acpt10k_123107.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
/X/
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
OR
|
/ /
|
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)
Securities
registered pursuant to Section 12(b) of the Act:
TITLE
OF EACH CLASS
Common
Shares, $.01 par value
|
NAME
OF EACH EXCHANGE ON WHICH REGISTERED
American
Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Exchange Act.Yes / /No /x/
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act.Yes / /No
/x/
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 report(s)), and (2) has been subject to such filing requirements
for the past 90 days.Yes /x/No / /
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /
/
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer / / Accelerated
filer / / Non-accelerated filer /
/ Smaller Reporting Company /x/
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act). Yes /
/ No /x/
As of
June 30, 2007 the aggregate market value of the common shares held by
non-affiliates of the registrant, based on the closing price reported on the
American Stock Exchange on that day of $20.41, was $50,432,130. As of
March 1, 2008, there were 5,229,954 common shares outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement of American Community Properties Trust to be filed with
the Securities and Exchange Commission with respect to the 2008 Annual Meeting
of Shareholders, to be held on June 4, 2008, are incorporated by reference into
Part III of this report.
AMERICAN
COMMUNITY PROPERTIES TRUST
2007
Form 10-K Annual Report
|
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Page
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Item
1.
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4
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Item
1A.
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21
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Item
1B.
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25
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Item
2.
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25
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Item
3.
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25
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Item
4.
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26
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Item
4A.
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26
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Item
5.
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28
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Item
6.
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30
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Item
7.
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31
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Item
8.
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53
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Item
9.
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90
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Item
9T.
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90
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Item
9B.
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90
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Item
10.
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91
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Item
11.
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91
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Item
12.
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91
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Item
13.
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91
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Item
14.
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92
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Item
15.
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92
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95
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References to "we," "us," "our" or the
"Company" refer to American Community Properties Trust and our business and
operations conducted through our subsidiaries.
GENERAL
On March 17, 1997, American Community
Properties Trust ("ACPT" or the "Company"), a wholly owned subsidiary of
Interstate General Company L.P. ("IGC" or "Predecessor"), was formed as a real
estate investment trust under Title 8 of the Corporations and Associates Article
of the Annotated Code of Maryland (the "Maryland REIT Law"). ACPT was
formed to succeed to most of IGC's real estate assets.
On October 5, 1998, IGC transferred to
ACPT the common shares of four subsidiaries that collectively comprised the
principal real estate operations and assets of IGC. In exchange, ACPT
issued to IGC 5,207,954 common shares of ACPT, all of which were distributed to
the partners of IGC.
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 have been passed through to ACPT’s
shareholders. A federal tax regulation has been proposed that could
eliminate the pass through of these foreign tax credits to ACPT’s
shareholders. Comments on the proposed regulation are currently being
evaluated with the final regulation expected to be effective for tax years
beginning after the final regulation is ultimately published in the Federal
Register. ACPT’s federal taxable income consists of certain passive
income from IGP Group, a controlled foreign corporation, additional
distributions from IGP Group including Puerto Rico taxes paid on behalf of ACPT,
and dividends from ACPT’s U.S. subsidiaries. Other than Interstate
Commercial Properties (“ICP”), which is taxed as a Puerto Rico corporation, the
taxable income from the remaining Puerto Rico operating entities passes through
to IGP Group or ALD. Of this taxable income, only the portion of taxable
income applicable to the profits, losses or gains on the residential land sold
in Parque Escorial passes through to ALD. ALD, ARMC, and ARPT are taxed as
U.S. corporations. The taxable income from the U.S. multifamily rental
properties flows through to ARPT.
ARPT
ARPT holds partnership interests in 21
multifamily rental properties ("U.S. Apartment Properties") indirectly through
American Housing Properties L.P. ("AHP"), a Delaware limited partnership, in
which ARPT has a 99% limited partner interest and American Housing Management
Company, a wholly owned subsidiary of ARPT, has a 1% general partner
interest.
ARMC
ARMC performs property management
services in the United States for the U.S. Apartment Properties and for one
other rental apartment not owned by ACPT.
ALD
ALD owns and operates the assets of
ACPT's United States community development operations. These include the
following:
1.
|
a
100% interest in St. Charles Community LLC ("SCC LLC") which holds
approximately 4,000 acres of land in St. Charles,
Maryland;
|
2.
|
the
Class B interest in Interstate General Properties Limited Partnership
S.E., a Maryland limited partnership ("IGP"), that represents IGP's rights
to income, gains and losses associated with the balance of the residential
land in Parque Escorial in Puerto Rico held by Land Development
Associates, S.E. ("LDA"), a wholly owned subsidiary of IGP;
and
|
3.
|
a
50% interest, through SCC LLC, in a land development joint venture, St.
Charles Active Adult Community, LLC
(“AAC”).
|
IGP
Group
IGP Group owns and operates the assets
of ACPT's Puerto Rico division indirectly through a 99% limited partnership
interest and 1% general partner interest in IGP excluding the Class B IGP
interest transferred to ALD. IGP's assets and operations include:
1.
|
a
100% partnership interest in LDA, a Puerto Rico special partnership which
holds 120 acres of land in the planned community of Parque Escorial and
490 acres of land in Canovanas;
|
2.
|
general
partner interests in 9 multifamily rental properties (“Puerto Rico
Apartment Properties”), and a limited partner interest in 1 of the 9
partnerships;
|
3.
|
a
100% ownership interest in Escorial Office Building I, Inc. (“EOBI”),
through LDA and IGP, a Puerto Rico corporation that holds the operations
of a three-story, 56,000 square foot office
building;
|
4.
|
a
100% ownership interest in ICP, an entity that holds the partnership
interest in El Monte Properties S.E.
(“EMP”);
|
5.
|
a
limited partnership interest in ELI, S.E. ("ELI"), that holds a 45.26%
share in the future cash flow generated from a 30-year lease of an office
building to the State Insurance Fund of the Government of Puerto Rico;
and
|
6.
|
an
indirect 100% ownership interest, through LDA and IGP, in Torres del
Escorial, Inc. ("Torres"), a Puerto Rico corporation organized
to build 160 condominium units.
|
In July 2007, J. Michael Wilson filed a
Form 13 D/A announcing the Wilson family’s intentions to obtain an investor for
a potential management buyout of the company. Accordingly, the Board of Trustees
formed a Special Committee of Independent Trustees to take such actions on
behalf of the Trust related to or airsing in connection with any such potential
transactions.
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. Set forth below is a brief description of these businesses
within each of our segments.
U.S.
SEGMENT:
INVESTMENT
IN RENTAL PROPERTIES
Multifamily Rental
Properties
ACPT, indirectly through ARPT and AHP,
holds interests in 21 U.S. Apartment Properties that own and operate apartment
facilities in Maryland and Virginia. The U.S. Apartment Properties include a
total of 3,366 rental units. Each of the U.S. Apartment Properties is financed
by a non-recourse mortgage whereby the owners are not jointly and severally
liable for the debt. The U.S. Department of Housing and Urban
Development ("HUD") provides rent subsidies to the projects for residents of 973
apartment units. In addition, 110 units are leased pursuant to HUD's Low Income
Housing Tax Credit ("LIHTC") program, and 139 other units are leased under
income guidelines set by the Maryland Community Development Administration. The
remaining 2,144 units are leased at market rates.
The Company continues to believe that
its investments in suburban multifamily rental properties will provide long-term
value. Suburban multifamily capitalization rates decreased for the
third consecutive year to 6.34%, down from 6.44% for 2006 and remain in the
first position relative to other types of real estate investment.1
New Multifamily Rental
Property Construction
Sheffield
Greens Apartments, which began leasing efforts in the first quarter of 2006,
completed the lease-up of the facility in the second quarter 2007. 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. The
complex was substantially complete as of January 31, 2007, with all units
available for occupancy at that time.
The Company is currently planning the
construction of a 184 unit luxury apartment complex within St. Charles, called
Gleneagles Apartments. Gleneagles Apartments is expected to consist
of 1, 2 and 3 bedroom units ranging in size of 905 to 1840 square
feet. The Company currently anticipates average monthly rents of
approximately $1,625 per unit. Pre-leasing efforts are currently
scheduled to commence during the second quarter of 2008, with delivery of the
initial units within the complex during the first quarter of
2009. The Company has submitted for building permits, and currently
anticipates final approval from Charles County by the third quarter of
2008. Construction of the project is expected to begin promptly after
the permits are issued. The Company is also currently in the process
of obtaining a HUD insured loan for this project which is expected to close
within 60 days of receiving the County’s approval of the
plat.
1 Per Integra Realty
Resources (“IRR”) Viewpoint 2008, “Real Estate Value Trends”
Multifamily Rental Property
Acquisitions
The following table sets forth the name
of each entity owning U.S. Apartment Properties; the number of rental units in
the property; the percentage of all units held by U.S. Apartment Properties; the
project cost; the percentage of such units under lease; and the expiration date
and maximum benefit for any subsidy contract:
|
|
Number
of
|
|
|
|
|
|
12/31/2007
|
|
|
Occupancy
|
|
|
Expiration
|
|
|
Maximum
|
|
|
|
Apartment
|
|
|
Percentage
of
|
|
|
Project
Cost (A)
|
|
|
at
|
|
|
Of
Subsidy
|
|
|
Subsidy
|
|
U.S.
APARTMENTS PROPERTIES
|
|
Units
|
|
|
Portfolio
|
|
|
(in
thousands)
|
|
|
12/31/2007
|
|
|
Contract
|
|
|
(in
thousands)
|
|
Consolidated
Partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bannister
|
|
|
167 |
|
|
|
5 |
% |
|
$ |
9,736 |
|
|
|
94 |
% |
|
N/A |
|
|
$ |
- |
|
|
|
|
41 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
521 |
|
Coachman's
|
|
|
104 |
|
|
|
3 |
% |
|
|
7,997 |
|
|
|
97 |
% |
|
N/A |
|
|
|
- |
|
Crossland
|
|
|
96 |
|
|
|
3 |
% |
|
|
3,358 |
|
|
|
92 |
% |
|
N/A |
|
|
|
- |
|
Essex
|
|
|
496 |
|
|
|
15 |
% |
|
|
21,037 |
|
|
|
98 |
% |
|
2008
|
|
|
|
4,488 |
|
Fox
Chase
|
|
|
176 |
|
|
|
5 |
% |
|
|
8,969 |
|
|
|
97 |
% |
|
N/A |
|
|
|
- |
|
Headen
House
|
|
|
136 |
|
|
|
4 |
% |
|
|
8,582 |
|
|
|
97 |
% |
|
2008
|
|
|
|
1,641 |
|
Huntington
|
|
|
204 |
|
|
|
6 |
% |
|
|
10,115 |
|
|
|
96 |
% |
|
2008
|
|
|
|
2,421 |
|
Lancaster
|
|
|
104 |
|
|
|
3 |
% |
|
|
6,002 |
|
|
|
96 |
% |
|
N/A |
|
|
(B)
|
|
Milford
Station I
|
|
|
200 |
|
|
|
6 |
% |
|
|
13,165 |
|
|
|
91 |
% |
|
N/A |
|
|
|
- |
|
Milford
Station II
|
|
|
50 |
|
|
|
1 |
% |
|
|
1,861 |
|
|
|
96 |
% |
|
N/A |
|
|
|
- |
|
New
Forest
|
|
|
256 |
|
|
|
8 |
% |
|
|
15,412 |
|
|
|
93 |
% |
|
N/A |
|
|
|
- |
|
Nottingham
South
|
|
|
85 |
|
|
|
3 |
% |
|
|
3,049 |
|
|
|
89 |
% |
|
N/A |
|
|
|
- |
|
Owings
Chase
|
|
|
234 |
|
|
|
7 |
% |
|
|
15,749 |
|
|
|
95 |
% |
|
N/A |
|
|
|
- |
|
Palmer
|
|
|
96 |
|
|
|
3 |
% |
|
|
9,138 |
|
|
|
91 |
% |
|
N/A |
|
|
|
- |
|
|
|
|
56 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
709 |
|
Prescott
Square
|
|
|
73 |
|
|
|
2 |
% |
|
|
4,738 |
|
|
|
92 |
% |
|
N/A |
|
|
|
- |
|
Sheffield
Greens
|
|
|
252 |
|
|
|
7 |
% |
|
|
25,854 |
|
|
|
93 |
% |
|
N/A |
|
|
|
- |
|
Village
Lake
|
|
|
122 |
|
|
|
3 |
% |
|
|
8,010 |
|
|
|
91 |
% |
|
N/A |
|
|
|
- |
|
Wakefield
Terrace
|
|
|
164 |
|
|
|
5 |
% |
|
|
11,325 |
|
|
|
93 |
% |
|
N/A |
|
|
|
- |
|
|
|
|
40 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
525 |
|
Wakefield
Third Age (Brookmont)
|
|
|
104 |
|
|
|
3 |
% |
|
|
5,552 |
|
|
|
95 |
% |
|
N/A |
|
|
|
- |
|
|
|
|
3,256 |
|
|
|
96 |
% |
|
|
189,649 |
|
|
|
|
|
|
|
|
|
|
|
10,305 |
|
Unconsolidated
Partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookside
Gardens
|
|
|
56 |
|
|
|
2 |
% |
|
|
2,694 |
|
|
|
98 |
% |
|
N/A |
|
|
(C)
|
|
Lakeside
Apartments
|
|
|
54 |
|
|
|
2 |
% |
|
|
4,130 |
|
|
|
98 |
% |
|
N/A |
|
|
(C)
|
|
|
|
|
110 |
|
|
|
4 |
% |
|
|
6,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,366 |
|
|
|
100 |
% |
|
$ |
196,473 |
|
|
|
|
|
|
|
|
|
|
$ |
10,305 |
|
(A)
|
Project
costs represent total capitalized costs for each respective property as
per Schedule III "Real Estate and Accumulated Depreciation" in Item 8 of
this 10-K.
|
(B)
|
Not
subsidized, however, 54 units are subject to household income restrictions
set by the Maryland Community Development Administration
(“MCDA”).
|
(C)
|
Not
subsidized, but all units are set aside for low to moderate income tenants
over certain age limitations under provisions set by the LIHTC
program.
|
The
following table sets forth the operating results, mortgage balances and our
economic interest in the U.S. Apartment Properties by location ($ amounts in
thousands, all other figures are actual):
U.S.
APARTMENT PROPERTIES
|
|
Number
of Apartment Units
|
|
|
Operating
Revenues
|
|
|
Operating
Expenses (a)
|
|
|
Non-Recourse
Mortgage Outstanding
|
|
|
Economic
Interest Upon Liquidation (b)
|
|
|
Consolidated
Partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
County, Maryland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bannister
|
|
|
208 |
|
|
$ |
2,561 |
|
|
$ |
1,118 |
|
|
$ |
12,501 |
|
|
|
100.0 |
% |
|
Coachman's
|
|
|
104 |
|
|
|
1,695 |
|
|
|
687 |
|
|
|
10,883 |
|
|
|
95.0 |
% |
|
Crossland
|
|
|
96 |
|
|
|
1,188 |
|
|
|
555 |
|
|
|
4,091 |
|
|
|
60.0 |
% |
|
Fox
Chase
|
|
|
176 |
|
|
|
2,293 |
|
|
|
883 |
|
|
|
12,840 |
|
|
|
99.9 |
% |
|
Headen
House
|
|
|
136 |
|
|
|
1,634 |
|
|
|
625 |
|
|
|
6,914 |
|
|
|
75.5 |
% |
|
Huntington
|
|
|
204 |
|
|
|
2,432 |
|
|
|
1,533 |
|
|
|
9,218 |
|
|
|
50.0 |
% |
|
Lancaster
|
|
|
104 |
|
|
|
1,462 |
|
|
|
683 |
|
|
|
8,491 |
|
|
|
100.0 |
% |
|
New
Forest
|
|
|
256 |
|
|
|
3,971 |
|
|
|
1,520 |
|
|
|
22,717 |
|
|
|
99.9 |
% |
|
Palmer
|
|
|
152 |
|
|
|
1,874 |
|
|
|
789 |
|
|
|
6,746 |
|
|
|
75.5 |
% |
|
Sheffield
Greens
|
|
|
252 |
|
|
|
3,700 |
|
|
|
1,871 |
|
|
|
26,945 |
|
|
|
100.0 |
% |
|
Village
Lake
|
|
|
122 |
|
|
|
1,604 |
|
|
|
649 |
|
|
|
9,205 |
|
|
|
95.0 |
% |
|
Wakefield
Terrace
|
|
|
204 |
|
|
|
2,283 |
|
|
|
1,085 |
|
|
|
10,041 |
|
|
|
75.5 |
% |
|
Wakefield
Third Age (Brookmont)
|
|
|
104 |
|
|
|
1,280 |
|
|
|
558 |
|
|
|
7,295 |
|
|
|
75.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baltimore
County, Maryland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milford
Station I
|
|
|
200 |
|
|
|
1,907 |
|
|
|
1,036 |
|
|
|
10,491 |
|
|
|
100.0 |
% |
|
Milford
Station II
|
|
|
50 |
|
|
|
399 |
|
|
|
284 |
|
|
|
1,345 |
|
|
|
100.0 |
% |
|
Nottingham
South
|
|
|
85 |
|
|
|
639 |
|
|
|
478 |
|
|
|
2,560 |
|
|
|
100.0 |
% |
|
Owings
Chase
|
|
|
234 |
|
|
|
2,427 |
|
|
|
1,302 |
|
|
|
12,376 |
|
|
|
100.0 |
% |
|
Prescott
Square
|
|
|
73 |
|
|
|
785 |
|
|
|
479 |
|
|
|
3,590 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henrico
County, Virginia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Essex
|
|
|
496 |
|
|
|
4,282 |
|
|
|
2,757 |
|
|
|
14,025 |
|
|
|
50.0 |
% |
(c)
|
Total
Consolidated
|
|
|
3,256 |
|
|
|
38,416 |
|
|
|
18,892 |
|
|
|
192,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated
Partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
County, Maryland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookside
Gardens
|
|
|
56 |
|
|
|
318 |
|
|
|
271 |
|
|
|
1,241 |
|
|
|
|
|
(d)
|
Lakeside
|
|
|
54 |
|
|
|
493 |
|
|
|
262 |
|
|
|
1,952 |
|
|
|
|
|
(e)
|
Total
Unconsolidated
|
|
|
110 |
|
|
|
811 |
|
|
|
533 |
|
|
|
3,193 |
|
|
|
|
|
|
Grand
Total
|
|
|
3,366 |
|
|
$ |
39,227 |
|
|
$ |
19,425 |
|
|
$ |
195,467 |
|
|
|
|
|
|
|
|
(a)
|
Amounts
exclude management fees eliminated in
consolidation.
|
(b)
|
Surplus
cash from operations and proceeds from sale or liquidation are allocated
based on the economic interest except those identified by additional
description.
|
(c)
|
Upon
liquidation, the limited partners have a priority distribution equal to
their unrecovered capital. As of December 31, 2007, the
unrecovered limited partner capital for Essex was
$1,890,000. The Company’s receivable of $2,958,000 is the
second priority of proceeds from the sale or liquidation on the
property. Until the limited partners have recovered their
capital contributions, any surplus cash is distributed first to the
limited partners up to $100,000, then a matching $100,000 to the general
partner, with any remaining split between the general partner and the
limited partners.
|
(d)
|
The
allocation of profits and surplus cash, as per the partnership agreement,
is based on a complex waterfall calculation. The Company’s
share of the economic ownership is
immaterial.
|
(e)
|
The
allocation of profits and surplus cash, as per the partnership agreement,
is based on a complex waterfall calculation. The Company is
currently eligible to receive $363,000 in distributions related to the
payment of a development fee. This amount receives priority
over return of equity to the partners but is subordinate to a $3,000 per
year preferred return to the minority partners. Upon settlement
of all priority items, balance is split 70% to the company and 30% to the
minority partners.
|
Government
Regulation
HUD subsidies are provided principally
under Section 8 of the National Housing Act. Under Section 8, the government
pays to the applicable apartment partnership the difference between market
rental rates (determined in accordance with government procedures) and the rate
the government deems residents can afford. In compliance with the
requirements of Section 8, ARMC screens residents for eligibility under HUD
guidelines. Subsidies are provided under contracts between the federal
government and the owners of the apartment properties.
Subsidy contracts for ACPT's U.S.
Apartment Properties are scheduled to expire between 2008 and 2011. ACPT
currently intends to seek the renewal of expiring subsidy contracts for its
properties based on the most advantageous options available at the time of
renewal. Please refer to the table shown on page 7 for the expiration dates and
amounts of subsidies for the respective properties. We initiate the HUD contract
renewal process annually. For contracts where we have elected five-year terms,
we are limited to increases based on an Operating Cost Adjustment Factor
(“OCAF”). At the end of the five-year term, or annually if a
five-year term is not elected, we will have six options for renewing Section 8
contracts depending upon whether we can meet the eligibility
criteria. Historically, we have met the criteria necessary to renew
our Section 8 contracts.
Cash flow from projects whose mortgage
loans are insured by the Federal Housing Authority ("FHA"), or financed through
the housing agencies in Maryland or Virginia (the "State Financing Agencies")
are subject to guidelines and limits established by the apartment properties'
regulatory agreements with HUD and the State Financing Agencies.
Our regulatory contracts with HUD
and/or the mortgage lenders generally require that certain escrows be
established as replacement reserves. The balance of the replacement
reserves are available to fund capital improvements as approved by HUD or the
mortgage lender. As of December 31, 2007, a total of $3.5 million was
designated as replacement reserves for the consolidated U.S. Apartment
Partnerships.
HUD has received congressional
authority to convert expired contracts to resident-based vouchers. This would
allow residents to choose where they wish to live, which may include the
dwelling unit in which they currently reside. If these vouchers
result in our tenants moving from their existing apartments, this may negatively
impact the income stream of certain properties. However, we intend to continue
to maintain our properties in order to preserve their values and retain
residents to the greatest extent possible.
The federal government has virtually
eliminated subsidy programs for new construction of low and moderate income
housing by profit-motivated developers such as ACPT. Any new
multifamily rental properties developed by ACPT in the U.S. are expected to
offer market rate rents.
Competition
ACPT's investment properties that
receive rent subsidies are not subject to the same market conditions as
properties charging market rate rents. The Company's subsidized units average
annual occupancy of approximately 98%. ACPT's apartments in St.
Charles that have market rate rents are impacted by the supply and demand for
competing rental apartments in the area, as well as the local housing market.
Our occupancy rates for our market rate properties typically range from 90% to
99%. When for-sale housing becomes more affordable due to lower
mortgage interest rates or softening home prices, this can adversely impact the
performance of rental apartments. Conversely, when mortgage interest rates rise
or home prices increase, the market for apartment rental units typically
benefits. With the recent subprime mortgage crisis, the Company has
seen new homeowners who can no longer afford the increases in their adjustable
rate mortgages return to the rental market.
The Company has historically been the
only source for multifamily apartment living in the St. Charles and surrounding
Waldorf areas. In the spring of 2008, Archstone-Smith is expected to
open “Westchester at the Pavilions,” a luxury apartment community in St.
Charles. We believe that rents within this new facility will be
higher than those currently charged for the Company’s
apartments. However, it is unclear if and to what extent occupancy at
our higher end fair market properties will be impacted by the addition of these
units into the St. Charles market.
PROPERTY
MANAGEMENT
ACPT, indirectly through ARMC, operates
a property management business in the Washington, D.C. metropolitan area,
Baltimore, Maryland and in Richmond, Virginia. ARMC earns fees from the
management of 3,654 rental apartment units. ACPT holds an ownership interest in
3,366 units managed by ARMC. Management fees for these 3,366 units
are based on a percentage of rents ranging from 4% to 6.5%. The management
contracts for these properties have terms of one or two years and are
automatically renewed upon expiration but, may be terminated on 30 days notice
by either party. ARMC is entitled to receive an aggregate incentive management
fee of $40,000 annually from two of the properties that it manages, as well as
the potential to receive an incentive management fee of $100,000 from another
property that it manages. The payment of these fees is subject to the
availability of surplus cash. Management and other fees earned from properties
included within the consolidated financial statements are eliminated in
consolidation. Management fees for the other managed apartment property owned by
a third party equal 3% of rents. Effective February 28, 2007, the Company’s
management agreement with one of these managed apartment properties, G.L.
Limited Partnership, was terminated upon the sale of the apartment property to a
third party.
COMMUNITY
DEVELOPMENT
ACPT, indirectly through ALD, owns
approximately 3,950 undeveloped acres in the planned community of St. Charles,
which is comprised of a total of approximately 9,100 acres (approximately 14
square miles) located in Charles County, Maryland, 23 miles southeast of
Washington, D.C. The land in St. Charles is being developed by ACPT
and its subsidiaries for a variety of residential uses, including single-family
homes, townhomes, condominiums and apartments, as well as commercial and
industrial uses.
St. Charles is comprised of five
separate villages: Smallwood Village (completed), Westlake Village
(substantially completed), Fairway Village (currently under development), Piney
Reach (undeveloped except for certain infrastructure improvements) and Wooded
Glen (undeveloped except for certain infrastructure improvements). Each of the
developed villages consists of individually planned neighborhoods, and includes
schools, churches, recreation centers, sports facilities, and a shopping center.
Other amenities include parks, lakes, hiking trails and bicycle paths. St.
Charles also has an 18-hole public golf course in its Fairway Village community.
Each community is planned for a mix of residential housing, including detached
single-family homes, townhomes, multiplex units and rental apartments. Typical
lot sizes for detached homes range from 6,000 to 8,000 square feet.
The development of St. Charles as a
planned unit development ("PUD") began in 1972 when Charles County approved a
comprehensive PUD agreement for St. Charles. This master plan allows for the
construction of 24,730 housing units and approximately 1,390 acres of commercial
and industrial development. As of December 31, 2007, there were more than 11,000
completed housing units in St. Charles, including Carrington neighborhood, which
began prior to 1972 and are not included in the PUD. In addition, there are
schools, recreation facilities, commercial, office and retail space in excess of
4.4 million square feet in St. Charles. ACPT, through outside
planners, engineers, architects and contractors, obtains necessary approvals for
land development, plans individual neighborhoods in accordance with regulatory
requirements, constructs roads, utilities and community facilities. ACPT
develops lots for sale for detached single-family homes, townhomes, apartment
complexes, and commercial and industrial development.
Fairway Village, named for the existing
18-hole public golf course it surrounds, is under development. The master plan
provides for 3,346 dwelling units on 1,612 acres, including a business park and
a 68-acre village center. Opened in 1999, development of Fairway Village
continues to progress as evidenced by the 78 lots settled in 2007 and the 129
completed lots in backlog as of December 31, 2007. All settlements made in 2007
were the result of the March 2004 agreement with Lennar Corporation (“Lennar”)
discussed below. Since inception of Fairway Village, builders have
settled 628 fully developed lots in the first thirteen parcels. In
addition to lots in backlog, infrastructure construction has started on the next
68 single family lots and 148 townhome lots, with completion expected by the end
of 2008. Some of this lot development is being completed in order for
the Company to have access to the parcel designated for our Gleneagles Apartment
complexes. Additional parcels are in the engineering phase.
The last two villages, Wooded Glen and
Piney Reach, comprise approximately 3,000 acres, and are planned for development
near the completion of Fairway Village. The County Commissioners must approve
the total number and mix of residential units before development can
begin. There can be no assurances that the total 24,730 units in St.
Charles' master plan can be attained within the remaining acreage currently
owned.
The Company continues to look for
opportunities to purchase land for future development. However, there
can be no assurance that the Company will be able to locate additional land
suitable for future development.
As of December 31, 2007, 35.66 acres of
developed commercial land and 129 residential lots were available for
delivery.
The
following table is a summary of the land inventory available in St. Charles as
of December 31, 2007:
|
|
Lot
Type
|
Estimated
Number of Lots
|
Approximate
Acreage
|
Entitlements
|
Estimated
Expected Date of Sale
|
Estimated
Aggregate Sales Price
|
SMALLWOOD
VILLAGE
|
|
|
|
|
|
|
|
Commercial,
Retail, Office:
|
|
|
|
|
|
|
|
Henry
Ford Circle
|
Commercial
|
8
|
8.89
|
A
|
2008
- 2009
|
$1.8
- $2.0 million
|
|
Industrial:
|
|
|
|
|
|
|
|
Industrial
Park North Tract 21, Parcel F
|
Light
Industrial
|
1
|
4.18
|
A
|
TBD
|
TBD
|
|
Industrial
Park North Tract 23, Parcel A
|
Light
Industrial
|
1
|
1.95
|
A
|
TBD
|
TBD
|
WESTLAKE
VILLAGE
|
|
|
|
|
|
|
|
Commercial,
Retail, Office:
|
|
|
|
|
|
|
|
Town
Center Parcel A3
|
Restaurant,
Office, Retail
|
4
|
7.76
|
A
|
2008
- 2012
|
$6
million
|
|
Town
Center Parcel A3 Lot 3
|
Restaurant,
Office Retail
|
1
|
1.50
|
A
|
Internal
Use
|
N/A
|
|
Parcel
M
|
Office,
Retail
|
1
|
2.61
|
A
|
2008
|
$300,000
|
|
Hampshire
Commercial Parcel Q
|
Commercial
|
1
|
13.31
|
C
|
TBD
|
$
2.1 million
|
FAIRWAY
VILLAGE
|
|
|
|
|
|
|
|
Residential
Lots:
|
|
|
|
|
|
|
|
Sheffield
Parcel I
|
SF
Attached
|
8
|
20.12
|
A
|
2008
|
*
|
|
Sheffield
Parcel G/M1
|
SF
Detached
|
121
|
32.15
|
A
|
2008
– 2009
|
*
|
|
Sheffield
Parcel J
|
SF
Attached
|
148
|
34.30
|
B
|
2008
- 2010
|
*
|
|
Gleneagles
Parcel A
|
Multi-Family
|
120
|
12.40
|
B
|
Internal
Use
|
N/A
|
|
Gleneagles
Parcel B
|
Multi-Family
|
184
|
13.00
|
B
|
Internal
Use
|
N/A
|
|
Gleneagles
Parcel D
|
SF
Detached
|
68
|
28.40
|
B
|
2008
- 2009
|
*
|
|
Gleneagles
Parcel E
|
SF
Detached
|
117
|
53.70
|
B
|
2009
- 2010
|
*
|
|
Gleneagles
Parcel C
|
SF
Attached
|
128
|
21.20
|
B
|
2010
- 2011
|
*
|
|
Gleneagles
Parcel F
|
SF
Detached
|
84
|
31.00
|
B
|
2009
- 2010
|
*
|
|
Gleneagles
South Neighborhood
|
SF
Attached
|
194
|
25.00
|
C
|
2011
- 2013
|
*
|
|
Gleneagles
South Neighborhood
|
SF
Detached
|
642
|
224.40
|
C
|
2010
- 2013
|
*
|
|
Gleneagles
South Neighborhood
|
Multi-Family
|
165
|
14.00
|
C
|
Internal
Use
|
N/A
|
|
Commercial,
Retail, Office:
|
|
|
|
|
|
|
|
Middle
Business Park Parcel D
|
Office,
Commercial
|
14
|
42.15
|
B
|
TBD
|
TBD
|
|
Fairway
Village Center
|
Retail,
Commercial
|
1
|
93.90
|
B
|
TBD
|
TBD
|
|
Middle
Business Park Parcel B
|
Office,
Commercial
|
4
|
32.85
|
B
|
TBD
|
TBD
|
|
Middle
Business Park Parcel C
|
Office,
Commercial
|
3
|
16.16
|
B
|
TBD
|
TBD
|
VILLAGE
OF WOODED GLEN
|
|
|
|
|
|
|
|
Residential
Parcels
|
TBD
|
7,155
|
1810.40
|
D
|
TBD
|
TBD
|
|
Wooded
Glen Village Center
|
Retail,
Commercial
|
1
|
30.00
|
C
|
TBD
|
TBD
|
VILLAGE
OF PINEY REACH
|
|
|
|
|
|
|
|
Residential
Parcels
|
TBD
|
2,921
|
666.60
|
D
|
TBD
|
TBD
|
|
Piney
Reach Village Center
|
Retail,
Commercial
|
1
|
37.30
|
C
|
TBD
|
TBD
|
|
Piney
Reach Industrial Park
|
Industrial
|
1
|
76.18
|
C
|
2009
|
$13.0
million
|
|
Piney
Reach Industrial Park
|
Industrial
|
66
|
506.59
|
C
|
TBD
|
TBD
|
(A)
Sites are fully developed and ready for sale
|
|
|
|
|
(B)
Completed master plan approval including all entitlements and received
preliminary site plan approval for development
|
(C)
Completed master plan approval including all entitlements
|
(D)
Completed master plan approval including all entitlements excluding school
allocations
|
TBD
means To Be Determined.
|
* Price
determined as a percentage (generally 30%) of the "Base Selling Price" of
the new home constructed and sold on the lot per the terms of the sales
agreement with Lennar Corporation.
|
Customer
Dependence
In March
2004, the Company executed development and purchase agreements with Lennar’s
homebuilding subsidiary to develop and sell approximately 1,950 residential
lots, consisting of approximately 1,359 single-family lots and 591 town home
lots in Fairway Village (the “Lennar Agreements”). The Lennar
Agreements require the homebuilder to provide $20,000,000 of letters of credit
to secure the purchase of the lots. The letters of credit will be
used as collateral for major infrastructure loans from the Charles County
Commissioners of up to $20,000,000 and will be reduced as the Company repays the
principal of these loans. As security for the Company’s obligations
to Lennar, a junior lien was placed on the residential portion of Fairway
Village. For each lot sold in Fairway Village, the Company will deposit $10,300
in an escrow account to fund the principal payments due to the Charles County
Commissioners at which time the lot is released from the junior
lien. Under the Lennar Agreements, the Company is responsible for
making developed lots available to Lennar on a monthly basis, and subject to
availability, the builder is required to purchase a minimum of 200 residential
lots developed by the Company per year. Based on 200 lot sales per
year, it is estimated that settlements will take place through 2015; however,
the continued slowing of the new homes sales market in the United States, and
more specifically in the Washington D.C. suburban areas, has adversely impact
Lennar’s willingness or ability to take down 200 lots per year. In
December 2007, the Company executed an amendment to the Lennar Agreements (the
“December Amendment”) whereby the Company agreed to accept 51 lot settlements in
December 2007 as satisfaction of Lennar’s lot takedown requirement for 2007,
resulting in 78 total lots taken down by Lennar during 2007.
According
to the terms of the Lennar Agreements, the final selling price of the lots will
be calculated based on 30% of the base sales price of homes sold by the
builder. As part of the December Amendment to the Lennar Agreements,
the Company agreed to temporarily reduce the final lot price for 100 lots (51
taken down in December 2007 and 49 which Lennar has agreed to take before June
1, 2008) from 30% to 22.5% of the base price of the home sold on the lot, with
guaranteed minimum prices of $78,000 per single family lot and $68,000 per
townhome lot. Currently new townhomes in Fairway Village are priced
between $330,000 and $400,000 while single family homes in Fairway Village are
priced between $390,000 and $500,000.
In
September 2004, the Company entered into a joint venture agreement with Lennar
for the development of a 352-unit, active adult community located in St.
Charles, Maryland; and transferred land to the joint venture in exchange for a
50% ownership interest and $4,277,000 in cash. Lennar and the Company
each have an equal interest in the cash, earnings and decision making concerning
the joint venture. The joint venture's operating agreement calls for the
development of 352 lots. Delivery of these lots began in the fourth
quarter of 2005. The Company manages the project's development for a
market rate fee pursuant to a management agreement. However, the
joint venture has ceased development activities for one year, as to date, lot
development has outpaced sales.
Revenues
from Lennar include residential land sales as well as certain management
fees. Total revenues from Lennar within our U.S. segment were
$9,663,000 for the year ended December 31, 2007 which represents 18% of the U.S.
segment's revenue and 11% of our total year-to-date consolidated
revenue. No other customers accounted for more than 10% of our
consolidated revenue for the year ended December 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. If such an event
were to occur, there would be no assurance that the lost volume would be
replaced timely and on comparable terms.
Government
Approvals
The St. Charles master plan has been
incorporated into Charles County's comprehensive zoning plan. In addition, the
Charles County government (the “County”) has agreed to provide sufficient water
and sewer connections for the balance of the housing units to be developed in
St. Charles. Specific development plans for each village in St.
Charles are subject to approval of the County Planning Commission. Such
approvals have previously been received for the villages of Smallwood, Westlake
and Fairway. Approvals have not yet been sought on the final two
villages.
In 2001, the Charles County
Commissioners enacted the Adequate Public Facilities Policy. This
policy limits the number of residential building permits issued to the amount of
school allocations calculated in a given period.
Under a
settlement agreement reached between ACPT and the County in 2001, the County
provided guaranteed school allocations to St. Charles for 898 new dwelling
units. The County subsequently granted allocations for an additional
200 dwelling units in 2005, 300 for 2006, 300 for 2007 and in January of 2008,
the County granted us an additional 300 units for 2008. To date, we
have recorded 898 dwelling units with the County leaving us with a balance of
1,096 school allocations available for new dwelling units. School
allocations are used when the Company records the subdivision plats with the
County. The Company anticipates using 452 allocations in 2008 related
to additional lot development and beginning construction of Gleneagles
multifamily housing.
Under the
settlement agreement, the County agreed to utilize a base line assumption of 200
school allocations per year, however, there are no guarantees that additional
allocations will be granted in future years. Under the settlement
agreement, the County will also provide sewer connection for the next 2,000
units in Fairway Village at fees that will be $1,608 less per unit than the fee
charged to builders outside of St. Charles. As of December 31, 2007,
approximately 1,425 of the 2,000 units remained. Our agreement
reached with the County also provides for the possibility of the Company's being
allowed to annex additional contiguous land to St. Charles.
Pursuant to the settlement agreement
the Company agreed to accelerate the construction of two major roadway links to
the County’s road system. Also, as part of the agreement, the County agreed to
issue general obligation public improvement bonds to finance $20,000,000 of this
construction guaranteed by letters of credit provided by Lennar. As of
December 31, 2007, the Charles County Commissioners have issued three separate
Consolidated Public Improvement Bonds (the “Bonds”) totaling $20,000,000 on
behalf of the Company. The Bonds bear an interest rate between 4% and
8% and call for semi-annual interest payments and annual principal payments and
mature in fifteen years. The Bond Repayment agreements with the County stipulate
the borrowing and repayment provisions for the funds advanced. Total
cost of the construction project is estimated at approximately
$31,138,000.
The complete terms of the
settlement are contained in an Amended Order in Docket 90 before the County
Commissioners of Charles County, a Consent Judgment in the Circuit Court, an
Indenture, and a Settlement Agreement.
In August
2005, the Company signed a memorandum of understanding ("MOU") with the Charles
County Commissioners regarding a land donation that is planned to house a 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 will issue the general obligation bonds to finance the
infrastructure improvements. In March 2006 and 2007, $4,000,000 and $3,000,000
of bonds were issued for this project, respectively. In March
2008, we anticipate the issuance of an additional $3,000,000 will be issued
related to completion of required stadium improvements. As per the
stipulations provided for in the Bond Repayment agreement with the County, the
funds for this project will be repaid by ACPT over a 15-year period. In
addition, the County agreed to increase the base line assumption from 200 to 300
school allocations per year commencing with the issuance of these bonds and
continuing until such bonds are repaid in full.
Competition
Competition among residential
communities in Charles County is intense. Currently, there are approximately 30
subdivisions competing for new homebuyers within a five-mile radius of St.
Charles. The largest competing housing developments are Charles Crossing, a
451-unit project being developed by a local developer; Charles Retreat,
approximately 400 active adult units being developed by Slenker Land
Corporation; Avalon, a 264-unit project being developed by Centex Homes; and
Autumn Hills, a 390-unit project being developed by Elm Street
Development. Smaller projects are being developed by more than 20
other developers. The marketplace attracts major national and regional
homebuilders. In this very price sensitive market, ACPT continues to position
St. Charles to provide affordable building lots and homes while offering more
amenities than the competition. A limited number of school allocation
permits in Charles County has slowed the growth of new residential construction.
We believe the guaranteed school allocations discussed above provide the Company
with a competitive edge.
Environmental
Impact
Management believes that the St.
Charles master plan can be completed without material adverse environmental
impact and in compliance with governmental regulations. In preparation for
immediate and future development, Phase I Environmental Site Assessments have
been prepared for substantially all of the undeveloped parcels. Historically,
the land has been used for farming, sand and gravel mining and forestry and no
significant environmental concerns were found. Jurisdictional determinations for
wetlands have been approved by the Army Corps of Engineers for the Sheffield
Neighborhood as well as parts of the Gleneagles Neighborhood in Fairway Village,
the current phase of residential development. Management has
developed an Environmental Policy Manual and has established an Environmental
Review Committee and an Environmental Coordination Officer to anticipate
environmental impacts and avoid regulatory violations. However, development can
be delayed while local, state and federal agencies are reviewing plans for
environmentally sensitive areas.
The ongoing process of land development
requires the installation, inspection and maintenance of erosion control
measures to prevent the discharge of silt-laden runoff from areas under
construction. The capital expenditures for these environmental
control facilities varies with the topography, proximity to environmental
features, soil characteristics, total area denuded and duration of
construction.
In 2007, we spent nearly $80,000 for
these costs. As land development continues, an annual cost of
approximately $100,000 can be expected.
ECONOMIC
AND DEMOGRAPHIC INFORMATION
Based on
figures prepared by the Charles County Department of Planning and Growth
Management ("DPGM"), the population of Charles County grew to 124,145 in 2000,
up from 101,000 in 1990, and is projected to increase at a rate of 2% per year,
reaching a total of 182,000 by 2020. Charles County was the ninth
fastest growing county in the state between the 1990 and 2000 census with an
average annual growth rate during that period of 1.77%. The median household
income in Charles County was $80,179 in 2006. Building permit
activity for new structures decreased 24% to 1,971 permits issued in Charles
County in 2007 compared to 2,602 permits issued in 2006.
PUERTO
RICO SEGMENT:
INVESTMENT
IN RENTAL PROPERTIES
Multifamily Rental
Properties
ACPT,
indirectly through IGP, holds interests in 9 Puerto Rico partnerships, which
collectively own and operate a total of 12 multifamily rental facilities in
Puerto Rico (“Puerto Rico Apartment Properties”). The Puerto Rico Apartment
Properties own a total of 2,653 rental units, all of which receive rent
subsidies from HUD and are financed by non-recourse mortgages.
The table below sets
forth the name of each property; the number of rental units in the property; the
percentage of all units held by Puerto Rico Apartment Properties; the project
cost; the percentage of such units under lease; and the expiration date and
maximum benefit for any subsidy contract:
|
|
Number
of
|
|
|
Percentage
|
|
|
12/31/2007
|
|
|
Occupancy
|
|
Expiration
|
|
Maximum
|
|
|
|
Apartment
|
|
|
of
|
|
|
Project
Cost (B)
|
|
|
at
|
|
Of
Subsidy
|
|
Subsidy
|
|
P.
R. APARTMENTS PROPERTIES
|
|
Units
|
|
|
Portfolio
|
|
|
(in
thousands)
|
|
|
12/31/2007
|
|
Contract
|
|
(in
thousands)
|
|
Consolidated
Partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San
Anton
|
|
|
184 |
|
|
|
7 |
% |
|
$ |
5,562 |
|
|
|
100 |
% |
2010
|
|
$ |
1,316 |
|
Monserrate
Associates
|
|
|
304 |
|
|
|
11 |
% |
|
|
12,853 |
|
|
|
100 |
% |
2009
|
|
|
2,568 |
|
Alturas
del Senorial
|
|
|
124 |
|
|
|
5 |
% |
|
|
5,126 |
|
|
|
99 |
% |
2009
|
|
|
1,039 |
|
Jardines
de Caparra
|
|
|
198 |
|
|
|
7 |
% |
|
|
8,076 |
|
|
|
100 |
% |
2010
|
|
|
1,582 |
|
Colinas
de San Juan
|
|
|
300 |
|
|
|
11 |
% |
|
|
12,645 |
|
|
|
100 |
% |
2011
|
|
|
2,048 |
|
Bayamon
Garden
|
|
|
280 |
|
|
|
11 |
% |
|
|
14,200 |
|
|
|
100 |
% |
2011
|
|
|
2,022 |
|
Vistas
del Turabo
|
|
|
96 |
|
|
|
4 |
% |
|
|
3,560 |
|
|
|
100 |
% |
2021
|
|
|
704 |
|
Monserrate
Tower II (A)
|
|
|
304 |
|
|
|
11 |
% |
|
|
13,539 |
|
|
|
100 |
% |
2020
|
|
|
2,478 |
|
Santa
Juana (A)
|
|
|
198 |
|
|
|
7 |
% |
|
|
8,128 |
|
|
|
100 |
% |
2020
|
|
|
1,660 |
|
Torre
De Las Cumbres (A)
|
|
|
155 |
|
|
|
6 |
% |
|
|
7,102 |
|
|
|
99 |
% |
2020
|
|
|
1,310 |
|
De
Diego (A)
|
|
|
198 |
|
|
|
8 |
% |
|
|
8,086 |
|
|
|
100 |
% |
2020
|
|
|
1,618 |
|
Valle
del Sol
|
|
|
312 |
|
|
|
12 |
% |
|
|
15,853 |
|
|
|
100 |
% |
2008
|
|
|
2,463 |
|
|
|
|
2,653 |
|
|
|
100 |
% |
|
$ |
114,730 |
|
|
|
|
|
|
|
$ |
20,808 |
|
(A)
|
This
property is owned by Carolina Associates L.P., a Maryland limited
partnership in which IGP holds a 50%
interest.
|
(B)
|
Project
costs represent total capitalized costs for each respective property as
per Schedule III "Real Estate and Accumulated Depreciation" in Item 8 of
this 10-K.
|
The table
below sets forth the operating results, mortgage balances and our economic
interest in the Puerto Rico Apartment Properties by location ($ amounts in
thousands, all other figures are actual):
P.R.
APARTMENT PROPERTIES
|
|
Number
of Apartment Units
|
|
|
Operating
Revenues
|
|
|
Operating
Expenses (a)
|
|
|
Non-Recourse
Mortgage Outstanding
|
|
|
Economic
Interest Upon Liquidation (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina,
Puerto Rico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monserrate
Associates
|
|
|
304 |
|
|
$ |
2,624 |
|
|
$ |
1,346 |
|
|
$ |
7,110 |
|
|
|
52.50 |
% |
|
Monserrate
Tower II (c)
|
|
|
304 |
|
|
|
2,597 |
|
|
|
1,312 |
|
|
|
9,995 |
|
|
|
50.00 |
% |
(e)
|
San
Anton
|
|
|
184 |
|
|
|
1,466 |
|
|
|
897 |
|
|
|
4,157 |
|
|
|
49.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San
Juan, Puerto Rico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alturas
Del Senorial
|
|
|
124 |
|
|
|
1,095 |
|
|
|
530 |
|
|
|
3,502 |
|
|
|
50.00 |
% |
|
Colinas
San Juan
|
|
|
300 |
|
|
|
2,090 |
|
|
|
845 |
|
|
|
9,499 |
|
|
|
50.00 |
% |
|
De
Diego (c)
|
|
|
198 |
|
|
|
1,715 |
|
|
|
845 |
|
|
|
5,531 |
|
|
|
50.00 |
% |
(e)
|
Torre
de Las Cumbres (c)
|
|
|
155 |
|
|
|
1,381 |
|
|
|
661 |
|
|
|
5,135 |
|
|
|
50.00 |
% |
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caguas,
Puerto Rico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa
Juana (c)
|
|
|
198 |
|
|
|
1,888 |
|
|
|
937 |
|
|
|
7,130 |
|
|
|
50.00 |
% |
(e)
|
Vistas
Del Turabo (f)
|
|
|
96 |
|
|
|
688 |
|
|
|
343 |
|
|
|
961 |
|
|
|
50.00 |
% |
(d)
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bayamon,
Puerto Rico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bayamon
Garden (f)
|
|
|
280 |
|
|
|
2,106 |
|
|
|
839 |
|
|
|
9,289 |
|
|
|
50.00 |
% |
(d)
(e)
|
Jardines
De Caparra
|
|
|
198 |
|
|
|
1,694 |
|
|
|
847 |
|
|
|
6,328 |
|
|
|
50.00 |
% |
(e)
|
Valle
Del Sol
|
|
|
312 |
|
|
|
2,501 |
|
|
|
835 |
|
|
|
10,578 |
|
|
|
50.00 |
% |
(d)
(f)
|
Total
Consolidated
|
|
|
2,653 |
|
|
$ |
21,845 |
|
|
$ |
10,237 |
|
|
$ |
79,215 |
|
|
|
|
|
|
(a)
|
Amounts
exclude management fees eliminated in
consolidation.
|
(b)
|
Surplus
cash from operations and proceeds from sale or liquidation are allocated
based on the economic interest except those identified by additional
description
|
(c)
|
Owned
by Carolina Associates
|
(d)
|
Upon
liquidation, the limited partners have a priority distribution equal to
their uncovered capital. As of December 31, 2007, the
unrecovered limited partner capital in Bayamon Garden, Valle Del Sol and
Vistas Del Turabo were $952,000, $779,000, and $618,000
respectively.
|
(e)
|
In
addition to normal operating receivables between the Company and the
Puerto Rico Apartment Properties, the Company has a receivable for
incentive management fees of $59,000 for Bayamon Gardens, $12,000 for
Jardines de Caparra, $22,000 for Torre de Las Cumbres, $28,000 for De
Diego Apartments, $28,000 for Santa Juana Apartments and $42,000 for
Monserrate Towers II. The Company also has a receivable for
working capital loan of $29,000 for Vistas del Turabo. This
receivable would receive priority upon liquidation of the interests of
this partnership.
|
(f)
|
In
addition to the receivable noted in (c) above, the Company has a note
receivable from Valle del Sol amounting $928,000. This
receivable is the result from unsecured development cost loans made to the
Partnership to cover acquisition and construction costs of the rental
property in excess of the permanent financing. Pursuant to the
terms of the Partnership agreement, the note is non-interest bearing and
is payable only by proceeds from mortgage refinancing, partial
condemnations, sales of easements or similar interests or proceeds from
sale of the properties, but only after the payment of the debt and
liabilities due to outsiders and expenses of
liquidation.
|
(g)
|
Distributions
from these partnerships are limited to an annual amount of $10,000 and
$118,000 for Vistas Del Turabo and Bayamon Gardens,
respectively.
|
Commercial Rental
Properties
In
September 2005, the Company commenced the operations of its first commercial
rental property in the community of Parque Escorial, known as Escorial Building
One, in which it holds a 100% ownership interest. Escorial
Building One is a three-story building with approximately 56,000 square feet of
office space for lease. The Company moved its Puerto Rico corporate
office to the new facility in the third quarter of 2005 and, as of December 31,
2007, leases approximately 20% of the building. As of December 31,
2007, 38% of the office space was leased. On December 10, 2007, the
Company signed a letter of intent with a new tenant to lease 33% of Escorial
Office Building One. The lease will commence 10 days following
completion of tenant improvements which is anticipated for the third quarter
2008. The Company continues to focus on leasing the balance of
available space in Escorial Office Building One.
In December 1998, LDA transferred title
of a seven-acre site in Parque Escorial's office park to ELI on which a 150,000
square foot building was constructed. ELI is a special partnership in which LDA
holds a 45.26% interest in future cash flow generated by the building
lease. The building is leased to the State Insurance Fund of Puerto
Rico, a government agency, for 30 years, at the end of which the lessee can
acquire it for $1. For income tax and book purposes, the lease is
considered a finance lease; therefore, the lease payments are treated as
mortgage payments. A significant portion of the lease payments
consist of interest due from a government agency which, when received by ELI, is
tax-free. The tax-free status stays intact when ELI distributes its
income to LDA.
Government
Regulation
HUD subsidies are provided principally
under Section 8 of the National Housing Act. Under Section 8, the government
pays to the applicable apartment partnership the difference between market
rental rates (determined in accordance with government procedures) and the rate
the government deems residents can afford. In compliance with the
requirements of Section 8, IGP screens residents for eligibility under HUD
guidelines. Subsidies are provided under contracts between the federal
government and the owners of the Puerto Rico Apartment Properties.
Subsidy contracts for the Puerto Rico
apartment properties are scheduled to expire between 2008 and 2021. HUD has in
the past approved new subsidy contracts set at five-year terms, renewable
annually. Please refer to the tables shown above for the expiration
dates and amounts of subsidies for the respective properties. We initiate the
HUD contract renewal process annually. For contracts where we have elected
five-year terms, we are limited to increases based on the OCAF
factor. At the end of the five-year term, or annually if a five-year
term is not elected, we will have six options for renewing Section 8 contracts
depending upon whether we can meet the eligibility
criteria. Historically, we have met the criteria necessary to renew
our Section 8 contracts.
Cash flow from projects whose mortgage
loans are insured by the FHA or financed through the housing agency in Puerto
Rico (the "Puerto Rico Financing Agency,") is subject to guidelines and limits
established by the apartment properties' regulatory agreements with HUD and the
Puerto Rico Financing Agency. Two of the regulatory agreements also
require that if cash from operations exceeds the allowable cash distributions,
the surplus must be deposited into restricted escrow accounts held by the
mortgagee and controlled by HUD or the Puerto Rico Financing Agency. Funds in
these restricted escrow accounts may be used for maintenance and capital
improvements with the approval of HUD and/or the Puerto Rico Finance
Agency.
Our regulatory contracts with HUD
and/or the mortgage lenders generally require that certain escrows be
established as replacement reserves and debt service reserves. The balance
of the replacement reserves are available to fund capital improvements as
approved by HUD or the mortgage lender. The balance of the debt service
reserves is restricted for the purposes of making mortgage payments in limited
circumstances. As of December 31, 2007, a total of $3.4 million was
designated as replacement reserves and $3.3 million as debt service reserves for
the consolidated PR Apartment Partnerships.
Two of our partnerships are limited
distribution partnerships in that annual distributions cannot exceed certain
pre-determined amounts. For Vistas Del Turabo, distributions are
limited to $10,000 per year. For Bayamon Gardens, distributions are
limited to $118,000 per year. Any surplus cash generated by these
properties must be deposited in a residual receipts account, that with HUD
approval, can be used for repairs to the property.
HUD has received congressional
authority to convert expired contracts to resident-based vouchers. This would
allow residents to choose where they wish to live, which may include the
dwelling unit in which they currently reside. If these vouchers
result in our tenants moving from their existing apartments, this may negatively
impact the income stream of certain properties. However, we intend to continue
to maintain our properties in order to preserve their values and retain
residents to the extent possible.
The
federal government has virtually eliminated subsidy programs for new
construction of low and moderate income housing by profit-motivated developers
such as ACPT. As a result, no new construction of multifamily rental properties
is expected in Puerto Rico.
Competition
The Puerto Rico apartment properties
all receive rent subsidies and are therefore not subject to the same market
conditions as properties charging market rate rents. Average annual
occupancy for the Puerto Rico apartment properties is approximately
99%.
PROPERTY
MANAGEMENT
IGP earns fees from the management of
2,653 rental apartment units in the Puerto Rico Apartment Properties that are
based on a percentage of rents ranging from 2.85% to 9.25%. The
management contracts for these properties have terms of three years and are
customarily renewed upon expiration. IGP is also entitled to receive
up to an aggregate of $192,000 annually in certain incentive management fees
with respect to six properties owned by the Puerto Rico apartment
partnerships. The payment of these fees is subject to availability of
surplus
cash.
Management and other fees earned from properties included within the
consolidated financial statements are eliminated in consolidation.
In addition, IGP currently manages 918
rental apartments owned by a non-profit entity, which acquired the units from
IGP in 1996 under the provisions of the Low Income Housing Preservation and
Resident Home Ownership Act (also known as "LIHPRHA"). The management
agreements for these properties expire March 15, 2010.
COMMUNITY
DEVELOPMENT
The Puerto Rico segment’s community
development assets consist of more than 600 acres of developed and undeveloped
land in the master planned communities of Parque Escorial in Carolina, Puerto
Rico and Parque El Comandante in Canovanas, Puerto Rico. The land in Parque
Escorial is being developed by the Company and its subsidiaries for a variety of
residential uses, including condominiums as well as commercial and industrial
uses.
The master plan for Parque Escorial was
approved in 1994. It includes the construction of 2,700 dwelling
units of various types on 282 acres and the development of 145 acres for
commercial, office and light industrial uses. The commercial site is anchored by
a Wal-Mart and Sam's Club, each consisting of 125,000 square feet. In
April 2005, the Company sold 7.2 commercial acres of land to a third party
developer who rezoned the land from commercial to residential use and is
currently constructing condominium units on this parcel. The rezoning
has no impact on the number of units allowed under the Parque Escorial master
plan. LDA has developed and sold 255 acres in this community, and
continues to own 120 acres of developed and undeveloped land. Parque
Escorial is located approximately six miles from the central business district
in San Juan, Puerto Rico.
Site improvements for the first three
residential phases, comprising 2,252 units, are substantially completed and
either sold to third party homebuilders or used by the Company’s homebuilding
operations for the construction of condominiums by the Company. The
next residential phase, at the Hill Top in Parque Escorial, comprising
approximately of 216 units, is in the beginning stage of infrastructure
development leaving the last phase of 232 units for development in the
future. There were no commercial land sales in backlog as of December
31, 2007.
ACPT
indirectly holds a 100% interest in LDA, which in 1989 acquired the 427-acre
site of the former El Comandante Race Track in Carolina, PR. LDA also
owns approximately 490 acres adjacent to the new El Comandante Race Track in
Canovanas, PR. At present, LDA is in the process of obtaining zoning
approvals to convert the property into a master plan mixed-use community, Parque
El Comandante, as we did in Parque Escorial. As part of the rezoning process in
Parque El Commandante, in December 2007, a government agency requested the
preparation of an Environmental Impact Statement which will be submitted during
the first quarter of 2008.
The
following table is a summary of the land inventory available in Puerto Rico as
of December 31, 2007:
|
|
Current
Zoning
|
Lot
Type
|
Estimated
Number of Units/Parcels
|
Approximate
Acreage
|
Entitlements
|
Expected
Date of Sale
|
Estimated
Asking Sales Price
|
PARQUE
ESCORIAL
|
|
|
|
|
|
|
|
|
Office
Park:
|
|
|
|
|
|
|
|
|
Lot
IV-3b
|
Office
|
Office
|
1
|
2.7
|
A
|
To
be held
|
N/A
|
|
Residential:
|
|
|
|
|
|
|
|
|
Hilltop
Phase I - 216 units
|
Residential
|
Residential
|
216
|
21.19
|
B
|
TBD
|
N/A
|
|
Hilltop
Phase II - 232 units
|
Residential
|
Residential
|
232
|
95.81
|
B
|
TBD
|
N/A
|
|
|
|
|
|
|
|
|
|
PARQUE
EL COMANDANTE
|
|
|
|
|
|
|
|
|
Mixed-use
Lots:
|
|
|
|
|
|
|
|
|
Phase
I - Quarry Site
|
Residential
|
Mixed-use
commercial
|
TBD
|
50.79
|
C
|
2008
– 2009
|
$25
million
|
|
Phase
II - Route 66 North
|
Agricultural
|
Mixed-use
|
TBD
|
165.83
|
C
|
TBD
|
TBD
|
|
Residential
Lots:
|
|
|
|
|
|
|
|
|
Phase
I - Quarry Site
|
Commercial
|
Residential
|
TBD
|
26.11
|
C
|
TBD
|
TBD
|
|
Phase
III - Route 66 South
|
Agricultural
|
Residential
|
TBD
|
209.14
|
C
|
TBD
|
TBD
|
|
Phase
IV - Out-Parcel
|
Agricultural
|
Residential
|
TBD
|
38.85
|
C
|
2008
- 2009
|
$3.0
- 4.0 million
|
|
|
|
|
|
|
|
|
|
(A)
Sites are fully developed and ready for sale
|
(B)
Completed master plan approval including all entitlements and received
preliminary site plan approval for development
|
(C)
Proposed master plan
|
|
|
|
|
|
|
|
Government
Approvals
Parque Escorial's master plan has been
approved but specific site plans are subject to the planning board review and
approval. Recently, the Company obtained approval from the natural
resources department of Puerto Rico for the infrastructure development of 216
Hill Top residential units.
Parque El Comandante is in the planning
stage and will require significant government approvals throughout the
development process. The master plan approval process is generally an
18 to 24 month process and the Company is approximately halfway through this
process. However, there can be no assurance that approvals for such
development will be obtained, or if obtained, that the Company will be able to
successfully develop such land.
Competition
The Company believes that the scarcity
of developable land in the San Juan metropolitan area creates a favorable market
for condominium unit sales at Parque Escorial. Competition for condominium unit
sales is expected primarily from condominium projects in areas that the Company
believes to be similar or less desirable than Parque Escorial. Nearby
projects provide for larger units, which are more costly than our
units. There are no projects in Parque Escorial offering units that
are the same size, quality and in the same price range as our
units. In addition, no other community developers are currently
developing projects similar to Parque Escorial in the area.
Environmental
Impact
Management
of ACPT believes that the Parque Escorial master plan can be completed without
material adverse environmental impact and in compliance with government
regulations. All of the necessary agencies have endorsed Parque
Escorial's environmental impact statement. Wal-Mart has provided
mitigation for 12 acres of wetlands impacted by its development of the shopping
center site and other land. An erosion and sedimentation control plan
must be obtained prior to construction. This plan specifies the
measures to be taken to prevent the discharge of silt-laden runoff from areas
under construction. In 2007, we did not incur any of these
costs. Once we begin development of the next phase, we expect to
incur an estimated $10,000 per year during the development period. We
are in the planning stage of Parque El Comandante and will not have estimates
for such costs until we are further in the design stage.
The Puerto Rico Department of Natural and Environment Resources
(DNER) have enacted Regulation #25 whereas it requires the replacement of trees
removed during land development of the proposed Escorial Hilltop Project on a
two to one basis. In February 2006, IGP's Agronomist submitted to
DNER a tree mitigation plan. On December 13, 2006, IGP received from
DNER's the approval and permit, under certain conditions, to proceed with the
tree mitigation plan. As part of this mitigation plan, in September
2007, the Company signed a Mitigation Agreement which included planting 10,900
trees in the Parque Escorial community over the next three years. In
addition, the Company segregated and donated 44 acres of land to the
Municipality of Carolina to get the final approval to begin the land development
at the Hilltop. In addition, the Company paid $275,000 to the
Municipality for future maintenance costs of the urban forest. These
parcels of land will be a conservation area for an urban forest.
HOMEBUILDING
During the first quarter of 2004, IGP
formed a wholly owned subsidiary, Torres del Escorial, a Puerto Rico
corporation, to construct and sell a 160-unit residential project within the
Parque Escorial master plan community. The project consists of four
towers with 40 units in each tower. The construction of the
four-tower condominium complex was completed in December 2006. As of
December 31, 2007, 139 units were delivered. The rest of the project
remains for sale in 2008. There was 1 unit under contract as of
December 31, 2007. This option is backed by a $6,000 deposit and
sales contract. In 2007, the Puerto Rico real estate market suffered
its worst year in the last three decades; however, we continued to sell units in
Torres del Escorial at favorable prices, but at a slower than anticipated
pace.
Competition
The
Company believes that competition related to homebuilding is similar to
competition related to community development. Refer to previous
discussion for details.
ECONOMIC
AND DEMOGRAPHIC INFORMATION
Puerto
Rico has a population of approximately 3.9 million, and the Puerto Rico Planning
Board projects the population will continue to grow. Construction in the
residential sector has shifted from single-family homes to multi-family
dwellings such as walk-up condominiums. As of the date of filing this report, we
were informed that the 2007 Economic Report to the Governor was not
available. As presented in the 2006 Economic Report to the Governor,
for the fiscal year ended June 30, 2006, per capita personal income was $12,997
with an average family income of $41,592. The economy of Puerto Rico registered
growth in constant dollars of 0.7% in 2006.
GENERAL
Employees
ACPT had 252 full-time employees as of
December 31, 2007, 114 in the United States and 138 in Puerto
Rico. In Puerto Rico, 34 employees, or 13% of the Company’s total
workforce, were subject to a Collective Bargaining Agreement which expired in
February 2007, and was currently under negotiations as of December 31, 2007.
Employees performing non-supervisory services through the Company's property
management operations receive salaries funded by the properties.
Available
Information
ACPT files annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission (the "SEC"). These filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document the Company files at the SEC's public reference room located
at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the public reference room.
Our
principal Internet address is www.acptrust.com. We make available, free of
charge, on or through www.acptrust.com our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and any
amendments to those reports, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. Copies of the Company's Annual Report or Code of Ethics for
Senior Financial Officers can be requested at no cost by writing to the
following address or telephoning us at the following telephone
number:
American
Community Properties Trust
222
Smallwood Village Center
St.
Charles, MD 20602
Attention: Director
of Investor Relations
(301)
843-8600
You
should carefully consider the risks described below. These risks are not the
only ones that we may face. Additional risks and uncertainties that we are
unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occurs, our business,
financial condition or results of operations could be materially and adversely
affected.
National,
regional and local economic and business conditions:
Risk
of reduced demand for residential lots, commercial parcels and multifamily
housing
The real estate industry is sensitive
to changes in economic conditions such as the level of employment, consumer
confidence, availability of financing and interest rate levels as well as other
market conditions such as oversupply or reduction in demand for commercial,
industrial or multifamily rental properties. In addition, regulatory
changes could possibly alter, among other things, the tax deductibility of
interest paid on home loans. Adverse changes in any of these
conditions generally, or in the market regions where we operate, could decrease
demand for our residential lots, commercial parcels and homes, which could
adversely affect our revenues and earnings.
Risk
that the real estate market would be unable to recover timely from an economic
downturn in the general economy
· The real
estate business is a cyclical business. Currently, weak economic
conditions in the United States and Puerto Rico have substantially slowed home
sales and reduced home sale prices. Continued significant declines in
the prices for real estate could adversely affect our home and land sales
revenues and margins. In addition, adverse changes to key economic
indicators such as unemployment rates and inflation could further reduce the
willingness or ability of individuals to purchase new homes which could
adversely affect our operations.
Lack
of availability and creditworthiness of tenants
· We are
exposed to customer risk. Our performance depends on our ability to collect rent
from our customers. General economic conditions and an increase in unemployment
rates could cause the financial condition of a large number of our tenants to
deteriorate. While no tenant in our wholly owned portfolio accounted for a
significant amount of the annualized rental revenue of these respective
properties at December 31, 2007, our financial position may be adversely
affected by financial difficulties experienced by our tenants, including
bankruptcies, insolvencies or general downturns in business.
The
risk of loss of available financing for both our customers and us
· Our
business and earnings are also substantially dependent on the ability of our
customers to finance the purchase of our land or homes. The current
credit crisis in the subprime mortgage markets has increased lender scrutiny and
made it difficult for some potential homebuyers to obtain
financing. Continued or increasing limitations on the availability of
financing or increases in the cost of such financing could adversely affect our
operations. Our business and earnings is also substantially dependent
on our ability to obtain financing for our development activities as well as
refinancing our properties' mortgages. Increases in interest rates,
concerns about the market or the economy, or consolidation or dissolution of
financial institutions could increase our cost of borrowing, reduce our ability
to obtain the funds required for our future operations, and limit our ability to
refinance existing debt when it matures. Changes in competition,
availability of financing, customer trends and market conditions may impact our
ability to obtain loans to finance the development of our future
communities.
Adverse
changes in the real estate markets, including, among other things:
Competition
with other companies
· We
operate in a very competitive environment, which is characterized by competition
from a number of other land developers. Actions or changes in plans
by competitors may negatively affect us.
Reduction
in demand for new construction homes
· The price
received for residential lots in St. Charles and home sales in Puerto Rico are
impacted by changes in the demand for new construction
homes. Continued softening of the demand for new homes in these areas
will likely result in reductions in selling prices which would negatively impact
our revenues and gross margins.
Risks
of real estate acquisition and development (including our ability to obtain
governmental approvals for development projects and to complete our current
development projects on time and within budget)
· Our plans
for the future development of our residential communities can be affected by a
number of factors including time delays in obtaining necessary government
permits and approvals and legal challenges to our planned
communities.
· The
agreements we execute to acquire properties generally are subject to customary
conditions to closing, including completion of due diligence investigations
which may be unacceptable; acquired properties may fail to perform as we
expected in analyzing our investments; our estimates of the costs or
repositioning or redeveloping acquired properties may be inaccurate; the
development opportunity may be abandoned after expending significant resources.
In connection with our development occupancy rates and rents at the newly
completed property may not meet the expected levels and could be insufficient to
make the property profitable.
· The
development of our residential communities may be affected by circumstances
beyond our control, including weather conditions, work stoppages, labor
disputes, unforeseen engineering, environmental or geological problems and
unanticipated shortages of or increases in the cost of materials and labor. Any
of these circumstances could give rise to delays in the completion of, or
increase the cost of, developing one or more of our residential
communities.
· The bulk
of our operations are concentrated in Maryland and Puerto Rico, making us
particularly vulnerable to changes in local economic conditions. In
addition, if weather conditions, or a natural disaster such as a hurricane or
tornado, were to impact those regions, our results of operations could be
adversely impacted. Although insurance could mitigate some amount of
losses from a catastrophe in those regions, it might not fully compensate us for
our opportunity costs or our projected results of future operations in those
regions, the market acceptance of which might be different after a
catastrophe.
Risk
of adverse changes in our relationship with significant customers, specifically
Lennar Corporation:
Revenues
from Lennar include residential land sales as well as certain management
fees. Total revenues from Lennar within our U.S. segment were
$9,663,000 for the year ended December 31, 2007 which represents 18% of the U.S.
segment's revenue and 11% of our total year-to-date consolidated
revenue. No other customers accounted for more than 10% of our
consolidated revenue for the year ended December 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. We cannot assure you
that any lost sales could be replaced on comparable terms, or at
all.
Although
Lennar is contractually obligated to take 200 lots per year, the market is not
currently sufficient to absorb this sales pace. Accordingly, Lennar’s
management requested and the Company granted a reduction of the 200 lot
requirement for 2007. Management agreed to accept a total of 78
lots as satisfaction of their lot takedown requirement for 2007. In
addition, the Company agreed to a temporary price reduction to 22.5% of the
selling price of the home for 100 lots, 49 of which Lennar agreed purchase prior
to June 1, 2008. Should Lennar not comply with their obligations
pursuant our amended contract or there be a reduced demand for our
commercial property our cash flow would be adversely impacted.
Risk
that we would be unable to renew HUD subsidy contracts and the absence of
federal funds on a timely basis to service these contracts
As of
December 31, 2007, we owned an equity interest in and managed for third parties
multifamily rental properties that benefit from governmental programs intended
to provide housing to people with low or moderate incomes. These programs, which
are usually administered by HUD or state housing finance agencies, typically
provide mortgage insurance, favorable financing terms or rental assistance
payments to the property owners. Historically, there have been delays
in the receipt of subsidy payments which generally occur upon contract renewal
and HUD’s annual budget renewal process. For those partnerships in
which we serve as General Partner, we may be required to fund operating cash
deficits when these delays occur. General Partner advances or loans
to the partnerships may then become subject to the repayment provisions required
by the respective partnership agreements which may impede the timing of
repayment. Furthermore, as a condition of the receipt of assistance
under these programs, the properties must comply with various requirements,
which typically limit rents to pre-approved amounts. If permitted rents on a
property are insufficient to cover costs, our cash flow from these properties
will be negatively impacted, and our management fees may be reduced or
eliminated.
Risk
that we would be unable to obtain insurance at a reasonable cost
We may
experience economic harm if any damage to our properties is not covered by
insurance. We carry insurance coverage on our properties of the type
and in amounts that we believe is in line with coverage customarily obtained by
owners of similar properties. We believe all of our properties are
adequately insured. However, we cannot guarantee that the limits of
our current policies will be sufficient in the event of a catastrophe to our
properties. We may suffer losses that are not covered under our
comprehensive liability, fire, extended coverage and rental loss insurance
policies. If an uninsured loss or a loss in excess of insured limits
should occur, we could lose capital invested in a property, as well as any
future revenue from the property. We would nevertheless remain
obligated on any mortgage indebtedness or other obligations related to the
property.
Risk
of significant environmental and safety requirements could reduce our
profitability
Our
properties may contain or develop harmful mold, which could lead to liability
for adverse health effects and costs of remediating the problem. When
excessive moisture accumulates in buildings or on building materials, mold
growth may occur, particularly if the moisture problem remains undiscovered or
is not addressed over a period of time. Some molds may produce
airborne toxins or irritants. Concern about indoor exposure to mold
has been increasing as exposure to mold may cause a variety of adverse health
effects and symptoms, including allergic or other reactions. As a
result, the presence of significant mold at any of our properties could require
us to undertake a costly remediation program to contain or remove the mold from
the affected property. In a similar manner, the existence of a
significant amount of lead based paint at our properties could result in costly
remediation efforts. In addition, the presence of significant mold or
lead based paint could expose us to liability from our tenants, employees of our
tenants and others if property damage or health concerns arise. In
addition, we are required to operate our properties in compliance with fire and
safety regulations, building codes and other land use regulations, as they may
be adopted by governmental agencies and bodies and become applicable to our
properties. We may be required to make substantial capital
expenditures to comply with those requirements and these expenditures could have
a material adverse effect on our operating results and financial condition, as
well as our ability to make distributions to shareholders.
Risk
of loss of senior management and key employees
We could
be hurt by the loss of key management personnel. Our future success
depends, to a significant degree, on the efforts of our senior
management. Our operations could be adversely affected if key members
of senior management cease to be active in our company.
If
the company were to be taxed as a corporation rather than a partnership, this
would have adverse tax consequences for the company with respect to the income
earned from our Puerto Rico operations.
The
Internal Revenue Code provides that publicly traded partnerships like ACPT will,
as a general rule, be taxed as corporations for U.S. federal income tax
purposes, subject to certain exceptions. We have relied in the past,
and expect to continue to rely on an exception to this general rule for publicly
traded partnerships that earn 90% or more of their gross income for every
taxable year from specified types of “qualifying income,” including dividends.
If we fail to meet this “qualifying income” exception or otherwise determine to
be treated as a corporation for federal income tax purposes, the income we earn
from our Puerto Rico operations would be subject to increased
taxes.
We do not
believe that there would be an increase in the U.S. income taxes that would be
imposed on our U.S. operations if ACPT were not to qualify as a partnership for
U.S. income tax purposes. However, our classification as a
partnership does permit us to reduce the overall taxes that the Company pays on
the operations of our Puerto Rico subsidiary (because, in ACPT’s current
partnership tax structure, ACPT is taxed in Puerto Rico, but not in the United
States, on those operations). If we were not to qualify as a
partnership for U.S. tax purposes, the net result would be an incremental increase in
ACPT’s total tax expense on income for operations in Puerto Rico, although it is
not practicable to quantify that potential impact.
The
tax liabilities of our shareholders may exceed the amount of the cash
distributions we make to them.
A
shareholder generally will be subject to U.S. federal income tax on his or her
allocable share of our taxable income, whether or not we distribute that income
to them. We intend to make elections and take other actions so that,
to the extent possible, our taxable income will be allocated to individual
shareholders in accordance with the cash received by them. In
addition, we are generally required by our Declaration of Trust to make minimum
aggregate distributions, in cash or property, each year to our shareholders
equal to 45% of our net taxable income, reduced by the amount of Puerto Rico
taxes we pay.
If our
income consists largely of cash distributions from our subsidiaries, as
expected, it is likely that we will have sufficient cash to distribute to
shareholders. There can be no assurance, however, that our income
allocations to the individual shareholders will be respected or that we will be
able to make distributions in any given year that provide each individual
shareholder with sufficient cash to meet his or her federal and state income tax
liabilities with respect to his or her share of our income. However,
there is pending legislation which may affect the ability to claim foreign tax
credits under Section 901 of the Code. On November 19, 2007, Notice
2007-95 provided a delay of the effective date of proposed amendments to the
foreign tax credit regulations. The regulations, with or without
changes, will be effective for tax years beginning after the final regulations
are published in the Federal Register.
A
portion of the proceeds from the sale of our shares may be taxed as ordinary
income.
A
shareholder will generally recognize gain or loss on the sales of our shares
equal to the difference between the amount realized and the shareholder’s tax
basis in the shares sold. Except as noted below, the gain or loss
recognized by a shareholder, other than a “dealer” in our shares, on the sale or
exchange of shares held for more than one year will generally be taxable as
capital gain or loss. Capital gain recognized by an individual on the
sale of shares held more than 12 months will generally be taxed at a maximum
rate of 15%.
A portion
of this gain or loss, however, may be taxable as ordinary income under Section
751 of the Code to the extent attributable to so-called “unrealized
receivables,” which term, for this purpose, includes stock in our Puerto Rico
subsidiary to the extent that gain from our sale of that stock would be taxable
to our shareholders as a dividend under Section 1248 of the Code. The
amount of ordinary income attributable to “unrealized receivables” related to
stock in our Puerto Rico subsidiary will be determined based on the amount of
earnings and profits accumulated by our Puerto Rico subsidiary. We
will provide to each selling shareholder, at the time we send the K-1 materials,
a table showing the earnings and profits accumulated by our Puerto Rico
subsidiary by year and the average number of our shares outstanding during the
year, so that the shareholder may make a determination of the amount of earnings
and profits allocable to him or her and the amount of ordinary income to be
recognized on the sale. Although there is no definitive authority on
the question, we believe that it is reasonable to base the allocation on the
earnings and profits accumulated during the period that the shareholder held the
shares that are sold and the percentage of our average number of shares
outstanding that those shares represented.
The
amount of unrealized receivables may exceed the net taxable capital gain that a
shareholder would otherwise realize on the sale of our shares, and may be
recognized even if the shareholder would realize a net taxable capital loss on
the sale. Thus, a shareholder may recognize both ordinary income and
capital loss upon a sale of our shares. Accordingly, a shareholder
considering the sale of our shares is urged to consult a tax advisor concerning
the portion of the proceeds that may be treated as ordinary
income. In addition, the shareholder is required to report to us any
sale of his or her shares, unless the broker effecting the transaction files a
Form 1009-B with respect to the sale transaction.
Investors
should be aware that tax rules relating to the tax basis and holding period of
interests in a partnership differ from those rules affecting corporate stock
generally, and these special rules may impact purchases and sales of our shares
in separate transactions.
The IRS
has ruled that an investor who acquires interests in an entity taxed as a
partnership, like ACPT, in separate transactions must combine those interests
and maintain a single adjusted tax basis for those interests. Upon a
sale or other disposition of less than all of the shares held by a shareholder,
a portion of the shareholder’s tax basis in all of his or her shares must be
allocated to the shares sold using an “equitable apportionment” method, which
generally means that the tax basis allocated to the shares sold bears the same
relation to the shareholder’s tax basis in all of the shares held as the value
of the shares sold bears to the value of all of the Shares held by the
shareholder immediately prior to the sale. Furthermore, Treasury
Regulations under Section 1223 of the Code generally provide that if a
shareholder has acquired shares at different times, the holding period of the
transferred shares shall be divided between long-term and short-term capital
gain or loss in the same proportions as the long-term and short-term capital
gain or loss that the shareholder would realize if the all of the shareholder’s
shares were transferred in a fully taxable transaction immediately before the
actual transfer. The Regulations provide, however, a special rule
that allows a selling shareholder who can identify shares transferred with an
ascertainable holding period to elect to use the actual holding period of the
shares transferred.
Thus,
according to the ruling discussed above, a shareholder will be unable to select
high or low basis shares to sell as would be the case with shares of entities
treated as corporations for federal income tax purposes, but, according to the
regulations, may designate specific shares for purposes of determining the
holding period of the shares transferred. A shareholder electing to
use the actual holding period of shares transferred must consistently use that
identification method for all subsequent sales or exchanges of
shares. A shareholder considering the purchase of additional shares
or a sale of shares purchased in separate transactions is urged to consult his
or her tax advisor as to the possible consequences of the ruling and the
application of these Treasury Regulations.
|
UNRESOLVED
STAFF COMMENTS
|
None
ACPT owns real property located in the
United States and Puerto Rico. As of December 31, 2007, the Company
held investments in multifamily and commercial real estate properties, apartment
properties under construction, community development land holdings, and
homebuilding units. Refer to the tables in Item 1 for additional
information required under this Item 2.
Below is a description of all material
litigation that ACPT or any of its subsidiaries are a party to.
Comité Loiza Valley en
Acción, Inc. vs. Cantera Hipódromo, Inc., Carlos Ortiz Brunet, his wife Frances
Vidal; Land Development Associates, S.E.; Integrand Assurance Company; American
International Insurance Company; Et als, No. FPE97-0759(406), Superior
Court of Carolina, Puerto Rico. On November 24, 1997, Comité Loiza
Valley en Acción, Inc., resident owners of Urbanización Loiza Valley in
Canovanas, Puerto Rico, a neighborhood consisting of 56 houses near the property
owned by LDA, filed a claim in the Superior Court of Carolina, Puerto Rico
against Cantera Hipodromo, Inc. (the “lessee” who operates a quarry on the land
owned by LDA), the owners of the lessee, the lessee’s Insurance Companies and
LDA. The Plaintiffs allege that as a result of certain explosions
occurring in the quarry, their houses have suffered different types of damages
and they have also suffered physical injuries and mental anguish. The
damages claimed exceed $11,000,000. The physical damage to the
property is estimated at less than $1,000,000. The lease agreement
contains an indemnification clause in favor of LDA. The lessee has
public liability insurance coverage of $1,000,000 through Integrand Assurance
Company and an umbrella insurance coverage of $2,000,000 through American
International Insurance Company. Integrand’s legal counsel has
provided the legal defense for all parties to date but in September 2003
declared that the allegations in the complaint regarding public nuisance do not
fall under their policy. In November 2003, the lessee’s legal counsel
filed a motion in opposition to such allegation. On January 28, 2005,
the appellate court in Puerto Rico confirmed that the trial court and Integrand
is forced to provide coverage and pay attorneys’ fees to LDA and to Cantera
Hipodromo. On February 11, 2005, Integrand filed a reconsideration
motion in the appellate court and on February 28, 2005 the same court dismissed
the motion presented by Integrand. On March 17, 2005, Integrand filed a request
of certiorari in the Supreme Court of Puerto Rico and on March 23, 2005, an
opposition to the expedition of the certiorari was filed. On June 6,
2005, the Supreme Court denied said request. Hence, LDA is an added
insured on the damage claims in the complaint. The trial began in
2007 and is expected to continue during the first six months of
2008.
Jalexis, Inc. vs. LDA,
Interstate, IGP, Constructora Santiago Corp; Et als, Civil no FDP060534
(404).
In late
November 2006, several subsidiaries of the Company (LDA, IGP and IGP Group) were
named in a lawsuit filed by Jalexis, Inc. (“Jalexis”). The lawsuit
claims damages for more than $15 million allegedly suffered due to faulty
subsoil conditions in a piece of land within the master plan of Parque Escorial
(“Lot I-13W”). Settlement of Lot I-13W occurred on April 29, 2005
under an option agreement dated April 19, 2004. Jalexis purchased Lot
I-13W from LDA for approximately $7.5 million, which represented 12% of our
total consolidated revenues for 2005. In the settlement agreement,
LDA did not make any representations or warranties with regard to the soil and
subsoil conditions and stipulated Lot I-13W was sold to Jalexis “as is” and
“where is”. The Company believes that it has a strong defense in this
case. Depositions for all parties started in November 2007 and are
expected to continue into the first six months of 2008.
Due to
the inherent uncertainties of the judicial process, we are unable to either
predict the outcome of or estimate a range of potential loss associated with
this matter. While we intend to vigorously defend this matter and believe we
have meritorious defenses available to us, there can be no assurance that we
would prevail. If this matter is not resolved in our favor, we are insured for
potential losses. Any amounts that exceed our insurance coverage
could have a material adverse effect on our financial condition and results of
operations.
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 these 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 these ordinary
course 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.
There are
no other proceedings required to be disclosed pursuant to Item 103 of Regulation
S-K.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No matters were submitted to a vote of
the shareholders during the fourth quarter of the fiscal year ended December 31,
2007.
|
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
The executive officers of the Company
as of December 31, 2007 are as follows:
Name
|
Age
|
Position
|
|
|
|
J.
Michael Wilson
|
42
|
Chairman
and Chief Executive Officer
|
Edwin
L. Kelly
|
66
|
Vice
Chairman, President and Chief Operating Officer
|
Carlos
R. Rodriguez
|
62
|
Executive
Vice President
|
Cynthia
L. Hedrick
|
55
|
Chief
Financial Officer, Executive Vice President, Secretary and
Treasurer
|
Paul
A. Resnik
|
60
|
Senior
Vice President and Assistant Secretary
|
Eduardo
Cruz Ocasio
|
61
|
Senior
Vice President and Assistant Secretary
|
Matthew
M. Martin
|
32
|
Vice
President and Chief Accounting Officer
|
Jorge
Garcia Massuet
|
69
|
Vice
President
|
Harry
Chalstrom
|
47
|
Vice
President
|
Mark
L. MacFarland
|
38
|
Vice
President
|
Rafael
Velez
|
51
|
Vice
President
|
Messrs. Wilson and Kelly are also
members of our Board of Trustees. Brief biographies of Messrs. Wilson
and Kelly are incorporated by reference to the Company’s Proxy Statement to be
filed with the Commission for its Annual Shareholder’s Meeting to be held in
June 2008. Biographical information for our other executive officers
is as follows:
Carlos R. Rodriguez was appointed
Executive Vice President of the Company in January 2002 after serving as Senior
Vice President since June 1999. Prior to that date, he served in
various capacities with the predecessor company and its affiliates.
Cynthia L. Hedrick was appointed
Executive Vice President in January 2006 after serving as Senior Vice President
since June 2002. She continues to serve the Company as the Chief
Financial Officer and Secretary/Treasurer, a position that she has held since
June 2002. Ms. Hedrick served as Vice President of the Company from
November 1998 to June 2002 and prior to that date she served as Vice President
of the predecessor company.
Paul A. Resnik was appointed Senior
Vice President of the Company in July 1998. He served as Senior Vice
President of the predecessor company from 1993-1998.
Eduardo Cruz Ocasio was appointed
Senior Vice President of the Company in June 2002 after serving as Vice
President and Assistant Secretary of the Company since July
1998. Prior to that date, he served in various capacities with the
predecessor company.
Matthew
M. Martin was appointed Vice President and Chief Accounting Officer in August of
2005. Prior to joining the Company, he worked for FTI Consulting
serving as a Manager in the Forensic and Litigation Consulting practice from
2002 to 2005. Prior to joining FTI Consulting, he managed audits for
Arthur Andersen.
Jorge Garcia Massuet was appointed Vice
President of the Company in June 2002. He has been Vice President of
IGP since January 1999. He served as Vice President and General
Manager of Fountainebleu Plaza, S.E., a real estate development firm, from
January 1994 to December 1998.
Harry Chalstrom was appointed Vice
President of the Company in January 2004 after serving as Director of Rental
Housing of the Company since November 2002. Prior to that date, he
worked for Bozzuto Construction Company from 1997 to 2002. During his
tenure at Bozzuto, he served as a Project Manager for apartment construction
projects.
Mark L. MacFarland was appointed Vice
President of the Company in January 2006 after serving as the Executive Director
of Land Development for the Company since June 2003. From June 2002 to
June 2003, he worked as a consultant for the Charles County Government working
on numerous capital improvement projects. Before serving as a consultant,
he worked as an engineer and developer in the power generation
industry.
Rafael Vélez was appointed Vice
President of the Company in January 2006. Mr. Vélez has been with the
Company since September of 2001 when he was hired as the Chief Accounting
Officer of IGP LP, a wholly owned subsidiary of the Company. In June
2002, Mr. Vélez was appointed as Vice President of IGP Group and in June 2003
was appointed and currently remains as Vice President, Secretary and
Treasurer. In June 2004, Mr. Vélez was appointed and currently
remains as Senior Vice President, Chief Financial Officer, Secretary and
Treasurer of IGP LP. He has more than 30 years experience in public
and private accounting in the Real Estate, Development, Construction and
Property Management Industries.
|
MARKET
FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
The
principal market for our Company’s common shares is the American Stock Exchange
under the symbol "APO. As of the close of business on March 3, 2008, there were
129 shareholders of record of ACPT’s common shares. On March 3, 2008 the closing
price reported by the American Stock Exchange was $19.00.
The table
below sets forth, for the periods indicated, the high and low closing prices of
the Company’s shares as reported in the consolidated reporting system of the
American Stock Exchange Composite, and the dividends declared per common share
for such calendar quarter.
|
|
|
Price
Range of ACPT Shares
|
|
|
Dividends
|
|
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
|
|
$ |
25.75 |
|
|
$ |
17.50 |
|
|
$ |
- |
|
|
Third
|
|
|
27.59 |
|
|
|
19.22 |
|
|
|
0.10 |
|
|
Second
|
|
|
20.33 |
|
|
|
18.58 |
|
|
|
0.10 |
|
|
First
|
|
|
19.47 |
|
|
|
17.64 |
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
|
|
$ |
20.24 |
|
|
$ |
17.49 |
|
|
$ |
0.10 |
|
|
Third
|
|
|
20.20 |
|
|
|
19.40 |
|
|
|
0.10 |
|
|
Second
|
|
|
22.25 |
|
|
|
19.75 |
|
|
|
0.10 |
|
|
First
|
|
|
23.25 |
|
|
|
19.48 |
|
|
|
0.53 |
|
Minimum
annual distributions
Under the
terms of the Declaration of Trust of ACPT, the Board of Trustees will make
minimum annual distributions to the shareholders equal to at least 45% of the
net taxable income allocated to the shareholders, reduced by any Puerto Rico
income tax paid by ACPT and any U.S. federal income taxes paid by ARPT with
respect to undistributed capital gains.
Non-required
dividend distributions to shareholders
Dividend
distributions in addition to the required minimum distribution (as stated above)
will be evaluated quarterly and made at the discretion of the Board of
Trustees. In making such determinations, the Board of Trustees will
take into account various factors, including ACPT's anticipated needs for cash
for future expansion and development, current and anticipated expenses,
obligations and contingencies, and other similar working capital
requirements.
Dividend
Distribution related to our IRS matter
As
announced on March 10, 2006 the Company entered into a closing agreement with
the United States Internal Revenue Service (“IRS”) by which the Company was able
to maintain its publicly traded partnership (“PTP”) status for U.S. federal
income tax purposes. The details of the closing agreement with the IRS
required that the Company report approximately $5.0 million to shareholders as
taxable income on March 29, 2006. Under the terms of the Company’s
governing documents, it was required to make minimum annual distributions to the
shareholders equal to at least 45% of net taxable income allocated to
shareholders. Accordingly, the Board of Trustees declared a dividend of
$0.43 per share, $2,230,000 in the aggregate. The dividend was paid on April 12,
2006 to shareholders of record on March 29, 2006.
The
following graph compares the cumulative 5-year total return to shareholders on
American Community Properties Trust's common stock relative to the cumulative
total returns of the S & P 500 index and the NAREIT Equity index. The graph
assumes that the value of the investment in the company's common stock and in
each of the indexes (including reinvestment of dividends) was $100 on December
31, 2002 and tracks it through December 31, 2007.
|
|
|
|
|
|
|
|
|
|
12/02
|
12/03
|
12/04
|
12/05
|
12/06
|
12/07
|
|
|
|
|
|
|
|
|
American
Community Properties Trust
|
|
100.00
|
149.00
|
228.46
|
374.83
|
387.95
|
395.82
|
S&P
500
|
|
100.00
|
128.68
|
142.69
|
149.70
|
173.34
|
182.87
|
NAREIT
Equity
|
|
100.00
|
137.13
|
180.44
|
202.38
|
273.34
|
230.45
|
The
stock price performance included in this graph is not necessarily indicative of
future stock price performance.
The
following table sets forth selected consolidated financial and operating data of
the Company for the five years ended December 31, 2007. The information in the
following table should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data" of this Annual Report on
Form 10-K.
|
|
Year
Ended December 31,
|
|
|
|
2007 |
* |
|
2006 |
** |
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In
thousands, except per share and operating data)
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating revenues
|
|
$ |
85,376 |
|
|
$ |
98,163 |
|
|
$ |
62,313 |
|
|
$ |
49,011 |
|
|
$ |
55,506 |
|
Total
operating expenses
|
|
|
69,294 |
|
|
|
73,168 |
|
|
|
51,207 |
|
|
|
40,932 |
|
|
|
47,720 |
|
Operating
income
|
|
|
16,082 |
|
|
|
24,995 |
|
|
|
11,106 |
|
|
|
8,079 |
|
|
|
7,786 |
|
Income
(loss) before provision (benefit) for income taxes
|
|
|
(848 |
) |
|
|
7,485 |
|
|
|
6,855 |
|
|
|
4,331 |
|
|
|
3,901 |
|
Income
tax provision (benefit)
|
|
|
(307 |
) |
|
|
2,894 |
|
|
|
(690 |
) |
|
|
1,500 |
|
|
|
1,596 |
|
Net
income (loss)
|
|
|
(541 |
) |
|
|
4,591 |
|
|
|
7,545 |
|
|
|
2,831 |
|
|
|
2,305 |
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.10 |
) |
|
$ |
0.88 |
|
|
$ |
1.45 |
|
|
$ |
0.55 |
|
|
$ |
0.44 |
|
Diluted
|
|
$ |
(0.10 |
) |
|
$ |
0.88 |
|
|
$ |
1.45 |
|
|
$ |
0.55 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
360,724 |
|
|
$ |
346,699 |
|
|
$ |
217,085 |
|
|
$ |
184,027 |
|
|
$ |
142,497 |
|
Recourse
debt
|
|
|
25,589 |
|
|
|
29,351 |
|
|
|
32,818 |
|
|
|
27,192 |
|
|
|
24,634 |
|
Non-recourse
debt
|
|
|
279,981 |
|
|
|
270,720 |
|
|
|
119,865 |
|
|
|
98,879 |
|
|
|
70,979 |
|
Other
liabilities
|
|
|
42,708 |
|
|
|
30,774 |
|
|
|
29,912 |
|
|
|
29,065 |
|
|
|
19,031 |
|
Total
liabilities
|
|
|
348,278 |
|
|
|
330,845 |
|
|
|
182,595 |
|
|
|
155,136 |
|
|
|
114,644 |
|
Shareholders'
equity
|
|
|
12,446 |
|
|
|
15,854 |
|
|
|
34,490 |
|
|
|
28,891 |
|
|
|
27,853 |
|
Cash
dividends declared and paid per common share
|
|
$ |
0.30 |
|
|
$ |
0.83 |
|
|
$ |
0.40 |
|
|
$ |
0.35 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
apartment units managed at end of period
|
|
|
7,225 |
|
|
|
7,693 |
|
|
|
7,491 |
|
|
|
7,406 |
|
|
|
7,747 |
|
Residential
lots sold
|
|
|
78 |
|
|
|
135 |
|
|
|
94 |
|
|
|
70 |
|
|
|
88 |
|
Residential
lots transferred to homebuilding
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
160 |
|
|
|
- |
|
Residential
lots transferred to joint venture
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
352 |
|
|
|
- |
|
Joint
venture lots delivered
|
|
|
48 |
|
|
|
61 |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
Residential
lots transferred to investment property division
|
|
|
- |
|
|
|
- |
|
|
|
252 |
|
|
|
- |
|
|
|
- |
|
Commercial
and business park acres sold
|
|
|
12 |
|
|
|
15 |
|
|
|
11 |
|
|
|
3 |
|
|
|
8 |
|
Homes
sold
|
|
|
29 |
|
|
|
78 |
|
|
|
32 |
|
|
|
55 |
|
|
|
124 |
|
* The
financial statements as of and for the year ended December 31, 2007 reflect the
adoption of Financial Accounting Standards Board Interpretation No.
48 “Account for Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007
(Refer to Note 2 and 10 of the Consolidated Financial Statements).
**The
financial statements as of and for the year ended December 31, 2006 reflect the
adoption of Emerging Issues Task Force 04-05, “Determining Whether a General
Partner as a Group Controls a Limited Partnership or Similar Entity When The
Limited Partners Have Certain Rights” (“EITF 04-05”) on January 1, 2006
(Refer to Note 2 of the Consolidated Financial Statements).
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
FORWARD
LOOKING STATEMENTS
The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing in Item 8 of this report.
Historical results set forth in Selected Financial Information, Management's
Discussion and Analysis of Financial Condition and Results of Operation and the
Financial Statements and Supplemental Data included in Items 6, 7 and 8 should
not be taken as indicative of our future operations.
This Annual Report on Form 10-K
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These include statements about our business
outlook, assessment of 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
unknown 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 Item 1A to this annual report on Form 10-K.
GENERAL
American
Community Properties Trust ("ACPT" or the "Company") is a self managed holding
company that is primarily engaged in investment in multifamily rental
properties, property management services, community development, and
homebuilding through its consolidated subsidiaries. The operations are managed
out of three primary offices: St. Charles, Maryland, Orlando, Florida, and San
Juan, Puerto Rico.
The U.S.
operations are managed through American Rental Management Company ("ARMC"). This
includes the management of apartment properties in which we have an ownership
interest, apartment properties owned by a third party, as well as our community
development operations. American Land Development U.S. Inc. ("ALD") and its
subsidiary own and develop our land holdings in St. Charles, Maryland. St.
Charles is a 9,000 acre planned community consisting of residential, commercial,
recreational and open space land. It has provided the Company and its
predecessor with inventory for the last three decades with expectations of
another three decades. With the aid of outside consultants, we plan, design and
develop the land for sale or use in our own investment portfolio. ALD also has a
50% interest in a land development joint venture formed to develop land for an
active adult community in St. Charles. American Rental Properties
Trust ("ARPT") and its subsidiaries hold the general and limited partnership
interests in our U.S. apartment property portfolio. The apartment properties are
individually organized into separate entities. ARPT's ownership in these
entities ranges from 0.1% to 100%. We expect to retain the land identified for
future apartment units in St. Charles to expand our apartment investment
portfolio through construction of new multifamily apartment complexes. We also
remain open to construction and acquisition of additional properties that will
add value to our existing investment assets.
The
Puerto Rico operations are managed through Interstate General Properties Limited
Partnership S.E. ("IGP"), a wholly owned subsidiary of IGP Group Corp which is a
wholly owned subsidiary of ACPT. IGP provides property management services to
multifamily rental properties in Puerto Rico in which we have an ownership
interest (“Puerto Rico Apartments”), apartment properties owned by third
parties, our commercial properties, and home-owner associations related to our
planned communities. IGP also provides management services for our
homebuilding and community development operations. IGP holds the ownership
interests in the Puerto Rico Apartments and two commercial properties. The
Puerto Rico apartments are organized into separate partnerships and receive HUD
subsidies. IGP's ownership in these partnerships ranges from 1% to 52.5%. IGP's
ownership in the commercial properties ranges from 28% to 100%. Our
community development assets in Puerto Rico, consisting of two planned
communities, are owned by Land Development Associates, S.E.
("LDA"). The first planned community, Parque Escorial, is currently
under development and consists of residential, commercial and recreation land
similar to our U.S. operations but on a smaller scale. Our second
planned community, Parque El Commandante is currently in the planning
stages. Our homebuilding operation builds condominiums for sale on
land located in its planned communities. Each homebuilding project is
organized into separate entities, all wholly owned by IGP and
LDA. LDA also retained a limited partnership interest in two
commercial buildings in Parque Escorial opened in 2001 and 2005 which were built
on land contributed by LDA.
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 have been passed through to
ACPT’s shareholders. A federal tax regulation has been proposed that could
eliminate the pass through of these foreign tax credits to ACPT’s
shareholders. Comments on the proposed regulation are currently being
evaluated with the final regulation expected to be effective for tax years
beginning after the final regulation is ultimately published in the Federal
Register. 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 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.
EXECUTIVE
SUMMARY OF CURRENT YEAR RESULTS
Consolidated
operating revenues are derived primarily from rental revenue, community
development land sales and home sales. For the year ended December
31, 2007, our consolidated rental revenues increased 12% as compared to the year
ended December 31, 2006. The increase was primarily attributable to
construction of new units in our United States segment as well as overall rent
increases at comparable properties in both the United States and Puerto Rico
segments.
Community
development land sales for the year ended December 31, 2007 decreased 31% as
compared to the year ended December 31, 2006. Land sales revenue in
any one period is affected by the mix of lot sizes and, to a greater extent, the
mix between residential and commercial sales. Land sales, currently
sourced from the United States segment, result in large part from a sales
agreement with Lennar Corporation. In March 2004, the Company
executed development and purchase agreements with Lennar Corporation to develop
and sell 1,950 residential lots (1,359 single family lots and 591 town home
lots) in Fairway Village in St. Charles, Maryland. The agreements require the
homebuilder to provide $20,000,000 in letters of credit to secure the purchase
of the lots. A junior lien was placed on the residential portion of
Fairway Village. The agreements require Lennar to purchase 200
residential lots per year, provided that they are developed and available for
delivery as defined by the development agreement. The junior lien is
released when the lots are sold and $10,300 of each lot sales proceeds are
placed in an escrow account to repay the principal of the bonds. In December
2007, the Company reached an agreement with Lennar allowing for a reduction in
their lot takedown requirements for 2007, resulting in 78 lots purchased by
Lennar in 2007 as compared to 135 lots taken in 2006. In addition to
the reduction in number of lots, the December 2007 amendment temporarily reduced
the final selling price of 100 lots (51 taken down in December 2007 and 49 which
Lennar has agreed to take before June 1, 2008) from 30% to 22.5% of the base
price of the home sold on the lot, with guaranteed minimum price of $78,000 per
single family lot and $68,000 per town home lot.
Home
sales for year ended December 31, 2007 decreased 62% as compared to the year
ended December 31, 2006. Home sales, currently sourced from the
Puerto Rico segment, are impacted by the local real estate
market. The Puerto Rico real estate market has slowed
substantially. The reduction of new contracts and the reduced pace of
sales has impacted the Company somewhat, but not to the same extent as the
overall Puerto Rico market decline. The Company settled 29 units
during 2007 as compared to 78 units closed during 2006. As of
December 31, 2007, 21 completed units remain within inventory, of which we
currently have 1 unit under contract. At the current sales pace, the
Company anticipates that the remaining units in Torres will be sold throughout
2008. We believe that our current pricing remains
competitive.
On a
consolidated basis, the Company reported a net loss of $541,000 for the year
ended December 31, 2007. The net loss includes a $307,000 benefit for
income taxes, resulting in a consolidated effective tax rate of approximately
36%. The consolidated effective rate was impacted by accrued
penalties on uncertain tax positions, certain nondeductible permanent items and
a change in the statutory tax rate in the United States segment and double
taxation on a certain non-recurring gain for our Puerto Rico
segment. For further discussion of these items, see the provision for
income taxes discussion within the United States and Puerto Rico segment
discussion.
Please
refer to the Results of Operations section of Management’s Discussion and
Analysis for additional details surrounding the results of each of our operating
segments.
NEW
ACCOUNTING PRONOUNCEMENTS AND CHANGE IN BASIS OF PRESENTATION
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 is an interpretation of FASB Statement
No. 109, “Accounting for
Income Taxes,” and it seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition in accounting for
income taxes. In addition, FIN 48 requires expanded disclosure with respect to
the uncertainty in income taxes. We adopted the provisions of FIN 48
on January 1, 2007. As a result of the implementation of FIN 48, we
recorded a $1,458,000 increase in the net liability for unrecognized tax
positions, which was recorded as a cumulative effect of a change in accounting
principle, reducing the opening balance of retained earnings on January 1,
2007. See Notes 2 and 10 to the consolidated financial statements for
further discussion.
In June
2005, the FASB ratified Emerging Issues Task Force Issue 04-05, "Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights," or EITF
04-05. EITF 04-05 provides an accounting model to be used by a
general partner, or group of general partners, to determine whether the general
partner(s) controls a limited partnership or similar entity in light of certain
rights held by the limited partners. In accordance with the
provisions of EITF 04-05, beginning January 1, 2006 we have included the
following partnerships in our consolidated group: Alturas Del Senorial
Associates Limited Partnership, Bayamon Garden Associates Limited Partnership,
Carolina Associates Limited Partnership S.E., Colinas de San Juan Associates
Limited Partnership, Essex Apartments Associates Limited Partnership, Huntington
Associates Limited Partnership, Jardines de Caparra Associates Limited
Partnership, Monserrate Associates Limited Partnership, San Anton Associates,
Turabo Limited Dividend Partnership and Valle del Sol Associates Limited
Partnership. Historically, our interests in these partnerships were
recorded using the equity method of accounting.
The
impact of consolidating the financial statements of these partnerships increased
our operating assets and liabilities by $78.5 million and $97.7 million,
respectively, as of January 1, 2006. The addition to assets is
primarily related to real estate at historical cost, net of accumulated
depreciation of approximately $53.3 million, and the addition to liabilities is
primarily related to non-recourse debt of approximately $98.6 million held by
these limited partnerships. The Company recorded an overall reduction
to retained earnings of $19.1 million in a manner similar to a cumulative effect
of a change in accounting principle. The retained earnings impact is
net of a deferred tax asset recorded of $9.8 million related to temporary
differences arising from the negative deficits absorbed by the Company in
consolidation.
With
respect to our accounting for minority interest in our consolidated
partnerships, when consolidated real estate partnerships make cash distributions
or allocate losses to partners in excess of the minority partners' basis in the
property, we generally record a charge equal to the amount of such excess
distribution.
CRITICAL
ACCOUNTING POLICIES
The Securities and Exchange Commission
defines critical accounting policies as those that are most important to the
portrayal of our financial condition and results. 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. Below is a discussion of accounting policies which we
consider critical in that they may require complex judgment in their application
or require estimates about matters which are inherently uncertain.
Sales, Profit Recognition
and Cost Capitalization
Community development land sales are
recognized at closing only when sufficient down payments have been obtained,
possession and other attributes of ownership have been transferred to the buyer,
and ACPT has no significant continuing involvement. Under the
provisions of SFAS 66, related to condominium sales, revenues and costs are
recognized when construction is beyond the preliminary stage, the buyer is
committed to the extent of being unable to require a refund except for
non-delivery of the unit, sufficient units in the project have been sold to
ensure that the property will not be converted to rental property, the sales
proceeds are collectible and the aggregate sales proceeds and the total cost of
the project can be reasonably estimated. Accordingly we recognize
revenue and costs upon settlement with the homebuyer which doesn’t occur until
after we receive use and occupancy permits for the building.
The costs of
developing the land are allocated to our land assets and charged to cost of
sales as the related inventories are sold using the relative sales value method
which rely on estimated costs and sales values. The costs of the land and
construction of the condominiums are allocated to these assets and charged to
cost of sales as the condominiums are sold. The cost of sales for
these condominiums is determined by the percentage of completion method, which
relies on total estimated costs and sales values. Residential and
commercial land sales can be highly cyclical. Once development is
undertaken, no assurances can be given that the Company will be able to sell the
various developed lots or condominiums in a timely manner. Failure to
sell such lots and homes in a timely manner could result in significantly
increased carrying costs and erosion or elimination of profit with respect to
any development. Even though our cost estimates are based on outside
engineers' cost estimates, construction contracts and historical costs, our
actual development and construction costs can exceed estimates for various
reasons, including but not limited to unknown site conditions, rising prices and
changes in government regulations. Any estimates of such costs may
differ substantially from the actual results of such costs and reduce or
eliminate the future profits with respect to any development.
The Company considers all debt and
related interest expense 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 is applied. Any excess interest is reflected as
interest expense.
Investment in Unconsolidated
Real Estate Entities
The
Company accounts for investments in unconsolidated real estate entities that are
not considered variable interest entities under FIN 46(R) in accordance with SOP
78-9 "Accounting for
Investments in Real Estate Ventures" and APB Opinion No. 18 "The Equity Method of Accounting for
Investments in Common Stock". For entities that are considered variable
interest entities under FIN 46(R), the Company performs an assessment to
determine the primary beneficiary of the entity as required by FIN 46(R). The
Company accounts for variable interest entities in which the Company is not a
primary beneficiary and does not bear a majority of the risk of expected loss in
accordance with the equity method of accounting.
The
Company considers many factors in determining whether or not an investment
should be recorded under the equity method, such as economic and ownership
interests, authority to make decisions, and contractual and substantive
participating rights of the partners. Income and losses are recognized in
accordance with the terms of the partnership agreements and any guarantee
obligations or commitments for financial support. The Company's investments in
unconsolidated real estate entities accounted for under the equity method of
accounting consisted of general partnership interests in two limited
partnerships which own apartment properties in the United States; a limited
partnership interest in a limited partnership that owns a commercial property in
Puerto Rico; and a 50% ownership interest in a joint venture formed as a limited
liability company.
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.
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.
Depreciation of Investments
in Real Estate
The Company's operating real estate is
stated at cost and includes all costs related to acquisitions, development and
construction. We are required to make 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. Our assessments,
all of which are judgmental determinations, of our investments in our real
estate assets are as follows:
·
|
Buildings
and improvements are depreciated over five to forty years using the
straight-line or double declining balance
methods,
|
·
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Furniture,
fixtures and equipment 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,
|
·
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Maintenance
and other repair costs are charged to operations as
incurred.
|
Income
Taxes
The Company's complex tax structure
involves foreign source income and multiple entities that file separate
returns. Due to the complex nature of tax regulations affecting our
entities, our income tax expense and related balance sheet amounts involve
significant management estimates and judgments.
Contingencies
The
Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. These matters are frequently covered by insurance.
If it has been determined that a loss is probable to occur, the estimated amount
of the loss is expensed in the financial statements. While the resolution of
these matters cannot be predicted with certainty, we rely on the advice of our
outside counsel as to the potential and probable outcome of these proceedings
when evaluating any financial statement impact.
Recent Accounting
Pronouncements
SFAS
157 and 159
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements” and
in February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities.” SFAS 157 defines fair
values as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the market
in which the reporting entity transacts. SFAS 157 applies whenever other
standards require assets or liabilities to be measured at fair value and does
not expand the use of fair value in any new circumstances. SFAS 157 establishes
a hierarchy that prioritizes the information used in developing fair value
estimates. The hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, such as the reporting
entity’s own data. SFAS 157 requires fair value measurements to be disclosed by
level within the fair value hierarchy. SFAS 157 is effective for fiscal years
beginning after November 15, 2007.
SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. The fair value election is designed to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company believes that the implementation of
SFAS 157 and 159 will not have a material impact on our financial
statements.
SFAS
141R
On December 4, 2007, the FASB issued
Statement No. 141R, “Business Combinations” (“SFAS 141R”). This
statement changes the accounting for acquisitions specifically eliminating the
step acquisition model, changing the recognition of contingent consideration
from being recognized when it is probable to being recognized at the time of
acquisition, disallowing the capitalization of transaction costs and delays when
restructurings related to acquisitions can be recognized. The standard is
effective for fiscal years ending after December 15, 2008 and will only
impact the accounting for acquisitions we make after its adoption.
SFAS
160
On
December 4, 2007, the FASB issued Statement No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 replaces the concept of minority interest with
noncontrolling interests in subsidiaries. Noncontrolling interests
will now be reported as a component of equity in the consolidated statement of
financial position. Earnings attributable to noncontrolling interests
will continue to be reported as a part of consolidated earnings; however, SFAS
160 requires that income attributable to both controlling and noncontrolling
interests be presented separately on the face of the consolidated income
statement. In addition, SFAS 160 provides that when losses
attributable to noncontrolling interests exceed the noncontrolling interest’s
basis, losses continue to be attributed to the noncontrolling interest as
opposed to being absorbed by the consolidating entity. SFAS 160
requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of SFAS 160 shall
be applied prospectively. SFAS 160 is effective for the first annual
reporting period beginning on or after December 15, 2008. The Company
is currently evaluating the impact of the adoption of SFAS 160 on its
consolidated financial statements. However, the provisions of SFAS
160 are directly applicable to the Company’s currently reported minority
interest in consolidated entities and, accordingly, will change the presentation
of the Company’s financial statements when implemented.
EITF
Issue No. 06-08
In
November 2006, the Emerging Issues Task force of the FASB (“EITF”) reached a
consensus on EITF Issue No. 06-08, “Applicability of a Buyer’s
Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real
Estate, for Sales of Condominiums” (“EITF 06-08”). EITF 06-08
will require condominium sales to meet the continuing investment criterion in
FAS No. 66 in order for profit to be recognized under the
percentage-of-completion method. EITF 06-08 will be effective for
annual reporting periods beginning after March 15, 2007. The
cumulative effect of applying EITF 06-08, if any, is to be reported as an
adjustment to the opening balance of retained earnings in the year of
adoption. The Company believes that the implementation of EITF 06-08
will not have a material impact on our financial statements.
RESULTS
OF OPERATIONS
The
following discussion is based on the consolidated financial statements of the
Company. It compares the components of the results of operations of the Company
by segment for each of the three years ended December 31, 2007, 2006 and
2005. Historically, the Company’s financial results have been
significantly affected by the cyclical nature of the real estate
industry. Accordingly, the Company’s historical financial statements
may not be indicative of future results. This discussion should be read in
conjunction with the accompanying consolidated financial statements and notes
included elsewhere in this report.
Results
of Operations - U.S. Operations:
For the
year ended December 31, 2007, our U.S. segment generated $9,009,000 of operating
income compared to $15,299,000 of operating income generated by the segment for
the same period in 2006 and $8,287,000 in 2005. Additional
information and analysis of the U.S. operations can be found below.
Rental
Property Revenues and Operating Expenses - U.S. Operations:
As of
December 31, 2007, nineteen U.S.-based apartment properties, representing 3,256
units, in which we hold an ownership interest qualified for the consolidation
method of accounting. The rules of consolidation require that we
include within our financial statements the consolidated apartment properties'
total revenue and operating expenses.
As of
December 31, 2007, thirteen of the consolidated properties were market rent
properties, representing 1,856 units, allowing us to determine the appropriate
rental rates. Even though we can determine the rents, 54 of our units
at one of our market rent properties must be leased to tenants with low to
moderate income. HUD subsidizes three of the properties representing 836 units
and the three remaining properties are a mix of 137 subsidized units and 427
market rent units. HUD dictates the rents of the subsidized units.
Beginning
January 1, 2006, two additional properties, Huntington Associates Limited
Partnership (“Huntington”) and Essex Apartments Associates Limited Partnership
(“Essex”) qualified for consolidation under the new provisions of EITF
04-05.
Apartment
Construction and Acquisition
A summary
of our significant apartment construction and acquisition activities in 2007,
2006 and 2005 is as follows. All of the constructed and acquired
properties are operating as market rate properties.
·
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On
January 31, 2007, the Company completed the construction of the newest
addition to our rental apartment properties in St. Charles' Fairway
Village, the Sheffield Greens Apartments (“Sheffield
Greens”). The nine building, 252-unit apartment project offers
1 and 2 bedroom units ranging in size from 800 to 1,400 square
feet. Construction activities were started in the fourth
quarter of 2005 and leasing efforts began in the first quarter of 2006.
The first five buildings became available for occupancy during the fourth
quarter of 2006 and the final four buildings were ready for occupancy in
January 2007. Leasing efforts have been successful and the
property was approximately 93% occupied as of December 31,
2007.
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·
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On
April 28, 2006, the Company acquired two multifamily rental 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.
|
·
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On
May 23, 2005, the Company acquired the assets of Nottingham Apartments
LLC, in Baltimore, Maryland containing 85 units for approximately
$3,000,000.
|
2007 compared to
2006
For year
ended December 31, 2007, rental property revenues increased $5,911,000 or 18% to
$38,416,000 compared to $32,505,000 for the same period in 2006. The
increase in rental revenues was primarily the result of additional revenues for
Sheffield Greens Apartments, Milford Station I and Milford Station II which
accounted for approximately $4,470,000 of the difference. The
increase was also attributable to an overall 4% increase in rents between
periods which is net of a $472,000 increase in vacancies between 2006 and
2007. The increase in vacancies was primarily attributable to the
lease up of Sheffield. Now that the lease up is complete and certain
incentive programs at Sheffield are over, occupancy at the other fair market
properties is increasing.
Rental
property operating expenses increased $3,163,000 or 20% for the year ended
December 31, 2007 to $19,235,000 compared to $16,072,000 for the same period of
2006. The overall increase in rental property operating expenses was
primarily the result of additional expenses for Sheffield Greens Apartments,
Milford Station I and Milford Station II, which accounted for approximately
$2,044,000 of the difference. The remainder of the increase resulted
from overall inflationary adjustments as well as specific above inflation
increases noted in advertising, concessions granted to residents, office and
maintenance salaries, office expenses, utilities, security expense, snow
removal, rehabilitation of apartment units and real estate taxes. We
are currently working to reduce all our controllable rental property operating
expenses within our US portfolio. Specific emphasis includes reducing
advertising and concessions expenses now that Sheffield Greens is leased and
occupancy rates at other our competing properties are increasing, implementing
measures to reduce security expenditures, as well as the cost benefit of a
reduction in management staff.
2006 compared to
2005
For the
year ended December 31, 2006, rental property revenues increased $9,997,000 to
$32,505,000 compared to $22,508,000 for the year ended December 31,
2005. The increase is primarily due to the impact of EITF 04-05
requiring us to include the results of operations for two apartment properties,
Huntington and Essex, in our consolidation beginning January 1,
2006. The revenues earned within these two properties in 2006 were
consistent with revenues earned in the prior year. The increase in
our rental property revenue during 2006 was also the result of our apartment
acquisitions in May 2005 and April 2006 which added $1,693,000 of rental
property revenues. Other increases in rental property revenues during
2006 included a 6% increase in overall average rents resulting in an additional
$1,329,000 of rental property income, which includes the additional revenue
earned from the January 2006 conversion of one of our subsidized apartment
properties to a market rent property. The average increase in rents
in 2006 for properties in the Washington DC and Baltimore suburban areas ranged
from 3% to 4%.
The
increase in revenue was also the result of a benefit of $274,000 resulting from
the completion of the amortization of acquired intangible leases for Owings
Chase and Prescott Square purchased in 2004, and the recognition of $200,000 of
rent revenue earned from Sheffield Greens, our newest apartment complex under
construction as of December 31, 2006.
For the
year ended December 31, 2006, rental property operating expenses increased
$5,943,000 to $16,072,000 compared to $10,129,000 for the year ended December
31, 2005. The increase is primarily the result of the impact of EITF
04-05, which added an additional $3,936,000 in 2006. The increase in
our rental property operating expenses during 2006 is also the result of our
apartment acquisitions in May 2005 and April 2006 which increased our operating
expenses by $1,010,000 as well as operating expenses of $280,000 incurred by
Sheffield Greens. Overall, during 2006, our rental property expenses
generally increased approximately 7% on a comparative basis. The
average increase in expenses in 2006 for properties in the Washington DC and
Baltimore suburban areas was 3%. The increase in excess of general
inflationary adjustments was attributable to the rehabilitation of our apartment
units, project wide cleaning, grounds and maintenance and utility
rates.
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 Development and Purchase Agreements with Lennar Corporation
(the “Lennar Agreements”) to develop and sell 1,950 residential lots (1,359
single-family lots and 591 town home lots) in Fairway Village in St. Charles,
Maryland. The Lennar Agreements requires the homebuilder to provide
$20,000,000 in letters of credit to secure the purchase of the lots. As security
for the Company’s obligation to develop the lots, a junior lien was placed on
the residential portion of Fairway Village. The agreements require
Lennar to purchase 200 residential lots per year, provided that they are
developed and available for delivery as defined by the Development
Agreement. For each lot sold in Fairway Village, the Company must
deposit $10,300 in an escrow account to fund the principal payments due to
Charles County, at which time the lots are released from the junior
lien. As of December 31, 2007, 1,565 lots remained under the
provisions of the Lennar Agreements. Assuming a sales pace of
200 lots per year, it is estimated that lot settlements will take place through
2015; however, the continued slowing of the new homes sales market in the United
States, and more specifically in the Washington D.C. suburban areas, has
adversely impact Lennar’s willingness or ability to take down 200 lots per
year. In December 2007, the Company executed an amendment to the
Lennar Agreements whereby the Company agreed to accept 51 lot settlements in
December 2007 as satisfaction of Lennar’s lot takedown requirement for 2007,
resulting in a total of 78 lots taken down by Lennar during
2007. This compares to the 135 lots taken down by Lennar in
2006.
Sales are
closed on a lot by lot basis at the time when the builder purchases the lot. The
final selling price per lot sold to Lennar may exceed the guaranteed minimum
price recognized at closing since the final lot price is based on a percentage
of the base price of the home sold on the lot but not less than the guaranteed
minimum price. As part of the December amendment to the Lennar
Agreements, the Company agreed to temporarily reduce the final lot price for 100
lots, as previously discussed, from 30% to 22.5% of the base price of the home
sold on the lot, with guaranteed minimum prices of $78,000 per single family lot
and $68,000 per townhome lot. Additional revenue exceeding the guaranteed
minimum take down price per lot will be recognized upon Lennar's settlement with
the respective homebuyers.
Residential
lots vary in size and location resulting in pricing differences. Gross margins
are calculated based on the total estimated sales values for all remaining lots
within a neighborhood as compared to the total estimated costs.
Commercial
land is typically sold by contract that allows for a study period and delayed
settlement until the purchaser obtains the necessary permits for development.
The sales prices and gross margins for commercial parcels vary significantly
depending on the location, size, extent of development and ultimate use.
Commercial land sales are cyclical and usually have a noticeable positive effect
on our earnings in the period they reach settlement.
2007 compared to
2006
Community
development land sales revenue decreased $6,481,000 to $14,486,000 for the year
ended December 31, 2007 compared to $20,967,000 for the year ended December 31,
2006. The 31% decrease in our community development land sales within
our U.S. segment in 2007 is primarily the result of a decrease in delivery of
residential lots to Lennar, offset by an increase in the commercial land
sales.
Residential
Land Sales
For the
year ended December 31, 2007, we delivered 34 single-family lots and 44
town-home lots to Lennar, resulting in the recognition of revenues ranging from
$121,000 to $78,000 per single family lot and $85,000 to $65,000 per town-home
lot plus $2,600 per lot of water and sewer fees, road fees and other off-site
fees. The total revenue recognized at initial settlement was
$5,964,000 for the year ended December 31, 2007. For the year ended December 31,
2006, we delivered 70 single-family lots and 65 town-home lots to Lennar,
resulting in the recognition of revenues ranging from $100,000 to $125,000 per
single family lot and $70,000 to $85,000 per town-home lot plus water and sewer
fees, road fees and other off-site fees. The total revenue recognized
at initial settlement was $13,130,000 for the year ended December 31, 2006. As
of December 31, 2007, we had 121 developed single-family lots and 8 finished
town-home lots in backlog and ready for delivery.
During
the years ended December 31, 2007 and 2006, we also recognized $2,295,000 and
$3,434,000, 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.
Currently new town-homes in Fairway Village are priced between $330,000 and
$400,000 while single-family homes in Fairway Village are priced between
$390,000 and $500,000.
The homes
sold by Lennar to the homebuyer in 2007 resulted in a total average final lot
price of $120,000 per single family lot and $94,000 per townhome lot. For
2006, the homes sold by Lennar to the homebuyer resulted in a total average
final lot price of $135,000 per single family lot. No townhomes were sold
to homebuyers in 2006.
Commercial
Land Sales
For the
year ended December 31, 2007, we sold 12.0 commercial acres in St. Charles for
$5,333,000 compared to 14.9 commercial acres for $2,903,000 for the year ended
December 31, 2006. Sales in 2007 included two parcels within the O’Donnell Lake
Restaurant Park, our latest commercial development project located near the St.
Charles Towne Center. These two parcels, totaling approximately 5
acres, were sold for $3.2 million. However, a portion of this revenue
was deferred related to certain ongoing development activities. In
addition, 2007 commercial sales included three lots, totaling approximately 3
acres, from Town Center Parcel G for approximately $1.4 million. The
Parcel G lots were previously developed commercial parcels and also surround St.
Charles Town Center. The 2007 lot sales also included four previously
developed lots within Henry Ford Circle, totaling approximately 4 acres, for
$771,000. As of December 31, 2007, our backlog contained 95.68
commercial acres in St. Charles under contract for a total of
$17,097,000.
St.
Charles Active Adult Community, LLC - Land Joint Venture
In
September 2004, the Company entered into a joint venture agreement with Lennar
Corporation for the development of a 352-unit, active adult community located in
St. Charles, Maryland. The Company manages the project’s development
for a market rate fee pursuant to a management agreement. In
September 2004, the Company transferred land to the joint venture in exchange
for a 50% ownership interest and $4,277,000 in cash. The Company’s
investment in the joint venture was recorded at 50% of the historical cost basis
of the land with the other 50% recorded within our deferred charges and other
assets. The proceeds received are reflected as deferred revenue. The
deferred revenue and related deferred costs will be recognized into income as
the joint venture sells lots to Lennar. In March 2005, the joint
venture closed a non-recourse development loan which was amended in September
2006, again in December 2006, and again in October 2007. Most
recently, the development loan was modified to provide a one year delay in
development of the project, as to date, lot development has outpaced
sales. Per the terms of the loan, both the Company and Lennar
provided development completion guarantees.
The joint
venture sold 48 lots to Lennar’s homebuilding division during 2007 compared to
61 lots delivered in 2006. As a result, the Company recognized
$1,063,000 in deferred revenue, management fees and off-site fees and $358,000
of deferred costs for the year ended December 31, 2007 compared to $1,294,000 in
deferred revenue, management fees and offsite fees and $419,000 of deferred
costs for the year ended December 31, 2006.
Gross
Margin on Land Sales
The gross
margin on land sales was 23% for the year ended December 31, 2007 as compared to
45% for the year ended December 31, 2006. Our gross margins on land
sales in the U.S. can fluctuate based on changes in the mix of residential and
commercial land sales. The reduction in gross margin between 2007 and 2006 was
primarily the result of decreasing our estimate of relative sales values for our
residential lots as a result of the downturn in the real estate market and the
reduced pricing granted to Lennar during 2007. The revised sales
values reduced our estimated gross margins on the residential lot sales to
approximately 31% from approximately 50%. In addition, gross margins on
commercial sales in 2007 ranged between 49% and 1% with an overall weighted
average of approximately 27%. The average gross margins on commercial
sales were negatively impacted by increased costs estimates related to the
development of certain amenities included within the O’Donnell Lake Restaurant
Park.
Customer
Dependence
Revenues
from Lennar include residential land sales as well as certain management
fees. Total revenues from Lennar within our U.S. segment were
$9,663,000 for the year ended December 31, 2007 which represents 18% of the U.S.
segment's revenue and 11% of our total year-to-date consolidated
revenue. No other customers accounted for more than 10% of our
consolidated revenue for the year ended December 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.
2006 compared to
2005
Community
development land sales revenue increased $8,564,000 to $20,967,000 for the year
ended December 31, 2006 compared to $12,403,000 for the year ended December 31,
2005. The 69% increase in our community development land sales within
our U.S. segment in 2006 is the result of our significant investment in
residential lot development and delivery of residential lots to
Lennar.
Residential
Land Sales
For the
year ended December 31, 2006, we delivered 70 single-family lots and 65
town-home lots to Lennar, resulting in the recognition of revenues ranging from
$100,000 to $125,000 per single family lot and $70,000 to $85,000 per town-home
lot plus water and sewer fees, road fees and other off-site fees. For the year
ended December 31 2005, we delivered 94 residential lots to Lennar at an initial
selling price of $100,000 per lot plus water and sewer fees, road fees and other
off-site fees.
During
the years ended December 31, 2006 and 2005, we also recognized $3,434,000 and
$2,000,000, 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
year ended December 31, 2006, we sold 14.9 commercial acres in St. Charles for
$2,800,000 compared to 1.34 commercial acres for $200,000 for the year ended
December 31, 2005.
St.
Charles Active Adult Community, LLC - Land Joint Venture
The joint
venture sold 61 lots to Lennar’s homebuilding division during the third and
fourth quarters of 2006 compared to 25 lots delivered in the fourth quarter of
2005. As a result, the Company recognized $1,294,000 in deferred
revenue, management fees and off-site fees and $419,000 of deferred costs for
the year ended December 31, 2006 compared to $610,000 in deferred revenue,
management fees and offsite fees and $176,000 of deferred costs for the year
ended December 31, 2005.
Gross
Margin on Land Sales
The gross
margins on land sales for the years ended December 31, 2006 and 2005 remained
consistent at 45%.
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 to a third party. Effective April 30, 2006, the
Company’s management agreement with Chastleton Associates LP terminated when the
apartment property was sold to a third party, however, we received an
agreed-upon management fee for administrative services through the end of the
second quarter 2006. These two 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 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.
This
section includes only the fees earned from the non-consolidated properties; the
fees earned from the consolidated properties are eliminated in
consolidation.
2007 compared to
2006
Management fees decreased $327,000 to
$336,000 for the year ended December 31, 2007 as compared to $663,000 for the
year ended December 31, 2006. The decrease was primarily the result
of the Company no longer providing management services to G.L. Limited
Partnership and Chastleton Associates LP.
2006 compared to
2005
Management
fees decreased $451,000 to $663,000 for the year ended December 31, 2006 as
compared to $1,114,000 for the year ended December 31, 2005. The
decrease was primarily the result of implementation of EITF 04-05, resulting in
an additional $375,000 eliminated related to the newly consolidated
properties. Excluding the impact of EITF 04-05, management and other
fees were relatively consistent with the prior periods.
General,
Administrative, Selling and Marketing Expense - U.S. Operations:
The costs
associated with the oversight of our U.S. operations, accounting, human
resources, office management and technology, as well as corporate and other
executive office costs are included in this section. ARMC employs the
centralized office management approach for its property management services for
our 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.
2007 compared to
2006
General,
administrative, selling and marketing costs incurred within our U.S. operations
increased $1,711,000 to $8,081,000 for the year ended December 31, 2007 compared
to $6,370,000 for the same period of 2006. The 27% increase is
primarily attributable to a $902,000 increase in consulting expenses and
$727,000 related to fees associated with an evaluation of a recapitalization of
the Company. The increases in consulting expenses including $408,000
of fees related to a consultant hired to assist the Company with an overall
strategic plan. Other increases in consulting included consulting services
provided for our FIN 48 implementation during the first quarter of 2007 and
consulting services for Sarbanes-Oxley Section 404 (“SOX 404”) internal control
compliance testing. Other increases included salaries and benefits
related to executive retention agreements with our COO and CFO executed in the
third quarter of 2007. The salaries and benefits increase was
partially offset by reduced bonus accruals for 2007 as bonuses were not awarded
to executive management for 2007. Other decreases in general,
administrative, selling and marketing costs include decreases in audit and
accounting expenses as 2006 amounts included non-recurring fees related to the
closing agreement reached with the IRS and a decrease in share appreciation
rights expense resulting from the decrease in our share price between
periods.
We
anticipate additional costs will be incurred as part of the company’s strategic
planning activities noted above. These costs include, but are not
limited to, legal fees, consulting fees, and fees paid to the Special Committee
to the Board of Trustees.
2006 compared to
2005
General,
administrative, selling and marketing costs incurred within our U.S. operations
decreased $537,000 to $6,370,000 for the year ended December 31, 2006, compared
to $6,907,000 for the year ended December 31, 2005. The 8% decrease
in general, administrative, selling and marketing costs is primarily
attributable to a decrease in the expense associated with our outstanding share
incentive rights, as a result of a reduction of shares outstanding due to prior
year exercises, coupled with a significant increase in the share price during
2005. The decrease was partially offset by an increase in salaries
and benefits, and legal fees related to the closing agreement reached with the
IRS earlier this year.
Depreciation
Expense - U.S. Operations:
2007 compared to
2006
Depreciation
expense increased $957,000 to $5,744,000 for the year ended December 31, 2007
compared to $4,787,000 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 and the depreciation related to
Sheffield Greens Apartments, all of which accounted for $609,000 of the
variance. The balance of the increases relate to the recent
refinancings of several properties at the end of 2006 and beginning of
2007. The Company used part of the proceeds to make significant
investments in capital improvements at these properties resulting in increased
depreciation expense for 2007.
Depreciation
expense increased $958,000 to $4,787,000 for the year ended December 31, 2006
compared to $3,829,000 for the year ended December 31, 2005. As a
result of adopting EITF 04-05 in 2006, we added an additional $540,000 of
depreciation expense to our 2006 consolidation. The remainder of the
increase is attributable to the acquisitions in May 2005 and April 2006 as well
as capital improvements made to the existing properties.
Interest
Income – U.S. Operations:
2007 compared to
2006
Interest
income increased $105,000 to $1,073,000 for the year ended December 31, 2007, as
compared to $968,000 for the same period of 2006. The increase was
primarily attributable to interest income received on investments of cash
received from the various apartment refinancings at the end of 2006 and
beginning of 2007. This increase was offset in part by a reduction of
the interest income received on the county bond receivables during the
year. During 2006, the Company negotiated a written agreement with
the County to receive interest income on bond proceeds held in escrow by the
County beginning July 1, 2005. Accordingly, 2006 amounts included the
recognition of 6 quarters of interest income from the County as the
Company.
2006 compared to
2005
Interest
income for the year ended December 31, 2006 was $968,000 compared to $145,000
for the year ended December 31, 2005. The $823,000 increase in
interest income in 2006 is the result of the recognition of $855,000 of interest
income in 2006 related to the Charles County bonds for the period from July 1,
2005 through December 31, 2006, an 18 month period, with no comparable amounts
recognized in 2005. 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. As
development activities specified by the bond agreement are completed, the
Company draws down the escrowed bond proceeds. The interest agreement
is expected to remain effective through the last draw made by the Company, and
the Company expects to receive future annual interest payments from the
County.
Equity
in Earnings from Unconsolidated Entities - U.S. Operations:
2007 compared to
2006
Equity in
earnings from unconsolidated entities was the same for the year ended December
31, 2007 as compared to the year ended December 31, 2006. In both
periods, the Company recognized a loss of $1,000 from its investment in its
unconsolidated real estate entities. We continue to account for our
investments in two apartment partnerships, Brookside and Lakeside, using equity
accounting, but due to our limited ownership in these partnerships, our
recognition of the partnerships’ earnings is immaterial.
2006 compared to
2005
For the
year ended December 31, 2006, the Company recognized a loss of $1,000 from its
investment in its unconsolidated real estate entities compared to the
recognition of earnings of $135,000 for the year ended December 31,
2005. With the implementation of the EITF 04-05, effective January 1,
2006, the Company has consolidated the operational results of Huntington and
Essex which resulted in the overall decrease in our equity in
earnings.
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, 2006 and 2005,
the excess interest primarily relates to the interest incurred on the
non-recourse debt from our investment properties.
2007 compared to
2006
Interest
expense increased $2,769,000 for the year ended December 31, 2007, to
$12,621,000, as compared to $9,852,000 for the same period of
2006. The increase in interest expense was primarily attributable to
interest expense incurred at new properties, including Sheffield Greens
Apartments, Milford Station I and Milford Station II all of which accounted for
$1,608,000 of the increase. In addition, the refinancing of several
apartment mortgages during the fourth quarter of 2006 and early first quarter
2007 increased interest expense at Fox Chase Apartments, LLC, New Forest
Apartments, LLC, Coachman’s Apartments LLC and Village Lake Apartments, LLC
$1,318,000 for 2007. Additionally, interest expense increased
$1,253,000 as a result of accrued interest on uncertain tax positions associated
with our implementation of FIN 48 beginning January 1, 2007.
For the
year ended December 31, 2007, $1,271,000 of interest was capitalized in the U.S.
operations compared to $1,504,000 of interest capitalized during
2006.
2006 compared to
2005
Interest
expense for the year ended December 31, 2006 increased $3,055,000 to $9,852,000
compared to $6,797,000 for the year ended December 31, 2005. The
increase is primarily the result of EITF 04-05, which added $1,263,000 of
interest expense in 2006. Excluding the impact of EITF 04-05, the
increase is the result of additional interest expense of $599,000 recognized as
a result of the conversion of one of our properties from an interest subsidized
property to a market rent property in December 2005, $554,000 on the mortgages
of the properties acquired in May 2005 and April 2006, and $200,000 of the write
off of pre-payment penalties and other fees from the refinancing of two of our
properties mortgages in the fourth quarter of 2006 with no comparable amounts
for 2005. The remainder of the increase is related to reduced amounts of
capitalized interest for 2006 as completed lots in Fairway Village and completed
units in Sheffield Greens were no longer eligible for
capitalization.
For the
year ended December 31, 2006, $1,504,000 of interest was capitalized in the U.S.
operations compared to $944,000 of interest capitalized during
2005.
Minority
Interest in Consolidated Entities - U.S. Operations:
Minority
interest in consolidated entities includes the minority partner's share of the
consolidated partnerships’ earnings and distributions to minority partners in
excess of their basis in the consolidated partnership. Losses charged to the
minority interest are limited to the minority partner's basis in the
partnership. Because the minority interest holders in most of our
partnerships have received distributions in excess of their basis, we anticipate
volatility in minority interest expense. Although this allows us to
recognize 100 percent of the income of the partnerships up to accumulated
distributions and losses in excess of the minority partner’s basis previously
required to be recognized as our expense, we will be required to recognize as
expense 100 percent of future distributions to minority partners and any
subsequent losses.
2007 compared to
2006
Minority
interest decreased $280,000 or 45% to $336,000 for the year ended December 31,
2007 compared to $616,000 for the same period in 2006. The decrease was
primarily the result of decreased surplus cash distributions in excess of basis
made to the limited partners during 2007 as compared to 2006.
2006 compared to
2005
Minority
interest for the year ended December 31, 2006 was $616,000 compared to $926,000
for the year ended December 31, 2005. The $310,000 decrease in
minority interest expense in 2006 is the result of distributions provided to
third party owners in excess of their basis after the refinancing of Terrace in
the fourth quarter of 2005 with no comparable distributions made in
2006. This was offset by distributions in excess of basis made to the
limited partners of Huntington for which we are now required to consolidate as a
result of the implementation of EITF 04-05.
Provision
for Income Taxes – U.S. Operations:
The
effective tax rates for the years ended December 31, 2007, 2006, and 2005 were
41%, 41% and 54%, respectively. The statutory rate is 40%. The
effective tax rate for 2007 differs from the statutory rate as a result of the
impact of a statutory rate change effective for 2008 on our net deferred tax
assets. This was partially offset by penalties accrued on
uncertain tax positions as well as certain nondeductible expenses creating
permanent differences. The effective tax rates for 2006 and 2005
differ from the statutory rate due to certain permanent differences and taxation
of foreign source interest income without a corresponding foreign tax
credit.
Results
of Operations - Puerto Rico Operations:
For the
year ended December 31, 2007, our Puerto Rico segment generated $7,074,000 of
operating income compared to $9,696,000 of operating income generated by the
segment for the same period in 2006 and $2,659,000 in
2005. Additional information and analysis of the Puerto Rico
operations can be found below.
Rental
Property Revenues and Operating Expenses - Puerto Rico Operations:
As of
December 31, 2007, nine Puerto Rico-based apartment properties, representing
twelve apartment complexes totaling 2,653 units, in which we hold an ownership
interest (“Puerto Rico Apartments”) qualified for the consolidation method of
accounting. The rules of consolidation require that we include within
our financial statements the consolidated apartment properties' total revenue
and operating expenses. The portions of net income attributable to the interests
of the outside owners of these properties and any losses and distributions in
excess of the minority owners’ basis in those properties are reflected as
minority interest expense. As of December 31, 2007, all of the Puerto
Rico Apartments were HUD subsidized projects with rental rates governed by
HUD.
Prior to
January 1, 2006, the Puerto Rico apartments were not included in the Company’s
consolidated results. Effective January 1, the Company included the
Puerto Rico Apartments in their consolidated results as part of the
implementation of the provisions of EITF 04-05.
Our
Puerto Rico rental property portfolio also includes the operations of a
commercial rental property in the community of Parque Escorial, known as
Escorial Building One. The company constructed and holds a 100%
ownership interest in Escorial Building One, which commenced operations in
September 2005. Escorial Building One is a three-story building with
approximately 56,000 square feet of offices space for lease. The
Company moved the Puerto Rico Corporate Office to the new facilities in the
third quarter of 2005 and leases approximately 20% of the building.
2007 compared to
2006
Rental
property revenues increased $782,000 or 4% to $22,306,000 for the year ended
December 31, 2007 compared to $21,524,000 for the same period of
2006. The increase in our rental property revenues was primarily the
result of an overall rent increase of 3% from HUD on our multifamily apartment
properties. In addition, rents for our commercial rental property,
EOB, increased 35% for the year as a result of lease up efforts and new
tenants.
Rental
property operating expenses increased $469,000 or 4% to $11,432,000 for the year
ended December 31, 2007 compared to $10,963,000 for the same period of
2006. The increase was the result of a 4% increase to our multifamily
apartment properties operating expenses driven by overall inflationary
adjustments as well as specific above inflation increases noted in utilities,
repairs and painting. In addition, operating expenses for our
commercial rental property, EOB, increased 6% for the year as a result of
amortized concessions related to new tenants as well as a reserve for bad
debts.
2006 compared to
2005
Rental
property revenues increased $21,466,000 to $21,524,000 for the year ended
December 31, 2006 compared to $58,000 for the year ended December 31,
2005. The consolidation of the Puerto Rico Apartments as a result of
EITF 04-05, increased rental property revenues by $21,168,000 for the year ended
December 31, 2006. Although not included in the consolidated results
for the same periods in 2005, rental property revenues from the Puerto Rico
Apartments were $20,589,000. The 2.8% increase for the year ended
December 31, 2006 was primarily related to increases in rents in such
period.
Rental
property operating expenses increased $10,302,000 to $10,963,000 for the year
ended December 31, 2006 compared to $661,000 for the year ended December 31,
2005. The consolidation of the Puerto Rico Apartments as a result of
EITF 04-05 increased rental property operating expenses by $9,862,000 for the
year ended December 31, 2006. Although not included in the
consolidated results for the same periods in 2005, rental property revenues from
the Puerto Rico Apartments were $9,742,000. The 1.2% increase for the
year ended December 31, 2006, was primarily due to increases in utilities and
other operating expenses, partially offset by a reduction in repairs, painting
and rehabilitation of units in such period.
Community
Development - Puerto Rico Operations:
Total
land sales revenue in any one period is affected by commercial sales which are
cyclical in nature and usually have a noticeable positive impact on our earnings
in the period in which settlement is made. There were no community
development land sales during the years ended December 31, 2007 and
2006. Community land sales were $10,397,000 for the year ended
December 31, 2005. In April 2005, the Company sold 7.2 commercial
acres for the $7,448,000 and in February 2005, sold 2.5 commercial acres for
$2,949,000 in the master-planned community of Parque Escorial. The
gross margin on land sales for the year ended December 31, 2005, was
28%. There were no commercial contracts for commercial sales in
backlog at December 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.
2007 compared to
2006
For the
year ended December 31, 2007, homebuilding revenues decreased $12,258,000 or 62%
to $7,580,000 as compared to $19,838,000 for the year ended December 31,
2006. The decrease in homebuilding revenues was impacted by the slow
housing market resulting in a decrease in the number of units sold in the
respective periods. For the year ended December 31, 2007, the company
sold 29 units at an average selling price of $261,000 as compared to 78 units at
an average selling price of $254,000 per unit for the same period of
2006. The gross margins on home sales for the years ended December
31, 2007 and 2006 were 27% and 25%, respectively. The slight increase
in gross profit percentages between periods results from the increased sales
prices for the units sold during 2007.
As of
December 31, 2007, 1 unit of Torres was under contract at a selling price of
$239,000. The sales contract is backed by a $6,000
deposit. For the year ended December 31, 2007, the Company had 22 new
contracts and 8 canceled contracts. For the year ended December 31, 2006,
the Company had 68 new contracts and 42 canceled contracts. The
Puerto Rico real estate market has slowed substantially from 2006 to
2007. The reduced pace of sales has impacted the Company somewhat,
but not to the same extent as the overall Puerto Rico market
decline. The Company currently anticipates that the remaining 21
units in Torres will be sold in 2008 and that its current pricing remains
competitive.
2006 compared to
2005
Within the Torres project and during
the years ended December 31, 2006 and 2005, 78 and 32 units, respectively, were
closed at an average selling price of approximately $254,000 and $ 232,000 per
unit, respectively, generating aggregate revenues of $19,838,000 and $7,424,000,
respectively. The gross margins on home sales for the years ended
December 31, 2006 and 2005 were 25% and 18%,
respectively. The increase in the gross profit margin is
primarily attributable to two factors. First, the cost of sales in
2005 included certain deferred commission expenses charged as period costs when
sales began in 2005. Secondly, the market has allowed for an increase
in the selling prices for the units sold within each subsequent building which
has improved the gross margins for this project.
Management
and Other fees – Puerto Rico Operations:
We earn
monthly fees from our management of four non-owned apartment properties and four
home-owner associations operating in Parque Escorial. This section
currently includes only the fees earned from the non-owned managed
entities. For 2005, this section also included fees earned from our
previously unconsolidated Puerto Rico Apartments. However, these fees
are now eliminated in consolidation.
2007 compared to
2006
Total
management fees increased $42,000 or 7%, to $634,000 for the year ended December
31, 2007, as compared to $592,000 for the year ended December 31,
2006. The increase in our management fees resulted from increases in
the annual rents, antenna rents and other miscellaneous income in the non-owned
apartment properties as well as increases in the management fees received
from Parque Escorial Associations during the year.
2006 compared to
2005
Total
management fees decreased $1,536,000 to $592,000 for the year ended December 31,
2006, as compared to $2,128,000 for the year ended December 31,
2005. The decrease was primarily the result of the implementation of
EITF 04-05 and the elimination of $2,358,000 of management fees in
consolidation. On a comparative basis, the management fees decreased
$114,000 to $592,000 for the year ended December 31, 2006, as compared to
$706,000 for the year ended December 31, 2005. The decrease was
primarily due to a broker’s fee of $139,000 earned in the sale of a property
owned by the Wilson family which was sold to a third party in April 2005, with
no comparable fees earned in 2006. This decrease was offset in part
during the year 2006 by an increase in management fees from Parque Escorial
Association.
General,
Administrative, Selling and Marketing Expenses – Puerto Rico
Operations: