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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended:  June 30, 2012

Commission File Number:  000-24003

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)

State of Minnesota
 
41-1848181
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
                                    30 East 7th Street, Suite 1300
St. Paul, Minnesota 55101
 
(651) 227-7333
(Address of principal executive offices)
 
(Registrant’s telephone number)

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.     x Yes    o No

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).     o Yes    o No

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.

o Large accelerated filer
o Accelerated filer
o Non-accelerated filer
x Smaller reporting company

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


 
 

 
 
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP

INDEX


   
Page
Part I – Financial Information
 
       
 
Item 1.
Financial Statements (unaudited):
 
       
   
Balance Sheet as of June 30, 2012 and December 31, 2011
3
       
   
Statements for the Periods ended June 30, 2012 and 2011:
 
         
     
Income
4
         
     
Cash Flows
5
         
     
Changes in Partners’ Capital (Deficit)
6
         
   
Notes to Financial Statements
7 - 10
       
 
Item 2.
Management's Discussion and Analysis of Financial
 
     
Condition and Results of Operations
11 - 16
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
16
       
 
Item 4.
Controls and Procedures
16
       
Part II – Other Information
 
       
 
Item 1.
Legal Proceedings
17
       
 
Item 1A.
Risk Factors
17
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17
       
 
Item 3.
Defaults Upon Senior Securities
18
       
 
Item 4.
Mine Safety Disclosures
18
       
 
Item 5.
Other Information
18
       
 
Item 6.
Exhibits
18
       
   
 

 
 
Page 2 of 18

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
BALANCE SHEET

ASSETS

   
June 30,
   
December 31,
 
   
2012
   
2011
 
Current Assets:
           
Cash
  $ 362,617     $ 410,261  
                 
Real Estate Held for Investment:
               
Land
    3,525,810       3,201,246  
Buildings and Equipment
    8,260,080       8,017,349  
Acquired Intangible Lease Assets
    321,405       116,953  
Real Estate Investments, at cost
    12,107,295       11,335,548  
Accumulated Depreciation and Amortization
    (1,744,390 )     (1,588,855 )
Real Estate Held for Investment, Net
    10,362,905       9,746,693  
Real Estate Held for Sale
    0       582,390  
Total Real Estate
    10,362,905       10,329,083  
Total Assets
  $ 10,725,522     $ 10,739,344  

LIABILITIES AND PARTNERS' CAPITAL

Current Liabilities:
           
Payable to AEI Fund Management, Inc.
  $ 8,701     $ 35,544  
Distributions Payable
    188,957       190,208  
Unearned Rent
    45,831       29,457  
Total Current Liabilities
    243,489       255,209  
                 
Partners’ Capital:
               
General Partners
    2,698       572  
Limited Partners:
   24,000 Units authorized; 16,917 Units issued;
   15,618 and 15,698 Units outstanding in
   2012 and 2011, respectively
    10,479,335       10,483,563  
Total Partners' Capital
    10,482,033       10,484,135  
Total Liabilities and Partners' Capital
  $ 10,725,522     $ 10,739,344  




The accompanying Notes to Financial Statements are an integral part of this statement.
 
 
Page 3 of 18

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENT OF INCOME


   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Rental Income
  $ 228,483     $ 190,397     $ 444,543     $ 378,050  
                                 
Expenses:
                               
Partnership Administration – Affiliates
    38,921       40,001       79,042       80,552  
Partnership Administration and Property
   Management – Unrelated Parties
    11,143       8,286       20,785       16,126  
Property Acquisition
    2,629       0       21,557       0  
Depreciation and Amortization
    88,093       74,390       171,834       148,780  
Total Expenses
    140,786       122,677       293,218       245,458  
                                 
Operating Income
    87,697       67,720       151,325       132,592  
                                 
Other Income:
                               
Interest Income
    303       2,398       1,578       5,102  
                                 
Income From Continuing Operations
    88,000       70,118       152,903       137,694  
                                 
Income (Loss) from Discontinued Operations
    (1,764 )     18,502       278,848       119,237  
                                 
Net Income
  $ 86,236     $ 88,620     $ 431,751     $ 256,931  
                                 
Net Income Allocated:
                               
General Partners
  $ 6,041     $ 5,264     $ 13,930     $ 27,051  
Limited Partners
    80,195       83,356       417,821       229,880  
Total
  $ 86,236     $ 88,620     $ 431,751     $ 256,931  
                                 
Income (Loss) per Limited Partnership Unit:
                         
Continuing Operations
  $ 5.47     $ 4.33     $ 9.47     $ 8.51  
Discontinued Operations
    (.34 )     .98       17.21       6.13  
Total
  $ 5.13     $ 5.31     $ 26.68     $ 14.64  
                                 
Weighted Average Units Outstanding –
      Basic and Diluted
    15,618       15,698       15,658       15,698  
                                 


The accompanying Notes to Financial Statements are an integral part of this statement.
 
 
Page 4 of 18

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS


   
Six Months Ended June 30,
 
   
2012
   
2011
 
Cash Flows from Operating Activities:
           
Net Income
  $ 431,751     $ 256,931  
                 
Adjustments to Reconcile Net Income
To Net Cash Provided by Operating Activities:
               
Depreciation and Amortization
    173,343       164,339  
Gain on Sale of Real Estate
    (276,394 )     (83,734 )
Increase (Decrease) in Payable to
   AEI Fund Management, Inc.
    (26,843 )     (38,000 )
Increase (Decrease) in Unearned Rent
    16,374       9,218  
Total Adjustments
    (113,520 )     51,823  
Net Cash Provided By
   Operating Activities
    318,231       308,754  
                 
Cash Flows from Investing Activities:
               
Investments in Real Estate
    (824,500 )     0  
Proceeds from Sale of Real Estate
    893,729       889,965  
Net Cash Provided By
   Investing Activities
    69,229       889,965  
                 
Cash Flows from Financing Activities:
               
Distributions Paid to Partners
    (380,416 )     (380,197 )
Redemption Payments
    (54,688 )     0  
Net Cash Used For
   Financing Activities
    (435,104 )     (380,197 )
                 
Net Increase (Decrease) in Cash
    (47,644 )     818,522  
                 
Cash, beginning of period
    410,261       509,767  
                 
Cash, end of period
  $ 362,617     $ 1,328,289  
                 




The accompanying Notes to Financial Statements are an integral part of this statement.
 
 
Page 5 of 18

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)


   
General Partners
   
Limited Partners
   
Total
   
Limited Partnership Units Outstanding
 
                         
Balance, December 31, 2010
  $ (16,055 )   $ 10,813,357     $ 10,797,302       15,697.53  
                                 
Distributions Declared
    (10,371 )     (369,003 )     (379,374 )        
                                 
Net Income
    27,051       229,880       256,931          
                                 
Balance, June 30, 2011
  $ 625     $ 10,674,234     $ 10,674,859       15,697.53  
                                 
                                 
Balance, December 31, 2011
  $ 572     $ 10,483,563     $ 10,484,135       15,697.53  
                                 
Distributions Declared
    (10,163 )     (369,002 )     (379,165 )        
                                 
Redemption Payments
    (1,641 )     (53,047 )     (54,688 )     (79.33 )
                                 
Net Income
    13,930       417,821       431,751          
                                 
Balance, June 30, 2012
  $ 2,698     $ 10,479,335     $ 10,482,033       15,618.20  
                                 



















The accompanying Notes to Financial Statements are an integral part of this statement.
 
 
Page 6 of 18

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2012

(1)  The condensed statements included herein have been prepared by the registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim period, on a basis consistent with the annual audited statements.  The adjustments made to these condensed statements consist only of normal recurring adjustments.  Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the registrant believes that the disclosures are adequate to make the information presented not misleading.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the registrant’s latest annual report on Form 10-K.

(2)  Organization –

AEI Income & Growth Fund XXII Limited Partnership (“Partnership”) was formed to acquire and lease commercial properties to operating tenants.  The Partnership's operations are managed by AEI Fund Management XXI, Inc. (“AFM”), the Managing General Partner.  Robert P. Johnson, the President and sole director of AFM, serves as the Individual General Partner.  AFM is a wholly owned subsidiary of AEI Capital Corporation of which Mr. Johnson is the majority shareholder.  AEI Fund Management, Inc. (“AEI”), an affiliate of AFM, performs the administrative and operating functions for the Partnership.

The terms of the Partnership offering called for a subscription price of $1,000 per Limited Partnership Unit, payable on acceptance of the offer.  The Partnership commenced operations on May 1, 1997 when minimum subscriptions of 1,500 Limited Partnership Units ($1,500,000) were accepted.  The offering terminated January 9, 1999 when the extended offering period expired.  The Partnership received subscriptions for 16,917.222 Limited Partnership Units.  Under the terms of the Limited Partnership Agreement, the Limited Partners and General Partners contributed funds of $16,917,222 and $1,000, respectively.

During operations, any Net Cash Flow, as defined, which the General Partners determine to distribute will be distributed 97% to the Limited Partners and 3% to the General Partners.  Distributions to Limited Partners will be made pro rata by Units.

Any Net Proceeds of Sale, as defined, from the sale or financing of properties which the General Partners determine to distribute will, after provisions for debts and reserves, be paid in the following manner: (i) first, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to: (a) their Adjusted Capital Contribution plus (b) an amount equal to 9% of their Adjusted Capital Contribution per annum, cumulative but not compounded, to the extent not previously distributed from Net Cash Flow; (ii) any remaining balance will be distributed 90% to the Limited Partners and 10% to the General Partners.  Distributions to the Limited Partners will be made pro rata by Units.

 
Page 7 of 18

 

AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)

(2)  Organization – (Continued)

For tax purposes, profits from operations, other than profits attributable to the sale, exchange, financing, refinancing or other disposition of property, will be allocated first in the same ratio in which, and to the extent, Net Cash Flow is distributed to the Partners for such year.  Any additional profits will be allocated in the same ratio as the last dollar of Net Cash Flow is distributed.  Net losses from operations will be allocated 99% to the Limited Partners and 1% to the General Partners.

For tax purposes, profits arising from the sale, financing, or other disposition of property will be allocated in accordance with the Partnership Agreement as follows: (i) first, to those partners with deficit balances in their capital accounts in an amount equal to the sum of such deficit balances; (ii) second, 99% to the Limited Partners and 1% to the General Partners until the aggregate balance in the Limited Partners' capital accounts equals the sum of the Limited Partners' Adjusted Capital Contributions plus an amount equal to 9% of their Adjusted Capital Contributions per annum, cumulative but not compounded, to the extent not previously allocated; (iii) third, the balance of any remaining gain will then be allocated 90% to the Limited Partners and 10% to the General Partners.  Losses will be allocated 98% to the Limited Partners and 2% to the General Partners.

The General Partners are not required to currently fund a deficit capital balance.  Upon liquidation of the Partnership or withdrawal by a General Partner, the General Partners will contribute to the Partnership an amount equal to the lesser of the deficit balances in their capital accounts or 1% of total Limited Partners' and General Partners' capital contributions.

(3)  Reclassification –

Certain items related to discontinued operations in the prior year’s financial statements have been reclassified to conform to 2012 presentation.  These reclassifications had no effect on Partners’ capital, net income or cash flows.

(4)  Real Estate Held for Investment –

On October 21, 2011, the Partnership purchased a 28% interest in a Staples store in Clermont, Florida for $897,288.  The Partnership allocated $116,953 of the purchase price to Acquired Intangible Lease Assets and incurred $18,941 of acquisition expenses related to the purchase that were expensed.  The property is leased to Staples the Office Superstore East, Inc. under a Lease Agreement with a remaining primary term of 8.4 years (as of the date of purchase) and annual rent of $73,031 for the interest purchased.  The remaining interest in the property was purchased by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership.

 
 
Page 8 of 18

 
 
AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)

(4)  Real Estate Held for Investment – (Continued)

On March 16, 2012, the Partnership purchased a 34% interest in a PetSmart store in Galveston, Texas for $824,500.  The Partnership allocated $204,452 of the purchase price to Acquired Intangible Lease Assets and incurred $21,557 of acquisition expenses related to the purchase that were expensed.  The property is leased to PetSmart, Inc. under a Lease Agreement with a remaining primary term of 10.0 years and annual rent of $65,560 for the interest purchased.  The remaining interest in the property was purchased by AEI Accredited Investor Fund V LP, an affiliate of the Partnership.

(5)  Payable to AEI Fund Management, Inc. –

AEI Fund Management, Inc. performs the administrative and operating functions for the Partnership.  The payable to AEI Fund Management represents the balance due for those services.  This balance is non-interest bearing and unsecured and is to be paid in the normal course of business.

(6)  Discontinued Operations –

In November 2010, the Partnership entered into an agreement to sell the Hollywood Video store in Minot, North Dakota to an unrelated third party.  On January 14, 2011, the sale closed with the Partnership receiving net proceeds of $881,953, which resulted in a net gain of $81,953.  At the time of sale, the cost and related accumulated depreciation was $1,111,393 and $311,393, respectively.

On March 17, 2011, the Partnership sold its remaining 0.5877% interest in the Arby’s restaurant in Homewood, Alabama to an unrelated third party.  The Partnership received net sale proceeds of $8,012, which resulted in a net gain of $1,781.  The cost and related accumulated depreciation of the interest sold was $8,184 and $1,953, respectively.

On January 6, 2012, the Partnership sold the KinderCare daycare center in Pearland, Texas to an unrelated third party.  The Partnership received net sale proceeds of $859,968, which resulted in a net gain of $277,578.  At the time of sale, the cost and related accumulated depreciation was $943,416 and $361,026, respectively.  At December 31, 2011, the property was classified as Real Estate Held for Sale with a carrying value of $582,390.

On February 3, 2012, the Partnership sold its remaining interests in the KinderCare daycare centers in Golden, Colorado, and Plainfield, Illinois to an unrelated third party.  The Partnership received total net sale proceeds of $26,200, which resulted in a net gain of $1,073.  The cost and related accumulated depreciation of the interests sold was $38,173 and $13,046, respectively.

 
Page 9 of 18

 


AEI INCOME & GROWTH FUND XXII LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)

(6)  Discontinued Operations – (Continued)

On May 10, 2012, the Partnership sold its remaining 0.8729% interest in the TGI Friday’s restaurant in Greensburg, Pennsylvania to an unrelated third party.  The Partnership received net sale proceeds of $7,561, which resulted in a net loss of $2,257.  The cost and related accumulated depreciation of the interest sold was $14,580 and $4,762, respectively.

During the first six months of 2012 and 2011, the Partnership distributed net sale proceeds of $60,606 and $50,505 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $3.84 and $3.18 per Limited Partnership Unit, respectively.  The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.

The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements.  The following are the results of discontinued operations:

   
Three Months Ended June 30,
 
Six Months Ended June 30,
   
2012
 
2011
 
2012
 
2011
                 
Rental Income
$
653
$
26,818
$
2,813
$
53,796
Property Management Expenses
 
(120)
 
(551)
 
(239)
 
(2,734)
Depreciation
 
(40)
 
(7,765)
 
(120)
 
(15,559)
Gain (Loss) on Disposal of Real Estate
 
(2,257)
 
0
 
276,394
 
83,734
Income (Loss) from Discontinued Operations
$
(1,764)
$
18,502
$
278,848
$
119,237

(7)  Fair Value Measurements –

As of June 30, 2012, the Partnership had no assets or liabilities measured at fair value on a recurring basis or nonrecurring basis.

 
Page 10 of 18

 

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

This section contains "forward-looking statements" which represent management's expectations or beliefs concerning future events, including statements regarding anticipated application of cash, expected returns from rental income, growth in revenue, the sufficiency of cash to meet operating expenses, rates of distribution, and other matters.  These, and other forward-looking statements, should be evaluated in the context of a number of factors that may affect the Partnership's financial condition and results of operations, including the following:

 
Market and economic conditions which affect the value of the properties the Partnership owns and the cash from rental income such properties generate;
 
the federal income tax consequences of rental income, deductions, gain on sales and other items and the effects of these consequences for the Partners;
 
resolution by the General Partners of conflicts with which they may be confronted;
 
the success of the General Partners of locating properties with favorable risk return characteristics;
 
the effect of tenant defaults; and
 
the condition of the industries in which the tenants of properties owned by the Partnership operate.

Application of Critical Accounting Policies

The Partnership’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).  Preparing the financial statements requires management to use judgment in the application of these accounting policies, including making estimates and assumptions.  These judgments will affect the reported amounts of the Partnership’s assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements and will affect the reported amounts of revenue and expenses during the reporting periods.  It is possible that the carrying amount of the Partnership’s assets and liabilities, or the results of reported operations, will be affected if management’s estimates or assumptions prove inaccurate.

Management of the Partnership evaluates the following accounting estimates on an ongoing basis, and has discussed the development and selection of these estimates and the management discussion and analysis disclosures regarding them with managing partner of the Partnership.

Allocation of Purchase Price of Acquired Properties

Upon acquisition of real properties, the Partnership records them in the financial statements at cost (not including acquisition expenses).  The purchase price is allocated to tangible assets, consisting of land and building, and to identified intangible assets and liabilities, which may include the value of above market and below market leases and the value of in-place leases.  The allocation of the purchase price is based upon the fair value of each component of the property.  Although independent appraisals may be used to assist in the determination of fair value, in many cases these values will be based upon management’s assessment of each property, the selling prices of comparable properties and the discounted value of cash flows from the asset.

 
Page 11 of 18

 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

The fair values of above market and below market in-place leases will be recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the non-cancelable term of the lease including any bargain renewal periods.  The above market and below market lease values will be capitalized as intangible lease assets or liabilities.  Above market lease values will be amortized as an adjustment of rental income over the remaining terms of the respective leases.  Below market leases will be amortized as an adjustment of rental income over the remaining term of the respective leases, including any bargain renewal periods.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market and below market in-place lease values relating to that lease would be recorded as an adjustment to rental income.
 
The fair values of in-place leases will include estimated direct costs associated with obtaining a new tenant, and opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease.  Direct costs associated with obtaining a new tenant may include commissions, tenant improvements, and other direct costs and are estimated, in part, by management’s consideration of current market costs to execute a similar lease.  These direct costs will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases.  The value of opportunity costs will be calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease.  These intangibles will be included in intangible lease assets on the balance sheet and will be amortized to expense over the remaining term of the respective leases.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.

The determination of the fair values of the assets and liabilities acquired will require the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount and capitalization rates, interest rates and other variables.  If management’s estimates or assumptions prove inaccurate, the result would be an inaccurate allocation of purchase price, which could impact the amount of reported net income.

Carrying Value of Properties

The carrying value of the properties is initially recorded at cost, not including acquisition expenses.  The Partnership tests long-lived assets for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable.  For properties the Partnership will hold and operate, management determines whether impairment has occurred by comparing the property’s probability-weighted future undiscounted cash flows to its current carrying value.  For properties held for sale, management determines whether impairment has occurred by comparing the property’s estimated fair value less cost to sell to its current carrying value.  If the carrying value is greater than the net realizable value, an impairment loss is recorded to reduce the carrying value of the property to its net realizable value.  Changes in these assumptions or analysis may cause material changes in the carrying value of the properties.

 
Page 12 of 18

 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

Allocation of Expenses

AEI Fund Management, Inc. allocates expenses to each of the funds they manage primarily on the basis of the number of hours devoted by their employees to each fund’s affairs.  They also allocate expenses at the end of each month that are not directly related to a fund’s operations based upon the number of investors in the fund and the fund’s capitalization relative to other funds they manage.  The Partnership reimburses these expenses subject to detailed limitations contained in the Partnership Agreement.

Results of Operations

For the six months ended June 30, 2012 and 2011, the Partnership recognized rental income from continuing operations of $444,543 and $378,050, respectively.  In 2012, rental income increased due to additional rent received from two property acquisitions in 2011 and 2012 and rent increases on four properties.  Based on the scheduled rent for the properties owned as of July 31, 2012, the Partnership expects to recognize rental income from continuing operations of approximately $906,000 in 2012.

For the six months ended June 30, 2012 and 2011, the Partnership incurred Partnership administration expenses from affiliated parties of $79,042 and $80,552, respectively.  These administration expenses include costs associated with the management of the properties, processing distributions, reporting requirements and communicating with the Limited Partners.  During the same periods, the Partnership incurred Partnership administration and property management expenses from unrelated parties of $20,785 and $16,126, respectively.  These expenses represent direct payments to third parties for legal and filing fees, direct administrative costs, outside audit costs, taxes, insurance and other property costs.

For the six months ended June 30, 2012, the Partnership incurred property acquisition expenses of $21,557 related to the purchase of the PetSmart store in Galveston, Texas.

For the six months ended June 30, 2012 and 2011, the Partnership recognized interest income of $1,578 and $5,102, respectively.  In 2012, interest income decreased due to the Partnership having less money invested in a money market account due to property acquisitions.

Upon complete disposal of a property or classification of a property as Real Estate Held for Sale, the Partnership includes the operating results and sale of the property in discontinued operations.  In addition, the Partnership reclassifies the prior periods’ operating results of the property to discontinued operations.  For the six months ended June 30, 2012, the Partnership recognized income from discontinued operations of $278,848, representing rental income less property management expenses and depreciation of $2,454 and gain on disposal of real estate of $276,394.  For the six months ended June 30, 2011, the Partnership recognized income from discontinued operations of $119,237, representing rental income less property management expenses and depreciation of $35,503 and gain on disposal of real estate of $83,734.

In November 2010, the Partnership entered into an agreement to sell the Hollywood Video store in Minot, North Dakota to an unrelated third party.  On January 14, 2011, the sale closed with the Partnership receiving net proceeds of $881,953, which resulted in a net gain of $81,953.  At the time of sale, the cost and related accumulated depreciation was $1,111,393 and $311,393, respectively.
 
 
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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

On March 17, 2011, the Partnership sold its remaining 0.5877% interest in the Arby’s restaurant in Homewood, Alabama to an unrelated third party.  The Partnership received net sale proceeds of $8,012, which resulted in a net gain of $1,781.  The cost and related accumulated depreciation of the interest sold was $8,184 and $1,953, respectively.
 

 
On January 6, 2012, the Partnership sold the KinderCare daycare center in Pearland, Texas to an unrelated third party.  The Partnership received net sale proceeds of $859,968, which resulted in a net gain of $277,578.  At the time of sale, the cost and related accumulated depreciation was $943,416 and $361,026, respectively.  At December 31, 2011, the property was classified as Real Estate Held for Sale with a carrying value of $582,390.

On February 3, 2012, the Partnership sold its remaining interests in the KinderCare daycare centers in Golden, Colorado, and Plainfield, Illinois to an unrelated third party.  The Partnership received total net sale proceeds of $26,200, which resulted in a net gain of $1,073.  The cost and related accumulated depreciation of the interests sold was $38,173 and $13,046, respectively.

On May 10, 2012, the Partnership sold its remaining 0.8729% interest in the TGI Friday’s restaurant in Greensburg, Pennsylvania to an unrelated third party.  The Partnership received net sale proceeds of $7,561, which resulted in a net loss of $2,257.  The cost and related accumulated depreciation of the interest sold was $14,580 and $4,762, respectively.

Management believes inflation has not significantly affected income from operations.  Leases may contain rent increases, based on the increase in the Consumer Price Index over a specified period, which will result in an increase in rental income over the term of the leases.  Inflation also may cause the real estate to appreciate in value.  However, inflation and changing prices may have an adverse impact on the operating margins of the properties' tenants, which could impair their ability to pay rent and subsequently reduce the Net Cash Flow available for distributions.

Liquidity and Capital Resources

During the six months ended June 30, 2012, the Partnership's cash balances decreased $47,644 as a result of cash used to purchase property and distributions and redemption payments paid to the Partners in excess of cash generated from operating activities, which were partially offset by cash generated from the sale of property.  During the six months ended June 30, 2011, the Partnership's cash balances increased $818,522 as a result of cash generated from the sale of property, which was partially offset by distributions paid to the Partners in excess of cash generated from operating activities.

Net cash provided by operating activities increased from $308,754 in 2011 to $318,231 in 2012 as a result of an increase in total rental and interest income in 2012 and net timing differences in the collection of payments from the tenants and the payment of expenses.  During 2012, cash from operations was reduced by $21,557 of acquisition expenses related to the purchase of real estate.  Pursuant to accounting guidance, these expenses were reflected as operating cash outflows.  However, pursuant to the Partnership Agreement, acquisition expenses were funded with proceeds from property sales.
 
 
Page 14 of 18

 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

The major components of the Partnership's cash flow from investing activities are investments in real estate and proceeds from the sale of real estate.  During the six months ended June 30, 2012 and 2011, the Partnership generated cash flow from the sale of real estate of $893,729 and $889,965, respectively.  During the six months ended June 30, 2012, the Partnership expended $824,500 to invest in real properties as the Partnership reinvested cash generated from property sales.

On October 21, 2011, the Partnership purchased a 28% interest in a Staples store in Clermont, Florida for $897,288.  The property is leased to Staples the Office Superstore East, Inc. under a Lease Agreement with a remaining primary term of 8.4 years (as of the date of purchase) and annual rent of $73,031 for the interest purchased.  The remaining interest in the property was purchased by AEI Income & Growth Fund 25 LLC, an affiliate of the Partnership.

On March 16, 2012, the Partnership purchased a 34% interest in a PetSmart store in Galveston, Texas for $824,500.  The property is leased to PetSmart, Inc. under a Lease Agreement with a remaining primary term of 10.0 years and annual rent of $65,560 for the interest purchased.  The remaining interest in the property was purchased by AEI Accredited Investor Fund V LP, an affiliate of the Partnership.

The Partnership's primary use of cash flow, other than investment in real estate, is distribution and redemption payments to Partners.  The Partnership declares its regular quarterly distributions before the end of each quarter and pays the distribution in the first week after the end of each quarter.  The Partnership attempts to maintain a stable distribution rate from quarter to quarter.  Redemption payments are paid to redeeming Partners on a semi-annual basis.

For the six months ended June 30, 2012 and 2011, the Partnership declared distributions of $379,165 and $379,374, respectively.  Pursuant to the Partnership Agreement, distributions of Net Cash Flow were allocated 97% to the Limited Partners and 3% to the General Partners.  Distributions of Net Proceeds of Sale were allocated 99% to the Limited Partners and 1% to the General Partners.  The Limited Partners received distributions of $369,002 and $369,003 and the General Partners received distributions of $10,163 and $10,371 for the periods, respectively.

During the first six months of 2012 and 2011, the Partnership distributed net sale proceeds of $60,606 and $50,505 to the Limited and General Partners as part of their quarterly distributions, which represented a return of capital of $3.84 and $3.18 per Limited Partnership Unit, respectively.  The Partnership anticipates the remaining net sale proceeds will either be reinvested in additional property or distributed to the Partners in the future.

The Partnership may acquire Units from Limited Partners who have tendered their Units to the Partnership.  Such Units may be acquired at a discount.  The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year.  In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.
 
 
 
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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.  (Continued)

On April 1, 2012, six Limited Partners redeemed a total of 79.33 Partnership Units for $53,047 in accordance with the Partnership Agreement.  The Partnership acquired these Units using Net Cash Flow from operations.  During the first six months of 2011, the Partnership did not redeem any Units from the Limited Partners.  In prior years, a total of 71 Limited Partners redeemed 1,219.69 Partnership Units for $975,145 in accordance with the Partnership Agreement.  The redemptions increase the remaining Limited Partners’ ownership interest in the Partnership.

The continuing rent payments from the properties, together with cash generated from property sales, should be adequate to fund continuing distributions and meet other Partnership obligations on both a short-term and long-term basis.

The Economy and Market Conditions

The impact of conditions in the economy over the last few years, including the turmoil in the credit markets, has adversely affected many real estate investment funds.  However, the absence of mortgage financing on the Partnership's properties eliminates the risks of foreclosure and debt-refinancing that can negatively impact the value and distributions of leveraged real estate investment funds.  Nevertheless, a prolonged economic downturn may adversely affect the operations of the Partnership's tenants and their cash flows.  If a tenant were to default on its lease obligations, the Partnership's income would decrease, its distributions would likely be reduced and the value of its properties might decline.

ITEM 3.  QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for a smaller reporting company.

ITEM 4.  CONTROLS AND PROCEDURES.

(a)  Disclosure Controls and Procedures.

Under the supervision and with the participation of management, including its President and Chief Financial Officer, the Managing General Partner of the Partnership evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based upon that evaluation, the President and Chief Financial Officer of the Managing General Partner concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to management, including the President and Chief Financial Officer of the Managing General Partner, in a manner that allows timely decisions regarding required disclosure.

(b)  Changes in Internal Control Over Financial Reporting.

During the most recent period covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
 
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PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

There are no material pending legal proceedings to which the Partnership is a party or of which the Partnership's property is subject.

ITEM 1A.  RISK FACTORS.

Not required for a smaller reporting company.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES & USE OF PROCEEDS.

(a) None.

(b) Not applicable.

(c) Pursuant to Section 7.7 of the Partnership Agreement, each Limited Partner has the right to present Units to the Partnership for purchase by submitting notice to the Managing General Partner during January or July of each year.  The purchase price of the Units is equal to 90% of the net asset value per Unit, as of the first business day of January or July of each year, as determined by the Managing General Partner in accordance with the provisions of the Partnership Agreement.  Units tendered to the Partnership during January and July are redeemed on April 1st and October 1st, respectively, of each year subject to the following limitations.  The Partnership will not be obligated to purchase in any year any number of Units that, when aggregated with all other transfers of Units that have occurred since the beginning of the same calendar year (excluding Permitted Transfers as defined in the Partnership Agreement), would exceed 5% of the total number of Units outstanding on January 1 of such year.  In no event shall the Partnership be obligated to purchase Units if, in the sole discretion of the Managing General Partner, such purchase would impair the capital or operation of the Partnership.

Small Business Issuer Purchases of Equity Securities

Period
Total Number
of Units
Purchased
Average
Price Paid
per Unit
Total Number of Units
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number
of Units that May Yet
Be Purchased Under
the Plans or Programs
         
4/1/12 to 4/30/12
79.33
$668.70
1,299.02(1)
(2)
         
5/1/12 to 5/31/12
--
--
--
--
         
6/1/12 to 6/30/12
--
--
--
--

(1)  
The Partnership's repurchase plan is mandated by the Partnership Agreement as included in the prospectus related to the original offering of the Units.
(2)  
The Partnership Agreement contains annual limitations on repurchases described in the paragraph above and has no expiration date.

 
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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5.  OTHER INFORMATION.

None.

ITEM 6.  EXHIBITS.

31.1
Certification of Chief Executive Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
Certification of Chief Financial Officer of General Partner pursuant to Rule 15d-14(a)(17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes-Oxley Act of 2002.

32
Certification of Chief Executive Officer and Chief Financial Officer of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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.


Dated:  August 13, 2012
AEI Income & Growth Fund XXII
 
Limited Partnership
 
By:
AEI Fund Management XXI, Inc.
 
Its:
Managing General Partner
     
     
     
 
By:
  /s/ ROBERT P JOHNSON
   
Robert P. Johnson
   
President
   
(Principal Executive Officer)
     
     
     
 
By:
  /s/ PATRICK W KEENE
   
Patrick W. Keene
   
Chief Financial Officer
   
(Principal Accounting Officer)




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