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
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For the quarterly period ended June 30, 2002
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from to
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Commission File Number: 0-28378
AMREIT, INC.
MARYLAND CORPORATION IRS IDENTIFICATION NO.
76-0410050
8 GREENWAY PLAZA, SUITE 824 HOUSTON, TX 77046
(713) 850-1400
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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2002
(Unaudited)
ASSETS
Cash and cash equivalents $ 412,982
Accounts receivable 34,637
Escrow deposits 188,118
Prepaid expenses, net 311,288
Property:
Land 13,136,706
Buildings 17,738,428
Furniture, fixtures and equipment 281,127
-----------
31,156,261
Accumulated depreciation (2,319,737)
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Total property, net 28,836,524
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Net investment in direct financing leases 16,895,057
Other assets:
Preacquisition costs 280,759
Loan acquisition cost, net of $72,447 in accumulated
amortization 231,699
Accrued rental income 490,477
Deferred compensation 79,001
Investment in non-consolidated subsidiary 608,128
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Total other assets 1,690,064
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TOTAL ASSETS $48,368,670
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $26,429,521
Accounts payable 606,178
Prepaid rent 7,438
Security deposit 17,073
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TOTAL LIABILITIES 27,060,210
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Minority interest 5,657,132
Shareholders' equity:
Preferred stock, $.01 par value, 10,001,000 shares authorized, none issued
1,000 Common stock, $.01 par value, 100,010,000 shares authorized,
2,384,117 shares issued 23,841
Capital in excess of par value 21,655,867
Accumulated distributions in excess of earnings (5,925,330)
Cost of treasury stock, 19,310 shares (103,050)
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TOTAL SHAREHOLDERS' EQUITY 15,651,328
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $48,368,670
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See Notes to Consolidated Financial Statements.
2
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30
(Unaudited)
Quarter Year to date
2002 2001 2002 2001
---------- ---------- ----------- ----------
Revenues:
Rental income from operating leases $ 677,614 $ 622,868 $ 1,384,354 $ 1,296,105
Earned income from direct financing leases 437,169 151,374 628,351 316,321
Service fees and other income 355,385 1,122,179 1,208,589 1,662,395
Gain on sale of property - 7 - 168,916
Interest income 1,039 889 2,053 3,051
--------------- ------------------ --------------- -------------
Total revenues 1,471,207 2,037,317 3,223,347 3,446,788
--------------- ------------------ --------------- -------------
Expenses:
General operating and administrative 467,005 438,946 1,245,987 853,069
Legal and professional 134,955 475,593 329,461 650,825
Interest 410,032 233,604 663,680 565,111
Depreciation 126,822 113,558 253,670 227,117
--------------- ------------------ --------------- -------------
Total expenses 1,138,814 1,261,701 2,492,798 2,296,122
--------------- ------------------ --------------- -------------
Income before federal income taxes and
minority interest in net income of
consolidated joint ventures 332,393 775,616 730,549 1,150,666
Federal income taxes expenses for taxable
REIT subsidiary 69,000 - (15,000) -
Minority interest in net income of
consolidated joint ventures (140,100) (131,893) (271,945) (263,536)
--------------- ------------------ --------------- -------------
Net income $ 261,293 $ 643,723 $ 443,604 $ 887,130
=============== ================== =============== =============
Basic and diluted earnings per share $ 0.11 $ 0.27 $ 0.19 $ 0.38
=============== ================== =============== =============
Weighted average number of common shares
outstanding 2,364,807 2,355,423 2,358,283 2,359,380
=============== ================== =============== =============
Weighted average number of common shares
outstanding plus dilutive potential
common shares 2,364,807 2,355,423 2,358,283 2,359,380
=============== ================== =============== =============
See Notes to Consolidated Financial Statements.
3
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(Unaudited)
Quarter Year to Date
2002 2001 2002 2001
---- ---- ---- ----
Cash flows from operating activities:
Net income $ 261,293 $ 643,723 $ 443,604 $ 887,130
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 126,822 113,558 253,670 227,117
Gain on sale of property - ( 7) - (168,916)
Decrease in accounts receivable 150,917 87,950 636,755 199,059
Increase in prepaid expense (103,256) ( 81,462) ( 58,420) ( 82,343)
Decrease in accounts payable ( 32,263) ( 23,315) (789,429) (137,681)
Cash recepits from direct financing
leases less than income recognized ( 72,505) ( 8,385) ( 76,765) ( 14,845)
Increase in escrow deposits, net of
minority interest partners - - - ( 5,000)
Increase in accrued rental income ( 18,992) ( 23,831) ( 21,217) ( 42,574)
Increase in prepaid rent 7,438 - 7,438 -
Decrease in security deposits ( 15,050) - ( 15,050) -
(Increase) decrease in other assets (130,284) 1,213 (106,573) ( 4,100)
Decrease (increase) in deferred compensation 15,457 - ( 79,001) -
Increase in minority interest 140,100 131,893 271,945 263,536
------------- ----------- ------------ -----------
Net cash provided by operating activities 329,677 841,337 466,957 1,121,383
------------- ----------- ------------ -----------
Cash flows used in investing activities:
Improvements to real estate (126,057) - (426,062) -
Acquisitions of real estate ( 9,811,015) - ( 9,811,015) -
Additions to furniture, fixtures and equipment ( 236) - ( 4,174) -
(Investment in) distributions from joint ventures ( 8,035) 218,000 372,811 ( 202,000)
Proceeds from sale of property - 7 - 1,025,354
Increase in prepaid acqusitions costs ( 58,647) ( 15,422) ( 71,559) ( 16,496)
------------- ----------- ------------ -----------
Net cash (used in) provided by investing activities (10,003,990) ( 27,819) ( 9,939,999) 394,786
------------- ----------- ------------ -----------
Cash flows used in financing activities:
Proceeds from notes payable 9,127,257 - 9,497,209 2,452,500
Payments of notes payable ( 24,461) (1,002,111) ( 39,237) (3,402,027
Loan acquisitions, net 15,408 - 37,138 ( 45,231)
(Issuance) purchase of treasury stock - ( 33,527) 185,120 ( 99,595)
Distributions paid to shareholders ( 169,637) ( 117,717) ( 331,177) ( 217,717)
Contributions from minority interest partners 609,000 - 609,000 -
Distributions to minority interest partners ( 149,574 ( 144,335) ( 299,146) ( 288,666)
------------- ----------- ------------ -----------
Net cash provided by (used in) financing activities 9,407,993 (1,297,690) 9,658,907) (1,599,736)
------------- ----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents ( 266,320) ( 484,172) 185,865 ( 83,567)
Cash and cash equivalents, beginning of period 679,982 1,336,472 227,117 935,867
------------- ----------- ------------ -----------
Cash and cash equivalents, end of period $ 412,982 $ 852,300 $ 412,982 $ 852,300
============= =========== ============ ===========
See Notes to Financial Statements.
4
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERTATIONS
AmREIT, Inc. (the "Company" or "AmREIT") is a real estate investment trust
("REIT") based in Houston, Texas that was incorporated in the state of
Maryland on August 17, 1993. AmREIT sponsors investment opportunities
through the broker-dealer financial services community. For more than
16-years, AmREIT and its predecessor have helped investors reach their
financial goals through ownership in real estate on lease to companies in
the general retail, financial services and banking, medical and restaurant
sectors of commercial real estate.
AmREIT owns a real estate portfolio that consists of single-tenant, free
standing credit tenant leased projects and multi-tenant frontage commercial
projects. The single tenant projects are located from coast to coast and
are leased to blue-chip corporate tenants where the lease is the direct
obligations of these companies. In so doing, the dependability of the lease
payments are based on the strength and viability of the entire company, not
just that location. The multi-tenant projects are situated on prime
locations throughout Texas. Supporting the real estate portfolio is an
operating company subsidiary of AmREIT that provides a complete range of
services including development, construction management, property
management, brokerage and leasing.
AmREIT's investment sponsorship business creates new investment entities
that buy and develop commercial real estate with proceeds raised from
third-party investors. AmREIT has extensive experience and long-term
relationships in the commercial real estate market, which is the basis of
its ability to sponsor real estate investment opportunities while creating
fee income and carried interests for AmREIT and its shareholders.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT, Inc.,
its subsidiaries, AmREIT Realty Investment Corporation ("ARIC"), AmREIT
Securities Company ("ASC"), AmREIT Operating Corporation ("AOC"), AmREIT
SPE1 Inc. ("SPE 1"), AmREIT Opportunity Corporation ("AOP"), AmREIT Income
and Growth Corporation ("AIGC"), Reno IHOP, L.P. ("Reno IHOP"), Sugar Land
IHOP L.P. ("Sugar Land IHOP"), AmREIT Fidelity Corporation ("Fidelity"),
Sugar Land Plaza, LP ("Plaza"), ARIC SPE 1, LLC ("ARIC SPE"), AAA CTL
Notes, Ltd. ("AAA"), and its six joint ventures with related parties. ARIC,
AOC and AOP were formed in June, July and April 1998 respectively. ASC and
SPE 1 were both formed in February 1999. AIGC was formed in January 2001
and Reno IHOP and Sugar Land IHOP were both formed in February 2001.
Fidelity, Plaza, and ARIC SPE were formed in October 2001. ASC is a wholly
owned subsidiary of ARIC and was established exclusively to distribute
security commissions generated through direct participation programs and
private placement activities. SPE 1 is a special purpose entity, created
solely at the lender's request. SPE 1 owns a building and land located in
Ridgeland, Mississippi that is leased to Hollywood Video. ARIC was
organized to acquire, develop, hold and sell real estate in the short-term
for capital gains and/or receive fee income. ARIC and AOP were structured
as non-qualified REIT subsidiaries, whereby AmREIT owned 100% of the
preferred stock outstanding. In January 2001, ARIC and AOP elected to
restructure their respective capital stock in conjunction with the 2000 tax
act. As a result, the preferred stock held by AmREIT was retired and common
stock was issued in its place. ARIC and AOP have elected to be treated as
taxable REIT subsidiaries, with AmREIT, Inc. owning 100% of the outstanding
common stock. AIGC was organized as a taxable REIT subsidiary with AmREIT,
Inc. owning 100% of the outstanding common stock. Reno IHOP is a special
purpose entity, created solely at the lender's request.
5
Reno IHOP owned land, located in Reno, Nevada that was leased to IHOP
Properties. During 2001, the IHOP in Reno was sold and this entity was
liquidated. Sugar Land IHOP, Fidelity, Plaza, and ARIC SPE were created
solely at the lenders' request. Sugar Land IHOP owns land located in Sugar
Land, Texas that is leased to IHOP Properties. Fidelity owns two IHOP's
which are located in Memphis, Tennessee and St. Peters, Missouri. Plaza
owns a multi-tenant property located in Sugar Land that is leased to
Mattress Giant and River Oaks Imaging. ARIC SPE was created at the lender's
request to act as the General Partner on loans for the property that is
owned by Fidelity. AAA is an investment entity that was created to purchase
fifteen IHOP leasehold estate properties and two IHOP fee simple
properties. All significant intercompany accounts and transactions have
been eliminated in consolidation. The Company owns greater than 50% of the
aforementioned joint ventures and exercises control over operations.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
reflected when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to
be cash equivalents. Cash and cash equivalents consist of demand deposits
at commercial banks and money market funds.
PROPERTY
Property is leased to others on a net lease basis whereby all operating
expenses related to the properties, including property taxes, insurance and
common area maintenance are the responsibility of the tenant. The leases
are accounted for under the operating method or the direct financing
method. Under the operating lease method, the properties are recorded at
cost. Rental income is recognized ratably over the life of the lease and
depreciation is charged based upon the estimated useful life of the
property. Under the direct financing lease method, properties are recorded
at their net investment. Unearned income is deferred and amortized to
income over the life of the lease so as to produce a constant periodic rate
of return.
Expenditures related to the development of real estate are carried at cost
plus capitalized carrying charges, acquisition costs and development costs.
Carrying charges, primarily interest and loan acquisition costs, and direct
and indirect development costs related to buildings under construction are
capitalized as part of construction in progress. The Company capitalizes
acquisition costs once the acquisition of the property becomes probable.
Prior to that time the Company expenses these costs as acquisition expense,
which are included as general operating and administrative expense.
Management reviews its properties for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets, including
accrued rental income, may not be recoverable through operations.
Management determines whether an impairment in value occurred by comparing
the estimated future cash flows (undiscounted and without interest
charges), including the residual value of the property, with the carrying
cost of the individual property. If impairment is indicated, a loss will be
recorded for the amount by which the carrying value of the asset exceeds
its fair value.
6
DEPRECIATION
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years.
INVESTMENT IN NON CONSOLIDATED SUBSIDIARIES
AOP invested $250,000 as a limited partner and $1,000 as a general partner
in AmREIT Opportunity Fund, Ltd., which is accounted for using the equity
method. The limited partners have the right to remove and replace the
general partner (AOP) by a vote of the limited partners owning a majority
of the outstanding units. AOP currently owns a 10.6 percent limited partner
interest in AmREIT Opportunity Fund, Ltd. AmREIT Opportunity Fund was
formed to develop, own, manage, and hold for investment and, or resell
property and to make or invest in loans for the development or construction
of property.
AIGC invested $200,000 as a limited partner and $1,000 as a general partner
in AmREIT Income & Growth Fund, Ltd. that is accounted for using the equity
method. The limited partners have the right to remove and replace the
general partner (AIGC) by a vote of the limited partners owning a majority
of the outstanding units. AIGC currently owns an 8.5 percent limited
partner interest in AmREIT Income & Growth Fund, Ltd. AmREIT Income &
Growth Fund was formed to develop, own, manage, and hold for investment
and, or resell property and to make or invest in loans for the development
or construction of property.
ARIC invested $69,810 as a limited partner in AmREIT CDP #27, LP that is
accounted for using the equity method. AmREIT CDP #27, LP was formed to
acquire commercial real property and to develop, operate, lease, manage,
and or sell real property. AmREIT CDP #27, LP purchased two IHOP properties
in 2001 located in Memphis, Tennessee and Tupelo, Mississippi. The Memphis,
Tennessee property was sold for a profit in the first quarter of 2002.
ARIC invested $121,870 as a limited partner in AmREIT CDP SPE #33, Ltd.
that is accounted for using the equity method. AmREIT CDP SPE #33, Ltd. was
formed to acquire commercial real property and to develop, operate, lease,
manage, and or sell real property. In December 2001, AmREIT CDP #33, Ltd.
purchased three IHOP leasehold estate properties located in Houston, Texas,
Orem, Utah, and Hagerstown, Maryland.
OTHER ASSETS
Other assets include pre-acquisition costs of $280,759. Pre-acquisition
costs include $62,207 in costs related to a multi-tenant pad site that is
being considered for acquisition. In addition, pre-acquisition costs
include $218,552 related to the joint proxy and consent solicitation
statement and prospectus declared effective by the Securities and Exchange
Commission on May 6, 2002, which proposes among other items, the merger of
certain affiliated partnerships into AmREIT. Other assets also include loan
acquisition costs of $231,699. Loan acquisition costs were incurred in
obtaining property financing and are amortized to interest expense on a
straight-line basis over the term of the debt agreements. Accumulated
amortization related to loan acquisition costs as of June 30, 2002 totaled
$72,447.
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the sale of
common stock are treated as a reduction of shareholder' equity.
7
REVENUE RECOGNITION
Properties are leased on a net lease basis. Revenue is recognized on a
straight-line basis over the terms of the individual leases. Service fees
are recognized when earned.
FEDERAL INCOME TAXES
The Company is qualified as a REIT under the Internal Revenue Code of 1986,
and is, therefore, not subject to Federal income taxes, provided it meets
all conditions specified by the Internal Revenue Code for retaining its
REIT status, including the requirement that at least 90% of its real estate
investment trust taxable income is distributed by March 15 of the following
year.
ARIC, a wholly owned subsidiary of AmREIT, Inc. is treated as a taxable
REIT subsidiary for federal income tax purposes. In addition, ARC, AOPP and
AIGC are treated as taxable REIT subsidiaries and are consolidated with
ARIC to file a federal income tax return. During the quarter, ARIC and its
consolidated subsidiaries recorded a federal tax credit of $69,000 based on
its taxable income for the six months ended June 30, 2002, which resulted
in a federal income tax obligation of $15,000 at June 30, 2002.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, cash
equivalents, accounts receivable and accounts and notes payable. The
carrying value of cash, cash equivalents, accounts receivable and accounts
payable are representative of their respective fair values due to the
short-term maturity of these instruments. The fair value of the Company's
debt obligations is representative of its carrying value based upon the
variable rate terms of the credit facility.
NEW ACCOUNTING STANDARDS
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the
Financial Accounting Standards Board ("FASB"). SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Goodwill and certain intangible assets will
remain on the balance sheet and not be amortized. On an annual basis, and
when there is reason to suspect that their values have been diminished or
impaired, these assets must be tested for impairment, and write-downs may
be necessary. The Company implemented SFAS No. 141 on July 1, 2001. The
adoption of this Statement had no effect on the Company's consolidated
financial position or results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this statement. The Company implemented SFAS No. 142
on January 1, 2002. The adoption of SFAS No. 142 did not have a material
impact on our financial position, results of operations, or cash flows.
8
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which is effective for fiscal years beginning after June 15,
2002. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The adoption of SFAS No. 143
will not have a material impact on our financial position, results of
operations, or cash flows.
On January 1, 2002, the company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
accounting and reporting for the impairment or disposal of a segment of a
business. More specifically, this Statement broadens the presentation of
discontinued operations to include a component of an entity whose
operations and cash flows can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity. The adoption
of SFAS No. 144 did not have a material impact on our financial position,
results of operations, or cash flows.
In April 2002, the FASB issued SAS No. 145, "Rescission of SFAS Statements
No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections."
The purpose of this statement is to update, clarify and simplify existing
accounting standards. We adopted this statement effective April 30, 2002
and determined that the adoption of this statement did not have a material
impact on our financial position, results of operations, or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to exit or
disposal plan. Examples of costs covered by the standard include lease
terminations costs and certain employee severance costs that are associated
with restructuring, discontinued operation, plant closings, or other exit
or disposal activity. Previous accounting guidance was provided by EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 replaces issue 94-3. SFAS No.
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. This statement is effective for our fiscal year
beginning January 1, 2002. The adoption of SFAS No. 146 will not have a
material impact on our financial position, results of operations, or cash
flows.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and include all of the
disclosures required by generally accepted accounting principles. The
financial statements reflect all normal and recurring adjustments, which
are, in the opinion of management, necessary to present a fair statement of
results for the three and six-month periods ended June 30, 2002 and 2001.
The financial statements of AmREIT, Inc. contained herein should be read in
conjunction with the financial statements included in the Company's annual
report on Form 10-KSB for the year ended December 31, 2001.
2. INVESTMENT IN JOINT VENTURES
NON CONSOLIDATED JOINT VENTURES
On June 29, 1998, the Company entered into a joint venture, GDC Vista Ridge
Partners, Ltd., with GDC Ltd. The joint venture was formed to acquire,
finance, develop, operate and dispose of a retail project located in
Lewisville, Texas. The Company's interest in the joint venture is
approximately 6.7%.
9
ARIC invested $69,810 as a limited partner in AmREIT CDP #27, LP that is
accounted for using the equity method. AmREIT CDP #27, LP, was formed to
acquire commercial real property and to develop, operate, lease, manage,
and or sell real property. AmREIT CDP #27, LP purchased two IHOP properties
in 2001 located in Memphis, Tennessee and Tupelo, Mississippi. One of the
two properties, owned by AmREIT CDP #27, LP, was sold during the first
quarter 2002. ARIC received investment income of $33,490, from the sale of
the property located in Memphis and still has $33,385 invested in the IHOP
in Tupelo.
ARIC invested $329,714 as a member in AmREIT CDP #31, LLC that is accounted
for using the equity method. AmREIT CDP #31, LLC, was formed to acquire
commercial real property and to develop, operate, lease, manage, and or
sell real property. AmREIT CDP #31, LLC purchased two IHOP properties in
2001 located in Cookeville, Tennessee and Scottsdale, Arizona. Both
properties were sold during the first quarter 2002, and AmREIT CDP #31, LLC
does not own any real property as of June 30, 2002.
ARIC has invested $121,113 as a limited partner in AmREIT CDP SPE #33, Ltd.
that is accounted for using the equity method. AmREIT CDP SPE #33, Ltd. was
formed to acquire commercial real property and to develop, operate, lease,
manage, and or sell real property. In December 2001, AmREIT CDP #33, Ltd.
purchased three IHOP leasehold estate properties located in Houston, Texas,
Orem, Utah, and Hagerstown, Maryland.
CONSOLIDATED JOINT VENTURES
The Company consolidates its joint ventures listed below due to its ability
to control operations. Pursuant to the Joint Venture Agreements that
incorporate the provisions to the Texas Revised Partnership Act, the
Company as majority owner may make management decisions, such as the sale
of the property, without the consent of the minority joint venture
interests.
On October 16, 1997, the Company entered into a joint venture with AAA Net
Realty XI, Ltd., an entity with common management. The joint venture was
formed to purchase a property, which is being operated as a Hollywood Video
store in Lafayette, Louisiana. The property was purchased on October 31,
1997 after the construction was completed. The Company's interest in the
joint venture is 74.58%.
On February 11, 1997, the Company entered into a joint venture with AAA Net
Realty XI, Ltd. The joint venture was formed for the purchase of a
property, which is being operated as a Just For Feet retail store in Baton
Rouge, Louisiana. The property was purchased on June 9, 1997 after the
construction was completed. The Company's interest in the joint venture is
51%.
On September 23, 1996, the Company entered into a joint venture with AAA
Net Realty XI, Ltd. The joint venture was formed to purchase a parcel of
land in The Woodlands, Texas upon which the tenant, Washington Mutual,
constructed a branch bank building at its cost. At the termination of the
lease, the improvements will be owned by the joint venture. The Company's
interest in the joint venture is 51%.
On April 5, 1996, the Company formed a joint venture, AAA Joint Venture
96-1, with AAA Net Realty Fund XI, Ltd. and AAA Net Realty Fund X, Ltd.,
entities with common management, for the purpose of acquiring a property
which is being operated as a Just For Feet retail store in Tucson, Arizona.
The property was purchased on September 11, 1996 after construction was
completed. The Company's interest in the joint venture is 51.9%.
On September 12, 1995, the Company entered into a joint venture agreement
with AAA Net Realty Fund XI, Ltd. to purchase a property, which is being
operated as a Blockbuster Music Store in Wichita, Kansas. The Company's
interest in the joint venture is 51%.
On October 27, 1994, the Company entered into a joint venture agreement
with AAA Net Realty Fund X, Ltd., an entity with common management. The
joint venture was formed to purchase a property, which is being operated as
a Blockbuster Music Store in Independence, Missouri. The Company's interest
in the joint venture is 54.84%.
10
4. NOTES PAYABLE
In November 1998, the Company entered into an unsecured credit facility
(the "Credit Facility"), which is being used to provide funds for the
acquisition of properties and working capital, and repaid all amounts
outstanding under the Company's prior credit facility. Under the Credit
Facility, which had an original term of one year, and has been extended
through October 2002, the Company may borrow up to $13 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, specified interest coverage and fixed
charge coverage ratios and allow the lender to approve all distributions.
Due to the joint proxy and consent solicitation statement and prospectus
declared effective by the Securities and Exchange Commission on May 6, 2002
the covenants and restrictions were waived by the lender as of June 30,
2002. The Credit Facility bears interest at an annual rate of LIBOR plus a
spread of 1.875% (4.23% as of June 30, 2002). As of June 30, 2002,
$10,379,477 was outstanding under the Credit Facility. Thus the Company has
approximately $755,341 available under its line of credit subject to use of
proceeds by the lender.
In March 1999, the Company entered into a ten-year mortgage, amortized over
30 years, note payable with NW L.L.C. for $1,000,000 with $973,060 being
outstanding at June 30, 2002. The interest rate is fixed at 8.375% with
payments of principal and interest due monthly. The note matures April 1,
2009 and as of June 30, 2002 the Company is in compliance with all terms of
the agreement. The note is collateralized by a first lien mortgage on a
Hollywood Video located in Ridgeland, MS. with an aggregate carrying value
of $1,189,409, net of $96,445 of accumulated depreciation.
In February 2001, the Company entered into a ten-year mortgage, amortized
over 20 years, note payable with General Electric Capital Business Asset
Funding Corporation for $1,350,000 with $1,315,023 being outstanding at
June 30, 2002. The interest rate is fixed at 8.25% with payments of
principal and interest due monthly. The note matures February 28, 2011 and
as of June 30, 2002 the Company is in compliance with all terms of the
agreement. The note is collateralized by a first lien mortgage on an IHOP
restaurant located in Sugarland, TX with an aggregate carrying value of
$1,635,748, net of $67,886 of accumulated depreciation.
In October 2001, the Company entered into a ten-year mortgage, amortized
over 30 years, note payable with Greenwich Capital Financial Products, Inc.
for $2,400,000 with $2,388,572 being outstanding at June 30, 2002. The
interest rate is fixed at 7.6% with payments of principal and interest due
monthly. The note matures November 1, 2011 and as of June 30, 2002 the
Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on Sugarland Plaza, a multi-tenant
center located in Sugarland, TX. with an aggregate carrying value of
$4,009,616, net of $287,243 of accumulated depreciation.
In October 2001, the Company entered into a note payable with Washington
Mutual for $1,378,000 with $1,378,000 being outstanding at June 30, 2002.
The interest rate is equal to the thirty day LIBOR rate plus 280 basis
points, but in no event lower than 6.75%, which equated to 6.75% at June
30, 2002. The note, which requires interest only payments, matures November
1, 2002 and as of June 30, 2002, the Company is in compliance with all
terms of the agreement. The note is collateralized by a first lien mortgage
on an IHOP restaurant located in Memphis, TN. with an aggregate carrying
value of $1,546,280 which is net of $18,727 of accumulated depreciation.
11
In October 2001, the Company entered into a note payable with Washington
Mutual for $1,658,000 with $1,658,000 being outstanding at June 30, 2002.
The interest rate is equal to the thirty day LIBOR rate plus 280 basis
points, but in no event lower than 6.75%, which equated to 6.75% at June
30, 2002. The note matures November 1, 2002 and as of June 30, 2002, the
Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on an IHOP restaurant located in
St. Peters, MO. with an aggregate carrying value of $1,857,787 net of
$22,499 of accumulated depreciation.
Beginning in April 2002, AAA began entering into ten-year mortgages,
amortized over 20 years, with General Electric Capital Business Asset
Funding Corporation related to the purchase of seventeen IHOP properties,
of which ten had closed as of June 30, 2002. The following table summarizes
the terms of loan agreements and the property collateralizing the notes. As
of June 30, 2002 the Company is in compliance with all terms of the
agreement. The notes are cross-collateralized and cross-defaulted with each
other.
--------------------- ----------------- ----------------- ---------------- ----------------- ------------------
Location Original Loan Outstanding Fixed Date Loan Net
Amount Loan Amount at Interest Rate Matures Investment
June 30, 2002 in Direct
Financing Lease
--------------------- --------------- --------------- ------------- -------------- ---------------
Shawnee, KS $ 750,542 $749,239 7.82% May 1, 2012 $ 884,676
--------------------- --------------- --------------- ------------- -------------- ---------------
El Paso, TX 760,467 759,147 7.82% May 1, 2012 896,242
--------------------- --------------- --------------- ------------- -------------- ---------------
Beaverton, OR 886,682 885,143 7.82% May 1, 2012 1,046,169
--------------------- --------------- --------------- ------------- -------------- ---------------
Rochester, NY 950,583 948,933 7.82% May 1, 2012 1,135,510
--------------------- --------------- --------------- ------------- -------------- ---------------
Baton Rouge, LA 1,250,317 1,248,146 7.82% May 1, 2012 1,479,674
--------------------- --------------- --------------- ------------- -------------- ---------------
Charlottesville, NC 630,005 628,911 7.82% May 1, 2012 748,521
--------------------- --------------- --------------- ------------- -------------- ---------------
Albuquerque, NM 756,618 755,304 7.82% May 1, 2012 893,644
--------------------- --------------- --------------- ------------- -------------- ---------------
Springfield, MO 1,030,227 1,030,227 7.82% June 1, 2012 1,212,403
--------------------- --------------- --------------- ------------- -------------- ---------------
Salem, OR 620,609 620,609 7.82% June 1, 2012 737,631
--------------------- --------------- --------------- ------------- -------------- ---------------
Roanoke, VA 711,730 711,730 7.89% July 1, 2012 844,661
--------------------- --------------- --------------- ------------- -------------- ---------------
Total $8,347,780 $8,337,389 $ 9,879,131
--------------------- --------------- --------------- ---------------
Aggregate annual maturity of the mortgage notes payable for each of the
following five years ending June 30 are as follows:
2002 $ 13,535,065
2003 254,141
2004 274,909
2005 297,376
Thereafter 12,068,030
--------------
$ 26,429,521
==============
12
5. MAJOR TENANTS
The following schedule summarizes rental income by lessee for the six
months ended June 30:
Quarter Year to Date
2002 2001 2002 2001
------ ------ ------ ------
International House of Pancakes $ 427,269 $ 121,582 $ 608,439 $ 242,993
Footstar, Inc. 178,526 177,459 355,889 354,639
OfficeMax, Inc. 129,624 129,624 259,247 259,247
Wherehouse Entertainment 94,482 94,477 188,958 188,951
Hollywood Entertainment Corp. 68,291 68,291 136,582 136,581
Sugar Land Imaging Affiliates Ltd. 63,156 53,302 126,311 103,021
Mattress Giant, Inc. 40,981 32,065 81,960 32,065
Washington Mutual 39,450 39,449 78,900 78,896
Radio Shack 27,225 27,225 54,450 54,450
Texas Children's Pediatrics (1) 26,001 - 26,001 -
Don Pablos 19,612 20,359 39,224 39,971
One Care Health Industries, Inc. (2) 166 50,409 56,744 100,818
America's Favorite Chicken Co. (3) - - - 20,794
----------- ---------- ----------- ----------
$1,114,783 $ 814,242 $2,012,705 $1,612,426
=========== ========== =========== ==========
(1) Texas Children's Pediatrics entered into a long-term lease with AmREIT, beginning in May 2002,
at Copperfield Medical Plaza. The lease was entered into as a result of the negotiated lease
buy out by AmREIT and One Care Health Industries, Inc.
(2) One Care Health Industries, Inc. was a tenant at Copperfield Medical Plaza. In April of
2002, AmREIT negotiated a lease buy out agreement with One Care for approximately $190,000.
As a result, AmREIT immediately released approximately 75 percent of the available space
to Texas Children's Pediatrics.
(3) America's Favorite Chicken Co., located in Atlanta and was sold by AmREIT during the first
quarter 2001.
6. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
share has been computed by dividing net income (as adjusted) by the
weighted average number of common shares outstanding plus dilutive
potential common shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
Quarter Year to Date
2002 2001 2002 2001
--------- --------- --------- ---------
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding 2,364,807 2,355,423 2,358,283 2,359,380
========= ========= ========= =========
Basic earnings per share $ .11 $ .27 $ .19 $ .38
========= ========= ========= =========
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding 2,364,807 2,355,423 2,358,283 2,359,380
Shares issuable from assumed conversion of warrants - - - -
--------- --------- --------- ---------
Weighted average common shares outstanding, as adjusted 2,364,807 2,355,423 2,358,283 2,359,380
========= ========= ========= =========
Diluted earnings per share $ .11 $ .27 $ .19 $ .38
========= ========= ========= =========
EARNINGS FOR BASIC AND DILUTED COMPUTATION Net income to common
shareholders (basic and diluted
earnings per share computation) $ 261,293 $ 643,723 $ 443,604 $ 887,130
========= ========= ========= =========
13
7. RELATED PARTY TRANSACTIONS
See Note 1 regarding investments in non-consolidated subsidiaries and Note
2 regarding consolidated joint ventures with related parties.
The Company provides property acquisition, leasing, administrative and
management services for thirteen affiliated real estate limited
partnerships that are under common management (the "Partnerships"). The
president and director of the Company owns between 45% and 100% of the
stock of the companies that serve as the general partner of the
Partnerships. For the six months ended June 30, service fees of $174,328
and $164,831 were paid by the Partnerships to the Company for 2002 and 2001
respectively.
On May 20, 1999, the Company entered into a partnership agreement with
various individual investors to form AmREIT Opportunity Fund, Ltd. The
partnership was formed to develop, own, manage, hold for investment and or
resell property and to make and or invest in loans for the development or
construction of property. The Company invested $250,000 as a Limited
Partner and $1,000 as the General Partner.
On January 26, 2001, the Company entered into a partnership agreement with
various individual investors to form AmREIT Income & Growth Fund, Ltd. The
partnership was formed to develop, own, manage, hold for investment and or
resell property and to make and or invest in loans for the development or
construction of property. The Company invested $200,000 as a Limited
Partner and $1,000 as the General Partner.
On March 20,2002, the Company formed a partnership agreement, AAA CTL
Notes, Ltd. ("AAA") whereby the Company would purchase fifteen IHOP
leasehold estate properties and two IHOP fee simple properties. Upon
completion of the purchase of the seventeen properties, AmREIT plans to
syndicate its equity through a private placement offering through its
selected group of financial planning and broker-dealer firms. Upon the
successful purchase of the properties and the syndication of AmREIT's
equity, AmREIT will maintain the general partner ownership and economic
benefits after certain return thresholds have been met for the investors.
Additionally, AmREIT has agreed to assign a portion, up to 50%, of the cash
flow and economic benefits to its key employees as contingent, long-term
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 without increasing
the overhead burden. This contingent compensation will only be assigned
once AmREIT has successfully syndicated its equity and the performance
hurdles set in the private placement memorandum have been met for the
investors. At June 30, 2002, AAA had closed ten properties and seven
property acquisitions are pending. Upon successful syndication of AmREIT's
equity, AAA will not be consolidated in the balance sheet, and will be
accounted for as an investment under the equity method of accounting. Below
is a condensed summary of the balance sheet and the statement of operations
of AAA on a stand alone basis as of June 30, 2002:
Current assets $ 303,499
Buildings, net 9,776,899
Other assets 51,322
-----------
Total assets $10,131,720
===========
Notes payable $ 8,337,389
Payable to AmREIT, Inc. 90,127
Other liabilities 95,074
Minority interest 617,303
Partners capital 991,827
-----------
Total liabilities and partners capital $10,131,720
===========
Earned income from direct financing leases $ 177,743
Other income 166
-----------
Total income 177,909
Depreciation expense 34,116
Interest and loan costs 111,828
Other expense 10,335
-----------
Total expense 156,279
Minority interest 8,303
Net Income $ 13,327
===========
14
8. COMMITMENTS
The Company has a one-year lease agreement for its office facilities
through December 31, 2002. Rental expense for the six months ended June 30,
2002 and 2001 was $38,602 and $32,232 respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
AmREIT sponsors real estate investment opportunities through the
broker-dealer financial services community. For more than 16-years, the
Company has helped investors reach their financial goals through ownership
in real estate on lease to blue-chip companies.
AmREIT owns a real estate portfolio that consists of single-tenant, free
standing credit tenant leased projects and multi-tenant frontage commercial
projects. The single tenant projects are located from coast to coast and
are leased to blue-chip corporate tenants where the lease is the direct
obligations of these companies. In so doing, the dependability of the lease
payments are based on the strength and viability of the entire company, not
just that location. The multi-tenant projects are situated on prime
locations throughout Texas. Supporting the real estate portfolio is an
operating company subsidiary of AmREIT that provides a complete range of
services including development, construction management, property
management, brokerage and leasing.
AmREIT's investment sponsorship business creates new investment entities
that buy and develop commercial real estate with proceeds raised from
third-party investors. AmREIT has extensive experience and long-term
relationship in the commercial real estate market - the basis of its
ability to sponsor solid real estate investment opportunities while
creating fee income and carried interests for AmREIT and its shareholders.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations has been the principal source of capital to fund
the Company's ongoing operations. The Company's issuance of common stock
and the use of the Company's credit facility have been the principal
sources of capital required to fund its growth.
Comparison of the Three Months Ended June 30, 2002 to June 30, 2001:
Net cash provided by operating activities decreased $511,660 for the three
month period ended June 30, 2002 when compared to the three month period
ended June 30, 2001. The decrease in cash provided by operating activities
was due primarily to the following components: (1) a decrease in net income
of $382,430, from income of $643,723 in 2001 to income of $261,293 in 2002,
and (2) the increase in other assets of $131,497, from a decrease of $1,213
in 2001 to an increase of $130,284 in 2002, related to loan costs in
conjunction with permanent debt placed during 2002 and increased merger
costs related to the joint proxy and consent solicitation statement and
prospectus declared effective by the Securities and Exchange Commission on
May 6, 2002. The above decreases are offset somewhat by an increase in
accounts receivable collections of $62,967 in 2002, compared to collections
in 2001.
Net cash used in investing activities increased for the three month period
ended June 30, 2002 when compared to the three month period ended June 30,
2001, from $27,819 to $10,003,990 in 2002. The increase in cash used was
primarily due to an increase in acquisitions of real estate from $230,404
to $9,811,015 related to the property acquisitions of AAA. Additionally an
increase in improvements to real estate, which increased by $126,057
related to improvements made to Copper Medical Plaza. Additionally, $8,035
was invested in joint ventures in 2002 compared to a distribution from
investments of $218,000 in 2001.
Net cash provided by financing activities increased $10,705,683 for the
three month period ended June 30, 2002 when compared to the three month
period ended June 30, 2001. The increase was primarily due to proceeds from
notes payable, which totaled $9,127,257 and were related to the acquisition
of real estate in our investing activities. Additionally, payments of notes
payable decreased $977,650 from $1,002,111 in 2001 to $24,461 in 2002 based
on property sales and loan maturity schedules.
15
Comparison of the Six Months Ended June 30, 2002 to June 30, 2001:
Net cash provided by operating activities decreased $654,426 for the six
month period ended June 30, 2002 when compared to the six month period
ended June 30, 2001. The decrease in cash provided by operating activities
was due primarily to the following components: (1) an increase in cash used
to pay down accounts payable of $651,748, from a decrease of $137,681 in
2001 to a decrease of $789,429 in 2002, and (2) a decrease in net income of
$443,526 from $887,130 in 2001 to $443,604 in 2002. The above are offset
somewhat by an increase in accounts receivable collections of $437,696,
from $199,059 in 2001 to $636,755 in 2002.
Net cash used in investing activities increased $10,334,785 for the six
month period ended June 30, 2002 when compared to the six month period
ended June 30, 2001. The increase cash used was primarily due to an
increase in acquisitions of real estate from $412,072 to $9,811,015.
Improvements to real estate increased by $426,062 and proceeds from the
sale of property decreased by $1,025,354. Distributions from joint ventures
increased $574,811 from an investment of $202,000 in 2001 to distributions
of $372,811 in 2002.
Net cash provided by financing activities increased $11,258,643 for the six
month period ended June 30, 2002 when compared to the six month period
ended June 30, 2001. The increase was primarily due to proceeds from notes
payable, which totaled $9,497,209 in 2002 compared to $2,452,500 in 2001
and were related to the acquisition of real estate in our investing
activities. In addition to the above contributions from minority interest
partners increased from $0 in 2001 to $609,000 in 2002. Payments of notes
payable decreased $3,362,790 from $3,402,027 in 2001 to $39,237 in 2002.
In order to continue to expand and develop its portfolio of properties and
other investments, the Company intends to finance future acquisitions and
growth through the most advantageous sources of capital available to the
Company at the time. Such capital sources may include proceeds from public
or private offerings of the Company's debt or equity securities, secured or
unsecured borrowings from banks or other lenders, a merger with certain
affiliated partnerships or other unrelated companies, or the disposition of
assets, as well as undistributed funds from operations.
The Company's leases typically provide that the tenant bears responsibility
for substantially all property costs and expenses associated with ongoing
maintenance and operation, including utilities, property taxes and
insurance. In addition, the Company's leases generally provide that the
tenant is responsible for roof and structural repairs. Some of the tenant's
leases require the Company to be responsible for roof and structural
repairs. In these instances, the Company normally requires warranties,
and/or guarantees from the related vendors, suppliers and/or contractors,
to mitigate the potential costs of repairs during the primary terms of the
leases. Because many of the properties, which are subject to leases that
place these responsibilities on the Company are recently constructed,
management anticipates that capital demands to meet obligations with
respect to these properties will be minimal for the foreseeable future and
can be met with funds from operations and working capital. The Company may
be required to use bank borrowing or other sources of capital in the event
of unforeseen significant capital expenditures.
16
In November 1998, the Company entered into an unsecured credit facility
(the "Credit Facility"), which is being used to provide funds for the
acquisition of properties and working capital, and repaid all amounts
outstanding under the Company's prior credit facility. Under the Credit
Facility, which had an original term of one year, and has been extended
through October 1, 2002, the Company may borrow up to $13 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, and specified interest
coverage and fixed charge coverage ratios. Due to the joint proxy and
consent solicitation statement and prospectus declared effective by the
Securities and Exchange Commission on May 6, 2002, the covenants and
restrictions were waived by the lender as of June 30, 2002. The Credit
Facility bears interest at an annual rate of LIBOR plus a spread of 1.875%.
As of June 30, 2002, $10,379,477 was outstanding under the Credit Facility.
Thus, the Company has approximately $755,341 available under its line of
credit, subject to use of proceeds by the lender.
In March 1999, the Company entered into a ten-year mortgage, amortized over
30 years, note payable with NW L.L.C. for $1,000,000 with $973,060 being
outstanding at June 30, 2002. The interest rate is fixed at 8.375% with
payments of principal and interest due monthly. The note matures April 1,
2009 and as of June 30, 2002 the Company is in compliance with all terms of
the agreement. The note is collateralized by a first lien mortgage on
property with an aggregate carrying value of $1,189,409, net of $96,445 of
accumulated depreciation.
In February 2001, the Company entered into a ten-year mortgage, amortized
over 20 years, note payable with General Electric Capital Business Asset
Funding Corporation for $1,350,000 with $1,315,023 being outstanding at
June 30, 2002. The interest rate is fixed at 8.25% with payments of
principal and interest due monthly. The note matures February 28, 2011 and
as of June 30, 2002 the Company is in compliance with all terms of the
agreement. The note is collateralized by a first lien mortgage on property
with an aggregate carrying value of $1,635,748, net of $67,886 of
accumulated depreciation.
In October 2001, the Company entered into a ten-year mortgage, amortized
over 30 years, note payable with Greenwich Capital Financial Products, Inc.
for $2,400,000 with $2,388,572 being outstanding at June 30, 2002. The
interest rate is fixed at 7.6% with payments of principal and interest due
monthly. The note matures November 1, 2011 and as of June 30, 2002 the
Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on property with an aggregate
carrying value of $4,016,253, net of $280,606 of accumulated depreciation.
In October 2001, the Company entered into a note payable with Washington
Mutual for $1,378,000 with $1,378,000 being outstanding at June 30, 2002.
The interest rate is equal to the thirty day LIBOR rate plus 280 basis
points, but in no event lower than 6.75%, which equated to 6.75% at June
30, 2002. The note, which requires interest only payments, matures November
1, 2002 and as of June 30, 2002, the Company is in compliance with all
terms of the agreement. The note is collateralized by a first lien mortgage
on property with an aggregate carrying value of $1,546,280 which is net of
$18,727 of accumulated depreciation.
In October 2001, the Company entered into a note payable with Washington
Mutual for $1,658,000 with $1,658,000 being outstanding at June 30, 2002.
The interest rate is equal to the thirty day LIBOR rate plus 280 basis
points, but in no event lower than 6.75%, which equated to 6.75% at June
30, 2002. The note matures November 1, 2002 and as of June 30, 2002, the
Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on property with an aggregate
carrying value of $1,857,787 which is net of $22,499 of accumulated
depreciation.
17
Beginning in April 2002, AAA began entering into ten-year mortgages,
amortized over 20 years, with General Electric Capital Business Asset
Funding Corporation related to the purchase of seventeen IHOP properties,
of which ten had closed as of June 30, 2002. The following table summarizes
the terms of loan agreements and the property collateralizing the notes. As
of June 30, 2002 the Company is in compliance with all terms of the
agreement The notes are cross-collateralized and defaulted with each other.
--------------------- ----------------- ----------------- ---------------- ----------------- ------------------
Location Original Loan Outstanding Fixed Date Loan Net
Amount Loan Amount at Interest Rate Matures Investment
June 30, 2002 in Direct
Financing Lease
--------------------- --------------- --------------- ------------- -------------- ---------------
Shawnee, KS $ 750,542 $749,239 7.82% May 1, 2012 $ 884,676
--------------------- --------------- --------------- ------------- -------------- ---------------
El Paso, TX 760,467 759,147 7.82% May 1, 2012 896,242
--------------------- --------------- --------------- ------------- -------------- ---------------
Beaverton, OR 886,682 885,143 7.82% May 1, 2012 1,046,169
--------------------- --------------- --------------- ------------- -------------- ---------------
Rochester, NY 950,583 948,933 7.82% May 1, 2012 1,135,510
--------------------- --------------- --------------- ------------- -------------- ---------------
Baton Rouge, LA 1,250,317 1,248,146 7.82% May 1, 2012 1,479,674
--------------------- --------------- --------------- ------------- -------------- ---------------
Charlottesville, NC 630,005 628,911 7.82% May 1, 2012 748,521
--------------------- --------------- --------------- ------------- -------------- ---------------
Albuquerque, NM 756,618 755,304 7.82% May 1, 2012 893,644
--------------------- --------------- --------------- ------------- -------------- ---------------
Springfield, MO 1,030,227 1,030,227 7.82% June 1, 2012 1,212,403
--------------------- --------------- --------------- ------------- -------------- ---------------
Salem, OR 620,609 620,609 7.82% June 1, 2012 737,631
--------------------- --------------- --------------- ------------- -------------- ---------------
Roanoke, VA 711,730 711,730 7.89% July 1, 2012 844,661
--------------------- --------------- --------------- ------------- -------------- ---------------
Total $8,347,780 $8,337,389 $ 9,879,131
--------------------- --------------- --------------- ---------------
Until properties are acquired by the Company, proceeds are held in
short-term, highly liquid investments that 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, 2002, the Company's cash and cash
equivalents totaled $412,982.
The Company made cash distributions to the Shareholders for the six months
ended June 30, 2002 and 2001, of $331,177 and $217,717 respectively.
Pursuant to a joint proxy and consent solicitation statement and prospectus
declared effective by the Securities and Exchange Commission on May 6,
2002, the Company was soliciting votes for a proposed merger of AAA Net
Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and AAA Net Realty Fund
XI, Ltd. with AmREIT, Inc. The special meeting of shareholders and limited
partners is scheduled to be held on July 16, 2002.
Inflation has had very little effect on income from operations. Management
expects that increases in store sales volumes due to inflation as well as
increases in the Consumer Price Index (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.
18
FUNDS FROM OPERATIONS
Funds from operations (FFO) decreased $369,159 or 48.7% to $388,115 for the
three months ended June 30, 2002 from $757,274 for the three months ended
June 30, 2001. For the six month period ended June 30, 2002 FFO decreased
$248,057 from $945,331 in 2001 to $697,274 in 2002. The decrease in FFO for
the six months ended June 30, 2002 as compared to the six months ended June
30, 2001 is due to a single transaction that closed in June 2001. The
Company is on track to meet its FFO target for 2002, which is a 22%
increase over 2001 FFO. The Company has adopted the National Association of
Real Estate Investment Trusts (NAREIT) definition of FFO. FFO is calculated
as net income (computed in accordance with generally accepted accounting
principles) excluding gains or losses from sales of depreciable operating
property, depreciation and amortization of real estate assets, and
excluding results defined as "extraordinary items" under generally accepted
accounting principles. FFO should not be considered an alternative to cash
flows from operating, investing and financing activities in accordance with
generally accepted accounting principles and is not necessarily indicative
of cash available to meet cash needs. The Company's computation of FFO may
differ from the methodology for calculating FFO utilized by other equity
REITs and, therefore, may not be comparable to such other REITs. FFO is not
defined by generally accepted accounting principles and should not be
considered an alternative to net income as an indication of the Company's
performance.
Below is the reconciliation of net income to funds from operations for the
three and six months ended June 30:
Quarter Year to Date
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 261,293 $ 643,723 $ 443,604 $ 887,130
Plus depreciation 126,822 113,558 253,670 227,117
Less gain on sale of operating
properties - ( 7) - (168,916)
----------- ---------- ----------- ----------
Total funds from operations $ 338,115 $ 757,274 $ 697,274 $ 945,331
=========== ========== =========== ==========
Cash distributions paid $ 169,637 $ 117,717 $ 331,177 $ 217,717
Distributions less than of FFO $ 218,478 $ 639,557 $ 366,097 $ 727,614
Cash flows from operating activities, investing activities, and financing
activities for the three and six months ended June 30 are presented below:
Quarter Year to Date
2002 2001 2002 2001
------------- ------------- ------------ -------------
Operating activities $ 329,677 $ 841,337 $ 466,957 $ 1,121,383
Investing activities $(10,003,990) $ ( 27,819) $(9,939,999) $ 394,786
Financing activities $ 9,407,993 $ (1,297,690) $ 9,658,907 $ (1,599,736)
19
Comparison of the Three Months Ended June 30, 2002 to June 30, 2001:
During the three months ended June 30, 2002 and June 30, 2001, the Company
owned and leased 28 properties and 17 properties respectively. During the
three months ended June 30, 2002 and June 30, 2001, the Company earned
$1,114,783 and $814,242, respectively, in rental income from operating
leases and earned income from direct financing leases. The additional
properties purchased by AAA resulted in the increased income from rents and
earned income from direct financing leases. Service fees and other income
decreased $866,794 from $1,222,179 in 2001 to $355,385 in 2002. The
decrease in service fees and other income was primarily due to a
non-recurring transaction that occurred during 2001.
During the three months ended June 30, 2002 and June 30, 2001, the
Company's expenses were $1,138,814 and $1,261,701 respectively. The
$122,887 decrease in expenses is primarily attributable to a decrease of
$340,638 in legal and professional expense that decreased from $475,593 in
2001 to $134,955 in 2002. The decrease is primarily attributable to a
non-recurring transaction that occurred in 2001. The decrease in legal and
professional fees are somewhat offset by an increase in interest expense of
$176,428 which is due to the additional debt used to finance the
acquisitions of additional properties. Additionally, general operating and
administrative expense increased by $28,059, which is primarily due to
increased commissions and compensation related primarily to our real estate
and sponsorship activities.
Comparison of the Six Months Ended June 30, 2002 to June 30, 2001:
During the six months ended June 30, 2002 and June 30, 2001, the Company
earned $2,012,705 and $1,612,426, respectively, in rental income from
operating leases and earned income from direct financing leases. The
additional properties acquired by AAA resulted in the increased income from
rents and earned income from direct financing leases. Service fees and
other income decreased $453,806 from $1,662,395 in 2001 to $1,208,589 in
2002. The decrease in service fees and other income was primarily due to a
non-recurring transaction that occurred during 2001 that led to service fee
income of $1,082,125 as of June 30, 2001 which is somewhat offset by
additional development fees received this year.
During the six months ended June 30, 2002 and June 30, 2001, the Company's
expenses were $2,492,798 and $2,296,122 respectively. The $196,676 increase
in expenses is primarily attributable to an increase of $392,918 in general
operating and administrative expenses are primarily due to: 1) an increase
in commissions and compensation related to our real estate and sponsorship
activities, 2) property cost expense related to repairs and maintenance at
Copperfield Medical Plaza and 3) accruals made for board compensation paid
in Company stock based on vesting schedules. Interest expense increased
$98,569 due to additional debt used to finance the acquisition of
additional properties. Depreciation increased $26,553 due to additional
properties added to our portfolio. Legal and professional expense decreased
$321,364 from $650,825 in 2001 to $329,461 in 2002. The decrease is
primarily attributable to a non-recurring transaction that occurred in
2001.
20
SUBSEQUENT EVENTS
On July 16, 2002 a special meeting of Stockholders was held to consider and
vote on the following proposals:
a) To consider and vote on a proposal to approve the agreements and plans
of merger dated as of September 10, 2001 between AmREIT, Inc. and each of
the following limited partnerships: AAA Net Realty Fund IX, Ltd., AAA Net
Realty Fund X, Ltd., and AAA Net Realty Fund XI, Ltd., under which each
partnership would merger into AmREIT, and as more fully described in the
Joint Consent and Proxy Solicitations Statement/Prospectus;
b) To consider and vote upon a proposal to amend AmREIT's Articles of
Incorporation to specifically authorize the class B common stock to be
created for issuance in the merger;
c) To consider and vote upon proposals to amend AmREIT's bylaws to (1)
specifically authorize the merger of the partnerships with AmREIT on the
terms and conditions set forth in the merger agreements and (2) limit the
amount of recourse indebtedness that AmREIT can incur to not more than 55%
of its net asset value as determined by AmREIT's board of directors; and
d) To consider and vote upon a proposal to reorganize AmREIT, Inc. from a
Maryland corporation to a real estate investment trust organized under the
Texas Real Estate Investment Trust Act.
At this meeting, all of the proposals were approved and the merger as
proposed was effective July 23, 2002 and the Company began trading its
class A common stock on the American Stock Exchange on July 23, 2002 under
the trading symbol AMY.
AmREIT's capital structure consists of two classes of common stock:
approximately 2,365,000 class A common stock, which is publicly traded on
the American Stock Exchange, and class B common stock, which is not
publicly traded; however it is convertible into class A common stock at any
time, receives an 8% preferred distribution, and does not have voting
rights. Approximately 2,645,000 shares of class B common stock, issued as a
result of the merger AmREIT and three of its affiliated public
partnerships, which was completed on July 23, 2002.
In July 2002 the board of directors of AmREIT, by unanamious consent,
approved a resolution that will allow the Company to pay dividends monthly,
rather than quarterly, on its Class A common stock, beginning October 2002.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities and Use of Proceeds
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Amended and Restated Agreement and Plan of Merger by and between AmREIT
and AAA Net Realty Fund IX, Ltd., dated September 10, 2001 (Incorporated by
reference to Exhibit 2.1 to the Company's Registration Statement on Form
S-4 filed June 29, 1999, as amended (File No. 333-81895)).
2.2 Amended and Restated Agreement and Plan of Merger by and between AmREIT
and AAA Net Realty Fund X, Ltd., dated September 10, 2001 (Incorporated by
reference to Exhibit 2.2 to the Company's Registration Statement on Form
S-4 filed June 29, 1999, as amended (File No. 333-81895)).
2.3 Amended and Restated Agreement and Plan of Merger by and between AmREIT
and AAA Net Realty Fund XI, Ltd., dated September 10, 2001 (Incorporated by
reference to Exhibit 2.3 to the Company's Registration Statement on Form
S-4 filed June 29, 1999, as amended (File No. 333-81895)).
99.1 Chief Executive Officer certification pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer certification pursuant to 18 U.S.C Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company did not file a current report on Form 8-K during the three
months ended June 30, 2002.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AmREIT, Inc.
---------------------------------------------
(Issuer)
August 14, 2002 /s/ H. Kerr Taylor
--------------- ---------------------------------------------
Date H. Kerr Taylor, President
August 14, 2002 /s/ Chad C. Braun
--------------- ---------------------------------------------
Date Chad C. Braun (Principal Accounting Officer)
23
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18-U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AmREIT, Inc (the "Company") on
Form 10-QSB for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, H. Kerr Taylor,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002, that:
1. The Report fully complies with the requirements of section-13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ H. Kerr Taylor
H. Kerr Taylor
Chief Executive Officer
August 14, 2002
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18-U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AmREIT, Inc. (the "Company")
on Form 10-QSB for the period ended June 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Chad C. Braun,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of section-13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Chad C. Braun
Chad C. Braun
Chief Financial Officer
August 14, 2002