UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
____X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 0-28378
AMREIT, INC.
(Exact Name of Registrant as Specified In Its Charter)
MARYLAND 76-0410050
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
8 GREENWAY PLAZA, SUITE 824, HOUSTON, TX 77046
(Address of Principal Executive Offices) (Zip Code)
(713) 850-1400
(Registrant's Telephone Number, Including Area 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of November 13, 2002, there were 2,768,471.277 shares of Class A Common
Stock, $0.01 par value outstanding and 2,544,741 shares of Class B Common Stock,
$0.01 par value outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2002
(Unaudited)
September 30, 2002 December 31, 2001
ASSETS
Property:
Land $ 19,046,526 $ 13,136,693
Buildings 32,169,632 17,312,379
Furniture, fixtures and equipment 289,456 276,953
-------------- --------------
51,505,614 30,726,025
Accumulated depreciation (2,198,836) (2,066,067)
-------------- --------------
Total property, net 49,306,778 28,659,958
-------------- --------------
Net investment in direct financing leases 22,356,174 7,007,277
Cash and cash equivalents 751,019 227,117
Accounts receivable 61,527 671,392
Escrow deposits 82,564 81,545
Prepaid expenses, net 261,569 252,868
Other assets:
Preacquisition costs 387 209,200
Loan acquisition cost, net 278,283 268,837
Accrued rental income 428,057 469,260
Investment in non-consolidated subsidiary 699,129 980,939
-------------- --------------
Total other assets 1,405,856 1,928,236
-------------- --------------
TOTAL ASSETS $ 74,225,487 $ 38,828,393
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 33,634,770 $ 16,971,549
Accounts payable 861,936 1,395,607
Security deposit 33,930 32,123
-------------- --------------
TOTAL LIABILITIES 34,530,636 18,399,279
-------------- --------------
Minority interest 629,845 5,075,333
Shareholders' equity:
Preferred stock, $.01 par value,
10,001,000 shares authorized, none issued - -
Class A Common stock, $.01 par value,
100,010,000 shares authorized,
2,702,242 shares issued 27,022 23,841
Class B Common stock, $.01 par value,
3,000,000 shares authorized,
2,580,234 shares issued 25,802 -
Capital in excess of par value 47,313,787 21,655,867
Accumulated distributions in
excess of earnings (7,976,256) (6,037,757)
Deferred compensation (220,811) -
Cost of treasury stock, 19,471 shares (104,538) (288,170)
------------- --------------
TOTAL SHAREHOLDERS' EQUITY 39,065,006 15,353,781
------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $74,225,487 $ 38,828,393
============= ==============
See Notes to Consolidated Financial Statements.
Page 2
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Quarter Year to date
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Rental income from operating leases $ 1,085,083 $ 664,778 $ 2,469,437 $ 1,960,883
Earned income from direct financing leases 594,429 151,615 1,222,780 467,936
Service fees and other income 776,877 264,919 1,985,466 1,927,314
Gain on sale of property (37,061) - (37,061) 168,916
Interest income 542 3,384 2,595 6,435
------------ ------------ ------------ ------------
Total revenues 2,419,870 1,084,696 5,643,217 4,531,484
------------ ------------ ------------ ------------
Expenses:
General operating and administrative 648,849 481,187 1,894,836 1,334,256
Legal and professional 365,400 101,379 694,861 752,204
Interest 519,665 264,232 1,183,345 829,343
Depreciation 241,275 118,025 494,945 345,142
Merger Costs - Partnership - 93,511 - 93,511
Deferred acquisition costs 1,904,370 - 1,904,370 -
------------ ------------ ------------ -----------
Total expenses 3,679,559 1,058,334 6,172,357 3,354,456
------------ ------------ ------------ -----------
Income before federal income taxes and minority
interest in net income of consolidated joint
ventures (1,259,689) 26,362 (529,140) 1,177,028
Federal income tax expense for taxable REIT
subsidiary 75,000 - 90,000 -
Minority interest in net income of
consolidated joint ventures (35,339) (131,922) (307,284) (395,458)
------------ ------------ ------------ -----------
Net (loss) income $(1,370,028) $ (105,560) $ (926,424) $ 781,570
============ ============ ============ ===========
Basic earnings per share:
Income (loss) before deferred acquisition costs $ 0.22 $ (0.04) $ 0.41 $ 0.33
Net (loss) income $ (0.57) $ (0.04) $ (0.39) $ 0.33
============ ============ ============ ===========
Weighted average number of common shares outstanding 2,412,544 2,354,349 2,376,569 2,357,685
============ ============ ============ ===========
Diluted earnings per share:
Income (loss) before deferred acquisition costs $ 0.12 $ (0.04) $ 0.32 $ 0.33
Net (loss) income $ (0.31) $ (0.04) $ (0.30) $ 0.33
============ ============ ============ ===========
Weighted average number of common shares outstanding
plus dilutive potential common shares 4,384,784 2,354,349 3,041,207 2,357,685
============ ============ ============ ===========
See Notes to Consolidated Financial Statements.
Page 3
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Quarter Year to Date
2002 2001 2002 2001
------------- ------------ ----------- -----------
Cash flows from operating activities:
Net (loss) income $ (1,370,028) $ (105,560) $ (926,424) $ 781,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of property - - - (168,916)
Depreciation 241,275 118,025 494,945 345,142
(Increase) decrease in accounts receivable (26,890) 18,615 609,865 217,674
Decrease (increase) in prepaid expense 49,719 14,624 (8,701) (67,719)
Increase (decrease) in accounts payable 255,758 9,702 (533,671) (127,979)
Cash receipts from direct financing leases
less than income recognized (81,282) (8,626) (158,047) (23,471)
Increase in escrow deposits, net of
minority interest partners - 5,000 - -
Increase in accrued rental income (14,683) (23,926) (35,900) (66,500)
Decrease in prepaid rent (7,438) - - -
Increase in security deposits 16,857 - 1,807 -
Decrease (increase) in other assets 105,554 (1,212) (1,019) (5,312)
Increase in deferred compensation (141,810) - (220,811) -
Increase in minority interest 35,339 131,922 307,284 395,458
------------- ------------ ------------- ------------
Net cash (used in) provided by operating activities (937,629) 158,564 (470,672) 1,279,947
------------- ------------ ------------- ------------
Cash flows from investing activities:
Improvements to real estate (71,107) (19,506) (497,169) (431,578)
Acquisitions of real estate (32,071,216) - (41,882,231) -
Additions to furniture, fixtures and equipment (8,329) - (12,503) -
(Investment in) distribution from joint ventures (91,001) (221,190) 281,810 (423,190)
Proceeds from sale of property 1,097,562 - 1,097,562 1,025,354
Decrease (increase) in prepaid acquisition costs 280,372 (12,522) 208,813 (29,018)
------------- ------------ ------------- ------------
Net cash (used in) provided by investing acttivities (30,863,719) (253,218) (40,803,718) 141,568
------------- ------------ ------------- ------------
Cash flows from financing activities:
Proceeds from notes payable 8,645,983 - 18,143,192 2,452,500
Payments of notes payable (1,440,734) (114,694) (1,479,971) (3,516,721)
Loan acquisition costs, net (46,584) (39,903) (9,446) (85,134)
(Purchase) issuance of treasury stock (8,442) - 176,678 (98,595)
Issuance of common stock 25,693,857 - 25,693,857 -
Distributions paid to shareholders (680,898) (137,025) (1,012,075) (354,742)
Contributions from minority interest partners 11,542 - 620,542 -
Distributions to minority interest partners (35,339) (144,332) (334,485) (432,998)
------------- ------------ ------------- ------------
Net cash provided by (used in) financing activities 32,139,385 (435,954) 41,798,292 (2,035,690)
------------- ------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 338,037 (530,608) 523,902 (614,175)
Cash and cash equivalents, beginning of period 412,982 852,300 227,117 935,867
------------- ------------ ------------- ------------
Cash and cash equivalents, end of period $ 751,019 $ 321,692 $ 751,019 $ 321,692
============= ============ ============= ============
See Notes to Consolidated Financial Statements.
Page 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT, Inc. ("AmREIT" or the "Company") is a real estate investment trust
("REIT") based in Houston, Texas that was incorporated in the state of Maryland
on August 17, 1993. AmREIT sponsors real estate investment opportunities through
the broker-dealer financial service community. For more than 17-years, the
Company has invested in real estate on lease to national and regional commercial
tenants with a focus on the retail, restaurant, banking and financial and
medical sectors.
AmREIT and its affiliates own a real estate portfolio that consists of over 66
properties located in 23 states. Its properties include single-tenant; free
standing credit tenant leased projects and multi-tenant frontage projects. The
single tenant projects are located from coast to coast and are primarily leased
to corporate tenants where the lease is the direct obligation of the parent
companies. In so doing, the dependability of the lease payments are based on the
strength and viability of the entire company, not just that location. The
multi-tenant projects are situated primarily throughout Texas. Supporting the
real estate portfolio is an operating company subsidiary of AmREIT that provides
a complete range of services including development, construction management,
property management, brokerage and leasing.
AmREIT's investment sponsorship business creates new investment entities that
buy and develop commercial real estate with proceeds raised from third-party
investors. AmREIT has extensive experience and long-term relationships in the
commercial real estate market - the basis of its ability to sponsor real estate
investment opportunities while creating fee income and carried interests for
AmREIT and its shareholders.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and AAA
Net Realty Fund XI, Ltd. With the merger of the affiliated partnerships, AmREIT
increased its real estate assets by approximately $25 million and issued
approximately 2.6 million shares of Class B common stock to the limited partners
in the affiliated partnerships. Approximately $760 thousand in 8 year, interest
only, subordinated notes were issued to limited partners of the affiliated
partnerships who dissented against the merger. The acquired properties are
unencumbered, single tenant, free standing properties on lease to national and
regional tenants, where the lease is the direct obligation of the parent
company. A deferred merger expense stemmed from stock issued to H. Kerr Taylor,
President and Chief Executive Officer, based on a deferred consideration that
was approved by the stockholders in 1998. Mr. Taylor was issued 302,281 shares
of Class A common stock, which resulted in the one-time charge to earnings in
the third quarter 2002.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT, Inc. and
its wholly or majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the accrual basis of
accounting, whereby revenues are recognized when earned and expenses are
reflected when incurred.
Page 5
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds.
PROPERTY
Property is leased to others, primarily on a net lease basis, whereby the
operating expenses related to the properties, including property taxes,
insurance and common area maintenance are the responsibility of the tenant. The
leases are accounted for under the operating method or the direct financing
method in accordance with generally accepted accounting principles. Under the
operating lease method, the properties are recorded at cost. Rental income is
recognized ratably over the life of the lease and depreciation is charged based
upon the estimated useful life of the property. Under the direct financing lease
method, properties are recorded at their net investment. Unearned income is
deferred and amortized to income over the life of the lease so as to produce a
constant periodic rate of return.
Expenditures related to the development of real estate are carried at cost plus
capitalized carrying charges, acquisition costs and development costs. Carrying
charges, primarily interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are capitalized as
part of construction in progress. The Company capitalizes acquisition costs once
the acquisition of the property becomes probable. Prior to that time the Company
expenses these costs as acquisition expense.
Management reviews its properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets, including accrued
rental income, may not be recoverable through operations. Management determines
whether an impairment in value occurred by comparing the estimated future cash
flows (undiscounted and without interest charges), including the residual value
of the property, with the carrying cost of the individual property. If
impairment is indicated, a loss will be recorded for the amount by which the
carrying value of the asset exceeds its fair value.
DEPRECIATION
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years. Leasehold estate properties, where the Company owns the
building and improvements but not the related ground, therefore there is no
residual value beyond the lease, are depreciated over life of lease.
INVESTMENT IN NON CONSOLIDATED SUBSIDIARIES
AmREIT invested $250 thousand as a limited partner and $1,000 as a general
partner in AmREIT Opportunity Fund, Ltd. ("AOF"), which is accounted for using
the equity method. The limited partners have the right to remove and replace the
general partner by a vote of the limited partners owning a majority of the
outstanding units. AmREIT currently owns a 10.6% limited partner interest in
AOF. AOF was formed to develop, own, manage, and hold for investment and, or
resell property and to make or invest in loans for the development or
construction of property. Liquidation of AOF commenced in July of 2002.
AmREIT invested $200 thousand as a limited partner and $1,000 as a general
partner in AmREIT Income & Growth Fund, Ltd. )"AIG") that is accounted for using
the equity method. The limited partners have the right to remove and replace the
general partner by a vote of the limited partners owning a majority of the
outstanding units. AmREIT currently owns an approximately 2.9% limited partner
interest in AIG. AIG was formed to develop, own, manage, and hold for investment
and, or resell property and to make or invest in loans for the development or
construction of property.
Page 6
AmREIT invested $70 thousand as a limited partner in AmREIT CDP #27, LP that is
accounted for using the equity method. AmREIT CDP #27, LP was formed to acquire
commercial real property and to develop, operate, lease, manage, and or sell
real property. AmREIT CDP #27, LP purchased two IHOP properties in 2001 located
in Memphis, Tennessee and Tupelo, Mississippi. The Memphis, Tennessee property
was sold for a profit in the first quarter of 2002.
AmREIT invested $122 thousand as a limited partner in AmREIT CDP SPE #33, Ltd.
that is accounted for using the equity method. AmREIT CDP SPE #33, Ltd. was
formed to acquire commercial real property and to develop, operate, lease,
manage, and or sell real property. In December 2001, AmREIT CDP #33, Ltd.
purchased three IHOP leasehold estate properties located in Houston, Texas,
Orem, Utah, and Hagerstown, Maryland.
OTHER ASSETS
Other assets include loan acquisition costs of $278 thousand. Loan acquisition
costs were incurred in obtaining property financing and are amortized to
interest expense on a straight-line basis over the term of the debt agreements.
Accumulated amortization related to loan acquisition costs as of September 30,
2002 totaled $72 thousand.
DEFERRED COMPENSATION
Deferred compensation includes stock grants to employees as a form of long term
compensation. The stock grants vest over a period of time not to exceed four
years. This allows the Company to align the interest of its employees with the
interest of our shareholders. As the stock grants vest, the Company will
amortize to compensation expense the vested portion. The expense will be
calculated by taking the number of shares vested multiplied by the market price
per share as determined on the vesting dates.
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the sale of common
stock are treated as a reduction of shareholders' equity.
REVENUE RECOGNITION
Properties are primarily leased on a net lease basis. Revenue is recognized on a
straight-line basis over the terms of the individual leases. Service fees are
recognized when earned.
FEDERAL INCOME TAXES
The Company is qualified as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, and is, therefore, not subject to Federal income
taxes to the extent of distributions paid, provided it meets all conditions
specified by the Internal Revenue Code for retaining its REIT status, including
the requirement that at least 90% of its real estate investment trust taxable
income is distributed by March 15 of the following year.
AmREIT Realty Investment Corporation ("ARIC"), a wholly owned subsidiary of
AmREIT, Inc., is treated as a taxable REIT subsidiary for federal income tax
purposes. As such, ARIC has recorded a federal income tax liability at September
30, 2002 of $90 thousand, which represents the federal income tax obligations on
the consolidated taxable REIT subsidiaries taxable net income.
Page 7
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash equivalents,
accounts receivable and accounts and notes payable. The carrying value of cash,
cash equivalents, accounts receivable and accounts payable are representative of
their respective fair values due to the short-term maturity of these
instruments. The fair value of the Company's debt obligations is representative
of its carrying value based upon the variable rate terms of the credit facility.
NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. In June
1999, the FASB issued SFAS 137 that deferred the effective date of adoption of
SFAS 133 for one year. This was followed in June 2000 by the issuance of SFAS
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", which amended SFAS 133.
The Company adopted these standards effective January 1, 2001. The Company
currently has no contracts that would be affected by these accounting standards
and as a result there was no effect on the Company's financial position, results
of operation or cash flows from the adoption of SFAS 133, as amended.
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the
Financial Accounting Standards Board ("FASB"). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Goodwill and certain intangible assets will remain on the
balance sheet and not be amortized. On an annual basis, and when there is reason
to suspect that their values have been diminished or impaired, these assets must
be tested for impairment, and write-downs may be necessary. The Company
implemented SFAS No. 141 on July 1, 2001. The adoption of this Statement had no
effect on the Company's consolidated financial position or results of
operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company implemented SFAS No. 142 on January 1,
2002. The adoption of SFAS No. 142 did not have a material impact on our
financial position, results of operations, or cash flows.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of SFAS No. 143 will not have a material
impact on our financial position, results of operations, or cash flows.
Page 8
On January 1, 2002, the company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses accounting
and reporting for the impairment or disposal of a segment of a business. More
specifically, this Statement broadens the presentation of discontinued
operations to include a component of an entity whose operations and cash flows
can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity. The adoption of SFAS No. 144 did not have
a material impact on our financial position, results of operations, or cash
flows.
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and include all of the disclosures required
by generally accepted accounting principles. The 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 three and nine-month
periods ended September 30, 2002 and 2001.
The financial statements of AmREIT, Inc. contained herein should be read in
conjunction with the financial statements included in the Company's annual
report on Form 10-KSB for the year ended December 31, 2001.
2. INVESTMENT IN NON CONSOLIDATED JOINT VENTURES
On June 29, 1998, the Company entered into a joint venture, GDC Vista Ridge
Partners, Ltd., with GDC Ltd. The joint venture was formed to acquire, finance,
develop, operate and dispose of a retail project located in Lewisville, Texas.
The Company's interest in the joint venture is approximately 6.7%.
AmREIT invested $70 thousand as a limited partner in AmREIT CDP #27, LP ("CDP
27") that is accounted for using the equity method. CDP 27 was formed to acquire
commercial real property and to develop, operate, lease, manage, and or sell
real property. CDP 27 purchased two IHOP properties in 2001 located in Memphis,
Tennessee and Tupelo, Mississippi. One of the two properties, owned by CDP 27
was sold during the first quarter 2002. AmREIT received investment income of $33
thousand, from the sale of the property located in Memphis and still has $33
thousand invested in the IHOP in Tupelo.
AmREIT invested $330 thousand as a member in AmREIT CDP #31, LLC ("CDP 31") that
is accounted for using the equity method. CDP 31 was formed to acquire
commercial real property and to develop, operate, lease, manage, and or sell
real property. CDP 31 purchased two IHOP properties in 2001 located in
Cookeville, Tennessee and Scottsdale, Arizona. Both properties were sold during
the first quarter 2002, and CDP 31 does not own any real property as of
September 30, 2002.
AmREIT has invested $121 thousand as a limited partner in AmREIT CDP SPE #33,
Ltd. ("CDP 33") that is accounted for using the equity method. CDP 33 was formed
to acquire commercial real property and to develop, operate, lease, manage, and
or sell real property. In December 2001, CDP 33 purchased three IHOP leasehold
estate properties located in Houston, Texas, Orem, Utah, and Hagerstown,
Maryland.
Page 9
3. NOTES PAYABLE
In November 1998, the Company entered into an unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the acquisition of
properties and working capital. Under the Credit Facility, which had an original
term of one year, and has been extended through December 2002, the Company may
borrow up to $20 million subject to the value of unencumbered assets. The Credit
Facility contains covenants, which among other restrictions, require the Company
to maintain a minimum net worth and a maximum leverage ratio. As of September
30, 2002, the Company is in compliance with all the covenants and restrictions
of the Credit Facility. The Credit Facility bears interest at an annual rate of
LIBOR plus a spread of 2.0 % (3.8125% as of September 30, 2002). As of September
30, 2002, $11.71 million was outstanding under the Credit Facility. Thus the
Company has approximately $2.8 million available under its line of credit based
upon the value of the unemcumbered assets, subject to use of proceeds by the
lender.
In March 1999, the Company entered into a ten-year mortgage note, amortized over
30 years, for $1 million with $971 thousand being outstanding at September 30,
2002. The interest rate is fixed at 8.375% with payments of principal and
interest due monthly. The note matures April 1, 2009, and as of September 30,
2002 the Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on property with an aggregate carrying
value of $1.18 million, net of $102 thousand of accumulated depreciation.
In February 2001, the Company entered into a ten-year mortgage note, amortized
over 20 years, for $1.35 million with $1.307 million being outstanding at
September 30, 2002. The interest rate is fixed at 8.25% with payments of
principal and interest due monthly. The note matures February 28, 2011 and as of
September 30, 2002 the Company is in compliance with all terms of the agreement.
The note is collateralized by a first lien mortgage on property with an
aggregate carrying value of $1.630 million, net of $74 thousand of accumulated
depreciation.
In October 2001, the Company entered into a ten-year mortgage note amortized
over 30 years, for $2.4 million with $2.384 million being outstanding at
September 30, 2002. The interest rate is fixed at 7.60% with payments of
principal and interest due monthly. The note matures November 1, 2011 and as of
September 30, 2002 the Company is in compliance with all terms of the agreement.
The note is collateralized by a first lien mortgage on property with an
aggregate carrying value of $3.988 million, net of $309 thousand of accumulated
depreciation.
In October 2001, the Company entered into a note payable for $1.658 million with
$1.658 million being outstanding at September 30, 2002. The interest rate is
equal to the thirty day LIBOR rate plus 280 basis points, but in no event lower
than 6.75%, which equated to 6.75% at September 30, 2002. The note matured
November 1, 2002 and as of September 30, 2002, the Company is in compliance with
all terms of the agreement. The Company is in negotiations with the lender to
extend the loan for a period of two years. The note is collateralized by a first
lien mortgage on property with an aggregate carrying value of $1.849 million net
of $31 thousand of accumulated depreciation.
Page 10
Beginning in April 2002, AAA began entering into non-recourse ten-year
mortgages, amortized over 20 years, related to the purchase of seventeen IHOP
properties. The following table summarizes the terms of loan agreements and the
property collateralizing the non-recourse notes. As of September 30, 2002 the
Company is in compliance with all terms of the agreement. The non-recourse notes
are cross-collateralized and defaulted with each other.
Loan Amount at
Original Loan September 30, Fixed Net Investment in
Location Amount 2002 Interest Date Loan Direct Financing
(in thousands) (in thousands) Rate Matures Lease
(in thousands)
Shawnee, KS $ 751 $ 745 7.82% May 1, 2012 $ 891
El Paso, TX 760 755 7.82% May 1, 2012 898
Beaverton, OR 887 880 7.82% May 1, 2012 1,049
Rochester, NY 951 944 7.82% May 1, 2012 1,138
Baton Rouge, LA 1,250 1,242 7.82% May 1, 2012 1,483
Charlottesville, VA 630 626 7.82% May 1, 2012 750
Albuquerque, NM 767 751 7.82% May 1, 2012 894
Springfield, MO 1,030 1,025 7.82% June 1, 2012 1,213
Salem, OR 621 617 7.82% June 1, 2012 738
Roanoke, VA 712 709 7.89% July 1, 2012 846
Alexandria, LA 716 715 7.89% Aug. 1, 2012 845
Centerville, UT 1,242 1,240 7.89% Aug. 1, 2012 1,534
Memphis, TN 1,342 1,340 7.89% Aug. 1, 2012 1,084
La Verne, CA 745 745 7.89% Sept. 1, 2012 995
El Paso, TX 894 894 7.89% Sept. 1, 2012 1,153
Memphis, TN 777 777 7.89% Sept. 1, 2012 1,058
Parker, CO 836 836 7.89% Sept. 1, 2012 1,112
--------- --------- ---------
Total $14,910 $14,841 $17,681
========= ========= =========
In July of 2002, the Company issued thirteen, 8 year subordinated, interest only
notes totaling $760 thousand, maturing July 2010. The notes were issued to those
partners who dissented against the Company's recent merger with three affiliated
public partnerships.
Aggregate annual maturity of the mortgage notes payable for each of the
following five years ending September 30 are as follows:
(in thousands)
2002 $14,228
2003 398
2004 430
2005 465
2006 503
Thereafter 17,610
---------
Total $33,635
=========
Page 11
4. MAJOR TENANTS
The following schedule summarizes rental income by lessee for the three and
nine-months ended September 30:
Quarter (in Thousands) Year to Date (in Thousands)
2002 2001 2002 2001
-------- ------- -------- -------
International House of Pancakes $ 612 $ 122 $1,221 $ 365
Footstar, Inc. 187 178 543 532
OfficeMax, Inc 130 130 389 389
Wherehouse Entertainment 96 94 285 283
Hollywood Entertainment Corp. 68 68 205 205
Sugar Land Imaging Affiliates Ltd. 63 53 189 156
Mattress Giant, Inc 41 35 123 67
Washington Mutual 39 39 118 118
Radio Shack 27 27 82 82
Golden Corral (4) 76 0 76 0
Texas Children's Pediatrics (2) 41 0 67 0
Don Pablos 20 20 59 60
One Care Health Industries, Inc. (1) 0 50 57 151
Comp USA (4) 51 0 51 0
Baptist Memorial Hospital (4) 43 0 43 0
TGI Friday's (4) 38 0 38 0
Dr. Pucillo (4) 36 0 36 0
Pier 1 (4) 27 0 27 0
America's Favorite Chicken Co. (3) (4) 22 0 22 21
Blockbuster (4) 19 0 19 0
Waldenbooks (4) 17 0 17 0
Jack in the Box (4) 15 0 15 0
Goodyear (4) 11 0 11 0
-------- ------- -------- --------
Total $1,680 $ 816 $3,692 $2,429
======== ======= ======== ========
(1) One Care Health Industries, Inc. was a tenant at Copperfield Medical Plaza.
In April of 2002, AmREIT negotiated a lease buy out agreement with One Care
for approximately $190 thousand. As a result, AmREIT immediately released
approximately 75% of the available space to Texas Children's Pediatrics and
the Company has negotiated a lease for balance of the space.
(2) Texas Children's Pediatrics entered into a long-term lease with AmREIT,
beginning in May 2002, at Copperfield Medical Plaza. The lease was entered
into as a result of the negotiated lease buy out by AmREIT and One Care
Health Industries, Inc.
(3) America's Favorite Chicken Co., located in Atlanta and was sold by AmREIT
during the first quarter 2001.
(4) Properties were purchased from three affiliated partnerships in July 2002.
5. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
has been computed by dividing net income (as adjusted) by the weighted average
number of common shares outstanding plus the weighted average number of dilutive
potential common shares.
Page 12
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
Quarter Year to Date
BASIC EARNINGS PER SHARE 2002 2001 2002 2001
-------- -------- -------- --------
Weighted average common shares outstanding (in thousands) 2,413 2,354 2,377 2,358
Earnings per share before deferred merger costs $ .22 $(.04) $ .41 $ .33
======== ======== ======== ========
Basic earnings per share $(.57) $(.04) $(.39) $ .33
======== ======== ======== =======
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding (in thousands) 4,385 2,354 3,041 2,358
Earnings per share before deferred merger costs $.12 $(.04) $.32 $.33
======== ======== ======== =======
Diluted earnings per share $(.31) $(.04) $(.30) $.33
======== ======== ======== =======
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Earnings (loss) to common shareholders before
deferred merger costs (in thousands) $534 $(106) $978 $782
======== ======== ======== =======
(Loss)earnings to common shareholders (in thousands) $(1,370) $(106) $(926) $782
======== ======== ======== =======
6. RELATED PARTY TRANSACTIONS
See Note 1 regarding investments in non-consolidated subsidiaries.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and AAA
Net Realty Fund XI, Ltd. With the merger of the affiliated partnerhsips, AmREIT
increased its real estate assets by approximately $25 million and issued
approximately 2.6 million shares of Class B common stock to the limited partners
in the affiliated partnerships. Approximately $760 thousand in 8 year, interest
only, subordinated notes were issued to limited partners of the affiliated
partnerships who dissented against the merger. The acquired properties are
unencumbered, single tenant, free standing properties on lease to national and
regional tenants, where the lease is the direct obligation of the parent
company. A deferred merger expense stemmed from stock issued to H. Kerr Taylor,
President and Chief Executive Officer, based on a deferred consideration that
was approved by the stockholders in 1998. Mr. Taylor was issued 302 thousand
shares of Class A common stock, which resulted in the one-time charge to
earnings in the third quarter 2002. As the Company raises additional equity, Mr.
Taylor is eligible to receive up to an additional 384 thousand shares of Class A
common stock pursuant to the deferred consideration approved by the stockholders
in 1998.
The Company provides property acquisition, leasing, administrative and
management services for ten affiliated real estate limited partnerships that are
under common management (the "Partnerships"). The president and director of the
Company owns between 45% and 100% of the stock of the companies that serve as
the general partner of the Partnerships. For the nine months ended September 30,
service fees of $219 thousand and $246 thousand were paid by the Partnerships to
the Company for 2002 and 2001 respectively.
As a sponsor of real estate investment opportunities to the NASD financial
planning broker dealer community, the Company maintains a 1% general partner
interest in the investment funds that it sponsors. The funds are typically
structured such that the limited partners receive 99% of the available cash flow
until 100% of their original invested capital has been returned and a preferred
return has been met. Once this has happened, then the general partner begins
sharing in the available cash flow at various promoted levels. The Company also
assigns a portion of this general partner interest in these investment funds to
its employees as long term, contingent compensation. In so doing, the Company
believes that it will align the interest of management with that of the
shareholders, while at the same time allowing for a competitive compensation
structure in order to attract and retain key management positions without
increasing the overhead burden.
Page 13
On May 20, 1999, the Company entered into a partnership agreement with various
individual investors to form AmREIT Opportunity Fund, Ltd. The partnership was
formed to develop, own, manage, hold for investment and or resell property and
to make and or invest in loans for the development or construction of property.
The Company invested $250 thousand as a Limited Partner and $1,000 as the
General Partner.
On January 26, 2001, the Company entered into a partnership agreement with
various individual investors to form AmREIT Income & Growth Fund, Ltd. The
partnership was formed to develop, own, manage, hold for investment and or
resell property and to make and or invest in loans for the development or
construction of property. The Company invested $200 thousand as a Limited
Partner and $1,000 as the General Partner.
On March 20, 2002, the Company formed AAA CTL Notes, Ltd. ("AAA") through which
the Company purchased fifteen IHOP leasehold estate properties and two IHOP fee
simple properties. At September 30, 2002, AAA had closed all seventeen
properties. Below is a condensed summary of the balance sheet and the statement
of operations of AAA on a stand alone basis as of September 30, 2002 (in
thousands):
Current Assets $ 200
Investment in direct financing leases 17,681
Land 470
Other Assets 125
--------
Total Assets 18,475
Notes Payable 14,841
Other Liabilities 187
Partners Capital 3,447
--------
Total Liabilities and Partners Capital $ 18,475
Earned Income From DF Leases $ 562
--------
Total Income 562
Interest & Loan Costs 349
Other Expense 17
Total Expense 366
--------
Net Income $ 197
7. COMMITMENTS
The Company has a one-year lease agreement for its office facilities through
December 31, 2002. Rental expense for the nine months ended September 30, 2002
and 2001 was $57 thousand and $52 thousand respectively.
Page 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
AmREIT sponsors real estate investment opportunities through the broker-dealer
financial services community. For more than 17-years, the Company has invested
in real estate on lease to national and regional commercial tenants with a focus
on the retail, restaurant, banking and financial and medical sectors.
AmREIT and its affiliates own a real estate portfolio that consists of over 66
properties located in 23 states. Its properties include single-tenant, free
standing credit tenant leased projects and multi-tenant frontage projects. The
single tenant projects are located from coast to coast and are primarily leased
to corporate tenants where the lease is the direct obligation of the parent
companies. In so doing, the dependability of the lease payments are based on the
strength and viability of the entire company, not just that location. The
multi-tenant projects are situated primarily throughout Texas. Supporting the
real estate portfolio is an operating company subsidiary of AmREIT that provides
a complete range of services including development, construction management,
property management, brokerage and leasing.
AmREIT's investment sponsorship business creates new investment entities that
buy and develop commercial real estate with proceeds raised from third-party
investors. AmREIT has extensive experience and long-term relationship in the
commercial real estate market - the basis of its ability to sponsor solid real
estate investment opportunities while creating fee income and carried interests
for AmREIT and its shareholders.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations has been the principal source of capital to fund the
Company's ongoing operations. The Company's issuance of common stock and the use
of the Company's credit facility have been the principal sources of capital
required to fund its growth.
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 to the Company 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, mergers or acquisitions or the disposition of assets,
as well as undistributed funds from operations which the Company believes will
be sufficient to meet its short term obligations and long term goals.
The Company's primary uses of funds have included property acquisitions and
development, distributions to stockholders, debt service, and working capital.
The Company made cash distributions to its Class A shareholders for three
month's ended September 30, 2002 and 2001 of $257 thousand and $137 thousand
respectively. Additionally, the Company made cash distributions to its Class B
shareholders of $424 thousand for the three months ended September 30, 2002.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and AAA
Net Realty Fund XI, Ltd. With the merger of the affiliated partnerhsips, AmREIT
increased its real estate assets by approximately $25 million and issued
approximately 2.6 million shares of Class B common stock to the limited partners
in the affiliated partnerships. Approximately $760 thousand in 8 year, interest
only, subordinated notes were issued to limited partners of the affiliated
partnerships who dissented against the merger. The acquired properties are
unencumbered, single tenant, free standing properties on lease to national and
regional tenants, where the lease is the direct obligation of the parent
company. A deferred merger expense stemmed from stock issued to H. Kerr Taylor,
President and Chief Executive Officer, based on a deferred consideration that
was approved by the stockholders in 1998. Mr. Taylor was issued 302 thousand
shares of Class A common stock, which resulted in the one-time charge to
earnings in the third quarter 2002.
Page 15
The Company's leases typically provide that the tenant bears responsibility for
substantially all property costs and expenses associated with ongoing
maintenance and operation, including utilities, property taxes and insurance. In
addition, the Company's leases generally provide that the tenant is responsible
for roof and structural repairs. Some of the tenant's leases require the Company
to be responsible for roof and structural repairs. In these instances, the
Company normally requires warranties, and/or guarantees from the related
vendors, suppliers and/or contractors, to mitigate the potential costs of
repairs during the primary terms of the leases. Because many of the properties,
which are subject to leases that place these responsibilities on the Company are
recently constructed, management anticipates that capital demands to meet
obligations with respect to these properties will be minimal for the foreseeable
future and can be met with funds from operations and working capital. The
Company may be required to use bank borrowing or other sources of capital in the
event of unforeseen significant capital expenditures.
In November 1998, the Company entered into an unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the acquisition of
properties and working capital. Under the Credit Facility, which had an original
term of one year, and has been extended through December 1, 2002, the Company
may borrow up to $20 million subject to the value of unencumbered assets. The
Credit Facility contains covenants, which among other restrictions, require the
Company to maintain a minimum net worth and a maximum leverage ratio. As of
September 30, 2002, the Company is in compliance with all the covenants and
restrictions of the Credit Facility and is in negotiations to extend the Credit
Facility for a period of not less than six months after it expiration date. The
Credit Facility bears interest at an annual rate of LIBOR plus a spread of 2.0 %
(3.8125% as of September 30, 2002). As of September 30, 2002, $11.71 million was
outstanding under the Credit Facility. Thus the Company has approximately $2.8
million available under its line of credit subject to use of proceeds by the
lender.
In March 1999, the Company entered into a ten-year mortgage note, amortized over
30 years, for $1 million with $971 thousand being outstanding at September 30,
2002. The interest rate is fixed at 8.375% with payments of principal and
interest due monthly. The note matures April 1, 2009 and as of September 30,
2002 the Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on property with an aggregate carrying
value of $1,184 thousand, net of $102 thousand of accumulated depreciation.
In February 2001, the Company entered into a ten-year mortgage note, amortized
over 20 years, for $1,350 thousand with $1,308 thousand being outstanding at
September 30, 2002. The interest rate is fixed at 8.25% with payments of
principal and interest due monthly. The note matures February 28, 2011 and as of
September 30, 2002 the Company is in compliance with all terms of the agreement.
The note is collateralized by a first lien mortgage on property with an
aggregate carrying value of $1,630 thousand, net of $74 thousand of accumulated
depreciation.
In October 2001, the Company entered into a ten-year mortgage note, amortized
over 30 years, for $2.400 million with $2.384 million being outstanding at
September 30, 2002. The interest rate is fixed at 7.6% with payments of
principal and interest due monthly. The note matures November 1, 2011 and as of
September 30, 2002 the Company is in compliance with all terms of the agreement.
The note is collateralized by a first lien mortgage on property with an
aggregate carrying value of $3.988 million, net of $309 thousand of accumulated
depreciation.
Page 16
In October 2001, the Company entered into a interest only, note payable for
$1,658 thousand with $1,658 thousand being outstanding at September 30, 2002.
The interest rate is equal to the thirty day LIBOR rate plus 280 basis points,
but in no event lower than 6.75%, which equated to 6.75% at September 30, 2002.
The note matured November 1, 2002 and as of September 30, 2002, the Company is
in compliance with all terms of the agreement. The Company is in negotiations
with the lender to extend the loan for a period of two years. The note is
collateralized by a first lien mortgage on property with an aggregate carrying
value of $1,849 thousand which is net of $31 thousand of accumulated
depreciation.
Beginning in April 2002, AAA began entering into ten-year mortgages, amortized
over 20 years, related to the purchase of seventeen IHOP. The following table
summarizes the terms of loan agreements and the property collateralizing the
notes. As of September 30, 2002 the Company is in compliance with all terms of
the agreement. The notes are cross-collateralized and defaulted with each other.
Loan Amount at
Original Loan September 30, Fixed Net Investment in
Location Amount 2002 Interest Date Loan Direct Financing
(in thousands) (in thousands) Rate Matures Lease
(in thousands)
Shawnee, KS $ 751 $ 745 7.82% May 1, 2012 $ 891
El Paso, TX 760 755 7.82% May 1, 2012 898
Beaverton, OR 887 880 7.82% May 1, 2012 1,049
Rochester, NY 951 944 7.82% May 1, 2012 1,138
Baton Rouge, LA 1,250 1,242 7.82% May 1, 2012 1,483
Charlottesville, VA 630 626 7.82% May 1, 2012 750
Albuquerque, NM 767 751 7.82% May 1, 2012 894
Springfield, MO 1,030 1,025 7.82% June 1, 2012 1,213
Salem, OR 621 617 7.82% June 1, 2012 738
Roanoke, VA 712 709 7.89% July 1, 2012 846
Alexandria, LA 716 715 7.89% Aug. 1, 2012 845
Centerville, UT 1,242 1,240 7.89% Aug. 1, 2012 1,534
Memphis, TN 1,342 1,340 7.89% Aug. 1, 2012 1,084
La Verne, CA 745 745 7.89% Sept. 1, 2012 995
El Paso, TX 894 894 7.89% Sept. 1, 2012 1,153
Memphis, TN 777 777 7.89% Sept. 1, 2012 1,058
Parker, CO 836 836 7.89% Sept. 1, 2012 1,112
--------- --------- ---------
Total $14,910 $14,841 $17,681
========= ========= =========
Until properties are acquired by the Company, proceeds are held in short-term,
highly liquid investments that the Company believes will provide the 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, 2002, the Company's cash and cash equivalents totaled $751
thousand.
Page 17
CASH FLOW
Comparison of the Three Months Ended September 30, 2002 to September 30, 2001:
Net cash provided by operating activities decreased $1,096 thousand for the
three month period ended September 30, 2002 when compared to the three month
period ended September 30, 2001. The decrease in cash provided by operating
activities was due primarily to the following components: (1) a decrease in net
income of $1,264 thousand, from a loss of $106 thousand in 2001 to a loss of
$1,370 thousand in 2002. The 2002 loss includes a non-recurring charge of $1,904
thousand in connection with a deferred payment of merger related expenses. (2)
an increase in deferred compensation of $142 thousand, from $0 change in 2001 to
an increase of $142 thousand in 2002. The above decreases are offset somewhat by
an increase in depreciation of $123 thousand, from $118 thousand in 2001 to $241
thousand in 2002, and an increase in accounts payable of $246 thousand, from a
$10 thousand increase in 2001 to a $256 thousand increase in 2002.
Net cash used in investing activities increased for the three month period ended
September 30, 2002 when compared to the three month period ended September 30,
2001, from $253 thousand to $30,864 thousand in 2002. The increase in cash used
was primarily due to an increase in acquisitions of real estate from $0 to
$32,071 thousand related to the property acquisitions of AAA and the three
affiliated partnerships. The property from the affiliated partnerships were
purchased through the issuance of Class B common stock. This increase in cash
used was partially offset by an increase in proceeds from the sale of property,
from $0 in 2001 to $1,098 thousand in 2002.
Net cash provided by financing activities increased $32,575 thousand for the
three month period ended September 30, 2002 when compared to the three month
period ended September 30, 2001. The increase was primarily due to proceeds from
the issuance of common stock, which totaled $25,694 thousand. The increase was
also due to proceeds from notes payable, which totaled $8,646 thousand, and were
related to the acquisition of real estate in AAA.
Comparison of the Nine Months Ended September 30, 2002 to September 30, 2001:
Net cash provided by operating activities decreased $1,751 thousand for the nine
month period ended September 30, 2002 when compared to the nine month period
ended September 30, 2001. The decrease in cash provided by operating activities
was due primarily to the following components: (1) a decrease in net income of
$1,708 thousand from income of $782 thousand in 2001 to a loss of $926 thousand
in 2002. The 2002 loss includes a non-recurring charge of $1,904 thousand in
connection with a deferred payment of merger related expenses. (2) an increase
in cash used to pay down accounts payable of $406 thousand, from a decrease of
$128 thousand in 2001 to a decrease of $534 thousand in 2002. The above are
offset somewhat by an increase in accounts receivable collections of $392
thousand, from $218 thousand in 2001 to $610 thousand in 2002.
Net cash used in investing activities increased $40,945 thousand for the nine
month period ended September 30, 2002 when compared to the nine month period
ended September 30, 2001. The increase in cash used was primarily due to an
increase in acquisitions of real estate from $0 to $41,882 thousand. The
acquisitions are from the purchase of properties in AAA as well as properties
purchased from the three affiliated partnerships in exchange for Class B common
stock. Distributions from joint ventures increased $705 thousand from an
investment of $423 thousand in 2001 to distributions of $282 thousand in 2002.
Page 18
Net cash provided by financing activities increased $43,834 thousand for the
nine month period ended September 30, 2002 when compared to the nine month
period ended September 30, 2001. The increase was primarily due to proceeds from
issuance of common stock, which totaled $25,694 thousand. The stock was issued
to the partners in the three merged affiliated partnerships in exchange for
their property. In addition proceeds from notes payable increased $15,691
thousand from $2,452 thousand in 2001 to $18,143 thousand in 2002, which was
related to the acquisition of real estate in AAA. Payments of notes payable
decreased $2,037 thousand from $3,517 thousand in 2001 to $1,480 thousand in
2002.
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, 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
Funds from operations (FFO) increased $339 thousand to $352 thousand for the
three months ended September 30, 2002 from $12 thousand for the three months
ended September 30, 2001. For the nine month period ended September 30, 2002 FFO
increased $91 thousand from $958 thousand in 2001 to $1,049 thousand in 2002.
The increase in FFO is primarily attributed to increased earnings after a
non-recurring charge of $1,904 thousand in connection with a deferred payment of
merger related expenses. The non-recurring charge is excluded from the FFO
calculation. The Company is on track to meet its FFO target for 2002, which is a
22% increase over 2001 FFO. The Company has adopted the National Association of
Real Estate Investment Trusts (NAREIT) definition of FFO. FFO is calculated as
net income (computed in accordance with generally accepted accounting
principles) excluding gains or losses from sales of depreciable operating
property, depreciation and amortization of real estate assets, and excluding
results defined as "extraordinary items" under generally accepted accounting
principles. FFO should not be considered an alternative to cash flows from
operating, investing and financing activities in accordance with generally
accepted accounting principles and is not necessarily indicative of cash
available to meet cash needs. The Company's computation of FFO may differ from
the methodology for calculating FFO utilized by other equity REITs and,
therefore, may not be comparable to such other REITs. FFO is not defined by
generally accepted accounting principles and should not be considered an
alternative to net income as an indication of the Company's performance.
Below is the reconciliation of net income to funds from operations for the three
and nine months ended September 30, (in thousands):
Quarter Year to Date
2002 2001 2002 2001
-------- -------- -------- --------
Net (loss) income $(1,370) $(106) $( 926) $ 782
Plus depreciation 241 118 495 345
Plus Deferred acquisition costs 1,904 - 1,904 -
Less Dividends paid to Class B ( 424) - ( 424) -
Less Gain on sale of operating properties - - - (169)
-------- -------- -------- --------
Total funds from operations $ 352 $ 12 $ 1,049 $ 958
======== ======== ======== ========
Cash flows from operating activities, investing activities, and financing
activities for the three and nine months ended September 30 are presented below
(in thousands):
Quarter Year to date
2002 2001 2002 2001
Operating activities $ ( 938) $ 159 $ ( 471) $ 1,280
Investing activities $(30,864) $( 253) $(40,804) $ 142
Financing activities $ 32,139 $( 436) $ 41,798 $(2,036)
Page 19
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2002 to September 30, 2001:
During the three months ended September 30, 2002 and September 30, 2001, the
Company earned $1,680 thousand and $816 thousand, respectively, in rental income
from operating leases and earned income from direct financing leases. The
additional properties purchased by AAA as well as the newly merged properties
from the three affiliated partnerships resulted in the increased income from
rents and earned income from direct financing leases. Service fees and other
income increased $512 thousand from $265 thousand in 2001 to $777 thousand in
2002. The increase is primarily attributable to a non-recurring transaction that
resulted in service fee income of $247 thousand as well as increased commissions
earned from equity investments as well as sales and leasing of property.
During the three months ended September 30, 2002 and September 30, 2001, the
Company's expenses were $3,680 thousand and $1,058 thousand respectively. The
$2,621 thousand increase in expenses is primarily attributable to a
non-recurring charge of $1,904 thousand in connection with a deferred payment of
merger related expenses. Additionally legal and professional fees increased $264
thousand from $101 thousand in 2001 to $365 thousand in 2002. The increase is
primarily attributable to increased commissions paid on increased equity
investments. Additionally, interest expense increased by $255 thousand from $264
thousand in 2001 to $520 thousand in 2002, which is due to the additional debt
used to finance the acquisitions of additional properties. General operating and
administrative expenses increased $168 thousand, from $481 thousand in 2001 to
$649 thousand in 2002.
Comparison of the Nine Months Ended September 30, 2002 to September 30, 2001:
During the nine months ended September 30, 2002 and September 30, 2001, the
Company earned $3,692 thousand and $2,429 thousand, respectively, in rental
income from operating leases and earned income from direct financing leases. The
additional properties acquired by AAA as well as the newly merged properties
from the three affiliated partnerships resulted in the increased income from
rents and earned income from direct financing leases. Service fees and other
income increased $58 thousand from $1,927 thousand in 2001 to $1,985 thousand in
2002. The increase in service fees and other income was primarily due to
increased commissions earned on equity raised as well as increased development
fees received this year.
During the nine months ended September 30, 2002 and September 30, 2001, the
Company's expenses were $6,172 thousand and $3,354 thousand respectively. The
$2,818 thousand increase in expenses is primarily attributable to a
non-recurring charge of $1,904 thousand in connection with a deferred payment of
merger related expenses. Additionally general operating expenses increased $561
thousand primarily due to: 1) an increase in commissions and compensation
related to our real estate and sponsorship activities, 2) property cost expense
related to repairs and maintenance at Copperfield Medical Plaza and 3) accruals
made for board compensation paid in Company stock based on vesting schedules.
Interest expense increased $354 thousand due to additional debt used to finance
the acquisition of additional properties. Depreciation increased $150 thousand
due to additional properties added to our portfolio. Legal and professional
expense decreased $57 thousand from $752 thousand in 2001 to $695 thousand in
2002. The decrease is primarily attributable to a non-recurring transaction that
occurred in 2001.
Page 20
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
AmREIT uses fixed and floating-rate debt to finance its capital requirements.
AmREIT does not use derivative financial instruments to hedge against an
increase in the interest rate on its floating-rate debt. These floating-rate
transactions, without the protection of derivative financial instruments,
exposes the Company to market risk related to changes in interest rates. At
September 30, 2002, the Company had fixed-rate debt of $20.2 million and
variable-rate debt of $13.4 million. The variable-rate debt had an average
interest rate of 4.18%. Should short-term interest rates increase by as much as
100 basis points, the Company would report an increase in interest expense of
$30 thousand per quarter.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Executive Vice President of Finance have
reviewed and evaluated the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules-13a-14(c) and 15d-14(c)) as of a
date within 90 days before the filing date of this quarterly report. Based on
that evaluation, the Chief Executive Officer and Executive Vice President of
Finance have concluded that our current disclosure controls and procedures are
effective and timely, providing them with material information relating to us
required to be disclosed in the reports we file or submit under the Exchange
Act.
Changes in Internal Controls
There have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. We are not aware of any significant deficiencies or material
weaknesses, therefore no corrective actions were taken.
Page 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities and Use of Proceeds
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
2.1 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund IX, Ltd., dated September 10, 2001
(Incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 filed June 29, 1999, as amended
(File No. 333-81895)).
2.2 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund X, Ltd., dated September 10, 2001
(Incorporated by reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-4 filed June 29, 1999, as amended
(File No. 333-81895)).
2.3 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund XI, Ltd., dated September 10, 2001
(Incorporated by reference to Exhibit 2.3 to the Company's
Registration Statement on Form S-4 filed June 29, 1999, as amended
(File No. 333-81895)).
99.1 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.
99.2 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 July 24, 2002 and filed with the
Commission on July 24, 2002 contained information under Item 5 (Other
Events) and Item 7 (Financial Statements, Pro Forma Financial Information
and Exhibits).
Current report on Form 8-K dated July 31, 2002 and filed with the
Commission on July 31, 2002 contained information under Item 5 (Other
Events) and Item 7 (Financial Statements, Pro Forma Financial Information
and Exhibits).
Current report on Form 8-K dated September 9, 2002 and filed with the
Commission on September 9, 2002 contained information under Item 5 (Other
Events) and Item 7 (Financial Statements, Pro Forma Financial Information
and Exhibits).
Page 22
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, Inc.
(Issuer)
November 14, 2002 /s/ H. Kerr Taylor
Date H. Kerr Taylor, President
November 14, 2002 /s/ Chad C. Braun
Date Chad C. Braun (Principal Accounting Officer)
Page 23
FORM OF SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, H. Kerr Taylor, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AmREIT, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
i. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
ii. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
iii. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
i. all significant deficiencies in the design or operation of
internal controls which could aversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
ii. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date:November 14, 2002 By: /s/ H. Kerr Taylor
H. Kerr Taylor, Chief Executive Officer
Page 24
FORM OF SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, Chad C. Braun, Executive Vice President of Finance, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AmREIT, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
i. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
ii. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
iii. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
i. all significant deficiencies in the design or operation of
internal controls which could aversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
ii. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Chad C. Braun
Chad C. Braun, Executive Vice President of Finance
Page 25
Exhibits
2.1 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund IX, Ltd., dated September 10, 2001
(Incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 filed June 29, 1999, as amended
(File No. 333-81895)).
2.2 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund X, Ltd., dated September 10, 2001
(Incorporated by reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-4 filed June 29, 1999, as amended
(File No. 333-81895)).
2.3 Amended and Restated Agreement and Plan of Merger by and between
AmREIT and AAA Net Realty Fund XI, Ltd., dated September 10, 2001
(Incorporated by reference to Exhibit 2.3 to the Company's
Registration Statement on Form S-4 filed June 29, 1999, as amended
(File No. 333-81895)).
99.1 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.
99.2 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.
Page 26
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AmREIT, Inc. (the "Company") on Form
10-QSB for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, H. Kerr Taylor, Chief
Executive Officer of the Company, certify, pursuant to 18-U.S.C. Section 1350,
as adopted pursuant to Section-906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section-13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ H. Kerr Taylor
H. Kerr Taylor
Chief Executive Officer
November 14, 2002
Page 27
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AmREIT, Inc. (the "Company') on Form
10-QSB for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Chad C. Braun, Chief
Financial Officer of the Company, certify, pursuant to 18-U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Chad C. Braun
Chad C. Braun
Chief Financial Officer
November 14, 2002
Page 28