UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-28378
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AMREIT
(Name of Small Business Issuer in its Charter)
TEXAS 76-0410050
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8 GREENWAY PLAZA, SUITE 1000
HOUSTON, TX 77046
(Address of Principal Executive Offices) (Zip Code)
Indicate by check mark whether the issuer (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 issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
X Yes No
----- -----
As of November 11, 2004 there were 3,441,630 class A, 2,258,914 class B,
4,083,111 class C, and 1,078,328 class D common shares of beneficial interest of
AmREIT, $.01 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMREIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
ASSETS
Property:
Land $ 58,028,471
Buildings 63,598,916
Tenant improvements 3,011,711
------------------
124,639,098
Less accumulated depreciation and amortization (3,212,809)
------------------
Net real estate held for investment 121,426,289
Real estate held for sale, net 9,684,222
Net investment in direct financing leases held for investment 19,221,864
Cash and cash equivalents 2,135,472
Accounts receivable 1,753,132
Accounts receivable - related party 1,288,261
Notes receivable 844,093
Escrow deposits 691,434
Prepaid expenses, net 167,143
Other assets:
Preacquisition costs 162,301
Loan acquisition cost, net 354,695
Leasing costs, net 524,595
Furniture, fixtures and equipment, net 488,051
Accrued rental income 625,671
Intangible lease cost, net 5,292,731
Investment in non-consolidated affiliates 1,997,319
------------------
Total other assets 9,445,363
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TOTAL ASSETS $ 166,657,273
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 84,905,243
Accounts payable 2,998,650
Accounts payable - related party 62,094
Below market leases, net 358,476
Construction payable 109,888
Deferred gain 37,156
Security deposits 287,143
Prepaid rent 59,880
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TOTAL LIABILITIES 88,818,530
------------------
Minority interest 1,069,840
Shareholders' equity:
Preferred shares, $.01 par value, 10,000,000 shares
authorized, none-issued
Class A Common shares, $.01 par value, 50,000,000
shares authorized, 3,409,846 shares issued 34,098
Class B Common shares, $.01 par value, 3,000,000 shares
authorized, 2,299,204 shares issued 22,992
Class C Common shares, $.01 par value, 4,400,000 shares
authorized, 4,077,680 shares issued 40,777
Class D Common shares, $.01 par value, 17,000,000 shares
authorized, 546,182 shares issued 5,462
Capital in excess of par value 90,541,676
Accumulated distributions in excess of earnings (12,988,899)
Deferred compensation (832,212)
Cost of treasury shares, 9,116 Class A shares (54,991)
------------------
TOTAL SHAREHOLDERS' EQUITY 76,768,903
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 166,657,273
==================
See Notes to Condensed Consolidated Financial Statements.
F-1
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
QUARTER ENDED SEPTEMBER 30, YEAR TO DATE SEPTEMBER 30,
2004 2003 2004 2003
------------ ------------- -------------- ------------
Revenues:
Rental income from operating leases $ 2,979,136 $ 1,024,206 $ 6,175,588 $ 2,964,182
Earned income from direct financing leases 507,335 506,963 1,521,844 1,508,042
Real estate fee income 415,466 165,469 1,364,032 432,222
Securities commission income 1,780,324 785,528 5,333,191 1,312,188
Asset management fee income 96,578 71,835 245,480 169,445
Interest and other income 18,398 1,317 343,355 4,711
------------ ------------- -------------- ------------
Total revenues 5,797,237 2,555,318 14,983,490 6,390,790
------------ ------------- -------------- ------------
Expenses:
General operating and administrative 2,062,016 863,965 5,070,042 2,400,039
Legal and professional 312,063 239,425 961,621 575,162
Securities commissions 1,387,416 621,670 4,148,641 1,017,991
Depreciation and amortization 749,024 194,366 1,252,618 550,261
Deferred merger costs - - 1,681,870 -
------------ ------------- -------------- ------------
Total expenses 4,510,519 1,919,426 13,114,792 4,543,453
------------ ------------- -------------- ------------
Operating income 1,286,718 635,892 1,868,698 1,847,337
Income from non-consolidated affiliates 53,595 7,138 240,400 92,476
Federal income tax expense for taxable REIT
subsidiary 427,308 (15,300) 152,056 -
Interest expense (1,026,690) (532,355) (2,189,695) (1,588,406)
Minority interest in income of consolidated
joint venture (46,198) (45,841) (139,649) (128,790)
------------ ------------- -------------- ------------
Income (loss) before discontinued operations 694,733 49,534 (68,190) 222,617
Income (loss) from discontinued operations (482,697) 371,887 (837,398) 1,026,701
Gain on sales of real estate acquired for resale 908,180 237,579 1,758,046 516,663
------------ ------------- -------------- ------------
Income from discontinued operations 425,483 609,466 920,648 1,543,364
------------ ------------- -------------- ------------
Net income $ 1,120,217 $ 659,000 $ 852,459 $ 1,765,981
Distributions paid to class B, C and D shareholders (1,168,372) (457,343) (3,087,242) (1,349,010)
------------ ------------- -------------- ------------
Net income (loss) available to class A shareholders $ (48,155) $ 201,657 $ (2,234,783) $ 416,971
============ ============= ============== ============
Net income (loss) per common share - basic and
diluted
Loss before discontinued operations $ (0.14) $ (0.15) $ (0.99) $ (0.40)
Income from discontinued operations $ 0.13 $ 0.22 $ 0.29 $ 0.55
------------ ------------- -------------- ------------
Net income (loss) $ (0.01) $ 0.07 $ (0.70) $ 0.15
============ ============= ============== ============
Weighted average class A common shares used to
compute net income per share, basic and diluted 3,381,899 2,805,753 3,190,810 2,788,303
============ ============= ============== ============
See Notes to Consolidated Financial Statements.
F-2
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
YEAR TO DATE SEPTEMBER 30,
2004 2003
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Cash flows from operating activities:
Net income $ 852,459 $ 1,765,981
Adjustments to reconcile net income to net cash
provided by operating activities:
Investment in real estate acquired for resale (3,752,250) (7,233,069)
Proceeds from sales of real estate acquired for resale 5,107,975 4,227,067
Gain on sales of real estate acquired for resale (1,758,046) (516,663)
Gain on sales of real estate acquired for investment (84,624) -
Impairment charges 1,103,144 -
Depreciation and amortization 1,303,928 708,537
Amortization of deferred compensation 188,371 90,842
Minority interest in income of consolidated joint ventures 299,063 128,790
Deferred merger costs 1,681,870 -
Decrease (increase) in accounts receivable 168,830 (198,941)
Increase in accounts receivable- related party (1,086,487) (81,498)
Decrease in prepaid expenses, net 194,978 22,679
Cash receipts from direct financing leases
(less) more than income recognized (5,886) 9,319
Increase in accrued rental income (152,826) (159,278)
Increase in other assets (369,448) (192,906)
Increase in accounts payable 866,232 175,111
Increase (decrease) in accounts payable- related party 50,654 (181,467)
Increase in security deposits 190,103 -
Increase in prepaid rent 53,319 384
-------------- ---------------
Net cash provided by (used in) operating activities 4,851,358 (1,435,112)
-------------- ---------------
Cash flows from investing activities:
Improvements to real estate (697,958) (323,087)
Acquisition of investment properties (32,339,341) (4,163,689)
Notes receivable collections 155,684 -
Additions to furniture, fixtures and equipment (441,870) (44,717)
Investment in non-consolidated affiliates (1,452,427) 29,462
Proceeds from sale of investment property 1,709,219 -
Increase in preacquisition costs (149,119) (15,323)
-------------- ---------------
Net cash used in investing activities (33,215,812) (4,517,354)
-------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 33,984,193 11,160,758
Payments of notes payable (29,689,949) (6,438,719)
Purchase of treasury shares - (414,224)
Issuance of common shares 31,078,344 3,393,764
Issuance costs (3,735,779) (514,689)
Common dividends paid (3,092,206) (2,274,526)
Distributions to minority interests (76,118) (118,381)
-------------- ---------------
Net cash provided by financing activities 28,468,485 4,793,983
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 104,032 (1,158,483)
Cash and cash equivalents, beginning of period 2,031,440 2,506,868
-------------- ---------------
Cash and cash equivalents, end of period $ 2,135,472 $ 1,348,385
============== ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In 2004 the Company issued 134,695 shares of restricted stock to employees and trust managers
as as part of their compensation plan. The restricted stock vests over a four and three period
respectively.
The Company recorded $875,518 in deferred compensation related to the issuance of the restricted stock.
In 2004 the Company assumed $31,345,333 in debt related to the acquisition of investment properties.
In 2003 the Company issued 24,257 shares of restricted stock to employees and trust managers as
as part of their compensation plan. The restricted stock vests over a four and three period respectively.
The Company recorded $152,819 in deferred compensation related to the issuance of the restricted stock.
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 1,958,463 1,618,249
Income taxes 165,004 46,987
See Notes to Consolidated Financial Statements.
F-3
AMREIT AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT is a Texas real estate investment trust ("REIT") that has elected to be
taxed as a REIT for federal income tax purposes. AmREIT is a self-managed,
self-advised REIT which, along with its predecessor, has a 19-year history and a
record of investing in quality income producing retail real estate. AmREIT's
class A common shares are traded on the American Stock Exchange under the symbol
"AMY". AmREIT's business structure consists of the publicly traded REIT and
three synergistic businesses that support the Company's platform of growth: a
real estate operating and development business, a securities business and a
retail partnership business. This unique combination provides AmREIT the ability
to access capital through both Wall Street and the independent financial
planning marketplace and strategically invest that capital in high quality
properties for flexibility and more dependable growth.
We finance our growth and working capital needs with a combination of cash flows
from operations, equity offerings and a conservative debt philosophy. Currently,
the Company is raising capital through its Series D offering, a publicly
registered, non-traded common share offering, being offered exclusively through
the independent financial planning community. Our Class C common share offering
which was opened in August 2003 is fully subscribed. We have raised $40.8
million through such offering as of September 30, 2004, including shares issued
through the dividend reinvestment program. On June 25, 2004, the Company
launched its class D common share offering: a $170 million publicly registered,
non-traded common share offering with a stated yield of 6.5%, and is convertible
into the Company's class A common shares after a seven-year lock out period.
Through its by-laws, the Company's debt is limited to 55% recourse debt as
compared to its gross asset value.
Our operating strategy and investment criteria discussed herein are reviewed by
our Board of Trust Managers on a regular basis and may be modified or changed
without a vote of our shareholders.
PORTFOLIO
We focus on acquiring "irreplaceable corners" - premier retail frontage
properties in high-traffic, highly populated areas. These premium properties
provide high leasing income and high occupancy rates for a strong income stream.
As of September 30, 2004, the occupancy rate at our properties was 92% based on
leasable square footage. Our shopping center and single tenant properties
attract a wide array of established retail tenants, and offer attractive
opportunities for dependable monthly income and potential capital appreciation.
These properties are typically located in high traffic areas within a three-mile
radius of a population of 100,000 with an average household income of $70
thousand or more. On average, more than 30,000 cars per day pass by these
properties.
Our revenues are substantially generated by corporate retail tenants such as
International House of Pancakes ("IHOP"), Kroger, CVS/pharmacy, Starbucks,
Landry's, Eckerd, Nextel, Washington Mutual, TGI Friday's, Bank of America and
others. We own, and may purchase in the future, fee simple retail properties (we
own the land and the building), ground lease properties (we own the land, but
not the building and receive rental income from the owner of the building) or
leasehold estate properties (we own the building, but not the land, and
therefore are obligated to make a ground lease payment to the owner of the
land). AmREIT may also develop properties for its portfolio or enter into joint
ventures, partnerships or co-ownership for the development of retail properties.
F-4
AmREIT owns a real estate portfolio consisting of 57 properties located in 18
states at September 30, 2004. Our multi-tenant shopping center properties are
primarily located throughout Texas and are leased to national, regional and
local tenants. Our single tenant properties are located throughout the United
States and are generally leased to corporate tenants where the lease is the
direct obligation of the parent company, not just the local operator, and in
most other cases, our leases are guaranteed by the parent company. In so doing,
the dependability of the lease payments is based on the strength and viability
of the entire company, not just the leased location. Properties that we acquire
are generally newly constructed or recently constructed at the time of
acquisition.
REAL ESTATE OPERATING AND DEVELOPMENT COMPANY
AmREIT's real estate operating and development subsidiary, AmREIT Realty
Investment Corporation ("ARIC"), comprising a fully integrated real estate team,
provides brokerage, leasing, construction management, development and property
management services to our tenants as well as third parties. This operating
subsidiary, which is a taxable REIT subsidiary, compliments our portfolio of
retail properties by generating fee income from providing services to third
parties and affiliated funds, providing a high level of service to our tenants,
as well as maintaining our portfolio of properties to meet our standards.
Having an internal real estate group also helps secure strong tenant
relationships for both us and our retail partnerships. Our growing roster of
leases with well-known national and regional tenants includes Bank of America,
Starbucks, TGI Friday's, CVS/pharmacy, Nextel, Landry's, Eckerd, IHOP,
Washington Mutual, and others. Equally important, we have affiliations with
these parent company tenants that extend across multiple sites. Not only does
our real estate operating and development company create value through
relationships, but it also provides an additional source of fee income and
profits. Through the development, construction, management, leasing and
brokerage services provided to our affiliated actively managed retail
partnerships, as well as for third parties, our real estate team continues to
generate fees and profits for us. Through ARIC, we are able to generate
additional profits through the selective acquisitions and dispositions of
properties within twelve to eighteen months.
SECURITIES COMPANY
The part of our business structure and operating strategy that really separates
us from other publicly traded REITs is AmREIT Securities Company (ASC), a wholly
owned subsidiary of ARIC. Through ASC, we are able to raise capital through the
National Association of Securities Dealers (NASD) independent financial planning
community. Traditionally, we have raised capital in two ways: first, for our
actively managed retail partnerships, and second, directly for AmREIT through
non-traded classes of common shares.
During 2003, ASC raised approximately $15 million for AmREIT Monthly Income &
Growth Fund, Ltd., an affiliated retail partnership sponsored by a subsidiary of
AmREIT. Additionally, since August of 2003, ASC has raised approximately $40.8
million, including shares issued through the dividend reinvestment program,
directly for us through a class C common share offering. ASC is also the dealer
manager on our newest offering, a $170 million class D common share offering: a
publicly registered, non-traded common share receiving a stated 6.5% annual
dividend paid monthly. The class D common shares are non-preferred,
non-cumulative and can convert into the class A common shares at a 7.7% premium
on invested capital after a seven-year lock out period. As of September 30,
2004, we have raised $5.5 million through this offering. Since capital is the
lifeblood of any real estate company, having the unique opportunity to raise
capital through both Wall Street and the independent financial planning
community adds additional financial flexibility and dependability to our income
stream.
F-5
During the second quarter of 2004, the Company fully subscribed its class C
common share offering which it started in August 2003. The offering was a $44
million offering ($40 million offered to the public and $4 million reserved for
the dividend reinvestment program), issued on a best efforts basis through the
independent financial broker dealer community. The Company has primarily used
the proceeds for the acquisition of new properties and to pay down existing
debt. Since August 2003, the Company has issued approximately 4.08 million
shares (including shares issued through the dividend reinvestment program),
representing approximately $40.8 million in proceeds from selling class C
shares.
RETAIL PARTNERSHIPS
AmREIT has retail partnership subsidiaries that sell limited partnership
interests to retail investors, in which AmREIT indirectly invests both as a
general partner and as a limited partner. We wanted to create a structure that
aligns the interest of our shareholders with that of our unit holders. Through
our general partner subsidiaries, value is created for AmREIT through managing
money from the sponsored funds, and in return, receiving management fees and
profit participation interests.
AmREIT's retail partnerships are structured so that an affiliate, as the general
partner, receives a significant profit only after the limited partners in the
retail partnerships have received their targeted return, again, linking AmREIT's
success to that of its unit holders.
As of September 30, 2004, AmREIT directly managed, through its four actively
managed funds, over $46 million in equity. These four partnerships have entered
or will enter their liquidation phases in 2003, 2009, 2010, and 2011
respectively. As these partnerships enter into liquidation, we expect to receive
economic benefit from our profit participation, after certain preferred returns
have been paid to the partnership's limited partners. In accordance with
generally accepted accounting principles, unrealized gains associated with this
potential profit participation, if any, have not been reflected on our balance
sheet or statement of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and include all of
the disclosures required by accounting principles generally accepted in the
United States of America. The condensed consolidated financial statements
reflect all normal and recurring adjustments, which are, in the opinion of
management, necessary to present a fair statement of results for the nine month
periods ended September 30, 2004 and 2003.
The condensed consolidated financial statements of AmREIT contained herein
should be read in conjunction with the consolidated financial statements
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2003.
ACCOUNTING FOR REAL ESTATE ACQUISITIONS
As further discussed in Footnote 9, we have made significant acquisitions of
real estate during 2004. We account for such acquisitions pursuant to Statement
of Financial Accounting Standards No. 141, "BUSINESS COMBINATIONS". Accordingly,
we assess the fair value of the acquired assets (including land, building,
acquired above- and below-market leases and in-place leases, as-if-vacant
property value and tenant relationships) and acquired liabilities, and allocate
the purchase price based on these assessments. We determine fair value based on
estimated cash flow projections that utilize appropriate discount and
capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including the historical operating
results, known trends, and specific market and economic conditions that may
affect the property. Factors considered by management in our
F-6
analysis of determining the as-if-vacant property value include an estimate of
carrying costs during the expected lease-up periods considering current market
conditions, and costs to execute similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and other operating expenses
and estimates of lost rentals at market rates during the expected lease-up
periods, up to 12 months depending on the property location, tenant demand and
other economic conditions. Management also estimates costs to execute similar
leases including leasing commissions, tenant improvements, legal and other
related expenses.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts or revenues and expenses during
the reporting period. Actual results could differ from the those estimates.
REAL ESTATE HELD FOR SALE
AmREIT constantly evaluates its real estate portfolio, identifying those assets
that are non-core and no longer meet its investment objectives. Management has
identified two portfolio properties that are considered non-core and are listed
for sale. Management will continue to reassess its portfolio of real estate
assets and classify non-core assets as held for sale in the period in which such
decision is made.
Properties are classified as real estate held for sale if the properties were
purchased with the intent to sell the properties within twelve to eighteen
months or if the properties are listed for sale. Additionally, if management has
made the determination to dispose of an operating property, the associated
property is reclassified to real estate held for sale and depreciation is
ceased. An evaluation for impairment is also performed. At September 30, 2004,
AmREIT owned nine properties that are classified as real estate held for sale.
The nine properties have a combined carrying value of $9.7 million.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT and its
wholly or majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46"), which
was amended in December 2003 (FIN 46R). FIN 46R requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual return or both. The
interpretation requires disclosures about variable interest entities that a
company is not required to consolidate, but in which it has a significant
variable interest. The adoption of FIN 46R for small business issuers is
effective no later than December 31, 2004. Management's assessment of FIN 46R's
impact on the Company's financial statements is ongoing; however, management
preliminarily believes that FIN 46R will not have a material impact on our
consolidated financial position, results of operations, or cash flows.
RECLASSIFICATION
Certain amounts in the interim unaudited 2003 condensed consolidated financial
statements have been reclassified to conform to the presentation used in the
interim unaudited 2004 condensed consolidated financial statements. Such
reclassifications had no effect on previously reported net income or loss or
shareholders' equity.
F-7
3. NOTES PAYABLE
The Company has an unsecured credit facility (the "Credit Facility") in place
which is being used to provide funds for the acquisition of properties and
working capital. The Credit Facility matures in October 2005 and provides that
the Company may borrow up to $35 million subject to the value of unencumbered
assets. In October 2004, the Company renewed its Credit Facility on terms and
conditions substantially the same as the previous facility. The Credit Facility
contains covenants which, among other restrictions, require the Company to
maintain a minimum net worth, a maximum leverage ratio, maximum tenant
concentration ratios, specified interest coverage and fixed charge coverage
ratios and allow the lender to approve all distributions. Furthermore, the
Credit Facility contains concentration covenants and limitations, limiting
property level net operating income for any one tenant to no more than 15% (25%
for IHOP) of total property net operating income. On September 30, 2004, the
Company was in compliance with all financial covenants. The Credit Facility's
annual interest rate varies depending upon the Company's debt to asset ratio,
from LIBOR plus a spread of 1.40% to LIBOR plus a spread of 2.35%. As of
September 30, 2004, the interest rate was LIBOR plus 1.75%. As of September 30,
2004, $30.7 million was outstanding under the Credit Facility. The Company has
approximately $3.0 million available under its line of credit, subject to Lender
approval on the use of the proceeds.
4. CONCENTRATIONS
As of September 30, 2004, one property (Plaza in the Park located in Houston,
TX) accounted for approximately 20% of the Company's total assets; no other
single property accounted for more than 10% of total assets. Consistent with our
strategy of investing in areas that we know well, seventeen of our properties
are located in the Houston metropolitan area. These properties represent the
majority of our rental income for the nine months ended September 30, 2004.
Houston is Texas' largest city and the fourth largest city in the United States.
Following are the revenues generated by the Company's top tenants for the
quarter ended September 30, 2004. No other tenant represents greater than 5% of
such revenues:
% of Rental % of Total
($000'S) Revenue Revenue
-------- ----------- -----------
IHOP $563 16.1% 9.7%
Kroger 398 11.4% 6.8%
CVS/Pharmacy 235 6.8% 4.1%
5. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss) available to
class A shareholders by the weighted average number of class A common shares
outstanding. Diluted earnings per share is computed by dividing net income
available to class A common shareholders (as adjusted as necessary) by the
weighted average number of common shares outstanding plus the weighted average
number of potentially dilutive common shares. Diluted earnings per share
information is not applicable due to the anti-dilutive nature of the common
Class B, Class C and Class D shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
F-8
--------------------------------------------- ------------------------- ---------------------------
QUARTER YEAR TO DATE
--------------------------------------------- ------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
--------------------------------------------- ------------ ------------ ------------- -------------
EARNINGS PER SHARE
--------------------------------------------- ------------ ------------ ------------- -------------
Earnings (loss) to class A common
shareholders (in thousands) $(48) $ 202 $ (2,235) $ 417
--------------------------------------------- ------------ ------------ ------------- -------------
--------------------------------------------- ------------ ------------ ------------- -------------
Weighted average class A common shares
outstanding (in thousands) 3,382 2,806 3,191 2,788
--------------------------------------------- ------------ ------------ ------------- -------------
--------------------------------------------- ------------ ------------ ------------- -------------
Basic and diluted (loss) earnings per share * $(0.01) $0.07 $(0.70) $0.15
--------------------------------------------- ------------ ------------ ------------- -------------
--------------------------------------------- ------------ ------------ ------------- -------------
* The operating results for the nine months ended September 30, 2004 include a
charge to earnings of $1.7 million, respectively, which represents the market
value of the class A common shares issued to H. Kerr Taylor, our President and
CEO, related to the sale of his advisory company to AmREIT in 1998. The charge
was for the deferred merger cost due from this sale that was triggered by the
issuance of additional class C common shares. Additionally, these operating
results include an impairment charge of $1.1 million, which represents a
write-down in value of the vacant Wherehouse Entertainment property located in
Wichita, Kansas, which was sold during the second quarter. For additional
information see Footnote 6 - DISCONTINUED OPERATIONS.
6. DISCONTINUED OPERATIONS
The following is a summary of our discontinued operations (in thousands, except
for per share data):
Quarter Year to Date
------- ------------
2004 2003 2004 2003
---- ---- ---- ----
Rental revenue $ 72 $ 301 $ 389 $ 859
Earned income from direct financing leases 7 174 150 442
Interest and other income - - 639 1
Gain on sale of real estate held for resale 908 238 1,758 517
Gain on sale of real estate held for investment 85 - 85 -
General operating and administrative (27) (12) (177) (18)
Legal and professional (1) (3) (1) (4)
Depreciation and amortization - (23) (39) (99)
Income tax (580) - (580) -
Interest expense - (66) (41) (155)
Minority interest (39) - (159) -
Impairment charge - - (1,103) -
--------- ---------- ---------- -----------
Income from discontinued operations 425 609 921 1,543
========= ========== ========== ===========
Basic and diluted income from discontinued
operations per common share $ .13 $ 0.22 $ 0.29 $ 0.55
On June 21, 2004, the Company sold its Wherehouse Entertainment project located
in Wichita, Kansas. The Company recorded an impairment charge to earnings of
approximately $1.1 million in the second quarter to reflect the loss incurred
upon sale of the property following the bankruptcy of its sole tenant. After a
thorough remarketing during the quarter, the Company could not replace the
previously existing value and determined to sell the asset and redeploy the
remaining value into more productive investments.
Gain on real estate held for sale is a result of selling two properties, one
acquired in 2003 and one acquired in 2004, with the intent to resell after a
short holding period. Through ARIC, AmREIT actively seeks undervalued assets,
and after a short holding period and value creation, dispose of the asset and
capture the value created.
F-9
7. COMMITMENTS
The Company has signed a 63 month lease for office space. The lease commenced on
the occupancy date which was May 14, 2004. The annual rent will be $210
thousand. Rental expense for the nine months ended September 30, 2004 and 2003
was $109 thousand and $68 thousand, respectively.
8. SEGMENT REPORTING
The operating segments presented are the segments of AmREIT for which separate
financial information is available, and revenue and operating performance is
evaluated regularly by senior management in deciding how to allocate resources
and in assessing performance.
AmREIT evaluates the performance of its operating segments primarily on revenue.
Because the real estate development and operating segment and securities and
retail partnership segment are both revenue and fee intensive, management
considers revenue the primary indicator in allocating resources and evaluating
performance.
The portfolio segment consists of our portfolio of single and multi-tenant
shopping center projects. This segment consists of 57 properties located in 18
states. Expenses for this segment include depreciation, interest, minority
interest, legal cost directly related to the portfolio of properties and the
property level expenses. The consolidated assets of AmREIT are substantially all
in this segment. Additionally, substantially all of the increase in total assets
during the nine months ended September 30, 2004 occurred within the portfolio
segment. Included in Corporate and Other are those costs and expenses related to
general overhead and personnel that are not solely responsible for one of the
reporting segments.
Real estate Securities &
operating & retail Corporate
Portfolio Development Partnerships and Other Total
--------- ----------- ------------ --------- -----
Nine months ended September 30, 2004:
Revenue $ 7,698 $ 1,364 $ 5,579 $ 343 $14,984
Income from non- consolidated affiliates - - 240 - 240
Expenses (3,582) 36 (4,033) (6,031) (13,610)
Deferred merger cost - - - (1,682) (1,682)
-----------------------------------------------------------------
Net income (loss) before discontinued
operations 4,116 1,400 1,786 (7,370) (68)
Nine months ended September 30, 2003:
Revenue $ 4,472 $ 432 $ 1,482 $ 5 $ 6,391
Income from non-consolidated affiliates - - 92 - 92
Expenses (2,267) - (1,018) (2,975) (6,260)
-----------------------------------------------------------------
Net income (loss) before discontinued
operations 2,205 432 556 (2,970) 223
F-10
Real estate Securities &
operating & retail Corporate
Portfolio Development Partnerships and Other Total
--------- ----------- ------------ --------- -----
Three months ended September 30, 2004:
Revenue $ 3,487 $ 415 $ 1,877 $ 18 $ 5,797
Income from non- consolidated affiliates - - 54 - 54
Expenses (1,822) (60) (900) (2,374) (5,156)
-----------------------------------------------------------------
Net income (loss) before discontinued
operations 1,665 355 1,031 (2,356) 695
Three months ended September 30, 2003:
Revenue $ 1,531 $ 165 $ 857 $ 1 $ 2,554
Income from non-consolidated affiliates - - 7 - 7
Expenses (772) (11) (626) (1,103) (2,512)
-----------------------------------------------------------------
Net income (loss) before discontinued
operations 759 154 238 (1,102) 49
9. PROPERTY ACQUISITIONS AND DISPOSITIONS
On June 15, 2004, AmREIT acquired The Courtyard at Post Oak, consisting of a
4,013 square-foot, free standing building occupied by Verizon Wireless (NYSE:
VZ) and a 9,584 square-foot, multi-tenant shopping center occupied by Ninfa's
Restaurant and Dessert Gallery. The property is located at the northwest
intersection of Post Oak and San Felipe in Houston, Texas which is the heart of
the Uptown Houston area, the most significant retail corridor in the Greater
Houston area. The property was acquired for cash. The weighted average remaining
lease term for the project is 5.2 years.
On July 1, 2004, AmREIT acquired Plaza in the Park, a 129,955 square-foot Kroger
(NYSE: KR) anchored shopping center located on approximately 14.3 acres. The
property is located at the southwest corner of Buffalo Speedway and Westpark in
Houston, Texas. Plaza in the Park's Kroger is undergoing a 13,120 square-foot
expansion, and when completed, will be the largest Kroger grocery store in the
state. The property was acquired for cash and the assumption of long-term fixed
rate debt. The weighted average remaining lease term for the project is 9.2
years. The Kroger lease is for 20 years, containing approximately 71,000 square
feet, expiring in August 2017. The shopping center was 97 percent occupied on
the date of acquisition.
On July 1, 2004, AmREIT acquired Cinco Ranch Plaza, a 97,297 square-foot Kroger
(NYSE: KR) anchored shopping center located on approximately 12.8 acres. The
property is located at the northeast corner of Mason Road and Westheimer Parkway
in Katy, Texas. The property was acquired for cash and the assumption of
long-term fixed rate debt. The weighted average remaining lease term for the
project is 14 years. The Kroger lease is for 20 years, containing approximately
63,000 square-feet, expiring in June 2023. The shopping center was 100 percent
occupied on the date of acquisition
On July 21, 2004, AmREIT acquired Bakery Square Shopping Center, a 34,704
square-foot retail project including a free standing Walgreen's and a shopping
center anchored by Bank of America (NYSE:BOA). This is an infill property
located just west of downtown Houston and includes other national tenants such
as T-Mobile, Blockbuster Video and Boston Market. The property was acquired for
cash and the assumption of long-term fixed rate debt. The weighted average
remaining lease term for the shopping center is 4.9 years. The Walgreen's lease
is for 60 years and will expire in October 2056. The shopping center was 100
percent occupied on the date of acquisition.
On July 21, 2004, AmREIT sold the IHOP property located in Grand Prairie, Texas.
The project was sold to an unaffiliated buyer for cash. The project generated
approximately $202 thousand in annual rental income from operating leases and
earned income from direct financing leases, and was sold for a profit of
approximately $800 thousand.
Following is a summary of assets acquired and liabilities assumed in conjunction
with the acquisitions consummated during the quarter ended September 30, 2004 as
described above:
F-11
Summary of Assets Acquired and Liabilities Assumed
(In Thousands)
Assets
Buildings $31,423
Tenant improvements 2,207
Land 20,215
In-place above-market leases 171
Intangible lease costs 4,280
-------------
TOTAL ASSETS 58,296
=============
Liabilities
In-place below-market leases 378
Debt 32,150
TOTAL LIABILITIES 32,528
-------------
Net assets acquired $25,768
-------------
The results of operations for each of the acquisitions described above
have been included in our results of operations from the date of acquisition
through the end of the reporting period. The allocations of purchase price above
are preliminary and are therefore subject to change because certain items such
as the determination of the fair value of the assets and liabilities as of the
respective acquisition dates have not been finalized.
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
Certain information presented in this Form 10-QSB constitutes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in these forward-looking statements are
based upon reasonable assumptions, the Company's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference include the following: changes in
general economic conditions, changes in real estate market conditions, continued
availability of proceeds from the Company's debt or equity capital, the ability
of the Company to locate suitable tenants for its properties and the ability of
tenants to make payments under their respective leases.
The condensed consolidated financial statements of AmREIT and the following
discussion contained herein should be read in conjunction with the consolidated
financial statements and discussion included in the Company's annual report on
Form 10-KSB for the year ended December 31, 2003. Historical results and trends
which might appear should not be taken as indicative of future operations.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. Historical results and trends which
might appear should not be taken as indicative of future operations.
EXECUTIVE OVERVIEW
AmREIT (AMEX: AMY) is a rapidly growing, self-managed and self-advised REIT with
a 19-year history of delivering results to its investors. Its business model
consists of a publicly traded REIT with a portfolio of irreplaceable corners
that is supported by three synergistic businesses - a real estate operating and
development business, NASD-registered broker dealer securities business and a
retail partnership business. This unique structure gives AmREIT access to the
intellectual and financial capital required to support a rapid growth platform.
Operated as a wholly owned subsidiary, AmREIT's real estate operating and
development business focuses on the development, acquisition, management,
brokerage and ownership of high quality commercial retail real estate to
generate monthly income and growth for our investors. The Company's in-house
NASD-registered securites group gives the company direct access to the
independent financial planning market, broadening AmREIT's avenues to raise
capital. The retail partnership business combines the skills of our real estate
team and our securities group to actively acquire and develop high quality
properties, creating potential for increasing income and capital appreciation by
opportunistically selling the properties within a defined time horizon.
The self-managed REIT focuses on the acquisition and development of
"irreplaceable corners" - premier retail frontage properties in high-traffic,
highly populated areas - to hold for long-term value. These properties are
leased to tenants located in high-end multi-tenant shopping centers, grocery
anchored centers and regional and national single tenants. AmREIT's retail
partnership business incorporates an "active management" strategy to acquire,
develop and sell high quality free-standing and shopping center properties to
create shorter-term added value.
AmREIT's goal is to deliver increasing, dependable, monthly income for its
shareholders. In so doing, AmREIT strives to increase and maximize Funds From
Operations ("FFO") by issuing long term capital through both the NASD
independent financial planning marketplace as well as through Wall Street, and
investing the capital in accretive real estate properties, acquired or
developed, on irreplaceable corners. Additionally, we strive to maintain a
conservative balance sheet. In that regard, our by-laws limit our debt to 55%
recourse debt as compared to our gross asset value.
F-13
At September 30, 2004, AmREIT owned a portfolio of 57 properties located in 18
states, subject to long term leases with retail tenants, either directly or
through its interests in joint ventures or partnerships. Nine of the properties
are multi-tenant and represent approximately 57% of 2004 annualized rental
income. Forty eight of the properties are single tenant properties, and
represent approximately 43% of 2004 annualized rental income. In assessing the
performance of the Company's properties, management evaluates the occupancy of
the Company's portfolio. Occupancy for the total portfolio was 92% based on
leaseable square footage as of September 30, 2004. A core strategy has been to
continue to increase the multi-tenant properties in the Company's portfolio,
with a goal of over half of the rental income being generated by multi-tenant
properties. With acquisitions made during the quarter, we have achieved this
goal. With the continued downward pressure on single tenant cap rates, resulting
in higher priced real estate, management anticipates the continued effort of
strategically increasing its holdings of multi-tenant shopping centers.
Management intends to increase total assets from $101 million as of December 31,
2003 to approximately $200 million at the end of 2004. The Company purchased
approximately $58 million of property during the quarter, resulting in total
assets of approximately $167 million, which is an increase in total assets of
approximately 65% since December 31, 2003 (see Footnote 9).
Management intends to fund future acquisitions and development projects through
a combination of equity offerings and debt financing. The Company has raised
approximately $5.5 million and $31.5 million for the three and nine months ended
September 30, 2004, respectively. During the fourth quarter 2004, management
expects to raise additional capital through its class D common share offering of
$22 million to $25 million, which will be used for property acquisitions and the
repayment of debt.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The results of operations and financial condition of the Company, as reflected
in the accompanying financial statements and related footnotes, are subject to
management's evaluation and interpretation of business conditions, retailer
performance, changing capital market conditions and other factors, which could
affect the ongoing viability of the Company's tenants. Management believes the
most critical accounting policies in this regard are the accounting for lease
revenues (including the straight line rent), the regular evaluation of whether
the value of a real estate asset has been impaired and the allowance for
doubtful accounts. We evaluate our assumptions and estimates on an on-going
basis. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable based on the circumstances.
RENTAL INCOME RECOGNITION - In accordance with US generally accepted accounting
principles, the Company accounts for rental income under the straight line
method, whereby we record rental income based on the average of the total rent
obligation due under the primary term of the lease. Certain leases contain a
provision for percentage rent. Percentage rent is recorded in the period when
the Company can reasonably calculate the amount of percentage rent owed, if any.
Generally, the Company records percentage rent in the period in which the
percentage rent payment is made, and can thereby be calculated and verified. For
the nine months ended September 30, 2004, the Company collected and recorded
percentage rent from tenants of $65 thousand.
REAL ESTATE VALUATION - Real estate assets are stated at cost less accumulated
depreciation, which, in the opinion of management, is not in excess of the
individual property's estimated undiscounted future cash flows, including
estimated proceeds from disposition. Depreciation is computed using the
straight-line method, generally over estimated useful lives of 39 years for
buildings and over the primary term of the lease for tenant improvements. Major
replacements that extend the life of the property or enhance the value of the
property are capitalized and the replaced asset and corresponding accumulated
depreciation are removed. All other maintenance items are charged to expense as
incurred.
F-14
Upon the acquisition of real estate projects, the Company assesses the fair
value of the acquired assets (including land, building, acquired above- and
below-market leases and in-place leases, as-if-vacant property value and tenant
relationships) and acquired liabilities, and allocates the purchase price based
on these assessments. The Company assesses fair value based on estimated cash
flow projections that utilize appropriate discount and capitalization rates and
available market information. Estimates of future cash flows are based on a
number of factors including the historical operating results, known trends, and
specific market and economic conditions that may affect the property. Factors
considered by management in our analysis of determining the as-if-vacant
property value include an estimate of carrying costs during the expected
lease-up periods considering current market conditions, and costs to execute
similar leases. In estimating carrying costs, management includes real estate
taxes, insurance and other operating expenses and estimates of lost rentals at
market rates during the expected lease-up periods, up to 12 months depending on
the property location, tenant demand and other economic conditions. Management
also estimates costs to execute similar leases including leasing commissions,
tenant improvements, legal and other related expenses.
Costs incurred in the development of new operating properties, including
preacquisition costs directly identifiable with the specific project,
development and construction costs, interest and real estate taxes are
capitalized into the basis of the project. The capitalization of such costs
ceases when the property, or any completed portion, becomes available for
occupancy.
AmREIT's properties are reviewed for impairment if events or changes in
circumstances indicate that the carrying amount of the property may not be
recoverable. In such an event, a comparison is made of the current and projected
operating cash flows of each such property on an undiscounted basis, plus the
residual value of the property upon disposition, to the carrying value of such
property. The carrying value would then be adjusted, if needed, to estimate the
fair value to reflect an impairment in the value of the asset. There were no
triggering events or changes in circumstances during the quarter that caused
management to determine that the value of its properties may not be recoverable.
VALUATION OF RECEIVABLES - An allowance for the uncollectible portion of accrued
rents, property receivables and accounts receivable is determined based upon an
analysis of balances outstanding, historical payment history, tenant credit
worthiness, additional guarantees and other economic trends. Balances
outstanding include base rents, tenant reimbursements and receivables attributed
to the accrual of straight line rents. Additionally, estimates of the expected
recovery of pre-petition and post-petition claims with respect to tenants in
bankruptcy are considered in assessing the collectibility of the related
receivables. The Company maintains a receivable related to Wherehouse
Entertainment of approximately $126 thousand. Based on discussions with
Wherehouse Entertainment and Blockbuster Entertainment Corporation, the
guarantor of the lease, and legal proceedings involving Wherehouse Entertainment
and Blockbuster Entertainment Corporation, the Company believes this receivable
is collectable and should be collected during 2004.
LIQUIDITY AND CAPITAL RESOURCES
Until properties are acquired by the Company, the Company's funds are held in
short-term, highly liquid investments which the Company believes to have
appropriate safety of principal. This investment strategy has allowed, and
continues to allow, high liquidity to facilitate the Company's use of these
funds to acquire properties at such time as properties suitable for acquisition
are located. At September 30, 2004, the Company's cash and cash equivalents
totaled $2.1 million.
Cash flows from operating activities, investing activities, and financing
activities for the nine months ended September 30, 2004 and 2003 are presented
below (in thousands):
F-15
2004 2003
-------------------------------
Operating activities $4,851 $ (1,435)
Investing activities (33,216) (4,517)
Financing activities 28,468 4,794
Cash flows from operating activities and financing activities have been the
principal sources of capital to fund the Company's ongoing operations and
dividends. As AmREIT deploys the capital raised, and expected to be raised from
its equity offerings, into income producing real estate, we anticipate that cash
flow from operations will provide adequate resources for future ongoing
operations and dividends. AmREIT's cash on hand, internally-generated cash flow,
borrowings under our existing credit facilities, issuance of equity securities,
as well as the placement of secured debt and other equity alternatives, is
expected to provide the necessary capital to maintain and operate our properties
as well as execute and achieve our growth strategies.
As part of its investment strategy, AmREIT constantly evaluates its property
portfolio, systematically selling any non-core or underperforming assets, and
replacing them with "irreplaceable corners" and other core assets. As AmREIT
continues to raise capital, it anticipates growing and increasing its cash flow
provided by operating activities by selling the underperforming assets and
deploying its capital into high-quality income producing retail real estate
assets. During the third quarter 2004, this was evidenced through the purchase
of Plaza in the Park, a 130 thousand square foot multi-tenant grocery anchored
shopping center, Cinco Ranch Plaza, a 97 thousand square foot multi-tenant
grocery anchored shopping center and Bakery Square, a 35 thousand square foot
multi-tenant shopping center. The Company has an executed sales contract for the
vacant Just For Feet property located in Tucson, Arizona that is anticipated to
close during the fourth quarter 2004. Management is evaluating the market
conditions, including determining the depth of the local real estate and leasing
market, for the vacant Just For Feet property located in Baton Rouge, Louisiana.
Management expects to determine during the fourth quarter of 2004 whether the
Company will begin re-developing the property or marketing it for sale.
AmREIT has begun to market its class D common share offering, a $170 million
common share offering, offered through the independent financial planning
community. The class D common shares have a stated, non-preferred 6.5% annual
dividend, paid monthly, are eligible for conversion into the Company's class A
common shares at any time after a seven-year lock out period for a 7.7% premium
on invested capital and are callable by the Company after one year. The Company
will utilize the proceeds from the sale of the class D shares primarily to pay
down debt or acquire additional properties. At September 30, 2004, the Company
had raised approximately $5.5 million through the sale of the class D common
shares.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO SEPTEMBER 30, 2003
Cash provided by operating activities as reported in the Consolidated Statements
of Cash Flows increased $6.3 million for the nine months ended September 30,
2004 when compared to the nine months ended September 30, 2003. Investment in
real estate acquired for resale decreased by $3.5 million. Proceeds from sales
of real estate acquired for resale increased by $881 thousand primarily due to
the sale of the IHOP property located in Grand Prairie, Texas. This property was
sold in September to an unaffiliated buyer for a profit.
Cash flows used in investing activities as reported in the Consolidated
Statements of Cash Flows increased from $4.5 million in the first nine months of
2003 to $33.2 million in the first nine months of 2004. Cash flows used in
investing activities has been primarily related to the acquisition or
development of retail properties. During the first nine months of 2004, AmREIT
purchased The Courtyard at Post Oak, consisting of a free standing building
occupied by Verizon Wireless and a multi-tenant center occupied by Ninfa's
Restaurant and Dessert Gallery, Plaza
F-16
in the Park, a 130 thousand square foot Kroger anchored shopping center, Cinco
Ranch Plaza, a 97 thousand square foot Kroger anchored shopping center and
Bakery Square, a 35 thousand square foot retail project including a free
standing Walgreen's and a shopping center anchored by Bank of America. The
investment was funded through a combination of capital raised through the class
C common share offering and debt financing.
Cash flows provided by financing activities increased from $4.8 million through
September 30, 2003 to $28.5 million through September 30, 2004. Cash flows
provided by financing activities were primarily generated from our class C and D
common share offerings. AmREIT fully subscribed its class C commons share
offering during the second quarter. 100% of the net proceeds have been used to
purchase irreplaceable corners. AmREIT has begun to market its class D common
share offering, a $170 million common share offering, offered through the
independent financial planning community, and through September 30, 2004 had
raised approximately $5.5 million in proceeds. One advantage of raising capital
through the independent financial planning marketplace is the capital is
received on a monthly basis, allowing for a scaleable matching of real estate
projects. Our first priority is to deploy the capital raised, and then to
moderately leverage the capital, while maintaining our philosophy of a
conservative balance sheet.
The Company has an unsecured credit facility (the "Credit Facility") in place
which is being used to provide funds for the acquisition of properties and
working capital. The Credit Facility matures in October 2005 and provides that
the Company may borrow up to $35 million subject to the value of unencumbered
assets. In October 2004, the Company renewed its Credit Facility on terms and
conditions substantially the same as the previous facility. The Credit Facility
contains covenants which, among other restrictions, require the Company to
maintain a minimum net worth, a maximum leverage ratio, maximum tenant
concentration ratios, specified interest coverage and fixed charge coverage
ratios and allow the lender to approve all distributions. At September 30, 2004,
the Company was in compliance with all financial covenants. The Credit
Facility's annual interest rate varies depending upon the Company's debt to
asset ratio, from LIBOR plus a spread of 1.40% to LIBOR plus a spread of 2.35%.
As of September 30, 2004, the interest rate was LIBOR plus 1.75%. As of
September 30, 2004, $30.7 million was outstanding under the Credit Facility. The
Company has approximately $3.0 million available under its line of credit,
subject to Lender approval on the use of the proceeds. In addition to the credit
facility, AmREIT utilizes various permanent mortgage financing and other debt
instruments. As of September 30, 2004, the Company had the following contractual
debt obligations:
2004 2005 2006 2007 2008 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Unsecured debt:
Revolving credit facility $ 30,653 $ - $ - $ - $ - $ - $ 30,653
5.46% dissenter notes - - - - - 760 760
Secured debt 280 1,197 1,276 1,360 1,450 47,929 53,492
Non-cancelable operating lease
payments 79 210 210 210 210 123 1,042
-------- ------- ------- ------- ------- ------- --------
Total contractual obligations $ 31,012 $ 1,407 $ 1,486 $ 1,570 $ 1,660 $48,812 $ 85,947
======== ======= ======= ======= ======= ======= ========
In order to continue to expand and develop its portfolio of properties and other
investments, the Company intends to finance future acquisitions and growth
through the most advantageous sources of capital available at the time. Such
capital sources may include proceeds from public or private offerings of the
Company's debt or equity securities, secured or unsecured borrowings from banks
or other lenders, acquisitions of the Company's affiliated entities or other
unrelated companies, or the disposition of assets, as well as undistributed
funds from operations.
For the quarters ended September 30, 2004 and 2003, the Company paid dividends
to its shareholders of $1.6
F-17
million, and $765 thousand respectively. The class A, class C and class D
shareholders receive monthly dividends and the class B shareholders receive
quarterly dividends. All dividends are declared on a quarterly basis. The
dividends by class follow (in thousands):
Class A Class B Class C Class D
2004
Third quarter $410 $425 $710 $33
Second quarter $383 $429 $677 N/A
First quarter $345 $434 $379 N/A
2003
Third quarter $308 $443 $14 N/A
Second quarter $310 $439 N/A N/A
First quarter $307 $453 N/A N/A
INFLATION
Inflation has had very little effect on income from operations. Management
expects that increases in store sales volumes due to inflation as well as
increases in the Consumer Price Index (C.P.I.), may contribute to capital
appreciation of the Company properties. These factors, however, also may have an
adverse impact on the operating margins of the tenants of the properties.
FUNDS FROM OPERATIONS
AmREIT considers FFO to be an appropriate measure of the operating performance
of an equity REIT. The National Association of Real Estate Investment Trusts
(NAREIT) defines FFO as net income or loss computed in accordance with generally
accepted accounting principles (GAAP), excluding gains from sales of property
held for investment, plus real estate related depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures. In
addition, NAREIT recommends that extraordinary items not be considered in
arriving at FFO. AmREIT calculates its FFO in accordance with this definition.
Most industry analysts and equity REITs, including AmREIT, consider FFO to be an
appropriate supplemental measure of operating performance because, by excluding
gains or losses on dispositions and excluding depreciation, FFO is a helpful
tool that can assist in the comparison of the operating performance of a
company's real estate between periods, or as compared to different companies.
There can be no assurance that FFO presented by AmREIT is comparable to
similarly titled measures of other REITs. FFO should not be considered as an
alternative to net income or other measurements under GAAP as an indicator of
our operating performance or to cash flows from operating, investing or
financing activities as a measure of liquidity.
Below is the calculation of FFO and the reconciliation to net income, which the
Company believes is the most comparable GAAP financial measure to FFO, in
thousands for the three and nine months ended September 30:
F-18
QUARTER YEAR TO DATE
------- ------------
2004 2003 2004 2003
--------------------------------------------------
Income (loss) before discontinued operations $695 $ 50 $ (68) $223
Income from discontinued operations 425 609 921 1,543
Plus depreciation of real estate assets - from operations 736 193 1,224 544
Plus depreciation of real estate assets - from discontinued - 22 38 98
operations
Less gain on sales of real estate acquired for investment (85) - (85) -
Less class B, class C and class D distributions (1,168) (457) (3,087) (1,349)
--------------------------------------------------
Total Funds From Operations available to class A
shareholders * $603 417 (1,057) $1,059
Cash dividends paid to class A shareholders 410 $308 $1,138 $926
Dividends (in excess of) less than FFO * $192 $109 $(2,195) $133
* Pursuant to the NAREIT definition of FFO, we have not added back the $1.7
million charge to earnings for the nine months ended September 30, 2004,
resulting from shares issued to Mr. Taylor. Additionally, we have not added back
the $1.1 million charge to earnings for the nine months ended September 30,
2004, resulting from an asset impairment and corresponding write-down of value.
Adding these charges back to earnings would result in adjusted funds from
operations available to class A shareholders of $1.7 million for the nine months
ended September 30, 2004. Adding the charge to earnings would also result in
dividends paid being less than adjusted FFO of $590 thousand for the nine months
ended September 30, 2004.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 TO SEPTEMBER 30, 2003:
Rental revenue and earned income from direct financing leases increased by 128%,
or $2.0 million, for the three months ended September 30, 2004 when compared to
the three months ended September 30, 2003. This increase was primarily related
to the following acquisitions which were made prior to September 30, 2004:
Uptown Plaza, Courtyard at Post Oak, Plaza in the Park, Cinco Ranch Plaza and
Bakery Square.
Securities commission income increased by $995 thousand for the three months
ended September 30, 2004 when compared to 2003. This increase in securities
commission income is due to increased capital being raised through our broker
dealer company, AmREIT Securities Company (ASC). As ASC raises capital for
either AmREIT or its affiliated retail partnerships, ASC earns a securities
commission of between 8% and 10.5% of the money raised. During the third quarter
of 2004, AmREIT and its affiliated retail partnerships raised approximately
$16.7 million, as compared to approximately $7.5 million during the third
quarter of 2003. This increase in commission income is somewhat mitigated by a
corresponding increase in commission expense paid to other third party broker
dealer firms. Commission expense increased by $766 thousand for the three months
ended September 30, 2004 compared to the three months ended September 30, 2003.
General and operating expense for the three months ended September 30, 2004
increased $1.2 million when compared to 2003. The increase in general and
operating expense is primarily due to an increase in property expense due to the
Just For Feet properties and the additional personnel and the associated salary
and benefits costs related to these individuals. By building our various teams,
we have not only been able to grow revenue and Funds from Operations, but
believe that we will be able to sustain and further enhance our growth.
Compensation expense increased $548 thousand in the three months ended September
30, 2004 as compared to the three months ended September 30, 2003.
Depreciation and amortization increased from $194 thousand to $749 thousand in
the three months ended
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September 30, 2004. The increase was attributable to the depreciation and
amortization recorded on the acquisitions consummated during 2004 as described
above, the majority of which were purchased early in July 2004. Additionally,
interest expense increased from $532 thousand to $1.0 million in the three
months ended September 30, 2004. This increase represents additional interest
cost on debt assumed in conjunction with the acquisitions as well as on
additional borrowings under our credit facility to finance such acquisitions.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO SEPTEMBER 30, 2003:
Rental revenue and earned income from direct financing leases increased by 72%,
or $3.2 million for the nine months ended September 30, 2004 when compared to
the nine months ended September 30, 2003. This increase was primarily related to
the following acquisitions which were made prior to September 30, 2004: Uptown
Plaza, Courtyard at Post Oak, Plaza in the Park, Cinco Ranch Plaza and Bakery
Square.
Securities commission income increased by $4.0 million, from $1.3 million in
2003 to $5.3 million in 2004. This increase in securities commission income is
due to increased capital being raised through our broker dealer company, AmREIT
Securities Company (ASC). As ASC raises capital for either AmREIT or its
affiliated retail partnerships, ASC earns a securities commission of between 8%
and 10.5% of the money raised. During the nine months ended September 30, 2004,
AmREIT and its affiliated retail partnerships raised approximately $50.1
million, as compared to approximately $12.6 million during the nine months ended
September 30, 2003. This increase in commission income is somewhat mitigated by
a corresponding increase in commission expense paid to other third party broker
dealer firms. Commission expense increased by $3.1 million, from $1.0 million in
2003 to $4.1 million in 2004.
Real estate fee income increased by $932 thousand, from $432 thousand in 2003 to
$1.4 million in 2004. This increase in real estate fee income was primarily
attributable to development fees earned on real estate development projects
which began during 2004.
Interest and other income increased by $339 thousand, from 5 thousand in 2003 to
$343 thousand in 2004. This increase was primarily due to the $296 thousand
lease buyout/sale of a receivable claim related to the bankruptcy of Footstar.
General and operating expense increased $2.67 million, from $2.4 million in 2003
to $5.1 million in 2004. This increase in general and operating expense is
primarily due to an increase in property expense due to the Just For Feet
properties, increase in legal and accounting fees and the addition of personnel
and the associated salary and benefit costs related to these individuals.
Compensation expense increased $1.3 million in the nine months ended September
30, 2004 as compared to the nine months ended September 30, 2003. By building
our various teams, we have not only been able to grow revenue and Funds from
Operations, but believe that we will be able to sustain and further enhance our
growth.
Depreciation and amortization increased from $550 thousand to $1.3 million in
the nine months ended September 30, 2004. The increase was attributable to the
depreciation and amortization recorded on the acquisitions consummated during
2004 as described above. Additionally, interest expense increased from $1.6
million to $2.2 million in the nine months ended September 30, 2004. This
increase represents additional interest cost on debt assumed in conjunction with
the acquisitions as well as on additional borrowings under our credit facility
to finance such acquisitions.
Deferred merger costs increased from $0 in 2003 to $1.7 million in the nine
months ended September 30, 2004. The deferred merger cost is related to deferred
consideration payable to Mr. Taylor as a result of the acquisition of our
advisor, which was owned by Mr. Taylor in 1998. In connection with the
acquisition, Mr. Taylor agreed to
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payment for this advisory company in the form of common shares, paid as the
Company increases its outstanding equity. To date, Mr. Taylor has received 900
thousand class A common shares, which fulfills the shares that he is owed under
the deferred consideration agreement, and no further shares will be issued to
Mr. Taylor pursuant to the deferred consideration agreement.
F-21
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Securities Exchange Act
Rule 13a-15. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective as of the end of the period covered by this report. There has been
no change in the Company's internal control over financial reporting that
occurred during the period covered by this report that has 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
NONE
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Chief Executive Officer Section 302 Certification
31.2 Chief Financial Officer Section 302 Certification
32.1 Chief Executive Officer certification pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to 18
U.S.C Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current report on Form 8-K dated and filed with the Commission
on August 11, 2004 contained information under Item 7 (Financial
Statements, Pro Forma Financial Information and Exhibits) and
Item 12 (Regulation FD Disclosure).
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Current report on Form 8-K dated and filed with the Commission
on September 9, 2004 contained information under Item 7.01
(Regulation FD Disclosure) and Item 9.01 (Financial Statements
and Exhibits).
Current report on Form 8-K dated and filed with the Commission
on September 14, 2004 contained information under Item 2.01
(Completion of Acquisition or Disposition of Assets) and Item
9.01 (Financial Statements and Exhibit).
F-23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AMREIT
--------------------------------------------
(Issuer)
November 12, 2004 /s/ H. Kerr Taylor
----------------- ------------------
Date H. Kerr Taylor, President
November 12, 2004 /s/ Chad C. Braun
----------------- -----------------
Date Chad C. Braun (Principal Accounting Officer)
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