UNITED
STATES
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 SEPTEMBER 30, 2007,
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 November 8, 2007, there were 5,229,954 Common Shares, par value $0.01
per
share, issued and outstanding
AMERICAN
COMMUNITY PROPERTIES TRUST
FORM
10-Q
SEPTEMBER
30, 2007
|
|
Page
Number
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements
|
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
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|
|
|
|
6
|
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|
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|
|
7
|
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|
8
|
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|
Item
2.
|
|
21
|
|
|
|
Item
3.
|
|
32
|
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|
|
Item
4.
|
|
32
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
|
33
|
|
|
|
Item
1A.
|
|
33
|
|
|
|
Item
2
|
|
33
|
|
|
|
Item
3.
|
|
33
|
|
|
|
Item
4.
|
|
33
|
|
|
|
Item
5.
|
|
33
|
|
|
|
Item
6.
|
|
33
|
|
|
|
|
|
34
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
|
|
FOR
THE NINE MONTHS ENDED SEPTEMBER 30
|
|
(In
thousands, except per share amounts)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Rental
property
|
|
$ |
45,249
|
|
|
$ |
39,946
|
|
Community
development-land sales
|
|
|
8,032
|
|
|
|
11,317
|
|
Homebuilding-home
sales
|
|
|
6,113
|
|
|
|
16,343
|
|
Management
and other fees, substantially all from related entities
|
|
|
756
|
|
|
|
885
|
|
Reimbursement
of expenses related to managed entities
|
|
|
1,307
|
|
|
|
1,622
|
|
Total
revenues
|
|
|
61,457
|
|
|
|
70,113
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Rental
property operating expenses
|
|
|
22,901
|
|
|
|
19,763
|
|
Cost
of land sales
|
|
|
5,930
|
|
|
|
6,156
|
|
Cost
of home sales
|
|
|
4,399
|
|
|
|
12,310
|
|
General,
administrative, selling and marketing
|
|
|
8,600
|
|
|
|
6,703
|
|
Depreciation
and amortization
|
|
|
7,009
|
|
|
|
6,239
|
|
Expenses
reimbursed from managed entities
|
|
|
1,307
|
|
|
|
1,622
|
|
Total
expenses
|
|
|
50,146
|
|
|
|
52,793
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
11,311
|
|
|
|
17,320
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
1,178
|
|
|
|
838
|
|
Equity
in earnings from unconsolidated entities
|
|
|
2,020
|
|
|
|
510
|
|
Interest
expense
|
|
|
(14,037 |
) |
|
|
(10,915 |
) |
Minority
interest in consolidated entities
|
|
|
(1,750 |
) |
|
|
(2,997 |
) |
|
|
|
|
|
|
|
|
|
Income
(loss) before provision (benefit) for income
taxes
|
|
|
(1,278 |
) |
|
|
4,756
|
|
Provision
(benefit) for income taxes
|
|
|
(19 |
) |
|
|
1,754
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(1,259 |
) |
|
$ |
3,002
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.24 |
) |
|
$ |
0.58
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,205
|
|
|
|
5,199
|
|
Diluted
|
|
|
5,212
|
|
|
|
5,199
|
|
Cash
dividends per share
|
|
$ |
0.30
|
|
|
$ |
0.73
|
|
The
accompanying notes are an integral part of these consolidated
statements.
|
|
|
|
|
|
|
|
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
|
|
FOR
THE THREE MONTHS ENDED SEPTEMBER 30
|
|
(In
thousands, except per share amounts)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Rental
property
|
|
$ |
15,417
|
|
|
$ |
13,808
|
|
Community
development-land sales
|
|
|
2,063
|
|
|
|
4,691
|
|
Homebuilding-home
sales
|
|
|
899
|
|
|
|
5,084
|
|
Management
and other fees, substantially all from related entities
|
|
|
250
|
|
|
|
320
|
|
Reimbursement
of expenses related to managed entities
|
|
|
414
|
|
|
|
518
|
|
Total
revenues
|
|
|
19,043
|
|
|
|
24,421
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Rental
property operating expenses
|
|
|
7,787
|
|
|
|
6,947
|
|
Cost
of land sales
|
|
|
1,574
|
|
|
|
2,490
|
|
Cost
of home sales
|
|
|
583
|
|
|
|
3,789
|
|
General,
administrative, selling and marketing
|
|
|
3,232
|
|
|
|
2,169
|
|
Depreciation
and amortization
|
|
|
2,428
|
|
|
|
2,165
|
|
Expenses
reimbursed from managed entities
|
|
|
414
|
|
|
|
518
|
|
Total
expenses
|
|
|
16,018
|
|
|
|
18,078
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
3,025
|
|
|
|
6,343
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
288
|
|
|
|
620
|
|
Equity
in earnings from unconsolidated entities
|
|
|
175
|
|
|
|
167
|
|
Interest
expense
|
|
|
(4,700 |
) |
|
|
(3,715 |
) |
Minority
interest in consolidated entities
|
|
|
(193 |
) |
|
|
(331 |
) |
|
|
|
|
|
|
|
|
|
Income
(loss) before provision (benefit) for income
taxes
|
|
|
(1,405 |
) |
|
|
3,084
|
|
Provision
(benefit) for income taxes
|
|
|
(307 |
) |
|
|
1,040
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(1,098 |
) |
|
$ |
2,044
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.21 |
) |
|
$ |
0.39
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,207
|
|
|
|
5,201
|
|
Diluted
|
|
|
5,214
|
|
|
|
5,201
|
|
Cash
dividends per share
|
|
$ |
0.10
|
|
|
$ |
0.10
|
|
The
accompanying notes are an integral part of these consolidated
statements.
|
|
|
|
|
|
|
|
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
|
|
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
As
of
September
30, 2007
(Unaudited)
|
|
|
As
of
December
31, 2006
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
Investments
in real estate:
|
|
|
|
|
|
|
Operating
real estate, net of accumulated depreciation
|
|
$ |
165,451
|
|
|
$ |
142,046
|
|
of
$149,130 and $142,458 respectively
|
|
|
|
|
|
|
|
|
Land
and development costs
|
|
|
83,243
|
|
|
|
67,993
|
|
Condominiums
under construction
|
|
|
5,413
|
|
|
|
9,265
|
|
Rental
projects under construction or development
|
|
|
707
|
|
|
|
24,143
|
|
Investments
in real estate, net
|
|
|
254,814
|
|
|
|
243,447
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
18,643
|
|
|
|
27,459
|
|
Restricted
cash and escrow deposits
|
|
|
21,518
|
|
|
|
19,677
|
|
Investments
in unconsolidated real estate entities
|
|
|
6,552
|
|
|
|
6,591
|
|
Receivable
from bond proceeds
|
|
|
10,425
|
|
|
|
13,710
|
|
Accounts
receivable
|
|
|
2,514
|
|
|
|
4,320
|
|
Deferred
tax assets
|
|
|
33,050
|
|
|
|
18,157
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
1,131
|
|
|
|
1,157
|
|
Deferred
charges and other assets, net of amortization of
|
|
|
|
|
|
|
|
|
$2,542
and $1,655 respectively
|
|
|
11,557
|
|
|
|
12,181
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
360,204
|
|
|
$ |
346,699
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Non-recourse
debt
|
|
$ |
279,796
|
|
|
$ |
270,720
|
|
Recourse
debt
|
|
|
25,952
|
|
|
|
29,351
|
|
Accounts
payable and accrued liabilities
|
|
|
25,709
|
|
|
|
24,191
|
|
Deferred
income
|
|
|
3,112
|
|
|
|
3,591
|
|
Accrued
current income tax liability
|
|
|
13,939
|
|
|
|
2,992
|
|
Total
Liabilities
|
|
|
348,508
|
|
|
|
330,845
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
shares, $.01 par value, 10,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
5,229,954 shares issued and outstanding as of September 30, 2007 and
December 31, 2006
|
|
|
52
|
|
|
|
52
|
|
Treasury
stock, 67,709 shares at cost
|
|
|
(376 |
) |
|
|
(376 |
) |
Additional
paid-in capital
|
|
|
17,345
|
|
|
|
17,238
|
|
Retained
(deficit) earnings
|
|
|
(5,325 |
) |
|
|
(1,060 |
) |
Total
Shareholders' Equity
|
|
|
11,696
|
|
|
|
15,854
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
360,204
|
|
|
$ |
346,699
|
|
The
accompanying notes are an integral part of these consolidated
statements.
|
|
|
|
|
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
(Deficit)
|
|
|
|
|
|
|
Number
|
|
|
Value
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
Balance
December 31, 2006 (Audited)
|
|
|
5,229,954
|
|
|
$ |
52
|
|
|
$ |
(376 |
) |
|
$ |
17,238
|
|
|
$ |
(1,060 |
) |
|
$ |
15,854
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,259 |
) |
|
|
(1,259 |
) |
Dividends
paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,548 |
) |
|
|
(1,548 |
) |
Cumulative
effect of change in accounting for FIN 48
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,458 |
) |
|
|
(1,458 |
) |
Amortization
of Trustee Restricted Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
107
|
|
|
|
-
|
|
|
|
107
|
|
Balance
September 30, 2007 (Unaudited)
|
|
|
5,229,954
|
|
|
$ |
52
|
|
|
$ |
(376 |
) |
|
$ |
17,345
|
|
|
$ |
(5,325 |
) |
|
$ |
11,696
|
|
The
accompanying notes are an integral part of those consolidated
statements.
|
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
|
|
FOR
THE NINE MONTHS ENDED SEPTEMBER 30
|
|
(In
thousands)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(1,259 |
) |
|
$ |
3,002
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,009
|
|
|
|
6,239
|
|
Distribution
to minority interests in excess of basis
|
|
|
1,988
|
|
|
|
2,957
|
|
Benefit
for deferred income taxes
|
|
|
(5,019 |
) |
|
|
(542 |
) |
Equity
in earnings-unconsolidated entities
|
|
|
(2,020 |
) |
|
|
(510 |
) |
Distribution
of earnings from unconsolidated entities
|
|
|
521
|
|
|
|
510
|
|
Cost
of land sales
|
|
|
5,930
|
|
|
|
6,156
|
|
Cost
of home sales
|
|
|
4,399
|
|
|
|
12,310
|
|
Stock
based compensation expense
|
|
|
190
|
|
|
|
219
|
|
Amortization
of deferred loan costs
|
|
|
643
|
|
|
|
411
|
|
Changes
in notes and accounts receivable
|
|
|
1,806
|
|
|
|
(71 |
) |
Additions
to community development assets
|
|
|
(23,180 |
) |
|
|
(16,789 |
) |
Right
of way easement
|
|
|
2,000
|
|
|
|
-
|
|
Homebuilding-construction
expenditures
|
|
|
(547 |
) |
|
|
(5,860 |
) |
Deferred
income-joint venture
|
|
|
(479 |
) |
|
|
(75 |
) |
Changes
in accounts payable, accrued liabilities
|
|
|
1,050
|
|
|
|
(2,685 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(6,968 |
) |
|
|
5,272
|
|
|
|
|
|
|
|
|
|
|
CashFlows
from Investing Activities
|
|
|
|
|
|
|
|
|
Investment
in apartment construction
|
|
|
(452 |
) |
|
|
(16,557 |
) |
Change
in investments - unconsolidated entities
|
|
|
1,538
|
|
|
|
27
|
|
Cash
from newly consolidated properties
|
|
|
-
|
|
|
|
4,723
|
|
Change
in restricted cash
|
|
|
(1,841 |
) |
|
|
503
|
|
Additions
to rental operating properties, net
|
|
|
(6,298 |
) |
|
|
(20,096 |
) |
Other
assets
|
|
|
(221 |
) |
|
|
(1,176 |
) |
Net
cash used in investing activities
|
|
|
(7,274 |
) |
|
|
(32,576 |
) |
|
|
|
|
|
|
|
|
|
CashFlows
from Financing Activities
|
|
|
|
|
|
|
|
|
Cash
proceeds from debt financing
|
|
|
23,339
|
|
|
|
51,847
|
|
Payment
of debt
|
|
|
(19,678 |
) |
|
|
(26,270 |
) |
County
Bonds proceeds, net of undisbursed funds
|
|
|
5,301
|
|
|
|
2,041
|
|
Payments
of distributions to minority interests
|
|
|
(1,988 |
) |
|
|
(2,957 |
) |
Dividends
paid to shareholders
|
|
|
(1,548 |
) |
|
|
(3,745 |
) |
Net
cash provided by financing activities
|
|
|
5,426
|
|
|
|
20,916
|
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(8,816 |
) |
|
|
(6,388 |
) |
Cash
and Cash Equivalents, Beginning of Period
|
|
|
27,459
|
|
|
|
21,156
|
|
Cash
and Cash Equivalents, End of Period
|
|
$ |
18,643
|
|
|
$ |
14,768
|
|
The
accompanying notes are an integral part of these consolidated
statements.
|
|
AMERICAN
COMMUNITY PROPERTIES TRUST
SEPTEMBER
30, 2007
(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. An IRS regulation
eliminating the pass through of these tax credits to ACPT’s shareholders has
been proposed and is expected to become effective in 2007. ACPT's federal
taxable income consists of certain passive income from IGP Group, a controlled
foreign corporation, distributions from IGP Group, 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 American
Community Properties Trust and its majority owned subsidiaries and partnerships,
after eliminating all intercompany transactions. All of the entities
included in the consolidated financial statements are hereinafter referred
to
collectively as the "Company" or "ACPT."
The
Company consolidates entities that are not variable interest entities as
defined
by Financial Accounting Standard Board (“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, 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”). The assets of consolidated real estate partnerships not 100%
owned by the Company are generally not available to pay creditors of the
Company.
The
consolidated group includes ACPT
and its four major subsidiaries, American Rental Properties Trust, American
Rental Management Company, American Land Development U.S., Inc., and IGP
Group
Corp. In addition, the consolidated group includes the following
other entities:
Alturas
del Senorial Associates Limited Partnership
|
|
LDA
Group, LLC
|
American
Housing Management Company
|
|
Milford
Station I, LLC
|
American
Housing Properties L.P.
|
|
Milford
Station II, LLC
|
Bannister
Associates Limited Partnership
|
|
Monserrate
Associates Limited Partnership
|
Bayamon
Garden Associates Limited Partnership
|
|
New
Forest Apartments, LLC
|
Carolina
Associates Limited Partnership S.E.
|
|
Nottingham
South, LLC
|
Coachman's
Apartments, LLC
|
|
Owings
Chase, LLC
|
Colinas
de San Juan Associates Limited Partnership
|
|
Palmer
Apartments Associates Limited Partnership
|
Crossland
Associates Limited Partnership
|
|
Prescott
Square, LLC
|
Escorial
Office Building I, Inc.
|
|
St.
Charles Community, LLC
|
Essex
Apartments Associates Limited Partnership
|
|
San
Anton Associates S.E.
|
Fox
Chase Apartments, LLC
|
|
Sheffield
Greens Apartments, LLC
|
Headen
House Associates Limited Partnership
|
|
Torres
del Escorial, Inc.
|
Huntington
Associates Limited Partnership
|
|
Turabo
Limited Dividend Partnership
|
Interstate
Commercial Properties, Inc.
|
|
Valle
del Sol Associates Limited Partnership
|
Interstate
General Properties Limited Partnership, S.E.
|
|
Village
Lake Apartments, LLC
|
Jardines
de Caparra Associates Limited Partnership
|
|
Wakefield
Terrace Associates Limited Partnership
|
Lancaster
Apartments Limited Partnership
|
|
Wakefield
Third Age Associates Limited Partnership
|
Land
Development Associates S.E.
|
|
|
The
Company's
investments in entities that it does not control 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 for the
year
ended December 31, 2006. The operating results for the nine and three
months ended September 30, 2007 and 2006 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 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. The Company implemented FIN 48 as of January 1,
2007. See Note 7 for further discussions.
Cash
Dividends
On
February 28, 2007, the Board of Trustees declared a cash dividend of $0.10
per
share, payable on March 28, 2007, to shareholders of record on March 14,
2007. On May 15, 2007, the Board of Trustees declared a cash dividend
of $0.10 per share, payable on June 13, 2007, to shareholders of record on
May
31, 2007. On August 13, 2007, the Board of Trustees declared a cash
dividend of $0.10 per share, payable on September 12, 2007 to shareholders
of
record on August 28, 2007.
Impairment
of Long-Lived Assets
ACPT
carries its rental properties,
homebuilding inventory, land and development costs at the lower of cost or
fair
value in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
For
real estate assets such as our rental properties which the Company plans
to hold
and use, which includes property to be developed in the future, property
currently under development and real estate projects that are completed or
substantially complete, we evaluate whether the carrying amount of each of
these
assets will be recovered from their undiscounted future cash flows arising
from
their use and eventual disposition. If the carrying value were to be greater
than the undiscounted future cash flows, we would recognize an impairment
loss
to the extent the carrying amount is not recoverable. Our estimates of the
undiscounted operating cash flows expected to be generated by each asset
are
performed on an individual project basis and based on a number of assumptions
that are subject to economic and market uncertainties, including, among others,
demand for apartment units, competition, changes in market rental rates,
and
costs to operate and complete each project. There have been no impairment
charges for the nine- and three-month periods ended September 30, 2007 and
2006.
The
Company evaluates, on an individual project basis, whether the carrying value
of
its substantially completed real estate projects, such as our homebuilding
inventory that are to be sold, will be recovered based on the fair value
less
cost to sell. If the carrying value were to be greater than the fair value
less
costs to sell, we would recognize an impairment loss to the extent the carrying
amount is not recoverable. Our estimates of the fair value less costs to
sell
are based on a number of assumptions that are subject to economic and market
uncertainties, including, among others, comparable sales, demand for commercial
and residential lots and competition. The Company performed similar reviews
for
land held for future development and sale considering such factors as the
cash
flows associated with future development expenditures. Should this evaluation
indicate an impairment has occurred, the Company will record an impairment
charge equal to the excess of the historical cost over fair value less costs
to
sell. There have been no impairment charges for the nine- and
three-month periods ended September 30, 2007 and 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 September 30,
2007
and December 31, 2006 (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Building
|
|
$ |
264,611
|
|
|
$ |
240,264
|
|
Building
improvements
|
|
|
10,263
|
|
|
|
8,022
|
|
Equipment
|
|
|
14,195
|
|
|
|
12,569
|
|
|
|
|
289,069
|
|
|
|
260,855
|
|
Less:
Accumulated depreciation
|
|
|
149,130
|
|
|
|
142,458
|
|
|
|
|
139,939
|
|
|
|
118,397
|
|
Land
|
|
|
25,512
|
|
|
|
23,649
|
|
Operating
properties, net
|
|
$ |
165,451
|
|
|
$ |
142,046
|
|
Other
Property and Equipment
In
addition, the Company owned other property and equipment of $1,131,000 and
$1,157,000, net of accumulated depreciation of $2,278,000 and $2,101,000
respectively, as of September 30, 2007, and December 31, 2006,
respectively.
Depreciation
Total
depreciation expense was $7,009,000 and $6,239,000 for the nine months ended
September 30, 2007 and 2006, respectively, and $2,428,000 and $2,165,000
for the
three months ended September 30, 2007 and 2006, respectively.
Impact
of Recently Issued Accounting Standards
SFAS
157 and 159
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements” and
in February 2007, the FASB issued SFAS 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 157 defines
fair values as the price that would be received to sell an asset or paid
to
transfer a liability in an orderly transaction between market participants
in
the market in which the reporting entity transacts. SFAS 157 applies whenever
other standards require assets or liabilities to be measured at fair value
and
does not expand the use of fair value in any new circumstances. SFAS 157
establishes a hierarchy that prioritizes the information used in developing
fair
value estimates. The hierarchy gives the highest priority to quoted prices
in
active markets and the lowest priority to unobservable data, such as the
reporting entity’s own data. SFAS 157 requires fair value measurements to be
disclosed by level within the fair value hierarchy. SFAS 157 is effective
for
fiscal years beginning after November 15, 2007.
SFAS
159
permits entities to choose to measure many financial instruments and certain
other items at fair value. The fair value election is designed to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We have not yet determined the impact that SFAS
157 and SFAS 159 will have on our financial statements.
EITF
Issue No. 06-08
In
November 2006, the Emerging Issues Task force of the FASB (“EITF”) reached a
consensus on EITF Issue No. 06-08, “Applicability of a Buyer’s Continuing
Investment under FASB Statement No. 66,
Accounting for Sales of Real Estate, for Sales of Condominiums” (“EITF
06-08”). EITF 06-08 will require condominium sales to meet the
continuing investment criterion in FAS No. 66 in order for profit to be
recognized under the percentage-of-completion method. EITF 06-08 will
be effective for annual reporting periods beginning after March 15,
2007. The cumulative effect of applying EITF 06-08, if any, is to be
reported as an adjustment to the opening balance of retained earnings in
the
year of adoption. We are evaluating the impact that EITF 06-08 may
have, if any, 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 currently consists 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
The
unconsolidated apartment partnerships as of September 30, 2007 and December
31,
2006 included Brookside Gardens Limited Partnership and Lakeside Apartments
Limited Partnership that collectively represent 110 rental units. We
have determined that these two entities 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 an economic
interest in Brookside and Lakeside but, as a general partner, we have
significant influence over operations of these entities that is disproportionate
to our economic ownership. 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 consisting of our net investment, loans and
unpaid
fees for Brookside of $214,000 and $189,000 and for Lakeside of $166,000
and
$172,000 as of September 30, 2007, and December 31, 2006,
respectively. 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 a 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 two notes of $1,500,000
each
that bear an interest rate of prime plus 2%, with a ceiling of 9%, and mature
on
December 3, 2009. 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 the notes to the partners whereby the
Company
received a $1,500,000 note. The Company determined that the cost
recovery method of accounting was appropriate for this transaction and
accordingly, deferred revenue recognition on this note until cash payment
was
received. In January 2007, the Company received $1,707,000, equal to
the full principal amount due plus all accrued interest outstanding and,
accordingly, recognized $1,500,000 of equity in earnings from unconsolidated
entities and $207,000 of interest income. The Company has no required
funding obligations and management expects to wind up El Monte’s affairs in
2007.
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. The Company manages 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 an $8.0 million non-recourse development loan, which was amended
in June 2006, December 2006 and again in October 2007. Included
within these amendments, the maximum borrowings outstanding on the facility
was
reduced to $5.0 million. For the October 2007 amendment, the
development loan was modified to provide a one year delay in development
of the
project, as to date, lot development has outpaced sales. Per the
terms of the loan, both the Company and Lennar provided development completion
guarantees. In the nine and three months ended September 30, 2007,
the joint venture delivered 48 and 18 lots to Lennar, recognizing $1,063,000
and
$408,000 in deferred revenue, off-site fees and management fees and $358,000
and
$140,000 of deferred costs, respectively.
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
|
|
|
|
|
|
|
Properties
|
|
|
Property
|
|
|
Venture
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Summary
Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
$ |
4,970
|
|
|
$ |
28,242
|
|
|
$ |
12,491
|
|
|
$ |
45,703
|
|
December
31, 2006
|
|
|
5,142
|
|
|
|
27,726
|
|
|
|
12,154
|
|
|
|
45,022
|
|
Total
Non-Recourse Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
3,205
|
|
|
|
22,960
|
|
|
|
3,861
|
|
|
|
30,026
|
|
December
31, 2006
|
|
|
3,244
|
|
|
|
22,960
|
|
|
|
3,476
|
|
|
|
29,680
|
|
Total
Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
1,264
|
|
|
|
1,046
|
|
|
|
1,694
|
|
|
|
4,004
|
|
December
31, 2006
|
|
|
1,242
|
|
|
|
722
|
|
|
|
1,744
|
|
|
|
3,708
|
|
Total
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
501
|
|
|
|
4,236
|
|
|
|
6,936
|
|
|
|
11,673
|
|
December
31, 2006
|
|
|
656
|
|
|
|
4,044
|
|
|
|
6,934
|
|
|
|
11,634
|
|
Company's
Investment, net (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
-
|
|
|
|
4,724
|
|
|
|
1,828
|
|
|
|
6,552
|
|
December
31, 2006
|
|
|
-
|
|
|
|
4,763
|
|
|
|
1,828
|
|
|
|
6,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
$ |
604
|
|
|
$ |
2,730
|
|
|
$ |
5,560
|
|
|
$ |
8,894
|
|
Nine
Months Ended September 30, 2006
|
|
|
588
|
|
|
|
2,742
|
|
|
|
2,453
|
|
|
|
5,783
|
|
Three
Months Ended September 30, 2007
|
|
|
203
|
|
|
|
909
|
|
|
|
1,951
|
|
|
|
3,063
|
|
Three
Months Ended September 30, 2006
|
|
|
196
|
|
|
|
914
|
|
|
|
2,453
|
|
|
|
3,563
|
|
Net
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
(155 |
) |
|
|
1,407
|
|
|
|
2
|
|
|
|
1,254
|
|
Nine
Months Ended September 30, 2006
|
|
|
(83 |
) |
|
|
1,374
|
|
|
|
-
|
|
|
|
1,291
|
|
Three
Months Ended September 30, 2007
|
|
|
(58 |
) |
|
|
470
|
|
|
|
-
|
|
|
|
412
|
|
Three
Months Ended September 30, 2006
|
|
|
(25 |
) |
|
|
448
|
|
|
|
-
|
|
|
|
423
|
|
Company's
recognition of equity in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
(1 |
) |
|
|
521
|
|
|
|
-
|
|
|
|
520
|
|
Nine
Months Ended September 30, 2006
|
|
|
-
|
|
|
|
510
|
|
|
|
-
|
|
|
|
510
|
|
Three
Months Ended September 30, 2007
|
|
|
-
|
|
|
|
175
|
|
|
|
-
|
|
|
|
175
|
|
Three
Months Ended September 30, 2006
|
|
|
-
|
|
|
|
167
|
|
|
|
-
|
|
|
|
167
|
|
Notes:
(1) Represents
the Company's net investment, including assets and accrued liabilities in
the
consolidated balance sheet for
unconsolidated
real estate
entities.
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
|
|
|
|
Apartment
|
|
|
Commercial
|
|
|
Joint
|
|
|
|
|
|
|
Partnerships
|
|
|
Partnerships
|
|
|
Venture
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Summary
of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
$ |
38
|
|
|
$ |
1,710
|
|
|
$ |
5,508
|
|
|
$ |
7,256
|
|
Nine
Months Ended September 30, 2006
|
|
|
93
|
|
|
|
1,606
|
|
|
|
3,333
|
|
|
|
5,032
|
|
Three
Months Ended September 30, 2007
|
|
|
(12 |
) |
|
|
865
|
|
|
|
2,359
|
|
|
|
3,212
|
|
Three
Months Ended September 30, 2006
|
|
|
16
|
|
|
|
574
|
|
|
|
3,201
|
|
|
|
3,791
|
|
Company's
Share of Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
-
|
|
|
|
774
|
|
|
|
2,754
|
|
|
|
3,528
|
|
Nine
Months Ended September 30, 2006
|
|
|
1
|
|
|
|
727
|
|
|
|
1,666
|
|
|
|
2,394
|
|
Three
Months Ended September 30, 2007
|
|
|
-
|
|
|
|
392
|
|
|
|
1,179
|
|
|
|
1,571
|
|
Three
Months Ended September 30, 2006
|
|
|
-
|
|
|
|
260
|
|
|
|
1,600
|
|
|
|
1,860
|
|
Operating
Cash Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
-
|
|
|
|
1,236
|
|
|
|
-
|
|
|
|
1,236
|
|
Nine
Months Ended September 30, 2006
|
|
|
-
|
|
|
|
1,185
|
|
|
|
-
|
|
|
|
1,185
|
|
Three
Months Ended September 30, 2007
|
|
|
-
|
|
|
|
442
|
|
|
|
-
|
|
|
|
442
|
|
Three
Months Ended September 30, 2006
|
|
|
-
|
|
|
|
438
|
|
|
|
-
|
|
|
|
438
|
|
Company's
Share of Operating Cash Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
-
|
|
|
|
560
|
|
|
|
-
|
|
|
|
560
|
|
Nine
Months Ended September 30, 2006
|
|
|
-
|
|
|
|
537
|
|
|
|
-
|
|
|
|
537
|
|
Three
Months Ended September 30, 2007
|
|
|
-
|
|
|
|
200
|
|
|
|
-
|
|
|
|
200
|
|
Three
Months Ended September 30, 2006
|
|
|
-
|
|
|
|
199
|
|
|
|
-
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's outstanding debt is collateralized primarily by land, land
improvements, receivables, investment properties, investments in partnerships,
and rental properties. The following table summarizes the
indebtedness of the Company at September 30, 2007 and December 31, 2006 (in
thousands):
|
Maturity
|
Interest
|
Outstanding
as of
|
|
Dates
|
Rates
|
September
30,
|
December
31,
|
|
From/To
|
From/To
|
2007
|
2006
|
|
|
|
(Unaudited)
|
(Audited)
|
Recourse
Debt
|
|
|
|
|
Community
Development (a), (b), (c)
|
08-31-08/03-01-22
|
4%/8%
|
$ 25,835
|
$ 24,694
|
Investment
Properties (d)
|
PAID
|
P+1.25%/6.98%
|
-
|
4,473
|
General
obligations (e)
|
07-29-07/01-01-12
|
Non-interest
|
|
|
|
|
bearing/8.10%
|
117
|
184
|
Total
Recourse Debt
|
|
|
25,952
|
29,351
|
|
|
|
|
|
Non-Recourse
Debt
|
|
|
|
|
Community
Development (f)
|
11-23-07
|
Non-interest
bearing
|
500
|
500
|
Investment
Properties (g)
|
04-30-09/08-01-47
|
4.95%/10%
|
279,296
|
270,220
|
Total
Non-Recourse Debt
|
|
|
279,796
|
270,720
|
Total
debt
|
|
|
$ 305,748
|
$ 300,071
|
|
|
|
|
|
a)
|
As
of September 30, 2007, $24,110,000 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.
|
b)
|
On
April 14, 2006, the Company closed a three year $14,000,000 revolving
acquisition and development 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 September 30, 2007, the Company was in
compliance with these financial covenants even though no amounts
were
outstanding on the Revolver.
|
c)
|
On
September 1, 2006, LDA secured a revolving line of credit facility
of
$15,000,000 to be utilized as follows: (i) to repay its outstanding
loan
of $800,000; and (ii) to fund development costs of a project in
which the
Company plans to develop a planned community in Canovanas, Puerto
Rico, to
fund acquisitions and/or investments mainly in estate ventures,
to fund
transaction costs and expenses, to fund future payments of interest
under
the line of credit and to fund any future working capital needs
of the
Company. The line of credit bears interest at a fluctuating
rate equivalent to the LIBOR Rate plus 200 basis points (7.36%
at
September 30, 2007) and matures on August 31, 2008. The
outstanding balance of this facility on September 30, 2007, was
$1,725,000.
|
d)
|
The
outstanding recourse debt within the investment properties was
comprised
of a loan borrowed to finance the acquisition of our properties
Village
Lake and Coachman's in January 2003, as well as a two-year, $3,000,000
recourse note that the Company obtained in June 2005. Both of these
loans were repaid in full in January
2007.
|
e)
|
The
general recourse debt outstanding as of September 30, 2007, is
made up of
various capital leases outstanding within our U.S. and Puerto Rico
operations, as well as installment loans for vehicles and other
miscellaneous equipment.
|
f)
|
In
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 on
November 23, 2007. The Company plans to annex the land into the
St. Charles master plan community.
|
g)
|
The
non-recourse debt related to the investment properties is collateralized
by the multifamily rental properties and the office building in
Parque
Escorial. As of September 30, 2007, approximately $73,338,000
of this debt is secured by the Federal Housing Administration ("FHA")
or
the Maryland Housing Fund. The non-recourse debt related to the
investment properties also includes a construction loan for Sheffield
Greens Apartments LLC (Sheffield Greens). As of September 30,
2007, the balance of the construction loan was $25,375,000. The
construction loan was converted to a 40-year non-recourse mortgage
on
October 16, 2007.
|
The
Company’s loans contain various
financial, cross collateral, cross default, technical and restrictive
provisions. As of September 30, 2007, 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. 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 issued 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 for total Bonds
issued
to date of 5.1%, and call for semi-annual interest payments and annual principal
payments and mature in fifteen years. Under the terms of Bond
repayment agreements between the Company and the County, the Company is
obligated to pay interest and principal to the County based 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 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. The County will also require
ACPT
to fund an escrow account from lot sales that will be used to repay these
Bonds.
In
August
2005, the Company signed a memorandum of understanding ("MOU") with the
Charles
County Commissioners regarding a land donation that is anticipated to 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. In return, the County agreed to issue $7,000,000 of general
obligation bonds to finance the infrastructure improvements. In March
2006, the County issued $4,000,000 of bonds for this project and in March
2007,
the County issued an additional $3,000,000. 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.
During
2006, the Company reached an agreement with Charles County whereby the Company
receives interest payments on any undistributed bond proceeds held in escrow
by
the County. The agreement covers the period from July 1, 2005 through
the last draw made by the Company. For the nine and three months
ended September 30, 2007, the Company recognized $458,000 and $159,000 of
interest income on these escrowed funds.
As
of September 30,
2007, ACPT is guarantor of $22,354,000 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
Agreement and Arrangement
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 September 30, 2007, ACPT has
guaranteed $24,110,000 of outstanding debt owed by its
subsidiaries. IGP has guaranteed $1,725,000 of its subsidiaries'
outstanding debt. 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.
Legal
Matters
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,
2006.
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 pending unresolved 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 is reflected below (in
thousands):
CONSOLIDATED
STATEMENT OF INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
and Other Fees (A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
subsidiaries with third party partners
|
|
|
$ |
32
|
|
|
$ |
32
|
|
|
$ |
11
|
|
|
$ |
13
|
|
Affiliates
of J. Michael Wilson, CEO and Chairman
|
|
|
|
43
|
|
|
|
333
|
|
|
|
-
|
|
|
|
85
|
|
|
|
|
$ |
75
|
|
|
$ |
365
|
|
|
$ |
11
|
|
|
$ |
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
Property Revenues
|
(B)
|
|
$ |
43
|
|
|
$ |
5
|
|
|
$ |
15
|
|
|
$ |
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
real estate entities with third party partners
|
|
|
$ |
6
|
|
|
$ |
6
|
|
|
$ |
2
|
|
|
$ |
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates
of J. Michael Wilson, CEO and Chairman
|
(C1)
|
|
$ |
-
|
|
|
$ |
19
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Reserve
additions and other write-offs-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
real estate entities with third party partners
|
(A)
|
|
|
25
|
|
|
|
-
|
|
|
|
14
|
|
|
|
(9 |
) |
Reimbursement
to IBC for ACPT's share of J. Michael Wilson's salary
|
|
|
293
|
|
|
|
281
|
|
|
|
98
|
|
|
|
93
|
|
Reimbursement
of administrative costs-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates
of J. Michael Wilson, CEO and Chairman
|
|
|
|
(18 |
) |
|
|
(16 |
) |
|
|
(5 |
) |
|
|
(11 |
) |
Legal
fees paid to J. Michael Wilson's attorney
|
(C4)
|
|
|
188
|
|
|
|
-
|
|
|
|
140
|
|
|
|
-
|
|
Consulting
Fees -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
J. Wilson, IGC Chairman and Director
|
(C2)
|
|
|
150
|
|
|
|
150
|
|
|
|
50
|
|
|
|
50
|
|
Thomas
J. Shafer, Trustee
|
(C3)
|
|
|
45
|
|
|
|
45
|
|
|
|
15
|
|
|
|
15
|
|
|
|
|
$ |
683
|
|
|
$ |
479
|
|
|
$ |
312
|
|
|
$ |
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SHEET:
|
|
|
Balance
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
- All unsecured and due on demand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
of J. Michael Wilson, CEO and Chairman
|
|
|
$ |
13
|
|
|
$ |
128
|
|
|
|
|
|
|
|
|
|
(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.
Chastleton
Associates, LP, previously owned by an affiliate of J. Michael Wilson, was
sold
to a third party during April 2007, resulting in a termination of our management
agreement. The Company earned an agreed-upon management fee for
administrative services through the end of the second quarter
2006. Management fees generated by this property accounted for less
than 1% of the Company’s total revenue.
At
the
end of February 2007, G.L. Limited Partnership, which was owned by affiliates
of
J. Michael Wilson, was sold to a third party. Accordingly, we are no
longer the management agent for this property effective March 1,
2007. Management fees generated by this property accounted for less
than 1% of the Company’s total revenue.
(B) Rental
Property Revenue
On
September 1, 2006, the Company, through one of its Puerto Rican subsidiaries,
Escorial Office Building I, Inc. (“Landlord”), executed a lease with Caribe
Waste Technologies, Inc. (“CWT”), a company owned by the J. Michael Wilson
Family. The lease provides for 1,842 square feet of office space to
be leased by CWT for five years at $19.00 per rentable square
foot. The company provided CWT with an allowance of $9,000 in tenant
improvements which are being amortized over the life of the lease. In
addition, CWT shall have the right to terminate this lease at any time after
one
year, provided it gives Landlord written notice six (6) months prior to
termination. The lease agreement is unconditionally guaranteed
by Interstate Business Corporation (“IBC”), a company owned by the J. Michael
Wilson Family.
(C) 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 leases that were assigned
to
the new owners when the property was sold in January 2006. 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.
|
2)
|
Represents
fees paid to James J. Wilson pursuant to a consulting and retirement
agreement. At Mr. Wilson's request, payments are made to
Interstate Waste Technologies, Inc.
(“IWT”).
|
3)
|
Represents
fees paid to Thomas J. Shafer, a trustee, pursuant to a consulting
agreement.
|
4)
|
The
Independent Trustees concluded that certain legal fees and expenses
incurred by J. Michael Wilson in connection with the preliminary
work
being done in seeking a strategic partner to recapitalize the Company
are
in the best interest of the Company and the minority
shareholders. Accordingly, the Independent Trustees authorized
the Company to fund up to $225,000 of such costs, $188,000 of which
have
been incurred as of September 30,
2007.
|
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 two notes of
$1,500,000 each that bear an interest rate of prime plus 2%, with a ceiling
of
9%, and mature on December 3, 2009. 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 a $1,500,000 note to the Company
in January 2005. On January 24, 2007, the Company received $1,707,000
as payment in full of the principal balance and all accrued interest related
to
the El Monte note receivable. Accordingly, the Company recorded
$1,500,000 as equity in earnings and $207,000 as interest income. As
previously noted, the Company deferred revenue recognition on this note until
the cash was received.
We
adopted the provisions of FIN 48 on January 1, 2007. As a result of
the implementation of FIN 48, we recorded a $1,458,000 increase in the net
liability for unrecognized tax positions, which was recorded as a cumulative
effect of a change in accounting principle, reducing the opening balance
of
retained earnings on January 1, 2007. The total amount of
unrecognized tax benefits as of January 1, 2007, was
$13,544,000. Included in the balance at January 1, 2007, were
$2,605,000 of tax positions that, if recognized, would impact the effective
tax
rate.
In
accordance with our accounting policy, we recognize accrued interest related
to
uncertain tax positions as a component of interest expense and penalties
as a
component of tax expense on the Consolidated Statements of
Income. This policy did not change as a result of the adoption of FIN
48. Our Consolidated Statements of Income for the nine and three
months ended September 30, 2007, and our Consolidated Balance Sheet as of
that
date included interest of $855,000, $304,000 and $2,485,000,
respectively and penalties of $143,000, $71,000 and $740,000,
respectively.
The
Company currently does not have any tax returns under audit by the United
States
Internal Revenue Service or the Puerto Rico Treasury
Department. However, the tax returns filed in the Unites States for
the years ended December 31, 2003 through 2006 remain subject to
examination. For Puerto Rico, the tax returns for the years ended
December 31, 2003 through 2006 remain subject to examination. On
August 31, 2007, the Company reached a closing agreement with the Puerto
Rico
Treasury Department whereby the company paid $252,000 related to the correction
of a special partnership income tax return. The Company does not
anticipate any other payments related to settlement of any tax
examinations. Additionally, as certain United States and Puerto Rico
income tax returns will no longer be subject to examination, and as a result,
there is a reasonable possibility that the amount of unrecognized tax benefits
will decrease by $27,000 when the related statutes of limitations
expire.
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 U.S. segment bears
substantially all of the corporate costs associated with being a public
company
and other corporate governance. 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 $5,131,000 for the nine
months
ended September 30, 2007, which represents 14% of the U.S. segment’s revenue and
8% of our total year-to-date consolidated revenue. No customers
accounted for more than 10% of our consolidated revenue for the nine months
ended September 30, 2007.
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 as defined by the development
agreement. Although Lennar is contractually obligated to take 200
lots per year, the market is not sufficient to absorb this sales
pace. Accordingly, Lennar’s management requested a reduction of the
200 lot requirement and lot price. The Company is in active
negotiations with Lennar to reach agreed upon terms that are mutually
beneficial
to both parties.
The
following presents the segment information for the nine months ended September
30, 2007 and 2006 (in thousands):
|
|
United
|
|
|
Puerto
|
|
|
Inter-
|
|
|
|
|
|
|
States
|
|
|
Rico
|
|
|
Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007 (Unaudited):
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Rental
property revenues
|
|
|
28,529
|
|
|
|
16,720
|
|
|
|
-
|
|
|
|
45,249
|
|
Rental
property operating expenses
|
|
|
14,376
|
|
|
|
8,543
|
|
|
|
(18 |
) |
|
|
22,901
|
|
Land
sales revenue
|
|
|
8,032
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,032
|
|
Cost
of land sales
|
|
|
5,930
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,930
|
|
Home
sales revenue
|
|
|
-
|
|
|
|
6,113
|
|
|
|
-
|
|
|
|
6,113
|
|
Cost
of home sales
|
|
|
-
|
|
|
|
4,399
|
|
|
|
-
|
|
|
|
4,399
|
|
Management
and other fees
|
|
|
299
|
|
|
|
479
|
|
|
|
(22 |
) |
|
|
756
|
|
General,
administrative, selling and marketing expense
|
|
|
6,355
|
|
|
|
2,249
|
|
|
|
(4 |
) |
|
|
8,600
|
|
Depreciation
and amortization
|
|
|
4,252
|
|
|
|
2,757
|
|
|
|
-
|
|
|
|
7,009
|
|
Operating
income
|
|
|
5,947
|
|
|
|
5,364
|
|
|
|
-
|
|
|
|
11,311
|
|
Interest
income
|
|
|
843
|
|
|
|
228
|
|
|
|
(80 |
) |
|
|
991
|
|
Equity
in earnings from unconsolidated entities
|
|
|
(1 |
) |
|
|
2,021
|
|
|
|
-
|
|
|
|
2,020
|
|
Interest
expense
|
|
|
9,436
|
|
|
|
4,681
|
|
|
|
(80 |
) |
|
|
14,037
|
|
Minority
interest in consolidated entities
|
|
|
332
|
|
|
|
1,418
|
|
|
|
-
|
|
|
|
1,750
|
|
Income
before provision/(benefit) for income taxes
|
|
|
(2,975 |
) |
|
|
1,697
|
|
|
|
-
|
|
|
|
(1,278 |
) |
Income
tax provision/(benefit)
|
|
|
(829 |
) |
|
|
810
|
|
|
|
-
|
|
|
|
(19 |
) |
Net
(loss) income
|
|
|
(2,146 |
) |
|
|
887
|
|
|
|
-
|
|
|
|
(1,259 |
) |
Gross
profit on land sale
|
|
|
2,102
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,102
|
|
Gross
profit on home sales
|
|
|
-
|
|
|
|
1,714
|
|
|
|
-
|
|
|
|
1,714
|
|
Total
assets
|
|
|
260,772
|
|
|
|
101,056
|
|
|
|
(1,624 |
) |
|
|
360,204
|
|
Additions
to long lived assets
|
|
|
6,226
|
|
|
|
524
|
|
|
|
-
|
|
|
|
6,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2006 (Unaudited):
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
Rental
property revenues
|
|
|
23,889
|
|
|
|
16,057
|
|
|
|
-
|
|
|
|
39,946
|
|
Rental
property operating expenses
|
|
|
11,591
|
|
|
|
8,187
|
|
|
|
(15 |
) |
|
|
19,763
|
|
Land
sales revenue
|
|
|
11,317
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,317
|
|
Cost
of land sales
|
|
|
6,156
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,156
|
|
Home
sales revenue
|
|
|
-
|
|
|
|
16,343
|
|
|
|
-
|
|
|
|
16,343
|
|
Cost
of home sales
|
|
|
-
|
|
|
|
12,310
|
|
|
|
-
|
|
|
|
12,310
|
|
Management
and other fees
|
|
|
461
|
|
|
|
443
|
|
|
|
(19 |
) |
|
|
885
|
|
General,
administrative, selling and marketing expense
|
|
|
4,648
|
|
|
|
2,059
|
|
|
|
(4 |
) |
|
|
6,703
|
|
Depreciation
and amortization
|
|
|
3,532
|
|
|
|
2,707
|
|
|
|
-
|
|
|
|
6,239
|
|
Operating
income
|
|
|
9,740
|
|
|
|
7,580
|
|
|
|
-
|
|
|
|
17,320
|
|
Interest
income
|
|
|
576
|
|
|
|
95
|
|
|
|
(40 |
) |
|
|
631
|
|
Equity
in earnings from unconsolidated entities
|
|
|
(1 |
) |
|
|
511
|
|
|
|
-
|
|
|
|
510
|
|
Interest
expense
|
|
|
6,604
|
|
|
|
4,351
|
|
|
|
(40 |
) |
|
|
10,915
|
|
Minority
interest in consolidated entities
|
|
|
610
|
|
|
|
2,387
|
|
|
|
-
|
|
|
|
2,997
|
|
Income
before provision/(benefit) for income taxes
|
|
|
3,105
|
|
|
|
1,651
|
|
|
|
-
|
|
|
|
4,756
|
|
Income
tax provision/(benefit)
|
|
|
1,284
|
|
|
|
470
|
|
|
|
-
|
|
|
|
1,754
|
|
Net
income
|
|
|
1,821
|
|
|
|
1,181
|
|
|
|
-
|
|
|
|
3,002
|
|
Gross
profit on land sale
|
|
|
5,161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,161
|
|
Gross
profit on home sales
|
|
|
-
|
|
|
|
4,033
|
|
|
|
-
|
|
|
|
4,033
|
|
Total
assets
|
|
|
220,662
|
|
|
|
106,489
|
|
|
|
-
|
|
|
|
327,151
|
|
Additions
to long lived assets
|
|
|
33,801
|
|
|
|
1,192
|
|
|
|
-
|
|
|
|
34,993
|
|
The
following presents the segment information for the three months ended September
30, 2007 and 2006 (in thousands):
|
|
United
|
|
|
Puerto
|
|
|
Inter-
|
|
|
|
|
|
|
States
|
|
|
Rico
|
|
|
Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2007 (Unaudited):
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Rental
property revenues
|
|
|
9,823
|
|
|
|
5,594
|
|
|
|
-
|
|
|
|
15,417
|
|
Rental
property operating expenses
|
|
|
4,887
|
|
|
|
2,905
|
|
|
|
(5 |
) |
|
|
7,787
|
|
Land
sales revenue
|
|
|
2,063
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,063
|
|
Cost
of land sales
|
|
|
1,574
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,574
|
|
Home
sales revenue
|
|
|
-
|
|
|
|
899
|
|
|
|
-
|
|
|
|
899
|
|
Cost
of home sales
|
|
|
-
|
|
|
|
583
|
|
|
|
-
|
|
|
|
583
|
|
Management
and other fees
|
|
|
91
|
|
|
|
166
|
|
|
|
(7 |
) |
|
|
250
|
|
General,
administrative, selling and marketing expense
|
|
|
2,432
|
|
|
|
801
|
|
|
|
(1 |
) |
|
|
3,232
|
|
Depreciation
and amortization
|
|
|
1,507
|
|
|
|
921
|
|
|
|
-
|
|
|
|
2,428
|
|
Operating
income
|
|
|
1,577
|
|
|
|
1,449
|
|
|
|
(1 |
) |
|
|
3,025
|
|
Interest
income
|
|
|
252
|
|
|
|
2
|
|
|
|
(25 |
) |
|
|
229
|
|
Equity
in earnings from unconsolidated entities
|
|
|
-
|
|
|
|
175
|
|
|
|
-
|
|
|
|
175
|
|
Interest
expense
|
|
|
3,210
|
|
|
|
1,515
|
|
|
|
(25 |
) |
|
|
4,700
|
|
Minority
interest in consolidated entities
|
|
|
159
|
|
|
|
34
|
|
|
|
-
|
|
|
|
193
|
|
Income
before provision/(benefit) for income taxes
|
|
|
(1,539 |
) |
|
|
134
|
|
|
|
-
|
|
|
|
(1,405 |
) |
Income
tax provision/(benefit)
|
|
|
(348 |
) |
|
|
41
|
|
|
|
-
|
|
|
|
(307 |
) |
Net
(loss) income
|
|
|
(1,191 |
) |
|
|
93
|
|
|
|
-
|
|
|
|
(1,098 |
) |
Gross
profit on land sale
|
|
|
489
|
|
|
|
-
|
|
|
|
-
|
|
|
|
489
|
|
Gross
profit on home sales
|
|
|
-
|
|
|
|
316
|
|
|
|
-
|
|
|
|
316
|
|
Total
assets
|
|
|
260,772
|
|
|
|
101,056
|
|
|
|
(1,624 |
) |
|
|
360,204
|
|
Additions
to long lived assets
|
|
|
1,707
|
|
|
|
102
|
|
|
|
- |
|
|
|
1,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2006 (Unaudited):
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
Rental
property revenues
|
|
|
8,283
|
|
|
|
5,525
|
|
|
|
-
|
|
|
|
13,808
|
|
Rental
property operating expenses
|
|
|
4,219
|
|
|
|
2,743
|
|
|
|
(15 |
) |
|
|
6,947
|
|
Land
sales revenue
|
|
|
4,691
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,691
|
|
Cost
of land sales
|
|
|
2,490
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,490
|
|
Home
sales revenue
|
|
|
-
|
|
|
|
5,084
|
|
|
|
-
|
|
|
|
5,084
|
|
Cost
of home sales
|
|
|
-
|
|
|
|
3,789
|
|
|
|
-
|
|
|
|
3,789
|
|
Management
and other fees
|
|
|
192
|
|
|
|
147
|
|
|
|
(19 |
) |
|
|
320
|
|
General,
administrative, selling and marketing expense
|
|
|
1,469
|
|
|
|
704
|
|
|
|
(4 |
) |
|
|
2,169
|
|
Depreciation
and amortization
|
|
|
1,257
|
|
|
|
908
|
|
|
|
-
|
|
|
|
2,165
|
|
Operating
income
|
|
|
3,731
|
|
|
|
2,612
|
|
|
|
-
|
|
|
|
6,343
|
|
Interest
income
|
|
|
517
|
|
|
|
35
|
|
|
|
(22 |
) |
|
|
530
|
|
Equity
in earnings from unconsolidated entities
|
|
|
(1 |
) |
|
|
168
|
|
|
|
-
|
|
|
|
167
|
|
Interest
expense
|
|
|
2,556
|
|
|
|
1,181
|
|
|
|
(22 |
) |
|
|
3,715
|
|
Minority
interest in consolidated entities
|
|
|
298
|
|
|
|
33
|
|
|
|
-
|
|
|
|
331
|
|
Income
before provision/(benefit) for income taxes
|
|
|
1,395
|
|
|
|
1,689
|
|
|
|
-
|
|
|
|
3,084
|
|
Income
tax provision/(benefit)
|
|
|
555
|
|
|
|
485
|
|
|
|
-
|
|
|
|
1,040
|
|
Net
income
|
|
|
840
|
|
|
|
1,204
|
|
|
|
-
|
|
|
|
2,044
|
|
Gross
profit on land sale
|
|
|
2,201
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,201
|
|
Gross
profit on home sales
|
|
|
-
|
|
|
|
1,295
|
|
|
|
-
|
|
|
|
1,295
|
|
Total
assets
|
|
|
220,662
|
|
|
|
106,489
|
|
|
|
-
|
|
|
|
327,151
|
|
Additions
to long lived assets
|
|
|
9,593
|
|
|
|
284
|
|
|
|
-
|
|
|
|
9,877
|
|
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 I, Item 1A to the Form 10-K for the year ended December 31,
2006.
EXECUTIVE
SUMMARY OF RESULTS
Consolidated
operating revenues are derived primarily from rental revenue, community
development land sales and home sales. For the nine and three months
ended September 30, 2007, our consolidated rental revenues have increased
13%
and 12%, respectively, over the comparable periods of 2006. The
increase was primarily attributable to acquisition and construction of
new units
in our United States segment as well as overall rent increases at comparable
properties in both the United States and Puerto Rico segments.
Community
development land sales for the nine and three months ended September 30,
2007
decreased 29% and 56%, respectively, from the 2006 periods. 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. Land sales, currently sourced from the United States segment,
result in large part from a sales agreement with Lennar
Corporation. 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 as defined by the development
agreement. Although Lennar is contractually obligated to take 200
lots per year, the market is not sufficient to absorb this sales
pace. Accordingly, Lennar’s management requested a reduction of the
200 lot requirement and lot price. The Company is in active
negotiations with Lennar to reach agreed upon terms that are mutually beneficial
to both parties.
Home
sales for the nine and three months ended September 30, 2007 decreased
63% and
82%, respectively, from the 2006 periods. Home sales, currently
sourced from the Puerto Rico segment, are impacted by the local real estate
market. The Puerto Rico real estate market has slowed
substantially. The reduction of new contracts and the reduced pace of
sales has impacted the Company somewhat, but not to the same extent as
the
overall Puerto Rico market decline. The Company settled 23 and 3
units for the nine and three months ended September 30, 2007,
respectively. As of September 30, 2007, 27 completed units remain
within inventory, of which we currently have 5 units under
contract. At the current sales pace, the Company anticipates that the
remaining units in Torres will continue into 2008. We believe that
our current pricing remains competitive.
On
a
consolidated basis, the Company reported a net loss of $1,259,000 for the
nine
months ended September 30, 2007. The net loss includes a $19,000
benefit for income taxes, resulting in a consolidated effective tax rate
of
approximately 1%. The consolidated effective rate was impacted by
accrued penalties on uncertain tax positions and certain nondeductible
permanent
items in the United States segment and double taxation on a certain
non-recurring gain for our Puerto Rico segment. For further
discussion of these items, see the provision for income taxes discussion
within
the United States and Puerto Rico segment discussion.
Please
refer to the Results of Operations section of Management’s Discussion and
Analysis for additional details surrounding the results of each of our
operating
segments.
NEW
ACCOUNTING PRONOUNCEMENTS AND CHANGE IN BASIS OF
PRESENTATION
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. We adopted the provisions of FIN 48 on January 1,
2007. As a result of the implementation of FIN 48, we recorded a
$1,458,000 increase in the net liability for unrecognized tax positions,
which
was recorded as a cumulative effect of a change in accounting principle,
reducing the opening balance of retained earnings on January 1,
2007. See Note 7 to the consolidated financial statements for further
discussion.
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 2006 Annual Report on Form 10-K for a discussion of critical
accounting policies, which include sales, profit recognition and cost
capitalization, investment in unconsolidated real estate entities, impairment
of
long-lived assets, depreciation of investments in real estate, income taxes
and
contingencies. For the nine months ended September 30, 2007, there
were no material changes to our policies except as noted above related to
the
implementation of FIN 48.
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 nine
and
three months ended September 30, 2007 (unaudited), with the results of
operations of the Company for the nine and three months ended September 30,
2006
(unaudited). 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 and within our Annual Report on Form 10-K
for
the year ended December 31, 2006.
Results
of Operations - U.S. Operations:
For
the
nine and three months ended September 30, 2007, our U.S. segment generated
$5,947,000 and $1,577,000 of operating income compared to $9,740,000 and
$3,731,000 of operating income generated by the segment for the same periods
in
2006, respectively. Additional information and analysis of the U.S. operations
can be found below.
Rental
Property Revenues and Operating Expenses - U.S.
Operations:
As
of
September 30, 2007, nineteen U.S.-based apartment properties, representing
3,256
units, in which we hold an ownership interest qualified for the consolidation
method of accounting. The rules of consolidation require that we
include within our financial statements the consolidated apartment properties'
total revenue and operating expenses. The portions 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.
As
of
September 30, 2007, thirteen of the consolidated properties were market rent
properties, representing 1,856 units, allowing us to determine the appropriate
rental rates. Even though we can determine the rents, a portion of
our units at some of our market rent properties must be leased to tenants
with
low to moderate income. HUD subsidizes three of the properties representing
836
units and the three remaining properties are a mix of 137 subsidized units
and
427 market rent units. HUD dictates the rents of the subsidized
units.
Apartment
Construction and Acquisitions
On
January 31, 2007, we completed the newest addition to our market rate
multifamily apartment portfolio located in St. Charles' Fairway Village,
the
Sheffield Greens Apartments. The 252-unit apartment project consists
of nine, 3-story buildings and offers 1 and 2 bedroom units ranging in size
from
800 to 1,400 square feet.
On
April
28, 2006, the Company acquired two apartment properties, Milford Station
I LLC
and Milford Station II LLC, in Baltimore, Maryland containing a combined
total
of 250 units for approximately $14,300,000. All of the acquired
properties are operated as market rate properties.
Nine
months ended
For
the
nine months ended September 30, 2007, rental property revenues increased
$4,640,000 or 19% to $28,529,000 compared to $23,889,000 for the same period
in
2006. The increase in rental revenues was primarily the result of
additional revenues for Sheffield Greens Apartments, Milford Station I and
Milford Station II which accounted for approximately $3,548,000 of the
difference. The increase was also attributable to an overall 4%
increase in rents between periods.
Rental
property operating expenses increased $2,785,000 or 24% for the nine months
ended September 30, 2007 to $14,376,000 compared to $11,591,000 for the same
period of 2006. The overall increase in rental property operating
expenses was primarily the result of additional expenses for Sheffield Greens
Apartments, Milford Station I and Milford Station II, which accounted for
approximately $1,667,000 of the difference. The remainder of the
increase resulted from overall inflationary adjustments as well as specific
above inflation increases noted in advertising, security, office and maintenance
salaries, utilities, maintenance, rehabilitation, real estate taxes and
concessions awarded to residents. We are currently working to reduce
all our controllable rental property operating expenses within our US
portfolio. Specific emphasis includes reducing advertising and
concessions expenses now that Sheffield Greens is leased and occupancy rates
at
other competing properties are increasing as well as pursuing measures to
reduce
security expenditures.
Three
months ended
For
the
three months ended September 30, 2007, rental property revenues increased
$1,540,000 or 19% to $9,823,000 compared to $8,283,000 for the same period
in
2006. The increase in rental revenues was primarily the result of
additional revenues for Sheffield Greens Apartments, which accounted for
approximately $1,109,000 of the difference. The increase was also
attributable to an overall 5% increase in rents between periods.
Rental
property operating expenses increased $668,000 or 16% for the third quarter
of
2007 to $4,887,000 compared to $4,219,000 for the third quarter of
2006. The overall increase in rental property operating expenses was
primarily the result of additional expenses for Sheffield Greens Apartments,
which accounted for approximately $454,000 of the difference. The
remainder of the increase resulted from overall inflationary adjustments
as well
as specific above inflation increases in office expenses, security, maintenance
supplies, real estate taxes and insurance. These increases were
offset in part by expense reduction efforts being implemented.
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 as defined by the development
agreement. Although Lennar is contractually obligated to take 200
lots per year, the market is not sufficient to absorb this sales
pace. Accordingly, Lennar’s management requested a reduction of the
200 lot requirement and lot price. The Company is in active
negotiations with Lennar to reach agreed upon terms that are mutually beneficial
to both parties.
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 a percentage of the base
price
of the home sold on the lot. Additional revenue exceeding the price per
lot
established at takedown 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 based on
the
relative sales values estimated within any given village in St.
Charles. Current real estate market conditions have resulted in price
reductions for our residential lots and, accordingly, adversely impacted
our
gross margins. 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 generally
cyclical.
Community
development land sales revenue decreased $3,285,000 or 29% for the nine
months
ended September 30, 2007, to $8,032,000 as compared to $11,317,000 for
the nine
months ended September 30, 2006. The decline in the housing market
negatively impacted the number of lots sold in the nine months of
2007. The impact of this reduction was offset in part by an increase
in the amount of commercial sales for the period.
Community
development land sales revenue decreased $2,628,000 or 56% for the three
months
ended September 30, 2007, to $2,063,000 as compared to $4,691,000 for the
three
months ended September 30, 2006. The overall decrease for the three
months ended September 30, 2007 as compared to the three months ended September
30, 2006 resulted from a decrease in the number of residential lots delivered
as
well as the impact of Lennar’s reduced home sales on the true-up payments
received, offset in part by increased commercial land sales for the
period. Further discussion of the components of this variance is as
follows:
Residential
Land Sales
For
the nine
months ended September 30, 2007, we recognized $2,255,000 related to the
delivery of 27 residential lots to Lennar, of which 24 were townhome lots
and 3
were single-family lots, as compared to $6,583,000 related to 42 single-family
lots and 14 townhome lots delivered in the nine months ended September
30,
2006. For the nine months ended September 30, 2007, we delivered 24
townhome lots to Lennar, recognizing as revenue an average price of $79,226
per
lot, which includes the initial recognition of $85,000 per lot for 14 lots
and
$65,000 per lot for 10 lots plus water and sewer fees, road fees and other
off-site fees. The Company also delivered 3 single family lots to
Lennar, recognizing as revenue an average price of $117,860 per lot, which
includes the initial recognition of $115,300 per lot plus water and sewer
fees,
road fees and other off-site fees. For the nine months ended
September 30, 2006, we delivered 42 single family 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, as well as 14 townhome lots in 2006 at the same initial
price as
currently being recognized.
As
of
September 30, 2007, 1,616 lots remained under contract to Lennar of which
154
single family lots and 29 townhome lots were developed and ready for
delivery.
In
addition to initial lot settlement, during the nine months ended September
30,
2007 and 2006, we also recognized $1,813,000 and $2,594,000, respectively,
of
additional revenue for lots that were previously sold to Lennar in 2006
and
2005. During the third quarter of 2007 and 2006, we recognized
$727,000 and $887,000, 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
nine months ended September 30, 2007, we sold 6.81 commercial acres in
St.
Charles for $2,717,000 as compared to 10.46 acres for $1,602,000 for the
nine
months ended September 30, 2006. For the three months ended September
30, 2007, we sold 1.03 acres of commercial land for $180,000 and recognized
$61,000 of revenue related to work completed on incomplete parcels previously
sold. No commercial contracts were closed in the third quarter of
2006. As of September 30, 2007, our commercial sales backlog
contained 94.19 acres under contract for a total of $16,761,000.
St.
Charles Active Adult Community, LLC – Land 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. The Company manages 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 September
2006, again in December 2006, and again in October 2007. Most
recently, the development loan was modified to provide a one year delay
in
development of the project, as to date, lot development has outpaced
sales. Per the terms of the loan, both the Company and Lennar
provided development completion guarantees.
In
the
nine and three months ended September 30, 2007, the joint venture delivered
48
and 18 lots to Lennar as compared to 25 for both the nine and three months
ended
September 30, 2006. Accordingly, for the nine and three months ended
September 30, 2007, the Company recognized $1,063,000 and $408,000 in deferred
revenue and off-site fees and $358,000 and $140,000 of deferred costs,
respectively. For the both the nine and three months ended September
30, 2006, the company recognized $538,000 in deferred revenue and off-site
fees
and $176,000 in deferred costs.
Gross
Margin on Land Sales
The
gross
margin on land sales for the nine and three months ended September 30,
2007,
were 26% and 24% as compared to 46% and 47% for the same period of
2006. Gross margins differ from period to period depending on the mix
of land sold. Land, development and related costs, both incurred and estimated
to be incurred in the future, are allocated to the cost of land sold based
upon
the relative sales values of the villages. Any changes resulting from a
change
in the estimated number of units to be sold, their related sales values,
or
changes in the estimated costs are allocated to the remaining unsold land
within
the respective village. Management reduced the estimated sales value of
the
remaining lots within Fairway Village in response to current market
conditions. As a result, the gross margins on our residential land
sales decreased from approximately 50% to 30%. In addition, our
commercial acres represented a significant portion of our land sales and
the
commercial parcels sold generated lower margins than the residential lot
sales. For the commercial sales in the nine months ended September
30, 2006, the parcels sold produced higher margins relative to those sold
in the
same periods of 2007.
Customer
Dependence
Residential
land sales to Lennar within our U.S. segment were $5,131,000 for the nine
months
ended September 30, 2007, which represents 14% of the U.S. segment’s revenue and
8% of our total year-to-date consolidated revenue. No customers
accounted for more than 10% of our consolidated revenue for the nine months
ended September 30, 2007. However, 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. Effective February 28, 2007, the
Company’s management agreement with G.L. Limited Partnership was terminated upon
the sale of the apartment property to a third party. Effective April
30, 2006, the Company’s management agreement with Chastleton Associates LP was
also terminated upon the sale of the apartment property to a third party.
These
properties were previously owned by an affiliate. Management fees generated
by
each of these properties accounted for less than 1% of the Company’s total
revenue.
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.
The
Company manages the project development of the joint venture with Lennar
for a
market rate fee pursuant to a management agreement. These fees are
based on the cost of the project and a prorated share is earned when each
lot is
sold.
Amounts
presented as management fees only include the fees earned from the
non-controlled properties; the fees earned from the controlled properties
are
eliminated in consolidation. For the nine and three months ended
September 30, 2007, management fees decreased $162,000 and $101,000,
respectively as compared to the nine and three months ended September 30,
2006. The decrease for the nine and three months periods was
attributable to the termination of the management agreements with G.L. Limited
Partnership and Chastleton Associates LP as noted above.
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 properties located in St. Charles, Maryland, our properties located in
the
Baltimore, Maryland area and the property in Virginia and, to a lesser extent,
the other properties that we manage. Our unconsolidated and managed-only
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
increased $1,707,000 to $6,355,000 for the nine months of 2007 compared to
$4,648,000 for the same period of 2006. The 37% increase is primarily
attributable to consulting and legal fees related to strategic planning,
including fees associated with an evaluation of a recapitalization of the
company, consulting services provided for our FIN 48 implementation during
the
first quarter of 2007, and consulting services for Sarbanes-Oxley Section
404
(“SOX 404”) internal control compliance testing. Other increases
included salaries and benefits related to the quarterly accrual in 2007 of
estimated management bonuses that were expensed in prior years in the fourth
quarter, accrual of expense related to new executive retention agreements
with
our COO and CFO executed in the third quarter of 2007, and increases in share
appreciation rights expense resulting from the increase in our share price
in
the third quarter 2007.
General,
administrative, selling and marketing costs incurred within our U.S. operations
increased $963,000 to $2,432,000 for the three months ended September 30,
2007,
compared to $1,469,000 for the same period of 2006. The 66% increase
is primarily attributable to consulting and legal fees related to strategic
planning, including fees associated with an evaluation of a recapitalization
of
the company, and consulting services provided for SOX 404 compliance
testing. Other increases included salaries and benefits related to
the quarterly accrual in 2007 of estimated management bonuses, accrual of
expense related to new executive retention agreements with our COO and CFO
executed in the third quarter of 2007 and increases in share appreciation
rights
expense resulting from the increase in our share price in the third quarter
2007.
We
anticipate additional costs will be incurred as part of the company’s strategic
planning activities noted above. These costs include, but are not
limited to, legal fees, consulting fees, and fees paid to the Special Committee
to the Board of Trustees.
Depreciation
Expense – U.S. Operations:
Depreciation
expense increased $720,000 to $4,252,000 for the first nine months of 2007
compared to $3,532,000 for the same period in 2006. The depreciation
expense also increased $250,000 to $1,507,000 compared to $1,257,000 for
the
three months ended September 30, 2006. The year to date and quarter
to date increases in depreciation are primarily the result of depreciation
related to the acquisitions of Milford Station I and Milford Station II and
the
depreciation related to Sheffield Greens Apartments, all of which accounted
for
$498,000 and $174,000 of the variances, respectively. The balance of
the increases relate to the recent refinancings of several properties at
the end
of 2006 and beginning of 2007. The Company used part of the proceeds
to make significant investments in capital improvements at these properties
resulting in increased depreciation expense for both the year to date and
quarter to date periods.
Interest
Income – U.S. Operations:
Interest
income increased $267,000 to $843,000 for the nine months ended September
30,
2007, as compared to $576,000 for the nine months ended September 30,
2006. The increase was primarily attributable to additional corporate
interest income earned on investments of cash received from the various
apartment partnership refinancings at the end of last year and the beginning
of
this year and has earned interest accordingly.
Interest
income decreased $265,000 to $252,000 for the three months ended September
30,
2007, as compared to $517,000 for the three months ended September 30,
2006. The decrease was primarily attributable to a full year interest
payment received from Charles County in the third quarter of 2006 totaling
$470,000, related to interest income on the undistributed bond proceeds held
in
escrow by Charles County. Prior to the third quarter of 2006, a
formal written agreement was not in place so accrual of interest income was
not
appropriate. For the third quarter 2007, interest accrued on
undistributed bond proceeds was $159,000. This decrease was partially
offset by an increase in the amount of corporate interest income earned on
investments of cash received from the various apartment partnership refinancings
at the end of 2006 year and the beginning of 2007.
Interest
Expense – U.S. Operations:
The
Company considers interest expense on all U.S. debt available for capitalization
to the extent of average qualifying assets for the period. Interest
specific to the construction of qualifying assets, represented primarily
by our
recourse debt, is first considered for capitalization. To the extent
qualifying assets exceed debt specifically identified, a weighted average
rate
including all other debt of the U.S. segment is applied. Any excess
interest is reflected as interest expense. For 2007 and 2006, the
excess interest primarily relates to the interest incurred on the non-recourse
debt from our investment properties.
Interest
expense increased $2,832,000 for the nine months ended September 30, 2007,
to
$9,436,000, as compared to $6,604,000 for the same period of
2006. Interest expense increased $654,000 for the third quarter of
2007 to $3,210,000 as compared to $2,556,000 for the same period of
2006. The year to date and quarter to date increases were primarily
attributable to interest expense incurred at new properties, including Sheffield
Greens Apartments, Milford Station I and Milford Station II all of which
accounted for $1,006,000 and $350,000 of the increase,
respectively. In addition, the refinancing of several apartment
mortgages during the fourth quarter of 2006 and early first quarter 2007
increased interest expense at Fox Chase Apartments, LLC, New Forest Apartments,
LLC, Coachman’s Apartments LLC and Village Lake Apartments, LLC $1,168,000 and
$404,000 for the nine and three month periods,
respectively. Additionally, interest expense increased as a result of
accrued interest on uncertain tax positions associated with our implementation
of FIN 48 in the first quarter 2007.
For
the
nine and three months ended September 30, 2007, $926,000 and $325,000 of
interest cost was capitalized. During the same period in 2006,
$1,355,000 and $623,000 of interest cost was capitalized.
Provision
for Income Taxes – U.S. Operations:
The
effective tax rates for the nine and three months ended September 30, 2007,
and
September 30, 2006, were 28% and 23% and 41% and 40%,
respectively. The statutory rate is 40%. The effective tax
rate for the nine and three months ended September 30, 2007 differs from
the
statutory rate due to accrued penalties on uncertain tax positions and certain
nondeductible permanent items, which offset the benefit recorded for the
period. The effective tax rates for the nine and three months ended
September 30, 2006 did not differ substantially from the effective
rate.
Results
of Operations – Puerto Rico Operations:
For
the
nine months ended September 30, 2007, our Puerto Rico segment generated
$5,364,000 of operating income compared to $7,580,000 of operating income
generated by the segment for the same period in 2006. For the three
months ended September 30, 2007, our Puerto Rico segment generated $1,449,000
of
operating income compared to $2,612,000 of operating income for the same
period
of 2006. Additional information and analysis of the Puerto Rico
operations can be found below.
Rental
Property Revenues and Operating Expenses - Puerto Rico
Operations:
Our
rental property revenues and
expenses are generated primarily from the 12 multifamily apartment properties
located in the San Juan metropolitan area. In addition, the Company
operates a commercial rental property in the community of Parque Escorial,
known
as Escorial Building One (“EBO”), in which it holds a 100% ownership
interest. EBO 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.
Nine
Months
Rental
property revenues increased $663,000 or 4% to $16,720,000 for the nine months
ended September 30, 2007 compared to $16,057,000 for the same period of
2006. The year to date increase in our rental property revenues was
primarily the result of an overall rent increases of 3% from HUD on our
multifamily apartment properties. In addition, rents for our
commercial rental property, EOB, increased 67% for the year to date period
as a
result of lease up efforts and new tenants.
Rental
property operating expenses increased $356,000 or 4% to $8,543,000 for the
nine
months ended September 30, 2007 compared to $8,187,000 for the same period
of
2006. The year to date increase was the result of a 3% increase to
our multifamily apartment properties operating expenses driven by overall
inflationary adjustments as well as specific above inflation increases noted
in
utilities, repairs and painting. In addition, operating expenses for
our commercial rental property, EOB, increased 29% for the year to date period
as a result of amortized concessions related to new tenants as well as a
reserve
for bad debts.
Three
Months
Rental
property revenues increased $69,000 or 1% to $5,594,000 for the three months
ended September 30, 2007 compared to $5,525,000 for the same period of
2006. The quarter to date increase in our rental property revenues
was nominal and driven by a 1% increase in rents from our multifamily apartment
properties and a 33% increase in rents for our commercial rental property
as a
result of lease up efforts and new tenants.
Rental
operating expenses increased $162,000 or 6% to $2,905,000 for the three months
ended September 30, 2007 compared to $2,743,000 for the same period in
2006. The quarter to date increase was the result of a 4% increase to
our multifamily apartment properties operating expenses driven by overall
inflationary adjustments as well as specific above inflation increases noted
in
utilities, repairs and painting. In addition, operating expenses for
our commercial rental property, EOB, increased 32% for the three-month period
as
a result of amortized concessions related to new tenants, as well as a reserve
for bad debts.
Community
Development – Puerto Rico Operations:
Total
land sales revenue in any one period is affected by commercial sales which
are
cyclical in nature and usually have a noticeable positive impact on our earnings
in the period in which settlement is made.
There
were no community development land sales during the nine and three months
ended
September 30, 2007 and 2006. There were no commercial contracts for
commercial sales in backlog at September 30, 2007.
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
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 onsite
sales office to pre-qualified homebuyers.
For
the
nine months ended September 30, 2007, homebuilding revenues decreased
$10,230,000 or 63% to $6,113,000 as compared to $16,343,000 for the nine
months
ended September 30, 2006. The decrease in year to date revenues was
impacted by the slow housing market resulting in a decrease in the number
of
units sold in the respective periods, offset in part by an increase in the
per
unit selling prices. For the nine months ended September 30, 2007,
the company sold 23 units at an average selling price of $266,000 as compared
to
65 units at an average selling price of $251,000 per unit for the same period
of
2006.
For
the
three months ended September 30, 2007, homebuilding revenues decreased
$4,185,000 or 82% to $899,000 as compared to $5,084,000 for the three months
ended September 30, 2006. The decrease in quarter to date revenues
was also primarily driven by a decrease in the number of units sold in the
respective periods, offset in part by an increase in the per unit selling
prices. For the three months ended September 30, 2007, the company
sold 3 units at an average selling price of $300,000 as compared to 20 units
at
an average selling price of $254,000 per unit for the same period of
2006.
The
gross
margins for the nine months ended September 30, 2007 and 2006 were 28% and
25%,
respectively. The gross margins for the three months ended September
30, 2007 and 2006 were 35% and 25%, respectively. The increases
in the gross profit margin are attributable to an increase in the sales prices
of the units in the third and fourth buildings as well as the units sold
in the
third quarter of 2007 represent premium penthouse units.
As
of September 30, 2007, 5 units of
Torres were under contract at an average selling price of $258,000 per
unit. Each sales contract is backed by a $6,000
deposit. For the nine months ended September 30, 2007, the Company
had 18 new contracts and 5 canceled contracts. For the same period in
2006, the Company had 48 new contracts and 36 canceled contracts. The
Puerto Rico real estate market has slowed substantially. The
reduction of new contracts and the reduced pace of sales has impacted the
Company somewhat, but not to the same extent as the overall Puerto Rico market
decline. The Company currently anticipates that the remaining 27
units in Torres will continue into 2008 and that its current pricing remains
competitive.
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 increased 8% or $36,000 to $479,000 for the nine months ended September
30,
2007, as compared to $443,000 for the same period of 2006. During the
three months ended September 30, 2007 management fees increased 13% or $19,000
to $166,000 as compared to $147,000 for the same period of 2006. The
year to date and quarter to date increases in our management fees resulted
from
increases in the annual rents in the non-owned apartment properties and from
increases in the managed fees received from Parque Escorial Associations
during
the respective periods.
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 our general,
administrative, selling and marketing expenses. 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 our corporate
office is in our office building, EBO, rent expense and parking expenses
are
eliminated in consolidation.
General,
administrative, selling and marketing expenses increased 9% or $190,000 to
$2,249,000 during the nine months ended September 30, 2007, as compared to
$2,059,000 for the same period of 2006. The increase is primarily
attributable to increases in salaries and benefits related to the accrual
in
2007 of quarterly management bonuses that were expensed in prior years in
the
fourth quarter; increases in legal expenses related to the Jalexis matter,
described in more detail in the Company’s 2006 Form 10-K; and an increase in
share appreciation rights expense as a result of the increase in our share
price
during the third quarter 2007.
During
the quarter ended September 30, 2007, general, administrative, selling and
marketing increased 14% or $97,000 to $801,000 as compared to $704,000 for
the
same period of 2006. The increase is primarily attributable to
increases in salaries and benefits related to the accrual in 2007 of quarterly
management bonuses, with no comparable amounts accrued for the same period
of
2006; increases in legal expenses related to the Jalexis matter, described
in
more detail in the Company’s 2006 Form 10-K; and an increase in share
appreciation rights expense as a result of the increase in our share price
during the third quarter 2007.
Depreciation
Expense – Puerto Rico Operations:
Depreciation
expense for the nine months ended September 30, 2007 increased $50,000 or
2% to
$2,757,000 as compared to $2,707,000 for the nine months ended September
30,
2006. Depreciation expense for the three months ended September 30,
2007 increased $13,000 or 1% to $921,000 as compared to $908,000 for the
nine
months ended September 30, 2006. The nominal increases in the year to
date and quarter to date amounts relate to depreciation expense recorded
on the
replacement of elevators in select apartment properties. In addition,
the depreciation expense increased due to the relocation of our offices
primarily related to our corporate office furniture and leasehold
improvements.
Interest
Income – Puerto Rico Operations:
Interest
income for the nine months ended September 30, 2007 increased $133,000 to
$228,000 as compared to $95,000 for the same period of 2006. The
increase in year to date interest income was primarily attributable to the
recognition of interest income on the El Monte note receivable. The
note originated as part of the sale of the complex in December 2004, at which
point the Company determined that the cost recovery method of accounting
was
appropriate for gain recognition. Accordingly, the interest income on
this note was also deferred until the interest payment was received, which
occurred in January 2007. Interest income for the three months ended
September 30, 2007 decreased $33,000 to $2,000 as compared to $35,000 for
the
same period of 2006.
Equity
in Earnings from Unconsolidated Entities – Puerto Rico
Operations:
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 from unconsolidated entities for the nine and three months ended
September 30, 2007 was $2,021,000 and $175,000, respectively, compared to
$511,000 and $168,000 for the same periods of 2006. The year to date
increase of $1,510,000 was related to the payment in full of the $1,500,000
note
receivable held by El Monte in January 2007. The note was received as
part of the sale of the El Monte facility, at which point the Company determined
that the cost recovery method of accounting was appropriate for gain
recognition. Accordingly, revenue was deferred until collection of
the note receivable, which occurred in January 2007.
Interest
Expense – Puerto Rico Operations:
The
Company considers interest expense on all Puerto Rico debt available for
capitalization to the extent of average qualifying assets for the
period. Interest specific to the construction of qualifying assets is
first considered for capitalization. To the extent qualifying assets
exceed debt specifically identified a weighted average rate including all
other
debt of the Puerto Rico segment is applied. Any excess interest is
reflected as interest expense. For 2007 and 2006, the excess interest
primarily relates to the interest incurred on the non-recourse debt from
our
investment properties.
For
the
nine months ended September 30, 2007, interest expense increased $330,000
or 8%
to $4,681,000 as compared to $4,351,000 for the same period of
2006. For the three months ended September 30, 2007, interest expense
increased $334,000 or 28% to $1,515,000 as compared to $1,181,000 for the
same
period of 2006. The year to date and quarter to date increases result
from interest expense from our working capital line of credit combined with
an
overall decrease in the qualified assets available for interest capitalization
between the respective periods.
For
the
nine and three months ended September 30, 2007, $129,000 and $50,000 of interest
cost was capitalized. During the same periods in 2006, $710,000 and
$214,000 of interest cost was capitalized. The decrease in amounts of
interest capitalized was due to the substantial completion of our Torres
project
at the end of 2006 as completed units are not considered qualifying assets
for
the purposes of interest capitalization.
Minority
Interest in Consolidated Entities – Puerto Rico
Operations:
The
Company 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. 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 nine and three months period ended September 30, 2007 were
$1,418,000 and $34,000, respectively. Minority interest for the nine
and three months period ended September 30, 2006 were $2,387,000 and $33,000,
respectively. The $969,000 decrease in minority interest
expense for the nine months ended September 30, 2007 as compared to the nine
month period ended September 30, 2006 was primarily the result of regular
distributions from the surplus cash and refinancing to the minority owners
in
excess of their basis from our consolidated apartment
partnerships. In the second quarter of 2006, the Company made
distributions of $1,100,000 to the limited partners of Colinas de San Juan
related the mortgage refinancing of the related
properties. In the first quarter of 2007, the company
made refinancing distributions of $400,000 to the limited partners of Carolina
Associates related to the mortgage refinancing of the related
properties. The remainder of the difference represents a decrease in
the operating cash distributions made between the respective
periods.
Provision
for Income Taxes – Puerto Rico Operations:
The
effective tax rate for the nine and three months ended September 30, 2007
and
2006 were 48% and 31% and 28% and 29%, respectively. The statutory rate is
29%. The difference in the statutory tax rate and the effective tax
rate for the nine and three months ended September 30, 2007 is primarily
due to
the double taxation on the earnings of our wholly owned corporate subsidiary,
ICP. As a result of a non-recurring gain recorded in the first
quarter 2007 related to its investment in El Monte, ICP’s current taxes payable
and ACPT’s related deferred tax liability on the ICP undistributed earnings
experienced a considerable increase for the nine months ended September 30,
2007. In addition, the effective tax rate for the three months ended September
30, 2007 was impacted by the effect of deferred taxes on items for which
no
current benefit may be recognized off-set in part by non-taxable items, such
as
the tax-exempt income received from our commercial partnership ELI,
SE. The effective rates for the nine and three months ended
September 30, 2006 did not differ substantially from the statutory
rate.
LIQUIDITY
AND CAPITAL RESOURCES
Summary
of Cash Flows
As
of
September 30, 2007, the Company had cash and cash equivalents totaling
$18,643,000 and restricted cash totaling $21,518,000. The following
table sets forth the changes in the Company’s cash flows ($ in
thousands):
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$ |
(6,968 |
) |
|
$ |
5,272
|
|
Investing
Activities
|
|
|
(7,274 |
) |
|
|
(32,576 |
) |
Financing
Activities
|
|
|
5,426
|
|
|
|
20,916
|
|
Net
Decrease in Cash
|
|
$ |
(8,816 |
) |
|
$ |
(6,388 |
) |
For
the nine
months ended September 30, 2007, operating activities used $6,968,000 of
cash
flows compared to $5,272,000 of cash flows provided by operating activities
for
the nine months ended September 30, 2006. The $12,240,000 decrease in
cash flows from operating activities was primarily related to the $10,230,000
decrease in homebuilding sales between periods and a decrease in community
development land sales of $3,285,000. Operating cash flows were also
impacted by $23,181,000 of additions to our community development assets
for the
nine months ended September 30, 2007, $6,392,000 in excess of the additions
during the same period of 2006. Pursuant to agreements with the
Charles County Commissioners, the company is committed to completing $23
million
of infrastructure. We anticipate $11.4 million to be spent over the
next twelve months. An additional $3.9 million of
development is under contract that is expected to be incurred over the next
36
months. These uses of cash were offset by a decrease of $5,313,000 in
our homebuilding expenditures for the nine months ended September 30, 2007,
as
compared to the same period in 2006. As of September 30, 2007, the
Torres project was substantially complete, whereas it was undergoing significant
construction during 2006. In addition, the company received a
$2,000,000 fee during the second quarter 2007 related to a right of way
agreement. From period to period, cash flow from operating activities
is also impacted by changes in our net income, as discussed more fully above
under "Results of Operations," as well as other changes in our receivables
and
payables.
For
the
nine months ended September 30, 2007, net cash used in investing activities
was
$7,274,000 compared to $32,576,000 for the same period of 2006. 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. The $25,302,000 decrease in the cash used in investing activities
between periods was primarily the result of $20,096,000 additions to our
rental
property portfolio in the United States, through acquisition and construction
during the nine months ended September 30, 2006, compared to $6,298,000 in
the
same period of 2007. This decrease primarily related to the
acquisition of Milford I and Milford II during the nine months ended September
30, 2006, with no comparable acquisitions in 2007. In addition, we
completed the construction of Sheffield Greens Apartments during the first
quarter of 2007, whereas during the first nine months of 2006 we invested
$16,577,000 in construction. These differences were partially offset
by the 11 additional properties added to our consolidation as of January
1,
2006, under the new provisions of EITF-04-05, at which point we added $4,723,000
to the consolidated cash balance.
For
the
nine months ended September 30, 2007, net cash provided by financing activities
was $5,426,000 as compared to $20,916,000 for the nine months ended September
30, 2006. The decrease in cash provided by financing activities was
primarily the result of reduced proceeds from debt financing, related to
the
mortgages for the Milford I and Milford II acquisition in 2006. In
addition, cash flows from financing activities decreased as a result of reduced
distribution payments made to minority interests as well as decreased dividends
paid to shareholders. Distributions to limited partners decreased as
a result of reduced refinancing distributions between
periods. Dividends to shareholders during the first nine months of
2007 were consistent with the distributions declared in the same period of
2006
with the exception of a non-recurring special dividend distribution made
in the
first half of 2006. Partially offsetting these decreases was an
increase in draws on the Charles County bond escrow as construction of
infrastructure within St. Charles continues and a decrease in debt repayments
as
the nine months of 2006 included curtailments of the Torres construction
loan
with no curtailments recorded in 2007 as the facility was repaid in December
2006.
Contractual
Financial Obligations
The
following chart reflects our contractual financial obligations as of September
30, 2007:
|
|
Payments
Due By Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
Than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1
Year
|
|
|
2-3
Years
|
|
|
4-5
Years
|
|
|
5
Years
|
|
|
|
|
|
Recourse
debt-community development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
homebuilding
|
|
$ |
25,835
|
|
|
$ |
1,404
|
|
|
$ |
4,708
|
|
|
$ |
3,300
|
|
|
$ |
16,423
|
|
Capital
lease obligations
|
|
|
117
|
|
|
|
18
|
|
|
|
57
|
|
|
|
35
|
|
|
|
7
|
|
Total
Recourse Debt
|
|
|
25,952
|
|
|
|
1,422
|
|
|
|
4,765
|
|
|
|
3,335
|
|
|
|
16,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse
debt-community development
|
|
|
500
|
|
|
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-recourse
debt-investment properties
|
|
|
279,296
|
|
|
|
3,779
|
|
|
|
14,953
|
|
|
|
9,202
|
|
|
|
251,362
|
|
Total
Non-Recourse Debt
|
|
|
279,796
|
|
|
|
4,279
|
|
|
|
14,953
|
|
|
|
9,202
|
|
|
|
251,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
|
1,211
|
|
|
|
301
|
|
|
|
718
|
|
|
|
192
|
|
|
|
-
|
|
Purchase
obligations
|
|
|
38,290
|
|
|
|
20,126
|
|
|
|
17,910
|
|
|
|
54
|
|
|
|
200
|
|
Total
contractual financial obligations
|
|
$ |
345,249
|
|
|
$ |
26,128
|
|
|
$ |
38,346
|
|
|
$ |
12,783
|
|
|
$ |
267,992
|
|
Recourse
Debt - U.S. Operations
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. The Company
was in compliance with these financial covenants as of September 30,
2007. As of September 30, 2007, no amounts were outstanding on the
Revolver.
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 issued 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
for total Bonds issued to date of 5.1%, and call for semi-annual interest
payments and annual principal payments and mature in fifteen
years. Under the terms of bond repayment agreements between the
Company and 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 undisbursed
Bond
proceeds to be advanced to the Company 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 due on the
Bonds. The County also requires ACPT to fund an escrow account from
lot sales that will be used to repay this obligation.
In
August
2005, the Company signed a memorandum of understanding ("MOU") with the Charles
County Commissioners regarding a land donation that is anticipated to 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, with an additional $3,000,000 issued
in
March 2007. The funds provided by the County 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.
In
December 2006, the Company reached an agreement with Charles County whereby
the
Company receives interest payments on any undistributed bond proceeds held
in
escrow by the County. The agreement covers the period from July 1,
2005, through the last draw made by the Company. For the nine and three months
ended September 30, 2007, the Company recognized $458,000 and $153,000 of
interest income on these escrowed funds.
Recourse
Debt - Puerto Rico Operations
Substantially
all of the Company's 490 acres of community development land assets in Parque
El
Comandante within the Puerto Rico segment are encumbered by recourse debt.
The homebuilding and land assets in Parque Escorial are unencumbered as of
September 30, 2007. On September 1, 2006, LDA secured a revolving
line of credit facility of $15,000,000 to be utilized as follows: (i) to
repay
its outstanding loan of $800,000; and (ii) to fund development costs of a
project in which the Company plans to develop a planned community in Canovanas,
Puerto Rico, to fund acquisitions and/or investments mainly in real estate
ventures, to fund transaction costs and expenses, to fund future payments
of
interest under the line of credit and to fund any future working capital
needs
of the Company. The line of credit bears interest at a fluctuating
rate equivalent to the LIBOR Rate plus 200 basis points (7.36% at September
30,
2007) and matures on August 31, 2008. The outstanding balance of this
facility on September 30, 2007, was $1,725,000.
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 September 30, 2007, approximately 38% 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 was converted to a permanent mortgage on October 16,
2007.
The loan has a fixed interest rate of 5.47%, and requires 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
January 31, 2007, Coachman’s Apartments, LLC (“Coachman’s”), a majority-owned
subsidiary of the Company, secured a non-recourse mortgage of $11,000,000.
The
ten-year loan, amortized over 30 years, has a fixed interest rate of 5.555%,
requires principal and interest payments through maturity and a balloon payment
at the maturity date, February 1, 2017. The prior mortgage of $6,020,000
was
repaid and the net proceeds from the refinancing will be used for overall
apartment property improvements, the repayment of recourse debt, future
development efforts and potential acquisitions.
On
February 1, 2007, Village Lake Apartments, LLC (“Village Lake”), a
majority-owned subsidiary of the Company, secured a non-recourse mortgage
of
$9,300,000. The ten-year loan, amortized over 30 years, has a fixed interest
rate of 5.72%, requires principal and interest payments through maturity
and a
balloon payment at the maturity date, February 1, 2017. The prior
mortgage
of $6,981,000 was repaid and the net proceeds from the refinancing will be
used
for overall apartment property improvements, the repayment of recourse debt,
future development efforts and potential acquisitions.
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 on November 23, 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 debt is collateralized by the respective
multifamily apartment project or commercial building. As of September 30,
2007, approximately 1% of this debt is secured by the Federal Housing
Administration ("FHA"). There were no significant changes to our
non-recourse debt obligations during the nine months ended September 30,
2007.
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 projects in St. Charles, costs associated
with
our 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 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.
Liquidity
Requirements
Our
short-term liquidity requirements consist primarily of obligations under
capital
and operating leases, normal recurring operating expenses, regular debt
service
requirements, 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, the Company has noted a current reduction in the demand for
residential
real estate in the St. Charles and Parque Escorial markets. Should
this reduced demand result in a significant decline in the prices of
real estate
in the St. Charles and Parque Escorial markets or defaults on our sales
contracts, it could adversely impact our cash flows. Specifically
related to St. Charles, although Lennar is contractually obligated to
take 200
lots per year, the market is not sufficient to absorb this sales
pace. Accordingly, Lennar’s management requested a reduction of the
200 lot requirement and the lot price. Related to our commercial
land, reduced demand for our commercial property could result in significantly
reduced prices of our commercial real estate and adversely impact our
cash
flows.
For
the
remainder of 2007 and into 2008, the Company plans to explore opportunities
in
Florida while continuing its development activity within the master planned
communities in St. Charles and Puerto Rico and may commit to future contractual
obligations as needed. Future acquisitions may be financed through a
combination of Company equity, third-party equity and market rate
mortgages.
The
Company anticipates the completion of several large infrastructure projects
in
2008 which will open up access to future villages. While much of
these costs were funded through bonds issued by Charles County, there remains
a
difference of approximately $10,000,000 between the cost of the projects
and the
bonds issued by Charles County. The Company expects to fund the
difference out of cash flow and/or financing between now and the end of
2008. Further, we may seek additional development loans and permanent
mortgages for continued development and expansion of other parts of St.
Charles
and Parque Escorial along with other potential rental property
opportunities. Anticipated cash flow from operations, existing loans,
refinanced or extended loans, and new financing are expected to meet our
financial commitments for the next 12 months. However, there are no assurances
that these funds will be generated. Accordingly, the Company will be
carefully monitoring cash flow requirements over the next 12
months.
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.
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
September 30, 2007, there have been no material changes in the Company's
financial market risk since December 31, 2006, 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 September 30, 2007,
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 determined the accounting errors referenced above indicated 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 has
implemented controls and procedures designed to remediate this material
weakness. These controls and procedures include hiring a new Director of
Tax who
will help manage the tax compliance and tax accounting process, retaining
international tax advisors to provide the Company with updates related to
changes in international tax laws impacting the Company, providing in-house
tax
professionals and senior financial management with additional training to
enhance their awareness of potential international tax matters and
implementation of other additional control procedures related to accounting
for
income taxes. In order to remediate the material weakness, management
must ensure that these new controls
and
procedures are operating effectively and fully address the risks giving rise
to
the material weakness. Management believes that once sufficient
evidence of the operating effectiveness of these controls exists, the material
weakness will be fully remediated.
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.
There
has
been no material change in the Company’s risk factors from those outlined in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2006.
None.
None.
None.
None.
(A)
|
Exhibits
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive
Officer
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
|
Section
1350 Certification of Chairman and Chief Executive Officer
|
|
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: November
14, 2007
|
By:
|
/s/
J. Michael Wilson
|
|
|
J.
Michael Wilson
Chairman
and Chief Executive Officer
|
|
|
|
Dated: November
14, 2007
|
By:
|
/s/
Cynthia L. Hedrick
|
|
|
Cynthia
L. Hedrick
Chief
Financial Officer
|
|
|
|
Dated: November
14, 2007
|
By:
|
/s/
Matthew M. Martin
|
|
|
Matthew
M. Martin
Chief
Accounting Officer
|