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Article by DailyStocks_admin    (03-10-08 05:49 AM)

American Spectrum Realty Inc. CEO WILLIAM J CARDEN bought 10, 600 shares on 3-3-2008 at 25

BUSINESS OVERVIEW

General Description of Business

American Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its subsidiaries, the “Company”) is a Maryland corporation established on August 8, 2000. The Company is a full-service real estate corporation which owns, manages and operates income-producing properties. Substantially all of the Company’s assets are held through an operating partnership (the “Operating Partnership”) in which the Company, as of December 31, 2006, held the sole general partner interest of .98% and a limited partnership interest totaling 85.75%. As of December 31, 2006, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 26 properties, which consisted of 22 office buildings, three industrial properties, and one shopping center. The 26 properties are located in six states.

During 2006, the Company purchased six office properties located in Houston, Texas and one office property located in Victoria, Texas. Three properties were sold during 2006, which consisted of an industrial property and an office building located in San Diego, California and an office building located in Palatine, Illinois. During 2005, the Company sold three properties, which consisted of a vacant single tenant industrial property located in San Diego, California, a shopping center located in Columbia, South Carolina and an apartment complex located in Hazelwood, Missouri. No properties were acquired in 2005. During 2004, the Company acquired two office buildings in Houston, Texas and sold three properties, which consisted of an office building located in Columbia, Missouri, an industrial property located in San Antonio, Texas and a parcel of undeveloped land located in Phoenix, Arizona. The property acquisitions are part of the Company’s strategy to acquire multi-tenant office and industrial properties located in its core markets of Texas, California and Arizona.

The Company is the sole general partner of the Operating Partnership. As the sole general partner of the Operating Partnership, the Company generally has the exclusive power to manage and conduct the business of the Operating Partnership under its partnership agreement. The Company’s interest as a limited partner in the Operating Partnership entitles it to share in any cash distributions from, and in profits and losses of, the Operating Partnership. If the Company receives any distributions from the Operating Partnership, it intends, in turn, if permitted by law, to pay dividends to its common stockholders so that the amount of dividends paid on each share of common stock equals four times the amount of distributions paid on each limited partnership unit in the Operating Partnership (“OP Unit”). The intended dividend of four times the distribution from each limited partnership unit is a result of the Company’s one-for-four reverse stock split in 2004. Most of the properties are owned by the Operating Partnership through subsidiary limited partnerships or limited liability companies.

Holders of the OP Units have the option to redeem their units and to receive, at the option of the Company, in exchange for each four OP Units (i) one share of Common Stock of the Company, or (ii) cash equal to the market value of one share of Common Stock of the Company at the date of conversion, but no fractional shares will be issued.

The Board of Directors has concluded that it is not in the best interests of the Company to elect to be treated as a real estate investment trust (or REIT), as defined under the Internal Revenue Code of 1986, as amended. In May 2006, the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation, which removed a provision restricting the ability of stockholders to acquire shares in excess of certain ownership limitations. This provision had been included in the Articles to preserve the Company’s ability to elect to be taxed as a REIT in the future, since one of the requirements of REIT status is that not more than 50% of a REIT’s equity securities may be held by 5 or fewer stockholders.

The Company expects to meet its short-term liquidity requirements for normal property operating expenses and general and administrative expenses from cash generated by operations. In addition, the Company expects to incur capital costs related to leasing space and making improvements to properties provided the estimated leasing of space is completed. The Company anticipates meeting these obligations with cash currently held, the use of funds held in escrow by lenders, and proceeds from sales and refinancing activities. Except for scheduled monthly principal payments, the Company has no mortgage debt due to mature in 2007.

Business Objectives and Strategy

The Company’s fundamental business objective is to maximize stockholder value. The Company intends to achieve its business objective through opportunistic investments with effective asset management.

The Company’s future growth will be focused on multi-tenant suburban office and industrial properties in the high growth markets of Texas, Arizona and California. Properties in non-core markets are expected to be sold and the net proceeds redeployed into funding future acquisitions in core markets and to pay for capital expenditures and reduce debt.

Opportunities to Acquire Undervalued and Undermanaged Properties. The Company believes it is positioned to invest in properties, either individually or in portfolios, at attractive prices, often at costs lower than replacement cost. This will be accomplished using the Company’s knowledge of its core geographical markets and core property types, as well as its established capability to identify, and negotiate with, highly-motivated sellers, which include individuals as well as such institutions as banks, insurance companies and pension funds. The Company will not set a maximum target purchase price but rather it will tailor its acquisitions to under performing properties, which the Company believes are attractively priced due to relative physical or operating deficiencies. The Company believes that its real estate expertise will allow it to, when necessary, reposition, renovate or redevelop these properties to make them competitive in their local markets.

Competitive Advantages. The Company believes it has competitive advantages that will enable it to be selective with respect to real estate investment opportunities and allow it to successfully pursue its growth strategy. Based on its management’s experience, the Company expects that its presence in geographically diverse markets will increase its exposure to opportunities for attractive acquisitions of various types of properties throughout its operating region and provide it with competitive advantages which enhance its ability to do so, including:


• strong local market expertise;

• long-standing relationships with tenants, real estate brokers, institutions and other owners of real estate in each local market;

• fully integrated real estate operations which allow quick response to acquisition opportunities;

• access to capital markets at competitive rates as a public company;

• ability to acquire properties in exchange for ASR shares or OP Units which may make it a more attractive purchaser when compared to purchasers who are not similarly structured or are unable to make similar use of equity to purchase properties.

Property Management Strategies. The Company has procedures and expertise which permit it to manage effectively a variety of types of properties throughout the United States. The decentralized structure with strong local management enables it to operate efficiently. In seeking to maximize revenues, minimize costs and increase the value of the properties, the Company follows aggressive property management policies. Among the property management techniques emphasized are regular and comprehensive maintenance programs, regular and comprehensive financial analyses, the use of a master property and casualty insurance program, aggressive restructuring or conversion of tenant spaces and frequent appearances before property tax assessors, planning commissions and other local governmental bodies. The Company believes that its management of the properties will be a substantial factor in its ability to realize its objectives of maximizing earnings.

Managing and Monitoring Investments. The Company has actively managed the property portfolio and administered its investments. The Company will monitor issues including the financial advantages of property sales, minimization of real estate taxes, and insurance costs. Also, the Company will actively analyze diversification, review tenant financial statements to deal with potential problems quickly and will restructure investments in the case of underperforming and non-performing properties.

Competition

The Company competes with other entities both to locate suitable properties for acquisition and to locate purchasers for its properties. While the markets in which it competes are highly fragmented with no dominant competitors, the Company faces substantial competition in both its leasing and property acquisition activities. There are numerous other similar types of properties located in close proximity to each of its properties. The amount of leasable space available in any market could have a material adverse effect on the Company’s ability to rent space and on the rents charged. Competition for acquisition of existing properties from institutional investors and publicly traded REITs has increased substantially in the past several years. In many of the Company’s markets, institutional investors and owners and developers of properties compete vigorously for the acquisition, development and leasing of space. Many of these competitors have greater resources and more experience than the Company.

Employees

As of December 31, 2006, ASR employed 34 individuals, including on-site property management and maintenance personnel.

Environmental Matters

Various federal, state and local laws and regulations subject property owners and operators to liability for reporting, investigating, remediating, and monitoring of regulated hazardous substances released on or from a property. These laws and regulations often impose strict liability without regard to whether the owner or operator knew of, or actually caused, the release. The presence of, or the failure to properly report, investigate, remediate, or monitor hazardous substances could adversely affect the financial condition of the Company or the ability of the Company to operate the properties. In addition, these factors could hinder the Company’s ability to borrow against the properties. The presence of hazardous substances on a property also could result in personal injury or similar claims by private plaintiffs. In addition, there are federal, state and local laws and regulations which impose requirements on the storage, use, management and disposal of regulated hazardous materials or substances. The failure to comply with those requirements could result in the imposition of liability, including penalties or fines, on the owner or operator of the properties. Future laws or regulations could also impose unanticipated material environmental liabilities on the Company in connection with any of the properties.

The Company is aware that two of its properties may contain hazardous substances above reportable levels. One of the properties is located in the State of Indiana. The Company retained an environmental expert that developed a clean up and monitoring plan that has been approved by the State of Indiana. In 2005, the Company accrued $75,000 for the future environmental cleanup and monitoring. The other property is located in the State of South Carolina and is included in a special fund sponsored by the state. The timing of the cleanup is dependent on the state’s priorities and state funds will cover the costs for the cleanup. As such, no liability has been accrued on the Company’s books for this property.

The Company may decide to acquire a property with known or suspected environmental contamination after it evaluates that business risk, the potential costs of investigation or remediation, and the potential costs to cure identified non-compliances with environmental laws or regulations. In connection with its acquisition of properties, the Company may seek to have the seller indemnify it against environmental conditions or non-compliances existing as of the date of purchase, and under appropriate circumstances, it may obtain environmental insurance. In some instances, the Company may become the assignee of or successor to the seller’s indemnification rights arising from the seller’s acquisition agreement for the property. Additionally, the Company may try to structure its leases for the property to require the tenant to assume all or some of the responsibility for environmental compliance and remediation, and to provide that material non-compliance with environmental laws or regulations will be deemed a default under the lease. However, there can be no assurances that, despite these efforts, liability will not be imposed on the Company under applicable federal, state, or local environmental laws or regulations relating to the properties.

Insurance

The Company currently carries comprehensive liability, fire, terrorism, extended coverage and rental loss insurance covering all of its properties, with policy specifications and insured limits which the Company believes are adequate and appropriate under the circumstances. There are, however, types of losses that are not generally insured because they are either uninsurable or not economically feasible to insure. In addition, costs to carry all of the types of insurance above may not always be economically feasible.

Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose its capital invested in the property, as well as the anticipated future revenues from the property and, in the case of debt which is with recourse to the Company, would remain obligated for any mortgage debt or other financial obligations related to the property. Any such loss would adversely affect the Company. Moreover, the Company will generally be liable for any unsatisfied obligations other than non-recourse obligations. The Company believes that its properties are adequately insured. No assurance can be given that material losses in excess of insurance proceeds will not occur in the future.

Capital Expenditures

Capital expenditure requirements include both normal recurring capital expenditures, and tenant improvements and lease commissions relating to the leasing of space to new or renewing tenants. The Company has a history of acquiring properties which required renovation, repositioning or management changes to improve their performance and to enable them to compete effectively. The Company plans to continue to invest in these types of properties. These properties may require major capital expenditures or significant tenant improvements in order to maximize their cash flows.

Acquisitions

During the second quarter of 2006, the Company purchased three office properties: two located in Houston, Texas and one located in Victoria, Texas. The three properties have an aggregate rentable square footage of 192,747 square feet. Acquisition costs consisted of the assumption of debt, seller financing and use of proceeds from tax-deferred exchanges.

During the first quarter of 2006, the Company purchased four office properties located in Houston, Texas. The four properties have an aggregate rentable square footage of 381,605 square feet. Acquisition costs consisted of a new mortgage loan, the assumption of debt, seller financing and use of proceeds from tax-deferred exchanges.

CEO BACKGROUND

William J. Carden — Mr. Carden is Chairman of the Board, Chief Executive Officer and President (positions he has held since the formation of the Company). Mr. Carden served as the Company’s Acting Chief Financial Officer from August 2002 to March 2007. He received an accounting degree from California State University, in Long Beach, California.

G. Anthony Eppolito — Mr. Eppolito was appointed Chief Financial Officer in March 2007. Mr. Eppolito has served as Vice President, Treasurer and Secretary since January 2006 and as Controller since November 2004. Mr. Eppolito has been with the Company since inception and served as Assistant Controller from March 2002 thru October 2004. Mr. Eppolito holds a Bachelor of Business Administration in Accounting from Texas A&M University in College Station, Texas and is a Certified Public Accountant.

Richard M. Holland — Mr. Holland was appointed Vice President in January 2006. Mr. Holland has served as Director of Leasing for the Company since October 2002. Mr. Holland’s experience includes in excess of twenty years of leasing experience with a wide variety of tenants and has a broad knowledge of office, industrial and retail properties. Mr. Holland holds a Bachelor of Business Administration in Marketing from the University of Houston in Clear Lake, Texas and has held a Texas Real Estate Broker’s license since 1981. Mr. Carden is the uncle of Mr. Holland.

Timothy R. Brown — Mr. Brown is a director of the Company and has been a Partner in the law firm of Thompson & Knight L.L.P. since 1999. Prior to that he was a founder and Partner of Brown, Parker & Leahy L.L.P. He received his B.A. from Stanford University and his JD from the University of Texas School of Law. Mr. Brown is Chairman of the Company’s Compensation and Nominating/Corporate Governance Committees.

John N. Galardi — Mr. Galardi is a director of the Company. Mr. Galardi has been the Chairman and Chief Executive Officer of Galardi Group, Inc., a privately-held franchising company encompassing more than 450 restaurants, including the Wienerschnitzel and Tastee Freez chains. Mr. Galardi has been a director of CGS Real Estate Company, Inc. (“CGS”) since 1989. Mr. Galardi served on the Boards of BCT International, Inc. in Fort Lauderdale, Florida, and Renovar Energy Corporation in Midland, Texas. He has also served on the Board of Advisors of National Bank of Southern California and Marine National Bank. Mr. Galardi attended Southwest Baptist University in Missouri.

William W. Geary, Jr. — Mr. Geary is a director of the Company and has served as the President of Carlsberg Management Company, a real estate development company, since February 1986. Mr. Geary received his M.B.A. and B.S. degrees from Northwestern University in Chicago, Illinois. Mr. Geary holds the designations of Charter Financial Analyst, Certified Property Manager (CPM), Specialist in Real Estate Securities (SRS) and the Certified Commercial-Investment Member (CCIM). He is a Member of Los Angeles Society of Security Analysts. Mr. Geary is a member of the Company’s Audit and Compensation Committees.

John F. Itzel — Mr. Itzel is a director of the Company. Mr. Itzel managed a large real estate portfolio for Pacific Gulf Properties, a real estate investment trust located in Newport Beach, California from 1995 until November 2000. Prior to 1995, Mr. Itzel was a banker with a specialty in major real estate loans. Commencing January 2001, Mr. Itzel became a commercial real estate broker. In January 2003, he became a principal in the Newport Beach office of Bond Street Capital, a national commercial mortgage lender. He received a BA in economics from California State University and is a licensed California Real Estate Broker. Mr. Itzel is a member of the Company’s Audit and Nominating/Corporate Governance Committees.

Presley E. Werlein, III — Mr. Werlein is a shareholder in Werlein & Harris, P.C., a certified public accounting firm in Houston, Texas. He serves as President and Chief Executive Officer of Noise Reduction Technologies, Inc., a holding company that owns Executive Wall Concepts, Inc., which is a specialty subcontractor specializing in acoustical fabric panels. Mr. Werlein is a Certified Public Accountant and holds a Bachelor of Business Administration in Accounting from the University of Texas in Austin, Texas. Mr. Werlein is Chairman of the Company’s Audit Committee and is a member of the Company’s Compensation and Nominating/Corporate Governance Committees.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

American Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its subsidiaries, the “Company”) is a Maryland corporation established on August 8, 2000. The Company is a full-service real estate corporation which owns, manages and operates income-producing properties. Substantially all of the Company’s assets are held through an operating partnership (the “Operating Partnership”) in which the Company, as of December 31, 2006, held the sole general partner interest of .98% and a limited partnership interest totaling 85.75%. As of December 31, 2006, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 26 properties, which consisted of 22 office buildings, three industrial properties, and one shopping center. The 26 properties are located in six states.

During 2006, the Company purchased six office properties located in Houston, Texas and one office property located in Victoria, Texas. Three properties were sold during 2006, which consisted of an industrial property located in San Diego, California, an office building located in San Diego, California and an office building located in Palatine, Illinois. During 2005, the Company sold three properties, which consisted of a vacant single tenant industrial property located in San Diego, California, a shopping center located in Columbia, South Carolina and an apartment complex located in Hazelwood, Missouri. No properties were acquired in 2005. During 2004, the Company acquired two office buildings in Houston, Texas and sold three properties, which consisted of an office building located in Columbia, Missouri, an industrial property located in San Antonio, Texas and a parcel of undeveloped land located in Phoenix, Arizona. The property acquisitions are part of the Company’s strategy to acquire multi-tenant office and industrial properties located in its core markets of Texas, California and Arizona.

The properties held for investment by the Company were 90% occupied at December 31, 2006 compared to 88% at December 31, 2005. The Company continues to aggressively pursue prospective tenants to increase its occupancy, which if successful, should have the effect of improving operational results.

In the accompanying financial statements, the results of operations of properties sold during 2004, 2005 and 2006 are shown in the section “Discontinued operations”. The three properties sold during the first quarter of 2006 are classified as “Real estate held for sale” on the December 31, 2005 balance sheet. No properties were classified as “Real estate held for sale” as of December 31, 2006. Therefore the revenues and expenses reported for the fiscal years ended December 31, 2004, 2005 and 2006 reflect results from properties currently held for investment by the Company. The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the selected financial data in Item 6 and the consolidated financial statements of the Company, including the notes thereto, included in Item 15.

The Company intends to continue to seek to acquire additional properties in core markets and further reduce its non-core assets while focusing on an aggressive leasing program during 2007.

CRITICAL ACCOUNTING POLICIES

The major accounting policies followed by the Company are listed in Note 2 — Summary of Significant Accounting Policies — of the Notes to the Consolidated Financial Statements. The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ materially from those estimates.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:


• Certain leases provide for tenant occupancy during periods for which no rent is due or where minimum rent payments increase during the term of the lease. The Company records rental income for the full term of each lease on a straight-line basis. Accordingly, a receivable, if deemed collectible, is recorded from tenants equal to the excess of the amount that would have been collected on a straight-line basis over the amount collected

and currently due (Deferred Rent Receivable). When a property is acquired, the term of existing leases is considered to commence as of the acquisition date for purposes of this calculation.


• Many of the Company’s leases provide for Common Area Maintenance (“CAM”)/Escalations (“ESC”) as the additional tenant revenue amounts due to the Company in addition to base rent. CAM/ESC represents increases in certain property operating expenses (as defined in each respective lease agreement) over the actual operating expense of the property in the base year. The base year is stated in the lease agreement; typically, the year in which the lease commenced. Generally, each tenant is responsible for his prorated share of increases in operating expenses. Tenants are billed an estimated CAM/ESC charge based on the budgeted operating expenses for the year. Within 90 days after the end of each fiscal year, a reconciliation and true up billing of CAM/ESC charges is performed based on actual operating expenses.

• Rental properties are stated at cost, net of accumulated depreciation, unless circumstances indicate that cost, net of accumulated depreciation, cannot be recovered, in which case the carrying value of the property is reduced to estimated fair value. Estimated fair value (i) is based upon the Company’s plans for the continued operation of each property and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized net operating income based upon the age, construction and use of the building. The fulfillment of the Company’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Company to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, the actual results of operating and disposing of the Company’s properties could be materially different than current expectations.

• Gains on property sales are accounted for in accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate”. Gains are recognized in full when real estate is sold, provided (i) the gain is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (ii) the earnings process is virtually complete, that is, the Company is not obligated to perform significant activities after the sale to earn the gain. Losses on property sales are recognized immediately.

RESULTS OF OPERATIONS

Comparison of the year ended December 31, 2006 to the year ended December 31, 2005

Rental revenue. Rental revenue for the year ended December 31, 2006 increased $5,627,000, or 28.2%, in comparison to the year ended December 31, 2005. This increase was attributable to $5,177,000 in revenue generated from seven office properties acquired in the first and second quarters of 2006, in addition to $450,000 in greater revenues from properties owned for the full years ended December 31, 2006 and December 31, 2005. (“Same Properties”). The increase in Same Properties revenue was primarily due to an increase in overall occupancy. The weighted average occupancy of properties held for investment increased from 88% at December 31, 2005 to 90% at December 31, 2006. Rental revenue from the acquired properties was included in the Company’s results since their respective dates of acquisition.

Property operating expenses. The increase of $3,219,000, or 36.9%, was principally due to $2,936,000 in expenses related to the seven acquired properties mentioned above. In addition, utilities increased as a result of higher electricity rates. Further, property taxes rose as a result of an increase in the assessed value of several properties. Also attributing to this increase were higher maintenance and repair costs incurred during 2006, in large part related to heating and air conditioning.

General and administrative. The decrease of $235,000, or 6.3%, was primarily attributable to a reduction in corporate expenses due to the closure of the Company’s office in St. Louis, Missouri in December 2005 and due to a decrease in compensation costs principally attributable to a reduction of corporate staff. This decrease was partially offset by legal costs of $150,000 incurred in connection with the settlement of a litigation matter and $148,000 due to recognition of an obligation to reimburse John N. Galardi for legal fees paid by him in prior years. The fees were incurred in connection with Mr. Galardi’s defense of a litigation matter in which he was named as a defendant by reason of his association with the Company.

Depreciation and amortization. The increase of $2,556,000, or 30.2%, was in large part due to the depreciation of capital improvements and amortization of capitalized lease costs. During 2006 and 2005, the Company incurred $4,933,000 and $4,886,000, respectively, in capital improvements on its existing properties, primarily for renovations and tenant improvements. The increase was also attributable to depreciation and amortization of $1,761,000 related to the seven acquired properties mentioned above.

Interest expense. The increase of $1,026,000, or 11.6%, was primarily due to additional interest expense of $1,824,000 related to the seven acquired properties mentioned above. This increase was partially offset by the pay-off of the Company’s litigation notes payable. In October 2005, the Company made a principal pay-down payment of $4,635,000 and in January 2006, paid the remaining balance due of $4,877,000.

Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $3,893,000 for the year ended December 31, 2006 compared to $3,360,000 for the year ended December 31, 2005. The income tax benefits were recorded at an effective rate of 43.5% for the year ended December 31, 2006 in comparison to an effective rate of 35.3% for the year ended December 31, 2005.

Minority interest. The share of loss from continuing operations for the year ended December 31, 2006 for the holders of OP Units was $674,000 compared to $764,000 for the year ended December 31, 2005. The 2006 loss represents an average of 13.3% limited partner interest in the Operating Partnership not held by the Company during 2006. The 2005 loss represents an average of 13.4% limited partner interest in the Operating Partnership not held by the Company during 2005.

Gain (loss) on extinguishment of debt. During 2006, the Company recorded a net gain on early extinguishment of debt of $1,282,000. In May 2006, the Company entered into a settlement and mortgage satisfaction agreement with the lender on its shopping center property located in South Carolina. The Company paid $1,500,000, which fully satisfied the Company’s indebtedness to the lender. A gain on extinguishment of debt of $1,849,000 was recognized in connection with the transaction. In December 2006, in connection with loan refinances on 12000 Westheimer and 2470 Gray Falls, the Company recorded a loss on early extinguishment of debt of $567,000, which consisted of a prepayment penalty of $474,000 and the write-off of unamortized loan costs of $93,000. During 2005, in connection with the loan refinance of 800 and 888 Sam Houston Parkway, the Company recorded a loss on early extinguishment of debt of $95,000 related to the write-off of unamortized loan costs.

Discontinued operations. The Company recorded net income from discontinued operations of $10,911,000 for the year ended December 31, 2006. Loss from operations of discontinued operations of $65,000 was related to the three properties sold during the first quarter of 2006. The Company recorded a loss from operations of discontinued operations of $2,110,000 during 2005 related to the three properties sold during 2006 and the three properties sold during 2005. Also reflected in the net income (loss) for 2006 and 2005 are the gains on sales of discontinued operations, income tax expense and minority interest from discontinued operations. See Note 4 — Discontinued Operations — of the Notes to Consolidated Financial Statements.

Gain on sale of discontinued operations. The Company sold three properties — an industrial property and two office buildings — during the first three months of 2006 for an aggregate sales price of $46,508,000. The 2006 sales generated a gain of $22,349,000. Proceeds of approximately $11,300,000 (net of debt repayments and sales costs) were received as a result of the transactions, of which approximately $6,300,000 was used to assist the funding of acquisitions in tax-deferred exchanges. The Company sold three properties — one shopping center, one industrial property and one apartment complex — during 2005 for an aggregate sales price of $27,043,000. The three properties sold during 2005 generated a net gain on sale of discontinued operations of $7,895,000. An income tax expense on discontinued operations of $9,698,000 was recorded during the year ended December 31, 2006 compared to $2,198,000 during the year ended December 31, 2005.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS
Discussion of the three months ended September 30, 2007 and 2006.

Rental revenue . Rental revenue increased $952,000, or 14.5%, for the three months ended September 30, 2007 in comparison to the three months ended September 30, 2006. This increase was primarily attributable to $576,000 in revenue generated from two retail properties and one industrial property acquired during the second quarter 2007. Greater revenues from properties owned for the full three months ended September 30, 2007 and September 30, 2006 accounted for the remaining increase of $376,000. The increase in revenue from the properties owned for the full three months ended September 30, 2007 and September 30, 2006 was primarily due to increases in rental rates. The increase was partially offset by a decrease in weighted average occupancy of properties held for investment, which decreased from 89% at September 30, 2006 to 87% at September 30, 2007. Rental revenue from the acquired properties has been included in the Company’s results since their respective dates of acquisition.

Property operating expenses . Property operating expenses increased by $348,000, or 11.1%, for the three months ended September 30, 2007 in comparison to the three months ended September 30, 2006. The increase was primarily due to operating expenses of $280,000 related to the three acquired properties mentioned above. An increase in property operating expenses, primarily repairs and maintenance, from properties owned for the full three months ended September 30, 2007 and September 2006 accounted for the remaining increase of $68,000.
General and administrative . General and administrative costs increased $92,000, or 11.4% for the three months ended September 30, 2007 in comparison to the three months ended September 30, 2006. The increase was principally due to higher compensations costs. The increase was also attributable to an increase in state franchise and other tax expenses incurred during the three months ended September 30, 2007 in comparison to the three months ended September 30, 2006.
Depreciation and amortization . Depreciation and amortization expense increased $553,000, or 20.3%, for the three months ended September 30, 2007 in comparison to the three months ended September 30, 2006. The increase was principally attributable to depreciation and amortization of $434,000 related to the acquired properties mentioned above. The increase was also due to the depreciation of additional capital improvements and amortization of capitalized lease costs incurred between July 2006 and September 2007.
Interest expense . Interest expense increased $647,000, or 25.2%, for the three months ended September 30, 2007 in comparison to the three months ended September 30, 2006. The increase was primarily due to interest expense associated with the acquired properties mentioned above of $513,000. Two corporate bank loans totaling $2,000,000, funded during the second quarter of 2007, also attributed to the increase in interest expense.
Loss on extinguishment of debt. In July 2007, the Company recorded a loss on early extinguishment of debt of $2,413,000 in connection with the loan refinance on 7700 Irvine Center, an office property located in Irvine, California. The loss consisted of a prepayment penalty of $3,546,000, partially offset by the write-off of unamortized loan premium of $1,123,000. The loss is included in other income in the consolidated statements of operations.
Deferred income taxes. The Company recognized a deferred income tax benefit of $2,136,000 for the three months ended September 30, 2007, compared to $977,000 for the three months ended September 30, 2006. The increase in deferred income tax benefit for the third quarter of 2007 corresponds to the increase in loss from continuing operations for the third quarter of 2007, in comparison to the third quarter of 2006.
Minority interest from continuing operations. The share of loss from continuing operations for the three months ended September 30, 2007 for the holders of OP Units was $464,000, compared to a share of loss of $225,000 for the three months ended September 30, 2006. The minority interest represents the approximate 13% interest in the Operating Partnership not held by the Company.
Discontinued operations . The Company recorded a net loss from discontinued operations of $72,000 and $62,000 for the three months ended September 30, 2006 and three months ended September 30, 2006. The losses represent the operating results of Northwest Corporate Center, an office property located in Missouri, classified as real estate held for sale.

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