American Community Properties Trust Form 10-Q 06-30-2006
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
FOR
THE QUARTERLY PERIOD ENDED JUNE
30, 2006,
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
FOR
THE TRANSITION PERIOD FROM _______________ TO
_________________
|
Commission
file number 1-14369
AMERICAN
COMMUNITY PROPERTIES TRUST
(Exact
name of registrant as specified in its charter)
MARYLAND
(State
or other jurisdiction of incorporation or organization)
|
52-2058165
(I.R.S.
Employer Identification No.)
|
222
Smallwood Village Center
St.
Charles, Maryland 20602
(Address
of principal executive offices)(Zip Code)
(301)
843-8600
(Registrant's
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “an accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
As
of August 7, 2006, there were 5,197,954 Common Shares, par value $0.01 per
share, outstanding
AMERICAN
COMMUNITY PROPERTIES TRUST
FORM
10-Q
JUNE
30, 2006
|
|
Page
Number
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements
|
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
|
|
7
|
|
|
|
|
|
8
|
|
|
|
Item
2.
|
|
23
|
|
|
|
Item
3.
|
|
35
|
|
|
|
Item
4.
|
|
35
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
|
35
|
|
|
|
Item
1A.
|
|
36
|
|
|
|
Item
2
|
|
39
|
|
|
|
Item
3.
|
|
39
|
|
|
|
Item
4.
|
|
39
|
|
|
|
Item
5.
|
|
39
|
|
|
|
Item
6.
|
|
39
|
|
|
|
|
|
40
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
FOR
THE SIX MONTHS ENDED JUNE 30,
|
|
(In
thousands, except per share amounts)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Rental
property revenues
|
|
$
|
26,138
|
|
$
|
10,828
|
|
Community
development-land sales
|
|
|
6,626
|
|
|
12,721
|
|
Homebuilding-home
sales
|
|
|
11,259
|
|
|
-
|
|
Management
and other fees, substantially all from related entities
|
|
|
565
|
|
|
1,697
|
|
Reimbursement
of expenses related to managed entities
|
|
|
1,104
|
|
|
3,227
|
|
Total
revenues
|
|
|
45,692
|
|
|
28,473
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
Rental
property operating expenses
|
|
|
12,343
|
|
|
4,374
|
|
Cost
of land sales
|
|
|
3,666
|
|
|
8,880
|
|
Cost
of home sales
|
|
|
8,521
|
|
|
21
|
|
General,
administrative, selling and marketing
|
|
|
5,007
|
|
|
5,415
|
|
Depreciation
and amortization
|
|
|
4,074
|
|
|
1,950
|
|
Expenses
reimbursed from managed entities
|
|
|
1,104
|
|
|
3,227
|
|
Total
expenses
|
|
|
34,715
|
|
|
23,867
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
10,977
|
|
|
4,606
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
218
|
|
|
646
|
|
Equity
in earnings from unconsolidated entities
|
|
|
343
|
|
|
628
|
|
Interest
expense
|
|
|
(7,200
|
)
|
|
(3,379
|
)
|
Minority
interest in consolidated entities
|
|
|
(2,666
|
)
|
|
(238
|
)
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
1,672
|
|
|
2,263
|
|
Provision
for income taxes
|
|
|
714
|
|
|
747
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
958
|
|
$
|
1,516
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
0.18
|
|
$
|
0.29
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
5,198
|
|
|
5,192
|
|
Cash
dividends per share
|
|
$
|
0.63
|
|
$
|
0.20
|
|
Note:
The
income statement for the six months ended June 30, 2006 reflects the adoption
of
Emerging Issues Task Force Issue 04-05, “Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights,” (“EITF
04-05”) on January 1, 2006 (Refer to Note 2).
The
accompanying notes are an integral part of these consolidated
statements.
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
FOR
THE THREE MONTHS ENDED JUNE
30,
|
|
(In
thousands, except per share amounts)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Revenues
|
|
|
|
|
|
Rental
property revenues
|
|
$
|
13,347
|
|
$
|
5,487
|
|
Community
development-land sales
|
|
|
2,682
|
|
|
8,973
|
|
Homebuilding-home
sales
|
|
|
7,234
|
|
|
-
|
|
Management
and other fees, substantially all from related entities
|
|
|
275
|
|
|
970
|
|
Reimbursement
of expenses related to managed entities
|
|
|
532
|
|
|
1,650
|
|
Total
revenues
|
|
|
24,070
|
|
|
17,080
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
Rental
property operating expenses
|
|
|
6,388
|
|
|
2,281
|
|
Cost
of land sales
|
|
|
1,430
|
|
|
6,236
|
|
Cost
of home sales
|
|
|
5,487
|
|
|
11
|
|
General,
administrative, selling and marketing
|
|
|
2,342
|
|
|
2,711
|
|
Depreciation
and amortization
|
|
|
2,101
|
|
|
942
|
|
Expenses
reimbursed from managed entities
|
|
|
532
|
|
|
1,650
|
|
Total
expenses
|
|
|
18,280
|
|
|
13,831
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
5,790
|
|
|
3,249
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
89
|
|
|
521
|
|
Equity
in earnings from unconsolidated entities
|
|
|
173
|
|
|
283
|
|
Interest
expense
|
|
|
(3,699
|
)
|
|
(1,623
|
)
|
Minority
interest in consolidated entities
|
|
|
(1,601
|
)
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
752
|
|
|
2,218
|
|
Provision
for income taxes
|
|
|
295
|
|
|
742
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
457
|
|
$
|
1,476
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
0.09
|
|
$
|
0.28
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
5,198
|
|
|
5,192
|
|
Cash
dividends per share
|
|
$
|
0.10
|
|
$
|
0.10
|
|
Note:
The
income statement for the three months ended June 30, 2006 reflects the adoption
of Emerging Issues Task Force Issue 04-05, “Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights,” (“EITF
04-05”) on January 1, 2006 (Refer to Note 2).
The
accompanying notes are an integral part of these consolidated
statements.
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
CONSOLIDATED
BALANCE
SHEETS
|
|
(In
thousands, except share and per share amounts)
|
|
|
|
As
of
|
|
As
of
|
|
|
|
June
30, 2006
|
|
December
31, 2005
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
Investments
in real estate:
|
|
|
|
|
|
|
|
Operating
real estate, net of accumulated depreciation
|
|
$
|
143,496
|
|
$
|
76,578
|
|
of
$139,631 and $46,412 respectively
|
|
|
|
|
|
|
|
Land
and development costs
|
|
|
60,041
|
|
|
54,232
|
|
Condominiums
under construction
|
|
|
13,454
|
|
|
17,621
|
|
Rental
projects under construction or development
|
|
|
12,205
|
|
|
4,458
|
|
Investments
in real estate, net
|
|
|
229,196
|
|
|
152,889
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
13,465
|
|
|
21,156
|
|
Restricted
cash and escrow deposits
|
|
|
21,326
|
|
|
8,925
|
|
Investments
in unconsolidated real estate entities
|
|
|
6,657
|
|
|
9,738
|
|
Receivable
from bond proceeds
|
|
|
16,873
|
|
|
8,422
|
|
Accounts
receivable
|
|
|
1,853
|
|
|
1,332
|
|
Deferred
tax assets
|
|
|
16,167
|
|
|
5,610
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
1,138
|
|
|
1,182
|
|
Deferred
charges and other assets, net of amortization of
|
|
|
|
|
|
|
|
$2,127
and $898 respectively
|
|
|
10,829
|
|
|
7,831
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
317,504
|
|
$
|
217,085
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
Non-recourse
debt
|
|
$
|
236,327
|
|
$
|
119,865
|
|
Recourse
debt
|
|
|
42,481
|
|
|
32,981
|
|
Accounts
payable and accrued liabilities
|
|
|
20,349
|
|
|
19,243
|
|
Deferred
income
|
|
|
4,091
|
|
|
3,961
|
|
Accrued
current income tax liability
|
|
|
1,178
|
|
|
6,545
|
|
Total
Liabilities
|
|
|
304,426
|
|
|
182,595
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Common
shares, $.01 par value, 10,000,000 shares authorized,
|
|
|
|
|
|
|
|
5,197,954
shares issued and outstanding as of
|
|
|
|
|
|
|
|
June
30, 2006 and December 31, 2005
|
|
|
52
|
|
|
52
|
|
Treasury
stock, 67,709 shares at cost
|
|
|
(376
|
)
|
|
(376
|
)
|
Additional
paid-in capital
|
|
|
17,066
|
|
|
17,066
|
|
Retained
earnings (deficit)
|
|
|
(3,664
|
)
|
|
17,748
|
|
Total
Shareholders' Equity
|
|
|
13,078
|
|
|
34,490
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
317,504
|
|
$
|
217,085
|
|
Note:
The
balance sheet as of June 30, 2006 reflects the adoption of Emerging Issues
Task
Force Issue 04-05, “Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights,” (“EITF
04-05”) on January 1, 2006 (Refer to Note 2).
The
accompanying notes are an integral part of these consolidated
statements.
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
CONSOLIDATED
STATEMENT
OF
CHANGES IN
SHAREHOLDERS' EQUITY
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
|
Additional
|
|
Retained
|
|
|
|
|
|
|
|
Par
|
|
Treasury
|
|
Earnings
|
|
Earnings
|
|
|
|
|
|
Number
|
|
Value
|
|
Stock
|
|
Capital
|
|
(Deficit)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005 (Audited)
|
|
|
5,197,954
|
|
$
|
52
|
|
$
|
(376
|
)
|
$
|
17,066
|
|
$
|
17,748
|
|
$
|
34,490
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
958
|
|
|
958
|
|
Dividends
paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,232
|
)
|
|
(3,232
|
)
|
Cumulative
effect of change in accounting for EITF 04-05
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(19,138
|
)
|
|
(19,138
|
)
|
Balance
June 30, 2006 (Unaudited)
|
|
|
5,197,954
|
|
$
|
52
|
|
$
|
(376
|
)
|
$
|
17,066
|
|
$
|
(3,664
|
)
|
$
|
13,078
|
|
The
accompanying notes are an integral part of these consolidated
statements.
|
|
|
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
(In
thousands)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
Net
income
|
|
$
|
958
|
|
$
|
1,516
|
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,074
|
|
|
1,950
|
|
Deficit
distribution to minority interests
|
|
|
2,646
|
|
|
179
|
|
Benefit
for deferred income taxes
|
|
|
(716
|
)
|
|
(3,495
|
)
|
Equity
in earnings-unconsolidated entities
|
|
|
(343
|
)
|
|
(628
|
)
|
Cost
of sales-community development
|
|
|
3,666
|
|
|
8,880
|
|
Cost
of sales-homebuilding
|
|
|
8,521
|
|
|
21
|
|
Stock
based compensation expense
|
|
|
102
|
|
|
655
|
|
Minority
interest in consolidated entities
|
|
|
2,666
|
|
|
238
|
|
Amortization
of deferred loan costs
|
|
|
275
|
|
|
312
|
|
Changes
in notes and accounts receivable
|
|
|
175
|
|
|
291
|
|
Additions
to community development assets
|
|
|
(9,475
|
)
|
|
(10,214
|
)
|
Homebuilding-construction
expenditures
|
|
|
(4,354
|
)
|
|
(5,976
|
)
|
Deferred
income
|
|
|
130
|
|
|
-
|
|
Changes
in accounts payable, accrued liabilities
|
|
|
(6,255
|
)
|
|
4,498
|
|
Net
cash provided by (used in) operating activities
|
|
|
2,070
|
|
|
(1,773
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
Investment
in office building and apartment construction
|
|
|
(7,747
|
)
|
|
(1,957
|
)
|
Distribution
from land real estate joint venture
|
|
|
-
|
|
|
1,160
|
|
Cash
from newly consolidated properties
|
|
|
4,723
|
|
|
-
|
|
Change
in investments-unconsolidated apartment partnerships
|
|
|
-
|
|
|
1,116
|
|
Change
in investments-unconsolidated commercial partnerships
|
|
|
338
|
|
|
356
|
|
Change
in restricted cash
|
|
|
560
|
|
|
112
|
|
Additions
to rental operating properties, net
|
|
|
(20,193
|
)
|
|
(2,043
|
)
|
Other
assets
|
|
|
(521
|
)
|
|
(347
|
)
|
Net
cash used in investing activities
|
|
|
(22,840
|
)
|
|
(1,603
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Cash
proceeds from debt financing
|
|
|
37,279
|
|
|
18,245
|
|
Payment
of debt
|
|
|
(19,399
|
)
|
|
(12,416
|
)
|
County
Bonds proceeds, net of undisbursed funds
|
|
|
1,077
|
|
|
1,214
|
|
Payments
of distributions to minority interests
|
|
|
(2,646
|
)
|
|
(179
|
)
|
Dividends
paid to shareholders
|
|
|
(3,232
|
)
|
|
(1,024
|
)
|
Net
cash provided by financing activities
|
|
|
13,079
|
|
|
5,840
|
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(7,691
|
)
|
|
2,464
|
|
Cash
and Cash Equivalents, Beginning of Year
|
|
|
21,156
|
|
|
16,138
|
|
Cash
and Cash Equivalents, June 30,
|
|
$
|
13,465
|
|
$
|
18,602
|
|
The
accompanying notes are an integral part of these consolidated
statements.
|
AMERICAN
COMMUNITY PROPERTIES TRUST
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006
(Unaudited)
American
Community Properties Trust ("ACPT") is a self-managed holding company that
is
primarily engaged in the investment of rental properties, property management
services, community development, and homebuilding. These operations are
concentrated in the Washington, D.C. metropolitan area and Puerto Rico and
are
carried out through American Rental Properties Trust ("ARPT"), American Rental
Management Company ("ARMC "), American Land Development U.S., Inc. ("ALD")
and
IGP Group Corp. ("IGP Group") and their subsidiaries.
ACPT
is
taxed as a U.S. partnership and its taxable income flows through to its
shareholders. ACPT is subject to Puerto Rico taxes on IGP Group's taxable
income, generating foreign tax credits that are passed through to ACPT's
shareholders. ACPT's federal taxable income consists of certain passive
income from IGP Group, a controlled foreign corporation, additional
distributions from IGP Group including Puerto Rico taxes paid on behalf of
ACPT,
and dividends from ACPT's U.S. subsidiaries. Other than Interstate
Commercial Properties ("ICP"), which is taxed as a Puerto Rico corporation,
the
taxable income from the remaining Puerto Rico operating entities passes through
to IGP Group or ALD. Of this taxable income, only the portion of taxable
income applicable to the profits, losses or gains on the residential land sold
in Parque Escorial passes through to ALD. ALD, ARMC, and ARPT are taxed as
U.S. corporations. The taxable income from the U.S. apartment properties
flows through to ARPT.
(2)
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of ACPT
and
its subsidiaries and partnerships, after eliminating all intercompany
transactions. Unless the context otherwise requires, all of the entities
included in the consolidated financial statements are hereinafter referred
to
collectively as the “Company” or “ACPT.”
The
Company consolidates entities which are not variable interest entities as
defined by FASB Interpretation No. 46 (revised December 2003) (“FIN 46 (R)”) in
which it owns, directly or indirectly, a majority voting interest in the entity.
In addition, beginning January 1, 2006, the Company consolidates entities,
regardless of ownership percentage, in which the Company serves as the general
partner and the limited partners do not have substantive kick-out rights or
substantive participation rights in accordance with Emerging Issues Task Force
Issue 04-05, "Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights,"
(“EITF
04-05”).
As
of
December 31, 2005, the consolidated group included ACPT and its four major
subsidiaries, ARPT, ARMC, ALD and IGP Group. In addition, the consolidated
group
includes American Housing Management Company, American Housing Properties L.P.
(“AHP”), St. Charles Community, LLC, Interstate General Properties Limited
Partnership S.E., Land Development Associates, S.E., LDA Group LLC, Torres
del
Escorial, Inc., Escorial Office Building I, Inc., Interstate Commercial
Properties, Inc., Bannister Associates Limited Partnership, Coachman's Limited
Partnership, Crossland Associates Limited Partnership, Fox Chase Apartments
General Partnership, Headen House Associates Limited Partnership, Lancaster
Apartments Limited Partnership, New Forest Apartments General Partnership,
Owings Chase, LLC, Palmer Apartments Associates Limited Partnership, Prescott
Square, LLC, Sheffield Greens Apartments, LLC, Village Lake L.P., Wakefield
Terrace Associates Limited Partnership, and Wakefield Third Age Associates
Limited Partnership.
Beginning
January 1, 2006, as a result of EITF 04-05, the consolidated group also includes
the following properties: Alturas del Senorial Associates Limited Partnership,
Bayamon Garden Associates Limited Partnership, Carolina Associates Limited
Partnership S.E., Colinas de San Juan Associates Limited Partnership, Essex
Apartments Associates Limited Partnership, Huntington Associates Limited
Partnership, Jardines de Caparra Associates Limited Partnership, Monserrate
Associates Limited Partnership, San Anton Associates S.E., Turabo Limited
Dividend Partnership and Valle del Sol Associates Limited Partnership.
Historically, these partnerships had been recorded using the equity method
of
accounting.
On
April
28, 2006, the Company, through its subsidiary AHP, completed the acquisition
of
two apartment properties, Milford Station I LLC and Milford Station II LLC,
in
Baltimore, Maryland containing a total of 250 units for approximately
$14,300,000. We allocated the purchase price of acquired properties to land,
building and in-place leases based on the relative fair value of each component
in accordance with SFAS No. 141, “Business
Combinations.” The
acquisitions of Milford I and Milford II are included within our results of
operations from the date of acquisition, April 28, 2006.
The
Company's investment in the four real estate entities that it does not control,
does not serve as the general partner, or for which it is not the primary
beneficiary if such entity is a variable interest entity, are recorded using
the
equity method of accounting. Refer to Note 3 for further discussion regarding
investments in unconsolidated real estate entities.
Interim
Financial Reporting
These
unaudited financial statements have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with GAAP
have
been condensed or omitted. The Company has no items of other comprehensive
income for any of the periods presented. In the opinion of management, these
unaudited financial statements reflect all adjustments (which are of a normal
recurring nature) necessary to present a fair statement of results for the
interim period. While management believes that the disclosures presented are
adequate to make the information not misleading, these financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report filed on Form 10-K/A for the
year ended December 31, 2005. The operating results for the six and three months
ended June 30, 2006 and 2005 are not necessarily indicative of the results
that
may be expected for the full year. Net income per share is calculated based
on
weighted average shares outstanding.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements, and accompanying notes and disclosures. These estimates
and assumptions are prepared using management's best judgment after considering
past and current events and economic conditions. Actual results could differ
from those estimates and assumptions.
Implementation
of EITF 04-05
As
of
January 1, 2006, we consolidated 11 partnerships which were previously
unconsolidated as a result of the application of EITF 04-05. Those partnerships
own, or control other entities that own, 14 apartment properties. Our interests
in the profits and losses of these partnerships range from 1 to 50 percent.
The
initial consolidation of those partnerships resulted in increases (decreases),
net of intercompany eliminations, and included the recording of deferred taxes
in amounts reported in our consolidated balance sheet as of January 1, 2006,
as
follows (in thousands):
|
|
|
Increase
(decrease)
|
|
Operating
real estate, net of accumulated depreciation
|
|
$
|
53,282
|
|
Cash
and cash equivalents
|
|
|
4,723
|
|
Investments
in unconsolidated real estate entities
|
|
|
(920
|
)
|
Deferred
tax assets
|
|
|
9,841
|
|
All
other assets
|
|
|
11,618
|
|
Total
assets
|
|
$
|
78,544
|
|
|
|
|
|
|
Non-recourse
debt
|
|
$
|
98,556
|
|
All
other liabilities
|
|
|
(874
|
)
|
Shareholders’
equity
|
|
|
(19,138
|
)
|
Total
liabilities and shareholders’ equity
|
|
$
|
78,544
|
|
The
Company recorded an overall reduction to retained earnings of $19.1 million
in a
manner similar to a cumulative effect of a change in accounting principle.
The
retained earnings impact is net of a deferred tax asset recorded of $9.8 million
related to temporary differences arising from the negative deficits absorbed
by
the Company as a result of consolidating the partnerships.
The
impact to our consolidated statements of income for the six months ended June
30, 2006 is summarized as follows:
|
|
Balance
prior
|
|
|
|
Six
Months
|
|
|
|
to
the
|
|
|
|
Ended
|
|
|
|
Implementation
|
|
Increase
|
|
June
30,
|
|
|
|
of
EITF 04-05
|
|
(Decrease)
|
|
2006
|
|
Rental
property revenues
|
|
$
|
12,524
|
|
$
|
13,614
|
|
$
|
26,138
|
|
Management
and other fees
|
|
|
1,477
|
|
|
(912
|
)
|
|
565
|
|
Reimbursement
of expenses related to managed entities
|
|
|
3,181
|
|
|
(2,077
|
)
|
|
1,104
|
|
Total
revenues
|
|
|
35,067
|
|
|
10,625
|
|
|
45,692
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
property operating expenses
|
|
|
5,512
|
|
|
6,831
|
|
|
12,343
|
|
Depreciation
and amortization
|
|
|
2,212
|
|
|
1,862
|
|
|
4,074
|
|
Expenses
reimbursed from managed entities
|
|
|
3,181
|
|
|
(2,077
|
)
|
|
1,104
|
|
Total
expenses
|
|
|
28,099
|
|
|
6,616
|
|
|
34,715
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
6,968
|
|
|
4,009
|
|
|
10,977
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings from unconsolidated entities
|
|
|
510
|
|
|
(167
|
)
|
|
343
|
|
Interest
expense
|
|
|
(3,737
|
)
|
|
(3,463
|
)
|
|
(7,200
|
)
|
Minority
interest in consolidated entities
|
|
|
(214
|
)
|
|
(2,452
|
)
|
|
(2,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision (benefit) for income taxes
|
|
|
3,745
|
|
|
(2,073
|
)
|
|
1,672
|
|
Provision
(benefit) for income taxes
|
|
|
1,373
|
|
|
(659
|
)
|
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
2,372
|
|
|
(1,414
|
)
|
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share basic and diluted
|
|
$
|
0.46
|
|
$
|
(0.28
|
)
|
$
|
0.18
|
|
The
impact to our consolidated statements of income for the three months ended
June
30, 2006 is summarized as follows:
|
|
Balance
prior
|
|
|
|
Three
Months
|
|
|
|
to
the
|
|
|
|
Ended
|
|
|
|
Implementation
|
|
Increase
|
|
June
30,
|
|
|
|
of
EITF 04-05
|
|
(Decrease)
|
|
2006
|
|
Rental
property revenues
|
|
$
|
6,499
|
|
$
|
6,848
|
|
$
|
13,347
|
|
Management
and other fees
|
|
|
750
|
|
|
(475
|
)
|
|
275
|
|
Reimbursement
of expenses related to managed entities
|
|
|
1,617
|
|
|
(1,085
|
)
|
|
532
|
|
Total
revenues
|
|
|
18,782
|
|
|
5,288
|
|
|
24,070
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
property operating expenses
|
|
|
2,865
|
|
|
3,523
|
|
|
6,388
|
|
Depreciation
and amortization
|
|
|
1,167
|
|
|
934
|
|
|
2,101
|
|
Expenses
reimbursed from managed entities
|
|
|
1,617
|
|
|
(1,085
|
)
|
|
532
|
|
Total
expenses
|
|
|
14,908
|
|
|
3,372
|
|
|
18,280
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,874
|
|
|
1,916
|
|
|
5,790
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings from unconsolidated entities
|
|
|
234
|
|
|
(61
|
)
|
|
173
|
|
Interest
expense
|
|
|
(1,958
|
)
|
|
(1,741
|
)
|
|
(3,699
|
)
|
Minority
interest in consolidated entities
|
|
|
(206
|
)
|
|
(1,395
|
)
|
|
(1,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision (benefit) for income taxes
|
|
|
2,033
|
|
|
(1,281
|
)
|
|
752
|
|
Provision
(benefit) for income taxes
|
|
|
709
|
|
|
(414
|
)
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,324
|
|
|
(867
|
)
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share basic and diluted
|
|
$
|
0.26
|
|
$
|
(0.17
|
)
|
$
|
0.09
|
|
In
prior
periods, we used the equity method of accounting to account for our investments
in the partnerships that we consolidated in 2006 in accordance with EITF 04-05.
Under the equity method of accounting, we recognized partnership income or
losses based generally on our percentage interest in the partnership.
Consolidation of a partnership does not ordinarily result in a change to the
net
amount of the partnership income or loss that is recognized using the equity
method of accounting. However, when consolidated real estate partnerships make
cash distributions or allocate losses to partners in excess of the minority
partners’ basis in the property, generally accepted accounting principles
require that the consolidating partner record a charge equal to the amount
of
such excess distribution. Certain of the partnerships that we consolidated
in
accordance with EITF 04-05 had deficits in equity that resulted from
distributions made to the partners in excess of basis and losses during prior
periods when we accounted for our investment using the equity method of
accounting. We would have been required to recognize the non-controlling
partners’ share of those distributions in excess of basis and losses had we
consolidated these entities in prior periods.
Cash
Dividends
As
announced on March 10, 2006, the Company entered into a closing agreement with
the United States Internal Revenue Service ("IRS") by which the Company will
maintain its publicly traded partnership ("PTP") status for U.S. federal income
tax purposes. The closing agreement with the IRS required the Company to
report approximately $5.0 million to shareholders as taxable income on March
29,
2006. Under the terms of the Company's governing documents, the Company
was required to make minimum annual distributions to the shareholders equal
to
at least 45% of net taxable income allocated to shareholders. Accordingly,
the Board of Trustees declared a dividend of $0.43 per share, or approximately
$2,230,000 in the aggregate, that was paid on April 12, 2006 to shareholders
of
record on March 29, 2006.
On
March
30, 2006, the Board of Trustees declared a cash dividend of $0.10 per share,
paid on April 27, 2006 to shareholders of record on April 13, 2006. On May
15,
2006, the Board of Trustees declared a $0.10 cash dividend paid on June 13,
2006
to shareholders of record on May 30, 2006.
Depreciable
Assets and Depreciation
The
Company's operating real estate is stated at cost and includes all costs related
to acquisitions, development and construction. The Company makes assessments
of
the useful lives of our real estate assets for purposes of determining the
amount of depreciation expense to reflect on our income statement on an annual
basis. The assessments, all of which are judgmental determinations, are as
follows:
· |
Buildings
and improvements are depreciated over five to forty years using the
straight-line or double declining balance
methods,
|
· |
Furniture,
fixtures and equipment are depreciated over five to seven years using
the
straight-line method,
|
· |
Leasehold
improvements are capitalized and depreciated over the lesser of the
life
of the lease or their estimated useful life,
|
· |
Maintenance
and other repair costs are charged to operations as
incurred.
|
The
table
below presents the major classes of depreciable assets as of June 30, 2006
and
December 31, 2005 (in thousands):
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(unaudited)
|
|
(audited)
|
|
|
|
|
|
|
|
Land
|
|
$
|
23,649
|
|
$
|
10,065
|
|
Building
|
|
|
240,184
|
|
|
102,140
|
|
Building
improvements
|
|
|
12,160
|
|
|
4,525
|
|
Equipment
|
|
|
7,134
|
|
|
6,260
|
|
|
|
|
283,127
|
|
|
122,990
|
|
Accumulated
depreciation
|
|
|
139,631
|
|
|
46,412
|
|
Operating
properties, net
|
|
$
|
143,496
|
|
$
|
76,578
|
|
Other
Property and Equipment
In
addition, the Company owned other property and equipment of $1,138,000 and
$1,182,000, net of accumulated depreciation, respectively, as of June 30, 2006
and December 31, 2005 respectively.
Depreciation
Total
depreciation expense was $4,074,000 and $1,950,000 for the six months ended
June
30, 2006 and 2005, respectively, and $2,101,000 and $942,000 for the three
months ended June 30, 2006 and 2005, respectively.
Reclassifications
Certain
amounts from prior years have been reclassified to conform to our current year's
presentation. This includes the reclassification of the Company’s consolidated
balance sheet as of December 31, 2005 to conform to the revised presentation
elected as of January 1, 2006. The revised presentation as of June 30, 2006
is
more condensed than prior periods and categorizes assets and liabilities by
type.
Impact
of Recently Issued Accounting Standards
SFAS
123(R)
In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No.
123(R), "Share
Based Payment,"
a
revision of SFAS No. 123, which is similar in concept to SFAS No. 123, but
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their
fair
values. Pro forma disclosure is no longer an alternative. In addition,
this revision requires a public entity to measure the cost of employee services
received in exchange for an award of liability instruments at their fair
value. The use of intrinsic value for liability instruments is no longer
allowed for public entities.
The
Company implemented the provisions of SFAS No. 123(R) as of January 1, 2006,
the
impact of which was not material on the Company’s financial position or results
of operations.
SFAS
154
In
May
2005, the FASB issued SFAS No. 154, "Accounting
Changes and Error Corrections,"
which
replaces APB Opinion No. 20 and SFAS No. 3, and changes the requirements for
the
accounting for and reporting of a change in accounting principle. This
statement is effective for accounting changes and corrections of errors made
in
fiscal years beginning after December 15, 2005, although early adoption is
permitted for accounting changes and corrections of errors made in fiscal years
beginning after the date SFAS 154 was issued. The adoption of SFAS 154 did
not have a material impact on our financial condition or results of
operations.
FIN
48
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation of FASB
Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce
the diversity in practice associated with certain aspects of measurement and
recognition in accounting for income taxes. In addition, FIN 48 requires
expanded disclosure with respect to the uncertainty in income taxes and is
effective as of the beginning of our 2007 fiscal year. We are currently
evaluating the impact, if any, that FIN 48 will have on our financial
statements.
(3)
|
INVESTMENT
IN UNCONSOLIDATED REAL ESTATE
ENTITIES
|
The
Company accounts for investments in unconsolidated real estate entities that
are
not considered variable interest entities under FIN 46 (R) in accordance with
SOP 78-9 "Accounting
for Investments in Real Estate Ventures" and
APB
Opinion No. 18 "The
Equity Method of Accounting for Investments in Common Stock".
For
entities that are considered variable interest entities under FIN 46(R), the
Company performs an assessment to determine the primary beneficiary of the
entity as required by FIN 46(R). The Company accounts for variable interest
entities in which the Company is not a primary beneficiary and does not bear
a
majority of the risk of expected loss in accordance with the equity method
of
accounting.
The
Company considers many factors in determining whether or not an investment
should be recorded under the equity method, such as economic and ownership
interests, authority to make decisions, and contractual and substantive
participating rights of the partners. Income and losses are recognized in
accordance with the terms of the partnership agreements and any guarantee
obligations or commitments for financial support. The Company's investments
in
unconsolidated real estate entities accounted for under the equity method of
accounting consisted of general partnership interests in two limited
partnerships which own apartment properties in the United States; a limited
partnership interest in a limited partnership that owns a commercial property
in
Puerto Rico; and a 50% ownership interest in a joint venture formed as a limited
liability company.
Apartment
Partnerships
On
January 1, 2006, the Company adopted EITF 04-05 which now requires us to
consolidate 11 additional partnerships, which historically, were recorded using
the equity method of accounting (refer to Note 2). The unconsolidated apartment
partnerships as of June 30, 2006 include two partnerships owning 110 rental
units compared to 13 partnerships owning 3,463 rental units in 16 apartment
complexes as of June 30, 2005. The two remaining unconsolidated complexes are
owned by Brookside Gardens Limited Partnership and Lakeside Apartments Limited
Partnership.
We
have
determined that two of our unconsolidated apartment partnerships, Brookside
Gardens and Lakeside Apartments, are variable interest entities under FIN 46-R,
however, the Company is not required to consolidate the partnerships due to
the
fact that it is not the primary beneficiary and does not bear the majority
of
the risk of expected losses. The Company holds less than a 20% economic interest
in Brookside and Lakeside. As a general partner, we have significant influence
over operations of Brookside and Lakeside that is disproportionate to our
economic ownership in these two partnerships. In accordance with SOP 78-9 and
APB No. 18, these investments are accounted for under the equity method. The
Company is exposed to losses for Brookside of $199,000 and Lakeside of $172,000,
consisting of our net investment, loans and unpaid fees. All amounts are fully
reserved. Pursuant to the partnership agreement for Brookside, the Company,
as
general partner, is responsible for providing operating deficit loans to the
partnership in the event that it is not able to generate sufficient cash flows
from its operating activities.
Commercial
Partnerships
The
Company holds a limited partner interest in a commercial property in Puerto
Rico
that it accounts for under the equity method of accounting. ELI, S.E. ("ELI"),
is a partnership formed for the purpose of constructing a building for lease
to
the State Insurance Fund of the Government of Puerto Rico. ACPT contributed
the
land in exchange for $700,000 and 27.82% ownership interest in the partnership's
assets, equal to a 45.26% interest in cash flow generated by the thirty-year
lease of the building.
On
April
30, 2004, the Company purchased a 50% limited partnership interest in El Monte
Properties, S.E. ("El Monte") from Insular Properties Limited Partnership
("Insular") for $1,462,500. Insular is owned by the J. Michael Wilson Family,
a
related party. In December 2004, a third party buyer purchased El Monte for
$20,000,000, $17,000,000 in cash and $3,000,000 in notes. The net cash proceeds
from the sale of the real estate were distributed to the partners. As a result,
the Company received $2,500,000 in cash and recognized $986,000 of income in
2004. The gain on sale was reduced by the amount of the seller's note which
is
subject to future subordination. In January 2005, El Monte distributed to the
Company its share of the $3,000,000 note, $1,500,000. The Company will recognize
income as it receives cash payments on the note. The note is due in installments
over a three year period beginning in December 2007. El Monte will distribute
any remaining cash when it winds up its affairs.
Land
Development Joint Venture
In
September 2004, the Company entered into a joint venture agreement with Lennar
Corporation for the development of a 352-unit, active adult community located
in
St. Charles, Maryland. At that time, a limited liability company, St. Charles
Active Adult Community, LLC, was formed to carry out the terms of this agreement
whereby Lennar and the Company would each hold a 50% ownership interest in
the
limited liability company. The joint venture's operating agreement calls for
the
development of 352 lots to be sold to Lennar's homebuilding division under
a
purchase agreement starting in the end of 2005. The Company will manage the
project's development for a market rate fee pursuant to a management agreement.
In September 2004, the Company transferred land to the joint venture in exchange
for a 50% ownership interest and $4,277,000 in cash. The Company's investment
in
the joint venture was recorded at 50% of the historical cost basis of the land
with the other 50% recorded within our deferred charges and other assets. The
proceeds received are reflected as deferred revenue. The deferred revenue and
related deferred costs will be recognized into income as the joint venture
sells
lots to Lennar. In March 2005, the joint venture closed a non-recourse
development loan which was amended in June 2006. Per the amended terms of the
loan, both the Company and Lennar provided development completion guarantees
and
Lennar is required to purchase a minimum of 100 lots per year; therefore the
joint venture is required to develop 100 lots per year. During the first six
months of 2006, the joint venture did not sell any lots to Lennar’s homebuilding
division.
The
following table summarizes the financial data and principal activities of the
unconsolidated real estate entities, which the Company accounts for under the
equity method. The information is presented to segregate the apartment
partnerships from the commercial partnerships as well as our 50% ownership
interest in the land development joint venture, which are all accounted for
as
“investments in unconsolidated real estate entities” on the balance
sheet.
|
|
|
|
|
|
Land
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
|
|
|
Apartment
|
|
Commercial
|
|
Joint
|
|
|
|
|
|
Partnerships
|
|
Partnerships
|
|
Venture
|
|
Total
|
|
|
|
(In
thousands)
|
|
Summary
Financial Position:
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
June
30, 2006
|
|
$
|
5,231
|
|
$
|
28,334
|
|
$
|
14,234
|
|
$
|
47,799
|
|
December
31, 2005
|
|
|
77,830
|
|
|
28,464
|
|
|
11,947
|
|
|
118,241
|
|
Total
Non-Recourse Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2006
|
|
|
3,268
|
|
|
23,475
|
|
|
6,173
|
|
|
32,916
|
|
December
31, 2005
|
|
|
101,848
|
|
|
23,120
|
|
|
4,019
|
|
|
128,987
|
|
Total
Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2006
|
|
|
1,245
|
|
|
852
|
|
|
1,127
|
|
|
3,224
|
|
December
31, 2005
|
|
|
9,782
|
|
|
1,516
|
|
|
994
|
|
|
12,292
|
|
Total
(Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2006
|
|
|
718
|
|
|
4,006
|
|
|
6,934
|
|
|
11,658
|
|
December
31, 2005
|
|
|
(33,800
|
)
|
|
3,828
|
|
|
6,934
|
|
|
(23,038
|
)
|
Company's
Investment, net (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2006
|
|
|
-
|
|
|
4,829
|
|
|
1,828
|
|
|
6,657
|
|
December
31, 2005
|
|
|
(1,597
|
)
|
|
4,824
|
|
|
1,828
|
|
|
5,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
392
|
|
|
1,828
|
|
|
-
|
|
|
2,220
|
|
Six
Months Ended June 30, 2005
|
|
|
13,871
|
|
|
1,827
|
|
|
-
|
|
|
15,698
|
|
Three
Months Ended June 30, 2006
|
|
|
193
|
|
|
915
|
|
|
-
|
|
|
1,108
|
|
Three
Months Ended June 30, 2005
|
|
|
6,956
|
|
|
913
|
|
|
-
|
|
|
7,869
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
(58
|
)
|
|
926
|
|
|
-
|
|
|
868
|
|
Six
Months Ended June 30, 2005
|
|
|
1,017
|
|
|
898
|
|
|
(3
|
)
|
|
1,912
|
|
Three
Months Ended June 30, 2006
|
|
|
(31
|
)
|
|
468
|
|
|
-
|
|
|
437
|
|
Three
Months Ended June 30, 2005
|
|
|
361
|
|
|
466
|
|
|
(3
|
)
|
|
824
|
|
Company's
Recognition of Equity in Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
-
|
|
|
343
|
|
|
-
|
|
|
343
|
|
Six
Months Ended June 30, 2005
|
|
|
256
|
|
|
372
|
|
|
-
|
|
|
628
|
|
Three
Months Ended June 30, 2006
|
|
|
-
|
|
|
173
|
|
|
-
|
|
|
173
|
|
Three
Months Ended June 30, 2005
|
|
|
104
|
|
|
179
|
|
|
-
|
|
|
283
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
|
|
|
Apartment
|
|
Commercial
|
|
Joint
|
|
|
|
|
|
Partnerships
|
|
Partnerships
|
|
Venture
|
|
Total
|
|
|
|
(In
thousands)
|
|
Summary
of Cash Flows:
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
$ |
77
|
|
$ |
1,032
|
|
$ |
132
|
|
$ |
1,241
|
|
Six
Months Ended June 30, 2005
|
|
|
3,196
|
|
|
875
|
|
|
42
|
|
|
4,113
|
|
Three
Months Ended June 30, 2006
|
|
|
24
|
|
|
173
|
|
|
721
|
|
|
918
|
|
Three
Months Ended June 30, 2005
|
|
|
1,020
|
|
|
7
|
|
|
42
|
|
|
1,069
|
|
Company's
Share of Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
1
|
|
|
467
|
|
|
66
|
|
|
534
|
|
Six
Months Ended June 30, 2005
|
|
|
1,014
|
|
|
396
|
|
|
21
|
|
|
1,431
|
|
Three
Months Ended June 30, 2006
|
|
|
-
|
|
|
78
|
|
|
361
|
|
|
439
|
|
Three
Months Ended June 30, 2005
|
|
|
313
|
|
|
(3
|
)
|
|
21
|
|
|
331
|
|
Operating
Cash Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
-
|
|
|
747
|
|
|
-
|
|
|
747
|
|
Six
Months Ended June 30, 2005
|
|
|
2,478
|
|
|
753
|
|
|
2,320
|
|
|
5,551
|
|
Three
Months Ended June 30, 2006
|
|
|
-
|
|
|
388
|
|
|
-
|
|
|
388
|
|
Three
Months Ended June 30, 2005
|
|
|
993
|
|
|
341
|
|
|
2,320
|
|
|
3,654
|
|
Company's
Share of Operating Cash Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
-
|
|
|
339
|
|
|
-
|
|
|
339
|
|
Six
Months Ended June 30, 2005
|
|
|
1,075
|
|
|
356
|
|
|
1,160
|
|
|
2,591
|
|
Three
Months Ended June 30, 2006
|
|
|
-
|
|
|
176
|
|
|
-
|
|
|
176
|
|
Three
Months Ended June 30, 2005
|
|
|
398
|
|
|
154
|
|
|
1,160
|
|
|
1,712
|
|
Refinancing
Cash Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Six
Months Ended June 30, 2005
|
|
|
100
|
|
|
-
|
|
|
-
|
|
|
100
|
|
Three
Months Ended June 30, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Three
Months Ended June 30, 2005
|
|
|
100
|
|
|
-
|
|
|
-
|
|
|
100
|
|
Company's
Share of Refinancing Cash Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Six
Months Ended June 30, 2005
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Three
Months Ended June 30, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Three
Months Ended June 30, 2005
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Notes:
(1)
Represents the Company's net investment, including assets and accrued
liabilities in the consolidated balance sheet for unconsolidated
real estate entities.
The
Company's outstanding debt is collateralized primarily by land, land
improvements, homebuilding assets, receivables, investment properties,
investments in partnerships, and rental properties. The following table
summarizes the indebtedness of the Company at June 30, 2006 and December 31,
2005 (in thousands):
|
|
Maturity
|
|
Interest
|
|
Outstanding
as of
|
|
|
|
Dates
|
|
Rates
(a)
|
|
June
30,
|
|
December
31,
|
|
|
|
From/To
|
|
From/To
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
(unaudited)
|
|
(audited)
|
|
Recourse
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
Development (b), (c), (d)
|
|
|
06-30-07/03-01-21
|
|
|
4%-P+1%
|
|
$
|
30,221
|
|
$
|
14,161
|
|
Homebuilding
(e)
|
|
|
10-31-07
|
|
|
P
|
|
|
7,514
|
|
|
13,905
|
|
Investment
Properties (f)
|
|
|
05-15-07/01-23-13
|
|
|
P+1.25%/6.98%
|
|
|
4,615
|
|
|
4,752
|
|
General
obligations (g)
|
|
|
07-29-07/05-01-10
|
|
|
Non-interest
bearing/5.99%
|
|
|
131 |
|
|
163 |
|
Total
Recourse Debt
|
|
|
|
|
|
|
|
|
42,481
|
|
|
32,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Recourse
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
Development (h)
|
|
|
11-23-07
|
|
|
Non-interest
bearing
|
|
|
500
|
|
|
500
|
|
Investment
Properties (i), (j), (k)
|
|
|
04-30-09/08-01-47
|
|
|
4.95%/10%
|
|
|
235,827
|
|
|
119,365
|
|
Total
Non-Recourse Debt
|
|
|
|
|
|
|
|
|
236,327
|
|
|
119,865
|
|
Total
Debt
|
|
|
|
|
|
|
|
$
|
278,808
|
|
$
|
152,846
|
|
|
(a)
|
"P"
= Prime lending interest rate. (The prime rate at June 30, 2006 was
8.25%)
|
|
(b)
|
As
of June 30, 2006, $22,689,000 of the community development recourse
debt
relates to the general obligation bonds issued by the Charles County
government as described in detail under the heading "Financial
Commitments" in Note 5.
|
|
(c)
|
On
April 14, 2006, the Company closed a three year $14,000,000 revolving
line
of credit loan (“the Revolver”) secured by a first lien deed of trust on
property located in St. Charles, MD. The maximum amount of the loan
at any
one time is $14,000,000. The facility includes various sub-limits
on a
revolving basis for amounts to finance apartment project acquisitions
and
land development in St. Charles. The terms require certain financial
covenants to be calculated annually as of December 31, including
a
tangible net worth to senior debt ratio for ALD and a minimum net
worth
test for ACPT. As of June 30, 2006, the Company borrowed $6,700,000
on the
Revolver.
|
|
(d)
|
The
remainder of the outstanding balance of our community development
recourse
debt, $800,000, is fully collateralized by approximately 490 acres
within
Parque El Commandante.
|
|
(e)
|
The
outstanding recourse debt related to the homebuilding operations
is
composed of a $26,000,000 revolving construction loan with a maximum
outstanding balance limited to $18,000,000 for Torres Del Escorial.
This loan is secured by a mortgage on the property and will be repaid
by
the proceeds from home sales.
|
|
(f)
|
As
of June 30, 2006 and December 31, 2005, the outstanding recourse
debt
within the investment properties is comprised of a loan borrowed
to
finance the acquisition of our properties Village Lake and Coachman's
in
January 2003, as well as a 2 year, $3,000,000 recourse note with
Columbia
Bank that the Company obtained in June 2005. The loan with Columbia
Bank carries a fixed interest rate of 6.98% and requires the Company
to
pay monthly principal and interest payments until its maturity on
May 15,
2007 and is collateralized by the Company's cash receipts from the
two
apartment properties acquired in 2004 and two parcels of land in
St.
Charles acquired in the second quarter of
2005.
|
|
(g)
|
The
general recourse debt outstanding as of June 30, 2006 is made up
of
various capital leases outstanding within our U.S. and Puerto Rico
operations as well as vehicle
notes.
|
|
(h)
|
In
the fourth quarter 2005, the Company purchased 22 residential acres
adjacent to the Sheffield Neighborhood for $1,000,000. The Company
funded
half of the purchase price with cash and signed a two-year note for
$500,000 due in November 2007. The Company plans to annex the land
into the St. Charles mater plan
community.
|
|
(i) |
The
non-recourse debt related to the investment properties is collateralized
by the apartment projects. As of June 30, 2006, approximately $88,330,000
of this debt is secured by the Federal Housing Administration ("FHA")
or
the Maryland Housing Fund. The non-recourse debt balance
is also composed of an $8,618,000 mortgage on the office building
in
Parque Escorial. The mortgage is a thirty-year loan with a ten
year
fixed rate equal to 7.33%. At the end of the first ten years the
interest
rate will be reset, at the discretion of management, to a fixed
rate
for an additional five, seven or ten years equal to the SWAP rate
plus
2.25%. The non-recourse debt related to the investment properties
also includes a construction loan for Sheffield Greens Apartments
LLC
(Sheffield Greens). As of June 30, 2006, the balance of the
construction loan was $10,978,000.
|
|
(j) |
On
April 5, 2006, the non-recourse mortgage for one of our consolidated
apartment properties in Puerto Rico, Colinas de San Juan Associates
L.P., was refinanced with a ten-year, 6.59% non-recourse mortgage
loan of
$9,680,000. The proceeds from the refinancing were used for capital
improvements
at the property site and distributions to the general and limited
partners.
|
|
(k) |
On April 28, 2006, the Company, through
its
subsidiary AHP, completed the acquisition of two apartment properties,
Milford Station I LLC and Milford Station II LLC, in Baltimore, Maryland
containing a total of 250 units for approximately $14,300,000. The
acquisition was financed through a combination of $11,836,000 of
non-recourse notes and borrowing $3,755,000 from the Revolver which
included funding improvement escrows and payment of closing
costs. |
The
Company’s loans contain various financial, cross collateral, cross default,
technical and restrictive provisions. As of June 30, 2006, the Company is in
compliance with the financial covenants and the other provisions of its loan
agreements.
(5)
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
Financial
Commitments
Pursuant
to an agreement reached between ACPT and the Charles County Commissioners in
2002, the Company agreed to accelerate the construction of two major roadway
links to the Charles County (the "County") road system. Also, as part of the
agreement, the County agreed to issue general obligation public improvement
bonds (the “Bonds”) to finance $20,000,000 of this construction guaranteed by
letters of credit provided by Lennar as part of a residential lot sales contract
for 1,950 lots in Fairway Village. In March 2006, the Charles County
Commissioners issued the last tranche of Bonds on behalf of the Company in
conjunction with the roadway construction project. The Bonds bear interest
rates from 4% to 8% and call for semi-annual interest payments and annual
principal payments and mature in fifteen years. The Company is obligated to
pay
interest and principal on the full amount of the Bonds; as such, the Company
recorded the full amount of the debt and a receivable from the County
representing the remaining Bond proceeds to be advanced to the Company over
an
eighteen month period by the Charles County Commissioners as major
infrastructure development within the project occurs. As part of the agreement,
the Company will pay the County a monthly payment equal to one-sixth of the
semi-annual interest payments and one-twelfth of the annual principal payment.
In
August
2005, the Company signed a memorandum of understanding ("MOU") with the Charles
County Commissioners regarding a land donation that will house a planned minor
league baseball stadium and entertainment complex. Under the terms of the MOU,
the Company donated 42 acres of land in St. Charles to Charles County on
December 31, 2005. The Company also agreed to expedite off-site utilities,
storm-water management and road construction improvements that will serve the
entertainment complex and future portions of St. Charles so that the
improvements will be completed concurrently with the entertainment complex.
Charles County will be responsible for infrastructure improvements on the site
of the complex. In return, Charles County agreed to issue $7,000,000 of general
obligation bonds to finance the infrastructure improvements. In March 2006,
$4,000,000 of these bonds were issued for this project. The funds for this
project will be repaid by ACPT over a 15-year period. In addition, the County
agreed to issue an additional 100 school allocations a year to St. Charles
commencing with the issuance of bonds. The County will also require ACPT to
fund
an escrow account from lot sales that will be used to repay these
bonds.
As
of
June 30, 2006, ACPT is guarantor of $23,578,000 of surety bonds for the
completion of land development projects with Charles County; substantially
all
are for the benefit of the Charles County Commissioners.
Consulting
Agreements and Arrangements
ACPT
entered into a consulting and retirement compensation agreement with Interstate
General Company L.P.’s (“IGC”) founder and Chief Executive Officer, James J.
Wilson, effective October 5, 1998 (the "Consulting Agreement"). IGC was the
predecessor company to ACPT. Under the terms of the Consulting Agreement, the
Company will pay Mr. Wilson $200,000 per year through October 2008.
Guarantees
ACPT
and
its subsidiaries typically provide guarantees for another subsidiary's loans.
In
many cases more than one company guarantees the same debt. Since all of these
companies are consolidated, the debt or other financial commitment made by
the
subsidiaries to third parties and guaranteed by ACPT, is included within ACPT's
consolidated financial statements. As of June 30, 2006, ACPT has guaranteed
$34,036,000 of outstanding debt owed by its subsidiaries. IGP has guaranteed
$8,314,000 of its subsidiaries' outstanding debt. LDA guaranteed $7,514,000
of
outstanding debt owed by its subsidiary. In addition, St. Charles Community
LLC
guaranteed $11,347,000 of outstanding debt owed by AHP. The guarantees will
remain in effect until the debt service is fully repaid by the respective
borrowing subsidiary. The terms of the debt service guarantees outstanding
range
from one to nine years. In addition to debt service guarantees, both the Company
and Lennar provided development completion guarantees related to the St. Charles
Active Adult Community Joint Venture. We do not expect any of these guarantees
to impair the individual subsidiary or the Company's ability to conduct business
or to pursue its future development plans.
There
have been no material changes to the legal proceedings previously disclosed
in
our Annual Report on Form 10-K for the year ended December 31,
2005.
The
Company and/or its subsidiaries have been named as defendants, along with other
companies, in tenant-related lawsuits. The
Company carries liability insurance against certain types of claims that
management believes meets industry standards. To date, payments
made to the plaintiffs of the settled cases were covered by our insurance
policy. The
Company believes it has strong defenses to the claims, and intends to continue
to defend itself vigorously in these matters.
In
the
normal course of business, ACPT is involved in various pending or unasserted
claims. In the opinion of management, these are not expected to have a material
impact on the financial condition or future operations of ACPT.
(6)
|
RELATED
PARTY TRANSACTIONS
|
Certain
officers and trustees of ACPT have ownership interests in various entities
that
conduct business with the Company. The financial impact of the related party
transactions on the accompanying consolidated financial statements are reflected
below (in thousands):
CONSOLIDATED
STATEMENT OF INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
Three
Months Ended
|
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
and Other Fees
(A)
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
subsidiaries with third party partners
|
|
|
|
|
$
|
19
|
|
$
|
1,135
|
|
$
|
9
|
|
$
|
683
|
|
Affiliates
of J. Michael Wilson, CEO and Chairman
|
|
|
|
|
|
248
|
|
|
244
|
|
|
117
|
|
|
122
|
|
|
|
|
|
|
$
|
267
|
|
$
|
1,379
|
|
$
|
126
|
|
$
|
805
|
|
General
and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates
of J. Michael Wilson, CEO and Chairman
|
|
|
(B1
|
)
|
$
|
19
|
|
$
|
69
|
|
$
|
-
|
|
$
|
37
|
|
Reserve
additions and other write-offs-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
real estate entities with third party
partners
|
|
|
(A
|
)
|
|
5
|
|
|
(18
|
)
|
|
(1
|
)
|
|
(8
|
)
|
Reimbursement
to IBC for ACPT’s share of J. Michael Wilson's
salary
|
|
|
|
|
|
188
|
|
|
175
|
|
|
94
|
|
|
87
|
|
Reimbursement
of administrative costs-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates of J. Michael Wilson, CEO and Chairman
|
|
|
|
|
|
(5
|
)
|
|
(9
|
)
|
|
(2
|
)
|
|
(5
|
)
|
James J. Wilson, IGC chairman and director
|
|
|
(B2
|
)
|
|
100
|
|
|
100
|
|
|
50
|
|
|
50
|
|
Thomas J. Shafer, Trustee
|
|
|
(B3
|
)
|
|
30
|
|
|
21
|
|
|
15
|
|
|
10
|
|
|
|
|
|
|
$
|
337
|
|
$
|
338
|
|
$
|
156
|
|
$
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Assets
Related to Rental Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables-All
unsecured and due on demand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
real estate entities with third party partners, net of
reserves
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
506
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables-All
unsecured and due on demand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
of J. Michael Wilson, CEO and Chairman
|
|
|
|
|
|
|
|
|
|
|
$
|
85
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85
|
|
$
|
108
|
|
(A) Management
and Other Services
The
Company provides management and other support services to its unconsolidated
subsidiaries and other affiliated entities in the normal course of business.
The
fees earned from these services are typically collected on a monthly basis,
one
month in arrears. Receivables are unsecured and due on demand. Certain
partnerships experiencing cash shortfalls have not paid timely. Generally,
receivable balances of these partnerships are fully reserved, until satisfied
or
the prospect of collectibility improves. The collectibility of management fee
receivables is evaluated quarterly. Any increase or decrease in the reserves
is
reflected accordingly as additional bad debt expenses or recovery of such
expenses.
In
prior
years, we managed a commercial property in Puerto Rico owned by the Wilson
Family. The Wilson Family property was sold to a third party in April 2005.
Management fees generated by this property represented less than 1% of the
Company's total revenue.
Effective
April 30, 2006, ARMC’s management agreement with Chastleton Associates LP
terminated due to the fact that the apartment property was sold to a third
party. The property was previously owned by an affiliate. Management fees
generated by this property accounted for less than 1% of the Company’s total
revenue. The Company earned an agreed-upon management fee for administrative
services through the end of the second quarter 2006.
(B) Other
Other
transactions with related parties are as follows:
(1)
|
In
2005, the Company rented executive office space and other property
from an
affiliate in the United States pursuant to a lease that expires in
2010.
In management’s opinion, all leases with affiliated persons were on terms
at least as favorable as these generally available from unaffiliated
persons for comparable property. Effective January 27, 2006, the
office
building was sold to a third party who assumed the Company’s lease
agreements.
|
(2)
|
Represents
fees paid to James J. Wilson pursuant to a consulting and retirement
agreement. At Mr. Wilson's request, payments are made to
IGC.
|
(3)
|
Represents
fees paid to Thomas J. Shafer, a trustee, pursuant to a consulting
agreement.
|
Related
Party Acquisitions
El
Monte
On
April
30, 2004, the Company purchased a 50% limited partnership interest in El Monte
Properties S.E. ("El Monte") from Insular Properties Limited Partnership
("Insular") for $1,462,500. Insular is owned by the J. Michael Wilson Family.
Per the terms of the agreement, the Company was responsible to fund $400,000
of
capital improvements and lease stabilization costs, and had a priority on cash
distributions up to its advances plus accrued interest at 8%, investment and
a
13% cumulative preferred return on its investment. The purchase price was based
on a third party appraisal of $16,500,000 dated April 22, 2003. The Company's
limited partnership investment was accounted for under the equity method of
accounting.
In
December 2004, a third party buyer purchased El Monte for $20,000,000 -
$17,000,000 in cash and $3,000,000 in notes. The net cash proceeds from the
sale
of the real estate were distributed to the partners. As a result, the Company
received $2,500,000 in cash and recognized $986,000 of income in 2004. El Monte
distributed the note, $1,500,000 to the Company in January 2005. The note bears
interest at a rate of prime plus 2% with a ceiling rate of 9% and matures on
December 3, 2009. The note is payable in three installments, the first
installment of $250,000 is due on December 3, 2007, the second installment
of
$250,000 is due on December 3, 2008 and the balance is due on December 3, 2009.
The Company will recognize the $1,500,000 as income as the cash payments on
the
note are received. El Monte will distribute any remaining cash when it winds
up
its affairs.
ACPT
has
two reportable segments: U.S. operations and Puerto Rico operations. The
Company's chief decision-makers allocate resources and evaluate the Company's
performance based on these two segments. The U.S. segment is comprised of
different components grouped by product type or service, to include: investments
in rental properties, community development and property management services.
The Puerto Rico segment entails the following components: investment in rental
properties, community development, homebuilding and property management
services. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Customer
Dependence
Residential
land sales to Lennar within our U.S. segment were $5,024,000 for the six months
ended June 30, 2006 which represents 22% of the U.S. segment's revenue and
11%
of our total year-to-date consolidated revenue. No other customers accounted
for
more than 10% of our consolidated revenue for the six and three months ended
June 30, 2006.
During
the second quarter of 2005, the Company sold commercial land for $7,448,000
to
Jalexis, Inc. within our Puerto Rico segment. That commercial land sale
represented 64% of the Puerto Rico segment's revenue and 26% of our consolidated
revenue for the six months ended June 30, 2005, and 91% of the Puerto Rico
segment’s revenue and 44% of the consolidated revenue for the three months ended
June 30, 2005. No other customers accounted for more than 10% of our
consolidated revenue in the six and three months ended June 30,
2006.
The
following presents the segment information for the six months ended June 30,
2006 and 2005 (in thousands):
|
|
United
|
|
Puerto
|
|
Inter-
|
|
|
|
Six
Months (Unaudited)
|
|
States
|
|
Rico
|
|
Segment
|
|
Total
|
|
2006:
|
|
|
|
|
|
|
|
|
|
Rental
property revenues
|
|
$
|
15,606
|
|
$
|
10,532
|
|
$
|
-
|
|
$
|
26,138
|
|
Rental
property operating expenses
|
|
|
7,155
|
|
|
5,188
|
|
|
-
|
|
|
12,343
|
|
Land
sales revenue
|
|
|
6,626
|
|
|
-
|
|
|
-
|
|
|
6,626
|
|
Cost
of land sales
|
|
|
3,666
|
|
|
-
|
|
|
-
|
|
|
3,666
|
|
Home
sales revenue
|
|
|
-
|
|
|
11,259
|
|
|
-
|
|
|
11,259
|
|
Cost
of home sales
|
|
|
-
|
|
|
8,521
|
|
|
-
|
|
|
8,521
|
|
Management
and other fees
|
|
|
269
|
|
|
296
|
|
|
-
|
|
|
565
|
|
General,
administrative, selling and marketing expense
|
|
|
3,396
|
|
|
1,611
|
|
|
-
|
|
|
5,007
|
|
Depreciation
and amortization
|
|
|
2,275
|
|
|
1,799
|
|
|
-
|
|
|
4,074
|
|
Operating
income
|
|
|
6,009
|
|
|
4,968
|
|
|
-
|
|
|
10,977
|
|
Interest
income
|
|
|
59
|
|
|
60
|
|
|
(18
|
)
|
|
101
|
|
Equity
in earnings from unconsolidated entities
|
|
|
-
|
|
|
343
|
|
|
-
|
|
|
343
|
|
Interest
expense
|
|
|
4,048
|
|
|
3,170
|
|
|
(18
|
)
|
|
7,200
|
|
Minority
interest in consolidated entities
|
|
|
312
|
|
|
2,354
|
|
|
-
|
|
|
2,666
|
|
Income
(loss) before provision for income taxes
|
|
|
1,710
|
|
|
(38
|
)
|
|
-
|
|
|
1,672
|
|
Income
tax provision (benefit)
|
|
|
729
|
|
|
(15
|
)
|
|
-
|
|
|
714
|
|
Net
income (loss)
|
|
|
981
|
|
|
(23
|
)
|
|
-
|
|
|
958
|
|
Gross
profit on land sales
|
|
|
2,960
|
|
|
-
|
|
|
-
|
|
|
2,960
|
|
Gross
profit (loss) on home sales
|
|
|
-
|
|
|
2,738
|
|
|
-
|
|
|
2,738
|
|
Total
assets
|
|
|
208,106
|
|
|
109,767
|
|
|
(369
|
)
|
|
317,504
|
|
Additions
to long lived assets
|
|
|
24,208
|
|
|
908
|
|
|
-
|
|
|
25,116
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
property revenues
|
|
$
|
10,828
|
|
$
|
-
|
|
$
|
-
|
|
$
|
10,828
|
|
Rental
property operating expenses
|
|
|
4,374
|
|
|
-
|
|
|
-
|
|
|
4,374
|
|
Land
sales revenue
|
|
|
2,324
|
|
|
10,397
|
|
|
-
|
|
|
12,721
|
|
Cost
of land sales
|
|
|
1,547
|
|
|
7,492
|
|
|
(159
|
)
|
|
8,880
|
|
Home
sales revenue
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cost
of home sales
|
|
|
-
|
|
|
21
|
|
|
-
|
|
|
21
|
|
Management
and other fees
|
|
|
505
|
|
|
1,194
|
|
|
(2
|
)
|
|
1,697
|
|
General,
administrative, selling and marketing expense
|
|
|
3,731
|
|
|
1,686
|
|
|
(2
|
)
|
|
5,415
|
|
Depreciation
and amortization
|
|
|
1,888
|
|
|
62
|
|
|
-
|
|
|
1,950
|
|
Operating
income
|
|
|
2,117
|
|
|
2,330
|
|
|
159
|
|
|
4,606
|
|
Interest
income
|
|
|
91
|
|
|
371
|
|
|
(382
|
)
|
|
80
|
|
Equity
in earnings from unconsolidated entities
|
|
|
73
|
|
|
555
|
|
|
-
|
|
|
628
|
|
Interest
expense
|
|
|
3,544
|
|
|
145
|
|
|
(310
|
)
|
|
3,379
|
|
Minority
interest in consolidated entities
|
|
|
238
|
|
|
-
|
|
|
-
|
|
|
238
|
|
(Loss)
Income before (benefit) provision for income taxes
|
|
|
(1,499
|
)
|
|
3,674
|
|
|
88
|
|
|
2,263
|
|
Income
tax (benefit) provision
|
|
|
(548
|
)
|
|
1,295
|
|
|
-
|
|
|
747
|
|
Net
(loss) income
|
|
|
(951
|
)
|
|
2,379
|
|
|
88
|
|
|
1,516
|
|
Gross
profit on land sales
|
|
|
777
|
|
|
2,905
|
|
|
159
|
|
|
3,841
|
|
Gross
profit on home sales
|
|
|
-
|
|
|
(21
|
)
|
|
-
|
|
|
(21
|
)
|
Total
assets
|
|
|
146,083
|
|
|
68,122
|
|
|
(10,058
|
)
|
|
204,147
|
|
Additions
to long lived assets
|
|
|
5,323
|
|
|
1,290
|
|
|
-
|
|
|
6,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following presents the segment information for the three months ended June
30,
2006 and 2005 (in thousands):
|
|
United
|
|
Puerto
|
|
Inter-
|
|
|
|
Three
Months (Unaudited)
|
|
States
|
|
Rico
|
|
Segment
|
|
Total
|
|
2006:
|
|
|
|
|
|
|
|
|
|
Rental
property revenues
|
|
$
|
8,059
|
|
$
|
5,288
|
|
$
|
-
|
|
$
|
13,347
|
|
Rental
property operating expenses
|
|
|
3,725
|
|
|
2,663
|
|
|
-
|
|
|
6,388
|
|
Land
sales revenue
|
|
|
2,682
|
|
|
-
|
|
|
-
|
|
|
2,682
|
|
Cost
of land sales
|
|
|
1,440
|
|
|
(10
|
)
|
|
-
|
|
|
1,430
|
|
Home
sales revenue
|
|
|
-
|
|
|
7,234
|
|
|
-
|
|
|
7,234
|
|
Cost
of home sales
|
|
|
-
|
|
|
5,487
|
|
|
-
|
|
|
5,487
|
|
Management
and other fees
|
|
|
128
|
|
|
147
|
|
|
-
|
|
|
275
|
|
General,
administrative, selling and marketing expense
|
|
|
1,605
|
|
|
737
|
|
|
-
|
|
|
2,342
|
|
Depreciation
and amortization
|
|
|
1,199
|
|
|
902
|
|
|
-
|
|
|
2,101
|
|
Operating
income
|
|
|
2,900
|
|
|
2,890
|
|
|
-
|
|
|
5,790
|
|
Interest
income
|
|
|
34
|
|
|
15
|
|
|
(18
|
)
|
|
31
|
|
Equity
in earnings from unconsolidated entities
|
|
|
-
|
|
|
173
|
|
|
-
|
|
|
173
|
|
Interest
expense
|
|
|
2,115
|
|
|
1,602
|
|
|
(18
|
)
|
|
3,699
|
|
Minority
interest in consolidated entities
|
|
|
304
|
|
|
1,297
|
|
|
-
|
|
|
1,601
|
|
Income
before provision for income taxes
|
|
|
515
|
|
|
237
|
|
|
-
|
|
|
752
|
|
Income
tax provision
|
|
|
228
|
|
|
67
|
|
|
-
|
|
|
295
|
|
Net
income
|
|
|
287
|
|
|
170
|
|
|
-
|
|
|
457
|
|
Gross
profit on land sales
|
|
|
1,242
|
|
|
10
|
|
|
-
|
|
|
1,252
|
|
Gross
profit (loss) on home sales
|
|
|
-
|
|
|
1,747
|
|
|
-
|
|
|
1,747
|
|
Total
assets
|
|
|
208,106
|
|
|
109,767
|
|
|
(369
|
)
|
|
317,504
|
|
Additions
to long lived assets
|
|
|
20,228
|
|
|
842
|
|
|
-
|
|
|
21,070
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
property revenues
|
|
$
|
5,487
|
|
$
|
-
|
|
$
|
-
|
|
$
|
5,487
|
|
Rental
property operating expenses
|
|
|
2,281
|
|
|
-
|
|
|
-
|
|
|
2,281
|
|
Land
sales revenue
|
|
|
1,525
|
|
|
7,448
|
|
|
-
|
|
|
8,973
|
|
Cost
of land sales
|
|
|
1,025
|
|
|
5,329
|
|
|
(118
|
)
|
|
6,236
|
|
Home
sales revenue
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cost
of home sales
|
|
|
-
|
|
|
11
|
|
|
-
|
|
|
11
|
|
Management
and other fees
|
|
|
264
|
|
|
707
|
|
|
(1
|
)
|
|
970
|
|
General,
administrative, selling and marketing expense
|
|
|
1,862
|
|
|
850
|
|
|
(1
|
)
|
|
2,711
|
|
Depreciation
and amortization
|
|
|
911
|
|
|
31
|
|
|
-
|
|
|
942
|
|
Operating
income
|
|
|
1,197
|
|
|
1,934
|
|
|
118
|
|
|
3,249
|
|
Interest
income
|
|
|
42
|
|
|
166
|
|
|
(191
|
)
|
|
17
|
|
Equity
in earnings from unconsolidated entities
|
|
|
49
|
|
|
234
|
|
|
-
|
|
|
283
|
|
Interest
expense
|
|
|
1,705
|
|
|
79
|
|
|
(161
|
)
|
|
1,623
|
|
Minority
interest in consolidated entities
|
|
|
212
|
|
|
-
|
|
|
-
|
|
|
212
|
|
(Loss)
Income before (benefit) provision for income taxes
|
|
|
(630
|
)
|
|
2,759
|
|
|
89
|
|
|
2,218
|
|
Income
tax (benefit) provision
|
|
|
(216
|
)
|
|
958
|
|
|
-
|
|
|
742
|
|
Net
(loss) income
|
|
|
(414
|
)
|
|
1,801
|
|
|
89
|
|
|
1,476
|
|
Gross
profit on land sales
|
|
|
500
|
|
|
2,119
|
|
|
118
|
|
|
2,737
|
|
Gross
profit on home sales
|
|
|
-
|
|
|
(11
|
)
|
|
-
|
|
|
(11
|
)
|
Total
assets
|
|
|
146,083
|
|
|
68,122
|
|
|
(10,058
|
)
|
|
204,147
|
|
Additions
to long lived assets
|
|
|
4,114
|
|
|
452
|
|
|
-
|
|
|
4,566
|
|
Cash
Dividend
On
August
10, 2006, the Board of Trustees declared a $0.10 per share cash dividend on
its
common shares, payable on September 8, 2006 to shareholders of record on August
24, 2006.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
FORWARD-LOOKING
STATEMENTS
The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing in this report. Historical
results set forth in Management's Discussion and Analysis of Financial Condition
and Results of Operation and the Financial Statements should not be taken as
indicative of our future operations.
This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These include
statements about our business outlook, market and economic conditions,
strategies, future plans, anticipated costs and expenses, capital spending,
and
any other statements that are not historical. The accuracy of these statements
is subject to a number of risks, uncertainties, and other factors that may
cause
our actual results, performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Those items are discussed under
"Risk Factors" in Part II, Item 1A to this Form 10-Q.
RESTATEMENT
AND INTERNAL CONTROL REMEDIATION MATTERS
During
the preparation of the Company's 2004 tax returns in the fourth quarter 2005,
the Company became aware that certain intercompany interest income was subject
to U.S. withholding tax when the interest was paid and certain income from
its
Puerto Rico operations could be treated as income of ACPT even though it was
not
distributed to ACPT. To correct the errors discovered, the Company restated
its
financial statements for the periods covered in its Form 10-K for the fiscal
year ended December 31, 2004 and its Forms 10-Q for the first two quarters
of
fiscal 2005. The Company has evaluated the effectiveness of its internal
control over accounting for income taxes as of June 30, 2006, and has determined
that the accounting errors referenced above and the potential for additional
misstatements indicate a material weakness in internal control over accounting
for income taxes. The Company is taking steps to ensure that the material
weakness is remediated, including the retention of additional international
tax
advisors and providing our in-house tax professionals and senior financial
management with additional training to enhance their awareness of potential
international tax matters and enable the Company to more effectively manage
its
internal and third-party tax professionals.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States, which we refer to as GAAP, requires
management to use judgment in the application of accounting policies, including
making estimates and assumptions. These judgments affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. If our judgment or interpretation of
the
facts and circumstances relating to various transactions had been different,
it
is possible that different accounting policies would have been applied resulting
in a different presentation of our financial statements.
Refer
to
the Company’s 2005 Annual Report on Form 10-K for a discussion of critical
accounting policies, which include profit recognition, cost capitalization,
investment in unconsolidated partnerships, impairment of long-lived assets,
depreciation of real estate investments, income taxes and contingencies. For
the
six months ended June 30, 2006 there were no material changes to our policies,
except as noted below.
NEW
ACCOUNTING PRONOUNCEMENT AND CHANGE IN BASIS OF
PRESENTATION
In
June
2005, the FASB ratified Emerging Issues Task Force Issue 04-05, "Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights," or EITF 04-05. EITF 04-05 provides an accounting model to be used
by a
general partner, or group of general partners, to determine whether the general
partner(s) controls a limited partnership or similar entity in light of certain
rights held by the limited partners. In accordance with the provisions of EITF
04-05, beginning January 1, 2006 we have included the following partnerships
in
our consolidated group: Alturas Del Senorial Associates Limited Partnership,
Bayamon Garden Associates Limited Partnership, Carolina Associates Limited
Partnership S.E., Colinas de San Juan Associates Limited Partnership, Essex
Apartments Associates Limited Partnership, Huntington Associates Limited
Partnership, Jardines de Caparra Associates Limited Partnership, Monserrate
Associates Limited Partnership, San Anton Associates, Turabo Limited Dividend
Partnership and Valle del Sol Associates Limited Partnership. Historically,
our
interests in these partnerships have been recorded using the equity method
of
accounting.
The
impact of consolidating the financial statements of these partnerships increased
our operating assets and liabilities by $78.5 million and $97.7 million,
respectively, as of January 1, 2006. The addition to assets is primarily related
to real estate at historical cost, net of accumulated depreciation of
approximately $53.3 million, and the addition to liabilities is primarily
related to non-recourse debt of approximately $98.6 million held by these
limited partnerships. The Company recorded an overall reduction to retained
earnings of $19.1 million in a manner similar to a cumulative effect of a change
in accounting principle. The retained earnings impact is net of a deferred
tax
asset recorded of $9.8 million related to temporary differences arising from
the
negative deficits absorbed by the Company in consolidation.
With
respect to our accounting for minority interest in our consolidated
partnerships, when consolidated real estate partnerships make cash distributions
or allocate losses to partners in excess of the minority partners' basis in
the
property, we generally record a charge equal to the amount of such excess
distribution, even though there is no economic effect or cost to our
shareholders.
RESULTS
OF OPERATIONS
The
following discussion is based on the consolidated financial statements of the
Company. It compares the results of operations of the Company for the six and
three months ended June 30, 2006 (unaudited) with the results of operations
of
the Company for the six and three months ended June 30, 2005 (unaudited). As
a
result of implementing EITF 04-05, our year to date net income, on a
consolidated basis, was reduced by $1,414,000 and our quarterly net income,
on a
consolidated basis, was reduced by $867,000. Historically, the Company’s
financial results have been significantly affected by the cyclical nature of
the
real estate industry. Accordingly, the Company’s historical financial statements
may not be indicative of future results. This discussion should be read in
conjunction with the accompanying consolidated financial statements and notes
included elsewhere in this report.
Results
of Operations - U.S. Operations:
For
the
six months ended June 30, 2006 our U.S. segment generated $6,009,000 of
operating income compared to $2,117,000 of operating income generated by the
segment for the same period in 2005. For the three months ended June 30, 2006,
our U.S. segment generated $2,900,000 of operating income compared to $1,197,000
of operating income for the three months ended June 30, 2005. Additional
information and analysis of the U.S. operations can be found below.
Rental
Property Revenues and Operating Expenses - U.S.
Operations:
In
the
prior period, 13 U.S. based apartment properties in which we hold an ownership
interest qualified for the consolidation method of accounting. Beginning January
1, 2006, two additional properties, Huntington Associates Limited Partnership
(“Huntington”) and Essex Apartments Associates Limited Partnership (“Essex”),
qualified for consolidation under the new provisions of EITF 04-05. The rules
of
consolidation require that we include within our financial statements the
consolidated apartment properties' total revenue and operating expenses. The
portion of net income attributable to the interests of the outside owners of
these properties and any losses and distributions in excess of the minority
owners' basis in those properties are reflected as minority interest expense.
On
May
23, 2005, the Company acquired the assets of Nottingham Apartments LLC, in
Baltimore, Maryland containing 85 units for approximately $3,000,000. On April
28, 2006, the Company completed the acquisition of two apartment properties,
Milford Station I LLC and Milford Station II LLC, in Baltimore, Maryland
containing a total of 250 units for approximately $14,300,000. All of the
acquired properties are being operated as market rate properties.
As
of
June 30, 2006, eleven of the consolidated properties are market rent properties,
allowing us to determine the appropriate rental rates. Even though we can
determine the rents, a portion of our units must be leased to tenants with
low
to moderate income. HUD subsidizes four of the properties and the two remaining
properties are a mix of subsidized units and market rent units. HUD dictates
the
rents of the subsidized units.
The
following table presents the results of rental property revenues and operating
expenses for the six and three months periods ended June 30, 2006 and 2005
($ in
thousands):
($
in thousands)
|
|
June
30, 2006
as
presented
|
|
Less
Effect
of
EITF
04-05
|
|
June
30, 2006
Comparative
|
|
June
30, 2005
|
|
Comparative
difference
|
|
Rental
property revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended
|
|
$
|
15,606
|
|
$
|
3,219
|
|
$
|
12,387
|
|
$
|
10,828
|
|
$
|
1,559
|
|
Three
months ended
|
|
$
|
8,059
|
|
$
|
1,628
|
|
$
|
6,431
|
|
$
|
5,487
|
|
$
|
944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended
|
|
$
|
7,155
|
|
$
|
1,925
|
|
$
|
5,230
|
|
$
|
4,374
|
|
$
|
856
|
|
Three
months ended
|
|
$
|
3,725
|
|
$
|
1,006
|
|
$
|
2,719
|
|
$
|
2,281
|
|
$
|
438
|
|
Six
months ended
Rental
property revenues, on a comparable basis, increased $1,559,000 to $12,387,000
for the six months ended June 30, 2006 compared to $10,828,000 for the same
period in 2005. The 14% increase in our rental property revenue during the
first
half of 2006 was primarily due to our apartment acquisitions in May 2005 and
April 2006 which added $590,000. The increase was also attributable to an
overall rent increase of 6% resulting in an additional $389,000 of rental
property income, a reduction in vacancies of $233,000, a benefit of $261,000
resulting from the completion of the amortization of acquired intangible leases
for Owings Chase and Prescott Square in 2005, and an increase in our other
revenues, such as corporate unit fees, cable income and recovery of bad debts
totaling $86,000.
The
addition of Huntington and Essex to the consolidation as a result of EITF 04-05
increased rental property revenues by $3,219,000 for the six months ended June
30, 2006. Although not included in the consolidated results for six months
ended
June 30, 2005, rental property revenues for Huntington and Essex were
$3,217,000, which is consistent with the rental property revenue for the six
months ended June 30, 2006.
Rental
property operating expenses, on a comparable basis, increased $856,000 in the
first half of 2006 to $5,230,000 compared to $4,374,000 for the first half
of
2005. The 20% increase in our rental property operating expenses during the
first six months of 2006 is the result of our apartment acquisitions in May
2005
and April 2006 which increased our operating expenses by $323,000, additional
operating and maintenance costs due to project wide cleaning and increased
security which added $242,000, an increase in administrative expenses of
$179,000, increases in utilities expenses of $84,000, and increases in insurance
and taxes of $25,000.
The
addition of Huntington and Essex to the consolidation as a result of EITF 04-05
increased rental property operating expenses by $1,925,000 for the six months
ended June 30, 2006. Although not included in the consolidated results for
six
months ended June 30, 2005, operating expenses for Huntington and Essex were
$1,469,000. The $456,000 increase was related to increased repairs and
maintenance expenses primarily related to rehabilitation of units, project
wide
cleaning, grounds, maintenance supplies and painting, as well as maintenance
salaries and security.
Three
months ended
Rental
property revenues, on a comparable basis, increased $944,000 to $6,431,000
for
the three months ended June 30, 2006 compared to $5,487,000 for the same period
in 2005. The 17% increase in our rental property revenue during the second
quarter of 2006 was primarily due to our apartment acquisitions in May 2005
and
April 2006 which added $442,000. The increase was also attributable to an
overall rent increase resulting in an additional $234,000 in rental property
revenue, a reduction in vacancies of $138,000 and a benefit of $89,000 resulting
from the completion of the amortization of acquired intangible leases for Owings
Chase and Prescott Square in 2005.
The
addition of Huntington and Essex to the consolidation as a result of EITF 04-05
increased rental property revenues by $1,628,000 for the three months ended
June
30, 2006. Although not included in the consolidated results for the three months
ended June 30, 2005, rental property revenues for Huntington and Essex were
$1,616,000, which is consistent with the rental property revenues for the three
months ended June 30, 2006.
Rental
property operating expenses, on a comparable basis, increased $438,000 in the
second quarter of 2006 to $2,719,000 compared to $2,281,000 for the first
quarter of 2005. The 19% increase in our rental property operating expenses
in
the second quarter of 2006 is the result of our apartment acquisitions in May
2005 and April 2006 which increased expenses by $219,000, additional operating
and maintenance costs due to project wide cleaning and increased security which
added $131,000 of rental property operating expenses and an increase in
administrative expenses of $72,000.
The
addition of Huntington and Essex to the consolidation as a result of EITF 04-05
increased rental property operating expenses by $1,006,000 for the three months
ended June 30, 2006. Although not included in the consolidated results for
the
three months ended June 30, 2005, operating expenses for Huntington and Essex
were $841,000. The $165,000 increase was related to increased repairs and
maintenance expenses primarily related to rehabilitation of units, project
wide
cleaning, grounds, maintenance supplies and painting, as well as maintenance
salaries and security.
Community
Development - U.S. Operations:
Land
sales revenue in any one period is affected by the mix of lot sizes and, to
a
greater extent, the mix between residential and commercial sales. In March
2004,
the Company executed an agreement with Lennar Corporation to sell 1,950
residential lots (1,359 single-family lots and 591 town home lots) in Fairway
Village in St. Charles, Maryland. The agreement requires the homebuilder to
provide $20,000,000 in letters of credit to secure the purchase of the lots
and
purchase 200 residential lots per year, provided that they are developed and
available for delivery. Based on 200 lot sales per year, it is estimated that
lot settlements will take place through 2015. Sales are closed on a lot by
lot
basis at the time when the builder purchases the lot. The ultimate selling
price
per lot sold to Lennar may exceed the amount recognized at closing since the
final lot price is equal to 30% of the base price of the home sold on the lot.
Additional revenue exceeding the established take down price per lot will be
recognized upon Lennar's settlement with the respective homebuyers. Residential
lots can vary in size and location resulting in pricing differences. Gross
margins of residential lots are fairly consistent within any given village
in
St. Charles. Commercial land is typically sold by contract that allows for
a
study period and delayed settlement until the purchaser obtains the necessary
permits for development. The sales prices and gross margins for commercial
parcels vary significantly depending on the location, size, extent of
development and ultimate use. Commercial land sales are cyclical and usually
have a noticeable positive effect on our earnings in the period they reach
settlement.
Community
development land sales revenue increased $4,302,000 to $6,626,000 for the six
months ended June 30, 2006 compared to $2,324,000 for the six months ended
June
30, 2005. Community development land sales revenue increased $1,157,000 to
$2,682,000 for the three months ended June 30, 2006 compared to $1,525,000
for
the three months ended June 30, 2005.
Residential
Land Sales
For
the
six months ended June 30, 2006, we delivered 26 residential lots to Lennar,
recognizing as revenue an average price of $127,560 per lot, which includes
the
initial recognition of $125,000 per lot plus water and sewer fees, road fees
and
other off-site fees. For the six months ended June 30, 2005, we delivered 10
residential lots to Lennar at an average selling price of $103,000 per lot
which
includes the initial recognition of $100,000 per lot plus water and sewer fees,
road fees and other off-site fees. As of June 30, 2006, we had 28 developed
residential lots ready for delivery.
For
the
three months ended June 30, 2006, we delivered 6 residential lots to Lennar
at
an average selling price of $127,560 per lot compared to 10 residential lots
delivered to Lennar during the second quarter of 2005 at an average selling
price of $103,000 per lot.
Prices
for our residential lots reflect the healthy housing market and increased home
prices in Charles County in 2005 which have remained steady in 2006. The current
selling price of new town-homes in this area is in excess of $300,000 while
single-family homes in Fairway Village are selling in excess of
$450,000.
During
the first six months of 2006 and 2005 we also recognized $1,707,000 and
$1,248,000, respectively, of additional revenue for lots that were previously
sold to Lennar in 2005 and 2004. During the second quarter of 2006 and 2005,
we
recognized $1,115,000 and $499,000, respectively, of additional revenue for
lots
previously sold to Lennar. This additional revenue is based on the final
settlement price of the homes as provided by our agreement with
Lennar.
Commercial
Land Sales
For
the
six months ended June 30, 2006, we sold 10.46 commercial acres in St. Charles
for $1,602,000 and during the three months ended June 30, 2006, we sold 7.81
commercial acres in St. Charles for $802,000. For the six and three months
ended
June 30, 2005, we sold 0.3 commercial acres $50,000. As of June 30, 2006, our
backlog contained 10.2 commercial acres under contract for a total of
$3,875,000.
St.
Charles Active Adult Community, LLC - Land Joint Venture
In
September 2004, the Company transferred a parcel of land in the Glen Eagles
Neighborhood in Fairway Village with a cost basis of $5,625,000 to a newly
formed joint venture with Lennar in exchange for cash of $4,277,000, and a
50%
membership interest in the venture. Pursuant to an operating agreement, the
joint venture will develop the property and sell it to Lennar’s homebuilding
division. The Company serves as the managing agent for the project and receives
a 3% management fee. The Company recorded deferred revenues equal to the cash
it
received at closing and off-site fees the joint venture is obligated to pay
the
Company until the lots are sold by the joint venture and deferred costs related
to 50% of the cost basis of the land. We expect to recognize the profit on
the
portion of land transferred as lots are sold by Lennar through the amortization
of previously deferred revenues and costs. Pursuant to the terms of the lot
option agreement, lots began selling in the fourth quarter of 2005 and are
expected to continue through the first quarter of 2009. The remaining 50% of
the
land's cost basis was recorded as our investment in the joint venture and is
reflected within our investments in unconsolidated real estate entities. The
joint venture did not sell any lots to Lennar’s homebuilding division during the
six and three months ended June 30, 2006 or 2005.
Gross
Margin on Land Sales
The
gross
margin on land sales for the six months ended June 30, 2006 was 45% compared
to
33% for the same period of 2005. The gross margin on land sales for the three
months ended June 30, 2006 and 2005 were 46% and 33%, respectively. Our gross
margins on land sales during the six and three months of 2006 and 2005 have
been
affected by increases in the price of steel, oil and fuel and the strong demand
and limited supply for contractors for the development of lots in Fairway
Village. These cost increases were more than offset by increased sales prices
of
homes in Fairway Village. In 2005, our period costs, and the lack of an offset
by land sales revenue, affected our gross margin on land sales.
Customer
Dependence
Residential
land sales to Lennar within our U.S. segment amounted to $5,024,000 for the
six
months ended June 30, 2006 which represents 22% of the U.S. segment's revenue
and 11% of our total consolidated revenue. Loss of all or a substantial portion
of our land sales, as well as the joint venture's land sales, to Lennar would
have a significant adverse effect on our financial results until such lost
sales
could be replaced.
Management
and Other Fees - U.S. Operations:
We
earn
monthly management fees from all of the apartment properties that we own as
well
as our management of apartment properties owned by third parties and affiliates
of J. Michael Wilson. We receive an additional fee from the properties that
we
manage for their use of the property management computer system that we
purchased at the end of 2001 and a fee for vehicles purchased by the Company
for
use on behalf of the properties. The cost of the computer system and vehicles
are reflected within depreciation expense. This section includes only the fees
earned from the non-controlled properties; the fees earned from the controlled
properties are eliminated in consolidation.
Management
and other fees
($
in thousands)
|
|
June
30, 2006
as
presented
|
|
Less
Effect
of
EITF
04-05
|
|
June
30, 2006
Comparative
|
|
June
30, 2005
|
|
Comparative
difference
|
|
Six
months ended
|
|
$
|
269
|
|
$
|
(202
|
)
|
$
|
471
|
|
$
|
505
|
|
$
|
(34
|
)
|
Three
months ended
|
|
$
|
128
|
|
$
|
(97
|
)
|
$
|
225
|
|
$
|
264
|
|
$
|
(39
|
)
|
Due
to
the required elimination of management fees in consolidation, the total
management fees decreased for the six and three months ended June 30, 2006,
as
compared to six and three months ended June 30, 2005 as a result of the impact
of EITF 04-05. On a comparative basis, management and other fees were relatively
consistent with the prior periods.
General,
Administrative, Selling and Marketing Expense - U.S.
Operations:
The
costs
associated with the oversight of our U.S. operations, accounting, human
resources, office management and technology, as well as corporate and other
executive office costs are included in this section. ARMC employs the
centralized office management approach for its property management services
for
our 15 properties located in St. Charles, Maryland, five properties located
in
the Baltimore, Maryland area and one property in Virginia and, to a lesser
extent, the other properties that we manage. The apartment properties reimburse
ARMC for certain costs incurred at the central office that are attributable
to
the operations of those properties. In accordance with EITF Topic 01-14,
"Income
Statement Characterization of Reimbursements Received for Out of Pocket Expenses
Incurred,"
the
cost and reimbursement of these costs are not included in general and
administrative expenses, but rather they are reflected as separate line items
on
the consolidated income statement.
General,
administrative, selling and marketing costs incurred within our U.S. operations
decreased $335,000 to $3,396,000 for the six months ended June 30, 2006,
compared to $3,731,000 for the same period of 2005. The 9% decrease in general,
administrative, selling and marketing costs is primarily attributable to a
decrease in the costs associated with our outstanding share incentive rights,
as
a result of a reduction of shares outstanding due to prior period exercises
coupled with a significant increase in the share price during the first six
months of 2005. There was also a decrease in Trustees’ fees due to shares issued
to the independent trustees in the prior year with no comparable issuances
in
the current year. The decrease was partially offset by an increase in
accounting, auditing fees and legal fees.
General,
administrative, selling and marketing costs incurred within our U.S. operations
decreased $257,000 to $1,605,000 for the three months ended June 30, 2006,
compared to $1,862,000 for the three months ended June 30, 2005. The 14%
decrease in general, administrative, selling and marketing costs is due to
a
decrease in the costs associated with our outstanding share incentive rights
and
a decrease in Trustees’ fees. The decrease was partially offset by an increase
in accounting, auditing fees and legal fees.
Depreciation
Expense - U.S. Operations:
Depreciation
expense
($
in thousands)
|
|
June
30, 2006
as
presented
|
|
Less
Effect
of
EITF
04-05
|
|
June
30, 2006
Comparative
|
|
June
30, 2005
|
|
Comparative
difference
|
|
Six
months ended
|
|
$
|
2,275
|
|
$
|
252
|
|
$
|
2,023
|
|
$
|
1,888
|
|
$
|
135
|
|
Three
months ended
|
|
$
|
1,199
|
|
$
|
126
|
|
$
|
1,073
|
|
$
|
911
|
|
$
|
162
|
|
Depreciation
expense, on a comparable basis, increased $135,000 to $2,023,000 for the first
six months of 2006 compared to $1,888,000 for the same period in 2005 and
increased $162,000 to $1,073,000 for the three months ended June 30, 2006
compared to $911,000 for the three months ended June 30, 2005. The increase
is
primarily attributable to the acquisitions in May 2005 and April 2006. The
increase is also attributable to additional capital improvements made to the
properties.
Equity
in Earnings from Unconsolidated Entities - U.S.
Operations:
With
the
implementation of the EITF 04-05, effective January 1, 2006, the Company has
consolidated the operational results of certain apartment partnerships which
resulted in the overall decrease in our equity in earnings. We account for
our
investments in two apartment partnerships, Brookside and Lakeside, using equity
accounting, but due to our limited ownership in these partnerships, our
recognition of the partnerships’ earnings is immaterial.
Interest
Expense - U.S. Operations:
The
interest related to the U.S. recourse debt, exclusive of debt related to the
apartment properties, is allocated to the qualifying land inventory based on
its
book balance. Any excess interest, interest on capital leases and amortization
of certain loan fees are reflected as interest expense. This section reflects
all interest expense incurred.
Interest
expense
($
in thousands)
|
|
June
30, 2006
as
presented
|
|
Less
Effect
of
EITF
04-05
|
|
June
30, 2006
Comparative
|
|
June
30, 2005
|
|
Comparative
difference
|
|
Six
months ended
|
|
$
|
4,048
|
|
$
|
633
|
|
$
|
3,415
|
|
$
|
3,544
|
|
$
|
(129
|
)
|
Three
months ended
|
|
$
|
2,115
|
|
$
|
316
|
|
$
|
1,799
|
|
$
|
1,705
|
|
$
|
94
|
|
Interest
expense, on a comparable basis, decreased 4% for the first six months ended
June
30, 2006 to $3,415,000 compared to $3,544,000 for the first six months of 2005.
The year to date decrease is due to loan fees and the write-off of unamortized
deferred financing fees of $210,000 in connection with the refinancing of one
of
our apartment property’s mortgage in March 2005. U.S. Operations interest
expense for the six months ended June 30, 2005 also includes $310,000 of
intersegment interest expense between our Puerto Rico operations with no
corresponding amounts for June 30, 2006. Interest expense between operating
segments eliminates in consolidation. These decreases were offset by the
additional interest expense on the mortgages of the properties acquired in
May
2005 and April 2006.
Interest
expense, on a comparable basis, increased $94,000 for the three months ended
June 30, 2006 to $1,799,000 compared to $1,705,000 for the three months ended
June 30, 2005. The increase is the result of the additional mortgage interest
on
the apartment properties acquired in May 2005 and April 2006.
For
the
six and three months ended June 30, 2006, $732,000 and $443,000 of interest
was
capitalized in the U.S. operations compared to $253,000 and $107,000 of interest
capitalized during the same periods in 2005.
Minority
Interest in Consolidated Entities - U.S. Operations:
Minority
interest in consolidated entities includes the minority partner's share of
the
consolidated partnerships earnings and distributions to minority partners in
excess of their basis in the consolidated partnership, even though these
distributions have no economic effect or cost to the Company. Losses charged
to
the minority interest are limited to the minority partner's basis in the
partnership. Because the minority interest holders in most of our partnerships
have received distributions in excess of their basis, we anticipate volatility
in minority interest expense. Although this allows us to recognize 100
percent of the income of the partnerships up to distributions and losses in
excess of basis previously required to be recognized as our expense, we will
be
required to recognize as expense 100 percent of future distributions to minority
partners and any subsequent losses.
Minority
interest for the six and three months ended June 30, 2006 was $312,000 and
$304,000 respectively compared to $238,000 and $212,000 for the six and three
months ended June 30, 2005. The year to date and quarter to date increases
in
minority interest expense are due to distributions made to the limited partners
of Huntington for which we are now required to consolidate as a result of the
implementation of EITF 04-05.
Provision
for Income Taxes - U.S. Operations:
The
effective
tax rates for the six and three months ended June 30, 2006, were 43% and 44%
respectively. The effective tax rates for the six and three months ended June
30, 2005 were (37)% and (34)%, respectively. The statutory rate is 39%. The
effective tax rate for 2006 differs from the statutory rate due to certain
permanent differences and state taxes. The effective rate for 2005 differs
from
the statutory rate primarily due to the effect of permanent items and the
taxation of foreign source interest income with a corresponding foreign tax
credit.
Results
of Operations - Puerto Rico Operations:
For
the
six months ended June 30, 2006, our Puerto Rico segment generated $4,968,000
of
operating income compared to $2,330,000 of operating income for the same period
in 2005. For the three months ended June 30, 2006, our Puerto Rico segment
generated $2,890,000 of operating income compared to $1,934,000 of operating
income for the same period in 2005. Additional information and analysis of
the
Puerto Rico operations can be found below.
Rental
Property Revenues and Operating Expenses - Puerto Rico
Operations:
Effective
January 1, 2006, the Company consolidated a number of apartment partnerships
in
accordance with EITF 04-05. Under the new consolidation guidance, nine Puerto
Rico based apartment partnerships, operating twelve apartment properties,
(“Puerto Rico Apartments”) in which we hold an ownership interest now qualify
for the consolidation method of accounting. As a result, we included within
our
financial statements the consolidated apartment properties’ total revenues and
operating expenses. The portion of net income attributable to the interests
of
the outside owners of these properties and any income or losses and
distributions in excess of the minority owners’ basis in those properties are
reflected as minority interest. As of June 30, 2006, our twelve consolidated
properties are HUD subsided projects with rental rates governed by HUD.
The
following table presents the results of rental property revenues and operating
expenses for the six and three-month periods ended June 30, 2006 and
2005:
($
in thousands)
|
|
June
30, 2006
as
presented
|
|
Less
Effect
of
EITF
04-05
|
|
June
30, 2006
Comparative
|
|
June
30,2005
|
|
Comparative
Difference
|
|
Rental
property revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended
|
|
$
|
10,532
|
|
$
|
10,395
|
|
$
|
137
|
|
$ |
-
|
|
$
|
137
|
|
Three
months ended
|
|
$
|
5,288
|
|
$
|
5,220
|
|
$
|
68
|
|
$ |
-
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended
|
|
$
|
5,188
|
|
$
|
4,906
|
|
$
|
282
|
|
$ |
-
|
|
$
|
282
|
|
Three
months ended
|
|
$
|
2,663
|
|
$
|
2,517
|
|
$
|
146
|
|
$ |
-
|
|
$
|
146
|
|
The
consolidation of the Puerto Rico Apartments as a result of EITF 04-05, increased
rental property revenues by $10,395,000 and $5,220,000 for the six and three
months ended June 30, 2006, respectively. Although not included in the
consolidated results for the same periods in 2005, rental property revenues
from
the Puerto Rico Apartments were $10,278,000 and $5,157,000. The increases for
the six and three month periods ended June 30, 2006 were related to an overall
increase in rents partially offset by an increase in the vacancy in the Carolina
Associates LP, SE Properties.
The
consolidation of the Puerto Rico Apartments as a result of EITF 04-05 increased
rental property operating expenses by $4,906,000 and $2,517,000 for the six
and
three months ended June 30, 2006, respectively. Although not included in the
consolidated results for the same periods in 2005, rental property revenues
from
the Puerto Rico Apartments were $4,796,000 and $2,511,000. The increases for
the
periods ended June 30, 2006, were primarily due to increases in utilities,
repairs and rehabilitation of units in such periods.
In
September 2005, the Company commenced the operations of the first commercial
rental property in the community of Parque Escorial, know as Escorial Building
One, in which it is holds a 100% ownership interest. Escorial Building One
is a
three-story building with approximately 56,000 square feet of offices space
for
lease. The Company moved the Puerto Rico Corporate Office to the new facilities
in the third quarter of 2005, and leases approximately 20% of the
building.
During
six and three months ended June 30 2006, the commercial rental property
generated $137,000 and $68,000 of rental property income, respectively.
Operating expenses for the commercial rental property during these periods
were
$282,000 and $146,000, respectively. As of June 30, 2006, 36% of the office
space was leased. There were no commercial rental property operations during
the
same periods in 2005.
Community
Development - Puerto Rico Operations:
Total
land sales revenue in any one period is affected by the mix of residential
and
commercial sales. Residential and commercial land sales are cyclical in nature
and usually have a noticeable positive effect impact on our earnings in the
period in which settlement is made.
There
were no community development land sales during the six and three months ended
June 30, 2006. Community development land sales during the same periods in
2005
were $10,397,000 and $7,448,000, respectively. In April 2005, the Company sold
7.2 commercial acres for $7,448,000 and in February 2005, the Company sold
2.5
commercial acres for $2,949,000 in the master- planned community of Parque
Escorial. The gross margins on land sales for the six and three months ended
June 30, 2005 were 29% and 30%, respectively, with no comparable gross margins
for the same periods in 2006.
There
were no commercial contracts for commercial sales in backlog at June 30,
2006.
Homebuilding
- Puerto Rico Operations:
The
Company organizes corporations as needed to operate each individual homebuilding
project. In April 2004, the Company commenced the construction of a new 160-unit
mid-rise condominium complex known as Torres del Escorial (“Torres”). The
condominium units were offered to buyers in the market in January 2005 and
delivery of the units commenced in the fourth quarter of 2005. The condominium
units are sold individually from an on site sales office to pre-qualified
homebuyers.
During
the six and three months of 2006, 45 and 29 units, respectively, within the
Torres project were closed at an average selling price of approximately $250,000
per unit for both periods, generating aggregate revenues of $11,259,000 and
$7,234,000, respectively, with no comparable home sales revenue generated for
the same periods in 2005. The year to date and quarter to date gross margins
on
home sales were 24%. As of June 30, 2006, 29 units of Torres were under contract
at an average selling price of $257,000 per unit. Each sales contract is backed
by a $6,000 deposit. For the six months ended June 30, 2006, the Company had
33
new contracts and 27 canceled contracts. The slowdown in new contracts is
partially attributable to a limited number of condominimums currently
available for contract in the balance of Building Three. At the Company's
discretion, more units will become available for contract in the
fourth and final building. The Company generally waits to open up a
new building until substantially all of the units in previous buildings are
under contract.
Management
and Other fees - Puerto Rico Operations:
We
earn
monthly fees from our management of four non-owned apartment properties and
four
property-owner associations operating in Parque Escorial. This section includes
only the fees earned from the non-owned managed entities. The fees earned from
the controlled properties are eliminated in consolidation.
Management
Fees
($
in thousands)
|
|
June
30, 2006
as
presented
|
|
Less
Effect
of
EITF
04-05
|
|
June
30, 2006
Comparative
|
|
June
30, 2005
|
|
Comparative
Difference
|
|
Six
months ended
|
|
$
|
296
|
|
$
|
(710
|
)
|
$
|
1,006
|
|
$
|
1,194
|
|
$
|
(188
|
)
|
Three
months ended
|
|
$
|
147
|
|
$
|
(378
|
)
|
$
|
525
|
|
$
|
707
|
|
$
|
(182
|
)
|
Due
to
the required elimination of management fees in consolidation, total management
fees decreased for the six and three months ended June 30, 2006, as compared
to
the six and three months ended June 30, 2005 as a result of the impact of EITF
04-05. On a comparative basis, the decrease in management fees primarily
resulted from the fact that in 2005, we managed one commercial property owned
by
the Wilson Family which was sold to a third party in April 2005. Fees earned
in
2005 included a broker’s fee from the sale of the property of $139,000 and a
refinancing fee of $96,000 was earned from Bayamon Garden.
General,
Administrative, Selling and Marketing Expenses - Puerto Rico
Operations:
The
costs
associated with the oversight of our operations, accounting, human resources,
office management and technology are included within this section. The apartment
properties reimburse IGP for certain costs incurred at IGP’s office that are
attributable to the operations of those properties. In accordance with EITF
01-14 the costs and reimbursement of these costs are not included within this
section but rather, they are reflected as separate line items on the
consolidated income statement. Due to the fact that we moved our corporate
office to our new office building, Escorial Office Building One, rent expense
and parking expenses are eliminated in consolidation.
General,
administrative, selling and marketing expenses decreased 4% or $75,000 to
$1,611,000 during the six months ended June 30, 2006, as compared to $1,686,000
for the same period of 2005 and decreased $113,000 or 13% to $737,000 during
the
three months ended June 30, 2006, as compared to $850,000 for the three months
ended June 30, 2005.
The
4%
year to date decrease is attributable to a reduction in office and parking
rents, a decrease in the outstanding share incentive rights expenses recorded
as
a result of a reduction in our share price that we experienced during the first
six months of 2006, as well as decreases in bad debts, consulting tax services
and miscellaneous general expenses. These decreases were offset in part by
an
increase in selling and marketing expenses incurred in the Torres project,
with
no comparable expense during the same period in 2005 and increases in municipal
and property taxes as well as salaries and benefits.
The
13%
decrease in our quarter to date general and administrative expenses is the
result of a reduction in the charge to our share appreciation rights, a decrease
in salaries and benefits, a reduction in office and parking rents and bad debt
expense. The three months decreases were offset by increases in municipal and
property taxes, other general administrative expenses and selling and marketing
expenses.
Depreciation
Expense - Puerto Rico Operations:
Depreciation
Expense
($
in thousands)
|
|
June
30, 2006
as
presented
|
|
Less
Effect
of
EITF
04-05
|
|
June
30, 2006
Comparative
|
|
June
30, 2005
|
|
Comparative
Difference
|
|
Six
months ended
|
|
$
|
1,799
|
|
$
|
1,610
|
|
$
|
189
|
|
$
|
62
|
|
$
|
127
|
|
Three
months ended
|
|
$
|
902
|
|
$
|
808
|
|
$
|
94
|
|
$
|
31
|
|
$
|
63
|
|
Depreciation
expense, on a comparable basis, increased $127,000 to $189,000 for the first
six
months of 2006 compared to $62,000 for the same period in 2005 and increased
$63,000 to $94,000 for the three months ended June 30, 2006 compared to $31,000
for the three months ended June 30, 2005. The increase is attributable to the
Escorial Building One, our commercial office building. Our year to date and
quarter to date depreciation expense for this building was $113,000 and $58,000
respectively.
Equity
in Earnings from Partnerships from Unconsolidated Entities- Puerto Rico
Operations:
With
the
implementation of the EITF 04-05, effective January 1, 2006, the Company
consolidated the operating results of its apartment partnerships.
We
account for our limited partner investment in the commercial rental property
owned by ELI and El Monte under the equity method of accounting. The earnings
from our investment in commercial rental property are reflected within this
section. The recognition of earnings depends on our investment basis in the
property, and where the partnership is in the earnings stream.
Equity
in earnings
($
in thousands)
|
|
June
30, 2006
as
presented
|
|
Less
Effect
of
EITF
04-05
|
|
June
30, 2006
Comparative
|
|
June
30, 2005
|
|
Comparative
Difference
|
|
Six
months ended
|
|
$
|
343
|
|
$
|
(103
|
)
|
$
|
446
|
|
$
|
555
|
|
$
|
(109
|
)
|
Three
months ended
|
|
$
|
173
|
|
$
|
(29
|
)
|
$
|
202
|
|
$
|
234
|
|
$
|
(32
|
)
|
Equity
in
earnings from partnerships, on a comparable basis, decreased 20% to $446,000
during the first six months of 2006, as compared to $555,000 during the same
period of 2005 and decreased 14% to $202,000 during the second quarter of 2006
compared to $234,000 in 2005. The six-month decrease is the result of reduced
net income for the Puerto Rico Apartments for both periods in 2006 as compared
to the same periods in 2005. The decreased net income was primarily related
to
operating, financial and depreciation expenses increasing at a greater rate
than
revenues.
Interest
Expense - Puerto Rico Operations:
Interest
on the homebuilding construction loan is capitalized. Interest related to the
non-recourse debt of our investment properties, interest on capital leases,
other than bank charges, and the amortization of certain loan fees are reflected
on our financial statements as interest expense. This section reflects all
interest expense incurred.
Interest
Expense
($
in thousands)
|
|
June
30, 2006
as
presented
|
|
Less
Effect
of
EITF
04-05
|
|
June
30, 2006
Comparative
|
|
June
30, 2005
|
|
Comparative
Difference
|
|
Six
months ended
|
|
$
|
3,170
|
|
$
|
2,830
|
|
$
|
340
|
|
$
|
145
|
|
$
|
195
|
|
Three
months ended
|
|
$
|
1,602
|
|
$
|
1,425
|
|
$
|
177
|
|
$
|
79
|
|
$
|
98
|
|
Interest
expense, on a comparable basis, increased $195,000 for the six months of 2006
to
$340,000, as compared to $145,000 for the six months ended June 30, 2005 and
increased $98,000 during the second quarter of 2006 to $177,000 as compared
to
$79,000 of interest expense for the same period of 2005. The year to date and
quarter ended increases are primarily attributable to interest expense incurred
on the office building mortgage and an intercompany loan which eliminates in
consolidation with no comparable interest recognized in both periods in 2005.
For
the
six months ended June 30, 2006, $340,000 of the interest incurred was expensed
and $496,000 was capitalized. During the same period in 2005, $145,000 was
expensed and $700,000 was capitalized. During the three months ended June 30,
2006, $177,000 of interest incurred was expensed and $224,000 was capitalized.
During the same period in 2005, $79,000 was expensed and $357,000 was
capitalized. The decreases in capitalized interest during the periods is
primarily due to a development loan that was paid in full in April 2005, as
well
as the conversion of the Escorial Office One construction loan to a permanent
loan in October 2005.
Minority
Interest in Consolidated Entities - Puerto Rico
Operations:
As
a
result in implementing EITF 04-05, our Puerto Rico segment now records minority
interest expense related to the minority partners’ share of the consolidated
apartment partnerships earnings and distributions to minority partners in excess
of their basis in the consolidated partnership, even though these distributions
have no economic effect or cost to the Company. Losses charged to the minority
interest are limited to the minority partners’ basis in the partnership. Because
the minority interest holders in most of our partnerships have received
distributions in excess of their basis, we anticipate volatility in minority
interest expense. Although this allows us to recognize 100 percent of the income
of the partnerships up to distributions and losses in excess of basis previously
required to be recognized as our expense, we will be required to expense 100
percent of future distributions to minority partners and any subsequent
losses.
Minority
interest for the six and three months ended June 30, 2006, were $2,354,000
and
$1,297,000, respectively. The minority interest expense in both periods was
primarily the result of distributions to the minority owners in excess of their
basis from our consolidated apartment partnerships. During the first quarter
of
2006, surplus cash distributions of $1,057,000 were made from the consolidated
apartment partnerships to the minority owners in excess of their basis. In
April
2006, the mortgage of one of our consolidated apartment properties was
refinanced and as a result, the Company made a distribution of $1,100,000 to
the
minority partners. Also during the second quarter, $200,000 of regular
distributions from the surplus cash from other consolidated apartment properties
were made.
Provision
for Income Taxes - Puerto Rico Operations:
The
effective tax rates for the six and three months ended June 30, 2006 were 39%
and 28%, respectively. The effective tax rates for the six and three months
ended June 30, 2005 were 35% for both periods. The statutory rate is 29%.
The effective tax rate for the six months ended June 30, 2006 was generated
by a
loss and corresponding tax benefit of $15,000, resulting in a variance from
the
statutory rate primarily due to the impact of non-taxable items, such
as the tax-exempt income received from our commercial partnership ELI, SE,
offset in part by deferred taxes on items for which no current benefit
may be recognized. The higher effective rate for 2005 relates to the
accrual of additional taxes regarding the potential taxation of certain PR
income at U.S. Corporate rates, however, this tax issue was subsequently
resolved and during the fourth quarter of 2005, such tax accumulation
was reversed.
LIQUIDITY
AND CAPITAL RESOURCES
Summary
of Cash Flows
As
of
June 30, 2006, the Company had cash and cash equivalents of $13,465,000 and
$21,326,000 in restricted cash. The following table sets forth the changes
in
the Company's cash flows ($ in thousands):
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$
|
2,070
|
|
$
|
(1,773
|
)
|
Investing
Activities
|
|
|
(22,840
|
)
|
|
(1,603
|
)
|
Financing
Activities
|
|
|
13,079
|
|
|
5,840
|
|
Net
(Decrease) Increase in Cash
|
|
$
|
(7,691
|
)
|
$
|
2,464
|
|
For
the
six months ended June 30, 2006 operating activities provided $2,070,000 of
cash
flows compared to $1,773,000 of cash flows used in its operating activities
for
the six months ended June 30, 2005. Our operating activities include cash paid
for additions to our community development as well as homebuilding improvements.
For the six months ended June 30, 2006, cash paid for additions to our community
development assets was $9,475,000 compared to $10,214,000 for the six months
ended June 30, 2005. For the six months ended June 30, 2006, we used $4,354,000
of cash from operating activities for our homebuilding expenditures compared
to
$5,976,000 for the six months ended June 30, 2005. From period to period, cash
flow from operating activities depends primarily upon changes in our net income,
as discussed more fully above under "Results of Operations," as well as changes
in our receivables and payables.
During
the six months ended June 30, 2006, the Company had $22,840,000 of net cash
used
in its investing activities compared to $1,603,000 of net cash used during
the
first six months of 2005. Cash provided by or used in investing activities
generally relates to increases in our investment portfolio through acquisition,
development or construction of rental properties and land held for future use,
net of returns on our investments. On April 28, 2006, the Company completed
the
acquisition of two apartment properties in Baltimore, Maryland containing a
total of 250 units for approximately $14,300,000. Also, during the first half
of
2006, we invested $7,747,000 in the construction of an apartment project in
St.
Charles compared to construction expenditures of $1,957,000, related to the
construction of our office building in Parque Escorial used during the first
half of 2005. Finally, as a result of adding 11 additional properties to our
consolidation as of January 1, 2006, under the new provisions of EITF-04-05,
we
added $4,723,000 to the opening consolidated cash balance. For further
discussion of the impact at the implementation of EITF 04-05, see Note 2 to
our
consolidated financial statements.
For
the
six months ended June 30, 2006, $13,079,000 of cash was provided by our
financing activities compared to $5,840,000 of cash provided by financing
activities for the same period in 2005. Cash used in or provided by financing
activities generally relates to dividend distributions to our shareholders,
distributions made to our minority interest partners and advances and repayment
of debt. The increase in distributions to minority interest partners from
$179,000 for the six months ended June 30, 2005 to $2,646,000 for the six months
ended June 30, 2006 is primarily the result of including the 11 additional
apartment properties as discussed above. The increase in dividends paid to
shareholders from $1,024,000 for the first half of 2005 to $3,232,000 for the
first half of 2006 is the result of a special dividend paid related to the
resolution of certain tax matters. Related to changes in our debt items,
generally, new debt incurred during a period depends upon the net effect of
our
acquisition, development and refinancing activity. The detailed activity within
our recourse and non-recourse debt instruments is discussed below within the
Contractual
Financial Obligations section.
Contractual
Financial Obligations
The
following chart reflects our contractual financial obligations as of June 30,
2006:
|
|
Payments
Due By Period
|
|
|
|
|
|
Less
Than
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
5
Years
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recourse debt - community development
and homebuilding
|
|
$
|
37,735
|
|
$
|
4,849
|
|
$
|
15,255
|
|
$
|
2,954
|
|
$
|
14,677
|
|
Total
recourse debt - investment properties
|
|
|
4,615
|
|
|
2,868
|
|
|
213
|
|
|
81
|
|
|
1,453
|
|
Total
non-recourse debt - community development
|
|
|
500
|
|
|
-
|
|
|
500
|
|
|
-
|
|
|
-
|
|
Total
non-recourse debt - investment properties
|
|
|
235,827
|
|
|
3,898
|
|
|
20,874
|
|
|
11,076
|
|
|
199,979
|
|
Capital
lease obligations
|
|
|
78
|
|
|
7
|
|
|
62
|
|
|
9
|
|
|
-
|
|
Operating
lease obligations
|
|
|
1,507
|
|
|
380
|
|
|
1,010
|
|
|
117
|
|
|
-
|
|
Purchase
obligations
|
|
|
53,392
|
|
|
22,763
|
|
|
30,454
|
|
|
50
|
|
|
125
|
|
Total
contractual cash obligations
|
|
$
|
333,654
|
|
$
|
34,765
|
|
$
|
68,368
|
|
$
|
14,287
|
|
$
|
216,234
|
|
Recourse
Debt - U.S. Operations
Pursuant
to an agreement reached between ACPT and the Charles County Commissioners in
2002, the Company agreed to accelerate the construction of two major roadway
links to the Charles County (the "County") road system. As part of the
agreement, the County agreed to issue general obligation public improvement
bonds (the “Bonds”) to finance $20,000,000 of this construction guaranteed by
letters of credit provided by Lennar as part of a residential lot sales contract
for 1,950 lots in Fairway Village. The Bonds were issues in three
installments with the final $6,000,000 installment issued in March 2006.
The Bonds bear interest rates ranging from 4% to 8%, for a blended lifetime
rate
of 5.6%, and call for semi-annual interest payments and annual principal
payments and mature in fifteen years. Under the terms of bond repayment
agreements with the County, the Company is obligated to pay interest and
principal on the full amount of the Bonds; as such, the Company recorded the
full amount of the debt and a receivable from the County representing the
remaining Bond proceeds to be advanced to the Company over an eighteen month
period as major infrastructure development within the project occurs. As part
of
the agreement, the Company will pay the County a monthly payment equal to
one-sixth of the semi-annual interest payments and one-twelfth of the annual
principal payment.
On
April
14, 2006, the Company closed a three year $14,000,000 revolving line of credit
loan (“the Revolver”) secured by a first lien deed of trust on property located
in St. Charles, MD. The maximum amount of the loan at any one time is
$14,000,000. The facility includes various sub-limits on a revolving basis
for
amounts to finance apartment project acquisitions and land development in St.
Charles. The terms require certain financial covenants to be calculated annually
as of December 31, including a tangible net worth to senior debt ratio for
ALD
and a minimum net worth test for ACPT. Although not required to be measured,
as
of June 30, 2006, the Company was in compliance with these financial covenants.
As of June 30, 2006, the Company borrowed $6,700,000 on the
Revolver.
In
August
2005, the Company signed a memorandum of understanding ("MOU") with the Charles
County Commissioners regarding a land donation that will house a planned minor
league baseball stadium and entertainment complex. Under the terms of the MOU,
the Company donated 42 acres of land in St. Charles to the County on December
31, 2005. The Company also agreed to expedite off-site utilities, storm-water
management and road construction improvements that will serve the entertainment
complex and future portions of St. Charles so that the improvements will be
completed concurrently with the entertainment complex. The County will be
responsible for infrastructure improvements on the site of the complex. In
return, the County agreed to issue $7,000,000 of general obligation bonds to
finance the infrastructure improvements. In March 2006, $4,000,000 of bonds
were
issued for this project. The funds for this project will be repaid by ACPT
over
a 15-year period. In addition, the County agreed to issue an additional 100
school allocations a year to St. Charles commencing with the issuance of bonds.
The County will also require ACPT to fund an escrow account from lot sales
that
will be used to repay these bonds.
In
June
2005, the Company signed a two year, $3,000,000 recourse note with Columbia
Bank. The loan carries a fixed interest rate of 6.98%, requires the
Company to pay monthly principal and interest payments until its maturity on
May
15, 2007 and is collateralized by the Company's cash receipts from the two
apartment properties acquired in October 2004 and two parcels of land in St.
Charles acquired in the second quarter of 2005.
Recourse
Debt - Puerto Rico Operations
Substantially
all of the Company's homebuilding assets and 490 acres of community development
land assets in Parque El Commandante within the Puerto Rico segment are
encumbered by recourse debt. The land assets in Parque Escorial are
unencumbered as of June 30, 2006. The Company obtained a construction loan
in
March 2004 for its current homebuilding project, Torres del Escorial. The
construction loan carries a $26,000,000 revolving line of credit with aggregate
advances not to exceed $18,000,000 outstanding at any one time. The loan is
secured by a mortgage on the property and will be repaid by the proceeds of
the
home sales. As of June 30, 2006, the construction loan balance to
advance is approximately $1,666,000 and the outstanding balance due to
the bank is $7,514,000.
Non-Recourse
Debt - U.S. Operations
As
more
fully described in Note 4 to our Consolidated Financial Statements included
in
this Form 10-Q, the non-recourse apartment properties' debt is collateralized
by
apartment projects. As of June 30, 2006, approximately 37% of this debt is
secured by the Federal Housing Administration ("FHA") or the Maryland Housing
Fund.
Non-recourse
debt within our U.S. operations also includes a construction loan for a new
apartment project in St. Charles. On August 11, 2005, Sheffield Greens
Apartments, LLC ("Sheffield Greens"), a wholly owned subsidiary of the Company,
obtained a non-recourse construction loan of $27,008,000 to fund the
construction costs for a new apartment property in St. Charles' Fairway Village.
The construction loan will mature in September 2007 and at such time will
convert into a 40-year non-recourse permanent mortgage. The loan has a fixed
interest rate of 5.47%, and requires interest-only payments during the
construction phase followed by principal and interest payments until maturity.
The loan is subject to a HUD regulatory agreement. The loan documents provide
for covenants and events of default that are customary for mortgage loans
insured by the Federal Housing Authority.
On
April
28, 2006, the Company completed the acquisition of two apartment properties
in
Baltimore, Maryland containing a total of 250 units for approximately
$14,300,000. The acquisition was financed through a combination $11,836,000
of
non-recourse notes and borrowing $3,755,000 from the Revolver, which included
funding improvement escrows and payment of closing costs.
In
the
fourth quarter of 2005, the Company purchased 22 residential acres adjacent
to
the Sheffield Neighborhood in St. Charles for $1,000,000. The Company paid
$500,000 in cash and signed a two-year, non-interest bearing, non-recourse
note,
for $500,000 due in November 2007.
Non-Recourse
Debt - Puerto Rico Operations
As
more
fully described in Note 4 to our Consolidated Financial Statements included
in
this Form 10-Q, the non-recourse apartment properties' debt is collateralized
by
the apartment projects. As of June 30, 2006, approximately $1,000,000 of
this debt is secured by the Federal Housing Administration ("FHA").
Non-recourse
debt within our Puerto Rico operations also includes a permanent mortgage of
$8,618,000 for the office building. The permanent loan facility consists of
a
thirty-year loan with a ten year fixed rate equal to 7.33%. At the end of the
first ten years the interest rate will be reset, at the discretion of
management, to a fixed rate for an additional five, seven or ten years equal
to
the SWAP rate plus 2.25%.
On
April
5, 2006, the non-recourse mortgage for one of our consolidated apartment
properties in Puerto Rico, Colinas de San Juan Associates Limited Partnership,
was refinanced with a ten-year, 6.59% non-recourse mortgage loan of $9,680,000.
The proceeds from the refinancing were used for capital improvements at the
property site and distributions to the general and limited
partners.
Purchase
Obligations and Other Contractual Obligations
In
addition to our contractual obligations described above, we have other purchase
obligations consisting primarily of contractual commitments for normal operating
expenses at our apartment properties, recurring corporate expenditures including
employment, consulting and compensation agreements and audit fees, non-recurring
corporate expenditures such as improvements at our investment properties, the
construction of the new apartment project in St. Charles, costs associated
with
our homebuilding project in Puerto Rico, land development contracts for the
County’s road projects and the development of our land in the U.S. and Puerto
Rico. Our U.S. and Puerto Rico land development contracts, homebuilding
contracts and construction contracts are subject to increases in cost of
materials and labor and other project overruns. Our overall capital requirements
will depend upon acquisition opportunities, the level of improvements on
existing properties and the cost of future phases of residential and commercial
land development. In 2006, the Company plans to continue its development
activity within the master planned communities in St. Charles and Puerto Rico
and may commit to future contractual obligations at that time.
Liquidity
Requirements
Our
short-term liquidity requirements consist primarily of obligations under capital
and operating leases, normal recurring operating expenses, regular debt service
requirements (including debt service relating to additional or replacement
debt
as well as matured debt), non-recurring expenditures and dividends to common
shareholders. The Company has historically met its liquidity requirements from
cash flow generated from residential and commercial land sales, home sales,
property management fees, and rental property revenue. However, a significant
reduction in the demand for real estate or a decline in the prices of real
estate could adversely impact our cash flows. Anticipated cash flow from
operations, existing loans, refinanced or extended loans, and new financing
are
expected to meet our financial commitments for the year. However, there are
no
assurances that these funds will be generated.
We
are
actively seeking additions to our rental property portfolio. We are currently
pursuing various opportunities to purchase additional apartment properties
in
the Baltimore, Maryland and Washington, D.C. areas. Future acquisitions may
be
financed through a combination of Company equity, third party equity and market
rate mortgages. During the remaining six months of 2006, we may seek additional
development loans and permanent mortgages for continued development and
expansion of St. Charles and Parque Escorial and other potential rental property
opportunities.
The
Company will evaluate and determine on a continuing basis, depending upon market
conditions and the outcome of events described under the section titled
"Forward-Looking Statements," the most efficient use of the Company's capital,
including acquisitions and dispositions, purchasing, refinancing, exchanging
or
retiring certain of the Company's outstanding debt obligations, distributions
to
shareholders and its existing contractual obligations.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
|
The
Company is exposed to certain financial market risks, the most predominant
being
fluctuations in interest rates. Interest rate fluctuations are monitored by
the
Company's management as an integral part of the Company's overall risk
management program, which recognizes the unpredictability of financial markets
and seeks to reduce the potentially adverse effect on the Company's results
of
operations.
As
of
June 30, 2006, there have been no material changes in the Company's financial
market risk since December 31, 2005 as discussed in the Company's Annual Report
on Form
10-K.
Evaluation
of Disclosure Controls and Procedures
In
connection with the preparation of this Form 10-Q, as of June 30, 2006, an
evaluation was performed under the supervision and with the participation of
the
Company's management, including the CEO and CFO, of the effectiveness of the
design and operation of our disclosure controls and procedures as defined in
Rule 13a-15(e) under the Exchange Act. In performing this evaluation, management
reviewed the selection, application and monitoring of our historical accounting
policies. Based on that evaluation, the CEO and CFO concluded that these
disclosure controls and procedures, because of the material weakness in internal
control discussed below, were not effective in ensuring that the information
required to be disclosed in our reports filed with the SEC is recorded,
processed, summarized and reported on a timely basis.
During
the preparation of the Company's 2004 tax returns in the fourth quarter 2005,
the Company became aware that certain intercompany interest income was subject
to U.S. withholding tax when the interest was paid and certain income from
its
Puerto Rico operations could be treated as income of ACPT even though it was
not
distributed to ACPT. The Company determined that neither the obligation to
pay
the withholding tax or exposure related to the tax status had been previously
accrued. Accordingly, the Company announced on November 15, 2005, that the
Company would restate financial statements for the periods covered in its Form
10-K for the fiscal year ended December 31, 2004 and the Forms 10-Q for the
first two quarters of fiscal 2005 to correct previously reported amounts related
to these income tax matters.
The
Company has determined the accounting errors referenced above indicate a
material weakness in internal controls with respect to accounting for income
taxes. A material weakness in internal control is a significant
deficiency, or combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the financial
statements would not be prevented or detected on a timely basis by the
Company. The Company is taking steps to ensure that the material weakness
is remediated, including the retention of additional international tax advisors
and providing our in-house tax professionals and senior financial management
with additional training to enhance their awareness of potential international
tax matters and enable the Company to more effectively
manage its internal and third-party tax professionals.
Management's
Annual Report on Internal Control Over Financial Reporting and Attestation
Report of the Independent Registered Public Accounting
Firm
Not
applicable
Changes
in Internal Control Over Financial Reporting
Except
as
discussed above, there have been no other changes during the Company's quarter
ended June 30, 2006, in the Company's internal controls over financial reporting
that have materially affected, or are reasonably likely to materially affect,
the Company's internal controls over financing reporting.
PART
II
|
OTHER
INFORMATION
|
See
the
information under the heading "Legal Matters" in
Note 5 to the consolidated financial statements in this Form 10-Q for
information regarding legal proceedings, which information is incorporated
by
reference in this Item 1.
You
should carefully consider the risks described below. These risks are not the
only ones that we may face. Additional risks and uncertainties that we are
unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occurs, our business,
financial condition or results of operations could be materially and adversely
affected.
National,
regional and local economic and business conditions that will, among other
things, affect:
Demand
for residential lots, commercial parcels and multifamily
housing
The
real
estate industry is sensitive to changes in economic conditions such as the
level
of employment, consumer confidence, availability of financing and interest
rate
levels as well as other market conditions such as oversupply or reduction in
demand for commercial, industrial or multifamily properties. In addition,
regulatory changes could possibly alter, among other things, the tax
deductibility of interest paid on home loans. Adverse changes in any of these
conditions generally, or in the market regions where we operate, could decrease
demand for our residential lots, commercial parcels and homes, which could
adversely affect our revenues and earnings.
The
ability of the general economy to recover timely from an economic
downturn
· Although
the real estate business historically has been cyclical, it has not undergone
a
significant economic down cycle in a number of years. Recently, the combination
of high home prices and interest rate increases have slowed the current real
estate market. This has led some people to assert that real estate prices may
be
inflated and may decline if demand continues to weaken. A decline in the prices
for real estate could adversely affect our home and land sales revenues and
margins.
Availability
and creditworthiness of tenants
· We
are
exposed to customer risk. Our performance depends on our ability to collect
rent
from our customers. General economic conditions and an increase in unemployment
rates could cause the financial condition of a large number of our tenants
to
deteriorate. While no tenant in our wholly owned portfolio accounted for a
significant amount of the annualized rental revenue of these respective
properties at June 30, 2006, our financial position may be adversely affected
by
financial difficulties experienced by our tenants, including bankruptcies,
insolvencies or general downturns in business.
The
availability of financing for both our customers and us
· Our
business and earnings are also substantially dependent on the ability of our
customers to finance the purchase of our land or homes. Limitations on the
availability of financing or increases in the cost of such financing could
adversely affect our operations. Our business and earnings is also substantially
dependent on our ability to obtain financing for our development activities
as
well as refinancing our properties' mortgages. Increases in interest rates,
concerns about the market or the economy, or consolidation or dissolution of
financial institutions could increase our cost of borrowing, reduce our ability
to obtain the funds required for our future operations, and limit our ability
to
refinance existing debt when it matures. Changes in competition, availability
of
financing, customer trends and market conditions may impact our ability to
obtain loans to finance the development of our future communities.
Adverse
changes in the real estate markets, including, among other
things:
Competition
with other companies
· We
operate in a very competitive environment, which is characterized by competition
from a number of other land developers. Actions or changes in plans by
competitors may negatively affect us.
Risks
of real estate acquisition and development (including our ability to obtain
governmental approvals for development projects and to complete our current
development projects on time and within budget)
· Our
plans
for the future development of our residential communities can be affected by
a
number of factors including time delays in obtaining necessary government
permits and approvals and legal challenges to our planned
communities.
· The
agreements we execute to acquire properties generally are subject to customary
conditions to closing, including completion of due diligence investigations
which may be unacceptable; acquired properties may fail to perform as we
expected in analyzing our investments; our estimates of the costs or
repositioning or redeveloping acquired properties may be inaccurate; the
development opportunity may be abandoned after expending significant resources.
In connection with our development occupancy rates and rents at the newly
completed property may not meet the expected levels and could be insufficient
to
make the property profitable.
· The
development of our residential communities may be affected by circumstances
beyond our control, including weather conditions, work stoppages, labor
disputes, unforeseen engineering, environmental or geological problems and
unanticipated shortages of or increases in the cost of materials and labor.
Any
of these circumstances could give rise to delays in the completion of, or
increase the cost of, developing one or more of our residential
communities.
· The
bulk
of our operations are concentrated in Maryland and Puerto Rico, making us
particularly vulnerable to changes in local economic conditions. In addition,
if
weather conditions, or a natural disaster such as a hurricane or tornado, were
to impact those regions, our results of operations could be adversely impacted.
Although insurance could mitigate some amount of losses from a catastrophe
in
those regions, it might not fully compensate us for our opportunity costs or
our
projected results of future operations in those regions, the market acceptance
of which might be different after a catastrophe.
We
depend on our relationship with Lennar for a significant portion of our U.S.
segment’s residential land sales revenues.
Residential
land sales to Lennar within our U.S. segment amounted to $5,024,000 and
$1,880,000 for the six and three months ended June 30, 2006 which represents
22%
and 17% of the U.S. segment's revenue and 11% and 8% of our total consolidated
revenue. Loss of all or a substantial portion of our land sales, as well as
the
joint venture's land sales, to Lennar would have a significant adverse effect
on
our financial results. We cannot assure you that any lost sales could be
replaced on comparable terms, or at all.
Ability
to renew HUD subsidy contracts and availability of federal funds on a timely
basis to service these contracts
As
of
June 30, 2006, we owned an equity interest in and managed for third parties
and
affiliates properties that benefit from governmental programs intended to
provide housing to people with low or moderate incomes. These programs, which
are usually administered by HUD or state housing finance agencies, typically
provide mortgage insurance, favorable financing terms or rental assistance
payments to the property owners. As a condition of the receipt of assistance
under these programs, the properties must comply with various requirements,
which typically limit rents to pre-approved amounts. If permitted rents on
a
property are insufficient to cover costs, our cash flow from these properties
will be negatively impacted, and our management fees may be reduced or
eliminated.
Ability
to obtain insurance at a reasonable cost
We
may
experience economic harm if any damage to our properties is not covered by
insurance. We carry insurance coverage on our properties of the type and in
amounts that we believe is in line with coverage customarily obtained by owners
of similar properties. We believe all of our properties are adequately insured.
However, we cannot guarantee that the limits of our current policies will be
sufficient in the event of a catastrophe to our properties. We may suffer losses
that are not covered under our comprehensive liability, fire, extended coverage
and rental loss insurance policies. If an uninsured loss or a loss in excess
of
insured limits should occur, we could lose capital invested in a property,
as
well as any future revenue from the property. We would nevertheless remain
obligated on any mortgage indebtedness or other obligations related to the
property.
Environmental
and safety requirements
Our
properties may contain or develop harmful mold, which could lead to liability
for adverse health effects and costs of remediating the problem. When excessive
moisture accumulates in buildings or on building materials, mold growth may
occur, particularly if the moisture problem remains undiscovered or is not
addressed over a period of time. Some molds may produce airborne toxins or
irritants. Concern about indoor exposure to mold has been increasing as exposure
to mold may cause a variety of adverse health effects and symptoms, including
allergic or other reactions. As a result, the presence of significant mold
at
any of our properties could require us to undertake a costly remediation program
to contain or remove the mold from the affected property. In addition, the
presence of significant mold could expose us to liability from our tenants,
employees of our tenants and others if property damage or health concerns arise.
In addition, we are required to operate our properties in compliance with fire
and safety regulations, building codes and other land use regulations, as they
may be adopted by governmental agencies and bodies and become applicable to
our
properties. We may be required to make substantial capital expenditures to
comply with those requirements and these expenditures could have a material
adverse effect on our operating results and financial condition, as well as
our
ability to make distributions to shareholders.
Ability
to retain senior management and key employees
We
could
be hurt by the loss of key management personnel. Our future success depends,
to
a significant degree, on the efforts of our senior management. Our operations
could be adversely affected if key members of senior management cease to be
active in our company.
If
the company were to be taxed as a corporation rather than a partnership, this
would have adverse tax consequences for the company and its shareholders with
respect to the income earned from our Puerto Rico
operations.
The
Internal Revenue Code provides that publicly traded partnerships like ACPT
will,
as a general rule, be taxed as corporations for U.S. federal income tax
purposes, subject to certain exceptions. We have relied in the past, and expect
to continue to rely on an exception to this general rule for publicly traded
partnerships that earn 90% or more of their gross income for every taxable
year
from specified types of “qualifying income,” including dividends. If we fail to
meet this “qualifying income” exception or otherwise determine to be treated as
a corporation for federal income tax purposes, the income we earn from our
Puerto Rico operations would be subject to increased taxes.
We
do not
believe that there would be an increase in the U.S. income taxes that would
be
imposed on our U.S. operations if we were not to qualify as a partnership for
U.S. income tax purposes. However, our classification as a partnership does
permit us to reduce the overall taxes that we pay on the operations of our
Puerto Rico subsidiary (because, in our current structure, we are taxed in
Puerto Rico, but not in the United States, on those operations as a result
of
our partnership structure). If we were not to qualify as a partnership for
U.S.
tax purposes, the net result would be an incremental
increase in our total tax expense on income for operations in Puerto Rico,
although it is not practicable to quantify that potential impact.
The
tax liabilities of our shareholders may exceed the amount of the cash
distributions we make to them.
A
shareholder generally will be subject to U.S. federal income tax on his or
her
allocable share of our taxable income, whether or not we distribute that income
to you. We intend to make elections and take other actions so that, to the
extent possible, our taxable income will be allocated to individual shareholders
in accordance with the cash received by them. In addition, we are generally
required by our Declaration of Trust to make minimum aggregate distributions,
in
cash or property, each year to our shareholders equal to 45% of our net taxable
income, reduced by the amount of Puerto Rico taxes we pay.
If
our income
consists largely of cash distributions from our subsidiaries, as expected,
it is
likely that we will have sufficient cash to distribute to shareholders. There
can be no assurance, however, that our allocations will be respected in their
entirety or that we will be able to make distributions in any given year that
provide each individual shareholder with sufficient cash to meet his or her
federal and state income tax liabilities with respect to his or her share of
our
income.
A
portion of the proceeds from the sale of our shares may be taxed as ordinary
income.
A
shareholder will generally recognize gain or loss on the sales of our shares
equal to the difference between the amount realized and the shareholder’s tax
basis in the shares sold. Except as noted below, the gain or loss recognized
by
a shareholder, other than a “dealer” in our shares, on the sale or exchange of
shares held for more than one year will generally be taxable as capital gain
or
loss. Capital gain recognized by an individual on the sale of shares held more
than 12 months will generally be taxed at a maximum rate of 15%.
A
portion
of this gain or loss, however, may be taxable as ordinary income under Section
751 of the Code to the extent attributable to so-called “unrealized
receivables,” which term, for this purpose, includes stock in our Puerto Rico
subsidiary to the extent that gain from our sale of that stock would be taxable
to our shareholders as a dividend under Section 1248 of the Code. The amount
of
ordinary income attributable to “unrealized receivables” related to stock in our
Puerto Rico subsidiary will be determined based on the amount of earnings and
profits accumulated by our Puerto Rico subsidiary. We will provide to each
selling shareholder, at the time we send the K-1 materials, a table showing
the
earnings and profits accumulated by our Puerto Rico subsidiary by year and
the
average number of our shares outstanding during the year, so that the
shareholder may make a determination of the amount of earnings and profits
allocable to him or her and the amount of ordinary income to be recognized
on
the sale. Although there is no definitive authority on the question, we believe
that it is reasonable to base the allocation on the earnings and profits
accumulated during the period that the shareholder held the shares that are
sold
and the percentage of our average number of shares outstanding that those shares
represented.
The
amount of unrealized receivables may exceed the net taxable capital gain that
a
shareholder would otherwise realize on the sale of our shares, and may be
recognized even if the shareholder would realize a net taxable capital loss
on
the sale. Thus, a shareholder may recognize both ordinary income and capital
loss upon a sale of our shares. Accordingly, a shareholder considering the
sale
of our shares is urged to consult a tax advisor concerning the portion of the
proceeds that may be treated as ordinary income. In addition, the shareholder
is
required to report to us any sale of his or her shares, unless the broker
effecting the transaction files a Form 1009-B with respect to the sale
transaction.
Investors
should be aware that tax rules relating to the tax basis and holding period
of
interests in a partnership differ from those rules affecting corporate stock
generally, and these special rules may impact your purchases and sales of our
shares in separate transactions.
The
IRS
has ruled that an investor who acquires interests in an entity taxed as a
partnership, like ACPT, in separate transactions must combine those interests
and maintain a single adjusted tax basis for those interests. Upon a sale or
other disposition of less than all of the shares held by a shareholder, a
portion of the shareholder’s tax basis in all of his or her shares must be
allocated to the shares sold using an “equitable apportionment” method, which
generally means that the tax basis allocated to the shares sold bears the same
relation to the shareholder’s tax basis in all of the shares held as the value
of the shares sold bears to the value of all of the Shares held by the
shareholder immediately prior to the sale. Furthermore, Treasury Regulations
under Section 1223 of the Code generally provide that if a shareholder has
acquired shares at different times, the holding period of the transferred shares
shall be divided between long-term and short-term capital gain or loss in the
same proportions as the long-term and short-term capital gain or loss that
the
shareholder would realize if the all of the shareholder’s shares were
transferred in a fully taxable transaction immediately before the actual
transfer. The Regulations provide, however, a special rule that allows a selling
shareholder who can identify shares transferred with an ascertainable holding
period to elect to use the actual holding period of the shares transferred.
Thus,
according to the ruling discussed above, a shareholder will be unable to select
high or low basis shares to sell as would be the case with shares of entities
treated as corporations for federal income tax purposes, but, according to
the
regulations, may designate specific shares for purposes of determining the
holding period of the shares transferred. A shareholder electing to use the
actual holding period of shares transferred must consistently use that
identification method for all subsequent sales or exchanges of shares. A
shareholder considering the purchase of additional shares or a sale of shares
purchased in separate transactions is urged to consult his tax advisor as to
the
possible consequences of the ruling and the application of these Treasury
Regulations.
None.
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
ACPT
held
its 2006 Annual Meeting of Shareholders on June 7, 2006. At the Meeting,
shareholders elected two individuals to serve as trustees for a three year
term
to expire at the Annual Meeting in 2009.
The
results of the voting were as follows:
Trustee Votes
for Votes
Withheld
Antonio
Ginorio 4,375,101 3,195
Edwin
L.
Kelly
4,371,456 6,840
The
terms
of Thomas J. Shafer, J. Michael Wilson, Thomas S. Condit, and T. Michael Scott
continued after the meeting and each continue to serve as a
trustee.
None.
(A)
|
Exhibits
|
10.1
|
Employment
and Consulting Agreement for Carlos R. Rodriguez
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
32.1
|
Section
1350 Certification of Chairman and Chief Executive
Officer
|
32.2
|
Section
1350 Certification of Chief Financial
Officer
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
|
(Registrant)
|
|
|
|
Dated:
August 10, 2006
|
By:
|
/s/
J. Michael Wilson
|
|
|
J.
Michael Wilson
Chairman
and Chief Executive Officer
|
|
|
|
Dated:
August 10, 2006
|
By:
|
/s/
Cynthia L. Hedrick
|
|
|
Cynthia
L. Hedrick
Chief
Financial Officer
|
|
|
|
Dated:
August 10, 2006
|
By:
|
/s/
Matthew M. Martin
|
|
|
Matthew
M. Martin
Chief
Accounting Officer
|