News Column

AMREIT MONTHLY INCOME & GROWTH FUND III LTD - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 14, 2014

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

Certain information presented in this Quarterly Report constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include, but are not limited to, the following: changes in general economic conditions, changes in real estate market conditions, continued availability of proceeds from our debt or equity capital, our ability to locate suitable tenants for our properties, the ability of tenants to make payments under their respective leases, timing of development starts and sales of properties, the ability to meet development and redevelopment schedules and other risks, uncertainties and assumptions. Any forward-looking statement speaks only as of the date on which it was made, and we undertake no duty or obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

OVERVIEW

We are a Texas limited partnership formed to acquire, develop and operate, directly or indirectly through joint venture arrangements, commercial real estate consisting primarily of single-tenant and multi-tenant retail properties. Our Units are not currently listed on a securities exchange, and there currently is no established public trading market for our Units. We do not intend to list our Units on a securities exchange in the future.

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

Our operating period ended on October 31, 2012, and we have entered into our liquidation period. However, an orderly liquidation of all of our properties will likely take years for our General Partner to complete and wind up our operations. Because we have entered into our liquidation period, we will not invest in any new real estate without approval of our limited partners. Because liquidation was not imminent as of March 31, 2014, the financial statements are presented assuming we continue as a going concern.

As of March 31, 2014, our investments included two wholly-owned properties comprised of approximately 125,000 square feet of GLA and six properties in which we own a non-controlling interest through joint ventures comprising approximately 985,000 square feet of GLA. A majority of our properties are located in highly populated, suburban communities in Texas. Substantially all of our revenue is derived from rental income from these properties, primarily from net leasing arrangements, where most of the operating expenses of the properties are absorbed by our tenants. As a result, our operating results and cash flows are primarily influenced by rental income from our properties and interest expense on our property acquisition indebtedness. Rental income accounted for 100% of our total revenue during the three months ended March 31, 2014 and 2013. As of March 31, 2014, our properties had an average occupancy rate of approximately 86.0%.

We have elected to sell our Lantern Lane property and, subject to the approval by our Limited Partners, AmREIT has chosen to exercise its option to acquire the property. In accordance with pre-established procedures, we and AmREIT have obtained separate appraisals on the property from two independent, national appraisal groups. Because the appraisals were within 5% of one another, the purchase price will be the average of the two appraisals, which was $22.7 million. If approved by the Limited Partners, we expect the sale to close in the second quarter of 2014 and to generate net sales proceeds of approximately $7.5 million after repayment of the mortgage loan secured by the property. If the sale is consummated, we intend to retain approximately 50% of the net sales proceeds to fund the anticipated capital activities related to Casa Linda Shopping Center, 5433 Westheimer and Westside Plaza, and to distribute approximately 50% of the net sales proceeds to our Limited Partners within 30 days of completing the proposed disposition.

13



--------------------------------------------------------------------------------

Table of Contents

We have created a strategic plan to maximize the potential value of our real estate portfolio and execute an orderly, but opportunistic liquidation. The components of this strategic plan are as follows:

• Complete our development and redevelopment projects with a goal to stabilize these projects over the next 6-12 months. We believe that completing our development and redevelopment projects, including their lease-up and stabilization, will allow us to maximize the return on these properties upon sale. Our investments in 5433 Westheimer and PTC/BSQ represent our assets currently under development/redevelopment. See Note 3 for further discussion of redevelopment plans at each of these properties. • Continue to operate our projects in a first-class manner with a goal to generate operating cash flow in order to re-commence distributions. We believe that the stabilization of our development and redevelopment properties, coupled with the continued and intense oversight of our properties will generate liquidity that could allow us to re-commence distributions to our Limited Partners; however, this will most likely not occur until we begin to sell our real estate assets. • Sell our properties opportunistically as the market continues to recover. We are in process of obtaining approval to sell our Lantern Lane property as discussed above. Once a property is marketed for sale, it may take several months to receive offers and complete due diligence by both parties. Our General Partner continues to review market sales opportunities for our remaining operating properties, but believes that retail property valuations continue to be challenged, and, accordingly, that attractive sales opportunities may not exist in the near term for our other properties. When deciding whether or when to sell properties, our General Partner will consider factors such as potential appreciation of value, and timing of cash flows. As we have now entered the liquidation period, we will not be acquiring new real estate investments. We will be completing our development and redevelopment projects and distributing net proceeds generated from property sales to our Limited Partners unless the General Partner has identified attractive acquisition opportunities and obtained a majority vote of the Limited Partners to re-invest such proceeds.



Although we believe that our strategic plan maximizes the value of our properties and is in the best interests of our Limited Partners, no assurances can be given that this strategy will be successful. An orderly liquidation of all of our properties will take years for our General Partner to complete and wind up our operations. Because of challenging real estate market conditions, it is possible that investors may not recover all of their original investment.

RESULTS OF OPERATIONS

Below is a discussion of our results of operations for the three months ended March 31, 2014, as compared to the same period in 2013.

Comparison of the Three Months Ended March 31, 2014, to the Three Months Ended March 31, 2013

Revenues. Revenues increased approximately $39,000 for the three months ended March 31, 2014, as compared to the same period in 2013. The increase was primarily attributable to increased occupancy at our Lantern Lane and Westside Plaza properties.

Asset management fees - related party. Asset management fees - related party increased approximately $30,000 for the three months ended March 31, 2014, as compared to the same period in 2013. Our asset management fees are calculated based upon the net value of our assets, which increased as compared to the same period in 2013.

Property Expense. Property expense increased $56,000, or 27%, during the first quarter of 2014 as compared to the same period during 2013. The increase is primarily related to bad debt recoveries of $53,000 during the three months ended March 31, 2013 with no such recoveries during the same period in 2014.

Interest Expense. Interest expense decreased $106,000, or 27%, during the three months ended March 31, 2014 as compared to the same period in 2013. This decrease is due to loan costs becoming fully amortized for our Lantern Lane property and a lower outstanding balance on our notes payable - related party after repaying $5.9 million during 2013.

Income (loss) from non-consolidated entities. Loss from non-consolidated entities decreased $120,000, or 61%, during the first quarter 2014 as compared to the same period in 2013. The resulting decrease in loss is primarily related to improved lease-up of our properties and improved operating income from our investments in PTC/BSQ, Casa Linda and 5433 Westheimer as compared to the comparable period in 2013.

14



--------------------------------------------------------------------------------

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2014, we have $1.9 million in cash on hand. During 2013, we refinanced our PTC/BSQ joint venture debt, our Woodlake Square joint venture sold its Woodlake Square property and our Woodlake Pointe joint venture also sold a single tenant building and land parcel. Together, these transactions significantly improved our liquidity and allowed us to repay approximately $5.9 million of our notes payable - related party. However, we continue to face liquidity challenges. Our results of operations and valuations of our real estate assets have been negatively impacted by overall economic conditions from the recent recession. Most of our retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations were negatively impacted by these market dynamics. The United States has experienced recent improvements in the general economy; however, it is difficult to determine if the improvements experienced in 2013 will continue through 2014 and into the future.

Other than our Olmos Creek property, which we delivered to the lender as settlement of unpaid debt in February 2012, we have been successful in meeting our historic cash shortfalls through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) managing the timing of operating expense payments and, to the extent possible, accelerating cash collections, (3) deferring the payment of fees owed to our General Partner and its affiliates, (4) selling certain of our properties and investments in non-consolidated entities (see Note 3) and/or (5) obtaining funds through additional borrowings from AmREIT.

Our continuing short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our properties, regular debt service requirements and capital expenditures. We anticipate that our primary long-term liquidity requirements will include, but will not be limited to, operating expenses, making scheduled debt service payments, funding renovations, expansions, and other significant capital expenditures for our existing portfolio of properties including those of our joint ventures.

During 2012, we and MIG IV initiated a lease-up strategy at our Casa Linda property (a 50% joint venture between us and MIG IV). We expect to fund a total of approximately $1.5 million in capital expenditures representing our 50% share of a lease-up strategy at this property. The lease-up strategy includes certain tenant build-out and site improvements. As of March 31, 2014, the joint venture has incurred approximately $1.5 million in total of the planned capital expenditures. Additionally, the joint venture refinanced the $38.0 million mortgage on the property on December 27, 2013, with a four-year, non-recourse loan with the opportunity for an additional funding of approximately $4.5 million related to the potential acquisition of an adjacent property.

We continue to work with the Westside Plaza debt servicer (see Note 4 of the Notes to Consolidated Financial Statements) to modify the debt to allow for relief either through reduction of escrow requirements, waiver of penalties and forgiveness of principal or all of the above. We believe that we will be successful in this endeavor; however, we expect that we will need to repay a portion of the debt (approximately $450,000) and incur a 1% modification fee.

We have elected to sell our Lantern Lane property and, subject to the approval by our Limited Partners, AmREIT has chosen to exercise its option to acquire the property. In accordance with pre-established procedures, we and AmREIT have obtained separate appraisals on the property from two independent, national appraisal groups. Because the appraisals were within 5% of one another, the purchase price will be the average of the two appraisals, which was $22.7 million. If approved by the Limited Partners, we expect the sale to close in the second quarter of 2014 and to generate net sales proceeds of approximately $7.5 million after repayment of the mortgage loan secured by the property. If the sale is consummated, we intend to retain approximately 50% of the net sales proceeds to fund the anticipated capital activities related to Casa Linda Shopping Center, 5433 Westheimer and Westside Plaza, and to distribute approximately 50% of the net sales proceeds to our Limited Partners within 30 days of completing the proposed disposition.

Although no assurance can be given, we believe that we will be able to generate liquidity sufficient to continue to execute our strategic plan through a combination of the foregoing liquidity initiatives. There is no guarantee that we and our joint ventures will be successful with the above liquidity initiatives, and we may continue to look to AmREIT to provide additional financial support to us to meet our operating cash needs. Historically, AmREIT has deferred payment of advisory fees and payment of notes payable - related party to the extent such deferral of payments were necessary for our continued operation. In the event our liquidity is not sufficient to execute our strategy, AmREIT has agreed to defer payments, subject to its continued ability to do so.

Market Conditions

Our operations are sensitive to changes in overall economic conditions that impact our tenants, including, market and economic challenges experienced by the U.S. economy, the real estate industry or within our geographic markets where our properties are located. The U.S. economy has improved from the recent severe recession; however, should recessionary conditions return, such conditions could prevent us from realizing growth or maintaining the value of our properties. Even if such conditions do not impact us directly, such conditions could adversely affect our tenants.

15



--------------------------------------------------------------------------------

Table of Contents

While it is difficult to determine the breadth and duration of financial market problems and the many ways in which they may affect our tenants and our business, a general reduction in the level of tenant leasing or shifts in tenant leasing practices could adversely affect our business, financial condition, liquidity, results of operations, our redevelopment projects and future property dispositions. Additionally, if credit markets and/or debt or equity capital markets contract, our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to refinance existing debt and increase our future interest expense.

Cash Flow Activities for the Three Months Ended March 31, 2014 and 2013

Cash flows provided by (used in) operating activities, investing activities and financing activities during the three months ended March 31, 2014 and 2013, are as follows (in thousands):

2014 2013 Operating activities $ (89 )$ 326 Investing activities 826 (314 ) Financing activities (82 ) (2,294 )



Net cash flows used in operating activities increased by $415,000 during the three months ended March 31, 2014, as compared to the same period in 2013. This increase in cashed used is primarily due to fewer receipts of accounts receivable - related party and increased payments of liabilities compared to the same period in 2013.

Net cash flows provided by investing activities increased by $1.1 million during the three months ended March 31, 2014, as compared to the same period in 2013. This increase in cash inflows is primarily due to the $490,000 distribution that we received from our PTC/BSQ joint venture and receipt of $400,000 in repayments from Casa Linda, which MIG III had advanced to the property in the fourth quarter of 2013 for the payment of property taxes.

Net cash flows used in financing activities decreased by $2.2 million for the three months ended March 31, 2014, as compared to the same period in 2013. This decrease was primarily due to payments made during 2013 on notes payable - related party with no such payments made during the three months ended March 31, 2014.

OFF BALANCE SHEET ARRANGEMENTS

We also serve as guarantor on debt in the amount of $8.0 million, which relates to our 5433 Westheimer joint venture, of which we own 57.5%, and matures in 2017. See Note 3 of the Notes to Consolidated Financial Statements. While we serve as guarantor on this debt, we do not believe that we would be required to perform under the guarantee as we believe the fair value of the property exceeds the amount of the loan. Accordingly, we believe that our potential exposure is limited to our investment balance.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters