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EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltdamreit153811migiii_ex31-1.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltdamreit153811migiii_ex32-1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltdamreit153811migiii_ex31-2.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltdamreit153811migiii_ex32-2.htm

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

 

For the quarterly period ended September 30, 2015

 

OR

 

  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 77046
Houston, TX (Zip Code)
(Address of Principal Executive Offices)  

(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 ☒  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). Yes ☒  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. (Check one):

       
  Large accelerated filer ☐ Accelerated filer ☐  
  Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company  
           

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

 
 
 

 

TABLE OF CONTENTS

        PAGE
         
Definitions       ii
PART I - FINANCIAL INFORMATION    
  ITEM 1. Financial Statements.   1
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   14
  ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.   18
  ITEM 4. Controls and Procedures.   18
PART II - OTHER INFORMATION    
  ITEM 1. Legal Proceedings.   18
  ITEM 1A. Risk Factors.   18
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.   18
  ITEM 3. Defaults Upon Senior Securities.   18
  ITEM 4. Mine Safety Disclosures.   18
  ITEM 5. Other Information.   18
  ITEM 6. Exhibits.   18
SIGNATURES   19
EXHIBIT INDEX   20

 

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DEFINITIONS

As used in this Quarterly Report, the following abbreviations and terms have the meanings as listed below. Additionally, the terms “we,” “our,” “MIG III,” the “Partnership” and “us” refer collectively to AmREIT Monthly Income & Growth Fund III, Ltd. and its subsidiaries, including joint ventures, unless the context clearly indicates otherwise.

As further defined below, “AmREIT” and its wholly-owned subsidiaries “ARIC” and AmREIT Monthly Income & Growth III Corporation (our General Partner) were acquired by Edens on February 18, 2015 in an all-cash transaction whereby AmREIT and its wholly-owned subsidiaries were merged into Saturn Subsidiary, LLC (an indirect, wholly-owned subsidiary of Edens) with Saturn Subsidiary, LLC as the surviving entity. Subsequent to the acquisition, all of the functions formerly performed by AmREIT and its designated affiliates are performed on our behalf by Edens, Saturn Subsidiary, LLC or one of its designated affiliates, including that of our General Partner. References herein to “AmREIT” (including its wholly-owned subsidiaries), “ARIC” or AmREIT Monthly Income & Growth III Corporation refer to the period prior to the acquisition. References herein to “Edens” (including Saturn Subsidiary, LLC or one of its designated affiliates) refer to periods after the acquisition.

 

ABBREVIATION DEFINITION
     
AmREIT   AmREIT, Inc., formerly a Maryland corporation that, prior to February 18, 2015, was a SEC reporting corporation that had a class of securities listed on the NYSE and that had elected to be taxed as a REIT. From January 1, 2015 through February 18, 2015, AmREIT was the owner of our General Partner. On February 18, 2015, all of AmREIT’s common stock was acquired by Edens in the AmREIT Acquisition when AmREIT and its wholly-owned subsidiaries were merged with and into Saturn Subsidiary, LLC (an indirect, wholly-owned subsidiary of Edens, “Saturn”) with Saturn being the surviving entity. Upon the acquisition of all of the outstanding common stock of AmREIT, Edens became the parent company of our General Partner.
     
AmREIT Acquisition   The purchase of all of AmREIT’s common stock for $26.55 per share in an all-cash transaction by Edens on February 18, 2015. Upon the acquisition of all of the outstanding common stock of AmREIT, Edens became the parent company of our General Partner. Effective February 18, 2015, all of the functions formerly performed by AmREIT and its wholly-owned subsidiaries are now performed by Edens or one of its designated subsidiaries, including those of our General Partner.
     
Annual Report   Annual report on Form 10-K filed with the SEC as of and for the year ended December 31, 2014.
     
AOCI   Accumulated Other Comprehensive Income (Loss).
     
ARIC   AmREIT Realty Investment Corporation and its consolidated subsidiaries, a wholly-owned taxable REIT subsidiary of Edens.
     
ASU   Accounting Standards Update.
     
Edens   Edens Investment Trust, which acquired all of AmREIT’s common stock in an all-cash transaction on February 18, 2015. Effective February 18, 2015, Edens is the parent company of our General Partner.
     
Exchange Act   Securities Exchange Act of 1934, as amended.
     
FASB   Financial Accounting Standards Board.
     
GAAP   U.S. generally accepted accounting principles.
     
General Partner   AmREIT Monthly Income & Growth III Corporation. From January 1, 2015 through February 18, 2015, our General Partner was a wholly-owned subsidiary of AmREIT, Inc. On February 18, 2015, all of AmREIT’s common stock was acquired by Edens in an all cash transaction.  Subsequent to this acquisition, Edens, is the parent company of our General Partner.

 

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GLA   Gross leasable area.
     
Limited Partners   Owners / holders of our Units.
     
MIG IV   AmREIT Monthly Income & Growth Fund IV, L.P., an affiliated entity.
     
NYSE   New York Stock Exchange.
     
Offering   Both the issuance and sale of our initial 80 Units pursuant to the terms of a private placement memorandum dated April 19, 2005, and subsequent sale of Units through October 31, 2006 (a total of 2,844 Units).
     
Partners   Collectively our General Partner and Limited Partners.
     
PTC/BSQ   PTC/BSQ Holding Company LLC.
     
Quarterly Report  

Quarterly Report on Form 10-Q filed with the SEC as of and for the three and nine months ended September 30, 2015. 

     
REIT   Real Estate Investment Trust.
     
SEC   Securities and Exchange Commission.
     
Securities Act   Securities Act of 1933, as amended.
     
Units   Limited partnership units sold in our Offering.

 

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PART I – FINANCIAL INFORMATION
 
ITEM 1.             FINANCIAL STATEMENTS.
 
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for Unit data)

 

           
   September 30,
2015
   December 31,
2014
 
   (unaudited)      
ASSETS          
Real estate investments at cost:          
Land  $   $4,760 
Buildings       9,723 
Tenant improvements       323 
        14,806 
Less accumulated depreciation and amortization       (2,787)
Real estate investments, net       12,019 
           
Investment in non-consolidated entities   12,293    14,991 
Net real estate investments   12,293    27,010 
           
Cash and cash equivalents   5,297    4,044 
Tenant and account receivables, net   15    222 
Accounts receivable - related party   3,416    262 
Notes receivable   13    93 
Notes receivable - related party   1,093    312 
Deferred costs, net       208 
Other assets       420 
TOTAL ASSETS  $22,127   $32,571 
           
LIABILITIES AND PARTNERS’ CAPITAL          
Liabilities:          
Note payable  $   $8,980 
Accounts payable and other liabilities   156    649 
Accounts payable - related party   771    215 
Security deposits       68 
TOTAL LIABILITIES   927    9,912 
           
Partners’ capital:          
General partner        
Limited partners, 2,833 Units outstanding at September 30, 2015 and December 31, 2014   21,220    22,694 
AOCI of non-consolidated entity   (20)   (35)
TOTAL PARTNERS’ CAPITAL   21,200    22,659 
           
 TOTAL LIABILITIES AND PARTNERS’ CAPITAL  $22,127   $32,571 

 

 See Notes to Consolidated Financial Statements.

 

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

 

   Three months ended September 30,   Nine months ended September 30, 
   2015   2014   2015   2014 
                 
Income (loss) from non-consolidated entities  $977   $(115)  $764   $(341)
                     
Expenses:                    
General and administrative   12    19    53    60 
General and administrative - related party   71    82    237    257 
Asset management fees - related party   89    88    266    266 
Legal and professional   59    62    204    191 
Total operating expenses   231    251    760    774 
                     
Operating income (loss)   746    (366)   4    (1,115)
                     
Other income (expense):                    
Interest income - related party   28        78     
Interest and other income   4    2    8     
Interest expense       (1)       (6)
Federal income tax expense           (10)    
Total other income (expense), net   32    1    76    (6)
                     
 Income (loss) from continuing operations  $778   $(365)  $80   $(1,121)
                     
                     
Income (loss) from discontinued operations   (23)   14    (1,554)   2 
Gain on sale of real estate acquired for investment               6,798 
Total income (loss) from discontinued operations   (23)   14    (1,554)   6,800 
                     
Net income (loss) attributable to partners  $755   $(351)  $(1,474)  $5,679 
                     
Income (loss) from continuing operations per Unit  $274.62   $(128.84)  $28.24   $(395.69)
Income (loss) from discontinued operations per Unit   (8.12)   4.94    (548.54)   2,400.28 
Net income (loss) per Unit  $266.50   $(123.90)  $(520.30)  $2,004.59 
                     
Weighted average Units outstanding   2,833    2,833    2,833    2,833 
                     
Net income (loss) attributable to partners  $755   $(351)  $(1,474)  $5,679 
                     
Other comprehensive income (loss) of non-consolidated entity   7    21    15    19 
                     
Net comprehensive income (loss)  $762   $(330)  $(1,459)  $5,698 

 

See Notes to Consolidated Financial Statements.

 

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AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

For the nine months ended September 30, 2015

 (in thousands)
 (unaudited)

 

   Partners’ Capital         
   General
Partner
   Limited
Partners
   AOCI of non-
consolidated entity
   Total 
                     
 Balance at December 31, 2014  $   $22,694   $(35)  $22,659 
                     
Net income (loss) attributable to partners(1)       (1,474)      (1,474)
Other comprehensive income of non-consolidated entity           15    15 
                     
Balance at September 30, 2015  $   $21,220   $(20)  $21,200 

 

(1)

The allocation of net loss includes a curative allocation to increase the General Partner capital account by $15 for the nine months ended September 30, 2015. The cumulative curative allocation since inception of the Partnership is $369. 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.

 

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

 

           
   Nine months ended September 30, 
   2015   2014 
Cash flows from operating activities:          
Net (loss) income  $(1,474)  $5,679 
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:          
Gain on sale of real estate acquired for investment       (6,798)
Impairment   1,342     
(Income) loss from non-consolidated entities   (764)   341 
Depreciation and amortization   208    680 
(Increase) decrease in tenant and accounts receivables   112    134 
Decrease (increase) in accounts receivable - related party   (55)    
Decrease (increase) in other assets   (132)   (140)
Increase (decrease) in accounts payable and other liabilities   (169)   (614)
Increase (decrease) in accounts payable - related party   142    319 
Increase (decrease) in security deposits       4 
Net cash provided by (used in) operating activities   (790)   (395)
           
Cash flows from investing activities:          
Improvements to real estate   (72)   (53)
Payments received on notes receivable   2    9 
Advances for notes receivable - related parties   (440)    
Repayments from related party   60    407 
Investments in and advances to non-consolidated entities   (51)   (104)
Distributions from non-consolidated entities   541    567 
Proceeds from property sales   10,983    22,700 
Net cash provided by (used in) investing activities   11,023    23,526 
           
Cash flows from financing activities:          
Payments on notes payable   (8,980)   (15,607)
Payments on note payable - related party       (551)
Loan modification costs       (266)
Distributions paid       (3,733)
Net cash provided by (used in) financing activities   (8,980)   (20,157)
           
Net increase in cash and cash equivalents   1,253    2,974 
Cash and cash equivalents, beginning of period   4,044    1,203 
Cash and cash equivalents, end of period  $5,297   $4,177 
           
Supplemental schedule of cash flow information:          
           
Cash paid during the period for interest  $237   $866 
Cash paid during the period for taxes  $65   $20 
           
Supplemental schedule of noncash investing and financing activities:          
           
Reclassification of notes receivable - related party and accounts payable - related party  $341   $ 
           
Construction fees from non-consolidated entities included in accounts payable  $73   $37 
           
Reclassification from accounts payable - related party to notes payable - related party  $   $283 
           
Distribution receivable  $3,170   $ 

 

See Notes to Consolidated Financial Statements.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015
(unaudited)

 

1.DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

 

General

 

We are a Texas limited partnership 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. Our General Partner is a Texas corporation and, prior to February 18, 2015, was a wholly-owned subsidiary of AmREIT. Effective February 18, 2015, Edens became the parent company of our General Partner in connection with the AmREIT Acquisition when AmREIT merged with and into Saturn Subsidiary, LLC (an indirect, wholly-owned subsidiary of Edens, “Saturn”), with Saturn being the surviving entity, after Edens acquired all of the outstanding common stock of AmREIT in an all-cash transaction.

 

As of September 30, 2015, we do not own any consolidated properties. On April 10, 2015, we sold Westside Plaza, our final consolidated property. See Note 3. As of September 30, 2015, our investments in real estate included five properties in which we own a non-controlling interest through three joint ventures comprising approximately 905,000 square feet of GLA. The joint venture properties are located in highly populated, suburban communities in Texas.

 

Strategic Plan

 

Our operating period ended on October 31, 2012, and we have entered into our liquidation period pursuant to the terms of our partnership agreement. Our General Partner is reviewing market sales opportunities in good faith, but attractive sales opportunities may not exist in the near term. While we believe an orderly liquidation of our assets will be completed within the next three to six months, successful wind-down of our operations may take longer for our General Partner to complete. During the liquidation period, we plan to distribute net proceeds generated from property sales to our Limited Partners. Although our General Partner will pursue sales opportunities that are in the best interest of our Limited Partners, we do not expect that our investors will recover all of their original investment. We do not expect that the AmREIT Acquisition will impact the orderly liquidation of our assets.

 

Economic Conditions and Liquidity

 

As of September 30, 2015, we have $5.3 million in cash on hand. Most of our investments in retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations were negatively impacted by the severe recession. The United States has experienced recent improvements in the general economy; however, it is difficult to determine if the improvements experienced will continue through 2015 and into the future.

 

A significant portion of Houston’s and Dallas’ industry is in oil and gas as well as oilfield services. The price of oil declined to five-year lows set in late March of 2015. Oil benchmarks have rallied somewhat from their lows; however, the recovery is only moderate with prices trading in a narrow range between $40-$50 a barrel since early May 2015. It is unknown when or whether oil prices will continue to increase, and if they increase, how much and for what duration. We are unable to predict the impact, if any, that lower oil prices could have on economies in which our properties are located. However, a prolonged period of depressed oil prices could potentially be adverse to these economies, the profitability of our tenants and, ultimately, the value of our properties.

 

Current strategies and recent transactions that have impacted current and future liquidity include:

 

We and our joint venture partner of the 5433 Westheimer property have listed this property for sale with HFF, a national top-tier commercial real estate brokerage firm. We have provided additional, short-term liquidity in the form of a promissory note up to a maximum of $1.5 million with repayment upon disposition of the property. As of September 30, 2015, we have advanced $1.1 million under this promissory note. Based upon current estimates of fair value, sufficient equity exists in the property post-renovation to recover our advances under this note.

 

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On April 10, 2015, we sold our Westside Plaza property for $11.0 million in an all-cash transaction. We evaluated Westside Plaza for impairment as of March 31, 2015 and recorded an impairment of $1.3 million during the first quarter of 2015 which represented the amount that the carrying value of the property exceeded the net sales proceeds received. See Notes 3 and 6.

 

On September 9, 2015, we sold the Woodlake Pointe property held within the underlying joint venture for $11.0 million in an all-cash transaction. The joint venture recorded a gain on sale of approximately $2.7 million, $810,000 of which represents our 30% portion.

 

We intend to sell our interests in the Casa Linda, Preston Towne Crossing, and Berkeley Square joint ventures and, Edens has elected to exercise its option to acquire our interests in the properties. In accordance with pre-established procedures, we and Edens obtained separate appraisals on the properties from two independent, national appraisal groups. Because the appraisals were within 5% of one another, the sale price will be the average of the two appraisals. The sales price for our 50% interest in Casa Linda has been determined as $28.6 million, the sales price for our 20% interest in Preston Towne Crossing has been determined as $16.8 million, and the sales price for our 20% interest in Berkeley Square has been determined as $7.2 million. Estimated net sales proceeds, after debt and closing costs, are expected to be $9.1 million for our interest in Casa Linda, $8.9 million for our interest in Preston Towne Crossing, and $3.8 million for our interest in Berkeley Square. Our Limited Partners have approved all three of the proposed transactions with Edens. We expect the sales to close in the fourth quarter of 2015, subject to satisfaction of customary closing conditions therein. There can be no assurances that these conditions will be satisfied or that we will complete the disposition on the terms described herein or at all.

 

Future liquidity sources will include cash on hand, distributions from our joint venture properties and sales proceeds from the sales of our real estate investments. Our continuing short-term and long-term liquidity requirements will include, but will not be limited to, corporate and administrative expenses of the Partnership, funding our proportionate share of renovations, expansions, and other significant capital expenditures for our existing joint venture properties to the extent they are unable to fund such expenditures on their own (such as our 5433 Westheimer property) and, ultimately, distributions to our Limited Partners upon sale of our real estate investments. Although no assurance can be given, we believe that we have sufficient liquidity to complete our orderly liquidation in accordance with our strategic plan.

 

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 4. 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 of September 30, 2015, 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 have been prepared pursuant to the rules and regulations of the SEC and are unaudited. 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 as of and for the year ended December 31, 2014.

 

The approved plan does not differ from our partnership agreement. As such, as of September 30, 2015, the financial statements are presented assuming we continue as a going concern.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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Reclassifications

 

Certain reclassifications have been made to our consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2014 to conform to current period presentation. The items had no impact on previously reported net income (loss), our consolidated balance sheets, or consolidated statement of cash flows. See Note 3 for a discussion of our presentation of discontinued operations.

 

Cash and Cash Equivalents

 

We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds.

 

Investments in and income (loss) from nonconsolidated investments

 

Our investments in non-consolidated entities are accounted for under the equity method because we exercise significant influence over such entities. We record our percentage interest in the earnings and losses of these entities in our statement of operations on a net basis as prescribed under GAAP. See Note 4 for further disclosure related to our investments in non-consolidated entities. The significant accounting policies of our non-consolidated entities are consistent with those of our subsidiaries in which we have a controlling financial interest.

 

Revenue Recognition

 

We lease space to tenants under agreements with varying terms. Our leases are accounted for as operating leases, and, although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, possession or control occurs on the lease commencement date. In cases where significant tenant improvements are made prior to lease commencement, the leased asset is considered to be the finished space, and revenue recognition therefore begins when the improvements are substantially complete. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Accrued rents are included in tenant and accounts receivable, net.

 

Depreciation

 

Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years for buildings and site improvements and over the lesser of the useful life or the respective lease term for tenant improvements. We re-evaluate the useful lives of our buildings and improvements as warranted by changing conditions at our properties. As part of this re-evaluation, we may also consider whether such changing conditions indicate a potential impairment, and we perform an impairment analysis, as necessary, at the property level. In the case of a property redevelopment, we reassess the useful lives of specific buildings or other improvements to be demolished as part of that redevelopment once the redevelopment is probable of occurring. As of March 31, 2015 we ceased depreciating our Westside Plaza property as it met the criteria as real estate held for sale during such time period.

 

Impairment

 

We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including acquired lease intangibles and accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors that require complex and subjective judgments to be made by management. For our multi-building retail centers, we consider the entire retail center as the asset group for purposes of our impairment analysis. We review our investments in non-consolidated entities for impairment based on a similar review of the properties held by the investee entity. We evaluated Westside Plaza for impairment as of March 31, 2015 based upon its sale on April 10, 2015, and we recorded an impairment of $1.3 million representing the amount the carrying value of the property at March 31, 2015 exceeded the net sales proceeds received. See Note 6. No impairment charges were recognized for the three and nine months ended September 30, 2014; however, our Woodlake Pointe joint venture recorded an impairment of $2.0 million as of December 31, 2014, $600,000 of which represents our 30% portion. See Note 4.

 

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New Accounting Pronouncements

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” This update changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The new guidance is effective for public business entities in fiscal years beginning after December 15, 2015. Early adoption is allowed, including early adoption in an interim period. We are currently evaluating this accounting to determine what impact, if any, this new guidance could have on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers” that will supersede the existing revenue recognition guidance under GAAP. The accounting update states that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. It also establishes a five-step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. It is effective for annual reporting periods beginning after December 15, 2017. This standard does not supersede current accounting literature for lease contracts. We are currently evaluating this accounting update and our existing revenue recognition policies for contracts, other than our lease contracts with tenants, to determine what impact, if any, this new guidance could have on our consolidated financial statements.

 

Subsequent Events

 

We did not identify any additional subsequent events as of the date of this filing that materially impacted our consolidated financial statements. 

 

3.ASSET DISPOSITIONS AND DISCONTINUED OPERATIONS

 

Effective January 1, 2015 we adopted ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“the ASU”). The ASU is effective on a prospective basis for disposals or assets meeting the definition as held-for-sale for accounting periods beginning on or after December 15, 2014. Under the ASU, discontinued operations are defined as either:

 

1) a component of an entity (or group of components) that: 

 

(i) has been disposed of or meets the criteria to be classified as held-for-sale and 

 

(ii) represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, or 

 

2) a business or nonprofit activity that on acquisition, meets the criteria to be classified as held-for-sale.

 

On April 10, 2015, we sold our Westside Plaza property for $11.0 million in an all-cash transaction. The ASU notes that a strategic shift could include a disposal of a major geographical area, a major line of business, a major equity investment, or other major parts of an entity. We believe that the results of operations from our Westside Plaza property constitute “a major part” of our operations. Accordingly, we have classified the results of operations of our Westside Plaza property as discontinued operations.

 

On June 25, 2014, we sold our Lantern Lane property to AmREIT for $22.7 million, which generated net sales proceeds of approximately $7.4 million, net of closing costs and the repayment of the mortgage loan secured by the property. We have presented the operating results of this property as discontinued operations.

 

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A summary of our discontinued operations for the periods presented is detailed below. The operations of these properties have been eliminated from ongoing operations, and we will not have continuing involvement after disposition. Prior period operating activity related to such properties has been reclassified as discontinued operations in our consolidated statements of operations and comprehensive income (loss) for all periods presented (amounts in thousands): 

                         
   Three Months Ended September 30, 2015   Three Months Ended September 30, 2014 
   Lantern
Lane
   Westside
Plaza
  Total   Lantern
Lane
   Westside
Plaza
   Total 
Revenues:                              
Rental (loss) income from operating leases  $   $(14)  $(14)  $(14)  $304   $290 
Total revenues       (14)   (14)   (14)   304    290 
                               
Expenses:                              
General and administrative       6    6    5    4    9 
Property expense       (16)   (16)   12    90    102 
Property management fees-related party                   13    13 
Legal and professional               5    1    6 
Depreciation and amortization               4    88    92 
Impairment                        
Total operating expenses       (10)   (10)   26    196    222 
                               
Operating income (loss)       (4)   (4)   (40)   108    68 
                               
Other income (expense):                              
Interest expense                   (54)   (54)
Total other income (expense), net                   (54)   (54)
                               
Income (loss) from discontinued operations  $   $(4)  $(4)  $(40)  $54   $14 

 

                         
   Nine Months Ended September 30, 2015   Nine Months Ended September 30, 2014 
   Lantern
Lane
   Westside
Plaza
  Total   Lantern
Lane
   Westside
Plaza
   Total 
                               
Revenues:                              
Rental income from operating leases  $   $340   $340   $1,101   $919   $2,020 
Total revenues       340    340    1,101    919    2,020 
                               
Expenses:                              
General and administrative       13    13    21    6    27 
Property expense       112    112    336    278    614 
Property management fees-related party       13    13    43    38    81 
Legal and professional       8    8    7    10    17 
Depreciation and amortization       116    116    315    263    578 
Impairment       1,342    1,342             
Total operating expenses       1,604    1,604    722    595    1,317 
                               
Operating income (loss)       (1,264)   (1,264)   379    324    703 
                               
Other income (expense):                              
Interest expense       (290)   (290)   (231)   (470)   (701)
Total other income (expense), net       (290)   (290)   (231)   (470)   (701)
                               
Income (loss) from discontinued operations  $   $(1,554)  $(1,554)  $148   $(146)  $2 

 

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4.INVESTMENTS IN NON-CONSOLIDATED ENTITIES

 

As of September 30, 2015, we have investments in four entities: PTC/BSQ Holding Company LLC, Casa Linda, Woodlake Pointe, and 5433 Westheimer, through which we owned an interest in five properties that are accounted for using the equity method of accounting due to our ability to exercise significant influence over them. We intend to sell our interests in the Casa Linda, Preston Towne Crossing, and Berkeley Square joint ventures and, Edens has elected to exercise its option to acquire our interests in the properties. See Note 1. Our investment balances as reported on our consolidated balance sheets are as follows ($ in thousands):

 

Investment  Ownership   September 30, 2015   December 31, 2014 
PTC/BSQ   20%  $7,621   $7,444 
Casa Linda   50%   2,736    2,875 
Woodlake Pointe   30%   11    2,303 
5433 Westheimer   57.5%   1,925    2,369 
Total       $12,293   $14,991 

  

PTC/BSQ - We own a 20% interest in PTC/BSQ Holding Company LLC, which owns three multi-tenant retail properties located in Plano, Texas with a combined GLA of 447,799 square feet. The remaining 80% is owned by an unaffiliated third party. Our PTC/BSQ joint venture is secured by a $54.0 million mortgage loan with an additional $4.5 million available for future capital improvements. The loan is scheduled to mature in June 2016; however, the loan contains two, one-year extension options. PTC/BSQ Holding Company LLC has entered into an interest rate swap with a notional amount of $54.0 million, effectively fixing the interest rate on this debt at 2.51% in order to manage the volatility inherent in a variable-rate mortgage. The interest rate swap was designated as a cash flow hedge for financial reporting purposes. Changes in fair value of derivatives that qualify as cash flow hedges are recognized in other comprehensive income. For the nine months ended September 30, 2015, our portion of the fair value decrease of the liability totaled $15,000 and is recorded as other comprehensive income (loss) of non-consolidated entities on our consolidated statements of operations and comprehensive income (loss).

 

Casa Linda - We own a 50% interest in AmREIT Casa Linda, LP, which owns a 324,569 square foot retail shopping center located in Dallas, Texas. The remaining 50% is owned by MIG IV, an affiliate of our General Partner. Albertson’s is the largest tenant, occupying 59,561 square feet with a lease scheduled to expire in July 2016.

 

During 2012, we and MIG IV initiated a lease-up strategy at our Casa Linda property (a 50% joint venture between us and MIG IV). As of September 30, 2015, the joint venture had substantially completed the lease-up strategy and incurred approximately $2.6 million of $3.0 million in planned capital expenditures, including certain tenant build-out and site improvements. The property is secured by a $38.0 million non-recourse, mortgage loan that matures in December 2017. Additionally, the loan contains a provision that would allow for an additional funding of approximately $4.5 million should the joint venture elect to acquire an adjacent property. The mortgage loan bears interest at a variable rate; however, we and MIG IV entered into an interest rate cap agreement that provides for a maximum rate of 3% per annum. The interest rate cap was not designated as a hedge for financial reporting purposes, and our portion of the change in fair value is recognized in income (loss) from non-consolidated entities. For the nine months ended September 30, 2015 and 2014, our portion of the decrease in fair value totaled $9,000 and $47,000, respectively, and is included in income (loss) from non-consolidated entities on our consolidated statements of operations and comprehensive income (loss).

 

Woodlake Pointe - On September 9, 2015, the joint venture in which we owned a 30% interest sold the Woodlake Pointe property for $11.0 million in an all-cash transaction. The joint venture recorded a gain on sale of approximately $2.7 million, $810,000 of which represents our 30% portion. The remaining 70% in the joint venture was owned by affiliated Edens entities, MIG IV (60%) and ARIC (10%). We and our joint venture partners recorded an impairment for this property as of December 31, 2014 of $2.0 million. In arriving at our fair value estimate we utilized both comparable sales information of similar properties assuming a “sell as is” scenario and a discounted cash flow model assuming that the property entered into a long term lease and redeveloped the property. The fair value determined under each of these scenarios was approximately $8.2 million. Accordingly, the joint venture recorded an impairment at the property of $2.0 million as of December 31, 2014, $600,000 of which represents our 30% portion and is included in our investment balance.

 

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5433 Westheimer – We own a 57.5% interest in 5433 Westheimer, LP, which owns an office building with 132,427 square feet of GLA in Houston, Texas. The remaining 42.5% is owned by a third party, joint venture partner. The property is accounted for under the equity method of accounting as we and our joint venture partner share equally in decision-making rights. The property is secured by a five-year term loan in the amount of $9.1 million, including construction draws for the redevelopment of the property. As of September 30, 2015, this loan had an outstanding balance of $9.1 million. On October 18, 2014, our 5433 Westheimer joint venture modified its mortgage loan. Among other things, the modification waived prior non-compliance with its debt covenants through October 18, 2014, modified ongoing debt service operating covenants, extended the term to October 2017 and extended the interest-only payment terms to October 2016. The loan was modified again on September 4, 2015 to include an additional draw of $370,000 and to modify certain debt covenants. While we serve as guarantor on this debt, we do not believe that we would be required to perform under the guarantee as the estimated fair value of the property exceeds the amount of the loan.

 

We and our joint venture partner initiated a redevelopment plan, primarily in the form of building and site improvements. Additionally, we and our joint venture partner have listed this property for sale with HFF, a national top-tier commercial real estate brokerage firm. As of September 30, 2015, approximately $6.7 million in redevelopment costs have been incurred including lease-up costs. 5433 Westheimer has not had sufficient liquidity to fund the redevelopment costs needed to ready the property for sale solely from its own cash flows. Additionally, the property owed ARIC and us approximately $400,000 primarily related to deferred asset management fees. As such, we provided the joint venture with an advancing promissory note with a 10% interest rate to fund up to approximately $1.5 million to:

 

complete the renovations to ready the property for sale,
roll in the accounts payable owed to ARIC and us, and
fund remaining working capital needs until the property is sold.

 

As of September 30, 2015, we have advanced our 5433 Westheimer joint venture $1.1 million under this promissory note. The promissory note will be due upon sale of the property. Based upon estimates of fair value, sufficient equity exists in the property post-renovation to recover our current investment and any current and future loans to the joint venture. However, we can provide no assurances that we will be able to do so, or under circumstances and timing that allow us to maximize the value of the property; thus, all or a portion of our investment of $1.9 million as well as all or a portion of the $1.1 million outstanding under the promissory note, is subject to risk of loss.

 

Combined condensed financial information for our non-consolidated entities, at 100%, is summarized for the three and nine months ended September 30, 2015 and 2014, as follows (amounts in thousands):

 

   Three months ended September 30,   Nine months ended September 30, 
   2015   2014   2015   2014 
                 
Revenues  $7,064   $4,239   $15,769   $12,826 
Depreciation and amortization   404    1,606    3,433    4,792 
Interest expense   819    937    2,700    2,896 
Net income (loss)   4,249    (37)   4,496    (187)

  

5.NOTE PAYABLE

 

Our outstanding consolidated debt to the third party lender as of September 30, 2015 and December 31, 2014 is as follows (amounts in thousands):

 

   September 30,   December 31, 
Note payable  2015   2014 
Westside Plaza  $   $8,980 
   Total  $   $8,980 

The Westside Plaza mortgage loan was secured by the underlying real estate in the joint venture and was scheduled to mature in July 2015. Note A payments were interest-only at 5.62% and Note B payments were deferred with no interest due until the debt was refinanced or the property was sold. Upon the sale of the property on April 10, 2015, the outstanding mortgage loan was repaid in full.

We also serve as joint and several guarantor of up to 25% of the $9.1 million mortgage loan held by our 5433 Westheimer joint venture, of which we own 57.5%. The debt matures in October 2017. See Note 4. While we serve as guarantor on this debt, we do not believe that we would be required to perform under the guarantee as the estimated fair value of the property exceeds the amount of the loan, and therefore we believe that our potential exposure is limited to our investment balance.

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6.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.

 

Our consolidated financial instruments consist of cash and cash equivalents, tenant and accounts receivable, accounts receivable – related party, notes receivable, note payable, accounts payable – related party, and accounts payable and other liabilities. The carrying values of all of these financial instruments are representative of the fair values due to the short-term nature of these instruments and negligible credit risks.

 

Non-Recurring Fair Value Measurements, Impairment – We determine whether an impairment in value occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors that require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. For our multi-building retail centers, we consider the entire retail center as the asset group for purposes of our impairment analysis.

 

We evaluated our Westside Plaza property for impairment as of March 31, 2015, based upon its sale on April 10, 2015, and we recorded an impairment of $1.3 million representing the amount that the carrying value of the property exceeded the net sales proceeds received.

 

7.PARTNERS’ CAPITAL AND NON-CONTROLLING INTEREST

 

Distributions – With the sale of our Westside Plaza property in April 2015, we expect that we will make a distribution to our limited partners during 2015. During 2014, we made a distribution of approximately $3.7 million to our Limited Partners related to the sale of our Lantern Lane property. Distributions will be made to 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;
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.

 

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8.RELATED PARTY TRANSACTIONS

 

We have no employees or offices. Certain of our affiliates receive fees and compensation from the Partnership, including compensation for providing services to us in the areas of asset management, development and acquisitions, property management and leasing, financing, brokerage and administration. We reimburse our General Partner for an allocation of general and administrative costs. The following table summarizes the amount of such costs incurred by us during the three and nine months ended September 30, 2015 and 2014 (amounts in thousands): 

                 
   Three months ended September 30,   Nine months ended September 30, 
Type of service  2015   2014   2015   2014 
Asset management fees  $89   $88   $266   $266 
Interest expense - related party               5 
Administrative costs reimbursements   71    82    237    257 
   $160   $170   $503   $528 

 

In addition to the above fees incurred 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, 2015 and 2014, such fees totaled $871,000 and $850,000, respectively. For more information, see Note 4 regarding investments in non-consolidated entities.

  

We also receive interest payments from 5433 Westhiemer for the advancing promissory note. During the three and nine months ended September 30, 2015, interest income – related party totaled $28,000 and $78,000, respectively.

 

9.COMMITMENTS AND CONTINGENCIES

 

Litigation - In the ordinary course of business, we may become subject to litigation or claims. There are no material pending legal proceedings known to be contemplated against us.

 

Environmental matters - In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. In particular, we are subject to numerous environmental laws and regulations as they apply to real estate pertaining to chemicals used by the dry cleaning industry, the existence of asbestos in older shopping centers, and underground petroleum storage tanks. We have not been notified by any governmental authority of any non-compliance, liability or other claim.

 

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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 Quarterly Report constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the 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, but are not limited to, 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 development starts and sales of properties, the ability to meet development and redevelopment 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 duty or obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating 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 arrangements, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use developments. Our General Partner is a Texas corporation, and, prior to February 18, 2015, was a wholly-owned subsidiary of AmREIT. Effective February 18, 2015, Edens became the parent company of our General Partner in connection with the AmREIT Acquisition when AmREIT merged with and into Saturn Subsidiary, LLC (an indirect, wholly-owned subsidiary of Edens, “Saturn”), with Saturn being the surviving entity after Edens acquired all of the outstanding common stock of AmREIT in an all cash transaction.

 

Our General Partner has the exclusive right to manage our business and affairs on a day-to-day basis pursuant to our limited partnership agreement. The Limited Partners have the right to remove and replace our General Partner, with or without cause, by a vote of the Limited Partners owning a majority of the outstanding Units (excluding any Units held by our General Partner). Our General Partner is responsible for all of our investment decisions, including decisions relating to the properties to be developed, the method and timing of financing or refinancing the properties, the selection of tenants, the terms of the leases, the method and timing of the sale of the properties and the reinvestment of net sales proceeds. Our General Partner utilizes the services of Edens and its affiliates in performing its duties under our limited partnership agreement.

 

As of September 30, 2015, we no longer own any consolidated properties. Our investments in real estate include five properties in which we own a non-controlling interest through joint ventures comprising approximately 905,000 square feet of GLA. All of our properties are located in highly populated, suburban communities in Texas. As of September 30, 2015, our properties had a weighted average occupancy rate of approximately 85.5%.

 

On April 10, 2015, we sold our Westside Plaza property to a third party (see Note 3 of the Notes to Consolidated Financial Statements). We evaluated Westside Plaza for impairment as of March 31, 2015 and recorded an impairment of $1.3 million representing the amount that the carrying value of our Westside Plaza property assets exceeded the net sales proceeds received.

 

On September 9, 2015, the joint venture in which we owned a 30% interest sold the Woodlake Pointe property for $11.0 million in an all-cash transaction. The joint venture recorded a gain on sale of approximately $2.7 million, $810,000 of which represents our 30% portion. 

 

We intend to sell our interests in the Casa Linda, Preston Towne Crossing, and Berkeley Square joint ventures and, Edens has elected to exercise its option to acquire our interests in the properties. In accordance with pre-established procedures, we and Edens obtained separate appraisals on the properties from two independent, national appraisal groups. Because the appraisals were within 5% of one another, the sale price will be the average of the two appraisals. The sales price for our 50% interest in Casa Linda has been determined as $28.6 million, the sales price for our 20% interest in Preston Towne Crossing has been determined as $16.8 million, and the sales price for our 20% interest in Berkeley Square has been determined as $7.2 million. Estimated net sales proceeds, after debt and closing costs, are expected to be $9.1 million for our interest in Casa Linda, $8.9 million for our interest in Preston Towne Crossing, and $3.8 million for our interest in Berkeley Square. We estimate that the net proceeds to be distributed per unit will be approximately $7,700. Our Limited Partners have approved all three of the proposed transactions with Edens. We expect the sales to close in the fourth quarter of 2015, subject to satisfaction of customary closing conditions therein. There can be no assurances that these conditions will be satisfied or that we will complete the disposition on the terms described herein or at all.

 

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Income from our non-controlling interests in our joint ventures is derived 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.

 

Strategic Plan

 

Our operating period ended on October 31, 2012, and we have entered into our liquidation period pursuant to the terms of our partnership agreement. Our General Partner is reviewing market sales opportunities in good faith, but attractive sales opportunities may not exist in the near term. While we believe an orderly liquidation of our assets will be completed within the next three to six months, successful wind-down of our operations may take longer for our General Partner to complete. During the liquidation period, we plan to distribute net proceeds generated from property sales to our Limited Partners. Although our General Partner will pursue sales opportunities that are in the best interest of our Limited Partners, we do not expect that our investors will recover all of their original investment. We do not expect that the AmREIT Acquisition described above will impact the orderly liquidation of our assets.

 

RESULTS OF OPERATIONS

 

Below is a discussion of our results of operations for the three months and nine months ended September 30, 2015, as compared to the same periods in 2014.

 

Comparison of the Three Months Ended September 30, 2015, to the Three Months Ended September 30, 2014

 

Income (loss) from non-consolidated entities. Income from non-consolidated entities increased approximately $1.1 million, for the three months ended September 30, 2015, as compared to the same period in 2014. These amounts represent our ownership portion of our joint ventures’ net income or loss for the period. The increased income is primarily due to equity pickup from our interest in the gain on sale of Woodlake Pointe during the third quarter of 2015 and higher net income in 2015 from our Casa Linda and PTC/BSQ joint venture properties.

 

Interest income – related party. Interest income – related party increased approximately $28,000 for the three months ended September 30, 2015, as compared to the same period in 2014. The increase is due to interest income from our note receivable – related party due from our 5433 Westheimer joint venture that was established during the fourth quarter of 2014.

 

Income (loss) from discontinued operations. Loss from discontinued operations increased approximately $37,000 for the three months ended September 30, 2015, as compared to the same period in 2014. The increase in loss is due to the elimination of operating income from Westside Plaza as a result of the sale in April 2015.

 

Comparison of the Nine Months Ended September 30, 2015, to the Nine Months Ended September 30, 2014

 

Income (loss) from non-consolidated entities. Income from non-consolidated entities increased approximately $1.1 million for the nine months ended September 30, 2015, as compared to the same period in 2014. These amounts represent our ownership portion of our joint ventures’ net income or loss for the period. The increased income is primarily due to equity pickup from our interest in the gain on sale of Woodlake Pointe and higher net income in 2015 from our Casa Linda and PTC/BSQ joint venture properties.

 

Interest income – related party. Interest income – related party increased approximately $78,000 for the nine months ended September 30, 2015, as compared to the same period in 2014. The increase is due to interest income from our note receivable – related party due from our 5433 Westheimer joint venture that was established during the fourth quarter of 2014.

 

Income (loss) from discontinued operations. Loss from discontinued operations increased approximately $1.5 million for the nine months ended September 30, 2015, as compared to the same period in 2014. This increase in loss is due to impairment of $1.3 million recorded on our Westside Plaza property during the first quarter of 2015. See Notes 2 and 6 of the Notes to Consolidated Financial Statements.

 

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Gain (loss) on sale of real estate acquired for investment. Gain on sale of real estate acquired for investment decreased approximately $6.8 million for the nine months ended September 30, 2015, as compared to the same period in 2014 as a result of a $6.8 million gain that was recorded in 2014 related to the sale of Lantern Lane.

 

Liquidity and Capital Resources

 

As of September 30, 2015, we have $5.3 million in cash on hand. With the sale of our Westside Plaza property and the potential sales of our interests in Casa Linda, Preston Towne Crossing, and Berkeley Square joint ventures, we expect that we will make a distribution for the net sales proceeds during the fourth quarter of 2015. Current strategies and recent transactions that have impacted current and future liquidity include:

 

We and our joint venture partner of the 5433 Westheimer property have listed this property for sale with HFF, a national top-tier commercial real estate brokerage firm. We have provided additional, short-term liquidity in the form of a promissory note up to a maximum of $1.5 million with repayment upon disposition of the property. As of September 30, 2015, we have advanced $1.1 million under this promissory note. Based upon current estimates of fair value, sufficient equity exists in the property post-renovation to recover our advances under this note.

  

On April 10, 2015, we sold our Westside Plaza property to a third party (see Note 3 of the Notes to Consolidated Financial Statements). We evaluated Westside Plaza for impairment as of March 31, 2015 and recorded an impairment of $1.3 million representing the amount that the carrying value of our Westside Plaza property assets exceeded the net sales proceeds received.

  

On September 9, 2015, we sold the Woodlake Pointe property held within the underlying joint venture for $11.0 million in an all-cash transaction. The joint venture recorded a gain on sale of approximately $2.7 million, $810,000 of which represents our 30% portion.

  

We intend to sell our interests in the Casa Linda, Preston Towne Crossing, and Berkeley Square joint ventures and, Edens has elected to exercise its option to acquire our interests in the properties. In accordance with pre-established procedures, we and Edens obtained separate appraisals on the properties from two independent, national appraisal groups. Because the appraisals were within 5% of one another, the sale price will be the average of the two appraisals. The sales price for our 50% interest in Casa Linda has been determined as $28.6 million, the sales price for our 20% interest in Preston Towne Crossing has been determined as $16.8 million, and the sales price for our 20% interest in Berkeley Square has been determined as $7.2 million. Estimated net sales proceeds, after debt and closing costs, are expected to be $9.1 million for our interest in Casa Linda, $8.9 million for our interest in Preston Towne Crossing, and $3.8 million for our interest in Berkeley Square. We estimate that the net proceeds to be distributed per unit will be approximately $7,700. Our Limited Partners have approved all three of the proposed transactions with Edens. We expect the sales to close in the fourth quarter of 2015, subject to satisfaction of customary closing conditions therein. There can be no assurances that these conditions will be satisfied or that we will complete the disposition on the terms described herein or at all.

  

Future liquidity sources will include cash on hand, distributions from our joint venture properties and sales proceeds from the sales of our real estate investments. Our continuing short-term and long-term liquidity requirements will include, but will not be limited to, corporate and administrative expenses of the Partnership, funding our proportionate share of renovations, expansions, and other significant capital expenditures for our existing joint venture properties to the extent they are unable to fund such expenditures on their own (our 5433 Westheimer property) and, ultimately, distributions to our Limited Partners upon sale of our real estate investments. Although no assurance can be given, we believe that we have sufficient liquidity to complete our orderly liquidation in accordance with our strategic plan.

 

Market Conditions

 

Our operations are sensitive to changes in overall economic conditions that impact our tenants, including market and economic challenges experienced by the U.S. economy, the real estate industry or within the geographic markets where our properties are located. Most of our retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations were negatively impacted by the severe recession. The United States has experienced recent improvements in the general economy; however, it is difficult to determine if the improvements experienced will continue through 2015 and into the future.

 

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A general reduction in the level of tenant leasing or shifts in tenant leasing practices could adversely affect the business, financial condition, liquidity, results of operations, our redevelopment projects and future property dispositions of our joint ventures. Additionally, if credit markets and/or debt or equity capital markets contract, our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our joint ventures’ ability to refinance existing debt and increase future interest expense.

 

A significant portion of Houston’s and Dallas’ industry is in oil and gas as well as oilfield services. The price of oil declined to five-year lows set in late March of 2015. Oil benchmarks have rallied somewhat from their lows; however, the recovery is only moderate with prices trading in a narrow range around $40-$50 a barrel since early May 2015. It is unknown when or whether oil prices will continue to increase, and if they increase, how much and for what duration. We are unable to predict the impact, if any, that lower oil prices could have on economies in which our properties are located. However, a prolonged period of depressed oil prices could potentially be adverse to these economies, the profitability of our tenants and, ultimately, the value of our properties.

 

Cash Flow Activities for the Nine months Ended September 30, 2015 and 2014

 

Cash flows provided by (used in) operating activities, investing activities and financing activities during the nine months ended September 30, 2015 and 2014, are as follows (in thousands):

 

   Nine months ended September 30, 
   2015   2014 
Operating activities  $(790)  $(395)
Investing activities   11,023    23,526 
Financing activities   (8,980)   (20,157)

  

Net cash flows used in operating activities increased by $395,000, from cash used by operating activities of $395,000 during the nine months ended September 30, 2014 to cash used in operating activities of $790,000 during the nine months ended September 30, 2015. This increase is primarily due to an increase in income from non-consolidated subsidiaries of approximately $1.1 million, a decrease in accounts payable-related party of approximately $177,000, off-set by lower net income, exclusive of the gain on sale of real estate and impairment of approximately $987,000 compared to the same period in 2014.

 

Net cash flows provided by investing activities decreased by $12.5 million, from cash provided by investing activities of $23.5 million during the nine months ended September 30, 2014 to cash provided by investing activities of $11.0 million during the nine months ended September 30, 2015. This decrease in cash inflows is primarily due to an $11.7 million reduction in proceeds received from the sales of properties. During 2014, we sold Lantern Lane for $22.7 million, and during 2015, we sold Westside Plaza for $11.0 million. We received cash payments of $407,000 from related parties during the nine months ended September 30, 2014 compared to only $60,000 in comparable receipts during the nine months ended September 30, 2015. Additionally, we loaned $440,000 to our 5433 Westheimer joint venture during the nine months ended September 30, 2015 with no comparable outflows during the nine months ended September 30, 2014.  

 

Net cash flows used in financing activities decreased by $11.2 million for the nine months ended September 30, 2015, as compared to the same period in 2014. This decrease was related to repayment activity on mortgage notes payable. During 2014 we repaid $15.6 million of notes payable, primarily related to the repayment of the $15.0 million Lantern Lane note payable upon the sale of the Lantern Lane property, and during 2015, we repaid approximately $9.0 million related to the repayment of the Westside Plaza note payable upon sale of the Westside Plaza property. We also paid distributions to limited partners of $3.7 million in 2014 with no distributions paid in 2015. In addition, in 2014, we made approximately $551,000 in payments on our note payable – related party, which was fully paid off in 2014. The remaining variance is due to loan modification costs that were paid in 2014 related to the Westside Plaza loan modification.

 

OFF BALANCE SHEET ARRANGEMENTS

 

We also serve as guarantor for up to 25% of the $9.1 million mortgage loan held by our 5433 Westheimer joint venture, of which we own 57.5%. The debt matures in October 2017. See Note 4 of the Notes to Consolidated Financial Statements. While we serve as guarantor on this debt, we do not believe that we would be required to perform under the guarantee as the estimated fair value of the property exceeds the amount of the loan, and therefore we believe that our potential exposure is limited to our investment balance.

 

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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 principal executive officer and principal financial officer, 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, 2015. Based on that evaluation, our General Partner’s principal executive officer and principal financial officer concluded that, as of September 30, 2015, 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.

 

Changes in Internal Controls Over Financial Reporting

 

There has been no change to our internal control over financial reporting during the quarter ended September 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

   
ITEM 1. LEGAL PROCEEDINGS.

 

In the ordinary course of business, we may become subject to litigation or claims. Neither we nor our properties are the subject of any material pending legal proceeding, nor are we aware of any legal proceeding that a government authority is contemplating against us.

   
   
ITEM 1A. RISK FACTORS.
   
Not applicable.
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
   
None.
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
   
None.
   
ITEM 4. MINE SAFETY DISCLOSURES.
   
Not applicable.
   
ITEM 5. OTHER INFORMATION.
   
None.
   
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 Quarterly Report.

 

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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 12, 2015 By: /s/ Jodie W. McLean
    Jodie W. McLean  
   

President and Director

(authorized officer) 

 
       
Date: November 12, 2015 By: /s/ Mark P. Garside
    Mark P. Garside  
    Secretary, Vice President and Director  
       

Date: November 12, 2015

By:

/s/ Chad C. Braun
    Chad C. Braun
    Vice President

 

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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 31.1 Certification of the principal executive officer of the Partnership’s General Partner pursuant to Exchange Act Rule 13a-14(a) (filed herewith).
   
Exhibit 31.2 Certification of the principal financial officer of the Partnership’s General Partner pursuant to Exchange Act Rule 13a-14(a) (filed herewith).
   
Exhibit 32.1 Certification of the principal executive officer of the Partnership’s General Partner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
   
Exhibit 32.2 Certification of the principal financial officer of the Partnership’s General Partner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
   
Exhibit 101.INS XBRL Instance Document*
   
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document*
   
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
   
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document*
   
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
   
Exhibit 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, 2015 (unaudited) and December 31, 2014, (ii) the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2015 and 2014 (unaudited), (iii) the Consolidated Statements of Partners’ Capital for the nine months ended September 30, 2015 (unaudited), (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited) and (v) the Notes to the Consolidated Financial Statements (unaudited).

 

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