e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-16785

American Spectrum Realty, Inc.

(Exact name of Registrant as specified in its charter)


State of Maryland		52-2258674

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5850 San Felipe, Suite 450
Houston, Texas 77057		77057

(Address of principal executive offices)		(Zip Code)

(713) 706-6200

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

As of October 31, 2007, 1,378,714 shares of Common Stock ($.01 par value) were outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN SPECTRUM REALTY, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands, except share amounts)


	September 30, 2007			December 31, 2006
	(Unaudited)
ASSETS

Real estate held for investment	$	231,665		$	202,525
Accumulated depreciation		(44,682	)		(36,125	)

Real estate held for investment, net		186,983			166,400

Real estate held for sale		7,005			7,708
Cash and cash equivalents		1,686			1,166
Restricted cash		3,559			—
Tenant and other receivables, net of allowance for doubtful accounts of $236 and $243, respectively		387			458
Deferred rents receivable		1,681			1,327
Investment in management company		4,000			4,000
Prepaid and other assets, net		10,110			9,123


Total Assets	$	215,411		$	190,182


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Notes payable, including premiums of $76 and $1,460, respectively	$	184,397		$	149,437
Liabilities related to real estate held for sale		5,862			6,072
Deferred tax liability		1,704			5,752
Accounts payable		2,072			2,351
Accrued and other liabilities		6,713			5,186


Total Liabilities		200,748			168,798


Minority interest		5,050			6,045

Stockholders’ Equity:
Preferred stock, $.01 par value; authorized, 25,000,000 shares, none issued and outstanding		—			—
Common stock, $.01 par value; authorized, 100,000,000 shares; issued, 1,614,054 and 1,606,179 shares, respectively; outstanding, 1,378,714 and 1,379,429 shares, respectively		16			16
Additional paid-in capital		46,680			46,553
Accumulated deficit		(33,997	)		(28,355	)
Treasury stock, at cost, 235,340 and 226,750 shares, respectively		(3,086	)		(2,875	)


Total Stockholders’ Equity		9,613			15,339


Total Liabilities and Stockholders’ Equity	$	215,411		$	190,182

The accompanying notes are an integral part of these consolidated condensed financial statements

AMERICAN SPECTRUM REALTY, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
REVENUES:
Rental revenue	$	7,498		$	6,546		$	22,099		$	17,685
Interest and other income		54			26			112			174

Total revenues		7,552			6,572			22,211			17,859


EXPENSES:
Property operating expense		3,488			3,140			9,555			8,193
Corporate general and administrative		898			806			2,648			2,730
Depreciation and amortization		3,272			2,719			9,056			7,640
Interest expense		3,211			2,564			8,746			6,935

Total expenses		10,869			9,229			30,005			25,498


OTHER (LOSS) INCOME:
(Loss) gain on extinguishment of debt		(2,413	)		—			(2,413	)		1,849

Total other (loss) income		(2,413	)		—			(2,413	)		1,849


Net loss from continuing operations before deferred income tax benefit and minority interest		(5,730	)		(2,657	)		(10,207	)		(5,790	)

Deferred income tax benefit		2,136			977			3,918			2,118


Net loss from continuing operations before minority interest		(3,594	)		(1,680	)		(6,289	)		(3,672	)

Minority interest (share from continuing operations)		464			225			818			490


Net loss from continuing operations		(3,130	)		(1,455	)		(5,471	)		(3,182	)

Discontinued operations:
Loss from discontinued operations		(135	)		(113	)		(327	)		(386	)
Gain on sale of discontinued operations		—			—			—			22,349
Deferred income tax benefit (expense)		52			42			130			(8,077	)
Minority interest		11			9			26			(1,848	)

(Loss) income from discontinued operations		(72	)		(62	)		(171	)		12,038

Net (loss) income	$	(3,202	)	$	(1,517	)	$	(5,642	)	$	8,856


Basic and diluted per share data:
Net loss from continuing operations	$	(2.27	)	$	(1.05	)	$	(3.97	)	$	(2.29	)
(Loss) income from discontinued operations		(0.05	)		(0.05	)		(0.12	)		8.66

Net (loss) income	$	(2.32	)	$	(1.10	)	$	(4.09	)	$	6.37


Basic weighted average shares used		1,380,093			1,383,404			1,379,039			1,388,660

The accompanying notes are an integral part of these consolidated condensed financial statements

AMERICAN SPECTRUM REALTY INC.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)


					Additional
	Common		Common		Paid-In		Accumulated			Treasury
	Stock		Stock		Capital		Deficit			Stock			Total Equity

Balance, January 1, 2007		1,606,179	$	16	$	46,553	$	(28,355	)	$	(2,875	)	$	15,339
Common stock repurchase		—		—		—		—			(211	)		(211	)
Issuance of common stock to officers and directors		4,750		—		—		—			—			—
Exercise of stock options		3,125		—		85		—			—			85
Stock-based compensation		—		—		36		—			—			36
Acquisition of minority interest in the operating partnership		—		—		6		—			—			6
Net loss		—		—		—		(5,642	)		—			(5,642	)


Balance, September 30, 2007		1,614,054	$	16	$	46,680	$	(33,997	)	$	(3,086	)	$	9,613

The accompanying notes are an integral part of these consolidated condensed financial statements

AMERICAN SPECTRUM REALTY, INC

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(5,642	)	$	8,856
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization		9,542			8,173
Deferred rental income		(236	)		(37	)
Minority interest		(844	)		1,359
Net gain on sales of real estate assets		—			(22,349	)
Loss (gain) on extinguishment of debt		2,413			(1,849	)
Stock-based compensation expense		36			43
Income tax (benefit) expense		(4,047	)		5,959
Amortization of note payable premiums, included in interest expense		(262	)		(331	)
Changes in operating assets and liabilities:
Decrease in tenant and other receivables		83			277
Increase in accounts payable		(279	)		(441	)
Increase in prepaid and other assets		(1,355	)		(1,390	)
Increase in accrued and other liabilities		1,369			1,063

Net cash provided by (used in) operating activities		778			(667	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds received from sales of real estate assets		—			36,163
Real estate acquisitions		(26,140	)		—
Capital improvements to real estate assets		(3,044	)		(3,005	)

Net cash (used in) provided by investing activities:		(29,184	)		33,158


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings		53,566			2,250
Proceeds from borrowings – property acquisitions		23,422			—
Repayment of borrowings – property sales		—			(26,165	)
Repayment of borrowings – refinances		(44,523	)		(1,500	)
Repayment of borrowings – scheduled payments		(3,268	)		(1,290	)
Note payments, litigation settlement		—			(4,877	)
Repurchase of common stock		(211	)		(390	)
Acquisition of minority interest in the operating partnership		(145	)		—
Proceeds from exercise of stock options		85			63

Net cash provided by (used in) financing activities:		28,926			(31,909	)


Increase in cash and cash equivalents		520			582

Cash and cash equivalents, beginning of period		1,166			300


Cash and cash equivalents, end of period	$	1,686		$	882


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	8,906		$	7,356
Cash paid for income taxes		325			133

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of operating partnership units into common stock	$	—		$	43
Debt assumed in connection with acquisitions of real estate assets		—			16,914
Borrowings in connection with acquisitions of real estate assets		—			16,452

The accompanying notes are an integral part of these consolidated condensed financial statements

AMERICAN SPECTRUM REALTY, INC.

Notes to Consolidated Condensed Financial Statements

NOTE 1. 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 September 30, 2007, held the sole general partner interest of .98% and a limited partnership interest totaling 86.09%. As of September 30, 2007, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 29 properties, which consisted of 22 office buildings, four industrial properties and three retail properties. The 29 properties are located in six states.

During the nine months ended September 30, 2007, the Company acquired a 400,000 square foot industrial park and two retail properties aggregating 76,000 square feet. All three properties are located in Houston, Texas. No properties were sold during the nine months ended September 30, 2007. 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. 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 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.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to these rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of the Company, these financial statements contain all adjustments necessary to present fairly its financial position as of September 30, 2007 and December 31, 2006 and the results of its operations and changes in its cash flows for all periods presented as of September 30, 2007 and 2006. All adjustments represent normal recurring items. The results of interim periods are not necessarily indicative of results for a full year. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Certain prior year amounts have been reclassified to conform with the 2007 presentation.

All significant intercompany transactions, receivables and payables have been eliminated in consolidation.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform with the current year presentation. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, real estate assets designated as held for sale are accounted for in accordance with the provisions of SFAS No. 144 and the results of operations of these properties are included in income from discontinued operations.

Prior periods have been reclassified for comparability, as required.

SEGEMENT REPORTING

The Company operates as one business operating and reportable segment.

NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement,” effective for the Company’s fiscal year beginning January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements, but simplifies and codifies related guidance within General Accepted Accounting Principles. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Company is currently reviewing this pronouncement, but believes it will not have a material impact on its financial statements.

STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), using the modified prospective transition method and, therefore, has not restated results for prior periods. Under this transition method, stock-based compensation expense for the first quarter of 2006 included compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company is recognizing these compensation costs on a straight-line basis over the requisite service period of the award, which range from immediate vesting to vesting over a three-year period. Prior to the January 1, 2006 adoption of SFAS 123R, the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 9 for a further discussion on stock-based compensation.

MINORITY INTEREST

Unit holders in the Operating Partnership (other than the Company) held a 12.93% and 13.27% limited interest in the Operating Partnership, as limited partners, at September 30, 2007 and December 31, 2006, respectively. Each of the holders of the interests in the Operating Partnership (other than the Company) has the option (exercisable after the first anniversary of the issuance of the OP Units) to redeem its OP Units and to receive, at the option of the Company, in exchange for each four OP Units, either (i) one share of Common Stock of the Company, or (ii) cash equal to the value of one share of Common Stock of the Company at the date of conversion, but no fractional shares will be issued.

NET INCOME (LOSS) PER SHARE

Net income (loss) per share is calculated based on the weighted average number of common shares outstanding. The Company incurred losses from continuing operations for each of the three and nine months ended September 30, 2007 and September 30, 2006. In accordance with SFAS No. 128, Earnings Per Share, stock options outstanding of 32,813 and 35,938 and OP Units (other than those held by the Company) outstanding of 823,509 and 852,304 (convertible into approximately 205,877 and 213,076 shares of common stock), at September 30, 2007 and 2006, respectively, have not been included in the Company’s net income (loss) per share calculations for periods presented since their effect would be anti-dilutive.

INCOME TAXES

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 has 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 removal of this restriction effectively precludes the Company from making an election to be taxed as a REIT. (A REIT typically is not subject to federal income taxation of its net income, provided applicable income tax requirements are satisfied). Since its inception, the Company has been taxed as a C corporation.

Due to the uncertainty of whether the Company would elect REIT status and due to the uncertainly of gains and losses that would be recognized on property sales, no tax provision was recorded during the three months ended March 31, 2006 and interim periods in prior years. (Factors which contributed to the uncertainty of gains and losses that would be recognized on property sales included the number of properties the Company would eventually sell during the year, the sales price to be obtained on each sale, the timing of when the sale would occur, and whether such sale would be part of a tax-deferred exchange or an outright sale with full gain or loss recognition). With the removal, in May 2006, of the uncertainty relating to the Company’s ability to elect REIT status, the Company determined that a tax provision should be recorded in future interim periods.

In May 2006, the State of Texas enacted a margin tax which will become effective in 2008. This margin tax will require each of the Company’s limited partnerships and limited liability companies that operate in Texas to pay a tax of 1.0% on their “margin” as defined in the law, beginning in 2008 based on 2007 results. The legislation revises the Texas franchise tax to create a new tax on virtually all Texas businesses. The margin tax did not have a material effect on the Company’s deferred income tax liability.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely–than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company adopted the provisions of FIN 48 and there was no material effect on its financial statements. As a result, there was no cumulative effect related to adopting FIN 48.

As of September 30, 2007, the Company had unrecognized tax benefits of approximately $117,000, all of which would affect our effective tax rate if recognized. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months. The Company’s policy is to recognize interest related to any unrecognized tax benefits as interest expense and penalties as operating expenses. There are no significant penalties or interest accrued at September 30, 2007. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company’s federal and state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2002 through 2006.

NOTE 3. REAL ESTATE

ACQUISITIONS

2007.

In April 2007, the Company the Company completed the acquisition of a multi-tenant industrial property located in Houston, Texas. The industrial property consists of approximately 400,000 leasable square feet. One of the park’s 23 buildings, which accounts for 22,000 square feet of the property was acquired in March 2007. The Company also acquired two retail properties located in Houston Texas in April 2007. These two properties have an aggregate rentable square footage of 76,000. Acquisition costs for the three properties were primarily funded with mortgage debt with the remainder in cash.

2006.

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.

DISPOSITIONS

2007.

No properties were sold during the nine months of 2007.

2006.

During the first quarter of 2006, the Company sold three properties for an aggregate sales price of $46,508,000. Sorrento II, an 88,073 square foot industrial property located in San Diego, California was sold January 6, 2006. Mira Mesa, an 88,295 square foot office property located in San Diego, California was sold January 13, 2006. Countryside, an 92,873 square foot office property located in Palatine, Illinois was sold March 14, 2006. 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 recorded a gain on sale of $22,349,000 in connection with the transactions, which are reflected as discontinued operations in the consolidated statements of operations.

NOTE 4. DISCONTINUED OPERATIONS

Real estate assets held for sale.

As of September 30, 2007, Northwest Corporate Center, an office property located in St. Louis, Missouri, was classified as “Real estate held for sale.” The property, which is currently in escrow, is anticipated to be sold during the fourth quarter of 2007.

The carrying amounts of the property at September 30, 2007 and December 31, 2006 (reclassified) are summarized below (dollars in thousands).

Condensed Consolidated Balance Sheet


	September 30, 2007		December 31, 2006

Real estate	$	6,053	$	6,413
Other		952		1,295

Real estate assets held for sale	$	7,005	$	7,708


Note payable,	$	5,546	$	5,599
Accounts payable		109		110
Accrued and other liabilities		207		363

Liabilities related to real estate held for sale	$	5,862	$	6,072

Net income (loss) from discontinued operations.

Net loss from discontinued operations of $72,000 and $62,000 for the three months ended September 30, 2007 and 2006 include Northwest Corporate Center’s operating results, deferred income tax benefit and minority interest share of loss.

Net loss from discontinued operations of $171,000 for the nine months ended September 30, 2007 includes Northwest Corporate Center’s operating results, deferred income tax benefit and minority interest share of loss. Net income from discontinued operations of $12,038,000 for the nine months ended September 30, 2006 includes a gain generated from the sale of Sorrento II, Mira Mesa, and Countryside, the properties’ operating results through their respective disposition dates, Northwest Corporate Center’s operating results, deferred income tax expense and minority interest share of income.

The condensed consolidated statements of operations of discontinued operations for the three and nine months ended September 30, 2007 and 2006 are summarized below (dollars in thousands):

Condensed Consolidated Statements of Operations


	Three Months Ended September 30,
	2007			2006

Rental revenue	$	294		$	286
Total expenses		429			399

Loss from discontinued operations before deferred income tax benefit and minority interest		(135	)		(113	)
Income tax benefit		52			42
Minority interest from discontinued operations		11			9

Net loss from discontinued operations	$	(72	)	$	(62	)

Condensed Consolidated Statements of Operations


	Nine Months Ended September 30,
	2007			2006

Rental revenue	$	871		$	1,245
Total expenses		1,198			1,631

Net loss from discontinued operations before gain on sale, income tax benefit (expense) and minority interest		(327	)		(386	)
Gain on sale of discontinued operations		—			22,349
Income tax benefit (expense)		130			(8,077	)
Minority interest from discontinued operations		26			(1,848	)

Net (loss) income from discontinued operations	$	(171	)	$	12,038

NOTE 5. NOTES PAYABLE, NET OF PREMIUMS

The Company had the following notes payable outstanding as of September 30, 2007 and December 31, 2006 (dollars in thousands):


			September 30, 2007					December 31, 2006
	Maturity		Principal		Interest			Principal		Interest
Property (unless otherwise noted)	Date		Balance		Rate			Balance		Rate

Fixed Rate
8 Centre/Windrose (1)		4/24/2009		—		18.00	%		—		—
Pacific Spectrum		6/10/2009		5,443		8.02	%		5,500		8.02	%
1501 Mockingbird		6/30/2009		305		6.00	%		308		6.00	%
6430 Richmond		6/30/2009		728		5.50	%		736		5.50	%
Morenci Professional Park		12/1/2009		1,639		6.60	%		1,704		6.60	%
Columbia		7/1/2011		2,227		7.15	%		2,242		7.15	%
Bristol Bay		8/1/2011		7,125		7.58	%		7,192		7.58	%
Technology		8/1/2011		7,371		7.44	%		7,443		7.44	%
Creekside		12/1/2011		6,014		7.17	%		6,074		7.17	%
16350 Park Ten Place		5/11/2012		4,600		7.45	%		4,642		7.45	%
16360 Park Ten Place		5/11/2012		3,605		7.45	%		3,637		7.45	%
2855 Mangum		5/11/2012		2,656		7.45	%		2,680		7.45	%
2855 Mangum		5/11/2012		1,545		6.00	%		1,586		6.00	%
6430 Richmond		5/11/2012		2,229		7.45	%		2,249		7.45	%
Southwest Pointe		6/1/2012		2,726		7.33	%		2,822		7.33	%
16350 Park Ten Place		5/11/2012		508		7.45	%		512		7.45	%
16360 Park Ten Place		8/11/2012		398		7.45	%		402		7.45	%
11500 Northwest Freeway		6/1/2014		4,223		5.93	%		4,267		5.93	%
11500 Northwest Freeway		6/1/2014		305		5.93	%		308		5.93	%
5850 San Felipe		8/1/2014		5,278		5.65	%		5,342		5.65	%
14741 Yorktown		9/1/2014		8,600		5.32	%		8,600		5.32	%
8100 Washington		2/22/2015		2,274		5.59	%		2,298		5.59	%
8300 Bissonnet		5/1/2015		4,678		5.51	%		4,724		5.51	%
1501 Mockingbird		7/1/2015		3,343		5.28	%		3,350		5.28	%
5450 Northwest Central		9/1/2015		2,725		5.38	%		2,754		5.38	%
800 Sam Houston Parkway		12/29/2015		2,432		6.25	%		2,466		6.25	%
888 Sam Houston Parkway		12/29/2015		2,432		6.25	%		2,466		6.25	%
2401 Fountainview		3/1/2016		12,528		5.82	%		12,640		5.82	%
12000 Westheimer		1/1/2017		4,250		5.70	%		4,250		5.70	%
Gray Falls		1/1/2017		3,100		5.70	%		3,100		5.70	%
6420 Richmond		6/5/2017		6,400		5.87	%		6,342		5.50	%
7700 Irvine Center		8/1/2017		45,000		5.99	%		33,147		8.50	%

	Subtotal		$	156,752				$	145,783

Variable Rate
Corporate – Unsecured		12/4/2007		500		8.75	%		—		—
Corporate – Unsecured		5/31/2008		200		8.75	%		200		9.25	%
Corporate – Unsecured		6/12/2008		1,500		8.75	%		—		—
Corporate – Secured		10/1/2008		1,965		8.07	%		1,994		8.07	%
Beltway Industrial		5/9/2010		17,000		8.15	%		—		—
8 Centre		4/19/2012		3,324		8.17	%		—		—
Windrose		4/19/2012		3,080		8.17	%		—		—

	Subtotal		$	27,569				$	2,194
Loan Premiums				76					1,460

	Total		$	184,397				$	149,437


(1)		Represents a $2,000,000 secured revolving line of credit, which was available as of September 30, 2007.

On July 31, 2007, the Company refinanced its debt on 7700 Irvine Center, an office property located in Irvine, California, by entering into a long-term loan agreement with a bank in the amount of $45,000,000. The bank funded $41,441,000 at closing. The Company entered into a holdback agreement with the bank that provides for the release of the remaining $3,559,000 upon the completion of certain lease-up terms and conditions. The new loan bears interest at a fixed rate of 5.99% and matures in 2017. Proceeds of $4,219,000, net of the $3,559,000 cash holdback, were received as a result of the refinance.

On May 15, 2007, the Company refinanced its debt on 6420 Richmond, an office property in Houston, Texas, by entering into a long-term loan agreement in the amount of $6,400,000. The new loan bears interest at a fixed rate of 5.87% and matures in June 2017. Net cash paid to refinance the debt amounted to $194,000.

On April 27, 2007, in connection with the completion of the acquisition of Beltway Industrial, a 23 building industrial park in Houston, Texas, the Company entered into a $17,375,000 loan agreement, of which $17,000,000 was funded at closing. The remaining $375,000 is being held in escrow by the lender to assist with the funding of future capital expenditures at the property. The loan bears interest at LIBOR plus 2.40% per annum and matures in May 2010.

On April 24, 2007, the Company obtained a junior loan in the amount of $2,000,000 bearing interest at a fixed rate of 18.00% per annum. The loan, which matures in August 2009, is secured by the Company’s 8 Centre and Windrose properties. On July 31, 2007, the Company repaid the loan in full with proceeds generated from the 7700 Irvine Center loan refinance. On September 28, 2007, the loan was converted into the revolving line of credit referred to above. As of September 30, 2007, the line of credit had a zero balance.

On April 19, 2007, in connection with the acquisition of 8 Centre, a retail property in Houston, Texas, the Company financed a new loan in the amount of $3,333,350. The loan bears interest at LIBOR plus 2.40% per annum and matures in April 2012.

On April 19, 2007, in connection with the acquisition of Windrose, a retail property in Houston, Texas, the Company financed a new loan in the amount of $3,089,340. The loan bears interest at LIBOR plus 2.40% per annum and matures in April 2012.

During the second quarter of 2007, the Company obtained two short-term bank loans for $1,500,000 and $500,000, respectively. The loans bear interest at Prime plus 1% per annum. In November 2007, maturity of the $1,500,000 loan, which was originally December 2007, was extended to June 2008. The $500,000 loan matures in December 2007. The loan proceeds were primarily used to assist with acquisition costs associated with the three properties acquired during the quarter.

On March 23, 2007, the Company obtained a short-term bank loan of $750,000. The proceeds were used to fund the acquisition one of the Beltway Industrial Park’s 23 buildings. On April 4, 2007, the bank refinanced the loan with a $975,000 mortgage loan secured by the property. Net proceeds of $191,000 were received in connection with the refinance. The mortgage loan, which bore interest at prime plus .25%, was paid with proceeds from the $17,375,000 loan obtained in connection with the completion of the Beltway Industrial acquisition on April 27, 2007.

The Company is not in compliance with a debt covenant related to its mortgage loan secured by its retail property located in South Carolina, which as of September 30, 2007, had a principal balance of $2,227,000. The debt covenant requires the Company to maintain a tangible book net worth as defined in the debt agreement of $20,000,000. The lender on the property could require the Company to obtain and deliver a standby letter of credit to the lender in the amount $750,000.

NOTE 6. (LOSS) GAIN 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.

In May 2006, the Company entered into a settlement and mortgage satisfaction agreement with the lender on its retail 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 during the second quarter of 2006 in connection with the transaction. The gain is included in other income in the consolidated statements of operations.

NOTE 7. MINORITY INTEREST

OP Units (other than those held by the Company) of 823,509 (convertible into approximately 205,877 shares of common stock) were outstanding as of September 30, 2007.

During the nine months ended September 30, 2007 a total of 21,998 OP Units were redeemed for cash. No OP Units were exchanged for stock during the first nine months of 2007.

During the year ended December 31, 2006, a total of 7,768 OP Units were exchanged for 1,940 shares of Common Stock and a total of 3,884 OP Units were redeemed for cash.

NOTE 8. REPURCHASE OF COMMON STOCK

In January 2006, the Company’s Board of Directors authorized the repurchase of up to an additional 100,000 shares of its common stock, which increased the authorized amount to 200,000 shares. The stock repurchases would be made from time to time in open market transactions.

During the first nine months of 2007, a total of 8,590 shares were repurchased in open market transactions, increasing the total number of shares repurchased to 122,206 as of September 30, 2007. The total cost of the 8,590 shares repurchased amounted to $211,000 at an average price of $24.60 per share inclusive of transaction fees.

During 2006, a total of 18,130 shares were repurchased in open market transactions. In addition, 219 shares were repurchased in a private transaction. The total cost of the 18,349 shares repurchased during the year amounted to $395,000 at an average price of $21.51 per share, inclusive of transaction fees.

NOTE 9. STOCK-BASED COMPENSATION

The Company has in effect the Omnibus Stock Incentive Plan (the “Plan”), which is administered by the Board of Directors, and provides for the granting of incentive and non-qualified stock options, stock appreciation rights, restricted stock, performance units and performance shares. The Board has reserved a total of 180,000 shares under the Plan. As of September 30, 2007, 114,126 ASR shares were available for issuance to executive officers, directors or other key employees of the Company.

Total stock-based compensation expense recognized during the three months ended September 30, 2007 and 2006 amounted to approximately $15,000 and $8,000, respectively. Total stock-based compensation expense recognized during the nine months ended September 30, 2007 and 2006 amounted to approximately $36,000 and $43,000, respectively. Compensation expense is included in general and administrative expense in the Company’s consolidated condensed statement of operations for all periods presented.

Stock Options

No stock options were granted during the nine months ended September 30, 2007. During the second quarter of 2006, the Company granted 7,500 stock options to its non-employee board members. The stock options have 10-year contractual terms and vest over a three-year period, with the first 25% vesting immediately. The estimated grant date fair value of the options granted during the second quarter of 2006 was $10.00.

The fair value of the options issued during the second quarter of 2006 was estimated, as of the grant date, using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 51%; risk-free interest rate of 5.12%; and 6-year expected life. Due to its limited history as a public entity, the Company used a blended method in computing its estimate of expected volatility. The Company considered both its own historical stock price fluctuations and stock price fluctuations from another public real estate entity comparable in size.

The fair value of each option granted prior to January 1, 2006 was estimated, as of the grant date, using the

Black-Scholes option-pricing model. Assumptions used for the 6,250 stock options granted during 2005 included expected volatility of 62%; risk-free interest rate of 4.28%; and 10-year expected life. Assumptions used for the 6,250 stock options granted during 2004 included expected volatility of 40%; risk-free interest rate of 4.50%; and 10-year expected life. Due to its limited history as a public entity, the Company assumed a 10-year expected life on all options granted prior to January 1, 2006.

The Company has a policy of issuing new shares upon the exercise of stock options. During the nine months ended September 30, 2007, a total of 3,125 options were exercised. Cash of $85,000 was received from the exercise of these options.

The following table summarizes activity and outstanding stock options under the plan:


	Shares			Weighted		Average
	Under			Average		Intrinsic
	Option			Exercise Price		Value
Outstanding on January 1, 2007		35,938		$	26.19
Granted		—			—
Forfeited		—			—
Exercised		(3,125	)	$	27.08	$	—
Outstanding on September 30, 2007		32,813		$	22.80	$	151,462

Exercisable as of September 30, 2007		27,813		$	24.07	$	130,025

The following table summarizes certain information for stock options outstanding on September 30, 2007:


			Weighted Average	Weighted
Range of			Remaining	Average
Exercise	Number		Contractual	Exercise
Price	Outstanding		Life	Price

$8.10 - $12.20		14,688	5.9 years	$	10.58
$18.25 - $27.16		12,500	4.5 years	$	20.41
$60.00 - $60.00		5,625	4.0 years	$	60.00

The following table summarizes certain information for stock options exercisable on September 30, 2007:


			Weighted
Range of			Average
Exercise	Number		Exercise
Price	Exercisable		Price

$8.10 - $12.20		13,438	$	10.81
$18.25 - $27.16		8,750	$	21.33
$60.00 - $60.00		5,625	$	60.00

A summary of the status of the Company’s nonvested stock options as of September 30, 2007 and changes during the nine months ended September 30, 2007 is presented below:


			Weighted Average
			Grant Date
Nonvested Stock Options	Number		Fair Value

Nonvested at January 1, 2007		9,374	$	8.48
Granted		—		—
Vested		4,374	$	7.89
Forfeited		—		—

Nonvested at September 30, 2007		5,000	$	9.00

As of September 30, 2007, there was $34,000 of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a remaining weighted-average vesting period of 1.7 years.

Restricted Stock

In May 2007, the Company issued a total of 4,750 shares of Common Stock to its officers and directors. Prior to this issuance, no restricted stock had been issued under the Plan since 2002. The restrictions on the shares issued in May 2007 lapse in three equal annual installments commencing on the first anniversary date of the issuance. Compensation expense is recognized on a straight-line basis over the vesting period. Compensation expense recognized during the three and nine months ended September 30, 2007 as a result of the restricted stock issued amounted to $15,000 and $21,000, respectively. Recipients of restricted stock have the right to vote all shares, to receive and retain all cash dividends payable to holders of shares of record on or after the date of issuance and to exercise all other rights, powers and privileges of a holder of Company shares, with the exception that the recipient may not transfer the shares during the restriction period.

A summary of the status of the Company’s restricted stock awards as of September 30, 2007 and changes during the nine months ended September 30, 2007 is presented below:


			Weighted Average
	Number of		Grant Date
Restricted Stock Awards	Shares		Fair Value

Nonvested at January 1, 2007		—
Granted		4,750	$	22.75
Vested		—
Forfeited		—
Nonvested at September 30, 2007		4,750	$	22.75

As of September 30, 2007, there was $93,000 of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted-average restriction period of 2.7 years.

NOTE 10. RELATED PARTY TRANSACTIONS

In July 2006, the Company reimbursed John N. Galardi, a director and principal stockholder, $250,810 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. Expenses not previously recognized on this obligation, which totaled approximately $174,000, were expensed during the second and third quarters of 2006.

The Company pays a guarantee fee to William J. Carden, Mr. Galardi and CGS Real Estate Company, Inc. (“CGS”), a company owned indirectly by Messrs. Carden and Galardi (“the Guarantors”), in consideration for their guarantees of certain obligations of the Company. Mr. Carden is the Chief Executive Officer, a director and a principal stockholder of the Company. The Guarantors are paid an annual guarantee fee equal to between .25% and .75% (depending on the nature of the guarantee) of the outstanding balance as of December 31 of the guaranteed obligations (“Guarantee Fee”). The Guarantee Fee is paid for a maximum of three years on any particular obligation. In December 2006, the Company paid $172,109 in Guarantee Fees, of which $161,442 was related to 2005 and $10,667 related to 2006.

NOTE 10. COMMITMENTS AND CONTINGENCIES

The following is information concerning legal proceedings to which the Company or its subsidiaries is a party or of which any of their property is subject:

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.

Certain claims and lawsuits have arisen against the Company in its normal course of business. The Company believes that such claims and lawsuits will not have a material adverse effect on the Company’s financial position, cash flow or results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

During the nine months ended September 30, 2007, the Company acquired a 400,000 square foot multi-tenant industrial property and two retail properties aggregating 76,000 square feet. All three properties are located in Houston, Texas. No properties were sold during the nine months ended September 30, 2007. 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. 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 87% occupied at September 30, 2007 compared to 89% at September 30, 2006. 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 in 2006 and the Company’s Northwest Corporate Center property are shown in the section “Discontinued operations”. Northwest Corporate Center property was classified as “Real estate held for sale” at September 30, 2007and December 31, 2006 (reclassified). Therefore, the revenues and expenses reported for the periods presented exclude results from properties sold or classified as held for sale.

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 require 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

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

The following table shows a comparison of rental revenues and certain expenses for the quarter ended September 30:


					Variance
	2007		2006		$		%
Rental revenue	$	7,498,000	$	6,546,000	$	952,000		14.5	%
Operating expenses:
Property operating expenses		3,488,000		3,140,000		348,000		11.1	%
General and administrative		898,000		806,000		92,000		11.4	%
Depreciation and amortization		3,272,000		2,719,000		553,000		20.3	%
Interest expense		3,211,000		2,564,000		647,000		25.2	%

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.

The net loss from discontinued operations for the three months ended September 30, 2007 and 2006 are summarized below (dollars in thousands):

Condensed Consolidated Statements of Operations


	Three Months Ended September 30,
	2007			2006

Rental revenue	$	294		$	286
Total expenses		429			399

Loss from discontinued operations before income tax benefit and minority interest		(135	)		(113	)
Income tax benefit		52			42
Minority interest		11			9

Net loss from discontinued operations	$	(72	)	$	(62	)

Discussion of the nine months ended September 30, 2007 and 2006.

The following table shows a comparison of rental revenues and certain expenses for the nine months ended September 30:


					Variance
	2007		2006		$			%
Rental revenue	$	22,099,000	$	17,685,000	$	4,414,000			25.0	%
Operating expenses:
Property operating expenses		9,555,000		8,193,000		1,362,000			16.6	%
General and administrative		2,648,000		2,730,000		(82,000	)		(3.0	%)
Depreciation and amortization		9,056,000		7,640,000		1,416,000			18.5	%
Interest expense		8,746,000		6,935,000		1,811,000			26.1	%

Rental revenue. Rental revenue increased $4,414,000, or 25.0%, for the nine months ended September 30, 2007 in comparison to the nine months ended September 30, 2006. This increase was attributable to $3,137,000 in revenue generated from the two retail properties and one industrial property acquired during 2007 and from seven office properties acquired during 2006. The increase was also attributable to $1,277,000 in greater revenues from properties owned for the full nine months ended September 30, 2007 and September 30, 2006. The increase in revenue from properties owned for the full nine months ended September 30, 2007 and September 30, 2006 was primarily due to an increase in rental rates. The increase was partially offset by a decrease in weighted average occupancy on properties held for investment, which decreased from 89% at September 30, 2006 to 87% at September 30, 2007. Rental revenue from the ten properties acquired in 2006 and 2007 was included in the Company’s results since their respective dates of acquisition.

Property operating expenses. The increase of $1,362,000, or 16.6%, was primarily due to additional operating expenses of $1,556,000 related to the ten acquired properties mentioned above. This increase was offset in part by a decrease in operating expenses of $194,000 from properties owned for the full nine months ended September 30, 2007 and September 30, 2006. This decrease was primarily due to lower electricity rates. The decrease was also attributable to lower repair and maintenance costs incurred during the nine months ended September 30, 2007 in comparison to the nine months ended September 30, 2006.

General and administrative. General and administrative costs decreased $82,000, or 3.0%, for the nine months ended September 30, 2007 in comparison to the nine months ended September 30, 2006. The decrease was primarily due to lower professional fees, principally legal, incurred during the nine months ended September 30, 2007. During the nine months ended September 30, 2006, legal costs of $150,000 were incurred due to the settlement of the Warren F. Ryan litigation matter. In addition, $148,000 was recognized related to an obligation to reimburse John N. Galardi for legal fees paid by him in prior years. These 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. The decrease in general and administrative costs was partially offset by an increase in compensation costs and other corporate expenses incurred during nine months ended September 30, 2007 when compared to the nine month ended September 30, 2006.

Depreciation and amortization. Depreciation and amortization expense increased $1,416,000, or 18.5%, for the nine months ended September 30, 2007 in comparison to the nine months ended September 30, 2006. The increase was primarily attributable to depreciation and amortization of $1,167,000 related to the ten properties acquired in 2006 and 2007. 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 $1,811,000, or 26.1%, for the nine months ended September 30, 2007 in comparison to the nine months ended September 30, 2006. The increase was in large part attributable to interest expense associated with the ten properties acquired during 2006 and 2007, which accounted for $1,673,000 of the increase. Two corporate bank loans totaling $2,000,000, funded during the second quarter of 2007, also attributed to the increase in interest expense.

(Loss) gain 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. In May 2006, the Company entered into a settlement and mortgage satisfaction agreement with the lender on its retail 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 during the second quarter of 2006 in connection with the transaction.

Deferred income taxes. The Company recognized a deferred income tax benefit of $3,918,000 and $2,118,000 for the nine months ended September 30, 2007 and September 30, 2006, respectively. The increase corresponds to the increase in net loss from continuing operations for the nine months ended September 30, 2007 in comparison to the nine months ended September 30, 2006.

Minority interest from continuing operations. The minority interest share of loss from continuing operations for the nine months ended September 30, 2007 for the holders of OP Units was $818,000 compared to a share of loss of $490,000 for the nine months ended September 30, 2006. The minority interest represent the approximate 13% limited partner interest in the Operating Partnership not held by the Company.

Discontinued operations. The Company recorded a net loss from discontinued operations of $171,000 for the nine months ended September 30, 2007. The net loss represents the operating results of Northwest Corporate Center, an office property located in Missouri, which was classified as real estate held for sale. Net income from discontinued operations of $12,038,000 for the nine months ended September 30, 2006 includes the gain on sale and operating results Sorrento II, Mira Mesa, and Countryside, which were sold during the first quarter of 2006.

The net income (loss) from discontinued operations for the nine months ended September 30, 2007 and 2006 are summarized below (dollars in thousands):

Condensed Consolidated Statements of Operations


	Nine Months Ended September 30,
	2007			2006

Rental revenue	$	871		$	1,245
Total expenses		1,198			1,631

Net loss from discontinued operations before gain on sale, income tax benefit (expense) and minority interest		(327	)		(386	)
Gain on sale of discontinued operations		—			22,349
Income tax benefit (expense)		130			(8,077	)
Minority interest from discontinued operations		26			(1,848	)

Net (loss) income from discontinued operations	$	(171	)	$	12,038

LIQUIDITY AND CAPITAL RESOURCES

During first nine months of 2007, the Company derived cash primarily from the collection of rents and net proceeds from borrowings and refinancing activities. Major uses of cash included the acquisitions of three properties, payments for capital improvements to real estate assets, primarily for tenant improvements, payment of operational expenses and scheduled principal payments on borrowings.

The Company reported a net loss of $5,642,000 for the nine months ended September 30, 2007 compared to net income of $8,856,000 for the nine months ended September 30, 2006. These results include the following non-cash items:


	Nine Months Ended
	September 30,
	2007			2006
Non-Cash Items:
Depreciation and amortization expense	$	9,542		$	8,173
Income tax (expense) benefit		(4,047	)		5,959
Deferred rental income		(236	)		(37	)
Minority interest		(844	)		1,359
Stock-based compensation expense		36			43
Amortization of loan premiums		(262	)		(331	)

Net cash provided by operating activities amounted to $778,000 for the nine months ended September 30, 2007. The net cash provided by operating activities included $960,000 generated by property operations partially offset by an increase in net operating assets and liabilities of $182,000. Net cash used in operating activities for the nine months ended September 30, 2006 amounted to $667,000, which was comprised of cash used in property operations of $176,000 and a decrease in net operating assets and liabilities of $491,000.

Net cash used in investing activities amounted to $29,184,000 for the nine months ended September 30, 2007. Cash of $26,140,000 was used to acquire two retail properties and an industrial property. In addition, cash of $3,044,000 was used for capital expenditures, primarily tenant improvements. Net cash provided by investing activities for nine months ended September 30, 2006 amounted to $33,158,000. This amount was primarily attributable to proceeds received from the sales of Sorrento II, Mira Mesa and Countryside during the period. Cash of $3,005,000 was used for capital expenditures, primarily for tenant improvements.

Net cash provided by financing activities amounted to $28,926,000 for the nine months ended September 30, 2007. Proceeds from borrowings totaled $53,566,000, which included a new loan on an office property located in Irvine, California and a new loan on an office property located in Houston, Texas. Other borrowings of $23,422,000 were obtained primarily to assist with the acquisition costs associated with three properties acquired during 2007. Repayment of borrowings related to refinances amounted to $44,523,000 and scheduled principal payments amounted to $3,268,000 for the nine months ended September 30, 2007. Net cash used by financing activities amounted to $31,909,000 for the nine months ended September 30, 2006. During the first nine months of 2006, borrowings of $26,165,000 were paid in connection with the sales of Sorrento II, Mira Mesa and Countryside. Scheduled principal payments amounted to $1,290,000 during the period. Proceeds of $2,250,000 were generated from a new loan on the Company’s retail property located in South Carolina, of which $1,500,000 was used to extinguish prior debt on the property. In January 2006, Company paid the remaining balance due on its notes payable related to the Teachout litigation matter of $4,877,000.

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 restricted cash, the use of funds held in escrow by lenders, and proceeds from future sales and refinancing activities.

The Company has a short-term bank note of $500,000 maturing in December 2007. The Company intends to repay the note with proceeds from the anticipated sale of Northwest Corporate Center. Should the anticipated sale not happen, the Company intends to either seek a maturity extension or pay the note by drawing from its $2,000,000 revolving line of credit. As of September 30, 2007, the entire line was available to the Company. The Company also has restricted cash of $3,559,000 on deposit with the lender for its 7700 Irvine Center property, which would be released upon the completion of certain lease-up terms and conditions at the property. The Company is anticipates meeting the lease-up terms and conditions during the first quarter of 2008.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table aggregates the Company’s contractual obligations as of September 30, 2007 (dollars in thousands):


	Payment Due By Period
			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years

Long-term debt (1)	$	184,321	$	2,386	$	12,825	$	41,416	$	127,694
Interest costs on long term debt (1)		78,805		3,018		23,260		19,654		32,873
Capital expenditures (2)		982		982		—		—		—
Deferred commission (3)		491		350		141		—		—
Consulting		14		14		—		—		—

Total	$	264,613	$	6,750	$	36,226	$	61,070	$	160,567


(1)		See Note 5 — Notes Payable – of the Consolidated Financial Statements.

(2)		Represents estimated cost of commitments for tenant improvements and lease commissions related to the leasing of space to new or renewing tenants.

(3)		Represents commission payable on 2007 property acquisitions.

INFLATION

Substantially all of the leases at the industrial and retail properties provide for pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance. Leases at the office properties typically provide for rent adjustment and pass-through of increases in operating expenses during the term of the lease. All of these provisions may permit the Company to increase rental rates or other charges to tenants in response to rising prices and therefore, serve to reduce the Company’s exposure to the adverse effects of inflation.

FORWARD-LOOKING STATEMENTS

This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements are based on management’s beliefs and expectations, which may not be correct. Important factors that could cause actual results to differ materially from the expectations reflected in these forward-looking statements include the following: the Company’s level of indebtedness and ability to refinance its debt; the fact that the Company’s predecessors have had a history of losses in the past; unforeseen liabilities which could arise as a result of the prior operations of companies acquired in the 2001 consolidation transaction; risks inherent in the Company’s acquisition and development of properties in the future, including risks associated with the Company’s strategy of investing in under-valued assets; general economic, business and market conditions, including the impact of the current economic downturn; changes in federal and local laws, and regulations; increased competitive pressures; and other factors, including the factors set forth below, as well as factors set forth elsewhere in this Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATES

One of the Company’s primary market risk exposure is to changes in interest rates on its borrowings.

It is the Company’s policy to manage its exposure to fluctuations in market interest rates for its borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. In order to maximize financial flexibility when selling properties and minimize potential prepayment penalties on fixed rate loans, the Company has also entered into variable rate debt arrangements.

At September 30, 2007, the Company’s total indebtedness included fixed-rate debt of approximately $156,753,000 and floating-rate indebtedness of approximately $27,568,000. The Company continually reviews the portfolio’s interest rate exposure in an effort to minimize the risk of interest rate fluctuations. The Company does not have any other material market-sensitive financial instruments.

A change of 1.00% in the index rate to which the Company’s variable rate debt is tied would change the annual interest incurred by the Company by approximately $276,000, or $.20 per share, based upon the balances outstanding on variable rate instruments at September 30, 2007.

ITEM 4. CONTROLS AND PROCEDURES

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on, and as of the date of, that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

There were no changes made in the Company’s internal controls over financial reporting during the third quarter of 2007 that materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

There have been no material changes to the Company’s Risk Factors as previously disclosed in the Company’s latest annual report on
Form 10-K.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

The Exhibit Index attached hereto is hereby incorporated by reference this item.

(b) Reports on Form 8-K:

On August 9, 2007, a report on Form 8-K was filed with respect to Item 2.02.

SIGNATURES

Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	AMERICAN SPECTRUM REALTY, INC.
Date: November 8, 2007	By:	/s/ William J. Carden
		William J. Carden
		Chairman of the Board, President and, Chief Executive Officer (Principal Executive Officer)


Date: November 8, 2007	By:	/s/ G. Anthony Eppolito
		G. Anthony Eppolito
		Vice President, Chief Financial Officer, (Principal Financial Officer and Accounting Officer), Treasurer and Secretary


		Page No.
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements		3
	Consolidated Condensed Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006		3
	Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2007 and 2006 (unaudited)		4
	Consolidated Condensed Statement of Stockholders’ Equity for the nine months ended September 30, 2007 (unaudited)		5
	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)		6
	Notes to Consolidated Condensed Financial Statements		7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3	Quantitative and Qualitative Disclosures about Market Risk		23
Item 4	Controls and Procedures		24

PART II	OTHER INFORMATION

Item 1	Legal Proceedings		25
Item 1A	Risk Factors		25
Item 6	Exhibits and Reports on Form 8-K		25
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


Exhibit No.		Exhibit Title

31.1		Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

6)		I have reviewed this quarterly report on Form 10-K of American Spectrum Realty, Inc.;

7)		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

8)		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

9)		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

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	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	(1)		The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of the dates indicated and results of operations of the Company for the period indicated.


Dated: November 8, 2007

/s/ William J. Carden
William J. Carden
President and Chief Executive Officer