Square, which carries a promoted interest in profits and cash flows once an 11.65% return is met on the project. We will continue to account for this investment using the equity method given our ability to significantly influence the property’s operations. The joint venture commenced redevelopment of this property in the third quarter of 2010. The redevelopment was completed in April 2011. To date, Woodlake Square has incurred approximately $6.1 million with a total expected cost of approximately $8.2 million including additional tenant improvements and leasing costs.

 

 

 

 

In November 2007, we acquired a 30% interest in AmREIT Westheimer Gessner, LP, which owns Woodlake Pointe, a multi-tenant retail property located in Houston, Texas with a combined gross leasable area of 82,120 square feet. The remaining 70% is owned by affiliated AmREIT entities, MIG IV and ARIC. In May 2008, AmREIT Westheimer Gessner, LP acquired an additional tract of land adjacent to Woodlake Pointe for $1.3 million.

We report our investments in these entities using the equity method of accounting due to our ability to exercise significant influence over them. Combined condensed financial information for our non-consolidated entities is summarized as of and for the three and nine months ended September 30, 2011 and 2010, as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenue

 

$

5,782

 

$

4,662

 

$

16,466

 

$

15,532

 

Depreciation and amortization

 

 

(1,823

)

 

(1,801

)

 

(5,449

)

 

(12,256

)

Interest expense

 

 

(1,522

)

 

(1,137

)

 

(4,615

)

 

(4,460

)

Net loss

 

 

(727

)

 

(1,387

)

 

(2,646

)

 

(9,493

)

9


Table of Contents



 

4. ACQUIRED LEASE INTANGIBLES

In accordance with GAAP, we identified and recorded the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangible assets (in-place leases and above-market leases) are amortized over the leases’ remaining terms, which range from 1 year to 14 years. Acquired lease intangible liabilities (below-market leases) are accreted over the leases’ remaining non-cancelable lease term, plus any fixed-rate renewal options, if any, which range from 1 year to 14 years. The amortization of above (and below) market leases is recorded as a reduction of (increase in) rental income, and the amortization of in-place leases is included in depreciation and amortization expense.

The table below details our acquired in-place and above and below-market lease amounts and their respective accumulated amortization as recoded on our consolidated balance sheets as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

December 31, 2010

 

Acquired lease intangible assets:

 

 

 

 

 

 

 

In-place leases

 

$

2,257

 

$

3,992

 

In-place leases - accumulated amortization

 

 

(1,892

)

 

(2,739

)

Above-market leases

 

 

265

 

 

269

 

Above-market leases - accumulated amortization

 

 

(255

)

 

(237

)

Acquired lease intangibles, net

 

$

375

 

$

1,285

 

 

 

 

 

 

 

 

 

Acquired lease intangible liabilities:

 

 

 

 

 

 

 

Below-market leases

 

$

(532

)

$

(699

)

Below-market leases - accumulated amortization

 

 

466

 

 

518

 

Acquired below-market lease intangibles, net

 

$

(66

)

$

(181

)

The table below details our acquired lease intangible activity for the nine months ended September 30, 2011 and 2010, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

Acquired lease intangible assets:

 

 

 

 

 

 

 

Disposals of in-place leases

 

$

(1,735

)

$

 

Amortization of in-place leases

 

 

(142

)

 

(386

)

Disposals of accumulated amortization of in-place leases

 

 

989

 

 

 

Disposals of above-market leases

 

 

(4

)

 

 

Amortization of above-market leases

 

 

(22

)

 

(36

)

Disposals of accumulated amortization of above-market leases

 

 

4

 

 

 

 

 

 

 

 

 

 

 

Acquired lease intangible liabilities:

 

 

 

 

 

 

 

Accretion of below-market leases

 

$

52

 

$

123

 

Disposals of below-market leases

 

 

167

 

 

 

Disposals of accumulatd amortization of below-market leases

 

 

(104

)

 

 

10


Table of Contents



 

5. NOTES PAYABLE

Our outstanding debt at September 30, 2011 and December 31, 2010 consisted entirely of fixed-rate mortgage loans of approximately $34.6 million and $50.4 million, respectively. Our mortgage loans are secured by our real estate properties and may be prepaid, but could be subject to a yield-maintenance premium or prepayment penalty. Mortgage loans are generally due in monthly installments of interest and principal and our mortgages mature over various terms ranging from December 2011 through June 2015. As of September 30, 2011, the weighted-average interest rate on our fixed-rate debt was 6%, and the weighted average remaining life of such debt was 1.1 years.

As of September 30, 2011, scheduled principal repayments on notes payable were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Scheduled

 

 

 

 

 

 

 

 

 

Principal

 

Term-Loan

 

Total

 

Scheduled Payments by Year

 

Payments

 

Maturities

 

Payments

 

2011

 

$

45

 

$

24,615

(1)

$

24,660

 

2012

 

 

183

 

 

 

 

183

 

2013

 

 

196

 

 

 

 

196

 

2014

 

 

207

 

 

 

 

207

 

2015

 

 

92

 

 

9,229

 

 

9,321

 

Thereafter

 

 

 

 

 

 

 

Total

 

$

723

 

$

33,844

 

$

34,567

 


 

 

 

 

(1)

Included is the $13.4 million in Lantern Lane debt that was refinanced in October 2011. The remaining $11.2 million represents the debt on our Olmos Creek property that matured unpaid on November 1, 2011. See Note 11.

We serve as guarantor on debt in the amount of $36.9 million that is the primary obligation of our non-consolidated joint ventures. This debt matures in 2013 and 2014. We have not accrued any liability with respect to these guarantees as we believe it is unlikely we would be required to perform and, therefore, the fair value of any obligation would be insignificant.

Notes Payable – Related Party – As of September 30, 2011 and December 31, 2010, the balance of notes payable – related party was $3.2 million and $2.6 million, respectively. Of the balance as of September 30, 2011, $1.7 million accrues interest monthly at LIBOR plus a spread of 4.0% with a floor of 7.0%, and the remaining amount accrues interest monthly at LIBOR plus a spread of 3.875% with a floor of 5.375%. The notes are due on demand and are secured by our investment interests in the Woodlake Pointe and Woodlake Square properties. As part of our repayment and refinance of our Lantern Lane debt, we borrowed an additional $1.5 million from AmREIT, Inc. in October 2011. See Note 11 for more information.

Fair Value of Notes Payable – We record our debt instruments based on contractual terms, net of any applicable premium or discount on our consolidated balance sheet. We did not elect to apply the alternative GAAP provisions of the fair value option for recording financial assets and financial liabilities. In determining the fair value of our debt instruments, we determine the appropriate treasury bill rate based on the remaining time to maturity for each of the debt instruments. We then add the appropriate yield spread to the treasury bill rate. The yield spread is a risk premium estimated by investors to account for credit risk involved in debt financing. The spread is typically estimated based on the property type and loan-to-value ratio of the debt instrument. The result is an estimate of the market interest rate a typical investor would expect to receive given the underlying subject asset (property type) and remaining time to maturity. We believe the fair value of our notes payable is classified in Level 2 of the fair value hierarchy. Based on these estimates, the fair value of notes payable was $35.7 million and $52.0 million at September 30, 2011 and December 31, 2010, respectively.

See also Note 11 regarding the October 2011 refinance of our Lantern Lane debt and our current plans with respect to our Olmos Creek debt, which matured unpaid on November 1, 2011.

11


Table of Contents


6. CONCENTRATIONS

As of September 30, 2011 and December 31, 2010, each of our three consolidated properties individually comprised greater than 10% of our consolidated total assets. Consistent with our strategy of investing in geographic areas that we know well, two of our three properties are located in the Houston metropolitan area. These Houston properties represent 72% and 73% of our rental income for the nine months ended September 30, 2011 and 2010, respectively. Houston is Texas’ largest city and the fourth largest city in the United States.

The following details our base rents generated by our top five tenants during the three and nine months ended September 30, 2011 and 2010 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

Tenant

 

 

2011

 

2010

 

2011

 

2010

 

H-E-B(1)

 

$

79

 

$

356

 

$

409

 

$

1,069

 

Trend Mall

 

 

95

 

 

 

 

234

 

 

 

Rice Food Markets, Inc.

 

 

73

 

 

73

 

 

219

 

 

219

 

Fidelity Investments

 

 

46

 

 

46

 

 

139

 

 

147

 

Fadis Mediterranean Delight, Inc.

 

 

33

 

 

33

 

 

98

 

 

98

 

 

 

$

326

 

$

508

 

$

1,099

 

$

1,533

 


 

 

 

 

(1)

H-E-B, a regional grocer, is the anchor tenant on our Olmos Creek property and was the anchor tenant on our Market at Lake Houston property. We sold our Market at Lake Houston property in February 2011 to AmREIT. The H-E-B on the Market at Lake Houston property accounted for $172,000 and $832,000 in base rents for the nine months ended September 30, 2011and 2010, respectively.


 

7. PARTNERS’ CAPITAL AND NON-CONTROLLING INTEREST

Redemptions — Limited partners who have held their units of limited partnership interest (“Units”) for at least three years may receive the benefit of interim liquidity by presenting all of those Units to the Partnership for redemption. At that time, we may, at our sole election and subject to the conditions and limitations described below, redeem the Units presented for cash to the extent that we have sufficient funds available to us to fund such redemption. The redemption price to be paid will be 92% of the limited partner’s unreturned invested capital. At no time during a 12-month period, however, may the number of Units redeemed by us exceed 2% of the number of Units outstanding at the beginning of that 12-month period. We suspended the optional redemption program during the second quarter of 2009 due to macroeconomic conditions and the need to preserve cash. During the nine months ended September 30, 2011, we received one redemption request in the amount of $30,000, which was denied. During the nine months ended September 30, 2010, we did not receive any redemption requests.

Distributions —We suspended all distribution payments in July 2009 and do not anticipate reinstating distributions until improvements in the real estate and liquidity markets warrant such payment. In March 2011, we made a distribution to our partners for $671,000, which was related to and funded by proceeds received from the sale of the Market at Lake Houston property. All distributions to date have been a return of capital, and the source of such distributions has been cash flows from operations and investing activities as well as our capital raising activities. During the liquidation stage of the Partnership (anticipated to commence in October 2012, unless extended), net cash flow, as defined, will be distributed among the limited partners and the General Partner in the following manner:

 

 

 

 

First - 99% to the limited partners and 1% to the General Partner until such time as the limited partners have received cumulative distributions from all sources (including monthly cash distributions during the operating stage of the Partnership) equal to 100% of their unreturned invested capital plus an amount equal to 10% per annum uncompounded on their invested capital;

12


Table of Contents



 

 

 

 

Second - 100% to the General Partner until it has received cumulative distributions from all sources (other than with respect to its limited partner Units it purchased) in an amount equal to 40% of the net cash flow paid to date to the limited partners in excess of their adjusted capital; and

 

 

 

 

Thereafter - 60% to the limited partners and 40% to the General Partner.

Non-controlling Interest — Non-controlling interest includes a 40% ownership interest that one of our affiliate investment funds had in our Market at Lake Houston property that we consolidated as a result of our 60% controlling financial interest in such partnership. On February 25, 2011, we sold the Market at Lake Houston property to AmREIT. See Note 9 for a discussion of the sale of our Market at Lake Houston property.

 

8. RELATED PARTY TRANSACTIONS

Certain of our affiliates received fees and compensation during the organizational stage of the Partnership, including securities commissions and due diligence reimbursements, marketing reimbursements and reimbursement of organizational and offering expenses. Certain of these affiliates also receive fees for ongoing property management and administrative services. In the event that these companies are unable to provide us with these services, we would be required to find alternative providers of these services. The following table summarizes the amount of such compensation paid to our affiliates during the three and nine months ended September 30, 2011 and 2010 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

Type of service

 

 

2011

 

2010

 

2011

 

2010

 

Asset management fees

 

$

111

 

$

154

 

$

376

 

$

463

 

Property management fees and leasing costs

 

 

47

 

 

76

 

 

219

 

 

275

 

Administrative costs reimbursements

 

 

91

 

 

121

 

 

256

 

 

334

 

 

 

$

249

 

$

351

 

$

851

 

$

1,072

 

In addition to the above fees paid by us, the non-consolidated entities in which we have investments pay property management and leasing fees to one of our affiliated entities. During the nine months ended September 30, 2011 and 2010, such fees totaled $902,000 and $498,000, respectively. For more information, see Note 3 regarding investments in non-consolidated entities.

See Note 9 for a discussion of the sale of our Market at Lake Houston property to AmREIT on February 25, 2011.

 

9. REAL ESTATE DISPOSITIONS

On February 25, 2011, we sold the Market at Lake Houston property to AmREIT, which generated net proceeds of $4.5 million and resulted in a gain of $1.7 million. In conjunction with the sale, we extinguished outstanding debt in the amount of $15.7 million that was secured by the property. This property was owned 60% by the Partnership and 40% by another fund whose general partner is also a subsidiary of AmREIT. The transaction was completed pursuant to an independent appraisal process.

 

10. COMMITMENTS AND CONTINGENCIES

As the owner or operator of real property, we may incur liability based on various property conditions and may be subject to liability for personal injury or property damage sustained as a result. In addition, we are subject to ongoing compliance requirements imposed on us by environmental laws.

We are involved in various matters of litigation arising in the normal course of business; however, we believe that we maintain comprehensive, general liability and extended insurance coverage as deemed necessary with respect to our properties. Except as further discussed below, we believe that no estimate of loss or range of loss, if any, can be made at this time for such matters; however, our management, based in part upon consultation with legal counsel, is of the opinion that, when such litigation is resolved, any liability in excess of amounts covered by insurance or already included in our consolidated financial statements, if any, will not have a material effect on our consolidated financial statements.

13


Table of Contents


In conjunction with our acquisition of the Lantern Lane shopping center in September 2006, we identified an environmental exposure caused by a dry cleaning business that operated on the property prior to our ownership. Our agreement with the seller provided that, if the seller could not provide satisfactory evidence that they performed appropriate remediation, we could reduce our note payable to them by the lesser of the actual costs to remediate or $1.0 million. We subsequently repaid this note and released the seller from their indemnification as described in Note 11 below. Based on the results of an environmental study conducted on the property, we have not recorded a separate liability for this exposure as we believe that the likelihood of a material obligation arising from the exposure is remote. In the event we are required to fund any remediation, such amount would be substantially covered by insurance.

We believe that the above matter will not have an adverse effect on our consolidated financial position or results of operations, and we are aware of no other environmental exposures. However, we can give no assurance that existing environmental studies with respect to the shopping centers have revealed all potential environmental liabilities; that any previous owner, occupant or tenant did not create any material environmental condition not known to it; that the current environmental condition of the shopping centers will not be affected by tenants and occupants, by the condition of nearby properties or by unrelated third parties; or that changes in applicable environmental laws and regulations or their interpretation will not result in additional environmental liability to the Partnership.

 

11. SUBSEQUENT EVENTS

Refinance of our Lantern Lane Debt

On October 7, 2011, we entered into a $12.8 million secured term loan with a lender. The proceeds received from the loan, along with cash on hand and approximately $1.5 million borrowed from AmREIT, Inc., were used to repay the $13.4 million mortgage on the Lantern Lane property to its seller that matured in September 2011. In connection with the payoff of the note payable owed to the seller and the potential environmental exposure at the Lantern Lane property (see Note 10 above), the seller has been released from their indemnification to us of $1.0 million in remediation costs. We have procured an insurance policy with a $10 million limit and a $50,000 deductible, which covers known environmental conditions.

The loan requires interest only payments until maturity on April 7, 2013 and bears interest at the one-month LIBOR rate plus 3.00%. We may extend the maturity date by twelve months upon meeting certain criteria. The loan’s financial covenants require us to maintain liquid assets of at least $1.0 million and a net worth of at least $25.0 million. We have guaranteed up to $3.2 million of the principal amount of the loan and accrued and unpaid interest.

Maturity of Olmos Creek Debt

Our Olmos Creek mortgage of $11.2 million matured on November 1, 2011 and remains outstanding as of the date of this report. This debt is non-recourse to us; however, the lender can take possession of the Olmos Creek property as full settlement of the debt. See also Note 2 regarding impairment of our Olmos Creek property. In the event the lender takes possession of the Olmos Creek property as full settlement of the debt, we would expect to record a gain on extinguishment of debt of approximately $1.6 million.

14


Table of Contents


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

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

Certain information presented in this Report constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include the following: changes in general economic conditions, changes in real estate market conditions, continued availability of proceeds from our debt or equity capital, our ability to locate suitable tenants for our properties, the ability of tenants to make payments under their respective leases, timing of acquisitions, development starts and sales of properties, the ability to meet development schedules and other risks, uncertainties and assumptions. Any forward-looking statement speaks only as of the date on which it was made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operation results over time.

Overview

We are a Texas limited partnership formed on April 19, 2005 to acquire, develop and operate, directly or indirectly through joint venture or other arrangements, commercial retail real estate consisting of single-tenant and multi-tenant properties net leased to investment grade and other creditworthy tenants throughout the United States. We focus on properties characterized by high automobile traffic counts, high populations, high household incomes and limited opportunities for competition.

We have no employees and are managed by AmREIT Monthly & Income III Corporation, our General Partner, pursuant to our Partnership Agreement. Our General Partner is a wholly-owned subsidiary of AmREIT. We qualify as a partnership for federal income tax purposes. Our Units were sold pursuant to exemptions from registration under the Securities Act of 1933, as amended (“Securities Act”), and are not currently listed on a national securities exchange. These Units will be transferable only if we register them under applicable securities laws (such registration is not expected) or pursuant to an exemption under the Securities Act and applicable state securities laws. We do not anticipate that any public market for the Units will develop.

On February 25, 2011, we sold the Market at Lake Houston property to AmREIT, which generated net proceeds of $4.5 million and resulted in a gain of $1.7 million. In conjunction with the sale, we extinguished outstanding debt in the amount of $15.7 million that was secured by the property. This property was owned 60% by the Partnership and 40% by another fund whose general partner is also a wholly-owned subsidiary of AmREIT. The transaction was completed at fair market value pursuant to an independent appraisal process. Prior to commencing the independent appraisal process, we and AmREIT also voluntarily solicited the approval of the transaction by our limited partners. In addition, two separate committees were appointed by AmREIT’s board of directors to represent the interests of the selling partnerships and the interests of AmREIT. Each committee contained three independent directors from AmREIT’s board of directors and was led by an independent director with substantial expertise in valuing commercial real estate. Each committee engaged its own independent nationally known appraiser. If the two appraised values were within five percent of each other, the market value of the property would be deemed to be the median of the two appraisals. If the two appraisals were more than five percent apart, a third appraiser would be appointed by the two existing appraisers. Approximately 57% of our limited partners voted, of which, 98% voted in favor of the sale. As a result of this process, we sold the property for a total $20.1 million. See Note 3 to our accompanying consolidated financial statements for a discussion of our investment activity with respect to our non-consolidated entities.

15


Table of Contents


As of September 30, 2011, our investments include three wholly-owned properties comprising approximately 225,000 square feet of gross leasable area and seven properties in which we own a non-controlling interest through joint ventures comprising approximately 1,142,000 square feet of gross leasable area. All of our properties are located in Texas, the majority of which are located in highly-populated, suburban communities. We derive a substantial portion of our revenue from rental income from these properties, primarily from net leasing arrangements, where most of the operating expenses of the properties are absorbed by our tenants. As a result, our operating results and cash flows are primarily influenced by rental income from our properties and interest expense on our property acquisition indebtedness. Rental income accounted for 100% of our total revenue during the nine months ended September 30, 2011 and 2010. As of September 30, 2011, our properties, including our non-consolidated investments, had an average occupancy rate of approximately 79%, and the average debt leverage ratio of the properties in which we have an investment interest was approximately 65%, with 67% of such debt carrying a fixed rate of interest.

Results of Operations

Below is a discussion of our results of operations for the three months and nine months ended September 30, 2011, as compared to the same periods in 2010. For purposes of comparing our results for the periods presented below, the operating results from the Market of Lake Houston have been presented separately as discontinued operations.

Comparison of Three Months Ended September 30, 2011 to the Three Months Ended September 30, 2010

Revenue. Our revenue remained comparable at approximately $1.0 million for the three months ended September 30, 2011 compared to the same period in 2010.

General and administrative – related party. General and administrative – related party decreased approximately $30,000 during the three months ended September 30, 2011 as compared to the same period in 2010 ($91,000 in 2011 versus $121,000 in 2010). This decrease was primarily due to a lower allocation of administrative costs to reflect a reduction of administrative time and resources incurred by AmREIT on behalf of the Partnership.

Asset management fees – related party. Asset management fees – related party decreased approximately $43,000 during the three months ended September 30, 2011 as compared to the same period in 2010 ($111,000 in 2011 versus $154,000 in 2010). Our asset management fees are calculated based upon the net value of our assets, which has decreased between the 2010 and 2011 periods.

Impairment. As discussed further in Note 2 to our accompanying consolidated financial statements, we recorded a $2.1 million impairment on our Olmos Creek property as of September 30, 2011 with no impairment during the comparable period in 2010.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased approximately $98,000 during the three months ended September 30, 2011 as compared to the same period in 2010 ($374,000 in 2011 versus $472,000 in 2010). This decrease was primarily due to a decrease in amortization of in-place leases as a substantial portion of those costs became fully amortized during the first quarter of 2011 or were written off due to tenant vacancies.

Equity in Losses From Non-Consolidated Entities. Equity in losses from non-consolidated entities decreased approximately $198,000 for the three months ended September 30, 2011 as compared to the same period in 2010 ($360,000 in 2011 versus $558,000 million in 2010). These amounts represent our ownership portion of our joint ventures’ net income or loss for the period. The decreased loss is due to a decrease in depreciation expense on our Woodlake Square property. During 2010, our joint venture reassessed and shortened the estimated useful lives of various buildings consistent with its plan to demolish such buildings as part of the redevelopment, which led to increased depreciation expense on the property in 2010.

Nine Months Ended September 30, 2011 versus Nine Months Ended September 30, 2010

Revenue. Revenue decreased approximately $390,000 during the nine months ended September 30, 2011 as compared to the same period in 2010 ($2.9 million in 2011 versus $3.2 million in 2010). The decrease is primarily attributable to the DSW Shoes vacancy at Westside Plaza and the Blockbuster vacancy at Lantern Lane. During 2011, we also increased occupancy with a new tenant at our Westside Plaza property, although at a rental rate lower than the previous tenant.

16


Table of Contents


General and Administrative – Related Party. General and administrative expenses paid to our affiliate decreased approximately $78,000 during the nine months ended September 30, 2011 as compared to the same period in 2010 ($256,000 in 2011 versus $334,000 in 2010). This decrease was primarily due to a lower allocation of administrative costs to reflect a reduction of administrative time and resources incurred by AmREIT on behalf of the Partnership.

Asset management fees – related party. Asset management fees – related party decreased approximately $87,000 during the nine months ended September 30, 2011 as compared to the same period in 2010 ($376,000 in 2011 versus $463,000 in 2010). Our asset management fees are calculated based upon the net value of our assets, which has decreased between the 2010 and 2011 periods.

Impairment. As discussed further in Note 2 to our accompanying consolidated financial statements, we recorded a $2.1 million impairment on our Olmos Creek property as of September 30, 2011 with no impairment during the comparable period in 2010.

Legal and Professional Fees. Legal and professional fees increased approximately $147,000 during the nine months ended September 30, 2011 as compared to the same period in 2010 ($320,000 in 2011 versus $173,000 in 2010). This increase was due to a non-recurring audit of one of our non-consolidated entities.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased approximately $205,000 during the nine months ended September 30, 2011 as compared to the same period in 2010 ($1.1 million in 2011 versus $1.3 million in 2010). This decrease was primarily due to a decrease in amortization of in-place leases as a substantial portion of those costs became fully amortized during the first quarter of 2011 or were written off due to tenant vacancies.

Equity in Losses From Non-Consolidated Entities. Equity in losses from non-consolidated entities decreased approximately $2.3 million during the nine months ended September 30, 2011 as compared to the same period in 2010 ($953,000 in 2011 versus $3.3 million in 2010). These amounts represent our ownership portion of our joint ventures’ net income or loss for the period. The decreased loss is due to a decrease in depreciation expense on our Woodlake Square property. During 2010, our joint venture reassessed and shortened the estimated useful lives of various buildings consistent with its plan to demolish such buildings as part of the redevelopment, which led to increased depreciation expense on the property in 2010.

Gain on Sale of Real Estate. During the first quarter of 2011, we recognized a gain of $1.7 million on the sale of our Market at Lake Houston property. See Notes 2 and 9 to our accompanying consolidated financial statements for further discussion on the sale of The Market at Lake Houston property.

Net (Income) Loss Attributable to Non-controlling Interest. Net loss attributable to non-controlling interest decreased approximately $702,000 during the nine months ended September 30, 2011 as compared to the same period in 2010 ($675,000 loss in 2011 versus income of ($27,000) in 2010). This decrease is due to the sale of The Market at Lake Houston in the first quarter of 2011 in which we previously included a 40% non-controlling interest. The 2010 period includes nine months of activity for The Market at Lake Houston.

Liquidity and Capital Resources

As of September 30, 2011 and December 31, 2010, our cash and cash equivalents totaled approximately $2.0 million and $2.6 million, respectively. We expect that our primary uses of capital will be for selective investment in existing properties, and the payment of operating expenses, including interest expense on any outstanding indebtedness.

Projected cash sources (including cash on hand) and uses for the Partnership indicate periods of cash shortfalls during the year ended December 31, 2011. However, we believe that we will be able to generate sufficient liquidity to satisfy any cash shortfalls through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) deferral of fees paid to our General Partner and its affiliates, (3) financings of unencumbered properties and (4) sales of certain of our investments in non-consolidated entities. No assurance can be given that we will be able to generate such liquidity. In the event that we are unable to generate sufficient liquidity, we may be forced to sell one or more properties at a time when it is disadvantageous to do so, potentially resulting in losses on the disposition of those properties. Additionally, the loss of future properties could reduce our ability to generate future cash flows. Based on the foregoing, it is possible that investors may not recover all of their original investment.

17


Table of Contents


In addition, we have significant debt maturing in the fourth quarter of 2011. Our Olmos Creek mortgage of $11.2 million matured on November 1, 2011 and remains outstanding as of the date of this report. This debt is non-recourse; however, the lender can take possession of the Olmos Creek property as full settlement of the debt. The lender has not demanded immediate delivery of the property or accelerated payment at this time; however, we have not made progress in our discussions with the lender to refinance or extend the debt. Instead, the lender has communicated to us that they are pursuing a sale of the debt (including the right to the property). The status of current discussions with the lender creates uncertainty in our ability to retain and operate the property. We assessed the Olmos Creek property for impairment and recorded an impairment of $2.1 million in order to reflect it at its estimated fair value. See also Notes 2 and 11to our accompanying consolidated financial statements for further discussion of our Olmos Creek property.

Distributions

Effective July 15, 2009, we suspended all distributions in an effort to (1) conserve cash, (2) protect our limited partners’ invested capital, (3) improve our ability to fund capital improvements, tenant improvements and leasing commissions and (4) meet our obligations, including debt service. We currently do not expect to distribute net sales proceeds or any net cash flows from operations to our partners until we enter the liquidation phase, which is scheduled for October 31, 2012. However, we may seek to postpone liquidation if we believe such liquidation is not in the best interests of the partners at that time.

Current Market Conditions

The U.S. economy is still experiencing weakness from recent economic conditions, which resulted in increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit markets. Our results of operations may be sensitive to changes in overall economic conditions that impact tenant leasing practices. Adverse economic conditions affecting tenant income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters, could reduce overall tenant leasing or cause tenants to shift their leasing practices. In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, could result in a general decline in rents or an increased incidence of defaults under existing leases. Recently, high levels of unemployment have persisted, and rental rates and valuations for retail space have not fully recovered to pre-recession levels and may not for a number of years. It is difficult to determine the breadth and duration of the financial market problems and the many ways in which they may affect our tenants and our business in general. A significant additional deterioration in the U.S. economy or the bankruptcy or insolvency of one or more of our significant tenants could cause our current plans to meet our projected cash shortfalls to be insufficient.

Further, recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. Although U.S. lawmakers passed legislation to raise the federal debt ceiling, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States (the “U.S.”) from “AAA” to “AA+” in August 2011. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, and despite the recent European agreement intended to help resolve the Euro crisis, the impact of the current crisis in Europe with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations is inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aid economic recovery will be effective. These developments and the government’s credit concerns in general, could cause interest rates and borrowing costs to rise, which may further negatively impact our ability to access the debt markets.

18


Table of Contents


Cash Flow Activities for the Nine Months Ended September 30, 2011 and 2010

Cash flows provided by (used in) operating activities, investing activities and financing activities during the nine months ended September 30, 2011 and 2010 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30

 

 

 

2011

 

2010

 

Operating activities

 

$

(548

)

$

(60

)

Investing activities

 

 

2,663

 

 

371

 

Financing activities

 

 

(2,777

)

 

(1,123

)

Net cash flows used in operating activities increased approximately $488,000 during the nine months ended September 30, 2011 as compared to the same period in 2010 ($548,000 used in operating activities in 2011 versus $60,000 used in operating activities in 2010). This increase in operating cash outflows was primarily attributable to a reduction in rental income, which was driven by reduced occupancy rates at Westside Plaza and Lantern Lane, coupled with lower operating income in 2011 as a result of the sale of The Market at Lake Houston property in February 2011.

Net cash flows provided by investing activities increased approximately $2.3 million during the nine months ended September 30, 2011 as compared to the same period in 2010 ($2.7 million provided by investing activities in 2011versus $371,000 in 2010). This increase in cash inflows is primarily due to net cash proceeds of $4.5 million received from the sale of The Market at Lake Houston property in February 2011, partially offset by an increase in investments in nonconsolidated entities. During the second quarter of 2011, we invested $1.8 million (our funding requirement of 20%) in PTC/BSQ Holding Company LLC in order to acquire the vacant anchor building within the Preston Towne Crossing shopping center.

Net cash flows used in financing activities increased approximately $1.7 million for the nine months ended September 30, 2011 as compared to the same period in 2010 ($2.8 million in 2011 versus $1.1 million in 2010). This increase was primarily due to distributions made to our non-controlling partner of $1.9 million and distributions made to our limited partners of $671,000 during the 2011 period, both of which were driven by the sale of The Market at Lake Houston. These outflows in 2011 were partially offset by net repayments on notes payable – related party of $1.0 million made during the 2010 period.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

 

 

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our General Partner’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), our General Partner’s management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of September 30, 2011. Based on that evaluation, our General Partner’s CEO and CFO concluded that, as of September 30, 2011, our disclosure controls and procedures were effective in causing material information relating to us to be recorded, processed, summarized and reported by management on a timely basis and to ensure the quality and timeliness of our public disclosures in accordance with SEC disclosure obligations.

19


Table of Contents


Changes in Internal Control over Financial Reporting.

There has been no change to our internal control over financial reporting during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

 

 

ITEM 6.

EXHIBITS.

The exhibits listed on the accompanying Exhibit Index are filed, furnished, or incorporated by reference (as stated therein) as part of this Report.

20


Table of Contents


SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

AmREIT Monthly Income & Growth Fund III, Ltd.

 

 

 

By:

AmREIT Monthly Income & Growth III Corporation, its
General Partner

 

 

 

Date: November 14, 2011

 

 

 

 

 

 

By:

/s/ H. Kerr Taylor

 

 

H. Kerr Taylor

 

 

President, Chief Executive Officer and Director

 

 

 

 

By:

/s/ Chad C. Braun

 

 

Chad C. Braun

 

 

Executive Vice President, Chief Financial Officer, Chief
Operating Officer, Treasurer and Secretary

21


Table of Contents


EXHIBIT INDEX

 

 

Exhibit 3.1

Certificate of Limited Partnership of AmREIT Monthly Income & Growth Fund III, Ltd., dated April 19, 2005 (incorporated herein by reference from Exhibit 3.1 to the Partnership’s Registration Statement on Form 10-SB dated April 30, 2007).

 

 

Exhibit 3.2

Agreement of Limited Partnership of AmREIT Monthly Income & Growth Fund III, Ltd., dated April 19, 2005 (incorporated herein by reference from Exhibit 3.2 to the Partnership’s Registration Statement on Form 10-SB dated April 30, 2007).

 

 

Exhibit 10.1

Term Loan Agreement by and between AmREIT Lantern Lane, LP, as Borrower and U.S. Bank National Association, as Lender, dated October 7, 2011(incorporated herein by reference from Exhibit 10.1 to the Partnership’s Current Report filed on Form 8-K filed with the Securities and Exchange Commission on October 12, 2011).

 

 

Exhibit 31.1

Certification pursuant to Rule 13a-14(a) of Chief Executive Officer of the Partnership’s General Partner (filed herewith).

 

 

Exhibit 31.2

Certification pursuant to Rule 13a-14(a) of Chief Financial Officer of the Partnership’s General Partner (filed herewith).

 

 

Exhibit 32.1

Chief Executive Officer of the Partnership’s General Partner certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

 

 

Exhibit 32.2

Chief Financial Officer of the Partnership’s General Partner certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).


 

 

101.INS

XBRL Instance Document*

101.SCH

XBRL Taxonomy Extension Schema Document*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document *

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document*


 

 

 

 

 

 

 

 

 

*

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, (ii) the Consolidated Statements of Operations for the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, (iii) the Consolidated Statement of Capital for the nine months ended September 30, 2011, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 and (v) the Notes to the Consolidated Financial Statements.

 

 

 

 

 

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

22