AQQ American Spectrum Realty, Inc.

 

 

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 June 30, 2009

OR

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 incorporation or organization)		(I.R.S. Employer Identification No.)
2401 Fountain View, Suite 510
Houston, Texas 77057		77057
(Address of principal executive offices)		(Zip Code)

(713) 706-6200

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company 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 July 31, 2009, 1,408,449 shares of Common Stock ($.01 par value) were outstanding.

 

 

TABLE OF CONTENTS

		Page No.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements			3
Consolidated Condensed Balance Sheets at June 30, 2009 (unaudited) and December 31, 2008			3
Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited)			4
Consolidated Condensed Statements of Cash Flows for the three and six months ended June 30, 2009 and 2008 (unaudited)			5
Notes to Consolidated Condensed Financial Statements			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 4T Controls and Procedures			21
PART II OTHER INFORMATION
Item 1 Legal Proceedings			22
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 4 Submission of Matters to a Vote of Security Holders			22
Item 6 Exhibits and Reports on Form 8-K			22

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN SPECTRUM REALTY, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)

		June 30, 2009				December 31, 2008
		(Unaudited)
ASSETS
Real estate held for investment		$	259,281			$	257,786
Accumulated depreciation			(68,127	)			(61,283	)
Real estate held for investment, net			191,154				196,503
Cash and cash equivalents			640				2,092
Tenant and other receivables, net of allowance for doubtful accounts of $453 and $371, respectively			1,184				805
Deferred rents receivable			1,900				1,869
Deferred tax asset			5,693				3,123
Insurance claims receivable			—				2,700
Investment in management company			4,000				4,000
Prepaid and other assets, net			12,660				13,899
Total Assets		$	217,231			$	224,991
LIABILITIES
Liabilities:
Notes payable, including premium of $0 and $19, respectively		$	201,303			$	202,194
Accounts payable			4,542				3,970
Liabilities related to insurance claims			1,814				3,200
Accrued and other liabilities			9,527				10,970
Total Liabilities			217,186				220,334
Commitments and Contingencies (Notes 9 and 10):
Equity:
American Spectrum Realty, Inc. stockholders’ equity:
Preferred stock, $.01 par value; authorized, 25,000,000 shares; issued and outstanding, 55,172 and 55,172 shares, respectively			1				1
Common stock, $.01 par value; authorized, 100,000,000 shares; issued, 1,644,155 and 1,620,304 shares, respectively; outstanding, 1,408,449 and 1,384,598 shares, respectively			16				16
Additional paid-in capital			48,631				48,393
Accumulated deficit			(48,194	)			(44,200	)
Treasury stock, at cost, 235,706 and 235,706 shares, respectively			(3,095	)			(3,095	)
Total American Spectrum Realty, Inc. stockholders’ (deficit) equity			(2,641	)			1,115
Noncontrolling interest			2,686				3,542
Total Equity			45				4,657
Total Liabilities and Equity		$	217,231			$	224,991

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 per share amounts)
(Unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
REVENUES:
Rental revenue		$	8,491			$	8,778			$	17,382			$	17,042
Third party management and leasing revenue			24				3				41				16
Interest and other income			19				37				27				114
Total revenues			8,534				8,818				17,450				17,172
EXPENSES:
Property operating expense			4,192				4,216				8,300				7,744
Corporate general and administrative			1,024				1,025				1,894				1,881
Depreciation and amortization			3,807				3,550				7,519				6,788
Interest expense			3,388				3,362				6,759				6,467
Total expenses			12,411				12,153				24,472				22,880
Loss from continuing operations before deferred income tax benefit			(3,877	)			(3,335	)			(7,022	)			(5,708	)
Deferred income tax benefit			1,392				1,165				2,486				2,013
Loss from continuing operations			(2,485	)			(2,170	)			(4,536	)			(3,695	)
Discontinued operations:
Gain from discontinued operations			—				—				—				5
Gain on sale of discontinued operations			—				—				—				1,141
Deferred income tax expense			—				—				—				(421	)
Income from discontinued operations			—				—				—				725
Net loss, including noncontrolling interest		$	(2,485	)		$	(2,170	)		$	(4,536	)		$	(2,970	)
Plus: Net loss attributable to noncontrolling interest			292				280				542				383
Net loss attributable to American Spectrum Realty, Inc.			(2,193	)			(1,890	)			(3,994	)			(2,587	)
Preferred stock dividend			(60	)			—				(120	)			—
Net loss attributable to American Spectrum Realty, Inc. common stockholders		$	(2,253	)		$	(1,890	)		$	(4,114	)		$	(2,587	)
Basic and diluted per share data:
Loss from continuing operations attributable to American Spectrum Realty, Inc. common stockholders		$	(1.60	)		$	(1.37	)		$	(2.93	)		$	(2.34	)
Income from discontinued operations attributable to American Spectrum Realty, Inc. common stockholders			—				—				—				0.46
Net loss attributable to American Spectrum Realty, Inc. common stockholders		$	(1.60	)		$	(1.37	)		$	(2.93	)		$	(1.88	)
Basic weighted average shares used			1,407,032				1,376,098				1,402,349				1,375,864
Amounts attributable to American Spectrum Realty, Inc. common stockholders:
Loss from continuing operations		$	(2,253	)		$	(1.37	)		$	(4,114	)		$	(3,218	)
Income from discontinuing operations		$	—			$	—			$	—			$	631
Net loss		$	(2,253	)		$	(1.37	)		$	(4,114	)		$	(2,587	)

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)

		Six Months Ended June 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to American Spectrum Realty, Inc.		$	(3,994	)		$	(2,587	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			7,519				6,810
Deferred rental income			(31	)			(260	)
Noncontrolling interest			(542	)			(383	)
Net gain on sale of real estate asset			—				(1,141	)
Stock-based compensation expense			44				30
Deferred income tax benefit			(2,486	)			(1,592	)
Amortization of note payable premium, included in interest expense			(19	)			(23	)
Changes in operating assets and liabilities:
Increase in tenant and other receivables			(379	)			(72	)
Decrease (increase) in prepaid and other assets			569				(1,737	)
Increase (decrease) in accounts payable			572				(375	)
(Decrease) increase in accrued and other liabilities			(1,606	)			999
Net cash used in operating activities			(353	)			(331	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds received from sale of real estate asset			—				3,014
Real estate acquisitions			—				(17,250	)
Capital improvements to real estate assets			(1,500	)			(1,862	)
Proceeds received related to insurance claims			2,700				—
Payments for damages related to insurance claims			(1,386	)			—
Net cash used in investing activities:			(186	)			(16,098	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings			2,215				300
Proceeds from borrowings – property acquisitions			—				16,950
Repayment of borrowings – property sales			—				(2,218	)
Repayment of borrowings – refinances			(1,474	)			(150	)
Repayment of borrowings – scheduled payments			(1,614	)			(829	)
Dividend payments to preferred stockholders			(40	)			—
Repurchase of common stock			—				(9	)
Proceeds from exercise of stock options			—				31
Release of restricted cash			—				3,565
Net cash (used in) provided by financing activities:			(913	)			17,640
(Decrease) increase in cash and cash equivalents			(1,452	)			1,211
Cash and cash equivalents, beginning of period			2,092				847
Cash and cash equivalents, end of period		$	640				2,058
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of operating partnership units to common stock		$	314				—
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	6,797			$	6,207
Cash paid for income taxes			60				151

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 June 30, 2009, held an interest of 88.38% (consisting of the sole general partnership and a limited partnership interest). As of June 30, 2009, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 29 properties, which consisted of 23 office buildings, five industrial properties and one retail property. The 29 properties are located in five states.

No properties were purchased or sold during the six months ended June 30, 2009. During 2008, the Company acquired a 178,000 square foot office property consisting of two adjacent buildings located in Houston, Texas. Also during 2008, the Company sold Columbia, one of the Company’s non-core properties. Columbia is a 58,783 square foot retail center located in Columbia, South Carolina. The 2008 property acquisition is part of the Company’s strategy to acquire value-added real estate in its core markets of Texas, California and Arizona.

American Spectrum Realty Management, Inc., (“ASRM”) a wholly-owned subsidiary of the Company, has started a third party management and leasing program. The program was initiated to generate additional income without the significant cost for acquisitions. Currently, ASRM leases and/or manages approximately 510,000 square feet of office, retail and industrial projects for third parties. ASRM plans to aggressively pursue third party management and leasing opportunities in the Company’s core markets of California, Texas and Arizona.

The current credit crisis, related turmoil in the global financial system and the recent downturn in the United States economy is impacting the Company’s liquidity and capital resources. The continuation of the credit crisis and/or the economic downturn could adversely affect the Company’s business in a number of ways, including effects on its ability to met its financial obligations, obtain new mortgages, to refinance current debt and to sell properties.

In general, the Company expects to meet its short-term liquidity requirements for normal operating expenses from cash generated by operations. In addition, the Company anticipates generating proceeds from borrowing activities, property sales and/or equity offerings to provide funds for payments of certain accounts payables, consisting primarily of tenant improvements and capital improvements on properties. As of June 30, 2009, amounts in accounts payable over 90 days totaled $2,075,000. Also, 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 the use of funds held in escrow by lenders, proceeds from property sales and borrowing activities. There can be no assurance, however, that these activities will occur. If these activities do not occur, the Company will not have sufficient cash to meet its obligations.

The Company has loans totaling $29,136,000, maturing over the next twelve months. One of these loans, with a balance of $17,170,000 as of June 30, 2009, contains two one-year extension options. The extension options are contingent upon satisfaction of certain terms and conditions required by the lender. Because of uncertainties with the current credit crisis, the Company’s current debt level and the Company’s historical losses there can be no assurances as to the Company’s ability to obtain funds necessary for the refinancing of its maturing debts. If refinancing transactions are not consummated, the Company will seek extensions and/or modifications from existing lenders. If these refinancings or extensions do not occur, the Company will not have sufficient cash to meet its obligations.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared without audit in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Pursuant to such rules and regulations, these financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. The condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. Such adjustments are considered to be of a normal recurring nature unless otherwise identified. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or for any future period.

The accompanying condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

The financial statements include the accounts of the Operating Partnership and all other subsidiaries of the Company. 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 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 (loss) from discontinued operations. Effective January 1, 2009, the Company adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51. In accordance with this pronouncement, the Company’s noncontrolling interest is reported as a component of stockholders’ equity.

SEGMENT REPORTING

The Company operates as one business operating and reportable segment.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 165, Subsequent Events (“SFAS No. 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS No. 165 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted SFAS No. 165 during the second quarter of 2009, and its application had no impact on the Company’s consolidated condensed financial statements. The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was August 13, 2009.

In June 2008, the FASB issued Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP No. EITF 03-6-1”). FSP No. EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in FASB Statement No. 128, Earnings Per Share .

FSP No. EITF 03-6-1 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008; early adoption is not permitted. The adoption of FSP No. EITF 03-6-1, which was effective January 1, 2009, did not materially affect the Company’s calculation of earnings per common share.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 requires (i) that noncontrolling (minority) interests be reported as a component of stockholders’ equity, (ii) that net income attributable to the parent and the noncontrolling interest be separately identified in the consolidated statements of operations, (iii) that changes in a parent’s ownership interest while the parent retains the controlling interest be accounted for as equity transactions, (iv) that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and (v) that sufficient disclosures are provided that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The Company adopted the provisions of SFAS No. 160 in the first quarter of 2009. As a result of the adoption, the Company has reported noncontrolling interests as a component of equity in the Consolidated Condensed Balance Sheets and the net income or loss attributable to noncontrolling interests has been separately identified in the Consolidated Condensed Statements of Operations. The prior periods presented have also been reclassified to conform to the current classification required by SFAS No. 160.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”). SFAS No. 141R replaces FASB Statement No. 141, Business Combinations (“SFAS No. 141”). The statement retains the purchase method of accounting used in business combinations but replaces SFAS No. 141 by establishing principles and requirements for the recognition and measurement of assets, liabilities and goodwill, including the requirement that most transaction and restructuring costs related to the acquisition be expensed. In addition, the statement requires disclosures to enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141R did not have a material impact on the Company’s consolidated results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS No. 157”), effective for the Company’s fiscal year beginning January 1, 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but simplifies and codifies related guidance within accounting principles generally accepted in the United States of America. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. The adoption of this pronouncement did not have a material impact on the Company’s consolidated results of operations and financial condition. As of June 30, 2009, the Company had no financial instruments requiring fair value measurement.

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 beginning with 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 ranges 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 8 for a further discussion on stock-based compensation.

NONCONTROLLING INTEREST

Unit holders in the Operating Partnership (other than the Company) held an 11.62% and 12.88% partnership interest in the Operating Partnership, as limited partners, at June 30, 2009 and December 31, 2008, 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 LOSS PER SHARE

Net loss per share is calculated based on the weighted average number of common shares outstanding. The Company incurred net losses for each of the three and six months ended June 30, 2009 and June 30, 2008. In accordance with SFAS No. 128, Earnings Per Share, stock options outstanding of 29,375 and 29,375 and OP Units (other than those held by the Company) outstanding of 744,982 and 823,509 (convertible into approximately 186,246 and 205,877 shares of common stock), at June 30, 2009 and June 30, 2008, respectively, have not been included in the Company’s net loss per share calculations for periods presented since their effect would be anti-dilutive.

INCOME TAXES

In May 2006, the State of Texas enacted a margin tax which became effective in 2008. This margin tax required 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 revised the Texas franchise tax to create a new tax on virtually all Texas businesses. The margin tax has not had a material effect on the Company’s 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 with no material effect on its financial statements. As a result, there was no cumulative effect related to adopting FIN 48.

As of June 30, 2009, the Company had unrecognized tax benefits of approximately $139,000, 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 June 30, 2009. 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, 2005 through 2008.

NOTE 3. REAL ESTATE

ACQUISITIONS

2009

No properties were acquired during the first six months of 2009.

2008

On April 30, 2008, the Company purchased Fountain View Place, a 178,000 square foot office property located in Houston, Texas. The project, which consists of two adjacent buildings, is within blocks of the Company’s 2401 Fountain View office building. Acquisition costs for the property were funded with new mortgage debt and proceeds from a tax-deferred exchange.

DISPOSITIONS

2009

No properties were sold during the first six months of 2009.

2008

During the first quarter of 2008, the Company sold a 58,783 square foot retail property (“Columbia’) located in Columbia, South Carolina for $3,200,000. The sale generated net proceeds of approximately $800,000, of which $300,000 was used to assist with the acquisition of Fountain View Place.

NOTE 4. DISCONTINUED OPERATIONS

There were no operations of discontinued operations for the three months ended June 30, 2009 and 2008. The operations of discontinued operations for the six months ended June 30, 2009 and 2008 are summarized below (dollars in thousands):

		Six Months Ended June 30,
Consolidated Condensed Statements of Operations		2009				2008
Rental revenue		$	—			$	73
Total expenses			—				68
Income from discontinued operations before gain on sale and income tax expense			—				5
Gain on sale of discontinued operations			—				1,141
Income tax expense			—				(421	)
Income from discontinued operations		$	—			$	725

NOTE 5. NOTES PAYABLE, NET OF PREMIUM

The Company had the following notes payable outstanding as of June 30, 2009 and December 31, 2008 (dollars in thousands):

						June 30, 2009								December 31, 2008
Collateral (property unless		Maturity				Principal				Interest				Principal				Interest
otherwise noted)		Date				Balance				Rate				Balance				Rate
Fixed Rate
1501 Mockingbird (1)			9/30/2009				298				6.00	%			300				6.00	%
6430 Richmond Atrium (1)			9/30/2009				709				5.50	%			715				5.50	%
Corporate — Secured			2/7/2010				1,950				7.50	%			1,950				7.50	%
Fountain View Place (2)			4/29/2010				1,515				10.00	%			1,700				10.00	%
Corporate — Unsecured (3)			5/31/2010				500				11.00	%			—				—
Pacific Spectrum (4)			6/10/2010				5,294				8.02	%			5,341				8.02	%
Fountain View Place (5)			10/29/2010				2,100				18.00	%			2,500				18.00	%
Bristol Bay			8/1/2011				6,952				7.58	%			7,005				7.58	%
Technology			8/1/2011				7,188				7.44	%			7,243				7.44	%
Creekside			12/1/2011				5,861				7.17	%			5,907				7.17	%
16350 Park Ten Place			5/11/2012				4,494				7.45	%			4,526				7.45	%

						June 30, 2009								December 31, 2008
Collateral (property unless		Maturity				Principal				Interest				Principal				Interest
otherwise noted)		Date				Balance				Rate				Balance				Rate
16360 Park Ten Place			5/11/2012				3,521				7.45	%			3,546				7.45	%
2855 Mangum			5/11/2012				2,594				7.45	%			2,613				7.45	%
2855 Mangum			5/11/2012				1,445				6.00	%			1,472				6.00	%
6430 Richmond Atrium			5/11/2012				2,177				7.45	%			2,193				7.45	%
Southwest Pointe			6/1/2012				2,730				7.33	%			2,751				7.33	%
16350 Park Ten Place			8/11/2012				496				7.45	%			500				7.45	%
16360 Park Ten Place			8/11/2012				389				7.45	%			391				7.45	%
11500 Northwest Freeway			6/1/2014				4,112				5.93	%			4,145				5.93	%
11500 Northwest Freeway			6/1/2014				297				5.93	%			300				5.93	%
Morenci			7/1/2014				1,707				7.25	%			1,524				6.60	%
5850 San Felipe			8/1/2014				5,134				5.65	%			5,177				5.65	%
Northwest Corporate Center			8/1/2014				5,411				6.26	%			5,451				6.26	%
14741 Yorktown			9/1/2014				8,600				5.32	%			8,600				5.32	%
8100 Washington			2/22/2015				2,214				5.59	%			2,232				5.59	%
8300 Bissonnet			5/1/2015				4,562				5.51	%			4,597				5.51	%
1501 Mockingbird			7/1/2015				3,263				5.28	%			3,287				5.28	%
5450 Northwest Central			9/1/2015				2,652				5.38	%			2,674				5.38	%
800 Sam Houston Parkway			12/29/2015				2,346				6.25	%			2,372				6.25	%
888 Sam Houston Parkway			12/29/2015				2,346				6.25	%			2,372				6.25	%
2401 Fountain View			3/1/2016				12,228				5.82	%			12,316				5.82	%
12000 Westheimer			1/1/2017				4,250				5.70	%			4,250				5.70	%
2470 Gray Falls			1/1/2017				3,100				5.70	%			3,100				5.70	%
6420 Richmond Atrium			6/5/2017				6,400				5.87	%			6,400				5.87	%
7700 Irvine Center			8/1/2017				45,000				5.99	%			45,000				5.99	%
Fountain View Place			4/29/2018				12,595				6.50	%			12,670				6.50	%
		Subtotal				$	176,430							$	177,120
Variable Rate
Corporate — Unsecured			1/12/2010				1,200				6.00	%			1,200				6.00	%
Beltway Industrial (6)			5/9/2010				17,170				7.00	%			17,170				7.00	%
Corporate — Unsecured			5/31/2010				500				6.00	%			500				6.00	%
Northwest Spectrum			4/19/2012				3,116				2.90	%			3,210				4.30	%
Windrose Plaza			4/19/2012				2,887				2.90	%			2,975				4.30	%
		Subtotal				$	24,870							$	25,055
Loan Premium							—								19
		Total				$	201,303							$	202,194

In June 2009, the Company refinanced its loan secured by Morenci, an industrial property located in Indianapolis, Indiana for $1,715,000. The new loan bears interest at a fixed rate of 7.25% per annum and matures in July 2014. Net proceeds of $241,000 were received as a result of the refinance.

The Company is not in compliance with a debt covenant on a mortgage loan secured by one of its office properties located in Houston, Texas. The debt covenant requires the Company to maintain a minimum tangible book net worth as defined in the debt agreement. In the event the lender elects to enforce the non-compliance matter, the Company will attempt to negotiate a revision to the loan covenant. If a refinance of the loan becomes necessary, the Company believes it could obtain a new mortgage loan for an amount in excess of the current debt balance and prepayment costs associated with the current loan.

NOTE 6. NONCONTROLLING INTEREST

In accordance with SFAS No. 160, effective January 1, 2009 and more fully described in Note 2, the Company’s noncontrolling interest is included as a component of stockholders’ equity.

OP Units (other than those held by the Company) of 744,982 (convertible into approximately 186,246 shares of common stock) were outstanding as of June 30, 2009.

In February 2009, William J. Carden, Chief Executive Officer, Chairman of the Board, and principal stockholder exchanged 78,406 OP Units for 19,601 shares of Common Stock.

The following represents the effects of changes in the Company’s ownership interest in the OP on the Company’s equity for the six months ended June 30, 2009 and 2008 (dollars in thousands):

		Six Months Ended June 30,
		2009				2008
Net loss attributable to the Company		$	(3,994	)		$	(2,587	)
Increase in the Company’s paid-in capital on exchange of OP Units for shares of Common Stock		$	314			$	—
Change from net loss attributable to the Company and exchange of OP Units for shares of Common Stock		$	(3,680	)		$	(2,587	)

There were no changes in the Company’s ownership interest in the OP on the Company’s equity for the three months ended June 30, 2009 and 2008.

NOTE 7. 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 were made from time to time in open market transactions. In May 2008, the authorization to repurchase shares in open market transactions was withdrawn by the Board of Directors.

NOTE 8. STOCK-BASED COMPENSATION

The Company has in effect its 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 June 30, 2009, 107,064 ASR shares were available for issuance to executive officers, directors or other key employees of the Company.

In accordance with SFAS No. 123R, stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated on the grant date using the Black-Scholes option-pricing model. The Company recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award.

Total stock-based compensation expense recognized for the three months ended June 30, 2009 and 2008 amounted to $23,000, or $.02 per basic and diluted earnings per share and $17,000, or $.01 per basic and diluted earnings per share, respectively. Total stock-based compensation expense recognized for the six months ended June 30, 2009 and 2008 amounted to $44,000, or $.03 per basic and diluted earnings per share and $30,000, or $.02 per basic and diluted earnings share, 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 have been granted since 2006. The Company has a policy of issuing new shares upon the exercise of stock options. During the six months ended June 30, 2009, no options were exercised.

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

		Shares				Weighted Average				Aggregate
		Under Option				Exercise Price				Intrinsic Value
Outstanding on January 1, 2009			29,375			$	23.93
Granted			—				—
Forfeited			—				—
Exercised			—				—
Outstanding on June 30, 2009			29,375			$	23.93			$	97,713
Exercisable as of June 30, 2009			29,375			$	23.93			$	97,713

The following table summarizes certain information for stock options, all of which are exercisable on June 30, 2009:

Weighted Average

Weighted

Range of

Remaining

Average

Exercise

Number

Contractual

Exercise

Price

Exercisable

Life

Price

$8.10 – $12.20

12,500

4.8 years

$

10.66

$18.25 – $27.16

11,250

5.2 years

$

20.65

$60.00 – $60.00

5,625

2.3 years

$

60.00

A summary of the status of the Company’s nonvested stock options as of January 1, 2009 and changes during the six months ended June 30, 2009 is presented below:

						Weighted Average
						Grant Date
Nonvested Stock Options		Number				Fair Value
Nonvested at January 1, 2009			1,562			$	10.00
Granted			—				—
Vested			(1,562	)		$	10.00
Forfeited			—				—
Nonvested at June 30, 2009			—			$	—

As of June 30, 2009, there was no unrecognized compensation cost related to stock options.

Restricted Stock

The Company issued 4,250 shares of Common Stock to its officers and directors under the Plan during each of three years ended December 31, 2008, 2007 and 2006. The restrictions on the shares issued 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.

During the three months ended June 30, 2009 and 2008, compensation expense of $22,000 and $12,000, respectively, was recognized for restricted shares. During the six months ended June 30, 2009 and 2008, compensation expense of $39,000 and $21,000, respectively, was recognized for restricted shares. 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 January 1, 2009 and changes during the six months ended June 30, 2009 is presented below:

						Weighted Average
		Number of				Grant Date
Restricted Stock Awards		Shares				Fair Value
Nonvested at January 1, 2009			7,087			$	24.10
Granted			4,250			$	21.23
Vested			(2,831	)		$	23.88
Forfeited			—				—
Nonvested at March 31, 2009			8,506			$	22.74

As of June 30, 2009, there was $178,000 of unrecognized compensation cost related to unvested restricted stock awards, which are expected to be recognized over a remaining weighted-average restriction period of approximately 2.8 years.

NOTE 9. RELATED PARTY TRANSACTIONS

In February 2009, William J. Carden, Chief Executive Officer, Chairman of the Board, and principal stockholder exchanged 78,406 OP Units for 19,601 shares of Common Stock.

On December 31, 2008, the Company issued a total of 55,172 shares of Series A Preferred Stock (“Preferred Stock”) to the following individuals: Mr. Carden, John N. Galardi, director and principal stockholder, and Timothy R. Brown, director. Each share of Preferred Stock was sold for $29.00 and is entitled to annual dividends, payable quarterly, at an annual rate of 15%, and to a preference on liquidation equal to the following: (a) if on or prior to December 31, 2011, the sum of $29.00 and any accrued and unpaid dividends or (b) if after December 31, 2011, the greater of (x) the sum of $29.00 and any accrued and unpaid dividends or (y) the amount which would be paid on account of each share of common stock upon liquidation if each share of Preferred Stock had hypothetically been converted into one share of common stock. The Preferred Stock is not required to be redeemed by the Company and the holders will have no right to require redemption. The Preferred Stock is redeemable at the option of the Company at any time after December 31, 2011. The shares were issued in a private transaction exempt from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended. At of June 30, 2009, the Company had accrued and unpaid dividends on the Preferred Stock of $80,000.

In December 2007, Messrs. Carden, Galardi and Brown adopted a 10b5-1 trading plan to jointly purchase up to 300,000 shares of ASR common stock, commencing December 26, 2007; to date, they have jointly purchased 93,823 shares of ASR common stock pursuant to this plan. In May 2009, the trading plan was terminated.

The Company pays a guarantee fee to Mr. Carden, Mr. Galardi and CGS Real Estate Company, Inc., a company owned indirectly by Messrs. Carden and Galardi (“the Guarantors”), in consideration for their guarantees of certain obligations 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. The Guarantee fee paid for the 2008 year was $96,712. The Company accrued $32,000 for the six months ended June 30, 2009 related to the Guarantee Fee for the 2009 year.

During 2007, the Company entered into a lease agreement with Galardi Group for 15,297 square feet of office space at the Company’s 7700 Irvine Center property. Mr. Galardi is a principal stockholder, director and officer of Galardi Group. The lease commenced March 1, 2008 and has a five-year term. The annual base rent due to the Company pursuant to the lease is $504,081 over the term of the lease.

NOTE 10. COMMITMENTS AND CONTINGENCIES

The Company filed insurance claims in 2008 related to Hurricane Ike, which affected the greater Houston area in September 2008, and related to a fire at one of its Houston area properties. The Company has accrued a liability of $1,814,000 at June 30, 2009 for property damage related to these matters, which represents unpaid out-of-pocket costs incurred to date for repairs. The Company is still assessing damages related to these claims and is in the process of filing additional claims for damages related to Hurricane Ike. The claim amounts are in excess of the accrued liabilities at June 30, 2009. Settlements are expected to be reached during the third or fourth quarter of 2009.

The Company is aware that one of its properties may contain hazardous substances above reportable levels. The property 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, of which the majority has been spent. The Company does not anticipate that remaining clean up costs will be material.

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.

NOTE 11. PREFERRED STOCK

The Company is authorized to issue up to 25,000,000 shares of one or more classes or series of preferred stock with a par value of $.01 per share.

On December 30, 2008, the Company filed Articles Supplementary to its Articles of Incorporation, which authorized the issuance of 68,965 of Series A Preferred Stock (“Preferred Stock”).

On December 31, 2008, Company issued 55,172 shares of the Preferred Stock to Messrs. Carden, Galardi, and Brown (Also see Note 9 — Related Party Transactions). Each share of Preferred Stock was sold for $29.00 and is entitled to annual dividends, payable quarterly, at an annual rate of 15%, and to a preference on liquidation equal to the following: (a) if on or prior to December 31, 2011, the sum of $29.00 and any accrued and unpaid dividends or (b) if after December 31, 2011, the greater of (x) the sum of $29.00 and any accrued and unpaid dividends or (y) the amount which would be paid on account of each share of common stock upon liquidation if each share of Preferred Stock had hypothetically been converted into one share of common stock. The Preferred Stock is not required to be redeemed by the Company and the holders will have no right to require redemption. The Preferred Stock is redeemable at the option of the Company at any time after December 31, 2011. The shares were issued in a private transaction exempt from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended. At of June 30, 2009, the Company had accrued and unpaid dividends on the Preferred Stock of $80,000.

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

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 June 30, 2009, held an interest of 88.38% (consisting on the sole general partnership and a limited partnership interest). As of June 30, 2009, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 29 properties, which consisted of 23 office buildings, five industrial properties and one retail property. The 29 properties are located in five states.

No properties were purchased or sold during the six months ended June 30, 2009. During 2008, the Company acquired a 178,000 square foot office property consisting of two adjacent buildings located in Houston, Texas. Also during 2008, the Company sold Columbia, one of the Company’s non-core

properties. Columbia is a 58,783 square foot retail center located in Columbia, South Carolina. The 2008 property acquisition is part of the Company’s strategy to acquire value-added real estate in its core markets of Texas, California and Arizona.

In the accompanying financial statements, the results of operations for Columbia are shown in the section “Discontinued operations.” The revenues and expenses reported for the periods presented exclude results from properties sold or classified as held for sale. The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the consolidated condensed financial statements of the Company, including the notes thereto, included in Item 1.

The Company’s properties were 83% occupied at June 30, 2009 compared to 88% at June 30, 2008. The Company continues to aggressively pursue prospective tenants to increase its occupancy, which if successful, should have the effect of improving operational results.

American Spectrum Realty Management, Inc., (“ASRM”) a wholly-owned subsidiary of the Company, has started a third party management and leasing program. The program was initiated to generate additional income without the heavy capital cost for acquisitions. Currently, ASRM leases and/or manages approximately 510,000 square feet of office, retail and industrial projects for third parties. ASRM plans to aggressively pursue third party management and leasing opportunities in the Company’s core markets of California, Texas and Arizona.

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 2009.

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 Condensed Financial Statements. The consolidated condensed 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 condensed financial statements:

Investment in Real Estate Assets

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.

Depreciation is provided using the straight-line method over the useful lives of the respective assets. The useful lives are as follows:

Building and Improvements		5 to 40 years
Tenant Improvements		Term of the related lease
Furniture and Equipment		3 to 5 years

Allocation of Purchase Price of Acquired Assets

Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible and intangible assets (including land, buildings, tenant improvements, above and below market leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with SFAS No. 141R, Business Combinations ), and allocates the purchase price to the acquired assets and assumed liabilities. The Company also considers an allocation of purchase price of other acquired intangibles, including acquired in-place leases.

The Company evaluates acquired “above and below” market leases at their fair value (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.

Sales of Real Estate Assets

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 June 30, 2009 and 2008.

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

		June 30,				June 30,				Variance
		2009				2008				$				%
Rental revenue		$	8,491,000			$	8,778,000			$	(287,000	)			(3.3	%)
Operating expenses:
Property operating expenses			4,192,000				4,216,000				(24,000	)			(0.6	%)
General and administrative			1,024,000				1,025,000				(1,000	)			(0.1	%)
Depreciation and amortization			3,807,000				3,550,000				257,000				7.2	%
Interest expense			3,388,000				3,362,000				26,000				0.8	%

Rental revenue . Rental revenue decreased $287,000, or 3.3%, for the three months ended June 30, 2009 in comparison to the three months ended June 30, 2008. Rental revenue for properties owned for the full three months ended June 30, 2009 and June 30, 2008 decreased $500,000, or 6.1%. The decrease was in large part due to a decrease in occupancy. The weighted average occupancy of the Company’s properties was 83% as of June 30, 2009 compared to 88% as of June 30, 2008. The decrease was also attributable to a rise in rent concessions and a decrease in lease termination revenue. The decrease was partially offset by revenue generated from an office property acquired during the second quarter of 2008. The amount of revenue attributable to this acquisition for the quarter ended June 30, 2009 was $213,000 more than for the quarter ended June 30, 2008.

Property operating expenses . Property operating expenses decreased by $24,000, or 0.6%, for the six months ended June 30, 2009 in comparison to the six months ended June 30, 2008. Property operating expenses for properties owned for the full three months ended June 30, 2009 and June 30, 2008 decreased by $154,000, or 3.9%. This decrease was principally due to a reduction in utility costs, primarily to due to lower electricity rates. The decrease was partially offset by an increase in property operating expenses of $130,000 related to the office property acquired in the second quarter of 2008.

General and administrative . General and administrative costs remained relatively unchanged, decreasing by $1,000, or 0.1%, for the three months ended June 30, 2009 in comparison to the three months ended June 30, 2008. A decrease in professional fees, principally legal and accounting, and a reduction in IT costs was offset by an increase in consulting costs related to business development.

Depreciation and amortization . Depreciation and amortization expense increased $257,000, or 7.2%, for the three months ended June 30, 2009 in comparison to the three months ended June 30, 2008. The increase was principally attributable to depreciation and amortization of $185,000 related to capital improvements and amortization of capitalized lease costs associated with properties owned for the full three months ended June 30, 2009 and June 30, 2008. Depreciation and amortization expense related to the acquired property mentioned above accounted for the remaining increase of $72,000.

Interest expense . Interest expense increased $26,000, or 0.8%, for the three months ended June 30, 2009 in comparison to the three months ended June 30, 2008. The increase was primarily due to interest expense of $94,000 attributable to the acquired property mentioned above. The increase was partially offset by a reduction in interest expense of $68,000 related to other debt. The decrease in interest expense related to other debt was due to a decrease in interest rates on several variable rate loans and an overall decrease in principal balances.

Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $1,392,000 for the three months ended June 30, 2009, compared to $1,165,000 for the three months ended June 30, 2008. The increase in deferred income tax benefit for the three months ended June 30, 2009 corresponds to the increase in loss from continuing operations for the period, in comparison to the three months ended June 30, 2008.

Noncontrolling interest. The share of loss attributable to the holders of OP Units was $292,000 for the three months ended June 30, 2009, compared to a share of loss of $280,000 for the three months ended June 30, 2008. The noncontrolling interest represents the approximate 12% interest in the Operating Partnership not held by the Company.

Discussion of the six months ended June 30, 2009 and 2008.

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

		June 30,				June 30,				Variance
		2009				2008				$				%
Rental revenue		$	17,382,000			$	17,042,000			$	340,000				2.0	%
Operating expenses:
Property operating expenses			8,300,000				7,744,000				556,000				7.2	%
General and administrative			1,894,000				1,881,000				13,000				0.7	%
Depreciation and amortization			7,519,000				6,788,000				731,000				10.8	%
Interest expense			6,759,000				6,467,000				292,000				4.5	%

Rental revenue . Rental revenue increased $340,000, or 2.0%, for the six months ended June 30, 2009 in comparison to the six months ended June 30, 2009. This increase was attributable to additional revenue generated from an office property acquired during the second quarter of 2008. The acquisition accounted for an increase in rental revenue of $1,031,000 for the period. The increase was offset by a decrease in revenues from properties owned for the full six months ended June 30, 2009 and June 30, 2008 of $690,000, in large part due to a decrease in occupancy. The weighted average occupancy of the Company’s properties was 83% as of June 30, 2009 compared to 88% as of June 30, 2008. The decrease was also attributable to a rise in rent concessions and a decrease in lease termination revenue for the period.

Property operating expenses . Property operating expenses increased by $556,000, or 7.2%, for the six months ended June 30, 2009 in comparison to the six months ended June 30, 2008. The increase was partially due to operating expenses of $533,000 related to the acquired property mentioned above. Property operating expenses on properties owned for the full six months ended June 30, 2009 and 2008 accounted for the remaining increase of $23,000. The increase in property operating expenses from properties owned for the full six months ended June 30, 2009 and June 30, 2008 was principally due to an increase in property administrative costs and higher repairs and maintenance.

General and administrative . General and administrative costs increased $13,000, or 0.07%, for the six months ended June 30, 2009 in comparison to the six months ended June 30, 2008. The increase was principally due to $192,000 increase in consulting cost related to business development. The increase was partially offset by a decrease in corporate staffing costs and IT related expenditures.

Depreciation and amortization . Depreciation and amortization expense increased $731,000, or 10.8%, for the six months ended June 30, 2009 in comparison to the six months ended June 30, 2008. The increase was principally attributable to depreciation and amortization of $348,000 related to the acquired property mentioned above. The remainder of the increase was due to the depreciation of additional capital improvements and amortization of capitalized lease costs associated with properties owned for the full six months ended June 30, 2009 and June 30, 2009.

Interest expense . Interest expense increased $292,000, or 4.5%, for the six months ended June 30, 2009 in comparison to the six months ended June 30, 2008. The increase was primarily due to interest expense of $511,000 attributable to the acquired property mentioned above. The increase was partially offset by a reduction in interest expense of $219,000 related to other debt. The decrease in interest expense related to other debt was due to a decrease in interest rates on several variable rate loans and an overall decrease in principal balances.

Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $2,486,000 for the six months ended June 30, 2009, compared to $2,013,000 for the six months ended June 30, 2008. The increase in deferred income tax benefit for the six months ended June 30, 2009 corresponds to the increase in loss from continuing operations for the period, in comparison to the six months ended June 30, 2008.

Noncontrolling interest. The share of loss attributable to the holders of OP Units was $542,000 for the six months ended June 30, 2009, compared to a share of loss of $383,000 for the six months ended June 30, 2008. The noncontrolling interest represents the approximate 12% interest in the Operating Partnership not held by the Company.

Discontinued operations . The Company recorded income from discontinued operations of $725,000 for the six months ended June 30, 2008. The income for the six months ended June 30, 2008 includes the operating results and gain on sale of Columbia. Columbia, a 58,783 square foot retail center located in Columbia, South Carolina, was sold in March 2008. The Company had no income or loss from discontinued operations for the six months ended June 30, 2009.

LIQUIDITY AND CAPITAL RESOURCES

During the first six months of 2009, the Company derived cash primarily from the collection of rents, borrowings and insurance claim proceeds related to Hurricane Ike and a fire at one of its Houston area properties. Major uses of cash included payments for capital improvements to real estate assets, primarily for tenant improvements, payment of operational expenses, payment for damages related to the hurricane and fire, repayment of borrowings and scheduled principal and interest payments on borrowings.

The Company reported a net loss attributable to American Spectrum Realty, Inc. of $3,994,000 for the six months ended June 30, 2009 compared to a net loss attributable to American Spectrum Realty, Inc. of $2,587,000 for the six months ended June 30, 2008. These results include the following non-cash items:

		Six Months Ended June 30,
		2009				2008
Non-Cash Items:
Depreciation and amortization expense		$	7,519			$	6,810
Income tax benefit			(2,486	)			(1,592	)
Deferred rental income			(31	)			(260	)
Noncontrolling interest			(542	)			(383	)
Stock-based compensation expense			44				30
Amortization of loan premium			(19	)			(23	)

Net cash used in operating activities amounted to $353,000 for the six months ended June 30, 2009. The net cash represented $491,000 generated by property operations, offset by a change in net operating assets and liabilities of $844,000. Net cash used in operating activities amounted to $331,000 for the six months ended June 30, 2008. The net cash represented $854,000 generated by property operations, offset by a change in net operating assets and liabilities of $1,185,000.

Net cash used in investing activities amounted to $186,000 for the six months ended June 30, 2009. Cash of $1,500,000 was used for capital expenditures, primarily tenant improvements. The Company received insurance proceeds of $2,700,000 related to its hurricane and fire claims and paid $1,386,000 for damages related to the hurricane and fire. Net cash used in investing activities amounted to $16,098,000 for the six months ended June 30, 2008. Cash of $17,250,000 was used to acquire one office property and $1,862,000 was used for capital expenditures, primarily tenant improvements. This amount was reduced by proceeds of $3,014,000 received from the sale of Columbia during the period.

Cash used in financing activities amounted to $913,000 for the six months ended June 30, 2009, which included repayments of borrowings of $1,474,000 and scheduled principal payments on debt of $1,614,000. This amount was partially offset by new borrowings of $2,215,000. Net cash provided by financing activities amounted to $17,640,000 for the six months ended June 30, 2008, which included $16,950,000 in new borrowings related to the acquisition of an office property, $300,000 from an additional borrowing on an unsecured loan and $3,565,000 from the release of restricted cash. This amount was reduced by the repayment of borrowings of $2,218,000 on the sale of Columbia, scheduled principal payments of $829,000 and other principal repayments of $150,000.

The current credit crisis, related turmoil in the global financial system and the recent downturn in the United States economy are impacting the Company’s liquidity and capital resources. The continuation of the credit crisis and/or economic downturn could adversely affect the Company’s business in a number of ways, including effects on its ability to met its financial obligations, obtain new mortgages, to refinance current debt and to sell properties.

In general, the Company expects to meet its short-term liquidity requirements for normal operating expenses from cash generated by operations. In addition, the Company anticipates generating proceeds from borrowing activities, property sales and/or equity offerings to provide funds for payments of certain accounts payables, consisting primarily of tenant improvements and capital improvements on properties. As of June 30, 2009, amounts in accounts payable over 90 days totaled $2,075,000. Also, 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 the use of funds held in escrow by lenders, proceeds from property sales and borrowing activities. There can be no assurance, however, that these activities will occur. If these activities do no occur, the Company will not have sufficient cash to meet its obligations.

The Company has loans totaling $29,136,000, maturing over the next twelve months. One of these loans, with a balance of $17,170,000 as of June 30, 2009, contains two one-year extension options. The extension options are contingent upon satisfaction of certain terms and conditions required by the lender. Because of uncertainties with the current credit crisis, the Company’s current debt level and the Company’s historical losses there can be no assurances as to the Company’s ability to obtain funds necessary for the refinancing of its maturing debts. If refinancing transactions are not consummated, the Company will seek extensions and/or modifications from existing lenders. If these refinancings or extensions do not occur, the Company will not have sufficient cash to meet its obligations.

The Company is not in compliance with a debt covenant on a mortgage loan secured by one of its office properties located in Houston, Texas. The debt covenant requires the Company to maintain a minimum tangible book net worth as defined in the debt agreement. In the event the lender elects to enforce the non-compliance matter, the Company will attempt to negotiate a revision to the loan covenant. If a refinance of the loan becomes necessary, the Company believes it could obtain a new mortgage loan for an amount in excess of the current debt balance and prepayment costs associated with the current loan.

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 global financial crisis and recent downturn in the United States economy; the potential delisting of the Company’s stock; changes in federal and local laws, and regulations; increased competitive pressures; and other factors, as well as factors set forth elsewhere in this Report on Form 10-Q.

ITEM 4T. CONTROLS AND PROCEDURES

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, has 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 second quarter of 2009 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

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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In May 2009, the Company issued a total of 4,250 shares of Common Stock to its officers and directors pursuant to the Company’s Omnibus Stock Option Incentive Plan. The issuance of Common Stock was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) and Rule 506 of Regulation D promulgated thereunder.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2009 annual meeting of stockholders was held on May 8, 2009. The matters on which the stockholders voted, in person or by proxy, were (i) to elect five directors to serve until the Company’s next annual meeting of stockholders and until their successors are duly elected and qualified, and (ii) to ratify the selection of Hein & Associates LLP, as the Company’s independent auditors for the fiscal year ended December 31, 2009. The results of the voting are shown below:

Election of directors:

Name of		Number of				Number of
Nominee		Votes For				Votes Withheld
Timothy R. Brown			1,098,113				3,555
William J. Carden			1,098,170				3,498
John N. Galardi			1,097,310				4,358
William W. Geary, Jr.			1,098,186				3,482
Presley E. Werlein, III			1,097,987				3,681

Ratify the selection of Hein & Associates LLP as independent auditors:

Number of		Number of				Number of
Votes For		Votes Against				Votes Abstaining
1,098,654			487				2,527

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 June 29, 2009, a report on Form 8-K was filed with respect to Item 8.01.

On May 26, 2009, a report on Form 8-K was filed with respect to Item 8.01.

On May 12, 2009, 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.

EXHIBIT INDEX

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

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