UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
-------------
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
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AMREIT
(Name of Small Business Issuer in its Charter)
TEXAS 76-0410050
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8 GREENWAY PLAZA, SUITE 1000
HOUSTON, TX 77046
(Address of Principal Executive Offices) (Zip Code)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
X Yes No
------- -------
As of June 30, 2004 there were 3,321,903 class A, 2,315,890 class B, and
4,035,140 class C common shares of beneficial interest of AmREIT, $.01 par value
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMREIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2004
(unaudited)
ASSETS
Property:
Land $ 37,920,045
Buildings 32,285,679
Tenant improvements 620,223
-----------------
70,825,947
Less accumulated depreciation and amortization (2,707,431)
-----------------
Net real estate held for investment 68,118,516
Real estate held for sale, net 11,031,821
Net investment in direct financing leases held for investment 19,222,398
Cash and cash equivalents 846,001
Accounts receivable 1,694,495
Accounts receivable - related party 1,359,437
Notes receivable 890,445
Escrow deposits 689,112
Prepaid expenses, net 329,669
Other assets:
Preacquisition costs 146,343
Loan acquisition cost, net of $166,365 in accumulated amortization 311,257
Leasing costs, net of $78,189 in accumulated amortization 440,237
Furniture, fixtures and equipment, net of $183,316 in accumulated depreciation 410,534
Accrued rental income 550,394
Intangible lease cost, net of $105,808 in accumulated amortization 671,680
Investment in non-consolidated affiliates 2,000,042
-----------------
Total other assets 4,530,487
-----------------
TOTAL ASSETS $ 108,712,381
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 32,534,450
Accounts payable 2,520,462
Accounts payable - related party 236,947
Construction payable 392,068
Deferred gain 132,569
Security deposit 153,673
Prepaid rent 28,916
-----------------
TOTAL LIABILITIES 35,999,085
-----------------
Minority interest 1,009,880
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,
3,347,030 shares issued 33,470
Class B Common shares, $.01 par value, 3,000,000 shares authorized,
2,315,890 shares issued 23,159
Class C Common shares, $.01 par value, 4,400,000 shares authorized,
4,035,140 shares issued 40,351
Capital in excess of par value 85,186,612
Accumulated distributions in excess of earnings (12,530,674)
Deferred compensation (888,623)
Cost of treasury shares, 25,127 shares (160,879)
-----------------
TOTAL SHAREHOLDERS' EQUITY 71,703,416
-----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 108,712,381
=================
See Notes to Condensed Consolidated Financial Statements.
F-1
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
QUARTER ENDED JUNE 30, YEAR TO DATE JUNE 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Rental income from operating leases $ 1,588,798 $ 970,501 $ 3,196,452 $ 1,939,976
Earned income from direct financing leases 507,307 506,799 1,014,509 1,001,079
Real estate fee income 581,207 136,001 948,566 266,753
Securities commission income 1,648,326 441,052 3,552,867 526,660
Asset management fee income 73,622 46,616 148,902 97,610
Interest and other income 313,505 281 324,957 3,394
------------ ------------ ------------ ------------
Total revenues 4,712,765 2,101,250 9,186,253 3,835,472
------------ ------------ ------------ ------------
Expenses:
General operating and administrative 1,587,601 783,210 3,008,026 1,536,074
Legal and professional 321,747 214,318 649,558 335,737
Securities commissions 1,337,593 331,286 2,761,225 396,321
Depreciation and amortization 270,330 171,155 503,594 355,895
Deferred merger costs 362,037 - 1,681,870 -
------------ ------------ ------------ ------------
Total expenses 3,879,308 1,499,969 8,604,273 2,624,027
------------ ------------ ------------ ------------
Operating income 833,457 601,281 581,980 1,211,445
Income from non-consolidated affiliates 172,207 45,033 186,805 85,338
Federal income tax (expense) benefit for taxable REIT
subsidiary (104,347) (57,700) (275,252) 15,300
Interest expense (543,974) (532,503) (1,163,005) (1,056,051)
Minority interest in income of consolidated joint
ventures (49,186) (43,161) (93,451) (82,949)
------------ ------------ ------------ ------------
Income (loss) before discontinued operations 308,157 12,950 (762,923) 173,083
(Loss) income from discontinued operations (452,877) 357,110 (354,701) 654,814
Gain on sales of real estate acquired for resale 241,979 279,084 849,866 279,084
------------ ------------ ------------ ------------
(Loss) income from discontinued operations (210,898) 636,194 495,165 933,898
------------ ------------ ------------ ------------
Net income (loss) $ 97,259 $ 649,144 $ (267,758) $ 1,106,981
Distributions paid to class B and class C
shareholders (1,105,814) (439,124) (1,918,870) (891,667)
------------ ------------ ------------ ------------
Net (loss) income available to class A shareholders $ (1,008,555) $ 210,020 $ (2,186,628) $ 215,314
============ ============ ============ ============
Net (loss) income per common share - basic and diluted
Loss before discontinued operations $ (0.25) $ (0.15) $ (0.87) $ (0.26)
(Loss) income from discontinued operations $ (0.06) $ 0.23 $ 0.16 $ 0.34
------------ ------------ ------------ ------------
Net (loss) income $ (0.31) $ 0.08 $ (0.71) $ 0.08
============ ============ ============ ============
Weighted avergage class A common shares used to
compute net income per share, basic and diluted 3,235,449 2,790,492 3,094,216 2,779,434
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
F-2
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
QUARTER ENDED JUNE 30, YEAR TO DATE JUNE 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 97,259 $ 649,144 $ (267,758) $ 1,106,981
Adjustments to reconcile net income to net cash
provided by operating activities:
Investment in real estate acquired for resale (1,533,452) (7,233,907) (2,200,290) (7,233,907)
Proceeds from sales of real estate acquired for
sa1e 49,020 1,898,356 2,612,742 1,898,356
Gain on sales of real estate acquired for resale (241,979) - (849,866) -
Impairment charges 1,103,144 - 1,103,144 -
Depreciation and amortization 305,039 237,319 560,524 467,016
Amortization of deferred compensation 67,677 15,457 131,960 75,385
Minority interest in income of consolidated joint
ventures 169,807 43,161 214,072 82,949
Deferred merger costs 362,037 - 1,681,870 -
Decrease (increase) in accounts receivable 436,392 (151,253) 227,467 (113,233)
Decrease (increase) in accounts receivable-
related party 336,777 (22,966) (1,157,663) (78,875)
(Increase) decrease in prepaid expenses, net (28,436) (30,536) 32,452 (16,459)
Cash receipts from direct financing leases
(less) more than income recognized (4,554) (4,265) (7,651) 12,795
Increase in accrued rental income (76,571) (30,328) (62,802) (79,847)
(Increase) decrease in other assets (334,707) (76,447) (323,688) 6,644
Increase (decrease) in accounts payable 743,923 270,726 (58,553) (277,198)
Increase (decrease) in accounts payable-
related party 4,778 7,561 225,507 (26,425)
Increase in security deposits 56,633 - 56,633 -
Increase in prepaid rent 22,355 84,802 22,355 84,802
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities 1,635,142 (4,343,176) 1,940,455 (4,091,016)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Improvements to real estate (93,771) (121,806) (394,188) (277,569)
Acquisition of investment properties (6,388,715) - (6,388,715) (2,688,157)
Notes receivable collections 65,777 - 109,332 -
Additions to furniture, fixtures and equipment (222,647) (17,553) (341,566) (41,593)
Investment in non-consolidating affiliates (137,048) 80,939 (1,455,150) (80,832)
Proceeds from sale of investment property 693,515 - 693,515 -
Increase in preacquisition costs (99,021) 18,703 (133,161) (8,010)
------------ ------------ ------------ ------------
Net cash used in investing activities (6,181,910) (39,717) (7,909,933) (3,096,161)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 6,142,154 6,892,959 9,106,671 9,260,758
Payments of notes payable (10,593,346) (1,749,299) (25,056,846) (1,850,462)
Purchase of treasury shares - (75,425) - (391,144)
Issuance of common shares 10,276,145 - 26,323,675 -
Issuance costs (1,096,470) - (2,892,009) -
Common dividends paid (1,488,660) (749,437) (2,646,365) (1,509,059)
Distributions to minority interests (26,056) (25,031) (51,087) (93,350)
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,213,767 4,293,767 4,784,039 5,416,743
------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents (1,333,001) (89,126) (1,185,439) (1,770,434)
Cash and cash equivalents, beginning of period 2,179,002 825,560 2,031,440 2,506,868
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 846,001 $ 736,434 $ 846,001 $ 736,434
============ ============ ============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In 2004 the Company issued 134,695 shares of restricted stock to employees and trust managers as
as part of their compensation plan. The restricted stock vests over a four and three period respectively.
The Company recorded $875,518 in deferred compensation related to the issuance of the restricted stock.
In 2003 the Company issued 24,257 shares of restricted stock to employees and trust managers as
as part of their compensation plan. The restricted stock vests over a four and three period respectively.
The Company recorded $152,819 in deferred compensation related to the issuance of the restricted stock.
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 528,604 603,232 1,149,292 1,127,421
Income taxes - - 48,600 31,103
See Notes to Condensed Consolidated Financial Statements.
F-3
AMREIT AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT is a Texas real estate investment trust ("REIT") that has elected to be
taxed as a REIT for federal income tax purposes. AmREIT is a self-managed,
self-advised REIT with, along with its predecessor, a 19-year history and a
record of investing in quality income producing retail real estate. AmREIT's
class A common shares are traded on the American Stock Exchange under the symbol
"AMY". AmREIT's business structure consists of the publicly traded REIT and
three synergistic businesses that support the Company's platform of growth: a
real estate operating and development business, a securities business and a
retail partnership business. This unique combination provides AmREIT the
opportunity to access capital through both Wall Street and the independent
financial planning marketplace and strategically invest that capital in high
quality properties for flexibility and more dependable growth.
We finance our growth and working capital needs with a combination of equity
offerings and a conservative debt philosophy. Currently, the Company is raising
capital through a series of publicly registered, non traded common share
offerings, being offered exclusively through the independent financial planning
community. As of June 30, 2004, the Company had raised approximately $40.4
million through sales of its class C common shares since the offering commencecd
in August 2003, including shares issued through the dividend reinvestment
program. On June 25, 2004, the Company launched its class D common share
offering: a $170 million publicly registered, non-traded common share offering
with a stated yield of 6.5%. The class D common shares are convertible into the
Company's class A common shares after a seven-year lock out period. Through its
by-laws, the Company's debt is limited to 55% recourse debt as compared to its
gross assets. As of June 30, 2004, the Company's debt to asset ratio was
approximately 33%.
Our operating strategy and investment criteria discussed herein are reviewed by
our Board of Trust Managers on a regular basis and may be modified or changed
without a vote of our shareholders.
PORTFOLIO
We focus on acquiring "irreplaceable corners" - premier retail frontage
properties in high-traffic, highly populated areas - which the Company expects
will create dependable income and long-lasting value. These premium properties
are expected to provide high leasing income and high occupancy rates for a
strong income stream. As of June 30, 2004, the occupancy rate of our properties
was 88.5%. Our properties attract a wide array of established commercial
tenants, and offer attractive opportunities for dependable monthly income and
potential capital appreciation. Management believes that the location and design
of its properties provide flexibility in use and tenant selection and an
increased likelihood of advantageous lease renewal terms.
Our revenues are substantially generated by corporate retail tenants such as
Starbucks, Landry's, CVS/pharmacy, International House of Pancakes ("IHOP"),
Eckerd, Nextel, Washington Mutual, TGI Friday's, and others. We own, and may
purchase in the future, fee simple retail properties (we own the land and the
building), ground lease properties (we own the land, but not the building and
receive rental income from the owner of the building) or leasehold estate
properties (we own the building, but not the land, and therefore are obligated
to make a ground lease payment to the owner of the land). AmREIT may also
develop properties for its portfolio or enter into joint ventures, partnerships
or co-ownership for the development of retail properties.
AmREIT owns a real estate portfolio consisting of 53 properties located in 19
states at June 30, 2004. Our multi-tenant shopping center properties are
primarily located throughout Texas and are leased to national, regional and
F-4
local tenants. Our single tenant properties are located throughout the United
States and are generally leased to corporate tenants where the lease is the
direct obligation of the parent company, not just the local operator, and in
most other cases, our leases are guaranteed by the parent company. In so doing,
the dependability of the lease payments is based on the strength and viability
of the entire company, not just the leased location. Properties that we acquire
are generally newly constructed or recently constructed at the time of
acquisition.
As of June 30, 2004, no single property accounted for more than 10% of the
Company's total assets. For the year to date period ended June 30, 2004, IHOP
accounted for 13.8% of the Company's total revenue and no other tenant accounted
for more than 5% of the Company's total revenue.
REAL ESTATE OPERATING AND DEVELOPMENT COMPANY
AmREIT's real estate operating and development subsidiary, AmREIT Realty
Investment Corporation ("ARIC"), comprised of a fully integrated real estate
team, provides brokerage, leasing, construction management, development and
property management services to our tenants as well as third parties. This
operating subsidiary, which is a taxable REIT subsidiary, compliments our
portfolio of retail properties by generating fee income from providing services
to third parties and affiliated funds, providing a high level of service to our
tenants, as well as maintaining our portfolio of properties to meet our
standards.
Having an internal real estate group also helps secure strong tenant
relationships for both us and our retail partnerships. Our growing roster of
leases with well-known national and regional tenants includes Bank of America,
Starbucks, TGI Friday's CVS/pharmacy, Nextel, Landry's, Eckerd, IHOP, Washington
Mutual, and others. Equally important, we have affiliations with these parent
company tenants that extend across multiple sites.
Not only does our real estate operating and development company create value
through relationships, but it also provides an additional source of fee income
and profits. Through the development, construction, management, leasing and
brokerage services provided to our affiliated actively managed retail
partnerships, as well as for third parties, our real estate team continues to
generate fees and profits for us. Through ARIC, we are able to generate
additional profits through the selective acquisitions and dispositions of
properties within twelve to eighteen months. These assets are listed as real
estate held for sale on our consolidated balance sheet, and at June 30, 2004,
these assets represented approximately $4.0 million of the $11.0 million
reported as real estate held for sale.
SECURITIES COMPANY
The part of our business structure and operating strategy that really separates
us from other publicly traded REITs is AmREIT Securities Company (ASC), a wholly
owned subsidiary of ARIC. Through ASC, we are able to raise capital through the
National Association of Securities Dealers (NASD) independent financial planning
community. Traditionally, we have raised capital in two ways: first, for our
actively managed retail partnerships, and second, directly for AmREIT through
non-traded classes of common shares.
During 2003, ASC raised approximately $15 million for AmREIT Monthly Income &
Growth Fund, Ltd., an affiliated retail partnership sponsored by a subsidiary of
AmREIT. Additionally, since August of 2003, ASC has raised approximately $40.4
million, including shares issued through the dividend reinvestment program,
directly for us through a class C common share offering. ASC is also the dealer
manager on our newest offering, a $170 million class D common share offering:
publicly registered, non-traded common shares receiving a stated 6.5% annual
dividend paid monthly. The class D common shares are non-cumulative and can
convert into the class A common shares at a 7.7% premium on invested capital
after a seven-year lock out period. We anticipate raising approximately $25-30
million during 2004 through this class D common share offering. Since capital is
the lifeblood of any real estate company, having the unique opportunity to raise
capital through both Wall Street and the independent financial planning
community adds additional financial flexibility and dependability to our income
stream.
F-5
RETAIL PARTNERSHIPS
AmREIT has retail partnership subsidiaries that sell limited partnership
interests to retail investors, in which AmREIT indirectly invests through both
the general partner and as a limited partner. We wanted to create a structure
that aligns the interest of our shareholders with that of our unit holders.
Through our subsidiary general partners of the retail partnerships, value is
created for AmREIT through managing money from the sponsored funds, and in
return, receiving management fees and profit participation interests.
AmREIT's retail partnerships are structured so that an affiliate, as the general
partner, receives a significant profit only after the limited partners in the
retail partnerships have received their targeted return, again, linking AmREIT's
success to that of its unit holders.
As of June 30, 2004, AmREIT directly managed, through its four actively managed
and previously sponsored retail partnerships, over $35 million in equity. These
four partnerships have entered or will enter their liquidation phases in 2003,
2009, 2010, and 2011 respectively. As these partnerships enter into liquidation,
we expect to receive economic benefit from our profit participation, after
certain preferred returns have been paid to the partnership's limited partners.
Unrealized gains associated with this potential profit participation, if any,
have not been reflected on our balance sheet or statement of operations.
In August 2003 the Company began selling class C common shares. The offering is
a $44 million offering ($40 million offered to the public and $4 million
reserved for the dividend reinvestment program), issued on a best efforts basis
through the independent financial broker dealer community. The Company will
primarily use the proceeds for the acquisition of new properties and to pay down
existing debt. Since August 2003, the Company had issued approximately 4.04
million shares (including shares issued through the dividend reinvestment
program), representing approximately $40.4 million in proceeds from selling
class C shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and include all of
the disclosures required by accounting principles generally accepted in the
United States of America. The condensed consolidated financial statements
reflect all normal and recurring adjustments, which are, in the opinion of
management, necessary to present a fair statement of results for the six month
periods ended June 30, 2004 and 2003. Operating results for the three and six
months ended June 30, 2004 are not necessarily indicative of the results to be
expected for the year ended December 31, 2004.
The condensed consolidated financial statements of AmREIT contained herein
should be read in conjunction with the consolidated financial statements
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2003.
REAL ESTATE HELD FOR SALE
AmREIT constantly evaluates its real estate portfolio, identifying those assets
that are non-core and no longer meet its investment objectives. Management has
identified three portfolio properties that are considered non-core and are
listed for sale. Further, management anticipates identifying an additional five
to seven properties that it will list for sale during 2004.
Properties are classified as real estate held for sale if the properties were
purchased with intent to sell the properties within twelve to eighteen months or
if the properties are listed for sale. Additionally, if management has made the
determination to dispose of an operating property, the associated property is
reclassified to real estate held for sale
F-6
and depreciation is ceased. An evaluation for impairment is also performed. At
June 30, 2004, AmREIT owned eight properties that are classified as real estate
held for sale. The eight properties have a combined carrying value of $11.0
million.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT and its
wholly or majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46"), which
was amended in December 2003. This Interpretation, as amended requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual return or
both. As amended the interpretation requires disclosures about variable interest
entities that a company is not required to consolidate, but in which it has a
significant variable interest. The adoption of FIN 46 for small business filers
is effective no later than December 31, 2004. Management anticipates the
adoption of FIN 46 will not have an impact on our consolidated financial
position, results of operations, or cash flows.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150
("Statement 150") "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". Statement 150 requires certain
financial instruments that have characteristics of both liabilities and equity
to be classified as a liability on the balance sheet. Statement 150 is effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. Statement 150 will be effected by reporting the cumulative
effect of a change in accounting principle for contracts created before the
issuance date and still existing at the beginning of that interim period. The
adoption of Statement 150 did not have an impact on our consolidated financial
position, results of operations, or cash flows.
RECLASSIFICATION
Certain amounts in the interim unaudited 2003 condensed consolidated financial
statements have been reclassified to conform to the presentation used in the
interim unaudited 2004 condensed consolidated financial statements. Such
reclassifications had no effect on previously reported net income or loss or
shareholders' equity.
3. NOTES PAYABLE
In September 2003, the Company renewed its unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the acquisition of
properties and working capital. In June 2004, the Credit Facility was amended in
order to increase the maximum availability and modify certain terms and
conditions of the Credit Facility. Under the amended Credit Facility, which
matures September 2004, the Company may borrow up to $35 million subject to the
value of unencumbered assets. The Company and the lender are in the process of
renewing the Credit Facility for a one year period. Management believes that the
Credit Facility will be renewed on terms and conditions substantially the same
as the current Credit Facility. The Credit Facility contains covenants which,
among other restrictions, require the Company to maintain a minimum net worth, a
maximum leverage ratio, specified interest coverage and fixed charge coverage
ratios and allow the lender to approve all distributions. Furthermore, the
Credit Facility contains concentration covenants and limitations, limiting
property level net operating income for any one tenant to no more than 15% (35%
for IHOP) of total property net operating income. For the six months ended June
30, 2004, IHOP net operating income represented approximately 33% of total
property net operating income. On June 30, 2004, the Company was in compliance
with all financial covenants. The Credit Facility's annual interest rate varies
depending upon the Company's debt to asset ratio, from LIBOR plus a spread of
1.40% to LIBOR plus a spread of 2.35%. As of June 30, 2004, the interest rate
was LIBOR plus 2.0%. As of June 30, 2004, $10.2 million was outstanding under
the Credit Facility. Thus the Company has
F-7
approximately $24.8 million available under its line of credit, subject to
Lender approval on the use of the proceeds.
4. MAJOR TENANTS
As of June 30, 2004, there have been no significant changes in the tenant
make-up from year end December 31, 2003, other than those delineated in Note 10.
5. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income (loss)
available to class A shareholders by the weighted average number of class A
common shares outstanding. Diluted earnings per share has been computed by
dividing net income (as adjusted) by the weighted average number of common
shares outstanding plus the weighted average number of potentially dilutive
common shares. Diluted earnings per share information is not applicable due to
the anti-dilutive nature of the common class B and class C shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
----------------------------------------------- --------------------------- ---------------------------
Quarter Year to Date
----------------------------------------------- --------------------------- ---------------------------
2004 2003 2004 2003
----------------------------------------------- ------------- ------------- ------------- -------------
BASIC EARNINGS PER SHARE
----------------------------------------------- ------------- ------------- ------------- -------------
Weighted average class A common shares
outstanding (in thousands) 3,235 2,790 3,094 2,779
----------------------------------------------- ------------- ------------- ------------- -------------
----------------------------------------------- ------------- ------------- ------------- -------------
Basic and diluted (loss) earnings per share * $(0.31) $0.08 $(0.71) $0.08
----------------------------------------------- ------------- ------------- ------------- -------------
----------------------------------------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) FOR BASIC AND
DILUTIVE COMPUTATION
----------------------------------------------- ------------- ------------- ------------- -------------
(Loss) earnings to class A common
shareholders (in thousands) $(1,009) $210 $(2,187) $215
----------------------------------------------- ------------- ------------- ------------- -------------
----------------------------------------------- ------------- ------------- ------------- -------------
* The operating results for the three and six months ended June 30, 2004 include
a charge to earnings of $362 thousand and $1.7 million, respectively, which
represents the market value of the class A common shares issued to H. Kerr
Taylor, President and CEO, related to the sale of his advisory company to AmREIT
in 1998. The charge was for the deferred merger cost due from this sale that was
triggered by the issuance of additional class C common shares. Additionally,
these operating results include an impairment charge of $1.1 million, which
represents a write-down in value of the vacant Wherehouse Entertainment property
located in Wichita, Kansas, which was sold during the quarter. For additional
information see Footnote 6 - DISCONTINUED OPERATIONS.
6. DISCONTINUED OPERATIONS
The operations of fifteen properties were reported as discontinued operations
for the six months period ended June 30, 2004. Eight of the properties were
listed as held for sale at June 30, 2004, three of the properties were sold in
the current year, and five of the properties were sold in 2003. The following is
a summary of our discontinued operations (in thousands, except for per share
data):
F-8
Quarter Year to Date
2004 2003 2004 2003
Rental revenue $ 176 $ 294 $ 317 $ 558
Earned income from direct financing leases 34 164 143 269
Interest and other income 639 - 639 -
Gain on sale of real estate held for sale 242 279 850 279
General operating and administrative (51) (2) (150) (6)
Legal and professional - - - (1)
Depreciation and amortization (25) (38) (39) (76)
Interest expense (2) (61) (41) (89)
Minority interest (121) - (121) -
Impairment charge (1,103) - (1,103) -
--------------------------------------------------
(Loss) income from discontinued operations (211) 636 495 934
==================================================
Basic and diluted (loss) income from discontinued
operations per common share $(0.07) $ 0.23 $ 0.16 $ 0.34
On June 21, 2004, the Company sold its Wherehouse Entertainment project located
in Wichita, Kansas. The Company recorded an impairment charge to earnings of
approximately $1.10 million in the second quarter to reflect the loss incurred
upon sale of the property, following the bankruptcy of its sole tenant. After a
thorough remarketing during the quarter, the Company could not replace the
previously existing value and determined to sell the asset and redeploy the
proceeds into more productive investments.
Gain on real estate held for sale is a result of selling two properties, one
acquired in 2003 and one acquired in 2004, with the intent to resell after a
short holding period. Through a taxable REIT subsidiary, AmREIT actively seeks
properties where there is an opportunity to purchase undervalued assets, and
after a short holding period and value creation, dispose of the asset and
capture the value created.
7. COMMITMENTS
The Company has signed a 63 month lease for office space. The lease commenced on
May 14, 2004. The annual rent will be $210 thousand. Rental expense for the six
months ended June 30, 2004 and 2003 was $60 thousand and $45 thousand,
respectively.
As of June 30, 2004, the Company has contracted to purchase approximately $57.0
million of multi-tenant real estate projects that are anticipated to close
during the third quarter of 2004. The acquisitions will be funded by cash and
the assumption of debt.
8. SEGMENT REPORTING
The operating segments presented are the segments of AmREIT for which separate
financial information is available, and revenue and operating performance is
evaluated regularly by senior management in deciding how to allocate resources
and in assessing performance.
AmREIT evaluates the performance of its operating segments primarily on revenue.
Because the real estate development and operating segment and securities and
retail partnership segment are both revenue and fee intensive, management
considers revenue the primary indicator in allocating resources and evaluating
performance.
The portfolio segment consists of our portfolio of single and multi-tenant
shopping center projects. This segment consists of 53 properties located in 19
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
F-9
assets of AmREIT are substantially all in this segment. Included in Corporate
and Other are those costs and expenses related to general overhead and personnel
that are not solely responsible for one of the reporting segments.
Real estate Securities &
operating & retail Corporate
Portfolio development partnerships and other Total
Six months ended June 30, 2004:
Revenue $ 4,211 $ 949 $ 3,702 $ 325 $ 9,187
Income from non- consolidated affiliates - - 187 - 187
Expenses (1,760) (95) (2,942) (3,658) (8,455)
Deferred merger cost - - - (1,682) (1,682)
------------------------------------------------------------------------
Net income (loss) before discontinued operations
2,451 854 947 (5,015) (763)
Six months ended June 30, 2003:
Revenue $ 2,941 $ 267 $ 624 $ 3 $ 3,835
Income from non-consolidated affiliates - - 86 - 86
Expenses (1,495) 11 (392) (1,872) (3,748)
------------------------------------------------------------------------
Net income (loss) before discontinued operations 1,446 278 318 (1,869) 173
Real estate Securities &
operating & retail Corporate
Portfolio development partnerships and other Total
Three months ended June 30, 2004:
Revenue $ 2,096 $ 581 $ 1,722 $ 313 $ 4,712
Income from non- consolidated affiliates - - 172 - 172
Expenses (863) (20) (1,422) (1,909) (4,214)
Deferred merger cost - - - (362) (362)
------------------------------------------------------------------------
Net income (loss) before discontinued operations 1,233 561 472 (1,958) 308
Three months ended June 30, 2003:
Revenue $ 1,477 $ 136 $ 488 $ - $ 2,101
Income from non-consolidated affiliates - - 45 - 45
Expenses (747) (41) (348) (997) (2,133)
------------------------------------------------------------------------
Net income (loss) before discontinued operations 730 95 185 (997) 13
9. PROPERTY ACQUISITIONS AND DISPOSITIONS
On June 15, 2004, AmREIT acquired The Courtyard at Post Oak, consisting of a
4,013 square-foot, free standing building occupied by Verizon Wireless (NYSE:
VZ) and a 9,584 square-foot, multi-tenant shopping center occupied by Ninfa's
Restaurant and Dessert Gallery. The property is located at the northwest
intersection of Post Oak and San Felipe in Houston, Texas which is the heart of
the Uptown Houston area, the most significant retail corridor in the Greater
Houston area. The property was acquired for cash. The weighted average remaining
lease term for the project is 5.2 years. The anticipated combined net operating
income contribution is approximately $450 thousand annually. Following is a
summary of assets acquired and liabilities assumed as of the date of the
Courtyard at Post Oak acquisition.
F-10
Summary of Assets Acquired and Liabilities Assumed
as of June 15, 2004
(In Thousands)
Assets
Buildings $1,874
Land 4,376
Intangible lease costs 101
------------
TOTAL ASSETS $6,351
============
Liabilities $91
Net assets acquired $6,260
------------
The following selected unaudited pro forma consolidated statement of operations
for AmREIT and subsidiaries gives effect to the acquisition of Uptown Plaza,
which assumes that the acquisition occurred on January 1, 2003. Uptown Plaza,
acquired in December 2003, is a 28,000 square foot retail complex located in
Houston, Texas, including a free-standing CVS/pharmacy drugstore and a retail
shopping center anchored by Grotto, a new concept of Landry's Restaurant, Inc.
Three months ended Six months ended
June 30, 2003 June 30, 2003
Revenues
Rental income and earned income $ 1,778 $ 3,502
Other income 624 894
-------------------- --------------------
Total Revenues 2,402 4,396
-------------------- --------------------
Total Expenses 1,573 2,752
-------------------- --------------------
Operating income
829 1,644
Income before discontinued operations 241 606
Income from discontinued operations 636 934
Pro forma net income 877 1,540
Distributions paid to class B and class C shareholders (439) (892)
-------------------- --------------------
Net income available to class A shareholders $ 438 $ 648
==================== ====================
Net income per common share - basic and diluted
Loss before discontinued operations (0.07) (0.10)
Income from discontinued operations 0.23 0.34
-------------------- --------------------
Net income 0.16 0.24
Weighted average common shares used to compute
net income per share, basic and diluted 2,790 2,779
==================== ====================
F-11
10. SUBSEQUENT EVENTS
On July 1, 2004, AmREIT acquired Plaza in the Park, a 129,955 square-foot Kroger
(NYSE: KR) anchored shopping center located on approximately 14.3 acres. The
property is located at the southwest corner of Buffalo Speedway and Westpark in
Houston, Texas. Plaza in the Park's Kroger is undergoing a 13,120 square-foot
expansion. The property was acquired for cash and the assumption of long-term
fixed rate debt. The weighted average remaining lease term for the project is
9.2 years. The Kroger lease is for 20 years, containing approximately 71,000
square feet, expiring in August 2017. The shopping center is 96.67 percent
occupied.
On July 1, 2004, AmREIT acquired Cinco Ranch - Kroger, a 97,297 square-foot
Kroger (NYSE: KR) anchored shopping center located on approximately 12.8 acres
of land. The property is located at the northeast corner of Mason Road and
Westheimer Parkway in Katy, Texas. The property was acquired for cash and the
assumption of long-term fixed rate debt. The weighted average remaining lease
term for the project is 14 years. The Kroger lease is for 20 years, containing
approximately 63,000 square-feet, expiring in June 2023. The shopping center is
100 percent occupied.
On July 21, 2004, AmREIT acquired Bakery Square Shopping Center, a 34,704
square-foot retail project including a free standing Walgreen's and a shopping
center anchored by Bank of America (NYSE:BOA). This is an infill property
located just west of downtown Houston and includes other national tenants such
as T-Mobile, Blockbuster Video and Boston Market. The property as acquired for
cash and the assumption of long-term fixed rate debt. The weighted average
remaining lease term for the shopping center is 4.9 years. The Walgreen's lease
is for 60 years and will expire in October 2056. The shopping center is 100
percent occupied.
On July 21, 2004, AmREIT sold the IHOP property located in Grand Prairie, Texas.
The project was sold to an unaffiliated, buyer for cash. The project generated
approximately $202 thousand in annual rental income from operating leases and
earned income from direct financing leases, and was sold for a profit of
approximately $800 thousand.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
Certain information presented in this Form 10-QSB constitutes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in these forward-looking statements are
based upon reasonable assumptions, the Company's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference include the following: changes in
general economic conditions, changes in real estate market conditions, continued
availability of proceeds from the Company's debt or
F-12
equity capital, the ability of the Company to locate suitable tenants for its
properties and the ability of tenants to make payments under their respective
leases.
The condensed consolidated financial statements of AmREIT, and the following
discussion contained herein should be read in conjunction with the consolidated
financial statements and discussion included in the Company's annual report on
Form 10-KSB for the year ended December 31, 2003. Historical results and trends
which might appear should not be taken as indicative of future operations.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and the comparative summary of selective
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 rapidly growing, self-managed and self-advised REIT with
a 19-year history of delivering results to its investors. Its business model
consists of a publicly traded REIT that is supported by three synergistic
businesses - a real estate operating and development business, NASD-registered
broker dealer securities business and a retail partnership business. This unique
structure gives AmREIT access to the intellectual and financial capital required
to support a rapid growth platform.
Operated as a wholly owned subsidiary, AmREIT's real estate operating and
development business focuses on the development, acquisition, management,
brokerage and ownership of high quality commercial retail real estate to
generate monthly income and growth for our investors. The Company's in-house
NASD-registered securites group gives the company direct access to the
independent financial planning market, broadening AmREIT's avenues to raise
capital. The retail partnership business combines the skills of our real estate
team and our securities group to actively acquire and develop high quality
properties, creating potential for increasing income and capital appreciation by
opportunistically selling the properties within a defined time horizon.
The self-managed REIT focuses on the acquisition and development of
"irreplaceable corners" - premier retail frontage properties in high-traffic,
highly populated areas - to hold for long-term value. These properties are
leased to tenants located in high-end multi-tenant shopping centers, grocery
anchored centers and regional and national single tenants. AmREIT's retail
partnership business incorporates an "active management" strategy to acqire
develop and sell high quality free-standing and shopping center properties to
create shorter-term added value.
AmREIT's goal is to deliver increasing, dependable, monthly income for its
shareholders. In so doing, AmREIT strives to increase and maximize Funds From
Operations ("FFO") by issuing long term capital through both the NASD
independent financial planning marketplace as well as through Wall Street, and
investing the capital in accretive real estate properties, acquired or
developed, on irreplaceable corners. Additionally, we strive to maintain a
conservative balance sheet. To that regard, we strive to maintain a debt to
total asset ratio of less than 55%. As of June 30, 2004, our debt to total asset
ratio was 33%.
At June 30, 2004, AmREIT owned a portfolio of 53 properties located in 19
states, subject to long term leases with retail tenants, either directly or
through its interests in joint ventures or partnerships. Forty seven of the
properties are single tenant properties, and represent approximately 74% of the
rental income for the six months ended June 30, 2004. Six of the properties are
multi-tenant and represent approximately 26% of the rental income for the six
months ended June 30, 2004. In assessing the performance of the Company's
properties, management evaluates the occupancy of the Company's portfolio.
Occupancy for the total portfolio was 88.5% based on leaseable square footage as
of June 30, 2004. Additionally, the Company anticipates that the majority of its
rental income will consist of rental income generated from multi-tenant shopping
centers by the end of 2004. We have been developing and acquiring multi-tenant
shopping centers for over ten years in our retail partnership business. During
that time, we believe we have developed the ability to recognize the high-end
multi-tenant properties that
F-13
can create long-term value, and with the downward pressure on single tenant cap
rates, resulting in higher priced real estate, management anticipates
strategically increasing its holdings of multi-tenant shopping centers.
Management intends to increase total assets from $101 million as of December 31,
2003 to approximately $200 million at the end of 2004. Through June 30, 2004,
the Company fully subscribed its $40 million class C common share offering and
began marketing its $170 million class D common share offering. With the
proceeds of the class C common share offering and the assumption of debt, the
Company has purchased approximately $70 million in real estate assets since
December 31, 2003 including acquisitions subsequent to June 30, 2004 (see
Footnote 10.).
Management intends to fund future acquisitions and development projects through
a combination of equity offerings and debt financing. During 2004, the Company
anticipates raising an additional $25 to $30 million of equity from various
sources including Wall Street and the independent financial planning community.
Management expects that single tenant, credit leased properties, will continue
to experience cap rate pressure during 2004 due to the low interest rate
environment and increased buyer demand. Therefore, as it has been, our continued
strategy will be to divest of properties which no longer meet our core criteria,
and replace them with multi-tenant projects or the development of single tenant
properties located on irreplaceable corners. With respect to additional growth
opportunities, we have purchased approximately $57.0 million in grocery anchored
and multi-tenant shopping center projects subsequent to June 30, 2004 and have
over $50 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 anticipates,
and has budgeted for, an increase in interest rates during 2004. As of June 30,
2004, approximately 69% 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%.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The results of operations and financial condition of the Company, as reflected
in the accompanying financial statements and related footnotes, are subject to
management's evaluation and interpretation of business conditions, retailer
performance, changing capital market conditions and other factors, which could
affect the ongoing viability of the Company's tenants. Management believes the
most critical accounting policies in this regard are the accounting for lease
revenues (including the straight line rent), the regular evaluation of whether
the value of a real estate asset has been impaired and the allowance for
doubtful accounts. We evaluate our assumptions and estimates on an on-going
basis. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable based on the circumstances.
RENTAL INCOME RECOGNITION - In accordance with accounting principles generally
accepted in the United States of America, the Company accounts for rental income
under the straight line method, whereby we record rental income based on the
average of the total rent obligation due under the primary term of the lease.
The Company prepares a straight line rent schedule for each lease entered into.
Certain leases contain a provision for percentage rent. Percentage rent is
recorded in the period when the Company can reasonably calculate the amount of
percentage rent owed, if any. Generally, the Company records percentage rent in
the period in which the percentage rent payment is made, and can thereby be
calculated and verified. For the six months ended June 30, 2004, the Company
collected and recorded percentage rent from tenants of $65 thousand.
REAL ESTATE VALUATION - Real estate assets are stated at cost less accumulated
depreciation, which, in the opinion of management, is not in excess of the
individual property's estimated undiscounted future cash flows, including
estimated proceeds from disposition. Depreciation is computed using the
straight-line method, generally over estimated useful lives of 39 years for
buildings and over the primary term of the lease for tenant improvements.
F-14
Major replacements that extend the life of the property, or enhance the value of
the property are capitalized and the replaced asset and corresponding
accumulated depreciation are removed. All other maintenance items are charged to
expense as incurred.
Upon the acquisition of real estate projects, the Company assesses the fair
value of the acquired assets (including land, building, acquired, above and
below market leases and in-place leases, as if vacant property value and tenant
relationships) and acquired liabilities, and allocates the purchase price based
on these assessments. The Company assesses fair value based on estimated cash
flow projections that utilize appropriate discount and capitalization rates and
available market information. Estimates of future cash flows are based on a
number of factors including the historical operating results, known trends, and
specific market and economic conditions that may affect the property. Factors
considered by management in our analysis of determining the as if vacant
property value include an estimate of carrying costs during the expected
lease-up periods considering current market conditions, and costs to execute
similar leases. In estimating carrying costs, management includes real estate
taxes, insurance and other operating expenses and estimates of lost rentals at
market rates during the expected lease-up periods, up to 12 months depending on
the property location, tenant demand and other economic conditions. Management
also estimates costs to execute similar leases including leasing commissions,
tenant improvements, legal and other related expenses.
Costs incurred in the development of new operating properties, including
preacquisition costs directly identifiable with the specific project,
development and construction costs, interest and real estate taxes are
capitalized into the basis of the project. The capitalization of such costs
ceases when the property, or any completed portion, becomes available for
occupancy.
AmREIT's properties are reviewed for impairment if events or changes in
circumstances indicate that the carrying amount of the property may not be
recoverable. In such an event, a comparison is made of the current and projected
operating cash flows of each such property on an undiscounted basis, plus the
residual value of the property upon disposition, to the carrying value of such
property. The carrying value would then be adjusted, if needed, to estimate the
fair value to reflect an impairment in the value of the asset. Following the
bankruptcy of its sole tenant, and after a thorough remarketing during the
quarter, the Company determined that it could not replace the previously
existing value in its Wherehouse Entertainment project located in Wichita,
Kansas, and recorded an impairment charge to earnings of approximately $1.10
million in the second quarter. Subsequent to the write-down in value, management
sold the property during the current quarter.
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. During the six months ended June 30, 2004, the Company wrote off
receivables totaling approximately $67 thousand. The receivable is attributable
to the accrual of straight line rents associated with Just for Feet. The write
off of the receivable from Just for Feet is included in income from discontinued
operations. The Company maintains a receivable related to Wherehouse
Entertainment of approximately $126 thousand. Based on discussions with
Wherehouse Entertainmentand Blockbuster Entertainment Corporation, the guarantor
of the lease, and legal proceedings involving Wherehouse Entertainment and
Blockbuster Entertainment Corporation, the Company believes this receivable is
collectable, and should be collected during 2004.
LIQUIDITY AND CAPITAL RESOURCES 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
F-15
from its equity offerings, into income producing real estate, we anticipate that
cash flow from operations will provide adequate resources for future ongoing
operations and dividends. AmREIT's cash on hand, internally-generated cash flow,
borrowings under our existing credit facilities, issuance of equity securities,
as well as the placement of secured debt and other equity alternatives, is
expected to provide the necessary capital to maintain and operate our properties
as well as execute and achieve our growth strategies.
SOURCES AND USES OF FUNDS
Cash provided by operating activities as reported in the Consolidated Statements
of Cash Flows increased $6.0 million for the six months ended June 30, 2004 when
compared to the six months ended June 30, 2003. Investment in real estate
acquired for resale decreased by $5.0 million. In addition, proceeds from sales
of real estate acquired for sale increased by $714 thousand. AmREIT sold two
properties for a profit that were acquired for sale, one in the first quarter
and one in the second quarter of 2004.
The increase in net cash provided by operating activities was primarily due to a
decrease in investment in real estate acquired for resale. During 2003, the
Company invested in five IHOP properties that were purchased as acquired for
resale. For the six months ended June 30, 2004, the Company has invested
approximately $2.2 million in real estate acquired for resale. This decrease in
investment in real estate acquired for resale was somewhat offset by a $1.1
million non-cash impairment charge related to the Wherehouse Entertainment
property located in Wichita Kansas and a $1.7 million non-cash increase in
deferred merger costs. The deferred merger expense is a result of shares issued
or 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
in 1998. Mr. Taylor has now earned 100% of the shares eligible under the
deferred consideration agreement. Therefore, AmREIT's internal advisor has been
fully paid for, 100% with Company shares as opposed to debt, and no further
payments of shares or expense related to the issuance of shares will be made.
Cash flows used in investing activities has been primarily related to the
acquisition or development of retail properties. During the second quarter of
2004, AmREIT purchased The Courtyard at Post Oak, consisting of a free standing
building occupied by Verizon Wireless and a multi-tenant center occupied by
Ninfa's Restaurant and Dessert Gallery. During the first quarter of 2004, AmREIT
through one its taxable REIT subsidiaries, acquired a 25% equity interest in a
45 acre retail redevelopment in Houston, Texas. The other partners are
affiliated partnerships. The investment was funded through a combination of the
$14.3 million of capital (net of $1.8 million in issuance costs) raised through
the class C common share offering and debt financing.
In addition, the Company received $694 thousand in proceeds during the second
quarter of 2004 from the sale of its Wherehouse Entertainment project located in
Wichita, Kansas. Prior to the sale, the Company recorded an impairment charge to
earnings of approximately $1.1 million to reflect the impaired value of the
property. Cash flows used in investing activities as reported in the
Consolidated Statements of Cash Flows increased from $3.1 million in the first
six months of 2003 to $7.9 million in the first six months of 2004.
Cash flows provided by financing activities decreased from $5.4 million through
June 30, 2003 to $4.8 million through June 30, 2004. Cash flows provided by
financing activities were primarily generated from our class C common share
offering. AmREIT fully subscribed its class C commons share offering during the
second quarter. 100% of the net proceeds have been used to purchase
irreplaceable corners. AmREIT has begun to market its class D common share
offering, a $170 million common share offering, offered through the independent
financial planning community. The class D common shares have a stated 6.5%
annual dividend, paid monthly, are convertible into the Company's class A common
shares at any time after a seven-year lock out period for a 7.7% premium on
invested capital and are callable by the Company after one year. One advantage
of raising capital through the independent financial planning marketplace is the
capital is received on a monthly basis, allowing for a
F-16
scaleable matching of real estate projects. Our first priority is to deploy the
capital raised, and then to moderately leverage the capital, while maintaining
our philosophy of a conservative balance sheet. The Company was able to reduce
debt by almost $25.1 million with the proceeds from it class C common share
offering.
AmREIT has a $35 million unsecured revolving credit facility, as amended in June
2004. The facility will mature on September 4, 2004, and the Company and Lender
are in the process of renewing the Credit Facility for a one year period.
Management believes that the Credit Facility will be renewed on terms and
conditions substantially the same as the current Credit Facility. The Credit
Facility contains covenants which, among other restrictions, require the Company
to maintain a minimum net worth, a maximum leverage ratio, specified interest
coverage and fixed charge coverage ratios and allow the lender to approve all
distributions. Furthermore, the Credit Facility contains concentration covenants
and limitations, limiting property level net operating income for any one tenant
to no more than 15% (35% for IHOP) of total property net operating income. At
June 30, 2004, IHOP net operating income represented approximately 33% of total
property net operating income. At June 30, 2004, the Company was in compliance
with all financial covenants. The Credit Facility's annual interest rate varies
depending upon the Company's debt to asset ratio, from LIBOR plus a spread of
1.40% to LIBOR plus a spread of 2.35%. As of June 30, 2004, the interest rate
was LIBOR plus 2.0%. As of June 30, 2004, $10.2 million was outstanding under
the Credit Facility. Thus the Company has approximately $24.8 million available
under its line of credit, subject to Lender approval on the use of the proceeds.
In addition to the credit facility, AmREIT utilizes various permanent mortgage
financing and other debt instruments. As of June 30, 2004, the Company had the
following contractual debt obligations:
2004 2005 2006 2007 2008 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Unsecured debt:
Revolving credit facility $ 10,168 $ - $ - $ - $ - $ - $ 10,168
5.46% dissenter notes - - - - - 760 760
Secured debt 230 490 530 573 620 19,163 21,606
Non-cancelable operating lease
payments 79 210 210 210 210 123 1,042
Total contractual obligations $ 10,477 $ 700 $ 740 $ 783 $ 830 $ 20,046 $ 33,576
======== ===== ===== ===== ===== ======== ========
In order to continue to expand and develop its portfolio of properties and other
investments, the Company intends to finance future acquisitions and growth
through the most advantageous sources of capital available at the time. Such
capital sources may include proceeds from public or private offerings of the
Company's debt or equity securities, secured or unsecured borrowings from banks
or other lenders, acquisitions of the Company's affiliated entities or other
unrelated companies, or the disposition of assets, as well as undistributed
funds from operations.
In August 2003, the Company commenced the class C common share offering. This
offering is being exclusively made through the NASD independent financial
planning community. It was a $44 million offering, of which $4 million has been
reserved for the dividend reinvestment plan. As of June 30, 2004, 4.04 million
shares had been issued, including shares issued through the dividend
reinvestment program, resulting in approximately $40.4 million in gross
proceeds. The proceeds are being and will be used to finance the acquisition and
development of retail real estate projects, pay down the revolving credit
facility and provide working capital for the on going operation of the company
and its properties.
For the quarters ended June 30, 2004 and 2003, the Company paid dividends to its
shareholders of $1.489 million, and $749 thousand respectively. The class A and
class C shareholders receive monthly dividends and the class B shareholders
receive quarterly dividends. All dividends are declared on a quarterly basis.
The dividends by class follow (in thousands):
F-17
Class A Class B Class C
2004
Second quarter $383 $429 $677
First quarter $345 $434 $379
2003
Fourth quarter $320 $437 $156
Third quarter $308 $443 $15
Second quarter $310 $439 N/A
Until properties are acquired by the Company, the Company's funds are held in
short-term, highly liquid investments which the Company believes to have
appropriate safety of principal. This investment strategy has allowed, and
continues to allow, high liquidity to facilitate the Company's use of these
funds to acquire properties at such time as properties suitable for acquisition
are located. At June 30, 2004, the Company's cash and cash equivalents totaled
$846 thousand.
Cash flows from operating activities, investing activities, and financing
activities for the three and six months ended June 30, are presented below in
thousands:
QUARTER YEAR TO DATE
2004 2003 2004 2003
-------------------------------------------------------
Operating activities $1,635 $(4,343) $1,940 $(4,091)
Investing activities (6,182) (40) (7,910) (3,096)
Financing activities 3,214 4,294 4,784 5,417
INFLATION
Inflation has had very little effect on income from operations. Management
expects that increases in store sales volumes due to inflation as well as
increases in the Consumer Price Index (C.P.I.), may contribute to capital
appreciation of the Company properties. These factors, however, also may have an
adverse impact on the operating margins of the tenants of the properties.
FUNDS FROM OPERATIONS
AmREIT considers FFO to be an appropriate measure of the operating performance
of an equity REIT. The National Association of Real Estate Investment Trusts
(NAREIT) defines FFO as net income or loss computed in accordance with generally
accepted accounting principles (GAAP), excluding gains from sales of property,
plus real estate related depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. In addition, NAREIT
recommends that extraordinary items not be considered in arriving at FFO. AmREIT
calculates its FFO in accordance with this definition. Most industry analysts
and equity REITs, including AmREIT, consider FFO to be an appropriate
supplemental measure of operating performance because, by excluding gains or
losses on dispositions and excluding depreciation, FFO is a helpful tool that
can assist in the comparison of the operating performance of a company's real
estate between periods, or as compared to different companies. There can be no
assurance that FFO presented by AmREIT is comparable to similarly titled
measures of other REITs. FFO should not be considered as an alternative to net
income or other measurements under GAAP
F-18
as an indicator of our operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity.
Below is the calculation of FFO and the reconciliation to net income, which the
Company believes is the most comparable GAAP financial measure to FFO, in
thousands for the three months ended June 30:
QUARTER YEAR TO DATE
2004 2003 2004 2003
------------------------------------------------------
Income (loss) before discontinued operations $ 308 $ 13 $ (763) $ 173
Income from discontinued operations (211) 636 495 934
Plus depreciation of real estate assets - from operations 257 170 488 352
Plus depreciation of real estate assets - from discontinued
operations 26 38 39 76
Less class B and class C distributions ( 1,106) (439) (1,919) (892)
------------------------------------------------------
Total Funds From Operations available to class A shareholders * $( 726) 418 (1,660) $ 643
Cash dividends paid to class A shareholders $ 383 $ 310 $ 728 $ 617
Dividends (in excess of) less than FFO * $( 1,109) $ 108 $ (2,388) $ 26
* Based on the adherence to the NAREIT definition of FFO, we have not added back
the $362 thousand or $1.7 million charge to earnings for the three and six
months ended June 30, 2004, respectively, resulting from shares issued to Mr.
Taylor. Additionally, we have not added back the $1.1 million charge to earnings
for the three and six months ended June 30, 2004, resulting from an asset
impairment and corresponding write-down of value. Adding these charges back to
earnings would result in adjusted funds from operations available to class A
shareholders of $739 thousand for the three months ended June 30, 2004 and $1.1
million for the six months ended June 30, 2004. Adding the charge to earnings
would also result in dividends paid being less than adjusted FFO of $356
thousand for the three months ended June 30, 2004 and $397 thousand for the six
months ended June 30, 2004.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2004 TO JUNE 30, 2003:
Rental revenue and earned income from direct financing leases increased by 42%,
or $619 thousand, for the three months ended June 30, 2004 when compared to the
three months ended June 30, 2003. Of this increase, $597 thousand is related to
acquisitions made after the second quarter of 2003.
Securities commission income increased by $1.2 million for the three months
ended June 30, 2004 when compared to 2003. This increase in securities
commission income is due to increased capital being raised through our broker
dealer company, AmREIT Securities Company (ASC). As ASC raises capital for
either AmREIT or its affiliated retail partnerships, ASC earns a securities
commission of between 8% and 10.5% of the money raised. During the second
quarter of 2004, AmREIT and its affiliated retail partnerships raised
approximately $15.3 million, as compared to approximately $4.3 million during
the second quarter of 2003. This increase in commission income is somewhat
mitigated by a corresponding increase in commission expense paid to other third
party broker dealer firms. Commission expense increased by $1.0 million for the
three months ended June 30, 2004 compared to the three months ended June 30,
2003. Interest and other income increased approximately $313 thousand primarily
due to the negotiated claim on the lease of the Footstar location in Baton
Rouge.
General and operating expense for the three months ended June 30, 2004 increased
$804 thousand when compared to 2003. The increase in general and operating
expense is primarily due to additional personnel and the associated
F-19
salary and benefits costs related to these individuals. Since the second quarter
of 2003, the Company added members to each of the operating teams, two on the
real estate team (property management, legal, acquisitions and leasing), four on
the securities team and three clerical and administrative support positions. By
building our various teams, we have not only been able to grow revenue and Funds
from Operations, but believe that we will be able to sustain and further enhance
our growth. Compensation expense increased $424 thousand in the three months
ended June 30, 2004 as compared to the three months ended June 30, 2003. In
addition, property expense increased $126 thousand.
Deferred merger costs increased from $0 in 2003 to $362 thousand in 2004. The
deferred merger cost is related to deferred consideration payable to Mr. Taylor
as a result of the acquisition of our advisor, which was owned by Mr. Taylor in
1998. In connection with the acquisition, Mr. Taylor agreed to payment for this
advisory company in the form of common shares, paid as the Company increases its
outstanding equity. To date, Mr. Taylor has received 900 thousand class A common
shares, which fulfills the shares that he is owed under the deferred
consideration agreement.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 TO JUNE 30, 2003:
Rental revenue and earned income from direct financing leases increased by 43%,
or $1.3 million for the six months ended June 30, 2004 when compared to the six
months ended June 30, 2003. Of this increase, $1.2 million is related to
acquisitions made after the second quarter of 2003.
Securities commission income increased by $3.0 million, from $527 thousand in
2003 to $3.6 million in 2004. This increase in securities commission income is
due to increased capital being raised through our broker dealer company, AmREIT
Securities Company (ASC). As ASC raises capital for either AmREIT or its
affiliated retail partnerships, ASC earns a securities commission of between 8%
and 10.5% of the money raised. During the six months ended June 30, 2004, AmREIT
and its affiliated retail partnerships raised approximately $33.3 million, as
compared to approximately $5.2 million during the six months ended June 30,
2003. This increase in commission income is somewhat mitigated by a
corresponding increase in commission expense paid to other third party broker
dealer firms. Commission expense increased by $2.4 million, from $396 thousand
in 2003 to $2.8 million in 2004.
General and operating expense increased $1.5 million, from $1.5 million in 2003
to $3.0 million in 2004. The increase in general and operating expense is
primarily due to additional personnel and the associated salary and benefits
costs related to these individuals. Since the second quarter of 2003, the
Company added members to each of the operating teams, two on the real estate
team (property management, legal, acquisitions and leasing), four on the
securities team and three clerical and administrative support positions. By
building our various teams, we have not only been able to grow revenue and Funds
from Operations, but believe that we will be able to sustain and further enhance
our growth. Compensation expense increased $882 thousand in the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003. In addition,
property expense increased $261 thousand.
Deferred merger costs increased from $0 in 2003 to $1.7 million in the six
months ended June 30, 2004. The deferred merger cost is related to deferred
consideration payable to Mr. Taylor as a result of the acquisition of our
advisor, which was owned by Mr. Taylor in 1998. In connection with the
acquisition, Mr. Taylor agreed to payment for this advisory company in the form
of common shares, paid as the Company increases its outstanding equity. To date,
Mr. Taylor has received 900 thousand class A common shares, which fulfills the
shares that he is owed under the deferred consideration agreement.
F-20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Chief Executive Officer Section 302 Certification
31.2 Chief Financial Officer Section 302 Certification
32.1 Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current report on Form 8-K dated and filed with the Commission on
May 6, 2004 contained information under Item 7 (Financial
Statements, Pro Forma Financial Information and Exhibits) and
Item 9 (Regulation FD Disclosure).
F-21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AmREIT
-----------------------------------
(Issuer)
August 13, 2004 /s/ H. Kerr Taylor
--------------- -----------------------------------
Date H. Kerr Taylor, President
August 13, 2004 /s/ Chad C. Braun
--------------- -----------------------------------
Date Chad C. Braun
(Principal Accounting Officer)
F-22