|
ITEM
1. FINANCIAL
STATEMENTS
|
MAXUS
REALTY TRUST, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
Investment
property:
|
|
|
|
|
|
|
Land
|
$
|
|
3,101,000
|
|
|
|
2,403,000
|
|
Buildings
and
improvements
|
|
|
59,713,000
|
|
|
|
44,663,000
|
|
Personal
property
|
|
|
4,612,000
|
|
|
|
3,525,000
|
|
|
|
|
67,426,000
|
|
|
|
50,591,000
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated
depreciation
|
|
|
(9,588,000
|
)
|
|
|
(7,491,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
investment property,
net
|
|
|
57,838,000
|
|
|
|
43,100,000
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
6,688,000
|
|
|
|
8,470,000
|
|
Escrows
and reserves
|
|
|
1,514,000
|
|
|
|
1,261,000
|
|
Accounts
receivable
|
|
|
49,000
|
|
|
|
119,000
|
|
Prepaid
expenses and other assets
|
|
|
403,000
|
|
|
|
281,000
|
|
Intangible
assets, net
|
|
|
249,000
|
|
|
|
346,000
|
|
Deferred
expenses, less accumulated amortization
|
|
|
712,000
|
|
|
|
529,000
|
|
Assets
of discontinued operations
|
|
|
132,000
|
|
|
|
128,000
|
|
Total
assets
|
$
|
|
67,585,000
|
|
|
|
54,234,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Mortgage
notes
payable
|
$
|
|
54,663,000
|
|
|
|
39,132,000
|
|
Accounts
payable, prepaid rent
and accrued expenses
|
|
|
1,104,000
|
|
|
|
1,190,000
|
|
Real
estate taxes
payable
|
|
|
733,000
|
|
|
|
265,000
|
|
Refundable
tenant
deposits
|
|
|
299,000
|
|
|
|
244,000
|
|
Other
accrued
liabilities
|
|
|
46,000
|
|
|
|
46,000
|
|
Liabilities
of discontinued
operations
|
|
|
205,000
|
|
|
|
204,000
|
|
Total
liabilities
|
|
|
57,050,000
|
|
|
|
41,081,000
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
651,000
|
|
|
|
702,000
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.01 par value; Authorized 5,000,000 shares,
|
|
|
|
|
|
|
|
|
no
shares issued and
outstanding
|
|
|
---
|
|
|
|
---
|
|
Common
stock, $1 par value; Authorized 5,000,000 shares,
|
|
|
|
|
|
|
|
|
issued
and outstanding
1,408,000 and 1,401,000 shares
|
|
|
|
|
|
|
|
|
in
2007 and 2006,
respectively
|
|
|
1,408,000
|
|
|
|
1,401,000
|
|
Additional
paid-in capital
|
|
|
19,212,000
|
|
|
|
19,130,000
|
|
Distributions
in excess of accumulated earnings
|
|
|
(10,736,000
|
)
|
|
|
(8,080,000
|
)
|
Total
shareholders’
equity
|
|
|
9,884,000
|
|
|
|
12,451,000
|
|
|
$
|
|
67,585,000
|
|
|
|
54,234,000
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
MAXUS
REALTY TRUST, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
Sept.
30,
|
|
|
Sept.
30,
|
|
|
Sept.
30,
|
|
|
Sept.
30,
|
|
Income
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
$
|
|
2,531,000
|
|
|
|
1,748,000
|
|
|
|
7,532,000
|
|
|
|
5,317,000
|
|
Other
|
|
|
355,000
|
|
|
|
249,000
|
|
|
|
1,041,000
|
|
|
|
663,000
|
|
Total
revenues
|
|
|
2,886,000
|
|
|
|
1,997,000
|
|
|
|
8,573,000
|
|
|
|
5,980,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
787,000
|
|
|
|
460,000
|
|
|
|
2,394,000
|
|
|
|
1,526,000
|
|
Repairs
and
maintenance
|
|
|
384,000
|
|
|
|
244,000
|
|
|
|
962,000
|
|
|
|
727,000
|
|
Turn
costs and
leasing
|
|
|
185,000
|
|
|
|
125,000
|
|
|
|
478,000
|
|
|
|
333,000
|
|
Utilities
|
|
|
278,000
|
|
|
|
139,000
|
|
|
|
805,000
|
|
|
|
400,000
|
|
Real
estate
taxes
|
|
|
206,000
|
|
|
|
146,000
|
|
|
|
650,000
|
|
|
|
424,000
|
|
Insurance
|
|
|
116,000
|
|
|
|
83,000
|
|
|
|
356,000
|
|
|
|
236,000
|
|
Related
party management
fee
|
|
|
122,000
|
|
|
|
93,000
|
|
|
|
387,000
|
|
|
|
289,000
|
|
Other
operating
expenses
|
|
|
429,000
|
|
|
|
385,000
|
|
|
|
1,142,000
|
|
|
|
916,000
|
|
General
and
administrative
|
|
|
305,000
|
|
|
|
156,000
|
|
|
|
515,000
|
|
|
|
336,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating
expenses
|
|
|
2,812,000
|
|
|
|
1,831,000
|
|
|
|
7,689,000
|
|
|
|
5,187,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
74,000
|
|
|
|
166,000
|
|
|
|
884,000
|
|
|
|
793,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(56,000
|
)
|
|
|
(183,000
|
)
|
|
|
(162,000
|
)
|
|
|
(480,000
|
)
|
Interest
expense
|
|
|
879,000
|
|
|
|
780,000
|
|
|
|
2,507,000
|
|
|
|
1,939,000
|
|
Gain
on debt
extinguishment
|
|
|
---
|
|
|
|
(219,000
|
)
|
|
|
---
|
|
|
|
(219,000
|
)
|
Loss
before minority interest
and discontinued operations
|
|
|
(749,000
|
)
|
|
|
(212,000
|
)
|
|
|
(1,461,000
|
)
|
|
|
(447,000
|
)
|
Less
minority interest in
continuing operations
|
|
|
24,000
|
|
|
|
7,000
|
|
|
|
47,000
|
|
|
|
15,000
|
|
Loss
from continuing
operations
|
|
|
(725,000
|
)
|
|
|
(205,000
|
)
|
|
|
(1,414,000
|
)
|
|
|
(432,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
minority
interest
|
|
|
(16,000
|
)
|
|
|
1,219,000
|
|
|
|
(84,000
|
)
|
|
|
1,395,000
|
|
Less
minority interest in
discontinued operations
|
|
|
---
|
|
|
|
(40,000
|
)
|
|
|
3,000
|
|
|
|
(46,000
|
)
|
Income
(loss) from
discontinued operations
|
|
|
(16,000
|
)
|
|
|
1,179,000
|
|
|
|
(81,000
|
)
|
|
|
1,349,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)
|
$
|
|
(741,000
|
)
|
|
|
974,000
|
|
|
|
(1,495,000
|
)
|
|
|
917,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing
operations
|
$
|
|
(.51
|
)
|
|
|
(0.15
|
)
|
|
|
(1.04
|
)
|
|
|
(0.31
|
)
|
Income
(loss) from
discontinued operations
|
|
|
(.01
|
)
|
|
|
0.84
|
|
|
|
(.05
|
)
|
|
|
.96
|
|
Net
income (loss) per
share
|
$
|
|
(.52
|
)
|
|
|
0.69
|
|
|
|
(1.09
|
)
|
|
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
year-to-date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
to
Shareholders
|
$
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Return
of
capital
|
$
|
|
.20
|
|
|
|
---
|
|
|
|
.80
|
|
|
|
---
|
|
Distributions
paid in current year
|
|
|
.20
|
|
|
|
---
|
|
|
|
.80
|
|
|
|
---
|
|
Weighted
average shares outstanding, basic and diluted
|
|
|
1,406,000
|
|
|
|
1,401,000
|
|
|
|
1,406,000
|
|
|
|
1,401,000
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
MAXUS
REALTY TRUST, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended
|
|
|
|
Sept.
30,
|
|
Sept.
30,
|
Cash
flows from operating activities:
|
|
2007
|
|
2006
|
Net
income (loss)
|
$
|
(1,495,000
|
)
|
|
917,000
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
Minority
interest
|
|
(50,000
|
)
|
|
31,000
|
|
Depreciation
and
amortization
|
|
2,394,000
|
|
|
1,567,000
|
|
Amortization
of loan
premium
|
|
---
|
|
|
(64,000
|
)
|
Amortization
of loan
costs
|
|
72,000
|
|
|
128,000
|
|
Gain
on debt
extinguishment
|
|
---
|
|
|
(219,000
|
)
|
Gain
on sale of Arbor
Gate
|
|
---
|
|
|
(1,402,000
|
)
|
Changes
in accounts affecting operations:
|
|
|
|
|
|
|
Accounts
receivable
|
|
70,000
|
|
|
(53,000
|
)
|
Prepaid
expenses and other
assets
|
|
(123,000
|
)
|
|
(136,000
|
)
|
Escrows
and reserves,
net
|
|
22,000
|
|
|
(227,000
|
)
|
Accounts
payable and other
liabilities
|
|
523,000
|
|
|
(92,000
|
)
|
Net
cash provided by operating
activities
|
|
1,413,000
|
|
|
450,000
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
Capital
expenditures
|
|
(783,000
|
)
|
|
(705,000
|
)
|
Acquisition
of Northtown
Business Center
|
|
---
|
|
|
(3,207,000
|
)
|
Insurance
proceeds received from
escrow for investment property
|
|
---
|
|
|
1,380,000
|
|
Acquisition
of Highland
Pointe
|
|
(3,420,000
|
)
|
|
---
|
|
Net
cash used in investing
activities
|
|
(4,203,000
|
)
|
|
(2,532,000
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Principal
payments on mortgage
notes payable
|
|
(389,000
|
)
|
|
(12,197,000
|
)
|
Proceeds
from mortgage
notes
|
|
---
|
|
|
20,650,000
|
|
Cash
paid in connection with
refinance of investment property
|
|
(45,000
|
)
|
|
---
|
|
Cash
received in connection with
refinance of investment property
|
|
2,530,000
|
|
|
---
|
|
Payment
of loan
fees
|
|
(16,000
|
)
|
|
(228,000
|
)
|
Issuance
of common
stock
|
|
89,000
|
|
|
---
|
|
Distributions
paid to
shareholders
|
|
(1,161,000
|
)
|
|
---
|
|
Net
cash provided
by financing activities
|
|
1,008,000
|
|
|
8,225,000
|
|
Net
increase (decrease) in
cash
|
|
(1,782,000
|
)
|
|
6,143,000
|
|
Cash,
beginning of
year
|
|
8,470,000
|
|
|
2,009,000
|
|
Cash,
end of
period
|
$
|
6,688,000
|
|
|
8,152,000
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information -
|
|
|
|
|
|
|
Cash
paid during the nine month
period for interest
|
$
|
2,532,000
|
|
|
1,987,000
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
Highland
Pointe assets
acquired
|
$
|
16,250,000
|
|
|
---
|
|
Highland
Pointe mortgage notes
payable and other liabilities assumed
|
$
|
12,830,000
|
|
|
---
|
|
Mortgage
debt extinguished with
refinancings
|
$
|
17,850,000
|
|
|
---
|
|
Mortgage
note resulting from
refinancing
|
$
|
21,070,000
|
|
|
---
|
|
Funds
escrowed from Arbor Gate sale used to finance acquisition of
Northtown
|
$
|
---
|
|
|
1,942,000
|
|
Arbor
Gate renovations financed
with accounts payable
|
$
|
---
|
|
|
1,302,000
|
|
Arbor
Gate renovations paid from
insurance escrow account
|
$
|
---
|
|
|
1,391,000
|
|
Waverly
mortgage paid from
insurance escrow account
|
$
|
---
|
|
|
4,187,000
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
MAXUS
REALTY TRUST, INC.
NOTES
TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(1)
Organization
Maxus
Realty Trust, Inc. (the “Trust” or “Registrant”), is structured as what is
commonly referred to as an umbrella partnership REIT, or UPREIT, structure.
To
effect the UPREIT restructuring, the Trust formed Maxus Operating Limited
Partnership, a Delaware limited partnership (“MOLP"), to which the Trust
contributed all of its assets, in exchange for a 99.999% partnership interest
in
MOLP and the assumption by MOLP of all of the Trust's
liabilities. The Trust now conducts and intends to continue to
conduct all of its activities through MOLP. MOLP is the sole member of limited
liability companies that own all of the Trust’s properties. Maxus Realty GP,
Inc., a Delaware corporation that is wholly owned by the Trust, is the sole
general partner of MOLP and has a 0.001% interest in MOLP. As the sole general
partner of MOLP, Maxus Realty GP, Inc. generally has the exclusive power under
the partnership agreement to manage and conduct the business of MOLP, subject
to
certain limited approval and voting rights of the limited partners.
Pursuant
to MOLP's limited partnership agreement, MOLP may issue limited partnership
operating units (and corresponding limited partnership interests) in return
for
cash or other property that is contributed to MOLP. Holders of MOLP
limited partnership operating units may redeem the units (and corresponding
limited partnership interests) in return for the issuance of the Trust's common
stock or cash, at the Trust's election, after a one (1) year holding period.
At
September 30, 2007, the Trust owned approximately 96.75% of the limited
partnership interests in MOLP and minority holders of MOLP owned 47,339 limited
partnership operating units, or approximately 3.25% of MOLP. The 47,339 limited
partnership operating units were issued in connection with the acquisition
of
the Terrace Apartments in April 2004, and the acquisition of the Bicycle Club
Apartments in July 2005.
(2)
Summary of Significant Accounting
Policies
Refer
to
the financial statements of the Trust for the year ended December 31, 2006,
which are contained in the Trust's Annual Report on Form 10-KSB, for a
description of the accounting policies, which have been
continued. Also, refer to the notes to the Trust’s Annual Report for
additional details of the Trust’s financial condition.
In
the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 2007 and for all periods presented
have been made. The results for the nine-month period ended September 30, 2007
are not necessarily indicative of the results which may be expected for the
entire year.
Prior
period amounts have been reclassified to conform to the current year
presentation. Prior to the third quarter of 2006 the Trust had presented
amortized debt issuance costs with depreciation and amortization. These debts
have been reclassified and have been presented as interest expense for all
periods presented. For the nine months ended September 30, 2007 and 2006 these
costs were $18,000 and $46,000 respectively.
(3)
Segment Reporting
The
Trust
has adopted SFAS No. 131,
Disclosure About Segments of an Enterprise and
Related Information
, which establishes standards for the way that public
business enterprises report information about operating segments in financial
statements, as well as related disclosures about products and services,
geographic areas, and major customers.
The
Trust
has two reportable operating segments, apartments and a commercial building.
The
Trust’s management evaluates the performance of each segment based on their net
operating income (NOI). NOI is defined as rental revenues less rental expenses
and real estate taxes. We rely on NOI for purposes of assessing segment
performance. We also believe NOI is a valuable means of comparing year-to-year
operating performance. The accounting policies of the segments are the same
as
those of the Trust.
Following
is information for each segment for the three and nine months ended September
30, 2007:
Three
Months Ended September 30, 2007:
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
(Loss)
|
|
|
Total
|
|
|
Continuing
|
|
|
Capital
|
|
|
and
|
|
|
Interest
|
|
|
Discontinued
|
|
|
Revenue
|
|
|
Operations
|
|
|
Expenditures
|
|
|
Amortization
|
|
|
Expense
|
|
|
Operations
|
|
Apartments
|
$
|
2,585,000
|
|
|
|
(576,000
|
)
|
|
|
330,000
|
|
|
|
736,000
|
|
|
|
542,000
|
|
|
|
(16,000
|
)
|
Commercial
Bldg
|
|
302,000
|
|
|
|
77,000
|
|
|
|
46,000
|
|
|
|
51,000
|
|
|
|
19,000
|
|
|
|
---
|
|
Parent
|
|
---
|
|
|
|
(250,000
|
)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Subtotal
|
|
2,886,000
|
|
|
|
(749,000
|
)
|
|
|
376,000
|
|
|
|
787,000
|
|
|
|
879,000
|
|
|
|
(16,000
|
)
|
Minority
Interest
|
|
---
|
|
|
|
24,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Total
|
$
|
2,886,000
|
|
|
|
(725,000
|
)
|
|
|
376,000
|
|
|
|
787,000
|
|
|
|
879,000
|
|
|
|
(16,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007:
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
|
Total
|
|
|
Continuing
|
|
|
Capital
|
|
|
and
|
|
|
Interest
|
|
|
Discontinued
|
|
|
|
|
|
|
Revenue
|
|
|
Operations
|
|
|
Expenditures
|
|
|
Amortization
|
|
|
Expense
|
|
|
Operations
|
|
|
Assets
(1)
|
|
Apartments
|
$
|
|
7,627,000
|
|
|
|
(1,338,000
|
)
|
|
|
16,777,000
|
|
|
|
2,241,000
|
|
|
|
2,342,000
|
|
|
|
(84,000
|
)
|
|
|
63,913,000
|
|
Commercial
Bldg
|
|
|
946,000
|
|
|
|
236,000
|
|
|
|
585,000
|
|
|
|
153,000
|
|
|
|
165,000
|
|
|
|
0
|
|
|
|
3,540,000
|
|
Parent
|
|
|
---
|
|
|
|
(359,000
|
)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
149,000
|
|
|
|
---
|
|
Subtotal
|
|
|
8,573,000
|
|
|
|
(1,461,000
|
)
|
|
|
16,835,000
|
|
|
|
2,244,000
|
|
|
|
2,507,000
|
|
|
|
(84,000
|
)
|
|
|
67,453,000
|
|
Minority
interest
|
|
|
---
|
|
|
|
47,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
3,000
|
|
|
|
---
|
|
Total
|
$
|
|
8,573,000
|
|
|
|
(1,414,000
|
)
|
|
|
16,835,000
|
|
|
|
2,394,000
|
|
|
|
2,507,000
|
|
|
|
(81,000
|
)
|
|
|
67,453,000
|
|
(1)
The
assets do not include assets from discontinued operations.
Mortgage
Notes Payable
The
Chalet mortgage note was refinanced by NorthMarq Capital, Inc. and Freddie
Mac
on September 14, 2007 and is secured by a mortgage on Chalet Apartments, an
assignment of rents, and a security agreement. The mortgage note has an
outstanding balance of $8,070,000 at September 30, 2007 with monthly principal
and interest payments of $47,299 at a fixed interest rate of 5.79%. The mortgage
note matures on October 1, 2017 with an extension period of 12 months at a
variable interest rate.
The
Trust
applies SFAS No. 141,
Business Combinations
, for rental property
acquisitions. The Trust considers the fair values of both tangible and
intangible assets or liabilities when allocating the purchase price (plus any
capitalized costs incurred during the acquisition). Tangible assets typically
include land, land improvements, building, tenant improvements, furniture,
fixtures and equipment. Intangible assets or liabilities may include values
assigned to in-place leases (including the separate values of tenant
relationships and any above or below market leases), and any assumed financing
that is determined to be above or below market terms.
The
Trust
usually acquires tenant leases with property acquisitions. The fair value of
the
tangible assets is determined by valuing the property as if it were vacant
based
on management’s determination of the relative fair values of the assets.
Management determines the as if vacant fair value of a property using recent
independent appraisals or methods similar to those used by independent
appraisers. The aggregate value of intangible assets or liabilities, including
in-place leases, is measured based on the difference between the stated price
plus capitalized costs of the property as if vacant.
The
fair
value of acquired in-place leases includes management’s estimate of the
following amounts: (i) the value associated with avoiding the cost of
originating the acquired in-place leases (i.e. the market cost to execute the
leases, including leasing commissions, advertising and other related costs);
(ii) the value associated with lost revenue related to tenant reimbursable
operating costs estimated to be incurred during the assumed re-leasing
period
(i.e.
utilities); (iii) the value associated with lost rental revenue from existing
leases during the assumed re-leasing period. Amounts allocated to in-place
leases are amortized over the estimated remaining initial lease term of the
respective leases and recorded as amortization expense.
In
accordance with SFAS No. 141,
Business Combinations
, the Trust has
determined the fair value of acquired in-place leases, which consist of the
following:
|
|
Sept.
30, 2007
|
|
|
Dec.
31, 2006
|
|
In-place
leases, net of accumulated amortization of $322,000 and$33,000
respectively
|
$
|
|
249,000
|
|
|
|
346,000
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets, net
|
$
|
|
249,000
|
|
|
|
346,000
|
|
In
place
leases, net at September 30, 2007 relate to the Northtown Business Center,
Valley Forge and Highland Pointe acquisitions and in-place leases net at
December 31, 2006 relate to the Northtown Business Center and Valley Forge
Apartments purchased in the fourth quarter of 2006.
Amortization
expense for 2007 is expected to be $313,000, of which $289,000 was recognized
in
the period ended September 30, 2007.
(4)
Related Party Transactions
Maxus
Properties, Inc., an affiliate of the Trust through affiliated ownership,
manages the Trust’s properties. The Trust paid Maxus Properties, Inc. property
management fees (including fees related to discontinued operations) of $387,000
and $289,000 for the nine months ended September 30, 2007 and 2006,
respectively. Management fees are determined pursuant to management agreements
that provide for fees calculated as a percentage of monthly gross receipts
(as
defined) from the properties’ operations and reimbursement of payroll related
costs. At September 30, 2007, and 2006, $99,000 and $78,000, respectively,
was
payable to Maxus Properties, Inc. for accrued payroll, direct expense
reimbursement and accrued management fees.
Certain
Maxus Properties, Inc. employees are located at the Trust’s properties and
perform leasing, maintenance, office management, and other related services
for
these properties. The Trust recognized $1,074,600 and $534,000 of payroll costs
in the nine months ended September 30, 2007 and 2006 respectively, that have
been reimbursed to Maxus Properties, Inc.
(5)
Contingencies
Legal
Proceedings
The
Trust
is a plaintiff in certain legal actions. It is our opinion, based on advice
of
legal counsel, that the outcome of these actions will not have a material
adverse effect on our consolidated financial position or operations. Please
refer to Part II, Item 1, of this report for a description of certain pending
legal proceedings.
(6) Discontinued
Operations/Involuntary Conversions
The
Trust
has reclassified its Condensed Consolidated Balance Sheet for the nine months
ended September 30, 2007 and has presented its Condensed Consolidated Statement
of Operations for the nine months ended September 30, 2007 to reflect
discontinued operations of the Arbor Gate Apartments (“Arbor Gate”) and the
Waverly Apartments (“Waverly”).
As
a
result of Hurricane Katrina, the Waverly Apartments were completely destroyed
and remain uninhabitable. On July 21, 2006, Arbor Gate Acquisition, L.L.C.,
a
wholly-owned subsidiary of MOLP, completed the sale of its multi-family unit
apartment complex, Arbor Gate Apartments. The assets of Arbor Gate
and Waverly were written down to their estimated fair values.
Condensed
financial information for Arbor Gate and Waverly are as
follows:
DISCONTINUED
OPERATIONS
(ARBOR
GATE AND WAVERLY)
Assets
|
|
Sept.
30, 2007
|
|
|
Dec.
31, 2006
|
|
Investment
property
|
|
|
|
|
|
|
Land
|
|
$
|
128,000
|
|
|
|
128,000
|
|
Prepaid
expenses and other
assets
|
|
|
4,000
|
|
|
|
---
|
|
Assets
of discontinued operations - property held for sale
|
|
$
|
132,000
|
|
|
|
128,000
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Account
payable, prepaid rent
and accrued expenses
|
|
$
|
149,000
|
|
|
|
149,000
|
|
Real
estate taxes
payable
|
|
|
56,000
|
|
|
|
55,000
|
|
Liabilities
of discontinued operations - property held for sale
|
|
$
|
205,000
|
|
|
|
204,000
|
|
DISCONTINUED
OPERATIONS
(ARBOR
GATE AND WAVERLY)
STATEMENTS
OF OPERATIONS
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
Sept.
30,
|
|
|
Sept.
30,
|
|
|
Sept.
30,
|
|
|
Sept.
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Total
revenues
|
|
$
|
---
|
|
|
|
47,000
|
|
|
|
---
|
|
|
|
406,000
|
|
Operating
expenses
|
|
|
(16,000
|
)
|
|
|
(118,000
|
)
|
|
|
(84,000
|
)
|
|
|
363,000
|
|
Gain
on sale
|
|
|
---
|
|
|
|
1,402,000
|
|
|
|
---
|
|
|
|
1,402,000
|
|
Net
operating income (loss)
|
|
|
(16,000
|
)
|
|
|
1,331,000
|
|
|
|
(84,000
|
)
|
|
|
1,444,000
|
|
Interest
income
|
|
|
---
|
|
|
|
(6,000
|
)
|
|
|
---
|
|
|
|
(32,000
|
)
|
Interest
expense
|
|
|
---
|
|
|
|
53,000
|
|
|
|
---
|
|
|
|
230,000
|
|
Income
(loss) from discontinued operations - before ACI
|
|
$
|
(16,000
|
)
|
|
|
1,284,000
|
|
|
|
(84,000
|
)
|
|
|
1,246,000
|
|
Income
(loss) from discontinued operations - ACI
|
|
|
---
|
|
|
|
(65,000
|
)
|
|
|
---
|
|
|
|
149,000
|
|
Income
(loss) from discontinued operations - ACI
|
|
$
|
(16,000
|
)
|
|
|
1,219,000
|
|
|
|
(84,000
|
)
|
|
|
1,395,000
|
|
On
August
29, 2005, Arbor Gate and Waverly sustained extensive damages caused by Hurricane
Katrina. The rehabilitation of Arbor Gate due to the damages was ongoing at
December 31, 2005 and was completed during the year ended December 31, 2006.
Waverly has not been rehabilitated. Both properties were insured for property
damage resulting from Hurricane Katrina.
As
of the
date of the hurricane, the estimated total net book value of the assets
destroyed at Arbor Gate and Waverly was $6,159,000. An insurance receivable
for
this amount was recorded during 2005 due to expected recovery from the insurance
carriers. During the year ended December 31, 2005, the Trust received a total
of
$5,600,000 from the insurance carriers resulting in a receivable at December
31,
2005 of approximately $560,000. During the year end December 31, 2006, the
Trust
received additional sums totaling approximately $1,430,000. Amounts received
in
excess of the recorded receivable were recognized as a gain of approximately
$871,000 after the Trust determined there were no remaining contingencies on
recoveries received. Of the total amount of insurance recoveries received to
date, approximately $344,000 was paid by the excess property carrier. The
recovery from the excess property carrier represents the undisputed portion
of
the Trust’s claim. The Trust is still seeking additional amounts from the excess
property carrier and has filed a lawsuit in regard to this matter as described
below.
The
Trust
has had various discussions with its excess property insurance carrier, RSUI
Indemnity Company (“RSUI”) concerning amounts the Trust believes it is owed
pursuant to its insurance policy. The Trust has reached settlements with its
flood and primary wind carrier for the amounts described in the preceding
paragraph. However, because management and RSUI have failed to reach an
agreement regarding the scope of damages and the associated costs specifically
related to the insurance claims filed on behalf of Waverly, the Trust filed
a
lawsuit on September 7,
2006
against RSUI in the United States District Court for the Western District of
Missouri. The lawsuit alleges breach of contract and vexatious refusal by RSUI
for its failure to fulfill its indemnity obligations under the commercial
property insurance policy issued to the Trust by RSUI covering Waverly
Apartments. The Trust intends to vigorously pursue this matter. At
this date, the amount of any additional recovery and the ultimate resolution
of
this matter cannot be estimated.
(7)
Subsequent Events
Stock
Repurchase Program
On
October 15, 2007, the Board of Trustees of the Trust approved a stock repurchase
program authorizing the Trust to purchase up to 100,000 shares of the Trust’s
common stock, par value $1.00. Pursuant to the repurchase
program, the Trust has authorized a broker to make purchases
on the open market from time to time based on market conditions, subject to
the broker complying with the safe harbor rules under SEC Rule 10b-18,
which place restrictions on the timing of purchases and the number of
shares that can be purchased each day to avoid market
manipulation. The repurchase program does not require the Trust to
repurchase any specific number of shares and may be modified, suspended, or
terminated by the Board of Trustees at any time without prior notice. The Trust
intends to finance repurchases under the program through available cash. As
of November 12, 2007, the Trust has purchased 4,661 shares totaling
$46,219.
Merger
On
October 15, 2007, the Board of Trustees approved the merger of Regency
North Associates, L.P. with and into Regency North Acquisition, L.L.C. (“RNA”),
a new subsidiary of the Trust's operating limited partnership Maxus
Operating Limited Partnership (MOLP), pursuant to which RNA would
acquire Regency North Apartments, a 180 unit multi-family housing apartment
complex located in Kansas City, Missouri. The current owners of Regency North
Associates, L.P. include Bond Purchase, L.L.C., (an affiliate of David L.
Johnson), Aspen Realty, L.L.C., and fifteen other limited partners. The limited
partners of Regency North Associates, L.P. have approved the transaction.
The effective cost to the Trust is estimated at $6,478,000 and the Trust would
assume the first mortgage on Regency North Apartments of
$4,835,000. Pursuant to the merger, the Trust has offered
the limited partners the option of $1,500 in cash or 100 operating units,
valued at $15 per unit (approximately $22,500 in the aggregate). The merger
is subject to the lender’s consent to the assumption including the guaranty by
MOLP and the Trust of certain obligations in the event of defaults.
Internal
Controls and Financial Reporting
On
October 15, 2007, at a special meeting, the Board of Trustees decided to
evaluate the Trust’s growth opportunities to make a decision regarding whether
to de-register the Trust’s common stock under the Securities Exchange Act of
1934, as amended, over the next several months since the Trust currently has
fewer than 300 shareholders, as described in the Trust’s Current Report on Form
8-K filed on October 19, 2007. Although the Board of Trustees has directed
management to continue to work towards compliance with the internal control
over
financial reporting requirements under the Sarbanes Oxley Act, the Board intends
to continue to investigate and evaluate the costs of becoming fully compliant
with such requirements. This analysis will be part of the Board’s
decision-making process of whether to de-register the Trust’s common
stock. As a result, management does not believe the Trust will be fully
compliant with the internal control over financial reporting requirements under
the Exchange Act in connection with the 2007 Form 10-KSB annual report required
to be filed with the SEC in March 2008.
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Section includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements, other than statements of historical facts,
included in this section and located elsewhere in this Form 10-QSB regarding
the
prospects of our industry and our prospects, plans, financial position and
business strategy may constitute forward-looking statements. Forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may,"
"will,"
"expect," "intend," "estimate," "anticipate," "plan," "foresee," "believe"
or
"continue" or the negatives of these terms or variations of them or similar
terminology. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we can give no assurance that these
expectations will prove to have been correct. All such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those contemplated by the relevant
forward-looking statement. Important factors that could cause actual results
to
differ materially from our expectations include, among others: (i) the ability
to retain tenants, (ii) general economic, business, market and social
conditions, (iii) trends in the real estate investment market, (iv) projected
leasing and sales, (v) competition, (vi) inflation and (vii) future prospects
for the Trust. Readers are urged to consider these factors carefully in
evaluating the forward-looking statements. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary
statements. The forward-looking statements included herein are made
only as of the date of this Form 10-QSB, and we do not undertake any obligation
to release publicly any revisions to such forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence
of
unanticipated events.
CRITICAL
ACCOUNTING POLICIES
Revenue
Recognition
Lease
agreements are accounted for as operating leases, and rentals from such leases
are reported as revenues ratably over the terms of the leases.
Investment
Property Useful Lives
The
Trust
is required to make subjective assessments as to the useful lives of its
properties for the purpose of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have
a
direct impact on the Trust’s net income.
Buildings
and improvements are depreciated over their estimated useful lives of 27.5
to 40
years on a straight-line basis. Land improvements are depreciated over their
useful lives of 15 to 20 years on a straight-line basis. Personal property
is
depreciated over its estimated useful life of 5 to 15 years using the
straight-line method.
Capital
Expenditures
For
reporting purposes, the Trust capitalizes all carpet, flooring, blinds,
appliance and HVAC replacements. The Trust expenses all other expenditures
that
total less than $10,000. Expenditures and costs related to contracts that are
equal to or greater than $10,000 are evaluated individually for capitalization.
Repairs and maintenance are charged to expense as incurred. Additions and
betterments are capitalized.
Classification
of Properties
The
Trust
is required to make subjective assessments as to whether a property should
be
classified as “Held for Sale” under the provisions of SFAS 144. SFAS
144 contains certain criteria that must be met in order for a property to be
classified as held for sale, including: management commits to a plan to sell
the
asset; the asset is available for immediate sale in its present condition;
an
active program to locate a buyer has been initiated; the sale of the asset
is
probable and transfer of the asset is expected to qualify for recognition as
a
sale within one year; the asset is being actively marketed for sale at a price
that is reasonable in relation to its current fair value; and actions required
to complete the plan indicate that it is unlikely that significant changes
to
the plan will be made or that the plan will be withdrawn.
Impairment
of Investment Property Values
The
Trust
is required to make subjective assessments as to whether there are impairments
in the value of its investment properties. Management's estimates of impairment
in the value of investment properties have
a
direct
impact on the Trust’s net
income.
The
Trust
follows the provisions of SFAS No. 144. The Trust assesses the carrying value
of
its long-lived asset
whenever
events or changes in circumstances indicate that the carrying amount of the
underlying asset may not be recoverable. Certain factors that may occur and
indicate that an impairment may exist include, but are not limited to:
significant underperformance relative to projected future operating results;
significant changes in the manner of the use of the asset; and significant
adverse industry or market economic trends. If an indicator of possible
impairment exists, a property is evaluated for impairment by a comparison of
the
carrying amount of a property to the estimated undiscounted future cash flows
expected to be generated by the property. If the carrying amount of a property
exceeds its estimated future cash flows on an undiscounted basis, an impairment
charge is recognized by the amount by which the carrying amount of the property
exceeds the fair value of the property. Management estimates fair value of
its
properties based on projected undiscounted cash flows using a discount rate
determined by management to be commensurate with the risk inherent in the
Trust.
Real
Estate Acquisitions
Upon
acquisitions of real estate properties, management makes subjective estimates
of
the fair value of acquired tangible assets (consisting of land, land
improvements, building, improvements, and furniture, fixtures and equipment)
and
identified intangible assets and liabilities (consisting of above and below
market leases, in-place leases, tenant relationships and assumed financing
that
is determined to be above or below market terms) in accordance with Statement
of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations
.
Management utilizes methods similar to those used by independent appraisers
in
making these estimates. Based on these estimates, management allocates purchase
price to the applicable assets and liabilities. These estimates have a direct
impact on our net income.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect amounts reported in the accompanying Condensed
Consolidated Financial Statements. The most significant assumptions and
estimates relate to revenue recognition, depreciable lives of investment
property, capital expenditures, properties held for sale, and the valuation
of
investment property. Application of these assumptions requires the exercise
of
judgment as to future uncertainties and, as a result, actual results could
differ from these estimates.
Impact
of
Recently Issued Accounting Standards
In
September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157,
Fair Value Measurements
(“FAS 157”). FAS 157
establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value, and expands on required disclosures about
fair value measurement. FAS 157 is effective for us on January 1, 2008 and
will
be applied prospectively. The provisions of FAS 157 are not expected to have
a
material impact on our condensed consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159,
Establishing the Fair Value
Option for Financial Assets and Liabilities
, to permit all entities to
choose to elect to measure eligible financial instruments at fair
value. SFAS No. 159 applies to fiscal years beginning after November
15, 2007, with early adoption permitted for an entity that has also elected
to
apply the provisions of SFAS No. 159, unless it chooses early adoption.
Management is currently evaluating the impact of SFAS No. 159 on its condensed
consolidated financial statements.
DESCRIPTION
OF BUSINESS
OVERVIEW
The
Trust
currently operates seven apartment communities and one industrial/commercial
property. Cash is primarily generated by renting units to tenants, or securing
loans with the Trust’s assets. Cash is used primarily to pay operating expenses
(repairs and maintenance, payroll, utilities, taxes, and insurance), make
capital expenditures for property improvements, repay principal and interest
on
outstanding loans or to pay cash distributions to shareholders. The key
performance indicators for revenues are occupancy rates and rental rates.
Revenues are also impacted by concessions (discounts) offered as rental
incentives. The key performance indicator for operating expenses is total
operating expense per apartment unit. A significant change in the turnover
rate
of rental units can also cause a significant change in operating expenses.
Management also evaluates total taxes, utilities and insurance
rates
for
each property.
General
economic trends that management evaluates include construction of apartment
units (supply), unemployment rates, job growth, and interest rates (demand).
The
apartment industry is sensitive to extremely low interest rates, which tend
to
increase home ownership and decrease apartment occupancy rates. The apartment
industry is also sensitive to increased unemployment rates, which tend to cause
possible renters to double up in a unit or share a non-rental dwelling with
relatives or acquaintances. New construction in an area with low occupancy
rates
can cause a further decline in occupancy or rental rates.
Economic
trends appear to indicate that interest rates are increasing. It also appears
that unemployment rates are declining, with job growth rising. If these trends
are correct and if the trends continue, management believes the Trust should
be
able to begin reducing concessions, raising rental rates and increasing
occupancy, which should improve revenues. In such case, management also believes
variable operating expenses will also tend to increase, but fixed expense
coverage would improve.
The
Trust
primarily invests in income-producing real properties (apartments). As of
September 30, 2007 the Trust’s portfolio is comprised of:
PROPERTY
|
#
UNITS
|
TYPE
|
LOCATION
|
PURCHASE
|
|
|
|
|
DATE
|
|
|
|
|
|
Barrington
Hills Apartments
|
232
|
Apartments
|
Little
Rock, AR
|
November,
2001
|
(“Barrington
Hills”)
|
|
|
|
|
|
|
|
|
|
Bicycle
Club Apartments
(“Bicycle
Club”)
|
312
|
Apartments
|
North
Kansas City, MO
|
July,
2005
|
|
|
|
|
|
Chalet
Apartments
(1)
|
234
|
Apartments
|
Topeka,
KS
|
September,
2001
|
(“Chalet”)
|
|
|
|
|
|
|
|
|
|
Forest
Park/Valley Forge Apts.
|
198
|
Apartments
|
Kansas
City, MO
|
August,
2000/
|
(“Forest
Park/Valley Forge”)
|
|
|
|
November,
2006
|
|
|
|
|
|
King’s
Court/Terrace Apts.
|
166
|
Apartments
|
Olathe,
KS
|
August,
2001/
|
(“King’s
Court/Terrace”)
|
|
|
|
April,
2004
|
|
|
|
|
|
Highland
Pointe Apartments
|
232
|
Apartments
|
Yukon,
OK
|
January,
2007
|
(“Highland
Pointe”)
|
|
|
|
|
|
|
|
|
|
Northtown
Business Center
|
240,000
sq. ft.
|
Industrial
and related
|
North
Kansas City,
|
August,
2006
|
|
&
|
office
and
|
MO
|
|
|
12.44
acres
|
mezzanine
space
|
|
|
|
|
|
|
|
The
Landings Apartments
|
154
|
Apartments
|
Little
Rock, AR
|
September,
2001
|
(the
“Landings”)
|
|
|
|
|
|
|
|
|
|
Waverly
Apartments
(2)
|
128
|
Apartments
|
Bay
Saint Louis, MS
|
September,
2004
|
(“Waverly”)
|
|
|
|
|
(1)
Chalet
I and Chalet II were merged into one subsidiary on September 27,
2007.
(2)
Waverly
Apartments is classified as a discontinued operation.
UPREIT
Structure
The
Trust
is structured as what is commonly referred to as an umbrella partnership REIT,
or UPREIT, structure. To effect the UPREIT restructuring, the Trust formed
Maxus
Operating Limited Partnership, a Delaware limited
partnership
(“MOLP"), to which the Trust contributed all of its assets, in exchange for a
99.999% partnership interest in MOLP and the assumption by MOLP of all of the
Trust's liabilities. The Trust conducts and intends to continue to conduct
all
of its activities through MOLP. Maxus Realty GP, Inc., a Delaware corporation
that is wholly owned by the Trust, is the sole general partner of MOLP and
has a
0.001% interest in MOLP. As the sole general partner of MOLP, Maxus Realty
GP,
Inc. generally has the exclusive power under the partnership agreement to manage
and conduct the business of MOLP, subject to certain limited approval and voting
rights of the limited partners.
Pursuant
to MOLP's limited partnership agreement, MOLP may issue limited partnership
operating units (and corresponding limited partnership interests) in return
for
cash or other property that is contributed to MOLP. Holders of MOLP limited
partnership operating units may redeem the units (and corresponding limited
partnership interests) in return for the issuance of the Trust's common stock
or
cash, at the Trust's election, after a one (1) year holding period. The Trust
anticipates that the UPREIT structure will enable it to make additional
acquisitions of properties from tax-motivated sellers. As an UPREIT, the Trust
believes that MOLP will be able to issue limited partnership operating units
to
tax-motivated sellers who contribute properties to MOLP, thereby enabling those
sellers to realize certain tax benefits that would be unavailable to them if
the
Trust purchased those properties directly for cash or common stock. As of
September 30, 2007, minority holders of MOLP owned 47,339 limited partnership
operating units, or approximately 3.25% of the partnership interest in MOLP.
Maxus Realty Trust’s common shares trade on the NASDAQ Stock Exchange (NASDAQ:
MRTI).
Each
of
the real estate properties are owned by single member limited liability
companies that are directly owned by MOLP.
Maxus
Properties, Inc. provides property management services for each of the Trust’s
real properties.
LIQUIDITY
AND CAPITAL RESOURCES
Comparison
of Consolidated Results
Cash
as
of September 30, 2007 was $6,688,000, a decrease of $1,782,000 from $8,470,000
at December 31, 2006. The majority of the decrease was due to requirements
for
cash to fund the acquisition of Highland Pointe. Escrows and reserves held
by
various lenders were $1,514,000 and $1,261,000 at September 30, 2007 and
December 31, 2006, respectively. A portion of the increase, $104,000, was due
to
the required capital replacement reserve requirements as set forth in the
refinancing agreement of Chalet. The balance of the increase is due to the
various lenders’ increased escrow and reserve funding requirements.
Net
cash
provided by operating activities increased $963,000 to $1,413,000 for the nine
month period ended September 30, 2007. The majority of the increase
was due to the changes in cash affecting operations such as the increase in
accounts payable and other accrued liabilities.
Net
cash
used in investing activities was $4,203,000 which was comprised of $3,420,000
for the acquisition of Highland Pointe and the balance comprised of routine
capital expenditures.
Net
cash
provided by financing activities was $1,008,000 for the nine month period ended
September 30, 2007. A portion of the cash was generated from the refinancing
of
the Chalet Apartments. Distributions in the amount of $1,160,000 were made
to
the shareholders of record for the nine months ended September 30,
2007.
Management
is committed to maintaining a strong balance sheet and preserving their
financial flexibility, which they believe will enhance their ability to
capitalize on attractive investment opportunities as they become
available. Management believes that the current cash position and the
properties’ ability to generate adequate cash flows should enable the Trust to
fund anticipated operating and capital expenditures for the remainder of 2007.
No assurance can be given as to the actual timing or amount of any additional
insurance proceeds or for sale proceeds from the Waverly
property. Please refer to the Condensed Consolidated Statements of
Cash Flows for detailed information of our sources and uses of cash for the
periods ending September 30, 2007 and 2006.
Projected
capital expenditures of approximately $1,503,000 are currently planned for
the
remainder of 2007, primarily for re-roofing, parking/driveway repair,
landscaping, concrete repairs, replacing damaged
wood
decks,
repairing balconies,
office/clubhouse renovations, and the replacement of HVAC
units
.
The majority of these expenditures are expected to be
reimbursed from escrow reserves held by lenders. Capital replacements
of
approximately
$374,000
are currently expected to be reimbursed from
reserves held by lenders. The Trust will also continue to evaluate opportunities
for the acquisition of investment properties and may incur material capital
expenditures in connection with these acquisition opportunities.
On
July
17, 2007, the Board of Trustees of the Trust declared a cash dividend of $0.20
per share payable to the holders of record on August 31, 2007 of the Trust's
$1.00 par value, common stock. The dividend was paid on September 21,
2007.
On
October 15, 2007, the Board of Trustees of the Trust approved a stock repurchase
program authorizing the Trust to purchase up to 100,000 shares of the Trust’s
common stock, par value $1.00. The share repurchase program will take place
on
the open market from time to time based on market conditions. The
repurchase program does not require the Trust to repurchase any specific number
of shares and may be modified, suspended, or terminated by the Board of Trustees
at any time without prior notice. The Trust intends to finance
repurchases under the program through available cash.
Contractual
Obligations and Commercial Commitments
|
Balance at
|
|
Interest
|
|
Fixed
|
Due
|
|
Sept.
30, 2007
|
|
Rate
|
|
or
(variable)
|
Date
|
|
|
|
|
|
|
|
Barrington
Hills
|
|
5,338,000
|
|
6.04
|
%
|
|
Fixed
|
July
1, 2029
|
|
|
|
|
|
|
|
|
|
Bicycle
Club
|
|
11,127,000
|
|
6.19
|
%
|
|
Fixed
|
September
1, 2016
|
|
|
|
|
|
|
|
|
|
Chalet
(1)
|
|
8,070,000
|
|
5.79
|
%
|
|
Fixed
|
October
1, 2017
|
|
|
|
|
|
|
|
|
|
Forest
Park
|
|
2,335,000
|
|
5.29
|
%
|
|
Fixed
|
September
1, 2015
|
|
|
|
|
|
|
|
|
|
Highland
Pointe
|
|
13,000,000
|
|
5.67
|
%
|
|
Fixed
|
February
28, 2017
|
|
|
|
|
|
|
|
|
|
Kings
Court
|
|
2,238,000
|
|
5.91
|
%
|
|
(variable)
|
May
1, 2009
|
|
|
|
|
|
|
|
|
|
Northtown
Bus. Center
|
|
3,115,000
|
|
6.87
|
%
|
|
Fixed
|
September
1, 2016
|
|
|
|
|
|
|
|
|
|
Terrace
|
|
1,544,000
|
|
6.87
|
%
|
|
Fixed
|
February
1, 2009
|
|
|
|
|
|
|
|
|
|
The
Landings
|
|
6,181,000
|
|
6.19
|
%
|
|
Fixed
|
September
1, 2016
|
|
|
|
|
|
|
|
|
|
Valley
Forge
|
|
1,715,000
|
|
5.69
|
%
|
|
Fixed
|
December
1, 2015
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
54,663,000
|
|
|
|
|
|
|
(1)
As
of
September 27, 2007 Chalet I & II merged into one subsidiary.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Trust
does not have any “off-balance sheet arrangements” as defined in Item 303 (c) of
Regulations S-B promulgated under the Securities Exchange Act of 1934, as
amended.
RESULTS
OF OPERATIONS
The
results of operations for the Trust's properties for the nine months ended
September 30, 2007 are detailed below.
Funds
from Operations
The
white
paper on Funds from Operations approved by the board of governors of NAREIT
defines Funds from Operations as net income (loss) (computed in accordance
with
GAAP), excluding gains (or losses) from sales of
property,
plus property related depreciation and amortization, and after adjustments
for
unconsolidated partnerships and joint ventures.
Adjustments
for unconsolidated partnerships and joint ventures are calculated to reflect
Funds from Operations on the same basis. In 1999, NAREIT clarified the
definition of Funds from Operations to include non-recurring events, except
for
those that are defined as “extraordinary items” under GAAP and gains and losses
from sales of depreciable operating property. In 2002, NAREIT clarified that
Funds from Operations related to assets held for sale, sold or otherwise
transferred and included in results of discontinued operations should continue
to be included in consolidated Funds from Operations.
The
Trust
computes Funds from Operations in accordance with the guidelines established
by
the white paper, which may differ from the methodology for calculating Funds
from Operations utilized by other equity REITs, and, accordingly, may not be
comparable to such other REITs. Funds from Operations do not represent amounts
available for management's discretionary use because of needed capital
replacement or expansion, debt service obligations, distributions or other
commitments and uncertainties. Funds from Operations should not be considered
as
an alternative to net income (determined in accordance with GAAP) as an
indication of the Trust’s financial performance or to cash flows from operating
activities (determined in accordance with GAAP) as a measure of the Trust’s
liquidity, nor is it indicative of funds available to fund the Trust’s cash
needs including its ability to make distributions. The Trust believes Funds
from
Operations is helpful to investors as a measure of the performance of the Trust
because, along with cash flows from operating activities, financing activities
and investing activities, it provides investors with an understanding of the
ability of the Trust to incur and service debt and make capital expenditures.
In
the table below, revenue, expenses, net income and property related depreciation
and amortization were determined in accordance with GAAP. The addition of
property related depreciation and amortization to net income results in Funds
from Operations, which is not determined in accordance with GAAP.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
Sept.
30,
|
|
|
Sept.
30,
|
|
|
Sept.
30,
|
|
|
Sept.
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income (loss)
|
|
$
|
(741,000
|
)
|
|
|
974,000
|
|
|
|
(1,495,000
|
)
|
|
|
917,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
related depreciation and amortization
(1)
|
|
|
787,000
|
|
|
|
460,000
|
|
|
|
2,394,000
|
|
|
|
1,567,000
|
|
Funds
from operations
|
|
$
|
46,000
|
|
|
|
1,434,000
|
|
|
|
899,000
|
|
|
|
2,484,000
|
|
(1)
For
the
nine months ended September 30, 2007 and September 30, 2006, depreciation and
amortization of discontinued operations of Arbor Gate and Waverly of $0 and
$41,000, respectively, and is included in this amount.
The
Trust
has historically added amortization of deferred financing costs back to net
income to determine funds from operations. Historically these costs have not
been material. Management has re-examined this policy and believes amortization
of deferred financing cost should not be included in the determination of funds
from operations. All periods presented have been adjusted to conform to this
change in policy.
Occupancy
The
occupancy levels at September 30, 2007 were as follows:
|
OCCUPANCY
LEVELS
|
|
AT
SEPTEMBER 30,
|
|
2007
|
|
2006
|
Barrington
Hills
|
87%
|
|
88%
|
Bicycle
Club
|
93%
|
|
90%
|
Chalet
|
96%
|
|
96%
|
Forest
Park/Valley Forge
(1)
|
86%
|
|
95%
|
Highland
Pointe
(2)
|
96%
|
|
n/a
|
King’s
Court/Terrace
|
92%
|
|
92%
|
The
Landings
|
99%
|
|
90%
|
Northtown Business Center
(3)
|
95%
|
|
95%
|
Waverly
(4)
|
0%
|
|
0%
|
(1)
Valley Forge was
acquired in November 2006.
(2)
Highland
Pointe was acquired in January 2007.
(3)
Northtown Business Center
was acquired in August 2006.
(4)
Waverly
is
uninhabitable due to the damages incurred by Hurricane Katrina in August
2005.
Forest
Park/Valley Forge was 86% occupied at September 30, 2007. A majority of the
percentage of decrease in occupancy from the same period in 2006 was due to
residents buying homes. Tenant concessions have been necessary to compete with
the existing competition. Bicycle Club was 93% occupied at September 30, 2007.
The property is experiencing few turnovers this year compared to last year,
mostly due to a decrease in home buying. King’s Court/Terrace occupancy
was 92% at September 30, 2007. King’s Court/Terrace is located in
Olathe, Kansas. Overall occupancy
in the Olathe, Kansas
market has remained stable, with most competitors’ average occupancy in the high
80% to low 90% range. It appears that tenant concessions are declining. There
continues to be fewer people purchasing homes in this market due to the increase
in interest rates. Olathe is the fastest growing city in the Johnson County
area. Chalet, which is located in Topeka, Kansas, ended the quarter at 96%
occupancy. The average occupancy for competitors in this market is 93%. Chalet
offers few concessions due to consistently high occupancy
rates.
The Landings and Barrington Hills are both located
in Little Rock, Arkansas. The average occupancy rate for Little Rock is 93%
to
95%. The Landings and Barrington Hills had occupancy
rates of 99% and 87%, respectively on September 30, 2007. Barrington’s
decrease in occupancy from the same period in 2006 is due in part to a downturn
in the rental market in the Little Rock area. Management is currently giving
rent concessions to all prospective tenants of Barrington Hills. During the
most recent quarter, concessions in the Little Rock area have been more
aggressive.
Because of the damages incurred by Hurricane
Katrina in August 2005, Waverly is uninhabitable. Waverly is located in Bay
Saint Louis, Mississippi. Due to the effects of Hurricane Katrina, competitive
conditions in this area of Mississippi are difficult to ascertain at this time.
The occupancy at Northtown Business Center is 95%. The commercial and
industrial real estate market in North Kansas City continues at a steady growth
pace. This is partly due to North Kansas City’s close proximity to downtown
Kansas City, easy access and regional centrality. Lease rates at
Northtown Business Center are consistent with market
prices.
Comparison
of Consolidated Results
For
the
nine month periods ended September 30, 2007 and 2006, the Trust’s consolidated
revenues from continuing operations were $8,573,000 and $5,980,000,
respectively. Revenues increased $2,593,000 (43%) for the nine month period
ended September 30, 2007 as compared to the same period ended September 30,
2006. The increase is due primarily to the 2006 acquisitions of Northtown
Business Center and Valley Forge, and the 2007 acquisition of Highland Pointe.
Highland Pointe provided an additional $1,332,000 of revenues for the nine
month
period ended September 30, 2007. Northtown Business Center provided an
additional $876,000 for the nine month period ended September 30,
2007.
For
the
nine month periods ended September 30, 2007 and 2006, the Trust’s consolidated
operating expenses were $7,689,000 and $5,187,000, respectively. Expenses
increased $2,502,000 (48%) for the nine month period ended September 30, 2007,
as compared to the same period ended September 30, 2006. This increase is due
primarily to the properties acquired in 2006 and the acquisition of Highland
Pointe in 2007. The acquisitions of Northtown Business Center and Valley Forge
increased operating expenses by $528,000 for the nine month period ended
September 30, 2007. The acquisition of Highland Pointe increased operating
expenses by $1,287,000 for the nine month period ended September 30, 2007.
For
the nine months ended September 30, 2007, depreciation and amortization expense
increased by $868,000, interest expense increased by $568,000, repairs and
maintenance expense increased $235,000, utility expense increased $405,000
and
other operating expenses increased by $226,000. These increases pertain to
the
additional investment assets associated with the acquisition of Northtown
Business Center, Valley Forge and Highland Pointe.
The
net
loss from continuing operations before minority interest for the nine month
period ended September 30, 2007 was ($1,461,000)
or
($1.04) per share. The net loss from continuing operations before minority
interest for the nine-month period ended September 30, 2006 was ($447,000)
or
($.31) per share.
MARKET
RISK
The
Trust’s results of operations are highly dependent on fluctuations in interest
rates to the extent its properties are financed through variable interest rate
loans or fixed interest rates loans nearing maturity. See the table
under this
Item
2
titled “Contractual Obligations and Commercial Commitments for the interest
rates affecting each property. Only the loan on the Kings Court
property, which matures in May 2009, has a variable interest rate, and the
only
loan that matures within the next two years is the loan on the Terrace property
(June 2009). A 100 basis point increase in the variable rate debt on the Kings
Court property on an annual basis would impact net income by approximately
$22,000. The Bicycle Club, Landings and Valley Forge notes will allow prepayment
in full, subject to compliance with the prepayment terms as set forth in the
promissory note, including payment of the applicable prepayment premium. The
prepayment penalty is the greater of 1% of the amount of principal being prepaid
or the yield maintenance calculation as contained in the note. In regards to
Northtown Business Center, at closing the Trust paid a $31,500 nonrefundable
prepayment buy-out payment which allows the Trust to prepay all or part of
the
outstanding principal balance of the mortgage loan on any monthly payment date
without payment of any further prepayment charge or fee.
As
of
September 30, 2007, the Trust does not currently meet the required
stockholder’s equity under NASDAQ's Global Market continued listing
standards, which requires at least $10 million in stockholder’s
equity. Currently, management is evaluating options in order to
increase stockholder’s equity. Management is also considering the
possibility of transferring the listing to the NASDAQ Capital Market,
which has less stringent listing requirements. Management
expects to receive a letter from NASDAQ regarding the failure to meet
the continued listing standard. Management further expects the letter
will give the Trust fifteen days to provide a plan to NASDAQ reasonably
satisfactory to NASDAQ to become compliant with the listing standard or
face de-listing proceedings from the Global Market.
INFLATION
The
effects of inflation did not have a material impact upon the Trust's operations
during the current period.