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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
[ ] 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
(Name of registrant as specified its charter)
TEXAS 76-0410050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 GREENWAY PLAZA, SUITE 1000 77046
HOUSTON, TX (Zip Code)
(Address of principal executive offices)
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. Yes [X] No [ ]
As of May 5, 2005 there were 3,608,665 class A, 2,200,756 class B,
4,083,798 class C and 5,163,248 class D common shares of beneficial interest of
AmREIT, $.01 par value outstanding.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMREIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
(UNAUDITED)
ASSETS
Real estate investments at cost:
Land...................................................... $ 67,168 $ 68,138
Buildings................................................. 85,961 88,211
Tenant improvements....................................... 4,248 4,243
-------- --------
157,377 160,592
Less accumulated depreciation and amortization............ (3,990) (3,561)
-------- --------
153,387 157,031
Real estate held for sale, net............................ 9,925 6,326
Net investment in direct financing leases held for
investment.............................................. 19,218 19,219
Investment in retail partnerships and other affiliates.... 1,877 1,979
-------- --------
Net real estate investments............................. 184,407 184,555
Cash and cash equivalents................................... 3,891 2,960
Tenant receivables.......................................... 1,900 1,338
Accounts receivable......................................... 485 37
Accounts receivable -- related party........................ 1,535 910
Deferred costs.............................................. 1,027 1,040
Intangible lease cost, net.................................. 10,238 10,628
Other assets................................................ 1,992 1,683
-------- --------
TOTAL ASSETS................................................ $205,475 $203,151
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable............................................. $ 92,751 $105,964
Accounts payable and other liabilities.................... 3,862 4,830
Below market leases, net.................................. 2,393 2,504
Security deposits......................................... 367 368
-------- --------
TOTAL LIABILITIES....................................... 99,373 113,666
-------- --------
Minority interest........................................... 1,105 1,115
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, 3,493,328 and 3,462,767 shares issued,
respectively............................................ 35 35
Class B Common shares, $.01 par value, 3,000,000 shares
authorized, 2,215,722 and 2,246,283 shares issued,
respectively............................................ 22 22
Class C Common shares, $.01 par value, 4,400,000 shares
authorized, 4,083,276 and 4,079,174 shares issued,
respectively............................................ 41 41
Class D Common shares, $.01 par value, 17,000,000 shares
authorized, 4,103,087 and 2,090,765 shares issued,
respectively............................................ 41 21
Capital in excess of par value............................ 122,013 104,114
Accumulated distributions in excess of earnings........... (15,741) (15,038)
Deferred compensation..................................... (1,359) (770)
Cost of treasury shares, 9,116 Class A shares............. (55) (55)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.............................. 104,997 88,370
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $205,475 $203,151
======== ========
See Notes to Consolidated Financial Statements.
F-2
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2005 2004
----------- -------
(UNAUDITED)
Revenues:
Rental income from operating leases....................... $ 4,313 $ 1,521
Earned income from direct financing leases................ 507 508
Real estate fee income.................................... 994 367
Securities commission income.............................. 2,123 1,905
Asset management fee income............................... 117 75
Interest and other income................................. 188 11
------- -------
Total revenues......................................... 8,242 4,387
------- -------
Expenses:
General and administrative................................ 1,652 1,201
Property expense.......................................... 729 209
Legal and professional.................................... 579 328
Securities commissions.................................... 1,633 1,424
Depreciation and amortization............................. 1,097 225
Deferred merger costs..................................... -- 1,320
------- -------
Total expenses......................................... 5,690 4,707
------- -------
Operating income (loss)..................................... 2,552 (320)
Other income (expense):
Income from retail partnerships and other affiliates........ 31 15
Federal income tax expense for taxable REIT subsidiary...... (34) (171)
Interest expense............................................ (1,517) (620)
Minority interest in income of consolidated joint
ventures.................................................. (15) (44)
------- -------
Income (loss) before discontinued operations................ 1,017 (1,140)
Income from discontinued operations......................... 341 167
Gain on sales of real estate acquired for resale............ -- 608
------- -------
Income from discontinued operations.................... 341 775
------- -------
Net income (loss)........................................... 1,358 (365)
Distributions paid to class B, C and D shareholders......... (1,632) (813)
------- -------
Net loss available to class A shareholders.................. $ (274) $(1,178)
======= =======
Net (loss) income per class A common share -- basic and
diluted
Loss before discontinued operations....................... $ (0.18) $ (0.66)
Income from discontinued operations....................... 0.10 0.26
------- -------
Net loss.................................................. $ (0.08) $ (0.40)
======= =======
Weighted average class A common shares used to compute net
(loss) income per share, basic and diluted................ 3,471 2,953
======= =======
See Notes to Consolidated Financial Statements.
F-3
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
QUARTER ENDED
MARCH 31,
-------------------
2005 2004
-------- --------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)......................................... $ 1,358 $ (365)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Investment in real estate acquired for resale........... (1,369) (667)
Proceeds from sales of real estate acquired for
resale................................................ -- 2,464
Gain on sales of real estate acquired for resale........ -- (608)
Gain on sales of real estate acquired for investment.... (250) --
Income from retail partnerships and other affiliates.... (31) (15)
Depreciation and amortization........................... 1,003 255
Amortization of deferred compensation................... 144 64
Minority interest in income of consolidated joint
ventures.............................................. 15 44
Deferred merger costs................................... -- 1,320
(Increase) decrease in tenant receivables............... (512) 109
Increase in accounts receivable......................... (448) (304)
Increase in accounts receivable -- related party........ (450) (1,494)
Cash receipts from direct financing leases more (less)
than income recognized................................ 1 (3)
Decrease (increase) in deferred costs................... 2 (42)
(Increase) decrease in other assets..................... (278) 45
Decrease in accounts payable............................ (1,701) (581)
Increase in security deposits........................... (1) --
-------- --------
Net cash (used in) provided by operating
activities........................................... (2,517) 222
-------- --------
Cash flows from investing activities:
Improvements to real estate............................... (109) (231)
Notes receivable collections.............................. -- 43
Additions to furniture, fixtures and equipment............ (61) (119)
Investment in retail partnerships and other affiliates.... (129) (1,313)
Distributions from retail partnerships and other
affiliates.............................................. 134 10
Proceeds from sale of investment property................. 941 --
Decrease (increase) in preacquisition costs............... (4) (34)
-------- --------
Net cash provided by (used in) investing activities..... 772 (1,644)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable............................... 2,888 2,965
Payments of notes payable................................. (16,045) (14,464)
Issuance of common shares................................. 19,793 15,815
Retirement of common shares............................... (410) --
Issuance costs............................................ (2,245) (1,796)
Common dividends paid..................................... (1,280) (925)
Distributions to minority interests....................... (25) (25)
-------- --------
Net cash provided by financing activities............... 2,676 1,570
-------- --------
Net increase in cash and cash equivalents................... 931 148
Cash and cash equivalents, beginning of period.............. 2,960 2,031
-------- --------
Cash and cash equivalents, end of period.................... $ 3,891 $ 2,179
======== ========
F-4
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $1,522,913 $620,688
Income taxes.............................................. 654,886 48,600
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the first quarter of 2005 and 2004, the Company converted 31
thousand and 23 thousand B shares to A shares, respectively. Additionally,
during the first quarter of 2005 and 2004, the Company issued Class C & D shares
with a value of $781 thousand and $233 thousand, respectively, in satisfaction
of dividends through the dividend reinvestment program.
During the first quarter of 2005, the Company issued 90 thousand shares of
restricted stock to employees and trust managers as part of their compensation
plan. The restricted stock vests over a four and three year period respectively.
The Company recorded $733 thousand in deferred compensation related to the
issuance of the restricted stock.
During the first quarter of 2004, the Company issued 135 thousand shares of
restricted stock to employees and trust managers as part of their compensation
plan. The restricted stock vests over a four and three year period respectively.
The Company recorded $876 thousand in deferred compensation related to the
issuance of the restricted stock.
See Notes to Consolidated Financial Statements.
F-5
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE QUARTER ENDED MARCH 31, 2005
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ACCUMULATED
CAPITAL IN DISTRIBUTIONS COST OF
COMMON SHARES EXCESS OF PAR IN EXCESS OF DEFERRED TREASURY
AMOUNT VALUE EARNINGS COMPENSATION SHARES TOTAL
------------- ------------- ------------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 2004........... $ 119 $ 104,114 $ (15,038) $ (770) $ (55) $ 88,370
Net income........................... -- -- 1,358 -- -- 1,358
Issuance of common shares, Class A... -- -- -- (733) -- (733)
Amortization of deferred
compensation....................... -- -- -- 144 -- 144
Issuance of common shares, Class C... -- 417 -- -- -- 417
Retirement of common shares, Class
C.................................. -- (410) -- -- -- (410)
Issuance of common shares, Class D... 20 17,892 -- -- -- 17,912
Distributions........................ -- -- (2,061) -- -- (2,061)
-------- ------------ ------------ --------- --------- -----------
BALANCE AT MARCH 31, 2005.............. $ 139 $ 122,013 $ (15,741) $ (1,359) $ (55) $ 104,997
======== ============ ============ ========= ========= ===========
See Notes to Consolidated Financial Statements.
F-6
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT is a fully integrated, self-managed and self-advised equity REIT
based in Houston, Texas. We own and operate a portfolio of multi-tenant and
single-tenant retail properties consisting of 61 properties in 17 states as of
March 31, 2005, having an aggregate gross leaseable area of approximately
908,000 square feet. Multi-tenant shopping centers represented 61.1 percent of
annualized rental income for the properties we owned as of March 31, 2005. We
also manage an additional 20 properties located in six states for our affiliated
retail partnerships. Properties that we acquire are generally newly constructed
or recently constructed at the time of acquisition. AmREIT's class A common
shares are traded on the American Stock Exchange under the symbol "AMY".
AmREIT directly owns a portfolio of grocery-anchored, strip center,
lifestyle shopping centers and single-tenant retail properties leased to
companies such as Kroger(R), Walgreens(R), GAP(R) and Starbucks(R). We have
focused geographically in the Houston market and other large metropolitan
markets in Texas such as Dallas and San Antonio. We focus on acquiring and
selectively developing multi-tenant shopping centers anchored by major
retailers. Many of our properties are located on what we call "Irreplaceable
Corners(TM)" which we define as premier retail frontage locations in
high-traffic, highly populated, affluent areas with high barriers to entry. 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. The dependability of the lease
payments is therefore based on the strength and viability of the entire company,
not just the leased location.
Our business structure consists of our portfolio of retail properties as
well as three additional businesses: (1) a full service real estate operating
and development business; (2) a retail partnership business; and (3) a
registered securities business. Through our real estate operating and
development business, we provide construction and development, property
management, asset acquisition and disposition, brokerage and leasing, tenant
representation, sale/leaseback and joint venture management services. Our retail
partnerships were formed to develop, own, manage and add value to retail
properties with a focus on shorter term value creation and a limited investment
period. Each of these partnerships owns multiple properties, and we act as the
partnerships' general partner while our real estate operating company acts as
property manager. Through our retail partnerships, AmREIT captures recurring
development, leasing, property management and asset management fees for services
performed while maintaining a residual interest after a preferred return is paid
to limited partners. Our registered securities business sells interests in our
affiliated retail partnerships and non-traded AmREIT shares through a wholesale
effort using a national network of unaffiliated, third-party financial planners.
We finance our growth and working capital needs with a combination of
equity and debt. Our registered securities business gives us access to capital
through the independent financial planning marketplace. Our class C common share
offering which was opened in August 2003 became fully subscribed during the
second quarter of 2004, and we are currently raising capital through our class D
common share offering. The class C and class D common shares are not publicly
traded and are being offered exclusively through the independent financial
planning community. Our bylaws limit our recourse debt to 55 percent of gross
asset value. Our strategies and our structure, as discussed herein, are reviewed
by our board on a regular basis and may be modified or changed without a vote of
our shareholders.
F-7
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AmREIT's initial predecessor, American Asset Advisers Trust, Inc. was
formed as a Maryland Corporation in 1993. Following the merger of our external
adviser into the Company in June 1998, we changed our name to AmREIT, Inc.,
which was a Maryland corporation. In December 2002, we reorganized as a Texas
real estate investment trust. 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 $24.3 million and issued approximately 2.6 million Class B common
shares 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 resulted from
the shares payable to H. Kerr Taylor, our President and Chief Executive Officer,
as a result of the merger, which shares represented a portion of consideration
payable to Mr. Taylor as a result of the sale of his advisory company to AmREIT.
To date, Mr. Taylor has received 900 thousand class A common shares, which
fulfills the shares that he is owed under the agreement, and no further shares
will be issued under this arrangement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are recorded
when incurred. The consolidated financial statements include the accounts of
AmREIT and its wholly or majority owned subsidiaries in which we have a
controlling financial interest. Investments in joint ventures and partnerships
where we have the ability to exercise significant influence, but do not exercise
financial and operating control, are accounted for using the equity method. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
The Company leases space to tenants under agreements with varying terms.
The majority of the leases are accounted for under the operating method with
revenue being recognized on a straight-line basis over the terms of the
individual leases. Accrued rents are included in tenant receivables. Revenue
from tenant reimbursements of taxes, maintenance expenses and insurance is
recognized in the period the related expense is recorded. Additionally, certain
of the lease agreements contain provisions that grant additional rents based on
tenants' sales volumes (contingent or percentage rent). Percentage rents are
earned when the tenants achieve the specified targets as defined in their lease
agreements and are generally recognized when such rents are collected. The terms
of certain leases require that the building/improvement portion of the lease be
accounted for under the direct financing method. Such method requires that an
asset be recorded for the present value of such future cash flows and that a
portion of such cash flows be recognized as earned income over the life of the
lease so as to produce a constant periodic rate of return.
The Company has been engaged to provide various services, including
development, construction management, property management, leasing and
brokerage. The fees for these services are generally calculated as a percentage
of revenues earned or to be earned and of property cost, as appropriate. Such
fees are recognized as services are provided.
REAL ESTATE INVESTMENTS
Development Properties -- Land, buildings and improvements are recorded at
cost. Expenditures related to the development of real estate are carried at cost
which includes capitalized carrying charges, acquisition costs and development
costs. Carrying charges, primarily interest, real estate taxes and loan
acquisition costs,
F-8
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and direct and indirect development costs related to buildings under
construction are capitalized as part of construction in progress. The
capitalization of such costs ceases at the earlier of one year from the date of
completion of major construction or when the property, or any completed portion,
becomes available for occupancy. 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.
Acquired Properties and Acquired Lease Intangibles -- We account for real
estate acquisitions pursuant to Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS 141"). Accordingly, we allocate the purchase
price of the acquired properties to land, building and improvements,
identifiable intangible assets and to the acquired liabilities based on their
respective fair values. Identifiable intangibles include amounts allocated to
acquired out-of-market leases and to the value of in-place leases. 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 analysis of
determining the as-if-vacant property value include an estimate of carrying
costs during the expected lease-up periods considering market conditions, and
costs to execute similar leases. In estimating carrying costs, management
includes real estate taxes, insurance and estimates of lost rentals at market
rates during the expected lease-up periods, tenant demand and other economic
conditions. Management also estimates costs to execute similar leases including
leasing commissions, tenant improvements, legal and other related expenses.
Intangibles related to out-of-market leases and in-place lease value are
recorded as acquired lease intangibles and are amortized over the remaining
terms of the underlying leases. Premiums or discounts on acquired out-of-market
debt are amortized to interest expense over the remaining term of such debt.
Depreciation -- Depreciation is computed using the straight-line method
over an estimated useful life of up to 50 years for buildings, up to 20 years
for site improvements and over the term of lease for tenant improvements.
Leasehold estate properties, where the Company owns the building and
improvements but not the related ground, are amortized over the life of the
lease.
Properties Held for Sale -- Properties are classified as held for sale if
management has decided to market the property for immediate sale in its present
condition with the belief that the sale will be completed within one year.
Properties held for sale are carried at the lower of cost or fair value less
cost to sell. Depreciation and amortization are suspended during the held for
sale period. At March 31, 2005, AmREIT owned twelve properties with a combined
carrying value of $9.9 million that are classified as real estate held for sale.
At December 31, 2004, AmREIT owned nine properties with a combined carrying
value of $6.3 million that were classified as real estate held for sale.
Our properties generally have operations and cash flows that can be clearly
distinguished from the rest of the Company. The operations and gains on sales
reported in discontinued operations include those properties that have been sold
or are held for sale and for which operations and cash flows can be clearly
distinguished. The operations of these properties have been eliminated from
ongoing operations, and we will not have continuing involvement after
disposition. Prior periods have been reclassified to reflect the operations of
these properties as discontinued operations.
Impairment -- 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 occurs by
comparing the estimated future cash flows (undiscounted and without interest
charges), including the residual value of the property, with the carrying value
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.
No impairment in value was recorded for the period ended March 31, 2005.
F-9
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TENANT RECEIVABLES
Included in tenant receivables are base rents, tenant reimbursements and
receivables attributable to recording rents on a straight-line basis. An
allowance for the uncollectible portion of accrued rents and accounts receivable
is determined based upon customer credit-worthiness (including expected recovery
of our claim with respect to any tenants in bankruptcy), historical bad debt
levels, and current economic trends.
DEFERRED COSTS
Deferred costs include deferred leasing costs and deferred loan fees, net
of amortization. Deferred loan fees are incurred in obtaining property financing
and are amortized to interest expense using a method that approximates the
effective interest method over the term of the debt agreements. Deferred leasing
costs consist of external commissions associated with leasing our properties and
are amortized to expense over the lease term. Accumulated amortization related
to deferred loan fees as of March 31, 2005 and December 31, 2004 totaled $210
thousand and $185 thousand, respectively. Accumulated amortization related to
leasing costs as of March 31, 2005 and December 31, 2004 totaled $123 thousand
and $108 thousand, respectively.
DEFERRED COMPENSATION
Our deferred compensation and long term incentive plan is designed to
attract and retain the services of our trust managers and employees that we
consider essential to our long-term growth and success. As such, it is designed
to provide them with the opportunity to own shares, in the form of restricted
shares, in AmREIT, and provide key employees the opportunity to participate in
the success of our affiliated actively managed retail partnerships through the
economic participation in our general partner companies. All long term
compensation awards are designed to vest over a period of three to seven years,
and promote retention of our quality team.
Deferred compensation includes share grants to employees as a form of
long-term compensation. The share grants vest over a period of three to seven
years. Additionally, the Company assigns a portion, up to 45 percent, of the
economic interest in certain of its retail limited partnerships to certain of
its key employees. This economic interest is received, as, if and when the
Company receives economic benefit from its profit participation, after certain
preferred returns have been paid to the partnership's limited partners. This
assignment of economic interest generally vests over a period of five to seven
years. This allows the Company to align the interest of its employees with the
interest of our shareholders. The Company amortizes the fair value, established
at the date of grant, of the restricted shares ratably over the vesting period.
Because the future profits and earnings from the retail limited partnerships can
not be reasonably predicted or estimated, and any employee benefit is completely
contingent upon the benefit received by the general partner of the retail
limited partnerships, AmREIT recognizes expense associated with the assignment
of economic interest in its retail limited partnerships as the Company
recognizes the corresponding income from the associated retail limited
partnerships. No portion of the economic interest in the retail partnerships
that have provided profit participation to the Company to date have been
assigned to employees. Therefore, no compensation expense has been recorded to
date.
AmREIT maintains a defined contribution 401k retirement plan for its
employees. This plan is available for all employees, immediately upon
employment. The plan allows for two open enrollment periods, June and December.
The plan is administered by Benefit Systems, Inc. and allows for contributions
to be either invested in an array of large, mid and small cap mutual funds
managed by Hartford, or directly into class A common shares. Employee
contributions invested in Company stock are limited to 50 percent of the
employee's contributions. The Company matches 50 percent of the employees
contribution, up to a maximum employee contribution of 4 percent. None of the
employer contribution is matched in Company stock.
F-10
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEDERAL INCOME TAXES
AmREIT has elected to be taxed 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 dividends paid, provided it meets all
conditions specified by the Internal Revenue Code for retaining its REIT status,
including the requirement that at least 90 percent of its real estate investment
trust taxable income be distributed to shareholders.
AmREIT's real estate operating and development business, AmREIT Realty
Investment Corporation and subsidiaries ("ARIC"), is a fully integrated and
wholly-owned group of brokers and real estate professionals that provide
development, acquisition, brokerage, leasing, construction, asset and property
management services to our publicly traded portfolio and retail partnerships as
well as to third parties. ARIC and our wholly-owned corporations that serve as
the general partners of our retail partnerships are treated for Federal income
tax purposes as taxable REIT subsidiaries (collectively, the "Taxable REIT
Subsidiaries"). Federal income taxes are accounted for under the asset and
liability method.
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income (loss)
available to class A common shareholders by the weighted average number of class
A common shares outstanding. Unvested shares of restricted stock have been
included in determining basic earnings per share due to the voting and dividend
rights associated with such shares. Diluted earnings per share has been computed
by dividing net income (as adjusted as appropriate) by the weighted average
number of common shares outstanding plus the weighted average number of dilutive
potential 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 which represent 13.1 million and 12.6 million potential common
shares as of March 31, 2005 and December 31, 2004, respectively.
The following table presents information necessary to calculate basic and
diluted earnings per share for the three months ended March 31, as indicated:
FOR THE THREE
MONTHS ENDED
MARCH 31,
----------------
2005 2004
------ -------
Loss to Class A common shareholders (in thousands)*......... $ (274) $(1,178)
Weighted average Class A common shares outstanding (in
thousands)................................................ 3,471 2,953
Basic and diluted loss per share*........................... $(0.08) $ (0.40)
---------------
* The operating results for the three months ended March 31, 2004 include a
charge to earnings of $1.3 million which was the market value of the class A
common shares issued to H. Kerr Taylor, President & CEO, related to the sale
of his advisory company to AmREIT in 1998. The charge represented deferred
merger costs related to this sale that was triggered by the issuance of
additional common stock as part of the merger with AmREIT's affiliated
partnerships during 2002 and the issuance of Class C common stock in 2003 and
in 2004.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
U.S. 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-11
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB reissued Interpretation No. 46 ("FIN 46R"),
Consolidation of Variable Interest Entities, as revised. FIN 46R addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights. FIN 46R requires a
variable interest entity to be consolidated by a company that 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 returns or both.
Disclosures are also required about variable interest entities in which a
company has a significant variable interest but that it is not required to
consolidate.
We are an investor in and the primary beneficiary of two entities that
qualify as variable interest entities pursuant to FIN 46R. These entities were
established to develop, own, manage, and hold property for investment. These
entities comprise $6.6 million of our total consolidated assets, and neither
entity had debt outstanding as of March 31, 2005. We historically consolidated
such entities under generally accepted accounting principles in effect prior to
the issuance of FIN 46R; accordingly, our adoption of FIN 46R had no effect on
our financial position or results of operations.
NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued Statement No. 123R ("SFAS 123R"),
Share-Based Payment that requires companies to expense the value of employee
stock options and similar awards. SFAS 123R becomes effective in 2006. We have
historically not used stock options as a means of compensating our employees,
and therefore we have no stock options outstanding as of March 31, 2005. Our
strategy to date has been to compensate our employees through issuance of
restricted shares of our class A common stock. We determine the fair value of
such awards based on the fair value of the shares on the date of grant and then
record that expense over the vesting period of the respective awards. The
provisions of SFAS 123R will not change this accounting treatment for our
restricted stock awards. Accordingly, we do not believe that our adoption of
SFAS 123R in 2006 will impact our consolidated financial position, results of
operations or cash flows.
DISCONTINUED OPERATIONS
The following is a summary of our discontinued operations for the three
months ended March 31, (in thousands, except for per share data):
2005 2004
----- -----
Rental revenue and earned income from DFL................... $ 124 $ 338
Gain on sale of real estate held for investment............. 250 --
Gain on sale of real estate held for resale................. -- 608
----- -----
Total revenues............................................ 374 946
Property expense............................................ (16) (44)
General operating and administrative........................ -- (67)
Legal and professional...................................... (4) --
Depreciation and amortization............................... (13) (21)
Interest expense............................................ -- (39)
----- -----
Total expenses............................................ (33) (171)
Income from discontinued operations....................... 341 775
Basic and diluted income from discontinued operations per
Class A common share...................................... $0.10 $0.26
F-12
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the sale of
common shares are treated as a reduction of shareholders' equity.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original 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.
RECLASSIFICATIONS
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the presentation used in the current year
consolidated financial statements. Such reclassifications had no effect on net
income (loss) or shareholders' equity as previously reported.
3. INVESTMENTS IN RETAIL PARTNERSHIPS AND OTHER AFFILIATES
RETAIL PARTNERSHIPS
As of March 31, 2005, AmREIT, indirectly through wholly owned subsidiaries,
owned interests in four limited partnerships, which are accounted for under the
equity method since AmREIT exercises significant influence over the investee. In
each of the partnerships, 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. Our interests in these limited partnerships range from
1.4 percent to 10.5 percent. These partnerships were formed to develop, own,
manage, and hold property for investment.
AmREIT Opportunity Fund ("AOF") -- AmREIT Opportunity Corporation ("AOC"),
a wholly owned subsidiary of AmREIT, invested $250 thousand as a limited partner
and $1 thousand as a general partner in AOF. AmREIT currently owns a 10.5
percent limited partner interest in AOF. Liquidation of AOF commenced in July of
2002, and as of March 31, 2005, AOF has an interest in one property. As the
general partner, AOC receives a promoted interest in cash flow and profits after
certain preferred returns are achieved for its limited partners.
AmREIT Income & Growth Fund, Ltd. ("AIG") -- AmREIT Income & Growth
Corporation, a wholly owned subsidiary of AmREIT, invested $200 thousand as a
limited partner and $1 thousand as a general partner in AIG. AmREIT currently
owns an approximately 2.0 percent limited partner interest in AIG.
AmREIT Monthly Income & Growth Fund ("MIG") -- AmREIT Monthly Income &
Growth Corporation, a wholly owned subsidiary of AmREIT, invested $200 thousand
as a limited partner and $1 thousand as a general partner in MIG. AmREIT
currently owns an approximately 1.4 percent limited partner interest in MIG.
AmREIT Monthly Income & Growth Fund II ("MIG II") -- AmREIT Monthly Income
& Growth II Corporation, a wholly owned subsidiary of AmREIT, invested $400
thousand as a limited partner and $1 thousand as a general partner in MIG II.
AmREIT currently owns an approximately 1.6 percent limited partner interest in
MIG II.
F-13
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth certain financial information for the AIG,
MIG and MIG II retail partnerships (AOF is not included as it is currently in
liquidation):
SHARING
RATIOS*
RETAIL CAPITAL LP GP SCHEDULED ---------
PARTNERSHIP UNDER MGMT. INTEREST INTEREST LIQUIDATION LP GP LP PREFERENCE*
----------- ----------- -------- -------- ----------- --- --- --------------
AIG.......................... $10 million 2.0% 1.0% 2008 99% 1% 8%
90% 10% 10%
80% 20% 12%
70% 30% 15%
0% 100% 40% Catch Up
60% 40% Thereafter
-- --- ------------
MIG.......................... $15 million 1.4% 1.0% 2010 99% 1% 8%
90% 10% 10%
80% 20% 12%
0% 100% 40% Catch Up
60% 40% Thereafter
-- --- ------------
MIG II....................... $25 million 1.6% 1.0% 2011 99% 1% 8%
85% 15% 12%
0% 100% 40% Catch Up
60% 40% Thereafter
-- --- ------------
---------------
* Illustrating the Sharing Ratios and LP Preference provisions using AIG as an
example, the LPs share in 99 percent of the cash distributions until they
receive an 8 percent preferred return. Thereafter, the LPs share in 90 percent
of the cash distributions until they receive a 10 percent preferred return.
OTHER AFFILIATE
Other than the retail partnerships, we have an investment in one entity
that is accounted for under the equity method since AmREIT exercises significant
influence over such investee. AmREIT invested $955 thousand in West Road Plaza,
LP, and we have a 25 percent limited partner interest in the partnership. West
Road Plaza was formed in 2004 to acquire, redevelop, lease and manage West Road
Plaza, a shopping center located on the north side of Houston, TX at the
intersection of I-45 and West Road.
4. ACQUIRED LEASE INTANGIBLES
In accordance with SFAS 141, we have identified and recorded the value of
intangibles at the property acquisition date. Such intangibles include the value
of in-place leases and out-of-market leases. These assets are amortized over the
leases' remaining terms, which range from 9 months to 20 years. The amortization
of above-market leases is recorded as a reduction of rental income and the
amortization of in-place leases is recorded to amortization expense.
F-14
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In-place leases, above-market leases and their respective accumulated
amortization at March 31, 2005 and December 31, 2004 were as follows:
MARCH 31, 2005 DECEMBER 31, 2004
----------------------- -----------------------
IN-PLACE ABOVE-MARKET IN-PLACE ABOVE-MARKET
LEASES LEASES LEASES LEASES
-------- ------------ -------- ------------
Cost.................................... $10,834 $328 $10,858 $328
Accumulated amortization................ (860) (64) (538) (20)
------- ---- ------- ----
$ 9,974 $264 $10,320 $308
------- ---- ------- ----
Acquired lease intangible liabilities (below-market leases) are net of
previously recognized rent of $174 thousand and $63 thousand at March 31, 2005
and December 31, 2004, respectively and are amortized over the leases' remaining
terms, which range from 10 months to 16 years. The amortization of below-market
leases is recorded as an increase to rental income.
5. NOTES PAYABLE
The Company's outstanding debt consists of the following (in thousands):
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
Notes Payable:
Fixed rate mortgage loans................................. $66,864 $ 67,190
Fixed rate unsecured loans................................ 760 760
------- --------
Total notes payable.................................... 67,624 67,950
Variable-rate unsecured line of credit...................... 25,127 38,014
------- --------
Total.................................................. $92,751 $105,964
======= ========
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 $41 million subject to the value of unencumbered
assets. In December 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. On March 31, 2005, 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 percent to LIBOR plus a spread of 2.35 percent.
As of March 31, 2005, the interest rate was LIBOR plus 2.35 percent. As of March
31, 2005, $25.1 million was outstanding under the Credit Facility. The Company
has approximately $15.9 million available under its line of credit, subject to
the financial covenants and Lender approval on the use of the proceeds.
F-15
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 2005, scheduled principal repayments on notes payable and
the credit facility were as follows (in thousands):
SCHEDULED
PRINCIPAL TERM-LOAN TOTAL
SCHEDULED PAYMENTS BY YEAR PAYMENTS MATURITIES PAYMENTS
-------------------------- --------- ---------- --------
2005 (includes Line of Credit)........................ $25,960 $ -- $25,960
2006.................................................. 1,184 -- 1,184
2007.................................................. 1,271 -- 1,271
2008.................................................. 1,365 13,410 14,775
2009.................................................. 1,453 885 2,338
Beyond five years..................................... 30,059 15,887 45,946
Unamortized debt premiums............................. -- 1,277 1,277
------- ------- -------
Total............................................... $61,292 $31,459 $92,751
======= ======= =======
6. CONCENTRATIONS
As of March 31, 2005, two properties individually accounted for more than
10 percent of the Company's consolidated total assets -- Plaza in the Park in
Houston, Texas and MacArthur Park in Dallas, Texas accounted for 16 percent and
20 percent, respectively of total assets. Consistent with our strategy of
investing in areas that we know well, 21 of our properties are located in the
Houston metropolitan area. These Houston properties represent 65 percent of our
rental income for the three months ended March 31, 2005. Houston is Texas'
largest city and the fourth largest city in the United States.
Following are the revenues generated by the Company's top tenants for the
three month period ended March 31 ($ in thousands):
TENANT 2005 2004
------ ------ ------
Kroger...................................................... $ 626 $ --
IHOP Corporation............................................ 562 658
CVS/pharmacy................................................ 236 229
Golden Corral............................................... 158 156
Linens 'N Things............................................ 155 --
Footstar.................................................... -- 138
Landry's.................................................... 129 113
------ ------
$1,866 $1,294
====== ======
7. SHAREHOLDERS' EQUITY AND MINORITY INTEREST
Class A Common Shares -- Our class A common shares are listed on the
American Stock Exchange ("AMEX") and traded under the symbol "AMY." As of March
31, 2005, there were 3,484,212 of the Company's class A common shares
outstanding, net of 9,116 shares held in treasury. The payment of any future
dividends by AmREIT to class A common shareholders is dependent upon applicable
legal and contractual restrictions, including the provisions of the class B,
class C and class D common shares, as well as its earnings and financial needs.
Class B Common Shares -- The class B common shares are not listed on an
exchange and there is currently no available trading market for the class B
common shares. The class B common shares have voting rights, together with all
classes of common shares, as one class of stock. The class B common shares were
F-16
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issued at $9.25 per share. They receive a fixed 8.0 percent cumulative and
preferred annual dividend, paid in quarterly installments, and are convertible
into the class A common shares on a one-for-one basis at any time, at the
holder's option. Beginning in July 2005, AmREIT has the right to call the shares
and, at the holder's option, either convert them on a one-for-one basis for
class A shares or redeem them for $10.18 per share in cash plus any accrued and
unpaid dividends. As of March 31, 2005, there were 2,215,722 of the Company's
class B common shares outstanding.
Class C Common Shares -- The class C common shares are not listed on an
exchange and there is currently no available trading market for the class C
common shares. The class C common shares have voting rights, together with all
classes of common shares, as one class of stock. The class C common shares were
issued at $10.00 per share. They receive a fixed 7.0 percent preferred annual
dividend, paid in monthly installments, and are convertible into the class A
common shares after a 7-year lock out period based on 110 percent of invested
capital, at the holder's option. After three years and beginning in August 2006,
subject to the issuance date of the respective shares, AmREIT has the right to
force conversion of the shares into class A shares at the 10 percent conversion
premium or to redeem the shares at a cash redemption price of $11.00 per share.
As of March 31, 2005, there were 4,083,276 of the Company's class C common
shares outstanding.
Class D Common Shares -- The class D common shares are not listed on an
exchange and there is currently no available trading market for the class D
common shares. The class D common shares have voting rights, together with all
classes of common shares, as one class of stock. The class D common shares were
issued at $10.00 per share. They receive a fixed 6.5 percent annual dividend,
paid in monthly installments, subject to payment of dividends then payable to
class B and class C common shares. The class D common shares are convertible
into the class A common shares at a 7.7 percent premium on original capital
after a 7-year lock out period, at the holder's option. After one year and
beginning in July 2005, subject to the issuance date of the respective shares,
AmREIT has the right to force conversion of the shares into class A shares at
the 7.7 percent conversion premium or to redeem the shares at a cash price of
$10.00. In either case, the conversion premium will be pro rated based on the
number of years the shares are outstanding. As of March 31, 2005, there were
4,103,087 of the Company's class D common shares outstanding.
Minority Interest -- Minority interest represents a third-party interest in
entities that we consolidate as a result of our controlling financial interest
in such investees.
8. RELATED PARTY TRANSACTIONS
See Note 3 regarding investments in retail partnerships and other
affiliates.
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. AmREIT accounted for this merger as a
purchase, whereby the assets of the partnerships have been recorded at fair
value. AmREIT increased its real estate assets by approximately $24.3 million
and issued approximately 2.6 million shares of Class B common stock to the
limited partners in the affiliated partnerships as a result of the merger.
Approximately $760 thousand in 8 year, 5.47 percent interest only, subordinated
notes were issued to limited partners of the affiliated partnerships who
dissented to 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 resulted from the shares payable to H. Kerr Taylor, our President
and Chief Executive Officer, as a result of the merger, which shares represented
a portion of consideration payable to Mr. Taylor as a result of the sale of his
advisory company to AmREIT. Mr. Taylor earned shares during 2004 and 2003 as a
result of our class C and class D common share offering, resulting in a non-cash
charge to earnings of approximately $1.68 million, $915 thousand and $1.9
million in 2004, 2003 and 2002, respectively. To date, Mr. Taylor has received
900 thousand class A
F-17
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company earns real estate fee income by providing property acquisition,
leasing, property management and construction management services to our retail
partnerships. The Company owns 100 percent of the stock of the companies that
serve as the general partner for four of the Partnerships. Real estate fee
income of $753 thousand and $317 thousand were paid by the Partnerships to the
Company for the three months ended March 31, 2005 and 2004 respectively. The
Company earns asset management fees from the Partnerships for providing
accounting related services, investor relations, facilitating the deployment of
capital, and other services provided in conjunction with operating the
Partnership. Asset management fees of $117 thousand and $75 thousand were paid
by the Partnerships to the Company for the three months ended March 31, 2005 and
2004, respectively.
As a sponsor of real estate investment opportunities to the NASD financial
planning broker-dealer community, the Company maintains an indirect 1 percent
general partner interest in the investment funds that it sponsors. The funds are
typically structured such that the limited partners receive 99 percent of the
available cash flow until 100 percent 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.
9. REAL ESTATE ACQUISITIONS AND DISPOSITIONS
For the three months ended March 31, 2005, AmREIT sold one single tenant
non-core property. The sale of the property resulted in a net gain of $250
thousand. The cash proceeds from the sale of the property were approximately
$941 thousand. As a result of the sale, the operations of the property,
including the gains on sales, have been classified as discontinued operations
for all periods presented.
During 2004, AmREIT invested $105.2 million through the acquisition of five
multi-tenant properties. The acquisitions were accounted for as purchases and
the results of their operations are included in the consolidated financial
statements from the respective dates of acquisition.
On December 27, 2004, AmREIT acquired MacArthur Park Shopping Center, a
Kroger (NYSE: KR) anchored shopping center consisting of 198,443 square feet
located on approximately 23 acres. The property, which was acquired from Regency
Centers, is located in Dallas, Texas at the northwest intersection of I-635 and
MacArthur Boulevard in the heart of Las Colinas, an affluent residential and
business community. The property is surrounded by companies such as Exxon Mobil,
Citigroup, and Sabre. The property was acquired for cash and the assumption of
long-term fixed rate debt. The Kroger lease is for 20-years, containing
approximately 63,000 square feet, expiring in November 2020.
On July 21, 2004, AmREIT acquired Bakery Square Shopping Center, a 34,614
square-foot retail project including a free standing Walgreens 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's leases is 4.4 years. The
Walgreens lease covers 15,210 square feet and is non-cancelable until October
31, 2016, with Walgreens having the option to renew the lease every five years
thereafter until the lease expires on October 31, 2056.
F-18
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 1, 2004, AmREIT acquired Plaza in the Park, a 138,663 square-foot
Kroger 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's leases is
9.2 years. The Kroger lease is for 20 years, containing approximately 71,000
square feet, expiring in August 2017.
On July 1, 2004, AmREIT acquired Cinco Ranch, a 97,297 square-foot Kroger
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's leases is
13.5 years. The Kroger lease is for 20 years, containing approximately 63,000
square-feet, expiring in June 2023.
On June 15, 2004, AmREIT acquired 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's leases is 4.7 years.
10. COMMITMENTS
In March of 2004, the Company signed a new lease agreement for its office
facilities which expires August 31, 2009. In addition, the Company leases
various office equipment for daily activities. Rental expense for the three
months ended March 31, 2005 and 2004 was $51 thousand and $6 thousand,
respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's consolidated financial instruments consist primarily of cash,
cash equivalents, tenant receivables, accounts receivable, accounts payable and
other liabilities and notes payable. The carrying value of cash, cash
equivalents, tenant receivables, accounts receivable, accounts payable and other
liabilities are representative of their respective fair values due to the
short-term maturity of these instruments. As of March 31, 2005, the carrying
value of the Company's total debt obligations was $92.8 million. Approximately
$25.1 million of our total debt obligations have market-based terms, including a
variable interest rate, and the carrying value of such debt is therefore
representative of its fair value as of March 31, 2005. Approximately $67.6
million of our total debt obligations have fixed rate terms and have an
estimated fair value of $69.1 million as of March 31, 2005. As of December 31,
2004, the carrying value of the Company's total debt obligations was $106.0
million. As of December 31, 2004, approximately $38.0 million of our total debt
obligations had market-based terms, including a variable interest rate, and the
carrying value of such debt is therefore representative of its fair value. As of
December 31, 2004, approximately $68.0 million of our total debt obligations had
fixed rate terms and had an estimated fair value of $69.7 million.
12. 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 has historically evaluated the performance of its operating segments
primarily on revenue. During 2005, we began evaluating our operating segments
based on income from continuing operations. Accordingly, we began allocating
certain overhead expenses to the individual business units to which those
F-19
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expenses relate. We have recorded reclassifications to the 2004 segment expenses
to conform to the current year presentation.
The portfolio segment consists of our portfolio of single and multi-tenant
shopping center projects. This segment consists of 61 properties located in 17
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 year ended December 31, 2004 and during the quarter ended March 31,
2005 occurred within the portfolio segment. Our real estate operating and
development business is a fully integrated and wholly-owned group of brokers and
real estate professionals that provide development, acquisition, brokerage,
leasing, construction, asset and property management services to our publicly
traded portfolio and retail partnerships as well as to third parties. The
securities segment consists of an NASD registered securities business that,
through the internal securities group, raises capital from the independent
financial planning marketplace. The retail partnerships sell limited partnership
interests to retail investors, in which AmREIT indirectly invests as both the
general partner and as a limited partner (see Note 3). These retail partnerships
were formed to develop, own, manage, and add value to properties with an average
holding period of two to four years.
REAL ESTATE RETAIL
FOR THE THREE MONTHS ENDED MARCH 31, 2005 PORTFOLIO OPERATIONS SECURITIES PARTNERSHIPS TOTAL
----------------------------------------- --------- ----------- ---------- ------------ -------
Rental income............................. $4,795 $ 25 $ -- $ -- $ 4,820
Securities commission income.............. -- -- 2,123 -- 2,123
Real estate fee income.................... -- 994 -- -- 994
Other income.............................. 140 48 -- 117 305
------ ------ ------ ---- -------
Total Revenue........................ 4,935 1,067 2,123 117 8,242
Securities commission expense............. -- -- 1,633 -- 1,633
Depreciation and amortization............. 1,097 -- -- -- 1,097
Property expense.......................... 729 -- -- -- 729
Professional fees......................... 314 95 16 -- 425
Real estate commission expense............ -- 154 -- -- 154
General and administrative expense........ 329 661 623 39 1,652
------ ------ ------ ---- -------
Total Expenses....................... 2,469 910 2,272 39 5,690
Interest expense.......................... (1,517) -- -- -- (1,517)
Other income (expense).................... (49) 33 (4) 2 (18)
Income from discontinued operations..... 318 23 -- -- 341
------ ------ ------ ---- -------
Net Income (loss).................... $1,218 $ 213 $ (153) $ 80 $ 1,358
------ ------ ------ ---- -------
F-20
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE RETAIL
FOR THE THREE MONTHS ENDED MARCH 31, 2004 PORTFOLIO OPERATIONS SECURITIES PARTNERSHIPS TOTAL
----------------------------------------- --------- ----------- ---------- ------------ -------
Rental income............................. $2,029 $ -- $ -- $ -- $ 2,029
Securities commission income.............. -- -- 1,905 -- 1,905
Real estate fee income.................... -- 367 -- -- 367
Other income.............................. 11 -- -- 75 86
------ ------ ------ ---- -------
Total Revenue........................ 2,040 367 1,905 75 4,387
Deferred merger expense................... 1,320 -- -- -- 1,320
Securities commission expense............. -- -- 1,424 -- 1,424
Professional fees......................... 141 16 11 -- 168
Depreciation and amortization............. 225 -- -- -- 225
Property expense.......................... 209 -- -- -- 209
Real estate commission expense............ -- 160 -- -- 160
General and administrative expense........ 265 338 582 16 1,201
------ ------ ------ ---- -------
Total Expenses....................... 2,160 514 2,017 16 4,707
Interest expense.......................... (620) -- -- -- (620)
Other income/(expense).................... (45) (166) (4) 15 (200)
Income from discontinued operations....... 110 665 -- -- 775
------ ------ ------ ---- -------
Net Income (loss).................... $ (675) $ 352 $ (116) $ 74 $ (365)
====== ====== ====== ==== =======
13. SUBSEQUENT EVENTS
On April 22, 2005, the Company filed a registration statement with the
Securities and Exchange Commission (SEC) registering 3,600,000 of its series A
common shares (including the 15% underwriters' over-allotment options) for
issuance to the public. The shares will be offered in an underwritten public
offering. The offering is expected to be completed before the end of the second
quarter of 2005.
On May 10, 2005, all contingencies in AmREIT's contract to acquire a
multi-tenant shopping center consisting of 169,000 square-feet located on
approximately 14 acres were satisfied, and the agreement became enforceable
against AmREIT. The property, which is expected to be acquired on June 2, 2005,
is being purchased for approximately $70 million and is located in a major Texas
market. The property will be acquired through the placement of $49 million of
long term fixed rate debt with the remainder of the purchase price to be paid in
cash. The debt will have a ten year term, a 5.37 interest rate, and require that
interest only payments be made monthly during the entire term of the loan. The
weighted average remaining lease term for the project is 5.5 years. The shopping
center is 92 percent occupied.
F-21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain information presented in this Form 10-Q 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 such 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, the ability of
tenants to make payments under their respective leases, timing of acquisitions,
development starts and sales of properties and the ability to meet development
schedules.
The 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-K for the year ended December 31, 2004. 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 and the comparative summary
of selected financial data appearing elsewhere in this report. Historical
results and trends which might appear should not be taken as indicative of
future operations.
EXECUTIVE OVERVIEW
AmREIT(AMEX: AMY) is a fully integrated, self-managed and self-advised
equity REIT based in Houston, Texas. We own and operate a portfolio of
multi-tenant and single-tenant retail properties consisting of 61 properties in
17 states as of March 31, 2005, having an aggregate gross leaseable area of
approximately 908,000 square feet. Multi-tenant shopping centers represented
61.1 percent and 62.5 percent of annualized rental income for the properties we
owned as of March 31, 2005 and December 31, 2004, respectively. We also manage
an additional 20 properties located in six states for our affiliated retail
partnerships. We have focused geographically in the Houston market and other
large metropolitan markets in Texas such as Dallas and San Antonio. We focus on
acquiring and selectively developing multi-tenant shopping centers anchored by
major retailers. Many of our properties are located on what we call
"Irreplaceable Corners(TM)" which we define as premier retail frontage locations
in high-traffic, highly populated, affluent areas with high barriers to entry.
We focus on Irreplaceable Corners because we believe that these properties are
in greater demand, have greater prospects for upward movement in rents and
should produce higher risk-adjusted returns than similar properties located in
other locations. AmREIT is vertically integrated with three additional
synergistic businesses that we believe enhance our earnings potential, add value
and support our portfolio expansion. These three synergistic businesses are: (1)
a full service real estate operating and development business; (2) a retail
partnership business; and (3) a registered securities business. This flexible
structure allows AmREIT access to multiple avenues of low-cost capital, which
can be deployed efficiently and accretively for our shareholders. In addition,
we believe our business structure cultivates growth both internally and
externally, distinguishing AmREIT as a value creator, a growth company and a
source of dependable monthly income.
AmREIT's goal is to deliver dependable, monthly income for our
shareholders. In so doing, AmREIT strives to increase and maximize Funds from
Operations (FFO) per share by issuing long-term capital through both the NASD
independent financial planning marketplace and potentially through underwritten
offerings, and investing the capital in accretive real estate properties,
acquired or developed, on Irreplaceable Corners. Additionally, we strive to
maintain a conservative balance sheet by keeping a debt to gross asset value
ratio of less than 55 percent. As of March 31, 2005, our ratio of debt to gross
asset value was less than 55 percent.
We have been developing and acquiring multi-tenant shopping centers for
almost ten years in our retail partnership business. During that time, we
believe we have sharpened our ability to recognize the high-end
grocery-anchored, strip center, lifestyle center and single-tenant properties
that can create long-term value. In
F-22
assessing the performance of the Company's properties, management evaluates the
occupancy of the Company's portfolio. Occupancy for our operating properties was
97.0 percent as of March 31, 2005 as compared to 96.6 percent as of December 31,
2004.
Management plans to continue selectively divesting properties which no
longer meet our core criteria and replace them primarily with high-quality,
multi-tenant shopping centers on Irreplaceable Corners. In executing this
strategy, we expect to increase total assets from $203 million as of December
31, 2004 to approximately $400 million by mid-2006. We intend to finance our
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. Through our class C and D common share
offerings, we raised approximately $46.4 million in capital in 2004, which along
with debt financing, financed $105.2 million in property acquisitions and
developments in 2004.
With respect to our growth opportunities, we currently have approximately
$175 million of projects in our pipeline at various stages of evaluation. Each
potential acquisition is subjected to a rigorous due diligence process that
includes site inspections, financial underwriting, credit analysis and market
and demographic studies. Therefore, there can be no assurance that any or all of
these projects will ultimately be purchased by AmREIT. Management has budgeted
for an increase in interest rates during 2005. As of March 31, 2005,
approximately 73 percent of our outstanding debt had a long-term fixed interest
rate with an average term of seven years. Our philosophy continues to be
matching long-term leases with long-term debt structures while keeping our debt
to total assets ratio less than 55 percent.
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 revenue
recognition, the regular evaluation of whether the value of a real estate asset
has been impaired, the allowance for doubtful accounts and accounting for real
estate acquisitions. 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.
Revenue Recognition -- The Company leases space to tenants under agreements
with varying terms. The majority of the leases are accounted for under the
operating method with revenue being recognized on a straight-line basis over the
terms of the individual leases. Accrued rents are included in tenant
receivables. Revenue from tenant reimbursements of taxes, maintenance expenses
and insurance is recognized in the period the related expense is recorded.
Additionally, certain of the lease agreements contain provisions that grant
additional rents based on tenants' sales volumes (contingent or percentage
rent). Percentage rents are earned when the tenants achieve the specified
targets as defined in their lease agreements and are generally recognized when
such rents are collected. The terms of certain leases require that the
building/improvement portion of the lease be accounted for under the direct
financing method. Such method requires that an asset be recorded for the present
value of such future cash flows and that a portion of such cash flows be
recognized as earned income over the life of the lease so as to produce a
constant periodic rate of return.
The Company has been engaged to provide various services, including
development, construction management, property management, leasing and
brokerage. The fees for these services are generally calculated as a percentage
of revenues earned or to be earned and of property cost, as appropriate. Such
fees are recognized as services are provided.
Real Estate Valuation -- Land, buildings and improvements are recorded at
cost. Expenditures related to the development of real estate are carried at cost
which includes 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.
F-23
The capitalization of such costs ceases at the earlier of one year from the date
of completion of major construction or when the property, or any completed
portion, becomes available for occupancy. The Company capitalizes acquisition
costs once the acquisition of the property becomes probable. Prior to that time,
the Company expenses these costs as acquisition expenses. Depreciation is
computed using the straight-line method over an estimated useful life of up to
50 years for buildings, up to 20 years for site improvements and over the term
of lease for tenant improvements. Leasehold estate properties, where the Company
owns the building and improvements but not the related ground, are amortized
over the life of the lease.
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 value 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.
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.
Real Estate Acquisitions -- We account for real estate acquisitions
pursuant to Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") Accordingly, we allocate the purchase price of the
acquired properties to land, building and improvements, identifiable intangible
assets and to the acquired liabilities based on their respective fair values.
Identifiable intangibles include amounts allocated to acquired out-of-market
leases and to the value of in-place leases. 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 analysis of
determining the as-if-vacant property value include an estimate of carrying
costs during the expected lease-up periods considering market conditions, and
costs to execute similar leases. In estimating carrying costs, management
includes real estate taxes, insurance and estimates of lost rentals at market
rates during the expected lease-up periods, tenant demand and other economic
conditions. Management also estimates costs to execute similar leases including
leasing commissions, tenant improvements, legal and other related expenses.
Intangibles related to out-of-market leases and in-place lease value are
recorded as acquired lease intangibles and are amortized over the remaining
terms of the underlying leases. Premiums or discounts on acquired out-of-market
debt are amortized to interest expense over the remaining term of such debt.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005 and 2004, the Company's cash and cash equivalents totaled
$3.9 million and $3.0 million, respectively. Cash flows from operating
activities, investing activities and financing activities for the three months
ended March 31, are as follows (in thousands):
2005 2004
------- -------
Operating activities........................................ $(2,517) $ 222
Investing activities........................................ 772 (1,644)
Financing activities........................................ 2,676 1,570
Cash flow 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
F-24
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, are expected to provide the necessary
capital to maintain and operate our properties as well as execute our growth
strategies.
Additionally, as part of its investment strategy, AmREIT constantly
evaluates its property portfolio, systematically selling off any non-core or
underperforming assets, and replacing them with Irreplaceable Corners(TM) and
other core assets. As we continue to raise capital, we anticipate growing and
increasing our operating cash flow by selling the underperforming assets and
deploying the capital generated into high-quality income producing retail real
estate assets. During 2004, this was evidenced through the purchases of
Courtyard at Post Oak, a 14 thousand square foot community shopping center,
Plaza in the Park, a 139 thousand square foot grocery-anchored shopping center,
Cinco Ranch Plaza, a 97 thousand square foot grocery-anchored shopping center,
Bakery Square, a 35 thousand square foot community shopping center and MacArthur
Park, a 198 thousand square foot grocery-anchored shopping center.
In June 2004, AmREIT began marketing its class D common share offering, a
$170 million publicly registered, non-traded common share offering, offered
through the independent financial planning community. The class D common shares
have a stated, non-preferred 6.5 percent 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 percent 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 March 31, 2005, the Company had raised
approximately $41.0 million through the sale of the class D common shares,
including shares issued through the dividend reinvestment program.
Cash provided by operating activities as reported in the Consolidated
Statements of Cash Flows decreased $2.7 million for the quarter ended March 31,
2005 when compared to the quarter ended March 31, 2004. This reduction was
primarily driven by a $2.5 million decrease in 2005 in proceeds from sales of
properties acquired for resale, coupled with a $702 thousand increase during
2005 in investments that we made in such properties during the quarter. These
decreases in cash flows were partially offset by a $1.1 million increase in our
income before depreciation and amortization in 2005 which was driven by our
significant property acquisitions during 2004.
Cash flows from investing activities as reported in the Consolidated
Statements of Cash Flows increased from a net investing outflow of $1.6 million
for the quarter in 2004 to a net investing inflow of $772 thousand in 2005. This
$2.4 million increase in cash flows is primarily attributable to two
factors -- we invested $1.2 million less in our retail partnerships and other
affiliates during 2005 as compared to 2004 and we sold one of our non-core
single-tenant properties in the first quarter of 2005 for $941 thousand, and we
had no similar property sales in the first quarter of 2004.
Cash flows provided by financing activities increased by $1.1 million from
$1.6 million during the quarter ended 2004 to $2.7 million during the quarter
ended 2005. This increase was primarily attributable to the Company's
capital-raising activities. Proceeds generated from the Company's class D common
share offering increased during 2005 by $3.5 million over 2004 proceeds, net of
issuance costs. This increase in net offering proceeds was partially offset by a
couple of factors. Payments made on notes payable increased by $1.6 million due
to the additional debt service resulting from our 2004 property acquisitions.
Additionally, dividends paid to shareholders increased during the quarter by
$355 thousand primarily due to the increase in the number of class D common
shareholders during 2004 and early 2005. During 2004, AmREIT began marketing its
class D common share offering, a $170 million common share offering, offered
through the independent financial planning community, and through March 31,
2005, has raised approximately $41.0 million, including shares issued through
the dividend reinvestment program.
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 $41 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, 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
F-25
March 31, 2005, 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 percent to LIBOR plus a spread
of 2.35 percent. As of March 31, 2005, the interest rate was LIBOR plus 2.35
percent. As of March 31, 2005, $25.1 million was outstanding under the Credit
Facility. The Company has approximately $15.9 million available under its line
of credit, subject to the financial covenants and Lender approval on the use of
the proceeds. In addition to the credit facility, AmREIT utilizes various
permanent mortgage financing and other debt instruments.
On April 22, 2005, the Company filed a registration statement with the
Securities and Exchange Commission (SEC) registering 3,600,000 of its series A
common shares (including the 15% underwriters' over-allotment options) for
issuance to the public. The shares will be offered in an underwritten public
offering. The offering is expected to be completed before the end of the second
quarter of 2005.
On May 10, 2005, all contingencies in AmREIT's contract to acquire a
multi-tenant shopping center consisting of 169,000 square-feet located on
approximately 14 acres were satisfied, and the agreement became enforceable
against AmREIT. The property, which is expected to be acquired on June 2, 2005,
is being purchased for approximately $70 million and is located in a major Texas
market. The property will be acquired through the placement of $49 million of
long term fixed rate debt with the remainder of the purchase price to be paid in
cash. The debt will have a ten year term, a 5.37 interest rate, and require that
interest only payments be made monthly during the entire term of the loan. The
weighted average remaining lease term for the project is 5.5 years. The shopping
center is 92 percent occupied.
CONTRACTUAL OBLIGATIONS
As of March 31, 2005, the Company had the following contractual debt
obligations (see also Note 7 the consolidated financial statements for further
discussion regarding the specific terms of our debt):
2005 2006 2007 2008 2009 THEREAFTER TOTAL
------- ------ ------ ------- ------ ---------- --------
Unsecured debt:
Revolving credit
facility*.............. $25,127 $ -- $ -- $ -- $ -- $ -- $ 25,127
5.46% dissenter notes..... -- -- -- -- -- 760 760
Secured debt**.............. 833 1,184 1,271 14,775 2,338 45,186 65,587
Interest*................... 3,891 4,237 4,151 4,057 3,080 24,502 43,918
Non-cancelable operating.... --
lease payments............ 203 267 267 267 174 -- 1,178
------- ------ ------ ------- ------ ------- --------
Total contractual
obligations............... $30,054 $5,688 $5,689 $19,099 $5,592 $70,448 $136,570
======= ====== ====== ======= ====== ======= ========
---------------
* Interest expense includes our interest obligations on our revolving credit
facility as well as on our fixed rate loans. Our revolving credit facility is
a variable-rate debt instrument, and its outstanding balance fluctuates
throughout the year based on our liquidity needs. This table assumes that the
balance outstanding ($25 million) and the interest rate as of March 31, 2005
(5.2 percent) remain constant throughout all periods presented.
** Secured debt as shown above is $1.3 million less than total secured debt as
reported due to the premium recorded on above-market debt assumed in
conjunction with certain of our 2004 property acquisitions.
During the three months ended March 31, 2005, the Company paid dividends to
its shareholders of $2.1 million, compared with $1.2 million in the three months
ended March 31, 2004. The class A, C and D
F-26
shareholders receive monthly dividends and the class B shareholders receive
quarterly dividends. All dividends are declared on a quarterly basis. The
dividends by class follows (in thousands):
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
2005
First Quarter.................................... $429 $410 $698 $524
2004
Fourth Quarter................................... $418 $416 $727 $224
Third Quarter.................................... $410 $425 $710 $ 33
Second Quarter................................... $383 $429 $677 N/A
First Quarter.................................... $345 $434 $379 N/A
2003
Fourth Quarter................................... $320 $437 $156 N/A
Third Quarter.................................... $308 $443 $ 15 N/A
Second Quarter................................... $310 $439 N/A N/A
First Quarter.................................... $307 $453 N/A N/A
Until properties are acquired by the Company, the Company's funds are used
to pay down outstanding debt under the Credit Facility. This investment strategy
allows us to manage our interest costs and provides us with the liquidity to
acquire properties at such time as those suitable for acquisition are located.
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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2005 TO THE THREE MONTHS ENDED
MARCH 31, 2004
Revenues
Total revenues increased by $3.8 million or 88 percent in the first quarter
of 2005 as compared to 2004 ($8.2 million in 2005 versus $4.4 million in 2004).
Rental revenues increased by $2.8 million or 184 percent in 2005 as compared to
2004. This increase is attributable to the significant property acquisitions
that we made after March 31, 2004. Real estate fee income increased
approximately $627 thousand, or 171 percent, primarily as a result of brokerage
commissions earned on property transactions within our retail partnerships.
Additionally, we recognized $140 thousand in other income during the quarter
ended March 31, 2005 as a result of a favorable settlement with a former tenant
related to receivables that were previously considered uncollectible.
Securities commission income increased by $218 thousand or 11 percent in
2005 as compared to 2004. This increase in commission income was driven by an
increase in the amount of capital raised through our broker-dealer company,
AmREIT Securities Company (ASC), in the first quarter of 2005 versus 2004. This
increase was partially offset by a corresponding increase in commission expense
paid to other third party broker-dealer firms. As ASC raises capital for either
AmREIT or its affiliated retail partnerships, ASC earns a securities commission
of between 8 percent and 10.5 percent of the money raised. These commission
revenues are then offset by commission payments to non-affiliated broker-dealer
of between 8 percent and 9 percent.
Expenses
Total operating expenses increased by $983 thousand, or 21 percent, from
$4.7 million in the first quarter of 2004 to $5.7 million in the first quarter
of 2005. This increase was primarily attributable to increases in depreciation
and amortization and in property costs, coupled with smaller increases in
securities commissions, as discussed above, and in general and administrative
expenses. These expense increases were partially offset in that $1.3 million of
deferred merger charges were recognized in the first quarter of 2004, and no
such charges have been recognized in 2005.
F-27
General and administrative expense increased by $451 thousand, or 38
percent, during 2005 to $1.7 million compared to $1.2 million in 2004. This
increase is primarily due to increases in personnel. The Company has increased
its total number of employees since March 31, 2004 in order to appropriately
match our resources with the growth in our portfolio. 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.
Property expense increased $520 thousand or 249 percent in 2005 as compared
to 2004 ($209 thousand in 2004 versus $729 thousand in 2005) primarily as a
result of the significant property acquisitions made during 2004.
Commission expense increased by $209 thousand or 15 percent from $1.4
million in 2004 to $1.6 million in 2005. This increase is attributable to
increased capital-raising activity through ASC during 2005 as discussed in
"Revenues" above.
Depreciation and amortization increased by $872 thousand, or 388 percent,
to $1.1 million in 2005 compared to $225 thousand in 2004. The increased
depreciation and amortization is attributable to the significant property
acquisitions made during 2004.
Deferred merger costs were $1.3 million in the first quarter of 2004 and
were $0 in the first quarter of 2005. The 2004 deferred merger costs were
related to deferred consideration payable to H. Kerr Taylor, the Chairman and
Chief Executive Officer of the Company, as a result of the acquisition of our
advisor in 1998, which was owned by Mr. Taylor. In connection with the
acquisition, Mr. Taylor agreed to payment for this advisory company in the form
of common shares, paid as the Company increased 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.
Other
Interest expense increased by $897 thousand, or 145 percent, from $620
thousand in 2004 to $1.5 million in 2005. The increase in interest expense is
primarily due to the debt that we assumed in 2004 related to our property
acquisitions. We assumed a total of $44.8 in debt, net of a premium of $1.4
million, as a result of these property acquisitions.
Gain on real estate acquired for resale was $608 thousand in 2004 as
compared to $0 in 2005. The gain recognized in 2004 is a result of selling one
single-tenant property. There have been no sales during 2005 of properties
acquired for resale.
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 funds from operations (FFO) as net income
(loss) computed in accordance with generally accepted accounting principles
(GAAP), excluding gains or losses from sales of property, 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. Management uses FFO as a supplemental measure
to conduct and evaluate our business because there are certain limitations
associated with using GAAP net income by itself as the primary measure of our
operating performance. Historical cost accounting for real estate assets in
accordance with GAAP implicitly assumes that the value of real estate assets
diminishes predictably over time. Since real estate values instead have
historically risen or fallen with market conditions, management believes that
the presentation of operating results for real estate companies
F-28
that uses historical cost accounting is insufficient by itself. 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:
2005 2004
------- -------
Income (loss) -- before discontinued operations............. $ 1,017 $(1,140)
Income -- from discontinued operations...................... 341 775
Plus depreciation of real estate assets -- from
operations................................................ 955 223
Plus depreciation of real estate assets -- from discontinued
operations................................................ 13 21
Less gain on sale of real estate assets acquired for
investment................................................ (250) --
Less class B, C & D distributions........................... (1,632) (813)
------- -------
Total Funds From Operations available to class A
shareholders*............................................. $ 444 $ (934)
Cash dividends paid to class A shareholders................. $ 429 $ 345
------- -------
Dividends in excess of (less than) FFO*..................... $ 15 $(1,279)
---------------
* Based on adherence to the NAREIT definition of FFO, we have not added back the
$1.3 million charge to earnings during 2004 resulting from shares issued to
Mr. Taylor as the deferred merger consideration. Adding this charge back to
earnings would result in adjusted funds from operations available to class A
shareholders of $386 thousand and adjusted FFO in excess of dividends
available to class A shareholders of $41 thousand in 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest-rate changes primarily related to the variable
interest rate on the line of credit and related to the refinancing of long-term
debt which currently contains fixed interest rates. Our interest-rate risk
management objective is to limit the impact of interest-rate changes on earnings
and cash flows and to lower our overall borrowing costs. To achieve these
objectives, we borrow primarily at fixed interest rates. We currently do not use
interest-rate swaps or any other derivative financial instruments as part of our
interest-rate risk management approach.
At March 31, 2005, approximately $67.6 million of our total debt
obligations have fixed rate terms and have an estimated fair value of $69.1
million. Approximately $25.1 million of our total debt obligations have variable
rate terms, and the carrying value of such debt is therefore representative of
its fair value as of March 31, 2005. In the event interest rates were to
increase 100 basis points, annual net income, funds from operations and future
cash flows would decrease by $251 thousand based upon the variable-rate debt
outstanding at March 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO") management has evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange
Act of 1934) as of March 31, 2005. Based on that evaluation, the CEO and CFO
concluded that our disclosure controls and procedures were effective as of March
31, 2005.
F-29
CHANGES IN INTERNAL CONTROLS
There has been no change to our internal control over financial reporting
during the quarter ended March 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY 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.
(a) Exhibits:
31.1 Rule 13a-4 Certification of Chief Executive Officer
31.2 Rule 13a-14 Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
F-30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this report to be signed on its
behalf on the 13th of May 2005 by the undersigned, thereunto duly authorized.
AmREIT
/s/ H. Kerr Taylor
--------------------------------------
H. Kerr Taylor,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Issuer
and in the capacities and on the dates indicated.
/s/ H. Kerr Taylor President, Chairman of the Board, May 13, 2005
------------------------------------------------ Chief Executive Officer and Director
H. KERR TAYLOR (Principal Executive Officer)
/s/ Robert S. Cartwright, Jr. Trust Manager May 13, 2005
------------------------------------------------
ROBERT S. CARTWRIGHT, JR.
/s/ G. Steven Dawson Trust Manager May 13, 2005
------------------------------------------------
G. STEVEN DAWSON
/s/ Philip W. Taggart Trust Manager May 13, 2005
------------------------------------------------
PHILIP W. TAGGART
/s/ Chad C. Braun Chief Financial Officer, Executive May 13, 2005
------------------------------------------------ Vice President and Secretary
CHAD C. BRAUN (Principal Accounting Officer)
F-31
EXHIBIT INDEX
Exhibits:
31.1 Rule 13a-4 Certification of Chief Executive Officer
31.2 Rule 13a-14 Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer