form10q3q07.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
For
the
quarterly period ended September 30, 2007
[
] 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
|
(Name
of registrant as specified its charter)
|
TEXAS
(State
or Other Jurisdiction of Incorporation or Organization)
|
76-0410050
(I.R.S.
Employer Identification No.)
|
8
GREENWAY PLAZA, SUITE 1000
HOUSTON,
TX
(Address
of Principal Executive Offices)
|
77046
(Zip
Code)
|
|
|
713-850-1400
(Registrant’s
Telephone Number, Including Area Code)
|
|
|
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the issuer was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days. YES x NO ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer ¨ Accelerated
Filer ¨ Non-Accelerated
Filer x
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ¨ NO x
As
of
November 6, 2007 there were 6,327,629 class A, 1,022,837 class B,
4,437,891class C and 11,903,311class D common shares of beneficial interest
of AmREIT, $.01 par value per share, outstanding.
Item
No.
|
|
Form
10-Q Report Page
|
|
PART
I
|
|
1
|
|
F-3
|
|
|
F-7
|
|
|
F-7
|
|
|
F-10
|
|
|
F-13
|
|
|
F-15
|
|
|
F-16
|
|
|
F-17
|
|
|
F-18
|
|
|
F-19
|
|
|
F-19
|
|
|
F-19
|
|
|
F-19
|
2
|
|
1-8
|
3
|
|
9
|
4
|
|
9
|
|
|
|
|
|
|
1
|
|
10
|
1A
|
|
10
|
2
|
|
10
|
3
|
|
10
|
4
|
|
10
|
5
|
|
10
|
6
|
|
10
|
PART
I –
FINANCIAL INFORMATION
AmREIT
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
September
30, 2007 and December 31, 2006
(in
thousands, except share data)
|
|
|
September
30, |
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
(unaudited)
|
|
|
|
|
Real
estate investments at cost:
|
|
|
|
|
|
|
Land
|
|
|
$ |
129,497
|
|
|
$ |
124,751
|
|
Buildings
|
|
|
|
140,277
|
|
|
|
140,487
|
|
Tenant
improvements
|
|
|
9,971
|
|
|
|
9,296
|
|
|
|
|
|
279,745
|
|
|
|
274,534
|
|
Less
accumulated depreciation and amortization
|
|
|
(14,361 |
) |
|
|
(10,628 |
) |
|
|
|
|
265,384
|
|
|
|
263,906
|
|
Real
estate held for sale, net
|
|
|
22,505
|
|
|
|
-
|
|
Net
investment in direct financing leases held for investment
|
|
|
2,055
|
|
|
|
19,204
|
|
Intangible
lease cost, net
|
|
|
13,764
|
|
|
|
16,016
|
|
Investment
in merchant development funds and other affiliates
|
|
|
6,912
|
|
|
|
2,651
|
|
Net
real estate investments
|
|
|
|
310,620
|
|
|
|
301,777
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
6,785
|
|
|
|
3,415
|
|
Tenant
receivables, net
|
|
|
4,034
|
|
|
|
4,330
|
|
Accounts
receivable, net
|
|
|
1,259
|
|
|
|
1,772
|
|
Accounts
receivable - related party
|
|
|
5,593
|
|
|
|
1,665
|
|
Notes
receivable - related party
|
|
|
7,216
|
|
|
|
10,104
|
|
Deferred
costs
|
|
|
|
2,285
|
|
|
|
2,045
|
|
Other
assets
|
|
|
|
3,740
|
|
|
|
3,322
|
|
TOTAL
ASSETS
|
|
$ |
341,532
|
|
|
$ |
328,430
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
154,386
|
|
|
$ |
144,453
|
|
Notes
payable, held for sale
|
|
|
12,928
|
|
|
|
-
|
|
Accounts
payable and other liabilities
|
|
|
6,361
|
|
|
|
9,162
|
|
Below
market leases, net
|
|
|
3,537
|
|
|
|
3,960
|
|
Security
deposits
|
|
|
676
|
|
|
|
668
|
|
TOTAL
LIABILITIES
|
|
|
177,888
|
|
|
|
158,243
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
1,166
|
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
|
|
|
|
|
6,599,033
and 6,549,950 shares issued, respectively
|
|
|
66
|
|
|
|
65
|
|
Class
B Common shares, $.01 par value, 3,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
1,031,097
and 1,080,180 shares issued and outstanding, respectively
|
|
|
10
|
|
|
|
11
|
|
Class
C Common shares, $.01 par value, 4,400,000 shares
authorized,
|
|
|
|
|
|
|
|
|
4,141,140
and 4,145,531 shares issued and outstanding, respectively
|
|
|
41
|
|
|
|
41
|
|
Class
D Common shares, $.01 par value, 17,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
11,044,413
and 11,039,803 shares issued and outstanding, respectively
|
|
|
110
|
|
|
|
110
|
|
Capital
in excess of par value
|
|
|
194,230
|
|
|
|
194,696
|
|
Accumulated
distributions in excess of earnings
|
|
|
(30,124 |
) |
|
|
(23,749 |
) |
Cost
of treasury shares, 244,353 and 292,238 Class A shares,
respectively
|
|
|
(1,855 |
) |
|
|
(2,124 |
) |
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
162,478
|
|
|
|
169,050
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
341,532
|
|
|
$ |
328,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
AmREIT
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
(unaudited)
|
|
Quarter
ended September 30,
|
|
|
|
|
|
Year
to date ended September 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
income from operating leases
|
|
$ |
7,600
|
|
|
$ |
7,241
|
|
|
$ |
22,359
|
|
|
$ |
20,646
|
|
Earned
income from direct financing leases
|
|
|
59
|
|
|
|
59
|
|
|
|
179
|
|
|
|
178
|
|
Real
estate fee income
|
|
|
118
|
|
|
|
27
|
|
|
|
972
|
|
|
|
778
|
|
Real
estate fee income - related party
|
|
|
1,775
|
|
|
|
897
|
|
|
|
2,837
|
|
|
|
2,574
|
|
Construction
revenues
|
|
|
300
|
|
|
|
705
|
|
|
|
1,092
|
|
|
|
1,645
|
|
Construction
revenues - related party
|
|
|
1,675
|
|
|
|
2,890
|
|
|
|
2,770
|
|
|
|
6,686
|
|
Securities
commission income - related party
|
|
|
933
|
|
|
|
1,554
|
|
|
|
3,410
|
|
|
|
4,172
|
|
Asset
management fee income - related party
|
|
|
334
|
|
|
|
212
|
|
|
|
930
|
|
|
|
556
|
|
Total
revenues
|
|
|
12,794
|
|
|
|
13,585
|
|
|
|
34,549
|
|
|
|
37,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,249
|
|
|
|
2,115
|
|
|
|
6,363
|
|
|
|
6,234
|
|
Property
expense
|
|
|
1,937
|
|
|
|
2,008
|
|
|
|
5,703
|
|
|
|
5,189
|
|
Construction
costs
|
|
|
1,792
|
|
|
|
3,224
|
|
|
|
3,521
|
|
|
|
7,508
|
|
Legal
and professional
|
|
|
425
|
|
|
|
356
|
|
|
|
1,188
|
|
|
|
942
|
|
Real
estate commissions
|
|
|
1
|
|
|
|
-
|
|
|
|
448
|
|
|
|
540
|
|
Securities
commissions
|
|
|
788
|
|
|
|
1,348
|
|
|
|
2,862
|
|
|
|
3,694
|
|
Depreciation
and amortization
|
|
|
2,016
|
|
|
|
2,046
|
|
|
|
5,914
|
|
|
|
6,620
|
|
Total
expenses
|
|
|
9,208
|
|
|
|
11,097
|
|
|
|
25,999
|
|
|
|
30,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,586
|
|
|
|
2,488
|
|
|
|
8,550
|
|
|
|
6,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income - related party
|
|
|
361
|
|
|
|
403
|
|
|
|
861
|
|
|
|
870
|
|
Income
from merchant development funds and other affiliates
|
|
|
462
|
|
|
|
213
|
|
|
|
435
|
|
|
|
519
|
|
Federal
income tax (expense) benefit for taxable REIT subsidiary
|
|
|
(259 |
) |
|
|
91
|
|
|
|
242
|
|
|
|
360
|
|
Interest
expense
|
|
|
(2,309 |
) |
|
|
(1,814 |
) |
|
|
(6,485 |
) |
|
|
(5,095 |
) |
Minority
interest in income of consolidated joint ventures
|
|
|
14
|
|
|
|
20
|
|
|
|
51
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before discontinued operations
|
|
|
1,855
|
|
|
|
1,401
|
|
|
|
3,654
|
|
|
|
3,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net of taxes
|
|
|
150
|
|
|
|
156
|
|
|
|
454
|
|
|
|
670
|
|
Gain
on sales of real estate acquired for resale, net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Income
from discontinued operations
|
|
|
150
|
|
|
|
156
|
|
|
|
454
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
2,005
|
|
|
|
1,557
|
|
|
|
4,108
|
|
|
|
3,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
paid to class B, C and D shareholders
|
|
|
(2,693 |
) |
|
|
(2,909 |
) |
|
|
(8,109 |
) |
|
|
(8,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to class A shareholders
|
|
$ |
(688 |
) |
|
$ |
(1,352 |
) |
|
$ |
(4,001 |
) |
|
$ |
(4,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per class A common share - basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before discontinued operations
|
|
$ |
(0.13 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.70 |
) |
|
$ |
(0.87 |
) |
Income
from discontinued operations
|
|
$ |
0.02
|
|
|
$ |
0.02
|
|
|
$ |
0.07
|
|
|
$ |
0.11
|
|
Net
loss
|
|
$ |
(0.11 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average class A common shares used to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compute
net loss per share, basic and diluted
|
|
|
6,385
|
|
|
|
6,285
|
|
|
|
6,373
|
|
|
|
6,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AmREIT
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands, except share data)
(unaudited)
|
|
Year
to date ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,108
|
|
|
$ |
3,902
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Investment
in real estate acquired for resale
|
|
|
-
|
|
|
|
(623 |
) |
Proceeds
from sales of real estate acquired for resale
|
|
|
1,399
|
|
|
|
1,153
|
|
Gain
on sales of real estate acquired for resale
|
|
|
-
|
|
|
|
(12 |
) |
Gain
on sales of real estate acquired for investment
|
|
|
-
|
|
|
|
(286 |
) |
Income
from merchant development funds and other affiliates
|
|
|
(435 |
) |
|
|
(519 |
) |
Cash
receipts related to deferred related party fees
|
|
|
607
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
5,861
|
|
|
|
6,447
|
|
Amortization
of deferred compensation
|
|
|
552
|
|
|
|
435
|
|
Minority
interest in income of consolidated joint ventures
|
|
|
102
|
|
|
|
42
|
|
Distributions
from merchant development funds and other affiliates
|
|
|
246
|
|
|
|
284
|
|
Decrease
(increase) in tenant receivables
|
|
|
296
|
|
|
|
(825 |
) |
Decrease
in accounts receivable
|
|
|
513
|
|
|
|
494
|
|
(Increase)
decrease in accounts receivable - related party
|
|
|
(3,928 |
) |
|
|
1,753
|
|
Cash
receipts from direct financing leases
|
|
|
|
|
|
|
|
|
more
than income recognized
|
|
|
62
|
|
|
|
5
|
|
Increase
in other assets
|
|
|
(455 |
) |
|
|
(418 |
) |
Decrease
in accounts payable and other liabilities
|
|
|
(2,716 |
) |
|
|
(285 |
) |
Increase
(decrease) in security deposits
|
|
|
8
|
|
|
|
(5 |
) |
Net
cash provided by operating activities
|
|
|
6,220
|
|
|
|
11,542
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Improvements
to real estate
|
|
|
(2,780 |
) |
|
|
(2,505 |
) |
Acquisition
of investment properties
|
|
|
(9,558 |
) |
|
|
(24,518 |
) |
Loans
to affiliates
|
|
|
(3,195 |
) |
|
|
(11,095 |
) |
Payments
from affiliates
|
|
|
6,083
|
|
|
|
9,339
|
|
Additions
to furniture, fixtures and equipment
|
|
|
(56 |
) |
|
|
(113 |
) |
Investment
in merchant development funds and other affiliates
|
|
|
(4,858 |
) |
|
|
-
|
|
Distributions
from merchant development funds and other affiliates
|
|
|
179
|
|
|
|
98
|
|
Proceeds
from sale of investment property
|
|
|
-
|
|
|
|
4,466
|
|
Increase
(decrease) in preacquisition costs
|
|
|
(40 |
) |
|
|
(71 |
) |
Net
cash used in investing activities
|
|
|
(14,225 |
) |
|
|
(24,399 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
77,686
|
|
|
|
57,505
|
|
Payments
of notes payable
|
|
|
(54,649 |
) |
|
|
(35,105 |
) |
Increase
in deferred costs
|
|
|
(271 |
) |
|
|
(169 |
) |
Purchase
of treasury shares
|
|
|
(652 |
) |
|
|
(2,375 |
) |
Issuance
of common shares
|
|
|
-
|
|
|
|
(1 |
) |
Retirement
of common shares
|
|
|
(4,795 |
) |
|
|
(3,897 |
) |
Issuance
costs
|
|
|
(8 |
) |
|
|
(43 |
) |
Common
dividends paid
|
|
|
(5,863 |
) |
|
|
(6,323 |
) |
Distributions
to minority interests
|
|
|
(73 |
) |
|
|
(73 |
) |
Net
cash provided by financing activities
|
|
|
11,375
|
|
|
|
9,519
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
3,370
|
|
|
|
(3,338 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
3,415
|
|
|
|
5,915
|
|
Cash
and cash equivalents, end of period
|
|
$ |
6,785
|
|
|
$ |
2,577
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
7,078
|
|
|
$ |
5,787
|
|
Income
taxes
|
|
|
1,054
|
|
|
|
945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of noncash investing and financing activities
During
2007 and 2006, 49,000 and 68,000 Class B shares, respectively were converted
to
Class A shares. Additionally, during 2007 and 2006, we issued Class C and
D shares with a valus of $4.6 million and $4.8 million, respectively, in
satisifaction of dividends through the dividen reinvestment
program.
In
2007,
we issued 131,000 restricted shares to employess and trust managers as part
of
their compensation arrangements. The restricted shares vest over a four
and three year period, respectively. We recorded $1.1 million in deferred
compensation related to the issuance of the restricted shares.
In
2006,
the Company issues 103,000 restricted shares to employees and trust managers
as
part of their compensation arrangements. The restricted shares vest over a
four and three year period, respectively. We recorded $725,000 in deferred
compensation related to the issuance of the restricted shares.
See
Notes
to Consolidated Financial Statements.
AmREIT
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS'
EQUITY
For
the nine months ended September 30, 2007
(in
thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
in
|
|
|
distributions
|
|
|
Cost
of
|
|
|
|
|
|
|
Common
Shares
|
|
|
excess
of
|
|
|
in
excess of
|
|
|
treasury
|
|
|
|
|
|
|
Amount
|
|
|
par
value
|
|
|
earnings
|
|
|
shares
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$ |
227
|
|
|
$ |
194,696
|
|
|
$ |
(23,749 |
) |
|
$ |
(2,124 |
) |
|
$ |
169,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
4,108
|
|
|
|
-
|
|
|
|
4,108
|
|
Deferred
compensation issuance of restricted shares, Class A
|
|
|
-
|
|
|
|
(835 |
) |
|
|
-
|
|
|
|
921
|
|
|
|
86
|
|
Issuance
of common shares, Class A
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Repurchase
of common shares, Class A
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(652 |
) |
|
|
(652 |
) |
Repurchase
of common shares, Class B
|
|
|
(1 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1 |
) |
Amortization
of deferred compensation
|
|
|
-
|
|
|
|
552
|
|
|
|
-
|
|
|
|
-
|
|
|
|
552
|
|
Issuance
of common shares, Class C
|
|
|
1
|
|
|
|
1,293
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,294
|
|
Retirement
of common shares, Class C
|
|
|
(1 |
) |
|
|
(1,341 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(1,342 |
) |
Issuance
of common shares, Class D
|
|
|
3
|
|
|
|
3,315
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,318
|
|
Retirement
of common shares, Class D
|
|
|
(3 |
) |
|
|
(3,450 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(3,453 |
) |
Distributions
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,483 |
) |
|
|
-
|
|
|
|
(10,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2007
|
|
$ |
227
|
|
|
$ |
194,230
|
|
|
$ |
(30,124 |
) |
|
$ |
(1,855 |
) |
|
$ |
162,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AmREIT
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(unaudited)
We
are an
established real estate company that, at our core, are value creators who have
delivered results to our investors for 22 years. We have elected to
be taxed as a real estate investment trust (“REIT”) for federal income tax
purposes. Our mission is to build a real estate business with
complementary operations that reduce our sensitivity to changing market
cycles.
We
view
ourselves as having two distinct companies in one: our institutional-grade
portfolio of Irreplaceable Corners– premier retail properties in
high-traffic, highly populated areas – which are held for long-term value and
provide a foundation to our funds from operations (FFO)
growth through a steady stream of rental income; and our
advisory/sponsorship business that broadens our access to capital and
raises equity for a series of merchant development funds, resulting in recurring
income from assets under management. We are able to add more of a growth
component to the recurring-income nature of each company as well as provide
earnings potential from multiple sources with our real estate development
and operating business, which seeks to provide value through offering an
array of services to our tenants and properties, to our advisory/sponsorship
business portfolios and to third parties.
Our
direct predecessor, American Asset Advisers Trust, Inc. (“AAA”), was formed as a
Maryland corporation in 1993. Prior to 1998, AAA was externally advised by
American Asset Advisors Corp. which was formed in 1985. In June 1998,
AAA merged with its advisor and changed its name to AmREIT, Inc. In
December 2002, AmREIT, Inc. reorganized as a Texas real estate investment
trust and became AmREIT.
Our
Class
A Common Shares are traded on the American Stock Exchange under the symbol
“AMY.” Our offices are located at 8 Greenway Plaza, Suite 1000
Houston, Texas 77046. Our telephone number is 713.850.1400
and we maintain an internet site at www.amreit.com.
BASIS
OF
PRESENTATION
Our
financial records are maintained on the accrual basis of accounting whereby
revenues are recognized when earned and expenses are recorded when incurred.
The
consolidated financial statements include our accounts and those of our wholly-
or majority-owned subsidiaries in which we have a controlling financial
interest. Investments in joint ventures and partnerships where we have the
ability to exercise significant influence, but do not exercise control, are
accounted for using the equity method. All significant intercompany accounts
and
transactions have been eliminated in consolidation.
REVENUE
RECOGNITION
We
lease
space to tenants under agreements with varying terms. The majority of the leases
are accounted for as operating leases with revenue being recognized on a
straight-line basis over the terms of the individual leases. Accrued rents
are
included in tenant receivables. Revenue from tenant reimbursements of taxes,
maintenance expenses and insurance is recognized in the period the related
expense is recorded. Additionally, certain of the lease agreements contain
provisions that grant additional rents based on tenants’ sales volumes
(contingent or percentage rent). Percentage rents are recognized when the
tenants achieve the specified targets as defined in their lease agreements.
During the nine months ended September 30, 2007 and 2006, we recognized
percentage rents of $165,000 and $291,000, respectively. We recognize
lease termination fees in the period that the lease is terminated and collection
of the fees is reasonably assured. During the nine months ended
September 30, 2007 and 2006, we recognized lease termination fees of $179,000
and $656,000, respectively, which have been included in rental income from
operating leases. The terms of certain leases require that the
building/improvement portion of the lease be accounted for under the direct
financing method which treats the building as if we had sold it to the lessee
and entered into a long-term financing arrangement with such lessee. This
accounting method is appropriate when the lessee has all of the benefits and
risks of property ownership that they otherwise would if they owned the building
versus leasing it from us.
We
have
been engaged to provide various real estate services, including development,
construction, construction management, property management, leasing and
brokerage. The fees for these services are recognized as services are provided
and are generally calculated as a percentage of revenues earned or to be earned
or of property cost, as appropriate. Revenues from fixed-price construction
contracts are recognized on the percentage-of-completion method, measured by
the
physical completion of the structure. Revenues from cost-plus-percentage-fee
contracts are recognized on the basis of costs incurred during the period plus
the percentage fee earned on those costs. Construction management contracts
are
recognized only to the extent of the fee revenue.
Construction
contract costs include all direct material and labor costs and any indirect
costs related to contract performance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from any contract penalty provisions,
and
final contract settlements may result in revisions to costs and income and
are
recognized in the period in which the revisions are determined. Any profit
incentives are included in revenues when their realization is reasonably
assured. An amount equal to contract costs attributable to any claims is
included in revenues when realization is probable and the amount can be reliably
estimated.
Unbilled
construction receivables represent reimbursable costs and amounts earned under
contracts in progress as of the date of our balance sheet. Such amounts become
billable according to contract terms, which usually consider the passage of
time, achievement of certain milestones or completion of the project. Advance
billings represent billings to or collections from clients on contracts in
advance of revenues earned thereon. Unbilled construction receivables are
generally billed and collected within the twelve months following the date
of
our balance sheet, and advance billings are generally earned within the twelve
months following the date of our balance sheet. As of September 30, 2007,
$73,000 of unbilled receivables has been included in “Accounts receivable” and
$234,000 of unbilled receivables due from related parties has been included
in
“Accounts receivable – related party.” As of December 31, 2006, $126,000 of
unbilled receivables has been included in “Accounts receivable” and $14,000 of
unbilled receivables due from related parties has been included in “Accounts
receivable – related party.” We had advance billings of
$6,000 and $44,000 as of September 30, 2007 and December 31, 2006,
respectively.
Securities
commission income is recognized as units of our merchant development funds
are
sold through our wholly-owned subsidiary, AmREIT Securities Company (ASC).
Securities commission income is earned as the services are performed and
pursuant to the corresponding prospectus or private offering memorandum.
Generally, it includes a selling commission of between 6.5% and 7.5%, a dealer
manager fee of between 2.5% and 3.25% and offering and organizational costs
of
1.0% to 1.50%. The selling commission is then paid to the unaffiliated selling
broker dealer and reflected as securities commission expense.
REAL
ESTATE INVESTMENTS
Development
Properties– Land, buildings and improvements are recorded at cost.
Expenditures related to the development of real estate are carried at cost
which
includes capitalized carrying charges, acquisition costs and development costs.
Carrying charges, primarily interest, real estate taxes and loan acquisition
costs, and direct and indirect development costs related to buildings under
construction, are capitalized as part of construction in progress. The
capitalization of such costs ceases at the earlier of one year from the date
of
completion of major construction or when the property, or any completed portion,
becomes available for occupancy. We capitalize acquisition costs as
incurred. Such costs are expensed if and when the acquisition becomes no longer
probable. During the nine months ended September 30, 2007 and
September 30, 2006 we capitalized $133,000 and $72,000, respectively, in
interest on properties under development.
Acquired
Properties and Acquired Lease Intangibles– We account for real estate
acquisitions pursuant to Statement of Financial Accounting Standards
No. 141 (“SFAS No. 141”), Business
Combinations. Accordingly, we allocate the purchase price of the
acquired properties to land, building and improvements, identifiable intangible
assets and to the acquired liabilities based on their respective fair values.
Identifiable intangibles include amounts allocated to acquired out-of-market
leases, the value of in-place leases and customer relationship value, if any.
We
determine fair value based on estimated cash flow projections that utilize
appropriate discount and capitalization rates and available market information.
Estimates of future cash flows are based on a number of factors including the
historical operating results, known trends and specific market and economic
conditions that may affect the property. Factors considered by management in
our
analysis of determining the as-if-vacant property value include an estimate
of
carrying costs during the expected lease-up periods considering market
conditions, and costs to execute similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and estimates of lost rentals
at market rates during the expected lease-up periods, tenant demand and other
economic conditions.
Management also estimates costs to execute similar leases including leasing
commissions, tenant improvements, and legal and other related expenses.
Intangibles related to out-of-market leases and in-place lease value are
recorded as acquired lease intangibles and are amortized as an adjustment to
rental revenue or amortization expense, as appropriate, over the remaining
terms
of the underlying leases. Premiums or discounts on acquired out-of-market debt
are amortized to interest expense over the remaining term of such
debt.
Depreciation—
Depreciation is computed using the straight-line method over an estimated useful
life of up to 50 years for buildings, up to 20 years for site
improvements and over the term of lease for tenant improvements. Leasehold
estate properties, where we own the building and improvements but not the
related ground, are amortized over the life of the lease.
Properties
Held for Sale— Properties are classified as held for sale if management has
decided to market the property for immediate sale in its present condition
with
the belief that the sale will be completed within one year. Operating properties
held for sale are carried at the lower of cost or fair value less cost to sell.
Depreciation and amortization are suspended during the held for sale period.
As
of September 30, 2007 we owned nineteen properties with a carrying value of
$22.5 million that were classified as real estate held for sale. As of
December 31, 2006, we did not have any properties that met the criteria
for classification as real estate held for sale.
Our
properties generally have operations and cash flows that can be clearly
distinguished from the rest of the Company. The operations and gains on sales
reported in discontinued operations include those properties that have been
sold
or are held for sale and for which operations and cash flows have been clearly
distinguished. The operations of these properties have been eliminated from
ongoing operations, and we will not have continuing involvement after
disposition. Prior period operating activity related to such properties has
been
reclassified as discontinued operations in the accompanying statements of
operations.
Impairment–
We review our 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. We determine whether
an impairment in value occurred by comparing the estimated future cash flows
(undiscounted and without interest charges), including the residual value of
the
property, with the carrying value of the individual property. If impairment
is
indicated, a loss will be recorded for the amount by which the carrying value
of
the asset exceeds its fair value.
RECEIVABLES
AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Tenant
receivables— Included in tenant receivables are base rents, tenant
reimbursements and receivables attributable to recording rents on a
straight-line basis. An allowance for the uncollectible portion of accrued
rents
and accounts receivable is determined based upon customer credit-worthiness
(including expected recovery of our claim with respect to any tenants in
bankruptcy), historical bad debt levels, and current economic trends. As of
September 30, 2007 and December 31, 2006, we had an allowance for uncollectible
accounts of $111,000 and $157,000, respectively, related to our tenant
receivables.
Accounts
receivable – Included in accounts receivable are amounts due from clients of
our construction services business and various other receivables. As of
September 30, 2007 and December 31, 2006, we had an allowance for uncollectible
accounts of $264,000 related to our accounts receivable.
Notes
receivable – related party– Included in related party notes receivable are
loans made to our affiliated merchant development funds as part of our treasury
management function whereby we place excess cash in short-term bridge loans
for
these affiliates related to the acquisition or development of properties. We
typically provide such financing to our affiliates as a way of efficiently
deploying our excess cash and earning a higher return than we would in other
short term investments or overnight funds. In most cases, the merchant
development funds have a construction lender in place, and we step in and
provide financing on the same terms as the third party lender. In so doing,
we
are able to access these funds as needed by having our affiliate then draw
down
on their construction loans. These loans are unsecured, bear interest at the
prime rate (7.75% at September 30, 2007) and are due upon demand.
DEFERRED
COSTS
Deferred
costs include deferred leasing costs and deferred loan costs, net of
amortization. Deferred loan costs are incurred in obtaining property financing
and are amortized to interest expense over the term of the debt agreements.
Deferred leasing costs consist of internal and external commissions associated
with leasing our properties and are amortized to expense over the lease term.
Accumulated amortization related to deferred loan costs as of September 30,
2007
and December 31, 2006 totaled $557,000 and $421,000, respectively. Accumulated
amortization related to deferred leasing costs as of September 30, 2007 and
December 31, 2006 totaled $400,000 and $264,000,
respectively.
Our
deferred compensation and long term incentive plan is designed to attract and
retain the services of our trust managers and employees that we consider
essential to our long-term growth and success. As such, it is designed to
provide them with the opportunity to own shares, in the form of restricted
shares, in us, and provide key employees the opportunity to participate in
the
success of our affiliated actively managed merchant development funds through
the economic participation in our general partner companies. All long term
compensation awards are designed to vest over a period of three to seven years
and promote retention of our team.
Restricted
Share Issuances - Deferred compensation includes grants of restricted shares
to our trust managers and employees as a form of long-term compensation. The
share grants vest over a period of three to seven years. We determine
the fair value of the restricted shares as the number of shares awarded
multiplied by the closing price per share of our class A common shares on the
grant date. We amortize such fair value ratably over the vesting periods of
the
respective awards. The following table presents restricted share
activity during the nine months ended September 30, 2007.
|
|
Non-vested
Shares
|
|
|
Weighted
Average
grant
date
fair value
|
|
Beginning
of period
|
|
|
355,599
|
|
|
$ |
7.31
|
|
Granted
|
|
|
131,334
|
|
|
|
8.51
|
|
Vested
|
|
|
(53,090 |
) |
|
|
7.34
|
|
Forfeited
|
|
|
(14,750 |
) |
|
|
7.27
|
|
End
of period
|
|
|
419,093
|
|
|
|
7.68
|
|
The
weighted-average grant date fair value of restricted shares issued during the
nine months ended September 30, 2007 and 2006 was $8.51 per share and $7.00
per
share, respectively. The total fair value of shares vested during the
nine months ended September 30, 2007 and 2006 was $390,000 and $238,000
respectively. Total compensation cost recognized related to
restricted shares during the nine months ended September 30, 2007 and 2006
was
$552,000 and $435,000, respectively. As of September 30, 2007, total
unrecognized compensation cost related to restricted shares was $2.4 million,
and the weighted average period over which we expect this cost to be recognized
is 4.0 years.
General
Partner Profit Participation Interests - We have assigned up to 45% of the
economic interest in certain of our merchant development funds to certain of
our
key employees. This economic interest is received, as, if and when we receive
economic benefit from our profit participation, after certain preferred returns
have been paid to the partnership’s limited partners. This assignment of
economic interest generally vests over a period of five to seven years. This
allows us to align the interest of our employees with the interest of our
shareholders. Because any future profits and earnings from the merchant
development funds cannot be reasonably predicted or estimated, and any employee
benefit is contingent upon the benefit received by the general partner of the
merchant development funds, we recognize expense associated with the assignment
of these economic interests as we recognize the corresponding income from the
associated merchant development funds. No portion of the economic interest
in
the merchant development funds that have provided profit participation to us
to
date have been assigned to employees. Therefore, no compensation expense has
been recorded to date. See Note 3 below for a discussion of the
potential sale of assets from one our merchant development funds, AAA CTL Notes,
Ltd.
Tax-Deferred
Retirement Plan (401k) - We maintain a defined contribution 401k retirement
plan for our employees. This plan is available for all employees immediately
upon employment. The plan allows for contributions to be either
invested in an array of large, mid and small cap mutual funds or directly into
class A common shares. Employee contributions invested in our shares are limited
to 50% of the employee’s contributions. We match 50% of the employee’s
contribution, up to a maximum employee contribution of 4%. None of the employer
contribution can be matched in our shares.
Share
Options - We are authorized to grant options of our class A common shares as
either incentive or non-qualified share options, up to an aggregate of 6.0%
of
the total voting shares outstanding. As of September 30, 2007 and
December 31, 2006, none of these options have been granted.
INCOME
TAXES
We
account for federal and state income taxes under the asset and liability
method.
Federal–
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
and are, therefore, not subject to Federal income taxes to the extent of
dividends paid, provided we meets all conditions specified by the Internal
Revenue Code for retaining our REIT status, including the requirement that
at
least 90% of our real estate investment trust taxable income be distributed
to
shareholders.
Our
real
estate development and operating business, AmREIT Realty Investment Corporation
and subsidiaries (“ARIC”), is a fully integrated and wholly-owned business
consisting of brokers and real estate professionals that provide development,
acquisition, brokerage, leasing, construction, asset and property management
services to our publicly traded portfolio and merchant development funds as
well
as to third parties. ARIC and our wholly-owned corporations that serve as the
general partners of our merchant development funds are treated for Federal
income tax purposes as taxable REIT subsidiaries (collectively, the “Taxable
REIT Subsidiaries”).
State–
In May 2006, the State of Texas adopted House Bill 3, which modified the state’s
franchise tax structure, replacing the previous tax based on capital or earned
surplus with one based on margin (often referred to as the “Texas Margin Tax”)
effective with franchise tax reports filed on or after January 1, 2008. The
Texas Margin Tax is computed by applying the applicable tax rate (1% for us)
to
the profit margin, which, generally, will be determined for us as total revenue
less a 30% standard deduction. Although House Bill 3 states that the
Texas Margin Tax is not an income tax, SFAS No. 109, Accounting for
Income Taxes, applies to the Texas Margin Tax. We have
recorded a margin tax provision of $174,000 for the Texas Margin Tax for the
nine months ended September 30, 2007.
EARNINGS
PER SHARE
Basic
earnings per share has been computed by dividing net loss available to
class A common 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 as appropriate) by the weighted average number of common
shares outstanding plus the weighted average number of dilutive potential common
shares. Diluted earnings per share information is not applicable due to the
anti-dilutive nature of the common class B, class C and class D shares which
represent 19.7 million and 25.8 million
potential common shares for the nine months ended September 30, 2007 and 2006,
respectively.
The
following table presents information necessary to calculate basic and diluted
earnings per class A share for the three and nine months
ended September 30, as indicated:
|
|
Quarter
|
|
|
YTD
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Loss
to class A common shareholders*
|
|
$ |
(688 |
) |
|
|
(1,352 |
) |
|
|
(4,001 |
) |
|
|
(4,827 |
) |
Weighted
average class A common shares outstanding*
|
|
|
6,385
|
|
|
|
6,285
|
|
|
|
6,373
|
|
|
|
6,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
|
(0.11 |
) |
|
|
(0.22 |
) |
|
|
(0.63 |
) |
|
|
(0.76 |
) |
*
In
thousands
USE
OF
ESTIMATES
The
preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Our
consolidated financial instruments consist primarily of cash, cash equivalents,
tenant receivables, accounts receivable, notes receivable, accounts payable
and
other liabilities and notes payable. The carrying value of cash, cash
equivalents, tenant receivables, accounts receivable, notes receivable, accounts
payable and other liabilities are representative of their respective fair values
due to the short-term maturity of these instruments. Our revolving line of
credit has market-based terms, including a variable interest rate. Accordingly,
the carrying value of the line of credit is representative of its fair
value.
As
of
September 30, 2007, the carrying value of our debt obligations associated with
assets held for investment was $154.4 million, $138.4 million of which
represented fixed rate obligations with an estimated fair value of
$140.1 million. As of December 31, 2006, the carrying value of our
total debt obligations was $144.5 million, $132.5 million of which
represented fixed-rate obligations with an estimated fair value of
$132.9 million.
As
of
September 30, 2007, the carrying value of our debt obligations associated with
assets held for sale was $12.9 million, all of which represented fixed rate
obligations with an estimated fair value of $13.2 million.
CONSOLIDATION
OF VARIABLE INTEREST ENTITIES
In
December 2003, the FASB reissued Interpretation No. 46 (“FIN 46R”),
Consolidation of Variable Interest Entities, as revised. FIN 46R
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights. FIN
46R
requires a variable interest entity to be consolidated by a company that is
subject to a majority of the risk of loss from the variable interest entity’s
activities or entitled to receive a majority of the entity’s residual returns or
both. Disclosures are also required about variable interest entities in which
a
company has a significant variable interest but that it is not required to
consolidate.
As
of
September 30, 2007, we are an investor in and the primary beneficiary of one
entity that qualifies as a variable interest entity pursuant to FIN 46R. This
entity was established to develop, own, manage, and hold property for investment
and comprises $4.8 million of our total consolidated assets at period end.
This entity had no debt outstanding at period end.
NEW
ACCOUNTING STANDARDS
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements. The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition of a tax position
taken, or expected to be taken, in a tax return. A tax position may only be
recognized in the financial statements if it is more likely than not that the
tax position will be sustained upon examination. There are also several
disclosure requirements. We adopted this interpretation during the
first quarter of 2007, and it had no effect on our consolidated financial
statements.
In
September 2006, the FASB issued “SFAS No.157,” Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and requires enhanced disclosures about
fair
value measurements. SFAS No. 157 requires companies to disclose the
fair value of its financial instruments according to a fair value
hierarchy. Additionally, companies are required to provide certain
disclosures regarding instruments within the hierarchy, including a
reconciliation of the beginning and ending balances for each major category
of
assets and liabilities. SFAS No. 157 is effective for our fiscal year
beginning January 1, 2008. The adoption of SFAS No. 157 is not
expected to have a material effect on our results of operations or financial
position.
In
February 2007 the FASB issued “SFAS No. 159,” The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other
items
at fair value. This Statement is effective for fiscal years beginning after
November 15, 2007. We currently do not plan to measure any eligible financial
assets and liabilities at fair value under the provisions of SFAS No.
159.
DISCONTINUED
OPERATIONS
The
following is a summary of our discontinued operations for the three and nine
months ended September 30 (in thousands, except for per share data)
|
|
Quarter
|
|
|
YTD
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Rental
revenue
|
|
$ |
76
|
|
|
$ |
44
|
|
|
$ |
194
|
|
|
$ |
151
|
|
Earned
income from direct financing leases
|
|
|
447
|
|
|
|
448
|
|
|
|
1,342
|
|
|
|
1,344
|
|
Gain
on sale of real estate held for investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
286
|
|
Gain
on sale of real estate held for resale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Total
revenues
|
|
|
523
|
|
|
|
492
|
|
|
|
1,536
|
|
|
|
1,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
expense
|
|
|
(1 |
) |
|
|
3
|
|
|
|
4
|
|
|
|
(116 |
) |
Other
general and administrative
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(16 |
) |
|
|
(19 |
) |
Federal
income tax expense
|
|
|
3
|
|
|
|
2
|
|
|
|
(1 |
) |
|
|
15
|
|
Legal
and professional
|
|
|
(4 |
) |
|
|
(7 |
) |
|
|
(20 |
) |
|
|
(31 |
) |
Depreciation
and amortization
|
|
|
(8 |
) |
|
|
(2 |
) |
|
|
(22 |
) |
|
|
(17 |
) |
Minority
interest
|
|
|
(42 |
) |
|
|
(43 |
) |
|
|
(154 |
) |
|
|
(98 |
) |
Interest
expense
|
|
|
(317 |
) |
|
|
(286 |
) |
|
|
(873 |
) |
|
|
(845 |
) |
Total
expenses
|
|
|
(373 |
) |
|
|
(336 |
) |
|
|
(1,082 |
) |
|
|
(1,111 |
) |
Income
from discontinued operations
|
|
|
150
|
|
|
|
156
|
|
|
|
454
|
|
|
|
682
|
|
Basic
and diluted income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
class A common share
|
|
$ |
0.02
|
|
|
$ |
0.02
|
|
|
$ |
0.07
|
|
|
$ |
0.11
|
|
STOCK
ISSUANCE COSTS
Issuance
costs incurred in the raising of capital through the sale of common shares
are
treated as a reduction of shareholders’ equity.
CASH
AND
CASH EQUIVALENTS
For
purposes of the consolidated statements of cash flows, we consider all highly
liquid debt instruments purchased with an original maturity of three months
or
less to be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds.
RECLASSIFICATIONS
Certain
amounts in the prior period consolidated financial statements have been
reclassified to conform to the presentation used in the current period
consolidated financial statements. Such reclassifications had no effect on
net
income (loss) or shareholders’ equity as previously reported.
AAA
CTL Notes, Ltd.
AAA
CTL
Notes I Corporation (“AAA Corp”), our wholly-owned subsidiary, invested as a
general partner and limited partner in AAA CTL Notes, Ltd.
(“AAA”). AAA is a majority-owned subsidiary through which we
purchased 15 IHOP leasehold estate properties and two IHOP fee simple
properties. We have consolidated AAA in our financial
statements. Certain members of our management team have been assigned
a 51% aggregate interest in the income and cash flow of AAA’s general
partner. Net sales proceeds from the liquidation of AAA will be
allocated to the limited partners and to the general partner pursuant to the
AAA
limited partnership agreement.
During
the third quarter of 2007, we elected to hold the AAA assets for sale, and
we
are currently under contract for their sale to a third
party. Assuming that the sale closes under its currently negotiated
terms, we will realize a gain in the fourth quarter of 2007 along with a
compensation charge related to the portion of that gain that we have assigned
to
management. See Note 1 under Deferred Compensation “General Partner
Profit Participation Interests.“
Merchant
Development Funds
As
of
September 30, 2007, we owned, through wholly-owned subsidiaries, interests
in
six limited partnerships which are accounted for under the equity method as
we
exercise significant influence over, but do not control, the investee. In each
of the partnerships, the limited partners have the right, with or without cause,
to remove and replace the general partner by a vote of the limited partners
owning a majority of the outstanding units. These merchant development funds
were formed to develop, own, manage and add value to properties with an average
holding period of two to four years. Our interests in these merchant development
funds range from 2.1% to 10.5%. See Note 8 regarding transactions we
have entered into with our merchant development funds.
AmREIT
Opportunity Fund (“AOF”)— AmREIT Opportunity Corporation (“AOC”), our
wholly-owned subsidiary, invested $250,000 as a limited partner and $1,000
as a
general partner in AOF. We currently own a 10.5% limited partner interest in
AOF. Liquidation of AOF commenced in July 2002, and, as of September 30, 2007,
AOF has an interest in one property. As the general partner, AOC receives a
promoted interest in cash flow and any profits after certain preferred returns
are achieved for its limited partners.
AmREIT
Income & Growth Fund, Ltd. (“AIG”)— AmREIT Income & Growth
Corporation (“AIGC”), our wholly-owned subsidiary, invested $200,000 as a
limited partner and $1,000 as a general partner in AIG. We currently own an
approximate 2.0% limited partner interest in AIG. Certain members of
our management team have been assigned a 49% aggregate interest in the income
and cash flow of AIGC. Pursuant to the AIG limited partnership
agreement, net sales proceeds from its liquidation (expected in 2008) will
be
allocated to the limited partners, and to the general partner (AIGC) as, if
and
when the annual return thresholds have been achieved by the limited
partners.
AmREIT
Monthly Income & Growth Fund (“MIG”)— AmREIT Monthly Income & Growth
Corporation, our wholly-owned subsidiary, invested $200,000 as a limited partner
and $1,000 as a general partner in MIG. We currently own an approximate 1.3%
limited partner interest in MIG.
AmREIT
Monthly Income & Growth Fund II (“MIG II”)— AmREIT Monthly Income &
Growth II Corporation, our wholly- owned subsidiary, invested $400,000
as a
limited partner and $1,000 as a general partner in MIG II. We currently own
an
approximate 1.6% limited partner interest in MIG II.
AmREIT
Monthly Income & Growth Fund III (“MIG III”)— AmREIT
Monthly Income & Growth III Corporation (“MIGC III”), our wholly-owned
subsidiary, invested $800,000 as a limited partner and $1,000 as a general
partner in MIG III. MIG III began raising money in
June 2005. The offering was closed in October 2006, and the
capital raised was approximately $71 million. Our $800,000 investment
represents a 1.1% limited partner interest in MIG III. Certain
members of our management team have been assigned a 28.5% aggregate interest
in
the income and cash flow of MIGC III. Pursuant to the MIG III limited
partnership agreement, net sales proceeds from its liquidation (expected in
2012) will be allocated to the limited partners, and to the general partner
(MIGC III) as, if and when the annual return thresholds have been achieved
by
the limited partners.
AmREIT
Monthly Income & Growth Fund IV (“MIG IV”) - AmREIT Monthly Income &
Growth IV Corporation (“MIGC IV”), our wholly-owned subsidiary, invested
$800,000 as a limited partner and $1,000 as a general partner in MIG
IV. MIG IV began raising money in November 2006, and, as of September
30, 2007, had raised approximately $32 million. We expect our limited
partnership interest at completion of the offering to be between 0.8% and
1.6%. Certain members of our management team have been assigned a
28.5% aggregate interest in the income and cash flow of MIGC
IV. Pursuant to the MIG IV limited partnership agreement, net sales
proceeds from its liquidation (expected in 2013) will be allocated to the
limited partners, and to the general partner (MIGC IV) as, if and when the
annual return thresholds have been achieved by the limited
partners.
The
following table sets forth certain financial information for the AIG, MIG,
MIG
II, MIG III and MIG IV merchant development funds (AOF is not included as it
is
currently in liquidation):
|
|
|
|
|
|
|
|
|
|
|
|
|
Sharing
Ratios*
|
|
|
|
Merchant
Development
Fund
|
|
Capital
under
Management
|
|
LP
Interest
|
|
|
GP
Interest
|
|
Scheduled
Liquidation
|
|
LP
|
|
|
GP
|
|
LP
Preference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIG
|
|
$10 million
|
|
2.0%
|
|
1.0%
|
2008
|
|
99%
|
|
|
1%
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90%
|
|
|
10%
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80%
|
|
|
20%
|
|
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70%
|
|
|
30%
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
100%
|
|
40%
Catch Up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60%
|
|
|
40%
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MIG
|
|
$15 million
|
|
|
1.3%
|
1.0%
|
2010
|
|
99%
|
|
|
1%
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90%
|
|
|
10%
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80%
|
|
|
20%
|
|
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
100%
|
|
40%
Catch Up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60%
|
|
|
40%
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MIG
II
|
|
$25 million
|
|
1.6%
|
1.0%
|
2011
|
|
99%
|
|
|
1%
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85%
|
|
|
15%
|
|
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
100%
|
|
40%
Catch Up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60%
|
|
|
40%
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MIG
III
|
|
$71 million
|
|
1.1%
|
1.0%
|
2012
|
|
99%
|
|
|
1%
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
100%
|
|
40%
Catch Up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60%
|
|
|
40%
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MIG
IV
|
|
$32 million
|
|
2.5%
|
1.0%
|
2013
|
|
99%
|
|
|
1%
|
|
8.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
100%
|
|
40%
Catch Up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60%
|
|
|
40%
|
|
Thereafter
|
*
Illustrating the Sharing Ratios and LP Preference provisions using AIG as an
example, the LPs share in 99% of the cash distributions until they receive
an 8%
preferred return. The LPs share in 90% of the cash distributions
until they receive a 10% preferred return and so on.
In
accordance with SFAS No. 141, we have identified and recorded the value of
intangibles at the property acquisition date. Such intangibles include the
value
of in-place leases and out-of-market leases. These assets are amortized over
the
leases’ remaining terms. The amortization of above-market leases is recorded as
a reduction of rental income and the amortization of in-place leases is recorded
to amortization expense. The amortization expense related to in-place leases
was
$2.0 million and $2.6 million during the nine months ended September 30, 2007
and September 30, 2006, respectively. The amortization of above-market leases,
which was recorded as a reduction of rental income, was $293,000 and $458,000
during the nine months ended September 30, 2007 and September 30, 2006,
respectively.
In-place
and above-market lease amounts and their respective accumulated amortization
are
as follows (in thousands):
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
In-Place
leases
|
|
|
Above-market
leases
|
|
|
In-Place
leases
|
|
|
Above-market
leases
|
|
Cost
|
|
$ |
19,083
|
|
|
$ |
2,025
|
|
|
$ |
19,408
|
|
|
$ |
2,146
|
|
Accumulated
amortization
|
|
|
(6,362 |
) |
|
|
(982 |
) |
|
|
(4,728 |
) |
|
|
(810 |
) |
Intangible
lease cost, net
|
|
$ |
12,721
|
|
|
$ |
1,043
|
|
|
$ |
14,680
|
|
|
$ |
1,336
|
|
Acquired
lease intangible liabilities (below-market leases) of $3.5 million and $4.0
million as of September 30, 2007 and December 31, 2006, respectively, are net
of
previously accreted minimum rent of $1.5 million and $1.1
million at September 30, 2007 and December 31, 2006, respectively. Below-market
leases are accreted over the leases’ remaining terms. The accretion of
below-market leases, which was recorded as an increase to rental income, was
$423,000 and $508,000 during the nine months ended September 30, 2007 and
September 30, 2006, respectively.
Our
outstanding debt at September 30, 2007 and December 31, 2006 consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
Notes
Payable, Held for Investment:
|
|
|
|
|
|
|
Fixed
rate mortgage loans
|
|
$ |
138,386
|
|
|
$ |
132,524
|
|
Variable-rate
unsecured line of credit
|
|
|
16,000
|
|
|
|
11,929
|
|
Notes
Payable, Held for Sale
|
|
|
12,928
|
|
|
|
0
|
|
Total
notes payable
|
|
$ |
167,314
|
|
|
$ |
144,453
|
|
We
have
an unsecured credit facility (the “Credit Facility”) in place which is being
used to provide funds for the acquisition of properties and working capital.
The
Credit Facility matures in November 2007 (see further discussion below) and
provides that we may borrow up to $40 million subject to the value of
unencumbered assets. The Credit Facility contains covenants which,
among other restrictions, require us to maintain a minimum net worth, a maximum
leverage ratio, maximum tenant concentration ratios, specified interest coverage
and fixed charge coverage ratios. On September 30, 2007, we were in compliance
with all financial covenants. The Credit Facility’s annual interest rate varies
depending upon our debt to asset ratio, from LIBOR plus a spread of 1.35% to
2.35%. As of September 30, 2007, the interest rate was LIBOR plus 1.65%. As
of
September 30, 2007, there was a balance outstanding of $16.0 million under
the
Credit Facility. We have approximately $22.0 million available under the Credit
Facility, subject to the covenants above. We have $2.0 million in
letters of credit outstanding related to various properties. These
letters of credit reduce our availability under the Credit
Facility.
We
have
renewed the Credit Facility, and effective October 30, 2007, our maximum
borrowing amount will be increased to $70.0 million, subject to the value of
unencumbered assets. The renewed facility matures on October 30, 2009
and provides for an annual interest rate range of LIBOR plus a spread of 1.0%
to
1.85%. The financial covenants contained in the renewed facility are
not materially different from those in place prior to renewal.
As
of
September 30, 2007, the weighted average interest rate on our fixed-rate debt
was 5.78%, and the weighted average remaining life of such debt was
7.0 years. We added fixed-rate debt of $19.9 million during the
nine months ended September 30, 2007. We added fixed-rate debt of
$20.0 million during 2006.
As
of
September 30, 2007, scheduled principal repayments on notes payable and the
Credit Facility were as follows (in thousands):
|
|
Associated
with Assets
|
|
|
Associated
with Assets
|
|
|
|
Held
for Investment
|
|
|
Held
for Sale
|
|
Scheduled
Payments by Year
|
|
Scheduled
Principal
Payments
|
|
|
Term-Loan
Maturities
|
|
|
Total
Payments
|
|
|
Scheduled
Principal
Payments
|
|
|
Term-Loan
Maturities
|
|
|
Total
Payments
|
|
2007
|
|
$ |
206
|
|
|
|
-
|
|
|
|
206
|
|
|
$ |
117
|
|
|
|
-
|
|
|
|
117
|
|
2008
|
|
|
859
|
|
|
|
13,410
|
|
|
|
14,269
|
|
|
|
491
|
|
|
|
-
|
|
|
|
491
|
|
2009
|
|
|
918
|
|
|
|
16,000
|
|
|
|
16,918
|
|
|
|
531
|
|
|
|
-
|
|
|
|
531
|
|
2010
|
|
|
982
|
|
|
|
-
|
|
|
|
982
|
|
|
|
574
|
|
|
|
-
|
|
|
|
574
|
|
2011
|
|
|
987
|
|
|
|
3,075
|
|
|
|
4,062
|
|
|
|
620
|
|
|
|
-
|
|
|
|
620
|
|
Beyond
five years
|
|
|
2,998
|
|
|
|
114,253
|
|
|
|
117,251
|
|
|
|
314
|
|
|
|
10,281
|
|
|
|
10,595
|
|
Unamortized
debt premiums
|
|
|
-
|
|
|
|
698
|
|
|
|
698
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$ |
6,950
|
|
|
$ |
147,436
|
|
|
$ |
154,386
|
|
|
$ |
2,647
|
|
|
$ |
10,281
|
|
|
$ |
12,928
|
|
As
of
September 30, 2007, two properties individually accounted for more than 10%
of
our consolidated total assets – Uptown Park in Houston, Texas and MacArthur Park
in Dallas, Texas accounted for 20% and 15%, respectively, of total assets.
Consistent with our strategy of investing in areas that we know well, 17 of
our
properties are located in the Houston metropolitan area. These Houston
properties represent 61% of our rental income for the nine months ended
September 30, 2007. Houston is Texas’ largest city and the fourth largest city
in the United States.
Following
are the revenues generated by our top tenants for the periods ended September
30
($ in thousands):
|
|
Quarter
|
|
|
Year
to date
|
|
Tenant
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Kroger
|
|
$ |
860
|
|
|
$ |
773
|
|
|
$ |
2,556
|
|
|
$ |
2,136
|
|
IHOP
Corporation *
|
|
|
562
|
|
|
|
562
|
|
|
|
1,686
|
|
|
|
1,687
|
|
CVS/Pharmacy
|
|
|
283
|
|
|
|
244
|
|
|
|
845
|
|
|
|
726
|
|
Landry's
|
|
|
266
|
|
|
|
223
|
|
|
|
790
|
|
|
|
484
|
|
Linens
'N Things
|
|
|
224
|
|
|
|
135
|
|
|
|
661
|
|
|
|
487
|
|
Hard
Rock Café International
|
|
|
173
|
|
|
|
112
|
|
|
|
513
|
|
|
|
411
|
|
Cosniac
Restaurant Group
|
|
|
149
|
|
|
|
145
|
|
|
|
445
|
|
|
|
376
|
|
Champps
Entertainment, Inc
|
|
|
140
|
|
|
|
143
|
|
|
|
417
|
|
|
|
429
|
|
Starbucks
|
|
|
126
|
|
|
|
87
|
|
|
|
376
|
|
|
|
343
|
|
McCormick
& Schmicks
|
|
|
115
|
|
|
|
117
|
|
|
|
342
|
|
|
|
349
|
|
|
|
$ |
2,898
|
|
|
$ |
2,541
|
|
|
$ |
8,631
|
|
|
$ |
7,428
|
|
*
A
significant portion of IHOP Corporation revenues are related to our AAA assets
which we have elected to hold for sale as described in Note 3. The
activity related to these assets held for sale is reflected as “Earned Income
From DFL” in the Discontinued Operations section of Note 1.
Class A
Common Shares— Our class A common shares are listed on the American Stock
Exchange (“AMEX”) and traded under the symbol “AMY.” As of September 30, 2007,
there were 6,354,680 of our class A common shares outstanding, net of 244,353
shares held in treasury. Our payment of any future dividends to our class A
common shareholders is dependent upon applicable legal and contractual
restrictions, including the provisions of the class B and class C common shares,
as well as our earnings and financial needs.
Class B
Common Shares— The class B common shares are not listed on an exchange and
there is currently no available trading market for the class B common shares.
The class B common shares have voting rights, together with all classes of
common shares, as one class of shares. The class B common shares were issued
at
$9.25 per share. They receive a fixed 8.0% cumulative and preferred annual
dividend, paid in quarterly installments, and are convertible into the class
A
common shares on a one-for-one basis at any time, at the holder’s
option. We have the right to call the shares and, at the holder’s
option, either convert them on a one-for-one basis for class A shares or redeem
them for $10.18 per share in cash plus any accrued and unpaid
dividends. In December 2006, we completed a tender offer for
approximately 48% of our class B common shares. In conjunction with
that tender offer, we repurchased 998,000 shares at $9.25 per share for a total
purchase price of $9.2 million. As of September 30, 2007, there were
1,031,097 of our class B common shares outstanding.
In
October 2007, we announced that we are redeeming the remaining class B common
shares. We plan to convert or redeem all such shares by December 31,
2007. Assuming that all class B common shareholders elect to receive
cash for their shares, the aggregate cash redemption price will be approximately
$10.5 million which will be funded through proceeds from our Credit Facility
(see Note 5 for a discussion of our Credit Facility renewal).
Class C
Common Shares— The class C common shares are not listed on an exchange and
there is currently no available trading market for the class C common shares.
The class C common shares have voting rights, together with all classes of
common shares, as one class of shares. The class C common shares were issued
at
$10.00 per share. They receive a fixed 7.0% preferred annual dividend, paid
in
monthly installments, and are convertible into the class A common shares after
a
7-year lock out period based on 110% of invested capital, at the holder’s
option. The class C common shares are convertible beginning in August
2010. We have the right to force conversion of the shares into class
A shares on a one-for-one basis or to redeem the shares at a cash redemption
price of $11.00 per share at the holder’s option. As of September 30,
2007, there were 4,141,140 of our class C common shares outstanding. Currently,
there is a class C dividend reinvestment program that allows investors to
reinvest their dividends into additional class C common shares. These reinvested
shares are also convertible into the class A common shares after the 7-year
lock
out period and receive the 10% conversion premium upon conversion.
Class D
Common Shares— The class D common shares are not listed on an exchange and
there is currently no available trading market for the class D common shares.
The class D common shares have voting rights, together with all classes of
common shares, as one class of shares. The class D common shares were issued
at
$10.00 per share. They receive a fixed 6.5% annual dividend, paid in monthly
installments, subject to payment of dividends then payable to class B and class
C common shares. The class D common shares are convertible into the class A
common shares at a 7.7% premium on original capital after a 7-year lock out
period, at the holder’s option. The class D common shares are convertible
beginning in June 2011. We have the right to force conversion of the
shares into class A shares at the 7.7% conversion premium or to redeem the
shares at a cash price of $10.00. In either case, the conversion premium will
be
pro rated based on the number of years the shares are outstanding. As of
September 30, 2007, there were 11,044,413 of our class D common shares
outstanding. Currently, there is a class D dividend reinvestment program that
allows investors to reinvest their dividends into additional class D common
shares. These reinvested shares are also convertible into the class A common
shares after the 7-year lock out period and receive the 7.7% conversion premium
upon conversion.
Minority
Interest— Minority interest represents a third party interest in entities
that we consolidate as a result of our controlling financial interest in such
investees. As of September 30, 2007, $1.2 million of the minority
interest is attributable to a third party interest in AAA which is held for
sale
as of September 30, 2007 as discussed in Note 3.
See
Note
3 regarding investments in merchant development funds and other affiliates
and
Note 2 regarding related party notes receivable.
We
earn
real estate fee income by providing property acquisition, leasing, property
management, construction and construction management services to our merchant
development funds. The companies that serve as the general partner
for the funds are wholly-owned by us. Real estate fee income of $2.8 million
and
$2.6 million was paid by our merchant development funds to us for the nine
months ended September 30, 2007 and September 30, 2006, respectively.
Additionally, construction revenues of $2.8 million and $6.7 million were earned
from the merchant development funds during 2007 and 2006, respectively. We
earn
asset management fees from the funds for facilitating the deployment of capital
and for performing other management oversight services. Asset
management fees of $930,000 and $556,000 were paid by the funds to us for the
nine months ended September 30, 2007 and September 30, 2006,
respectively. Additionally, during the nine months ended September
30, 2007 and September 30, 2006 we were reimbursed by the merchant development
funds $442,000 and $0, respectively for reimbursements of administrative costs
and for organization and offering costs incurred on behalf of those
funds.
As
a
sponsor of real estate investment opportunities to the NASD financial planning
broker-dealer community, we maintain a 1% general partner interest in the
investment funds that we sponsor. The funds are typically structured such that
the limited partners receive 99% of the available cash flow until 100% of their
original invested capital has been returned and a preferred return has been
met.
Once the original invested capital has been returned, then the general partner
begins sharing in the available cash flow at various promoted levels. We also
may assign a portion of this general partner interest in these investment funds
to our employees as long term, contingent compensation. We believe that this
assignment will align the interest of management with that of the shareholders,
while at the same time allowing for a competitive compensation structure in
order to attract and retain key management positions without increasing the
overhead burden.
In
May
2007, we acquired a 2-acre parcel of land in Champaign, IL that was acquired
for
resale and is currently under development for a national tenant that is in
the
rental equipment business. In February 2007, we acquired The
Woodlands Mall Ring Road property, which represents 66,000 square feet of gross
leaseable area in Houston, Texas. The property is ground-leased to
five tenants, including Bank of America, Circuit City and Landry’s
Seafood. Additionally, during the nine months ended September
30, 2007, we sold one property acquired for resale for $1.4 million which
approximated our cost.
On
March
30, 2006, we acquired Uptown Plaza in Dallas, a 34,000 square foot multi-tenant
retail complex which was developed in 2005. The center’s tenants include, among
others, Pei-Wei, Grotto and Century Bank. Uptown Plaza is located at the corner
of McKinney Avenue and Pearl Street in an infill location with high barriers
to
entry and the property services the surrounding affluent residential and
downtown areas. The property was acquired for cash which was substantially
funded by proceeds from our Credit Facility.
During
the nine months ended September 30, 2006, we sold two properties which were
recorded as real estate held for sale. These sales generated
aggregate proceeds of $3.6 million which approximated the properties’ carrying
values. Additionally, we sold one of our properties that was held for
investment for proceeds of $2.1 million, which generated a $286,000
gain.
In
March
2004, we signed a new lease agreement for our office facilities which expires
August 31, 2009. In addition, we lease various office equipment for daily
activities. Rental expense for the nine months ended September 30, 2007 and
2006
was $204,000 and $228,000, respectively.
The
operating segments presented are the segments of AmREIT for which separate
financial information is available, and revenue and operating performance is
evaluated regularly by senior management in deciding how to allocate resources
and in assessing performance.
The
portfolio segment consists of our portfolio of single and multi-tenant shopping
center projects. This segment consists of 50 properties located in 15 states.
Expenses for this segment include depreciation, interest, minority interest,
legal cost directly related to the portfolio of properties and property level
expenses. Our consolidated assets are substantially all in this segment.
Additionally, substantially all of the increase in total assets during the
nine
months ended September 30, 2007 occurred within the portfolio
segment.
Our
real
estate development and operating business is a fully integrated and wholly-owned
business consisting of brokers and real estate professionals that provide
development, acquisition, brokerage, leasing, construction, and asset and
property management services to our publicly traded portfolio and merchant
development funds as well as to third parties. Our securities operations consist
of an NASD registered securities business that, through the internal securities
group, raises capital from the independent financial planning marketplace.
The
merchant development funds sell limited partnership interests to retail
investors, in which we invest as both the general partner and as a limited
partner (see Note 3). These merchant development funds were formed to develop,
own, manage, and add value to properties with an average holding period of
two
to four years.
|
|
|
|
|
|
|
|
|
Asset
Advisory
|
|
|
|
|
For
the nine months ended September 30, 2007 ($ in
000's)
|
|
|
Portfolio
|
|
|
Real
Estate Operations
|
|
|
Securities
|
|
|
Merchant
Development Funds
|
|
|
Total
|
|
Rental
income
|
|
|
$ |
22,538
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
22,538
|
|
Real
estate fee income
|
|
|
|
-
|
|
|
|
3,809
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,809
|
|
Construction
revenues
|
|
|
|
-
|
|
|
|
3,862
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,862
|
|
Securities
commission income
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,410
|
|
|
|
-
|
|
|
|
3,410
|
|
Asset
management fee income
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
930
|
|
|
|
930
|
|
|
Total
revenue
|
|
|
22,538
|
|
|
|
7,671
|
|
|
|
3,410
|
|
|
|
930
|
|
|
|
34,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
|
1,118
|
|
|
|
3,874
|
|
|
|
1,330
|
|
|
|
41
|
|
|
|
6,363
|
|
Property
expense
|
|
|
|
5,606
|
|
|
|
93
|
|
|
|
4
|
|
|
|
-
|
|
|
|
5,703
|
|
Construction
costs
|
|
|
|
-
|
|
|
|
3,521
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,521
|
|
Legal
and professional
|
|
|
|
909
|
|
|
|
162
|
|
|
|
112
|
|
|
|
5
|
|
|
|
1,188
|
|
Real
estate commissions
|
|
|
|
-
|
|
|
|
448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
448
|
|
Securities
commissions
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,862
|
|
|
|
-
|
|
|
|
2,862
|
|
Depreciation
and amortization
|
|
|
|
5,914
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,914
|
|
|
Total
expenses
|
|
|
13,547
|
|
|
|
8,098
|
|
|
|
4,308
|
|
|
|
46
|
|
|
|
25,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
(6,041 |
) |
|
|
(415 |
) |
|
|
(29 |
) |
|
|
-
|
|
|
|
(6,485 |
) |
Other
income/ (expense)
|
|
|
|
890
|
|
|
|
392
|
|
|
|
336
|
|
|
|
(29 |
) |
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
451
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
4,291
|
|
|
$ |
(447 |
) |
|
$ |
(591 |
) |
|
$ |
855
|
|
|
$ |
4,108
|
|
|
|
|
|
|
|
|
|
|
Asset
Advisory
|
|
|
|
|
For
the nine months ended September 30, 2006 ($ in
000's)
|
|
Portfolio
|
|
|
Real
Estate Operations
|
|
|
Securities
|
|
|
Merchant
Development Funds
|
|
|
Total
|
|
Rental
income
|
|
|
$ |
20,824
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
20,824
|
|
Real
estate fee income
|
|
|
|
-
|
|
|
|
3,352
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,352
|
|
Construction
revenues
|
|
|
|
-
|
|
|
|
8,331
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,331
|
|
Securities
commission income
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,172
|
|
|
|
-
|
|
|
|
4,172
|
|
Asset
management fee income
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
556
|
|
|
|
556
|
|
|
Total
revenue
|
|
|
20,824
|
|
|
|
11,683
|
|
|
|
4,172
|
|
|
|
556
|
|
|
|
37,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
|
802
|
|
|
|
3,664
|
|
|
|
1,635
|
|
|
|
133
|
|
|
|
6,234
|
|
Property
expense
|
|
|
|
5,083
|
|
|
|
86
|
|
|
|
20
|
|
|
|
-
|
|
|
|
5,189
|
|
Construction
costs
|
|
|
|
-
|
|
|
|
7,508
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,508
|
|
Legal
and professional
|
|
|
|
699
|
|
|
|
186
|
|
|
|
57
|
|
|
|
-
|
|
|
|
942
|
|
Real
estate commissions
|
|
|
|
-
|
|
|
|
540
|
|
|
|
-
|
|
|
|
-
|
|
|
|
540
|
|
Securities
commissions
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,694
|
|
|
|
-
|
|
|
|
3,694
|
|
Depreciation
and amortization
|
|
|
|
6,620
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,620
|
|
|
Total
expenses
|
|
|
13,204
|
|
|
|
11,984
|
|
|
|
5,406
|
|
|
|
133
|
|
|
|
30,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
(4,718 |
) |
|
|
(341 |
) |
|
|
(36 |
) |
|
|
-
|
|
|
|
(5,095 |
) |
Other
income/ (expense)
|
|
|
|
1,200
|
|
|
|
141
|
|
|
|
126
|
|
|
|
340
|
|
|
|
1,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
701
|
|
|
|
(19 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
4,803
|
|
|
$ |
(520 |
) |
|
$ |
(1,144 |
) |
|
$ |
763
|
|
|
$ |
3,902
|
|
|
|
|
|
|
|
|
|
|
Asset
Advisory
|
|
|
|
|
For
the three months ended September 30, 2007 ($ in
000's)
|
|
|
Portfolio
|
|
|
Real
Estate Operations
|
|
|
Securities
|
|
|
Merchant
Development Funds
|
|
|
Total
|
|
Rental
income
|
|
|
$ |
7,659
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
7,659
|
|
Real
estate fee income
|
|
|
|
-
|
|
|
|
1,893
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,893
|
|
Construction
revenues
|
|
|
|
-
|
|
|
|
1,975
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,975
|
|
Securities
commission income
|
|
|
|
-
|
|
|
|
-
|
|
|
|
933
|
|
|
|
-
|
|
|
|
933
|
|
Asset
management fee income
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
334
|
|
|
|
334
|
|
|
Total
revenue
|
|
|
7,659
|
|
|
|
3,868
|
|
|
|
933
|
|
|
|
334
|
|
|
|
12,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
|
413
|
|
|
|
1,407
|
|
|
|
479
|
|
|
|
(50 |
) |
|
|
2,249
|
|
Property
expense
|
|
|
|
1,912
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,937
|
|
Construction
costs
|
|
|
|
-
|
|
|
|
1,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,792
|
|
Legal
and professional
|
|
|
|
338
|
|
|
|
32
|
|
|
|
50
|
|
|
|
5
|
|
|
|
425
|
|
Real
estate commissions
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Securities
commissions
|
|
|
|
-
|
|
|
|
-
|
|
|
|
788
|
|
|
|
-
|
|
|
|
788
|
|
Depreciation
and amortization
|
|
|
|
2,016
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,016
|
|
|
Total
expenses
|
|
|
4,679
|
|
|
|
3,257
|
|
|
|
1,317
|
|
|
|
(45 |
) |
|
|
9,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
(2,140 |
) |
|
|
(151 |
) |
|
|
(18 |
) |
|
|
-
|
|
|
|
(2,309 |
) |
Other
income/ (expense)
|
|
|
|
431
|
|
|
|
(181 |
) |
|
|
157
|
|
|
|
171
|
|
|
|
578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
151
|
|
|
|
(1 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
1,422
|
|
|
$ |
278
|
|
|
$ |
(245 |
) |
|
$ |
550
|
|
|
$ |
2,005
|
|
|
|
|
|
|
|
|
|
|
Asset
Advisory
|
|
|
|
|
For
the three months ended September 30, 2006 ($ in
000's)
|
|
|
Portfolio
|
|
|
Real
Estate Operations
|
|
|
Securities
|
|
|
Merchant
Development Funds
|
|
|
Total
|
|
Rental
income
|
|
|
$ |
7,300
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
7,300
|
|
Real
estate fee income
|
|
|
|
-
|
|
|
|
924
|
|
|
|
-
|
|
|
|
-
|
|
|
|
924
|
|
Construction
revenues
|
|
|
|
-
|
|
|
|
3,595
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,595
|
|
Securities
commission income
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,554
|
|
|
|
-
|
|
|
|
1,554
|
|
Asset
management fee income
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
212
|
|
|
|
212
|
|
|
Total
revenue
|
|
|
7,300
|
|
|
|
4,519
|
|
|
|
1,554
|
|
|
|
212
|
|
|
|
13,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
|
229
|
|
|
|
1,302
|
|
|
|
532
|
|
|
|
52
|
|
|
|
2,115
|
|
Property
expense
|
|
|
|
1,961
|
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,008
|
|
Construction
costs
|
|
|
|
-
|
|
|
|
3,224
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,224
|
|
Legal
and professional
|
|
|
|
236
|
|
|
|
87
|
|
|
|
33
|
|
|
|
-
|
|
|
|
356
|
|
Real
estate commissions
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Securities
commissions
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,348
|
|
|
|
-
|
|
|
|
1,348
|
|
Depreciation
and amortization
|
|
|
|
2,046
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,046
|
|
|
Total
expenses
|
|
|
4,472
|
|
|
|
4,660
|
|
|
|
1,913
|
|
|
|
52
|
|
|
|
11,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
(1,712 |
) |
|
|
(92 |
) |
|
|
(10 |
) |
|
|
-
|
|
|
|
(1,814 |
) |
Other
income/ (expense)
|
|
|
|
592
|
|
|
|
(7 |
) |
|
|
(10 |
) |
|
|
152
|
|
|
|
727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
159
|
|
|
|
(3 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
1,867
|
|
|
$ |
(243 |
) |
|
$ |
(379 |
) |
|
$ |
312
|
|
|
$ |
1,557
|
|
FORWARD-LOOKING
STATEMENTS
Certain
information presented in this Form 10-Q constitutes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in such forward-looking statements
are
based upon reasonable assumptions, the Company’s actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference include the following: changes in
general economic conditions, changes in real estate market conditions, continued
availability of proceeds from the Company’s debt or equity capital, the ability
of the Company to locate suitable tenants for its properties, the ability of
tenants to make payments under their respective leases, timing of acquisitions,
development starts and sales of properties and the ability to meet development
schedules.
The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this report,
as
well as our 2006 consolidated financial statements and notes thereto included
in
our filing on Form 10-K for the year ended December 31, 2006. Historical results
and trends which might appear should not be taken as indicative of future
operations.
EXECUTIVE
OVERVIEW
We
are an
established real estate company that, at our core, are value creators who have
delivered results to our investors for 22 years. We have elected to
be taxed as a REIT for federal income tax purposes. Our mission is to
build a real estate business with the potential to realize profitable growth
year over year regardless of market cycles. Our structure consists of two
distinct companies, representing three synergistic businesses that provide
earnings potential from multiple sources. First, we own an
institutional-grade portfolio of Irreplaceable Corners– premier retail
properties in high-traffic, highly populated areas – which are held for
long-term value and provide a foundation to our FFO growth through a steady
stream of rental income. Second, our advisory/sponsorship business
broadens our avenues to capital and raises capital for a series of merchant
development funds. And third, as a real estate development and
operating company, we provide value through offering an array of services
to our tenants and properties, to our advisory/sponsorship business’s portfolios
and to third parties. These three
business segments add value to the overall Company and, together, give us the
flexibility to achieve our financial objectives over the long-term as we
navigate the changing market cycles that come our way.
When
we
listed on the AMEX in July 2002, our total assets had a book value of $48
million and equity under management within our advisory/sponsorship business
totaled $15 million. As of September 30,
2007:
·
|
We
owned a real estate portfolio consisting of 50 properties located
in 15
states that had a net book value of $307
million;
|
·
|
We
directly managed, through our five actively managed merchant development
funds, a total of $155 million in contributed capital;
and
|
·
|
We
had over 400,000 square feet of retail centers in various stages
of
development, re-development or in the pipeline for both our
advisory/sponsorship business and for third
parties.
|
Portfolio
of Irreplaceable Corners
Our
portfolio consists primarily of premier retail properties typically located
on
“Main and Main” intersections in high-traffic, highly populated affluent areas.
Because of their location and exposure as central gathering places, we believe
these centers attract well established tenants and can withstand the test of
time, providing our shareholders a steady rental income stream.
As
of
September 30, 2007, we owned a real estate portfolio consisting of 50 properties
located in 15 states. A majority of our properties are located in
densely populated, suburban communities in and around Houston, Dallas and San
Antonio. Within these broad markets, we target locations that we believe have
the best demographics and highest long term value. We refer to these
properties as Irreplaceable Corners. Our criteria for an Irreplaceable Corner
includes: high barriers to entry (typically infill locations in
established communities without significant raw land available for development),
significant population within a three mile radius (typically in excess of
100,000 people), located on the hard corner of an intersection guided by a
traffic signal, ideal average household income in excess of $80,000 per year,
strong visibility and significant traffic counts passing by the location
(typically in excess of 30,000 cars per day). We believe that centers
with these characteristics will provide for consistent leasing demand and rents
that increase at or above the rate of inflation. Additionally,
these areas have barriers to entry for competitors seeking to develop new
properties due to the lack of available land. We take a very hands-on
approach to ownership, and directly manage the operations and leasing at all
of
our wholly owned properties.
We
expect
that single-tenant, credit leased properties, will continue to experience cap
rate pressure during 2007 due to the low interest rate environment and increased
buyer demand. Therefore, we will continue to divest of properties
which no longer meet our core criteria, and, to the extent that we can do so
accretively, replace them with high-quality grocery-anchored, lifestyle, and
multi-tenant shopping centers or the development of single-tenant properties
located on Irreplaceable Corners. 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 we will ultimately
purchase any or all of these projects. Our acquisitions program is
sensitive to changes in interest rates. As of September 30, 2007, 89%
of our outstanding debt had a long-term fixed interest rate with an average
term
of 7.0 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%.
Advisory/Sponsorship
Business
The
part
of our business model and operating strategy that distinguishes us from other
publicly-traded REITs is our asset advisory business, AmREIT Securities Company,
a NASD registered broker-dealer which is a wholly-owned subsidiary of
ARIC. For the past 22 years, we have been raising capital for our
merchant development funds and building relationships in the financial planning
and broker-dealer community, earning fees and sharing in profits from those
activities. Historically, our advisory group has raised capital in
two ways: first, directly for us through non-traded classes of common
shares, and second, for our actively managed merchant development
funds.
The
advisory/sponsorship business invests in and actively manages six merchant
development partnership funds which were formed to develop, own, manage, and
add
value to properties with an average holding period of two to four
years. We invest as both the general partner and as a limited
partner, and our advisory/sponsorship business sells interests in these funds
to
retail investors. We, as the general partner, manage the funds and, in return,
receive management fees as well as potentially significant profit participation
interests. However, we strive to create a structure that aligns the
interests of our shareholders with those of our limited partners. In
this spirit, the funds are structured so that the general partner does not
receive a significant profit until after the limited partners in the funds
have
received their targeted return, which links our success to that of the limited
partners.
Real
Estate Development and Operating Company
Our
real
estate development and operating business, ARIC, is a fully integrated and
wholly-owned business, consisting of brokers and real estate professionals
that
provide development, acquisition, brokerage, leasing, construction, general
contracting, asset and property management services to our portfolio of
properties, to our advisory/sponsorship business, and to third
parties. This operating subsidiary, which is a taxable REIT
subsidiary, is a transaction-oriented subsidiary that is very active in the
real
estate market and generates significant profits and fees on an annual
basis. This business can provide significant long-term and annual
growth; however, its quarter to quarter results will fluctuate, and therefore
its contributions to our quarterly earnings will be volatile.
Summary
of Critical Accounting Policies
Our
results of operations and financial condition, as reflected in the accompanying
consolidated 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 our tenants. Management believes the most
critical accounting policies in this regard are revenue recognition, the regular
evaluation of whether the value of a real estate asset has been impaired, the
allowance for uncollectible accounts and accounting for real estate
acquisitions. We evaluate our assumptions and estimates on an on-going basis.
We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable based on the circumstances.
Revenue
Recognition— We lease space to tenants under agreements with varying terms.
The majority of the leases are accounted for as operating leases with revenue
being recognized on a straight-line basis over the terms of the individual
leases. Accrued rents are included in tenant receivables. Revenue from tenant
reimbursements of taxes, maintenance expenses and insurance is recognized in
the
period the related expense is recorded. Additionally, certain of the lease
agreements contain provisions that grant additional rents based on tenants’
sales volumes (contingent or percentage rent). Percentage rents are recognized
when the tenants achieve the specified targets as defined in their lease
agreements. The terms of certain leases require that the building/improvement
portion of the lease be accounted for under the direct financing method which
treats the building as if we had sold it to the lessee and entered into a
long-term financing arrangement with such lessee. This accounting method is
appropriate when the lessee has all of the benefits and risks of property
ownership that they otherwise would if they owned the building versus leasing
it
from us.
We
have
been engaged to provide various services, including development, construction,
construction management, property management, leasing and brokerage. The fees
for these services are recognized as services are provided and are generally
calculated as a percentage of revenues earned or to be earned or of property
cost, as appropriate. Revenues from fixed-price construction contracts are
recognized on the percentage-of-completion method, measured by the physical
completion of the structure. Revenues from cost-plus-percentage-fee contracts
are recognized on the basis of costs incurred during the period plus the
percentage fee earned on those costs. Construction management contracts are
recognized only to the extent of the fee revenue.
Construction
contract costs include all direct material and labor costs and any indirect
costs related to contract performance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from any contract penalty provisions,
and
final contract settlements may result in revisions to costs and income and
are
recognized in the period in which the revisions are determined. Any profit
incentives are included in revenues when their realization is reasonably
assured. An amount equal to contract costs attributable to any claims is
included in revenues when realization is probable and the amount can be reliably
estimated.
Unbilled
construction receivables represent reimbursable costs and amounts earned under
contracts in progress as of the date of our balance sheet. Such amounts become
billable according to contract terms, which usually consider the passage of
time, achievement of certain milestones or completion of the project. Advance
billings represent billings to or collections from clients on contracts in
advance of revenues earned thereon. Unbilled construction receivables are
generally billed and collected within the 12 months following the date of our
balance sheet, and advance billings are generally earned within the 12 months
following the date of our balance sheet.
Securities
commission income is recognized as units of our merchant development funds
are
sold through AmREIT Securities Company. Securities commission income is earned
as the services are performed and pursuant to the corresponding prospectus
or
private offering memorandum. Generally, it includes a selling commission of
between 6.5% and 7.5%, a dealer manager fee of between 2.5% and 3.25% and
offering and organizational costs of 1.0% to 1.5%. The selling commission is
then paid out to the unaffiliated selling broker dealer and reflected as
securities commission expense.
Real
Estate Valuation— Land, buildings and improvements are recorded at cost.
Expenditures related to the development of real estate are carried at cost
which
includes capitalized carrying charges, acquisition costs and development costs.
Carrying charges, primarily interest and loan acquisition costs, and direct
and
indirect development costs related to buildings under construction are
capitalized as part of construction in progress. The capitalization of such
costs ceases at the earlier of one year from the date of completion of major
construction or when the property, or any completed portion, becomes available
for occupancy. We capitalize
acquisition costs as incurred. Such costs are expensed if and when the
acquisition becomes no longer probable. Depreciation is computed using
the straight-line method over an estimated useful life of up to 50 years
for buildings, up to 20 years for site improvements and over the life of
lease for tenant improvements. Leasehold estate properties, where the Company
owns the building and improvements but not the related ground, are amortized
over the life of the lease.
We
review
our 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. We determine whether an
impairment in value occurred by comparing the estimated future cash flows
(undiscounted and without interest charges), including the residual value of
the
property, with the carrying value of the individual property. If impairment
is
indicated, a loss will be recorded for the amount by which the carrying value
of
the asset exceeds its fair value.
Valuation
of Receivables— An allowance for the uncollectible portion of tenant
receivables and accounts receivable is determined based upon an analysis of
balances outstanding, historical payment history, tenant credit worthiness,
additional guarantees and other economic trends. Balances outstanding include
base rents, tenant reimbursements and receivables attributed to the accrual
of
straight line rents. Additionally, estimates of the expected recovery of
pre-petition and post-petition claims with respect to tenants in bankruptcy
are
considered in assessing the collectibility of the related
receivables.
Real
Estate Acquisitions— We account for real estate acquisitions pursuant to
Statement of Financial Accounting Standards No. 141, Business
Combinations (“SFAS No. 141”). Accordingly, we allocate the purchase price
of the acquired properties to land, building and improvements, identifiable
intangible assets and to the acquired liabilities based on their respective
fair
values. Identifiable intangibles include amounts allocated to acquired
out-of-market leases, the value of in-place leases and customer relationships,
if any. We determine fair value based on estimated cash flow projections that
utilize appropriate discount and capitalization rates and available market
information. Estimates of future cash flows are based on a number of factors
including the historical operating results, known trends and specific market
and
economic conditions that may affect the property. Factors considered by
management in our analysis of determining the as-if-vacant property value
include an estimate of carrying costs during the expected lease-up periods
considering market conditions, and costs to execute similar leases. In
estimating carrying costs, management includes real estate taxes, insurance
and
estimates of lost rentals at market rates during the expected lease-up periods,
tenant demand and other economic conditions. Management also estimates costs
to
execute similar leases including leasing commissions, tenant improvements,
legal
and other related expenses. Intangibles related to out-of-market leases and
in-place lease value are recorded as acquired lease intangibles and are
amortized as an adjustment to rental revenue or amortization expense, as
appropriate, over the remaining terms of the underlying leases. Premiums or
discounts on acquired out-of-market debt are amortized to interest expense
over
the remaining term of such debt.
Recently
Issued Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements. The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition of a tax position
taken, or expected to be taken, in a tax return. A tax position may only be
recognized in the financial statements if it is more likely than not that the
tax position will be sustained upon examination. There are also several
disclosure requirements. We adopted this interpretation during the
first quarter of 2007, and it did not have a material effect on our consolidated
financial statements.
In
September 2006, the FASB issued “SFAS No. 157,” Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and requires enhanced disclosures about
fair
value measurements. SFAS No. 157 requires companies to disclose the
fair value of its financial instruments according to a fair value
hierarchy. Additionally, companies are required to provide certain
disclosures regarding instruments within the hierarchy, including a
reconciliation of the beginning and ending balances for each major category
of
assets and liabilities. SFAS No. 157 is effective for our fiscal year
beginning January 1, 2008. The adoption of SFAS No. 157 is not
expected to have a material effect on our results of operations or financial
position.
In
February 2007 the FASB issued “SFAS No. 159,” The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other
items
at fair value. This Statement is effective for fiscal years beginning after
November 15, 2007. We have not yet decided if we will choose to measure any
eligible financial assets and liabilities at fair value under the provisions
of
SFAS No. 159.
Liquidity
and Capital Resources
At
September 30, 2007 and December 31, 2006, our cash and cash equivalents totaled
$6.8 million and $3.4 million, respectively. Cash flows provided by
(used in) operating activities, investing activities and financing activities
for the nine months ended September 30, are as follows (in
thousands):
|
|
2007
|
|
|
2006
|
|
Operating
activities
|
|
$ |
6,220
|
|
|
$ |
11,542
|
|
Investing
activities
|
|
$ |
(14,225 |
) |
|
$ |
(24,399 |
) |
Financing
activities
|
|
$ |
11,375
|
|
|
$ |
9,519
|
|
Cash
flows from operating activities and financing activities have been the principal
sources of capital to fund our ongoing operations and dividends. Our 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, are expected to provide the necessary
capital to maintain and operate our properties as well as execute our growth
strategies.
Additionally,
as part of our investment strategy, we constantly evaluate our property
portfolio, systematically selling off any non-core or underperforming assets,
and replacing them with Irreplaceable Corners and other core assets. We
anticipate that we will continue to increase our operating cash flow by selling
the underperforming assets and deploying the capital generated into high-quality
income-producing retail real estate assets. Since January 2004, we have executed
this strategy through the acquisition of $143 million of shopping centers,
consisting primarily of four premier properties with approximately 289,000
square feet. We completed our acquisition of Uptown Park, a 169,000 square
foot
multi-tenant shopping center, in June 2005, our acquisition of The South
Bank, a 47,000 square foot multi-tenant retail center located on the San Antonio
Riverwalk, in September 2005, our acquisition in December 2005 of 39,000
square feet of multi-tenant retail projects located adjacent to our MacArthur
Park Shopping Center in Las Colinas, an affluent residential and business
community in Dallas, Texas and our acquisition of Uptown Plaza in Dallas, a
34,000 square foot multi-tenant retail complex located at the corner of McKinney
Avenue and Pearl Street near downtown Dallas.
Cash
provided by operating activities as reported in the Consolidated Statements
of
Cash Flows decreased by $5.3 million for the 2007 period when compared to the
2006 period. This net decrease is primarily attributable to a $6.9 million
decrease in working capital cash flow during the period. This working
capital decrease was due primarily to a $4.5 million net decrease in cash flows
from receivables which was driven by a number of factors – (1) an $1.8 million
increase during 2006 in working capital cash flows as a result of improved
collection efforts on 2005 related party receivables generated by our
construction business which commenced operations during 2005, (2) a $1.0 million
earnest money deposit made during 2007 on behalf of our merchant development
funds related to a property acquisition (this deposit was reimbursed to us
by
the fund in October 2007) and (3) $1.1 million of organization and offering
costs incurred on behalf of one of our merchant development funds that is
currently in the pre-operating stage (these costs will be reimbursed by the
fund
in the first quarter of 2008). This $6.9 million decrease in working
capital cash flows was partially offset by an $869,000 increase in cash flow
from our activities related to real estate acquired for
resale. During 2006, we had net cash inflows from these activities of
$530,000 as compared to net cash inflows of $1.4 million during 2007 – during
2006, we invested $623,000 in real estate held for resale, and we made no
investments in such real estate during 2007.
Cash
flows used in investing activities as reported in the Consolidated Statements
of
Cash Flows decreased from a net investing outflow of approximately $24.4 million
in 2006 to a net investing outflow of $14.2 million in
2007. This $10.2 million decrease is primarily attributable to a
$15.0 million decrease in property acquisitions during 2007, coupled with a
$7.9
million decrease in loans to affiliates during the period. These
decreases in cash outflows were partially offset by decreases in payments from
affiliates of $3.3 million, an increase in investments of $4.9 million and
a
$4.5 million reduction in proceeds from the sale of investment
property. On the property acquisition side, in February 2007, we
acquired The Woodlands Mall Ring Road property, which represents 66,000 square
feet of gross leaseable area in Houston, Texas. The property has been
ground-leased to five tenants, including NationsBank, Circuit City and Landry’s
Seafood. In March 2006, we acquired Uptown Plaza in Dallas, a 34,000
square foot multi-tenant retail complex located near downtown
Dallas. With respect to loans to and payments from affiliates, we
have the ability as part of our treasury management function to place excess
cash in short term bridge loans for our merchant development funds for the
purpose of acquiring or developing properties. We typically provide such
financing to our affiliates as a way of efficiently deploying our excess cash
and earning a higher return than we would in other short term investments or
overnight funds. In most cases, the funds have a construction lender in place,
and we simply step in as the lender and provide financing on the same terms
as
the third party lender. In so doing, we are able to access these funds as needed
by having our affiliate then draw down on their construction loans. These loans
are unsecured, bear a market rate of interest and are due upon
demand. With respect to investments made during 2007, we acquired a
30% interest in AmREIT Woodlake LP., which purchased Woodlake Square Shopping
Center, a 205,000 square foot Randall’s-anchored shopping center on the
northeast corner of Westheimer and Gessner in Houston, Texas. We made
no such investments in 2006. With respect to the decrease in proceeds
from sales of investment property, during 2007, we did not have any such sales
whereas in 2006, we sold two properties held for investment, generating proceeds
of $4.5 million.
Cash
flows provided by financing activities increased from $9.5 million during the
2006 period to $11.4 million during the 2007 period. This $1.9 million
increase was primarily attributable to a $1.7 million reduction in share
repurchase activity under our share repurchase program. The $20.2
million increase in proceeds from notes payable during the period was almost
entirely offset by a $19.5 million increase in payments of notes
payable. During the 2006 period, net proceeds from notes payable were
$22.4 million (driven primarily by the $20.0 million financing of The South
Bank) versus net proceeds from notes payable of $23.0 million during the 2007
period (driven primarily by the $19.9 million in proceeds from the financing
of
Uptown Dallas).
We
have
an unsecured credit facility in place which is being used to provide funds
for
the acquisition of properties and working capital. The credit
facility matures in November 2007 (see further discussion below) and provides
that we may borrow up to $40 million subject to the value of unencumbered
assets. The credit facility contains covenants which, among other
restrictions, require us to maintain a minimum net worth, a maximum leverage
ratio, maximum tenant concentration ratios, specified interest coverage and
fixed charge coverage ratios and allow the lender to approve all
distributions. At September 30, 2007, we were in compliance with all
financial covenants. The credit facility’s annual
interest rate varies depending upon our debt to asset ratio, from LIBOR plus
a
spread of 1.35% to LIBOR plus a spread of 2.35%. As of September 30,
2007, the interest rate was LIBOR plus 1.65%. As of September 30,
2007 there was $16.0 million outstanding on the credit facility. As
of September 30, 2007, we have approximately $22.0 million available under
our
line of credit, subject to the covenant provisions discussed
above. In addition to the credit facility, we utilize various
permanent mortgage financing and other debt instruments.
We
have
renewed the Credit Facility, and effective October 30, 2007, our maximum
borrowing amount will be increased to $70.0 million, subject to the value of
unencumbered assets. The renewed facility matures on October 30, 2009
and provides for an annual interest rate range of LIBOR plus a spread of 1.0%
to
1.85%. The financial covenants contained in the renewed facility are
not materially different from those in place prior to renewal.
During
the nine months ended September 30, 2007, we declared dividends to our
shareholders of $10.5 million, compared with $11.1 million in the nine months
ended September 30, 2006. The class A, C and D shareholders receive
monthly dividends and the class B shareholders receive quarterly
dividends. All dividends are declared on a quarterly
basis. The dividends by class follow (in thousands):
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
C
|
|
|
Class
D
|
|
2007
|
Third
Quarter
|
|
$ |
792
|
|
|
$ |
190
|
|
|
$ |
720
|
|
|
$ |
1,783
|
|
|
Second
Quarter
|
|
$ |
797
|
|
|
$ |
192
|
|
|
$ |
726
|
|
|
$ |
1,793
|
|
|
First
Quarter
|
|
$ |
785
|
|
|
$ |
194
|
|
|
$ |
725
|
|
|
$ |
1,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
Fourth
Quarter
|
|
$ |
776
|
|
|
$ |
200
|
|
|
$ |
723
|
|
|
$ |
1,790
|
|
|
Third
Quarter
|
|
$ |
782
|
|
|
$ |
385
|
|
|
$ |
724
|
|
|
$ |
1,799
|
|
|
Second
Quarter
|
|
$ |
788
|
|
|
$ |
390
|
|
|
$ |
726
|
|
|
$ |
1,798
|
|
|
First
Quarter
|
|
$ |
789
|
|
|
$ |
390
|
|
|
$ |
722
|
|
|
$ |
1,794
|
|
Until
we
acquire properties, we use our funds to pay down outstanding debt under the
credit facility. Thereafter, any excess cash is provided first to our
affiliates in the form of short-term bridge financing for development or
acquisition of properties and then is invested in short-term investments or
overnight funds. This investment strategy allows us to manage
our interest costs and provides us with the liquidity to acquire properties
at
such time as those suitable for acquisition are located.
Inflation
has had very little effect on our income from operations. We expect that
increases in store sales volumes due to inflation as well as increases in the
Consumer Price Index, may contribute to capital appreciation of our properties.
These factors, however, also may have an adverse impact on the operating margins
of the tenants of the properties.
Results
of Operations
Comparison
of the three months ended September 30, 2007 to the three months ended September
30, 2006
Total
revenues decreased by $791,000 or 6% in 2007 as compared to 2006 ($12.8 million
in 2007 versus $13.6 million in 2006). AmREIT Construction Company
(“ACC”) generated revenues of $2.0 million during 2007, compared to $3.6 million
during 2006. Such revenues have been recognized under the
percentage-of-completion method of accounting. This reduction in
revenues is primarily attributable to reduced related party work. A
significant related party contract that generated $2.2 million in revenues
during the three months ended September 30, 2006 was completed in the fourth
quarter of 2006.
Securities
commission revenue decreased by $621,000 or 40% in 2007 as compared to 2006.
This decrease in commission revenue was driven by the capital-raising activities
of our advisory/sponsorship business. During the third quarter of
2007, we raised $8.5 million in capital for one of our merchant development
funds, AmREIT Monthly Income and Growth Fund IV, L.P. (MIG IV) versus $14.2
million in capital that we raised for AmREIT Monthly Income and Growth Fund
III,
LP (MIG III) during the third quarter of 2006. This decrease in
commission income was partially offset by a corresponding increase in commission
expense paid to other third party broker-dealer firms. As we raise capital
for
our affiliated merchant development partnerships, we earn a securities
commission of approximately 11% of the money raised. These commission revenues
are then offset by commission payments to non-affiliated broker-dealers of
between 8% and 9%.
Real
estate fee income increased approximately
$969,000, or 105%, primarily as a result of an increase in acquisition fees
earned on property transactions within our merchant development
funds.
Expenses
Total
operating expenses decreased by $1.9 million, or 17%, from $11.1 million in
2006
to $9.2 million in 2007. This decrease was primarily attributable to decreases
in construction costs and securities commissions, which were offset by an
increase in general and administrative and legal and professional
expenses.
ACC
recognized $1.8 million in construction costs during 2007, compared to $3.2
million in 2006. This reduction in construction costs is consistent
with the reduction in revenues described above.
Securities
commission expense decreased by $560,000, or 42%, from $1.3 million in 2006
to
$788,000 in 2007. This decrease is attributable to decreased capital-raising
activity through ASC during 2007 as discussed in “Revenues”
above.
General
and administrative expense increased by $134,000, or 6%, during 2007 to $2.2
million compared to $2.1 million in 2006. This increase is primarily due to
increases in personnel.
Legal
and
professional expense increased by $69,000, or 19%, to $425,000 in 2007 compared
to $356,000 in 2006. This increase is attributable to costs
associated with our accounting software conversion as well as an increase in
audit and compliance costs.
Other
Income
from merchant development funds and other affiliates increased by $249,000,
or
117%, from $213,000 in 2006 to $462,000 in 2007. During 2007, we
realized $405,000 of profit participation from our general partner interest
in
AOF, one of our merchant development funds which is currently in
liquidation. In 2006, we recognized $196,000 related to our general
partner interest in AOF.
Interest
expense increased by $495,000, or 27%, from $1.8 million in 2006 to $2.3 million
in 2007. The increase in interest expense is primarily attributable
to draw-downs on our Credit Facility in late 2006 related to the tender of
the
Class B shares.
Comparison
of the nine months ended September 30, 2007 to the nine months ended September
30, 2006
Total revenues
decreased by $2.7 million or 7% in 2007 as compared to 2006 ($34.5 million
in
2007 versus $37.2 million in 2006). Rental revenues increased by $1.7
million, or 8%, in 2007 as compared to 2006. This increase is
attributable to the acquisition of Uptown Dallas in March 2006 and the Woodlands
ground leases in February 2007. In addition, in the first quarter of
2006 we recorded a reduction to rental revenues of $457,000 as a result of
a
favorable property tax protest on one of our properties. This
reduction was offset by a corresponding reduction in property expense during
the
nine months ended September 30, 2006.
AmREIT
Construction Company (“ACC”) generated revenues of $3.9 million during 2007,
compared to $8.3 million during 2006. Such revenues have been
recognized under the percentage-of-completion method of
accounting. This reduction in revenues is primarily attributable to
reduced related party work. A significant related party contract that
generated $4.8 million revenues during the nine months ended September 30,
2006
was completed in the fourth quarter of 2006.
Securities
commission revenue decreased by $762,000 or 18% in 2007 as compared to 2006.
This decrease in commission revenue was driven by the capital-raising activities
of our advisory/sponsorship business. During the nine months ended
September 30, 2007, we raised $30.4 million in capital for one of our merchant
development funds, AmREIT Monthly Income and Growth Fund IV, L.P. (MIG IV)
versus $38.0 million in capital that we raised for AmREIT Monthly Income and
Growth Fund III, LP (MIG III) during 2006. This decrease in
commission income was partially offset by a corresponding decrease in commission
expense paid to other third party broker-dealer firms. As we raise capital
for
our affiliated merchant development partnerships, we earn a securities
commission of approximately 11% of the money raised. These commission revenues
are then offset by commission payments to non-affiliated broker-dealers of
between 8% and 9%.
Expenses
Total
operating expenses decreased by $4.7 million, or 15%, from $30.7 million in
2006
to $26.0 million in 2007. This decrease was primarily attributable to decreases
in construction costs, depreciation and amortization and securities commissions,
which were offset by increases in property expense and legal and professional
expenses.
ACC
recognized $3.5 million in construction costs during 2007, compared to $7.5
million in 2006. This reduction in construction costs is consistent
with the reduction in revenues described above.
Depreciation
and amortization decreased by $706,000, or 11%, to $5.9 million in 2007 compared
to $6.6 million in 2006. The decrease in depreciation and amortization is
attributable to a number of leases that expired in 2006, which reduced the
amortization related to intangible lease costs and tenant
improvements. This decrease was partially offset by increased
depreciation and amortization related to Uptown Dallas.
Securities
commission expense decreased by $832,000 or 23% from $3.7 million in 2006 to
$2.9 million in 2007. This decrease is attributable to decreased capital-raising
activity through ASC during 2007 as discussed in “Revenues”
above.
Property
expense increased $514,000 or 10% in 2007 as compared to 2006 ($5.7 million
in
2007 versus $5.2 million in 2006). The increase is primarily as a result of
the
acquisitions of the properties discussed in “Revenues”
above. In addition, in the first quarter of 2006 we recorded a
reduction to property expense of $465,000 as a result of a favorable property
tax protest on one of our properties. This reduction was offset by a
corresponding reduction in rental from operating leases during the nine months
ended September 30, 2006.
Legal
and
professional expense increased $246,000, or 26%, from $942,000 in 2006 to $1.2
million in 2007. This increase is attributable to costs associated
with our accounting software conversion as well as an increase in legal, audit
and compliance costs.
Other
Interest
expense increased by $1.4 million, or 27%, from $5.1 million in 2006 to $6.5
million in 2007. The increase in interest expense is primarily
attributable to property acquisitions, as well as additional draw-downs on
our
line of credit related to the tender of the Class B shares.
Funds
From Operations
We
consider FFO to be an appropriate measure of the operating performance of an
equity REIT. NAREIT defines FFO as net income (loss) computed in
accordance with GAAP, excluding gains or losses from sales of property, plus
real estate related depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. In addition, NAREIT
recommends that extraordinary items not be considered in arriving at FFO. We
calculate our FFO in accordance with this definition. Most industry
analysts and equity REITs, including us, consider FFO to be an appropriate
supplemental measure of operating performance because, by excluding gains or
losses on dispositions and excluding depreciation, FFO is a helpful tool that
can assist in the comparison of the operating performance of a company’s real
estate between periods, or as compared to different
companies. Management uses FFO as a supplemental measure to conduct
and evaluate our business because there are certain limitations associated
with
using GAAP net income by itself as the primary measure of our operating
performance. Historical cost accounting for real estate assets in
accordance with GAAP implicitly assumes that the value of real estate assets
diminishes predictably over time. Since real estate values instead
have historically risen or fallen with market conditions, management believes
that the presentation of operating results for real estate companies that uses
historical cost accounting is insufficient by itself. There can be no
assurance that FFO presented by us is comparable to similarly titled measures
of
other REITs. FFO should not be considered as an alternative to net
income or other measurements under GAAP as an indicator of our operating
performance or to cash flows from operating, investing or financing activities
as a measure of liquidity.
Below
is
the calculation of FFO and the reconciliation to net income, which we believe
is
the most comparable GAAP financial measure to FFO, in thousands:
|
|
Quarter
|
|
|
Year
to date
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Income
- before discontinued operations
|
|
$ |
1,855
|
|
|
$ |
1,401
|
|
|
$ |
3,654
|
|
|
$ |
3,220
|
|
Income
(loss) - from discontinued operations
|
|
|
150
|
|
|
|
156
|
|
|
|
454
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus
depreciation of real estate assets - from operations
|
|
|
2,022
|
|
|
|
2,034
|
|
|
|
5,922
|
|
|
|
6,624
|
|
Plus
depreciation of real estate assets - from discontinued
operations
|
|
|
8
|
|
|
|
2
|
|
|
|
22
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
for nonconsolidated affiliates
|
|
|
66
|
|
|
|
42
|
|
|
|
102
|
|
|
|
111
|
|
Less
gain on sale of real estate assets acquired for investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(286 |
) |
Less
class B, C & D distributions
|
|
|
(2,693 |
) |
|
|
(2,909 |
) |
|
|
(8,109 |
) |
|
|
(8,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Funds From Operations available to class A shareholders
|
|
$ |
1,408
|
|
|
$ |
726
|
|
|
$ |
2,045
|
|
|
$ |
1,639
|
|
We
are
exposed to interest-rate changes primarily related to the variable interest
rate
on our credit facility and related to the refinancing of long-term debt which
currently contains fixed interest rates. Our interest
rate risk management objective is to limit the impact of interest rate changes
on earnings and cash flows and to lower our overall borrowing
costs. To achieve this objective, we borrow primarily at fixed
interest rates. We currently do not use interest-rate swaps or any
other derivative financial instruments as part of our interest-rate risk
management approach.
As
of
September 30, 2007, the carrying value of our debt obligations associated with
assets held for investment was $154.4 million, $138.4 million of which
represented fixed rate obligations with an estimated fair value of
$140.1 million. As of September 30, 2007, the carrying value of
our debt obligations associated with assets held for sale was
$12.9 million, all of which represented fixed rate obligations with an
estimated fair value of $13.2 million. The remaining $16.0
million of our debt obligations have a variable interest rate. Such
debt has market-based terms, and its carrying value is therefore representative
of its fair value as of September 30, 2007. In the event interest
rates were to increase 100 basis points, annual net income, FFO and future
cash
flows would decrease by $160,000 based on the variable-rate debt outstanding
at
September 30, 2007.
As
of
December 31, 2006, the carrying value of our total debt obligations was
$144.5 million, $132.5 million of which represented fixed-rate obligations
with an estimated fair value of $132.9 million.
The
discussion above considers only those exposures that exist as of September
30,
2007. It therefore does not consider any exposures or positions that
could arise after that date. As a result, the ultimate impact to us
of interest-rate fluctuations will depend upon the exposures that arise during
the period, any hedging strategies in place at that time and actual interest
rates.
Evaluation
of Disclosure Controls and Procedures
Under
the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, management has evaluated the effectiveness of the design
and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of September
30, 2007. Based on that evaluation, our CEO and CFO concluded that
our disclosure controls and procedures were effective as of September
30, 2007.
Changes
in Internal Controls
There
has
been no change to our internal control over financial reporting (as such term
is
defined in Rule 13a – 15(f) under the Securities Exchange Act of 1934) during
the quarter ended September 30, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
We
are
not a party to any material pending legal proceedings.
See
our
filing on Form 10-K for the year ended December 31, 2006, for a full discussion
of risk factors associated with ownership of our common shares. During the
quarter ended September 30, 2007, we had no material changes in these risk
factors.
None.
None.
None.
Not
applicable.
(a)
|
Exhibits |
|
|
|
31.1
Rule 13a-4 Certification of Chief Executive Officer |
|
|
|
31.2
Rule 13a-14 Certification of Chief Financial Officer |
|
|
|
32.1
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
Section 1350 Certification of Chief Financial Officer |
|
|
|
|
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Issuer has duly caused this report to be signed on its behalf on
the
9th day of November 2007 by the undersigned, thereunto duly
authorized.
AmREIT
/s/
H. Kerr
Taylor
H.
Kerr Taylor, President and Chief
Executive Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Issuer and in the
capacities and on the dates indicated.
/s/
H. Kerr
Taylor
H.
KERR TAYLOR
President,
Chairman of the Board, Chief Executive
Officer
and Director (Principal Executive Officer)
|
November
9, 2007
|
/s/
Robert S. Cartwright,
Jr.
ROBERT
S. CARTWRIGHT, JR., Trust Manager
|
|
/s/
G. Steven
Dawson
G.
STEVEN DAWSON, Trust Manager
|
|
/s/
Philip W.
Taggart
PHILIP
W. TAGGART, Trust Manager
|
|
/s/
H.L. Rush,
Jr.
H.L.
RUSH, JR., Trust Manager
|
|
/s/
Brett P.
Treadwell
BRETT
P. TREADWELL, Vice President – Finance
(Principal
Accounting Officer)
|
|