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
MARCH 31, 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 May 7, 2007, there were 5,229,954 Common Shares, par value $0.01 per share,
issued and outstanding
AMERICAN
COMMUNITY PROPERTIES TRUST
FORM
10-Q
MARCH
31, 2007
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Page
Number
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PART
I
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FINANCIAL
INFORMATION
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Item
1.
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Consolidated
Financial Statements
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3
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4
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5
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6
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7
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Item
2.
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18
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Item
3.
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26
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Item
4.
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26
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PART
II
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Item
1.
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27
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Item
1A.
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27
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Item
2
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27
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Item
3.
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27
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Item
4.
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27
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Item
5.
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27
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Item
6.
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27
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28
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AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
|
|
FOR
THE THREE MONTHS ENDED MARCH 31,
|
|
(In
thousands, except per share amounts)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Rental property revenues
|
$
|
14,410
|
|
|
$
|
12,791
|
|
Community development-land sales
|
|
3,755
|
|
|
|
3,944
|
|
Homebuilding-home sales
|
|
3,088
|
|
|
|
4,025
|
|
Management and other fees, substantially all from related
entities
|
|
263
|
|
|
|
290
|
|
Reimbursement of expenses related to managed entities
|
|
471
|
|
|
|
572
|
|
Total revenues
|
|
21,987
|
|
|
|
21,622
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|
|
|
|
|
|
|
|
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Expenses
|
|
|
|
|
|
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|
Rental property operating expenses
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|
7,356
|
|
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|
6,188
|
|
Cost of land sales
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|
2,916
|
|
|
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2,236
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|
Cost of home sales
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|
2,286
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|
|
|
3,034
|
|
General, administrative, selling and marketing
|
|
2,463
|
|
|
|
2,432
|
|
Depreciation and amortization
|
|
2,184
|
|
|
|
1,973
|
|
Expenses reimbursed from managed entities
|
|
471
|
|
|
|
572
|
|
Total expenses
|
|
17,676
|
|
|
|
16,435
|
|
|
|
|
|
|
|
|
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Operating
income
|
|
4,311
|
|
|
|
5,187
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
Interest and other income
|
|
552
|
|
|
|
129
|
|
Equity in earnings from unconsolidated entities
|
|
1,673
|
|
|
|
170
|
|
Interest expense
|
|
(4,617
|
)
|
|
|
(3,501
|
)
|
Minority interest in consolidated entities
|
|
(1,372
|
)
|
|
|
(1,065
|
)
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
547
|
|
|
|
920
|
|
Provision
for income taxes
|
|
523
|
|
|
|
419
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
24
|
|
|
$
|
501
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
0.00
|
|
|
$
|
0.10
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
5,208
|
|
|
|
5,198
|
|
Cash
dividends per share
|
$
|
0.10
|
|
|
$
|
0.53
|
|
The
accompanying notes are an integral part of these consolidated
statements.
|
|
|
|
|
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AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
|
|
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2007
(Unaudited)
|
|
|
As
of December 31, 2006
(Audited)
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|
ASSETS
|
|
|
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ASSETS:
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|
|
|
|
|
Investments
in real estate:
|
|
|
|
|
|
|
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|
Operating real estate, net of accumulated depreciation
|
|
$
|
166,821
|
|
|
$
|
142,046
|
|
of $144,541 and $142,458, respectively
|
|
|
|
|
|
|
|
|
Land and development costs
|
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|
71,368
|
|
|
|
67,993
|
|
Condominiums under construction
|
|
|
7,075
|
|
|
|
9,265
|
|
Rental projects under construction or development
|
|
|
311
|
|
|
|
24,143
|
|
Investments in real estate, net
|
|
|
245,575
|
|
|
|
243,447
|
|
|
|
|
|
|
|
|
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|
Cash
and cash equivalents
|
|
|
33,081
|
|
|
|
27,459
|
|
Restricted
cash and escrow deposits
|
|
|
21,067
|
|
|
|
19,677
|
|
Investments
in unconsolidated real estate entities
|
|
|
6,578
|
|
|
|
6,591
|
|
Receivable
from bond proceeds
|
|
|
13,736
|
|
|
|
13,710
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|
Accounts
receivable
|
|
|
2,310
|
|
|
|
4,320
|
|
Deferred
tax assets
|
|
|
28,324
|
|
|
|
18,157
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
1,135
|
|
|
|
1,157
|
|
Deferred
charges and other assets, net of amortization of
|
|
|
|
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|
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|
$2,101 and $1,655 respectively
|
|
|
10,795
|
|
|
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12,181
|
|
Total Assets
|
|
$
|
362,601
|
|
|
$
|
346,699
|
|
|
|
|
|
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|
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LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
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LIABILITIES:
|
|
|
|
|
|
|
|
|
Non-recourse
debt
|
|
$
|
281,290
|
|
|
$
|
270,720
|
|
Recourse
debt
|
|
|
27,567
|
|
|
|
29,351
|
|
Accounts
payable and accrued liabilities
|
|
|
22,230
|
|
|
|
24,191
|
|
Deferred
income
|
|
|
3,606
|
|
|
|
3,591
|
|
Accrued
current income tax liability
|
|
|
13,972
|
|
|
|
2,992
|
|
Total Liabilities
|
|
|
348,665
|
|
|
|
330,845
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common shares, $.01 par value, 10,000,000 shares
authorized, 5,229,954 shares issued and outstanding as of
March 31, 2007 and December 31, 2006
|
|
|
52
|
|
|
|
52
|
|
Treasury stock, 67,709 shares at cost
|
|
|
(376
|
)
|
|
|
(376
|
) |
Additional paid-in capital
|
|
|
17,270
|
|
|
|
17,238
|
|
Retained Deficit
|
|
|
(3,010
|
) |
|
|
(1,060
|
)
|
Total Shareholders' Equity
|
|
|
13,936
|
|
|
|
15,854
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
362,601
|
|
|
$
|
346,699
|
|
|
|
|
|
|
|
|
|
|
|
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
|
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Par
|
|
Treasury
|
|
|
Paid-in
|
|
|
Retained
|
|
|
|
|
|
|
|
Number
|
|
|
Value
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance
December 31, 2006 (Audited)
|
|
|
5,229,954
|
|
$
|
52
|
|
$
|
(376)
|
|
$
|
17,238
|
|
$
|
(1,060
|
)
|
$
|
15,854
|
|
Net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24
|
|
|
24
|
|
Dividends paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(516
|
)
|
|
(516
|
)
|
Cumulative effect of change in accounting for FIN 48
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,458
|
)
|
|
(1,458
|
)
|
Amortization of Trustee Restricted Shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
32
|
|
|
-
|
|
|
32
|
|
Balance
March 31, 2007 (Unaudited)
|
|
|
5,229,954
|
|
$
|
52
|
|
$
|
(376)
|
|
$
|
17,270
|
|
$
|
(3,010)
|
|
$
|
13,936
|
|
The accompanying notes are an integral part of those consolidated
statements.
|
AMERICAN
COMMUNITY PROPERTIES TRUST
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
FOR
THE THREE MONTHS ENDED MARCH 31,
|
(In
thousands)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24
|
|
$
|
501
|
|
Adjustments to reconcile net income to net cash provided
by
|
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,184
|
|
|
1,973
|
|
Distribution to minority interests in excess of basis
|
|
|
1,648
|
|
|
1,043
|
|
Benefit for deferred income taxes
|
|
|
(293
|
)
|
|
(217
|
)
|
Equity in earnings-unconsolidated entities
|
|
|
(1,673
|
)
|
|
(170
|
)
|
Distribution of earnings from unconsolidated entities
|
|
|
173
|
|
|
163
|
|
Cost of land sales
|
|
|
2,916
|
|
|
2,236
|
|
Cost of home sales
|
|
|
2,286
|
|
|
3,034
|
|
Stock based compensation expense
|
|
|
(1
|
)
|
|
195
|
|
Amortization of deferred loan costs
|
|
|
292
|
|
|
139
|
|
Changes in notes and accounts receivable
|
|
|
2,010
|
|
|
199
|
|
Additions to community development assets
|
|
|
(5,661
|
)
|
|
(3,351
|
)
|
Homebuilding-construction expenditures
|
|
|
(726
|
)
|
|
(2,310
|
)
|
Deferred income-joint venture
|
|
|
15
|
|
|
100
|
|
Changes in accounts payable, accrued liabilities
|
|
|
(2,280
|
)
|
|
(1,948
|
)
|
Net cash provided by operating activities
|
|
$
|
914
|
|
$
|
1,587
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
Investment in apartment construction
|
|
|
(56
|
)
|
|
(3,464
|
)
|
Change in investments - unconsolidated entities
|
|
|
1,513
|
|
|
-
|
|
Cash from newly consolidated properties
|
|
|
-
|
|
|
4,723
|
|
Change in restricted cash
|
|
|
(1,390
|
)
|
|
(721
|
)
|
Additions to rental operating properties, net
|
|
|
(2,997
|
)
|
|
(1,119
|
)
|
Other assets
|
|
|
1,042
|
|
|
578
|
|
Net cash used in investing activities
|
|
$
|
(1,888
|
)
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Cash proceeds from debt financing
|
|
|
23,116
|
|
|
3,832
|
|
Payment of debt
|
|
|
(17,032
|
)
|
|
(4,801
|
)
|
County Bonds proceeds, net of undisbursed funds
|
|
|
2,676
|
|
|
180
|
|
Payments of distributions to minority interests
|
|
|
(1,648
|
)
|
|
(1,043
|
)
|
Dividends paid to shareholders
|
|
|
(516
|
)
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
$
|
6,596
|
|
$
|
(1,832
|
)
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
5,622
|
|
|
(248
|
)
|
Cash
and Cash Equivalents, Beginning of Period
|
|
|
27,459
|
|
|
21,156
|
|
Cash
and Cash Equivalents, End of Period
|
|
$
|
33,081
|
|
$
|
20,908
|
|
AMERICAN
COMMUNITY PROPERTIES TRUST
MARCH
31, 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 which are not variable interest entities as
defined by FASB Interpretation No. 46 (revised December 2003) (“FIN 46 (R)”) in
which it owns, directly or indirectly, a majority voting interest in the
entity.
In addition, 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:
American
Housing Management Company
|
|
Owings
Chase, LLC
|
American
Housing Properties L.P.
|
|
Palmer
Apartments Associates Limited Partnership
|
St.
Charles Community, LLC
|
|
Prescott
Square, LLC
|
Interstate
General Properties Limited Partnership, S.E.
|
|
Sheffield
Greens Apartments, LLC
|
Land
Development Associates S.E.
|
|
Village
Lake Apartments, LLC
|
LDA
Group, LLC
|
|
Wakefield
Terrace Associates Limited Partnership
|
Torres
del Escorial, Inc.
|
|
Wakefield
Third
Age Associates Limited Partnership
|
Escorial
Office
Building I, Inc.
|
|
Alturas
del Senorial Associates Limited Partnership
|
Interstate
Commercial Properties, Inc.
|
|
Bayamon
Garden Associates Limited Partnership
|
Bannister
Associates Limited Partnership
|
|
Carolina
Associates Limited Partnership S.E.
|
Coachman's
Apartments, LLC
|
|
Colinas
de San Juan Associates Limited Partnership
|
Crossland
Associates Limited Partnership
|
|
Essex
Apartments Associates Limited Partnership
|
Fox
Chase Apartments, LLC
|
|
Huntington
Associates Limited Partnership
|
Headen
House Associates Limited Partnership
|
|
Jardines
de
Caparra Associates Limited Partnership
|
Lancaster
Apartments Limited Partnership
|
|
Monserrate
Associates Limited Partnership
|
Milford
Station I, LLC
|
|
San
Anton Associates S.E.
|
Milford
Station II, LLC
|
|
Turabo
Limited Dividend Partnership
|
New
Forest Apartments, LLC
|
|
Valle
del Sol Associates Limited Partnership
|
Nottingham
South, LLC
|
|
|
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 three months ended
March
31, 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.
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 three months ended March 31, 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 three months ended March 31, 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 March 31, 2007
and
December 31, 2006 (in thousands):
|
|
March
31,
|
|
December
31,
|
|
|
2007
|
|
2006
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
|
|
|
|
Building
|
|
$
|
264,299
|
|
$
|
240,264
|
Building
improvements
|
|
|
8,429
|
|
|
8,022
|
Equipment
|
|
|
13,134
|
|
|
12,569
|
|
|
|
285,862
|
|
|
260,855
|
Less:
Accumulated
depreciation
|
|
|
144,541
|
|
|
142,458
|
|
|
|
141,321
|
|
|
118,397
|
Land
|
|
|
25,500
|
|
|
23,649
|
Operating
properties, net
|
|
$
|
166,821
|
|
$
|
142,046
|
Other
Property and Equipment
In
addition, the Company owned other property and equipment of $1,135,000 and
$1,157,000, net of accumulated depreciation of $2,156,000 and $2,101,000
respectively, as of March 31, 2007 and December 31, 2006 respectively.
Depreciation
Total
depreciation expense was $2,184,000 and $1,973,000 for the three months ended
March 31, 2007 and 2006, respectively.
Impact
of Recently Issued Accounting Standards
SFAS
157
In
September 2006, the FASB issued SFAS 157, Fair
Value Measurements. 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. We have not yet determined
the
impact that SFAS 157 will have on our financial statements.
EITF
Issue No. 06-08, “Applicability of the Assessment of a Buyer’s Continuing
Investment under FASB Statement No. 66 for Sales of
Condominiums”
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 March 31, 2007 and 2006 included
Brookside Gardens Limited Partnership and Lakeside Apartments Limited
Partnership which 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 a nominal (1% or less) 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
$196,000 and $189,000 and for Lakeside of $170,000 and $172,000 as of March
31
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 notes. The net cash proceeds
from the sale of the real estate were distributed to the partners. As a result,
the Company received $2,500,000 in cash and recognized $986,000 of income
in
2004. The gain on sale was reduced by the amount of the seller's note which
is
subject to future subordination. In January 2005, El Monte distributed 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 a non-recourse development loan, which
was
amended in June 2006 and again in December 2006. Per the amended terms of
the
loan, both the Company and Lennar provided development completion guarantees.
In
the first quarter of 2007, the joint venture sold 14 lots to Lennar. As a
result, the Company recognized $292,000 in deferred revenue, off-site fees
and
management fees and $93,000 of deferred costs.
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
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
$
|
5,116
|
|
$
|
28,133
|
|
$
|
12,763
|
|
$
|
46,012
|
|
December 31, 2006
|
|
|
5,142
|
|
|
27,726
|
|
|
12,154
|
|
|
45,022
|
|
Total Non-Recourse Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
3,230
|
|
|
22,960
|
|
|
4,600
|
|
|
30,790
|
|
December 31, 2006
|
|
|
3,244
|
|
|
22,960
|
|
|
3,476
|
|
|
29,680
|
|
Total Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
1,269
|
|
|
1,051
|
|
|
1,229
|
|
|
3,549
|
|
December 31, 2006
|
|
|
1,242
|
|
|
722
|
|
|
1,744
|
|
|
3,708
|
|
Total Deficit/Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
617
|
|
|
4,122
|
|
|
6,934
|
|
|
11,673
|
|
December 31, 2006
|
|
|
656
|
|
|
4,044
|
|
|
6,934
|
|
|
11,634
|
|
Company's Investment, net (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
-
|
|
|
4,750
|
|
|
1,828
|
|
|
6,578
|
|
December 31, 2006
|
|
|
-
|
|
|
4,763
|
|
|
1,828
|
|
|
6,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
$
|
170
|
|
$
|
909
|
|
$
|
1,874
|
|
$
|
2,953
|
|
Three Months Ended March 31, 2006
|
|
|
199
|
|
|
913
|
|
|
-
|
|
|
1,112
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
(39
|
)
|
|
468
|
|
|
-
|
|
|
429
|
|
Three Months Ended March 31, 2006
|
|
|
(27
|
)
|
|
458
|
|
|
-
|
|
|
431
|
|
Company's recognition of equity in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
-
|
|
|
173
|
|
|
-
|
|
|
173
|
|
Three Months Ended March 31, 2006
|
|
|
-
|
|
|
170
|
|
|
-
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
$
|
34
|
|
$
|
862
|
|
$
|
1,358
|
|
$
|
2,254
|
|
Three Months Ended March 31, 2006
|
|
|
53
|
|
|
859
|
|
|
(589
|
)
|
|
323
|
|
Company's share of cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
-
|
|
|
390
|
|
|
679
|
|
|
1,069
|
|
Three Months Ended March 31, 2006
|
|
|
1
|
|
|
389
|
|
|
(295
|
)
|
|
95
|
|
Operating cash distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
-
|
|
|
411
|
|
|
-
|
|
|
411
|
|
Three Months Ended March 31, 2006
|
|
|
-
|
|
|
359
|
|
|
-
|
|
|
359
|
|
Company's share of operating cash distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
-
|
|
|
186
|
|
|
-
|
|
|
186
|
|
Three Months Ended March 31, 2006
|
|
|
-
|
|
|
163
|
|
|
-
|
|
|
163
|
|
Notes:
(1)
Represents the
Company's net investment, including assets and accrued liabilities in the
consolidated balance sheet for unconsolidated
real estate entities.
The
Company's outstanding debt is collateralized primarily by land, land
improvements, receivables, investment properties, investments in partnerships,
and rental properties. The following table summarizes the indebtedness of
the
Company at March 31, 2007 and December 31, 2006 (in thousands):
|
|
Maturity
|
|
Interest
|
|
Outstanding
as of
|
|
|
|
Dates
|
|
Rates
|
|
March
31,
|
|
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%
|
|
$
27,396
|
|
$
24,694
|
|
Investment
Properties (d)
|
|
PAID
|
|
PAID
|
|
-
|
|
4,473
|
|
General
obligations (e)
|
|
07-29-07/01-01-12
|
|
Non-interest
|
|
|
|
|
|
|
|
|
|
bearing/8.10%
|
|
171
|
|
184
|
|
Total
Recourse Debt
|
|
|
|
|
|
|
|
|
27,567
|
|
|
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%
|
|
280,790
|
|
|
270,220
|
|
Total
Non-Recourse Debt
|
|
|
|
|
|
|
|
|
281,290
|
|
|
270,720
|
|
Total
debt
|
|
|
|
|
|
|
$ 308,857
|
|
|
$
300,071
|
|
a) |
As
of March 31, 2007, $24,796,000 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 line of credit loan (“the Revolver”) secured
by a first lien deed of trust on property located in St. Charles,
MD. The
maximum amount of the loan at any one time is $14,000,000. The facility
includes various sub-limits on a revolving basis for amounts to finance
apartment project acquisitions and land development in St. Charles.
The
terms require certain financial covenants to be calculated annually
as of
December 31, including a tangible net worth to senior debt ratio
for ALD
and a minimum net worth test for ACPT. As of March 31, 2007, the
Company
was in compliance with these financial covenants. However, 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 the 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 March 31, 2007) and matures
on
August 31, 2008. The outstanding balance of this facility on March
31,
2007, was $2,600,000.
|
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 March 31, 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 in November
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 March 31, 2007, approximately $73,536,000 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 March 31, 2007, the balance of the construction
loan was $25,167,000. The construction loan will convert to a 40
year
non-recourse permanent mortgage not later than September of
2007.
|
The
Company’s loans contain various financial, cross collateral, cross default,
technical and restrictive provisions. As of March 31, 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.
As
of
March 31, 2007, ACPT is guarantor of $28,263,000 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 March 31, 2007, ACPT has guaranteed
$24,796,000 of outstanding debt owed by its subsidiaries. IGP has guaranteed
$2,600,000 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 other 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 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: |
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Management
and Other Fees |
|
|
|
|
|
|
|
|
|
Unconsolidated subsidiaries with third party partners |
(A)
|
|
$
|
10
|
|
|
$
|
10
|
|
Affiliates of J. Michael Wilson, CEO and Chairman |
|
|
|
43 |
|
|
|
131
|
|
|
|
|
$ |
53 |
|
|
$
|
141 |
|
|
|
|
|
|
|
|
|
|
|
Rental
Property Revenues
|
(B)
|
|
$
|
14
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Other Income
|
|
|
|
|
|
|
|
|
|
Unconsolidated real estate entities with third party
partners
|
$ |
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)
|
|
|
2
|
|
|
|
6
|
|
Reimbursement to IBC for ACPT's share of J. Michael Wilson's
salary
|
|
|
|
98
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursement of administrative costs-
|
|
|
|
|
|
|
|
|
|
Affiliates of J. Michael Wilson, CEO and Chairman
|
|
|
|
(6
|
)
|
|
|
(3
|
)
|
Consulting Fees
|
|
|
|
|
|
|
|
|
|
James J. Wilson, IGC Chairman and Director
|
(C2)
|
|
|
50
|
|
|
|
50
|
|
Thomas J. Shafer, Trustee
|
(C3)
|
|
|
15
|
|
|
|
15
|
|
|
|
|
$ |
159
|
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SHEET:
|
|
|
|
Balance
|
|
|
Balance
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
Receivables
- All unsecured and due on demand
|
|
|
|
|
|
|
|
|
|
Affiliate of J. Michael Wilson, CEO and Chairman
|
|
|
$ |
6
|
|
|
$
|
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.
Effective
April 30, 2006, ARMC’s management agreement with Chastleton Associates LP
terminated due to the fact that the apartment property was sold to a third
party. The property was previously owned by an affiliate. Management fees
generated by this property accounted for less than 1% of the Company’s total
revenue. The Company earned an agreed-upon management fee for administrative
services through the end of the second quarter 2006.
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 a lease that expires in
2010.
In management’s opinion, all leases with affiliated persons were on terms
at least as favorable as these generally available from unaffiliated
persons for comparable property. Effective January 27, 2006, the
office
building was sold to a third party who assumed the Company’s lease
agreements.
|
2) |
Represents
fees paid to James J. Wilson pursuant to a consulting and retirement
agreement. At Mr. Wilson's request, payments are made to
IGC.
|
3) |
Represents
fees paid to Thomas J. Shafer, a trustee, pursuant to a consulting
agreement.
|
Related
Party Acquisitions
El
Monte
On
April
30, 2004, the Company purchased a 50% limited partnership interest in El
Monte
Properties S.E. ("El Monte") from Insular Properties Limited Partnership
("Insular") for $1,462,500. Insular is owned by the J. Michael Wilson Family.
Per the terms of the agreement, the Company was responsible to fund $400,000
of
capital improvements and lease stabilization costs, and had a priority on
cash
distributions up to its advances plus accrued interest at 8%, investment
and a
13% cumulative preferred return on its investment. The purchase price was
based
on a third party appraisal of $16,500,000 dated April 22, 2003. The Company's
limited partnership investment was accounted for under the equity method
of
accounting.
In
December 2004, a third party buyer purchased El Monte for $20,000,000 -
$17,000,000 in cash and $3,000,000 in notes. The net cash proceeds from the
sale
of the real estate were distributed to the partners. As a result, the Company
received $2,500,000 in cash and recognized $986,000 of income in 2004. El
Monte
distributed the note, $1,500,000, to the Company in January 2005. The note
bears
interest at a rate of prime plus 2% with a ceiling rate of 9% and matures
on
December 3, 2009. The note was payable in three installments, the first
installment of $250,000 was due on December 3, 2007, the second installment
of
$250,000 was due on December 3, 2008 and the balance was due on December
3,
2009. 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 $2,317,000 of tax positions that, if recognized, would affect the effective
tax rate.
In accordance with our accounting policy, we recognize accrued interest related
to unrecognized tax benefits 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 Statement
of Income for the quarter ended March 31, 2007, and our Consolidated Balance
Sheet as of that date included interest of $179,000 and $1,244,000, respectively
and penalties of $58,000 and $655,000, 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, 2002 through 2006 remain subject to examination.
Within the next twelve months, the Company does not anticipate any 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 $25,000.
ACPT
has
two reportable segments: U.S. operations and Puerto Rico operations. The
Company's chief decision-makers allocate resources and evaluate the Company's
performance based on these two segments. The U.S. segment is comprised of
different
components
grouped by product type or service, to include: investments in rental
properties, community development and property management services. The Puerto
Rico segment entails the following components: investment in rental properties,
community development, homebuilding and property management services. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
Customer
Dependence
Residential
land sales to Lennar within our U.S. segment were $1,219,000 for the three
months ended March 31, 2007 which represents 10% of the U.S. segment's revenue
and 6% of our total year-to-date consolidated revenue. No customers accounted
for more than 10% of our consolidated revenue for the three months ended
March
31, 2007.
Residential
land sales to Lennar within our U.S. segment were $3,144,000 for the three
months ended March 31, 2006 which represents 27% of the U.S. segment's revenue
and 15% of our total consolidated revenue for the year. No other customers
accounted for more than 10% of our consolidated revenue for the three months
ended March 31, 2006.
The
following presents the segment information for the three months ended March
31,
2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
Puerto
|
|
|
|
|
|
|
|
States
|
|
Rico
|
|
Segment
|
|
Total
|
|
Three
Months Ended March 31, 2007 (Unaudited):
|
|
|
|
|
|
|
|
|
|
Rental
property revenues
|
|
$
|
8,905
|
|
$
|
5,505
|
|
$
|
-
|
|
$
|
14,410
|
|
Rental
property operating expenses
|
|
|
4,625
|
|
|
2,731
|
|
|
-
|
|
|
7,356
|
|
Land
sales revenue
|
|
|
3,755
|
|
|
-
|
|
|
-
|
|
|
3,755
|
|
Cost
of land sales
|
|
|
2,916
|
|
|
-
|
|
|
-
|
|
|
2,916
|
|
Home
sales revenue
|
|
|
-
|
|
|
3,088
|
|
|
-
|
|
|
3,088
|
|
Cost
of home sales
|
|
|
-
|
|
|
2,286
|
|
|
-
|
|
|
2,286
|
|
Management
and other fees
|
|
|
110
|
|
|
153
|
|
|
-
|
|
|
263
|
|
General,
administrative, selling and marketing expense
|
|
|
1,747
|
|
|
716
|
|
|
-
|
|
|
2,463
|
|
Depreciation
and amortization
|
|
|
1,271
|
|
|
913
|
|
|
-
|
|
|
2,184
|
|
Operating
income
|
|
|
2,211
|
|
|
2,100
|
|
|
-
|
|
|
4,311
|
|
Interest
income
|
|
|
297
|
|
|
215
|
|
|
(30
|
)
|
|
482
|
|
Equity
in earnings from unconsolidated entities
|
|
|
-
|
|
|
1,673
|
|
|
-
|
|
|
1,673
|
|
Interest
expense
|
|
|
3,066
|
|
|
1,581
|
|
|
(30
|
)
|
|
4,617
|
|
Minority
interest in consolidated entities
|
|
|
-
|
|
|
1,372
|
|
|
-
|
|
|
1,372
|
|
(Loss)
income before provision for income taxes
|
|
|
(557
|
)
|
|
1,104
|
|
|
-
|
|
|
547
|
|
Income
tax provision
|
|
|
(75
|
)
|
|
598
|
|
|
-
|
|
|
523
|
|
Net
(loss) income
|
|
|
(482
|
)
|
|
506
|
|
|
-
|
|
|
24
|
|
Gross
profit on land sale
|
|
|
839
|
|
|
-
|
|
|
-
|
|
|
839
|
|
Gross
profit on home sales
|
|
|
-
|
|
|
802
|
|
|
-
|
|
|
802
|
|
Total
assets
|
|
|
257,772
|
|
|
106,424
|
|
|
(1,595
|
)
|
|
362,601
|
|
Additions
to long lived assets
|
|
|
2,826
|
|
|
227
|
|
|
-
|
|
|
3,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2006 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
property revenues
|
|
$
|
7,547
|
|
$
|
5,244
|
|
$
|
-
|
|
$
|
12,791
|
|
Rental
property operating expenses
|
|
|
3,539
|
|
|
2,649
|
|
|
-
|
|
|
6,188
|
|
Land
sales revenue
|
|
|
3,944
|
|
|
-
|
|
|
-
|
|
|
3,944
|
|
Cost
of land sales
|
|
|
2,226
|
|
|
10
|
|
|
-
|
|
|
2,236
|
|
Home
sales revenue
|
|
|
-
|
|
|
4,025
|
|
|
-
|
|
|
4,025
|
|
Cost
of home sales
|
|
|
-
|
|
|
3,034
|
|
|
-
|
|
|
3,034
|
|
Management
and other fees
|
|
|
141
|
|
|
149
|
|
|
-
|
|
|
290
|
|
General,
administrative, selling and marketing expense
|
|
|
1,682
|
|
|
750
|
|
|
-
|
|
|
2,432
|
|
Depreciation
and amortization
|
|
|
1,076
|
|
|
897
|
|
|
-
|
|
|
1,973
|
|
Operating
income
|
|
|
3,109
|
|
|
2,078
|
|
|
-
|
|
|
5,187
|
|
Interest
income
|
|
|
25
|
|
|
45
|
|
|
-
|
|
|
70
|
|
Equity
in earnings from unconsolidated entities
|
|
|
-
|
|
|
170
|
|
|
-
|
|
|
170
|
|
Interest
expense
|
|
|
1,933
|
|
|
1,568
|
|
|
-
|
|
|
3,501
|
|
Minority
interest in consolidated entities
|
|
|
8
|
|
|
1,057
|
|
|
-
|
|
|
1,065
|
|
Income
before provision/(benefit) for income taxes
|
|
|
1,195
|
|
|
(275
|
)
|
|
-
|
|
|
920
|
|
Income
tax provision/(benefit)
|
|
|
501
|
|
|
(82
|
)
|
|
-
|
|
|
419
|
|
Net
income
|
|
|
694
|
|
|
(193
|
)
|
|
-
|
|
|
501
|
|
Gross
profit on land sale
|
|
|
1,718
|
|
|
(10
|
)
|
|
-
|
|
|
1,708
|
|
Gross
profit on home sales
|
|
|
-
|
|
|
991
|
|
|
-
|
|
|
991
|
|
Total
assets
|
|
|
187,029
|
|
|
116,848
|
|
|
(369
|
)
|
|
303,508
|
|
Additions
to long lived assets
|
|
|
3,980
|
|
|
66
|
|
|
-
|
|
|
4,046
|
|
Cash
Dividend
On
May
15, 2007, the Board of Trustees declared a $0.10 per share cash dividend
on its
common shares, payable on June 13, 2007, to shareholders of record as of
May 30,
2007.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
FORWARD-LOOKING
STATEMENTS
The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing in this report. Historical
results set forth in Management's Discussion and Analysis of Financial Condition
and Results of Operation and the Financial Statements should not be taken
as
indicative of our future operations.
This
quarterly report on Form 10-Q contains forward-looking statements within
the
meaning of the Private Securities Litigation Reform Act of 1995. These include
statements about our business outlook, market and economic conditions,
strategies, future plans, anticipated costs and expenses, capital spending,
and
any other statements that are not historical. The accuracy of these statements
is subject to a number of risks, uncertainties, and other factors that may
cause
our actual results, performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed
or
implied by such forward-looking statements. Those items are discussed under
"Risk Factors" in Part I, Item 1A to the Form 10-K for the year ended December
31, 2006.
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 three months ended March 31, 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 three
months ended March 31, 2007 (unaudited), with the results of operations of
the
Company for the three months ended March 31, 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
three months ended March 31, 2007, our U.S. segment generated $2,211,000
of
operating income compared to $3,109,000 of operating income generated by
the
segment for the same period in 2006. Additional information and analysis
of the
U.S. operations can be found below.
Rental
Property Revenues and Operating Expenses - U.S.
Operations:
As
of
March 31, 2007, nineteen U.S. based apartment properties 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
portion of net income attributable to the interests of the
outside
owners of these properties and any losses and distributions in excess of
the
minority owners’ basis in those properties are reflected as minority interest
expense.
As
of March 31, 2007, thirteen of the consolidated properties are market rent
properties, allowing us to determine the appropriate rental rates. Even though
we can determine the rents, a portion of our units at some of our market
rent
properties must be leased to tenants with low to moderate income. HUD subsidizes
four of the properties and the two remaining properties are a mix of subsidized
units and market rent units. HUD dictates the rents of the subsidized
units.
Apartment
Construction and Acquisitions
On
January 31, 2007, we completed our newest addition to our rental apartment
properties 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. Leasing efforts
continue to be successful, with 78% of the total complex leased as of March
31,
2007.
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.
Three
months ended
For
the
three months ended March 31, 2007, rental property revenues increased $1,358,000
or 18% to $8,905,000 compared to $7,547,000 for the three months ended March
31,
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 $1,048,000 of the difference. The increase
was also attributable to an overall 6% increase in rents between periods.
These
rental revenue increases were offset in part by an increase in our vacancy
rate
in the US, primarily resulting from the supply of new units to the area upon
completion of the Sheffield Greens Apartments. Once the new units are absorbed,
we believe occupancy at competing locations will return.
Rental
property operating expenses increased $1,086,000 or 31% for the first quarter
of
2007 to $4,625,000 compared to $3,539,000 for the first quarter 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 $639,000 of the
difference. The remainder of the increase resulted from overall inflationary
adjustments as well as specific increases in office and maintenance salaries,
grounds and maintenance, rehabilitation and concessions awarded to
residents.
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. Based on
200 lot
sales per year, it is estimated that lot settlements will take place through
2015. Sales are closed on a lot by lot basis at the time when the builder
purchases the lot. The ultimate selling price per lot sold to Lennar may
exceed
the amount recognized at closing since the final lot price is equal to 30%
of
the base price of the home sold on the lot. Additional revenue exceeding
the
established take down price per lot will be recognized upon Lennar's settlement
with the respective homebuyers. Residential lots can vary in size and location
resulting in pricing differences. Gross margins of residential lots are fairly
consistent within any given village in St. Charles. Commercial land is typically
sold by contract that allows for a study period and delayed settlement until
the
purchaser obtains the necessary permits for development. The sales prices
and
gross margins for commercial parcels vary significantly depending on the
location, size, extent of development and ultimate use. Commercial land sales
are generally cyclical.
Community
development land sales revenue decreased $189,000 or 5% for the three months
ended March 31, 2007 to $3,755,000 as compared to $3,944,000 for the three
months ended March 31, 2006. The overall decrease was primarily the result
of a
decrease in the number of lots sold during the first quarter 2007 offset
in part
by an increase in the amount of commercial sales for the period as compared
to
the first quarter 2006. Further discussion of the components of this variance
is
as follows:
Residential
Land Sales
For
the
three months ended March 31, 2007, we recognized $613,000 related to the
delivery of 7 townhome lots to Lennar as compared to $2,551,000 related to
20
single family lots delivered in the first quarter of 2006. For the townhome
lots
delivered in 2007, we recognized as revenue the initial $85,000 per townhome
lot
plus water and sewer fees, road fees and other off-site fees. For the three
months ended March 31, 2006, we delivered 20 single family lots to Lennar
at an
initial selling price of $125,000 per lot plus water and sewer fees, road
fees
and other off-site fees. As of March 31, 2007, 1,636 lots remained under
contract to Lennar of which 157 single family lots and 46 townhome lots were
developed and ready for delivery.
During
the first quarter of 2007 and 2006, we also recognized $314,000 and $593,000,
respectively, of additional revenue for lots that were 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
three months ended March 31, 2007, we sold 5.78 commercial acres in St. Charles
for $2,536,000 as compared to 2.65 acres for $593,000 for the three months
ended
March 31, 2006. As of March 31, 2007, our commercial sales backlog contained
12.45 acres under contract for a total of $2,721,000.
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 June 2006. Per the amended terms of the loan, both the Company
and
Lennar provided development completion guarantees.
In
the
first quarter of 2007, the joint venture delivered 14 lots to Lennar as compared
to no lot deliveries for the first quarter 2006. Accordingly, for the three
Months ended March 31, 2007, the Company recognized $292,000 in deferred
revenue, off-site fees and management fees and $93,000 of deferred costs.
Gross
Margin on Land Sales
The
gross
margin on land sales for the first quarter 2007 was 22% as compared to 44%
for
the first quarter of 2006. Gross margins differ from period to period depending
on the mix of land sold. In the first quarter 2007 our commercial acres
represented the majority of our land sales and these parcels had lower margins
than our residential land sales. The gross margins on our residential land
sales
for the U.S. have remained relatively stable.
Customer
Dependence
Residential
land sales to Lennar within our U.S. segment were $1,219,000 for the three
months ended March 31, 2007 which represents 10% of the U.S. segment's revenue
and 6% of our total year-to-date consolidated revenue. No customers accounted
for more than 10% of our consolidated revenue for the three months ended
March
31, 2007. 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.
Management
fees for the first quarter of 2007 decreased $31,000 to $110,000 as compared
to
$141,000 for the first quarter 2006. These amounts only include the fees
earned
from the non-controlled properties; the fees earned from the controlled
properties are eliminated in consolidation.
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 $65,000 to $1,747,000 for the three months ended March 31, 2007,
compared to $1,682,000 for the same period of 2006. The 4% increase is primarily
attributable to offsetting variances. We experienced increases in our consulting
fees related to services provided for our FIN 48 implementation during the
first
quarter of 2007, as well as other increases in salaries and benefits. These
increases were offset in party by decreases in the expense associated with
our
outstanding share incentive rights as a result of the fluctuation in share
price
for the respective periods. In addition we experienced a decrease in audit
and
accounting expenses as a result of the non-recurring work required in the
first
quarter of 2006 related to the closing agreement reached with the
IRS.
Depreciation
Expense - U.S. Operations:
Depreciation
expense increased $195,000 to $1,271,000 for the first three months of 2007
compared to $1,076,000 for the same period in 2006. The increase in depreciation
is primarily the result of depreciation related to the acquisitions of Milford
Station I and Milford Station II. In addition, as a result of the recent
refinancings of several properties, the Company has made significant investments
in capital improvements at these properties.
Interest
Income - U.S. Operations:
Interest
income increased $272,000 to $297,000 for the three months ended March 31,
2007,
as compared to $25,000 for the three months ended March 31, 2006. The increase
was primarily attributable to interest income accrued on the undistributed
bond
proceeds held in escrow by Charles County. The Company reached a written
agreement with the County regarding interest earned on amounts held in escrow
by
the County, but not yet drawn by the Company, whereby the Company is now
able to
accrue income on the related receivables.
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
as
well as certain corporate recourse debt.
Interest
expense increased $1,133,000 for the first three months of 2007 to $3,066,000,
as compared to $1,933,000 for the same period of 2006. The increase was
primarily attributable to interest expense incurred at new properties, including
Sheffield Greens Apartments, Milford Station I and Milford Station II. 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.
Additionally, interest expense increased as a result of our implementation
of
FIN 48 for the first quarter 2007 and the presentation of accrued interest
on
uncertain tax positions as interest expense. Increases in interest expense
were
offset by the decrease related to the re-payment of certain recourse debt
obligations during the first quarter 2007.
For
the
three months ended March 31, 2007, $311,000 of interest cost was capitalized.
During the same period in 2006, $377,000 of interest cost was
capitalized.
Provision
for Income Taxes - U.S. Operations:
The
effective tax rates for the three months ended March 31, 2007, and March
31,
2006, were 13% and 42%, respectively. The statutory rate is 40%. The effective
tax rate for 2007 differs from the statutory rate due to a relatively small
net
loss for the first quarter of 2007, the related benefit for which, was partially
offset by accrued penalties on uncertain tax positions as part of the
implementation of FIN 48.
Results
of Operations - Puerto Rico Operations:
For
the
three months ended March 31, 2007, our Puerto Rico segment generated $2,100,000
of operating income compared to $2,078,000 of operating income generated
by the
segment for the same period in 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.
Rental
property revenues increased $261,000 to $5,505,000 for the three months ended
March 31, 2007 compared to $5,244,000 for the same period of 2006. The increase
for the first quarter of 2007 as compared to the first quarter 2006 was the
result of overall rent increases for our HUD subsidized multifamily apartment
properties of 3% and an increase of 2% for our commercial property,
EBO.
Rental
operating expenses increased $82,000 to $2,731,000 for the three months ended
March 31, 2007 compared to $2,649,000 for the same period of 2006. The increase
for the first quarter of 2007 was related to an overall inflationary increase
of
3%. In addition, we experienced above inflationary increases in utilities
and
repairs.
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
was
no community development land sales during the three months ended March 31,
2007
and 2006. There were no sales contracts in backlog at March 31,
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.
Homebuilding
revenues decreased $937,000 for the three month period ended March 31, 2007,
as
compared to the three month period ended March 31, 2006. The decrease in
revenues was primarily driven by a decrease in the number of units sold during
the respective period. Within the Torres project, the Company closed 12 units
for the first quarter 2007 and 16 units for the first quarter 2006. The average
selling price per unit was similar, approximately $257,000 and $ 252,000
per
unit respectively, generating aggregate revenues of $3,088,000 and $4,025,000,
respectively. The gross margin for the three months ended March 31, 2007,
and
2006 were 26% and 25%, respectively. The slight increase in the gross profit
margin is attributable to an increase in the sales revenue for the remaining
project as a result of increased selling prices of the units the third and
fourth buildings.
As
of
March 31, 2007, only 38 units within the Torres project remain available
for
sale, of which we have received contracts for 8 of these units at an average
selling price of $269,000 per unit. Each sales contract is backed by a $6,000
deposit. For the three months ended March 31, 2007, the Company’s sales activity
resulted in the execution of 8 contracts and the loss of 3 contracts that
were
cancelled. For the same period in 2006, the Company had 23 new contracts
and 11 canceled contracts. The Puerto Rico real estate market has slowed
substantially since the second quarter of 2006. 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 continues
to
believe that the remaining 38 units in Torres will sell during the year 2007
and
that its current pricing remains competitive.
General,
Administrative, Selling and Marketing Expenses - Puerto Rico
Operations:
The
costs
associated with the oversight of our operations, accounting, human resources,
office management and technology are included within this section. The apartment
properties reimburse IGP for certain costs incurred at IGP’s office that are
attributable to the operations of those properties. In accordance with EITF
01-14 the costs and reimbursement of these costs are not included within
this
section but rather, they are reflected as separate line items on the
consolidated income statement. Due to the fact that our corporate office
is in
our office building, Escorial Office Building One, rent expense and parking
expenses are eliminated in consolidation.
General,
administrative, selling and marketing expenses decreased 5% or $34,000 to
$716,000 during the three months ended March 31, 2007, as compared to $750,000
for the same period of 2006. The decrease is primarily attributable to a
reduction in the outstanding share incentive rights expense recorded as a
result
of a reduction in our share price that we experienced during the first three
months of 2007, as well as decreases in legal expenses, car expenses, dues
and
subscriptions, and other miscellaneous expenses. These decreases were offset
in
part by increases in selling and marketing expenses incurred in the Torres
project, as well as increases in audit and tax consulting, outside personnel
services, postage, telephone, and other general and administrative
expenses.
Interest
Income - Puerto Rico Operations:
Interest
income for the three months ended March 31, 2007 increased $170,000 to $215,000
as compared to $45,000 for the same period of 2006. The increase is 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.
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 increased $1,503,000 to $1,673,000
during
the three months ended March 31, 2007, compared to $170,000 during the same
period of 2006. The increase 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.
Depreciation
Expense - Puerto Rico Operations:
Depreciation
expense for the three months ended March 31, 2007, and 2006, was $913,000
and
$897,000 respectively. The $16,000 increase is primarily attributable to
the
depreciation expense in the apartment properties due to the replacement of
elevators in some apartment partnerships. In addition, the depreciation expense
increased in the new office building and our corporate office furniture and
leasehold improvements.
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, 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 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.
Interest
expense increased $13,000, less than 1%, for the first three months of 2007
to
$1,581,000, as compared to $1,568,000 for the same period of 2006.
For
the
three months ended March 31, 2007, $39,000 of interest cost was capitalized.
During the same period in 2006, $271,000 of interest cost was
capitalized.
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 three-month period ended March 31, 2007, increased $315,000
to
$1,372,000, as compared to $1,057,000 for the same period of 2006. The increase
was primarily the result of a $400,000 distribution made to minority partners
of
one of our partnerships that was refinanced at the end of 2006. In addition,
the
Company made surplus cash distributions of $972,000 to the minority partners
for
the first quarter 2007 as compared to surplus cash distributions of $1,057,000
for the same period 2006.
Provision
for Income Taxes - Puerto Rico Operations:
The
effective tax rate for the three months ended March 31, 2007 and 2006 were
54%,
and 30%, respectively. The statutory rate is 29%. The difference in the
statutory tax rate and the effective tax rate for the three months ended
March
31, 2007, was primarily due to the double taxation on the earnings of our
wholly
owned corporate subsidiary, ICP. As a result of a non-recurring gain 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 during the quarter. The effective tax rate for the
benefit
for income taxes for the first quarter 2006 did not differ substantially
from
the statutory rate.
LIQUIDITY
AND CAPITAL RESOURCES
Summary
of Cash Flows
As
of
March 31, 2007, the Company had cash and cash equivalents of $33,081,000
and
$21,067,000 in restricted cash. The following table sets forth the changes
in
the Company's cash flows ($ in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$
|
914
|
|
$
|
1,587
|
|
Investing
Activities
|
|
|
(1,888
|
)
|
|
(3
|
)
|
Financing
Activities
|
|
|
6,596
|
|
|
(1,832
|
)
|
Net Decrease in Cash
|
|
$
|
5,622
|
|
$
|
(248
|
)
|
For
the
three months ended March 31, 2007, operating activities provided $914,000
of
cash flows compared to $1,587,000 of cash flows provided by operating activities
for the three months ended March 31, 2006. The $673,000 decrease in cash
flows
from
operating
activities for the first quarter of 2007 compared to the same period in 2006
is
primarily related to the phases of our community development and homebuilding
activities. For the first quarter of 2007, additions to our community
development assets were $2,310,000 in excess of the additions during the
same
period of 2006. The Company continues to invest a significant amount into
infrastructure within St. Charles. This increase was offset by a decrease
of
$1,584,000 in our homebuilding expenditures for the three months ended March
31,
2007 as compared to the same period in 2006. As of March 31, 2007, the Torres
project was substantially complete, whereas it was undergoing significant
construction during the first quarter 2006. 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 changes
in
our receivables and payables.
For
the quarter ended March 31, 2007, net cash used in investing activities was
$1,888,000 compared to $3,000 for the first quarter 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 change
in
cash related to investing activities was primarily the result of adding 11
additional properties 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. In addition, the Company increased its investment in capital
improvements for the first quarter of 2007 as compared to the first quarter
2006. The $1,878,000 increase in capital improvements resulted from the
refinancing of several apartment properties and re-investment of some of
those
proceeds into the related projects. These decreases were partially offset
by the
completion of Sheffield Greens Apartments in the first quarter of 2007,
requiring the investment of only $56,000 for the first quarter of 2007 as
compared to the investment of $3,464,000 for the first quarter 2006. In
addition, the Company received $1,707,000 million in the first quarter of
2007
related to principal and accrued interest payments on the El Monte receivable.
For
the three months ended March 31, 2007, net cash provided by financing activities
was $6,596,000 as compared to cash used in financing activities of $1,832,000
for the three months ended March 31, 2006. The increase in cash provided
by
financing activities was primarily the result of the refinancing of the
mortgages of two apartment properties, Village Lake Apartments, LLC and
Coachman’s Apartments, LLC during the first quarter of 2007, as discussed in
more detail below. In addition, the Company drew down on the Charles County
bond
escrow as construction of infrastructure within St. Charles continues. These
additions were offset by increased distributions to minority interests and
the
timing of dividend payments to shareholders.
Contractual
Financial Obligations
The
following chart reflects our contractual financial obligations as of March
31,
2007:
|
Payments
Due By Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
After
|
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
4-5 Years
|
|
5 Years
|
|
|
|
|
Recourse
debt-community development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and homebuilding
|
$
|
27,396
|
|
$
|
1,376
|
|
$
|
7,077
|
|
$
|
3,349
|
|
$
|
15,594
|
|
Capital
lease obligations
|
|
171
|
|
|
43
|
|
|
99
|
|
|
29
|
|
|
-
|
|
Total Recourse Debt
|
|
27,567
|
|
|
1,419
|
|
|
7,176
|
|
|
3,378
|
|
|
15,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse
debt-community development
|
|
500
|
|
|
500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Non-recourse
debt-investment properties
|
|
280,790
|
|
|
3,598
|
|
|
19,051
|
|
|
9,651
|
|
|
248,490
|
|
Total Non-Recourse Debt
|
|
281,290
|
|
|
4,098
|
|
|
19,051
|
|
|
9,651
|
|
|
248,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
1,229
|
|
|
360
|
|
|
847
|
|
|
22
|
|
|
-
|
|
Purchase
obligations
|
|
35,408
|
|
|
19,601
|
|
|
15,553
|
|
|
54
|
|
|
200
|
|
Total
contractual financial obligations
|
$
|
345,494
|
|
$
|
25,478
|
|
$
|
42,627
|
|
$
|
13,105
|
|
$
|
264,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2007. As of March 31, 2007, no amounts were outstanding on
the
Revolver. Management expects to fund development operations from current
cash
balances and operating cash flows rather than borrowings from the line of
credit.
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.
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
March 31, 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 estate ventures, to fund transaction
costs and expenses, to fund future payments of interest under the line of
credit
and to fund the 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 March 31, 2007) and matures on August 31, 2008. The outstanding
balance of this facility on March 31, 2007 was $2,600,000.
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 March 31, 2007, approximately 45% of this debt
is secured by the Federal Housing Administration ("FHA") or the Maryland
Housing
Fund.
Non-recourse
debt within our U.S. operations also includes a construction loan for a new
apartment project in St. Charles. On August 11, 2005, Sheffield Greens
Apartments, LLC ("Sheffield Greens"), a wholly owned subsidiary of the Company,
obtained a non-recourse construction loan of $27,008,000 to fund the
construction costs for a new apartment property in St. Charles' Fairway Village.
The construction loan will mature in September 2007 and at such time will
convert into a 40-year non-recourse permanent mortgage. The loan has a fixed
interest rate of 5.47%, and requires interest-only payments during the
construction phase followed by principal and interest payments until maturity.
The loan is subject to a HUD regulatory agreement. The loan documents provide
for covenants and events of default that are customary for mortgage loans
insured by the Federal Housing Authority.
On
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 in November 2007.
Non-Recourse
Debt - Puerto Rico Operations
As
more
fully described in Note 4 to our Consolidated Financial Statements included
in
this Form 10-Q, the non-recourse debt is collateralized by the respective
multifamily apartment project or commercial building. As of March 31,
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 three months ended March 31, 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. For the remainder of 2007 and into 2008, the Company plans
to
continue its development activity within the master planned communities in
St.
Charles and Puerto Rico and may commit to future contractual obligations
at that
time.
Liquidity
Requirements
Our
short-term liquidity requirements consist primarily of obligations under
capital
and operating leases, normal recurring operating expenses, regular debt service
requirements, non-recurring expenditures and dividends to common shareholders.
The Company has historically met its liquidity requirements from cash flow
generated from residential and commercial land sales, home sales, property
management fees, and rental property revenue. However, a significant reduction
in the demand for real estate or a decline in the prices of real estate could
adversely impact our cash flows. Anticipated cash flow from operations, existing
loans, refinanced or extended loans, and new financing are expected to meet
our
financial commitments for the year. However, there are no assurances that
these
funds will be generated.
We
are
actively seeking additions to our multifamily apartment property portfolio
and
our real estate holdings. We are currently pursuing various opportunities
to
purchase additional multifamily apartment properties in the Baltimore, Maryland
and Washington, D.C. areas. Future acquisitions may be financed through a
combination of Company equity, third party equity and market rate mortgages.
For
the remainder of 2007 and into 2008, we may seek additional development loans
and permanent mortgages for continued development and expansion of St. Charles
and Parque Escorial and other potential rental property opportunities.
The
Company will evaluate and determine on a continuing basis, depending upon
market
conditions and the outcome of events described under the section titled
"Forward-Looking Statements," the most efficient use of the Company's capital,
including acquisitions and dispositions, purchasing, refinancing, exchanging
or
retiring certain of the Company's outstanding debt obligations, distributions
to
shareholders and its existing contractual obligations.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
Company is exposed to certain financial market risks, the most predominant
being
fluctuations in interest rates. Interest rate fluctuations are monitored
by the
Company's management as an integral part of the Company's overall risk
management program, which recognizes the unpredictability of financial markets
and seeks to reduce the potentially adverse effect on the Company's results
of
operations.
As
of
March 31, 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 March 31, 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.
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.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
None.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
None.
(A)
|
Exhibits
|
31.1
|
|
31.2
|
|
32.1
|
|
32.2
|
|
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:
May 15, 2007
|
By:
|
/s/
J. Michael Wilson
|
|
|
J.
Michael Wilson
Chairman
and Chief Executive Officer
|
|
|
|
Dated:
May 15, 2007
|
By:
|
/s/
Cynthia L. Hedrick
|
|
|
Cynthia
L. Hedrick
Chief
Financial Officer
|
|
|
|
Dated:
May 15, 2007
|
By:
|
/s/
Matthew M. Martin
|
|
|
Matthew
M. Martin
Chief
Accounting Officer
|
-28-