2007 1st Quarter Form 10Q
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 March 31, 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 May
9, 2007 there were 6,409,925 class A, 1,041,360 class B, 4,178,031 class
C and
11,100,407 class 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-17
|
|
|
F-18
|
|
|
F-19
|
|
|
F-19
|
|
|
F-19
|
2
|
|
1
-
7
|
3
|
|
8
|
4
|
|
8
|
|
|
|
|
PART
II
|
|
1
|
|
8
|
1A
|
|
8
|
2
|
|
8
|
3
|
|
8
|
4
|
|
8
|
5
|
|
9
|
6
|
|
9
|
Item
1.
Financial Statements
AmREIT
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March
31, 2007 and December 31, 2006
(in
thousands, except share data)
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Real
estate investments at cost:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
$
|
133,345
|
|
$
|
124,751
|
|
Buildings
|
|
|
|
|
|
140,360
|
|
|
140,487
|
|
Tenant
improvements
|
|
|
|
|
|
9,409
|
|
|
9,296
|
|
|
|
|
|
|
|
283,114
|
|
|
274,534
|
|
Less
accumulated depreciation and amortization
|
|
|
|
|
|
(11,871
|
)
|
|
(10,628
|
)
|
|
|
|
|
|
|
271,243
|
|
|
263,906
|
|
Net
investment in direct financing leases held for investment
|
|
|
|
|
|
19,200
|
|
|
19,204
|
|
Intangible
lease cost, net
|
|
|
|
|
|
15,278
|
|
|
16,016
|
|
Investment
in merchant development funds and other affiliates
|
|
|
|
|
|
2,564
|
|
|
2,651
|
|
Net
real estate investments
|
|
|
|
|
|
308,285
|
|
|
301,777
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
7,274
|
|
|
3,415
|
|
Tenant
receivables, net
|
|
|
|
|
|
4,480
|
|
|
4,330
|
|
Accounts
receivable, net
|
|
|
|
|
|
703
|
|
|
1,772
|
|
Accounts
receivable - related party
|
|
|
|
|
|
2,482
|
|
|
1,665
|
|
Notes
receivable - related party
|
|
|
|
|
|
11,269
|
|
|
10,104
|
|
Deferred
costs
|
|
|
|
|
|
2,247
|
|
|
2,045
|
|
Other
assets
|
|
|
|
|
|
2,841
|
|
|
3,322
|
|
TOTAL
ASSETS
|
|
|
|
|
$
|
339,581
|
|
$
|
328,430
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
|
|
$
|
161,914
|
|
$
|
144,453
|
|
Accounts
payable and other liabilities
|
|
|
|
|
|
4,850
|
|
|
9,162
|
|
Below
market leases, net
|
|
|
|
|
|
3,822
|
|
|
3,960
|
|
Security
deposits
|
|
|
|
|
|
678
|
|
|
668
|
|
TOTAL
LIABILITIES
|
|
|
|
|
|
171,264
|
|
|
158,243
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
|
|
|
1,153
|
|
|
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,
|
|
|
|
|
|
|
|
|
|
|
6,580,305
and 6,549,950 shares issued, respectively
|
|
|
|
|
|
66
|
|
|
65
|
|
Class
B Common shares, $.01 par value, 3,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
|
1,049,825
and 1,080,180 shares issued, respectively
|
|
|
|
|
|
10
|
|
|
11
|
|
Class
C Common shares, $.01 par value, 4,400,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
|
4,167,338
and 4,145,531 shares issued, respectively
|
|
|
|
|
|
42
|
|
|
41
|
|
Class
D Common shares, $.01 par value, 17,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
|
11,058,788
and 11,039,803 shares issued, respectively
|
|
|
|
|
|
111
|
|
|
110
|
|
Capital
in excess of par value
|
|
|
|
|
|
194,462
|
|
|
194,696
|
|
Accumulated
distributions in excess of earnings
|
|
|
|
|
|
(26,236
|
)
|
|
(23,749
|
)
|
Cost
of treasury shares, 177,984 and 292,238 Class A shares, respectively
|
|
|
|
|
|
(1,291
|
)
|
|
(2,124
|
)
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
167,164
|
|
|
169,050
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
$
|
339,581
|
|
$
|
328,430
|
|
See
Notes
to Consolidated Financial Statements
AmREIT
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months
ended March 31, 2007 and
2006
(in thousands, except per share data)
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
Rental
income from operating leases
|
|
$
|
7,082
|
|
$
|
5,973
|
|
Earned
income from direct financing leases
|
|
|
507
|
|
|
507
|
|
Real
estate fee income
|
|
|
694
|
|
|
751
|
|
Real
estate fee income - related party
|
|
|
713
|
|
|
767
|
|
Construction
revenues
|
|
|
97
|
|
|
621
|
|
Construction
revenues - related party
|
|
|
876
|
|
|
1,173
|
|
Securities
commission income - related party
|
|
|
993
|
|
|
1,391
|
|
Asset
management fee income - related party
|
|
|
284
|
|
|
158
|
|
Total
revenues
|
|
|
11,246
|
|
|
11,341
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,210
|
|
|
1,879
|
|
Property
expense
|
|
|
1,730
|
|
|
1,015
|
|
Construction
costs
|
|
|
861
|
|
|
1,675
|
|
Legal
and professional
|
|
|
295
|
|
|
312
|
|
Real
estate commissions
|
|
|
421
|
|
|
540
|
|
Securities
commissions
|
|
|
829
|
|
|
1,257
|
|
Depreciation
and amortization
|
|
|
1,941
|
|
|
2,182
|
|
Total
expenses
|
|
|
8,287
|
|
|
8,860
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
2,959
|
|
|
2,481
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
and other income - related party
|
|
|
244
|
|
|
235
|
|
(Loss)
income from merchant development funds and other affiliates
|
|
|
(12
|
)
|
|
98
|
|
Federal
income tax benefit for taxable REIT subsidiary
|
|
|
201
|
|
|
83
|
|
Interest
expense
|
|
|
(2,357
|
)
|
|
(1,743
|
)
|
Minority
interest in income of consolidated joint ventures
|
|
|
(36
|
)
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
Income
before discontinued operations
|
|
|
999
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of taxes
|
|
|
4
|
|
|
(30
|
)
|
Gain
on sales of real estate acquired for resale, net of taxes
|
|
|
-
|
|
|
5
|
|
Income
(loss) from discontinued operations
|
|
|
4
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,003
|
|
|
1,093
|
|
|
|
|
|
|
|
|
|
Distributions
paid to class B, C and D shareholders
|
|
|
(2,705
|
)
|
|
(2,906
|
)
|
|
|
|
|
|
|
|
|
Net
loss available to class A shareholders
|
|
$
|
(1,702
|
)
|
$
|
(1,813
|
)
|
|
|
|
|
|
|
|
|
Net
(loss) income per class A common share - basic and diluted
|
|
|
|
|
|
|
|
Loss
before discontinued operations
|
|
$
|
(0.27
|
)
|
$
|
(0.28
|
)
|
Income
from discontinued operations
|
|
|
0.00
|
|
|
0.00
|
|
Net
loss
|
|
$
|
(0.27
|
)
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
Weighted
average class A common shares used to
|
|
|
|
|
|
|
|
compute
net loss per share, basic and diluted
|
|
|
6,320
|
|
|
6,425
|
|
See
Notes to Consolidated Financial Statements
AmREIT
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
For
the three months ended March 31, 2007
(in
thousands, except share data)
(unaudited)
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Capital
in
|
|
distributions
|
|
|
|
|
|
|
|
Common
Shares
|
|
excess
of
|
|
in
excess of
|
|
Cost
of
|
|
|
|
|
|
Amount
|
|
par
value
|
|
earnings
|
|
Treasury
shares
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$
|
227
|
|
$
|
194,696
|
|
$
|
(23,749
|
)
|
$
|
(2,124
|
)
|
$
|
169,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
1,003
|
|
|
-
|
|
|
1,003
|
|
Deferred
compensation issuance of restricted shares, Class A
|
|
|
-
|
|
|
(747
|
)
|
|
-
|
|
|
833
|
|
|
86
|
|
Issuance
of common shares, Class A
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Repurchase
of common shares, Class B
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
Amortization
of deferred compensation
|
|
|
-
|
|
|
169
|
|
|
-
|
|
|
-
|
|
|
169
|
|
Issuance
of common shares, Class C
|
|
|
1
|
|
|
436
|
|
|
-
|
|
|
-
|
|
|
437
|
|
Retirement
of common shares, Class C
|
|
|
-
|
|
|
(220
|
)
|
|
-
|
|
|
-
|
|
|
(220
|
)
|
Issuance
of common shares, Class D
|
|
|
1
|
|
|
1,109
|
|
|
-
|
|
|
-
|
|
|
1,110
|
|
Retirement
of common shares, Class D
|
|
|
-
|
|
|
(981
|
)
|
|
-
|
|
|
-
|
|
|
(981
|
)
|
Distributions
|
|
|
-
|
|
|
-
|
|
|
(3,490
|
)
|
|
-
|
|
|
(3,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2007
|
|
$
|
229
|
|
$
|
194,462
|
|
$
|
(26,236
|
)
|
$
|
(1,291
|
)
|
$
|
167,164
|
|
See
Notes
of Consolidated Financial Statements
AmREIT
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands, except share data)
|
|
|
For
the three months ended March 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,003
|
|
$
|
1,093
|
|
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
|
|
|
1,398
|
|
|
1,146
|
|
Gain
on sales of real estate acquired for resale
|
|
|
-
|
|
|
(5
|
)
|
Income
(loss) from merchant development funds and other affiliates
|
|
|
12
|
|
|
(98
|
)
|
Depreciation
and amortization
|
|
|
1,928
|
|
|
2,186
|
|
Amortization
of deferred compensation
|
|
|
169
|
|
|
131
|
|
Minority
interest in income of consolidated joint ventures
|
|
|
41
|
|
|
36
|
|
Distributions
from merchant development funds and other affiliates
|
|
|
20
|
|
|
15
|
|
(Increase)
decrease in tenant receivables
|
|
|
(150
|
)
|
|
242
|
|
Decrease
in accounts receivable
|
|
|
1,069
|
|
|
59
|
|
(Increase)
decrease in accounts receivable - related party
|
|
|
(817
|
)
|
|
812
|
|
Cash
receipts from direct financing leases
|
|
|
|
|
|
|
|
more
than income recognized
|
|
|
4
|
|
|
2
|
|
Decrease
(increase) in other assets
|
|
|
468
|
|
|
(177
|
)
|
Increase
in accounts payable and other liabilities
|
|
|
(4,227
|
)
|
|
(3,826
|
)
|
Increase
in security deposits
|
|
|
10
|
|
|
56
|
|
Net
cash provided by operating activities
|
|
|
928
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Improvements
to real estate
|
|
|
(898
|
)
|
|
(676
|
)
|
Acquisition
of investment properties
|
|
|
(9,157
|
)
|
|
(23,967
|
)
|
Loans
to affiliates
|
|
|
(1,165
|
)
|
|
(1,460
|
)
|
Payments
from affiliates
|
|
|
-
|
|
|
4,535
|
|
Additions
to furniture, fixtures and equipment
|
|
|
(10
|
)
|
|
(63
|
)
|
Distributions
from merchant development funds and other affiliates
|
|
|
55
|
|
|
30
|
|
Proceeds
from sale of investment property
|
|
|
-
|
|
|
2,463
|
|
Increase
(decrease) in preacquisition costs
|
|
|
(21
|
)
|
|
10
|
|
Net
cash used in investing activities
|
|
|
(11,196
|
)
|
|
(19,128
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
52,257
|
|
|
25,889
|
|
Payments
of notes payable
|
|
|
(34,738
|
)
|
|
(7,247
|
)
|
Increase
in deferred costs
|
|
|
(223
|
)
|
|
-
|
|
Purchase
of treasury shares
|
|
|
-
|
|
|
(975
|
)
|
Retirement
of common shares
|
|
|
(1,201
|
)
|
|
(1,126
|
)
|
Issuance
costs
|
|
|
(2
|
)
|
|
(36
|
)
|
Distributions
|
|
|
(1,941
|
)
|
|
(2,097
|
)
|
Distributions
to minority interests
|
|
|
(25
|
)
|
|
(24
|
)
|
Net
cash provided by financing activities
|
|
|
14,127
|
|
|
14,384
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
3,859
|
|
|
(3,695
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
3,415
|
|
|
5,915
|
|
Cash
and cash equivalents, end of period
|
|
$
|
7,274
|
|
$
|
2,220
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,299
|
|
$
|
1,713
|
|
Income
taxes
|
|
|
-
|
|
|
909
|
|
Supplements
schedule of noncash investing and financing activities
During
2007 and 2006, we converted 30,000 and 35,000 B shares to A shares,
respectively. Additionally, during 2007 and 2006, we issued Class C and D
shares with a value of $1.6 million and $1.6 million, respectively, in
satisfaction of dividends through the dividend reinvestment
program.
In
2007,
we issued 117,000 restricted shares to employees and trust managers as
part of
their compensation arrangements. The restricted shares vest over a four
and three year periods, respectively. We recorded $1.0 million in deferred
compensation related to the issuance of the restricted shares.
In
2006,
we issued 89,000 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 $626,000 in deferred
compensation related to the issuance of the restricted shares.
See
Notes
to Consolidated Financial Statements
AmREIT
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007
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.
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 March 31, 2007:
· |
We
owned a real estate portfolio consisting of 49 properties located
in 15
states that had a book value of $340
million;
|
· |
We
directly managed, through our five actively managed merchant development
funds, a total of $131 million in contributed capital; and
|
· |
We
had over 1.2 million 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.
|
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.
We
recognize lease termination fees in the period that the lease is terminated
and
collection of the fees is reasonably assured.
During
the three
months ended March 31, 2007and 2006, we recognized lease termination fees
of $0 and $151 thousand, 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 March 31, 2007, $94,000
of
unbilled receivables has been included in “Accounts receivable” and $244,000 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 $47,000 and $44,000 as of March 31, 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 out to the unaffiliated
selling broker dealer and reflected as securities commission expense. There
has
been no change in the underlying operations of ASC - we will continue to raise
capital for AmREIT and affiliated entities as needed and as available on
cost-effective terms. ASC’s activities for 2007 to date have been limited to
capital-raising for our affiliated merchant development funds.
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 periods ended March 31, 2007 and March 31, 2006 we capitalized
$79,000 and $19,000, 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 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 March
31,
2007 and December 31, 2006, we did not have any properties that were classified
as real estate held for sale.
Our
properties generally have operations and cash flows that can be clearly
distinguished from the rest of the Company. The operations and gains on sales
reported in discontinued operations include those properties that have been
sold
or are held for sale and for which operations and cash flows 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 periods have been restated to reflect the operations of
these
properties as discontinued operations.
Impairment
-
Management reviews its properties for impairment whenever events or changes
in
circumstances indicate that the carrying amount of the assets, including accrued
rental income, may not be recoverable through operations. Management determines
whether an impairment in value 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 March 31, 2007 and December 31,
2006,
we had an allowance for uncollectible accounts of $136,000 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 March 31, 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 simply 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 (8.25% at
March 31, 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 March
31,
2007 and December 31, 2006 totaled $463,000 and $421,000, respectively.
Accumulated amortization related to deferred leasing costs as of March 31,
2007
and December 31, 2006 totaled $310,000 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 three months ended March 31,
2007.
|
|
Non-vested
|
|
Weighted
Average grant
|
|
Shares
|
|
|
|
|
|
date
fair value
|
|
Beginning
of period
|
|
|
355,599
|
|
$
|
7.31
|
|
Granted
|
|
|
117,622
|
|
|
8.52
|
|
Vested
|
|
|
(44,187
|
)
|
|
7.31
|
|
Forfeited
|
|
|
(13,479
|
)
|
|
7.16
|
|
End
of period
|
|
|
415,555
|
|
$
|
7.65
|
|
The
weighted-average grant date fair value of restricted shares issued during the
three
months ended March 31, 2007 and 2006 was $7.65 per share and $7.37 per share,
respectively. The total fair value of shares vested during the three months
ended March 31, 2007 and 2006 was $323,000 and $238,000 respectively. Total
compensation cost recognized related to restricted shares during the three
months ended March 31, 2007 and 2006 was $169,000 and $131,000, respectively.
As
of March 31, 2007, total unrecognized compensation cost related to restricted
shares was $2.6 million, and the weighted average period over which we expect
this cost to be recognized is 4.5 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 retail limited partnerships cannot be reasonably
predicted or estimated, and any employee benefit is contingent upon the benefit
received by the general partner of the retail limited partnerships, we recognize
expense associated with the assignment of economic interest in our retail
limited partnerships 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.
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 March 31, 2007 and December 31, 2006, none of
these options have been granted.
We
account for federal
and state income taxes under the asset and liability method.
Federal
- AmREIT
has elected to be taxed as a REIT under the Internal Revenue Code of 1986,
and
is, therefore, not subject to Federal income taxes to the extent of dividends
paid, provided it meets all conditions specified by the Internal Revenue Code
for retaining its REIT status, including the requirement that at least 90%
of
its real estate investment trust taxable income be distributed to shareholders.
AmREIT’s
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 an income tax provision of $45,000
for
the Texas Margin Tax for the quarter ended March 31, 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 20.5 million
and 25.7 million potential common shares for the three months ended March
31, 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 March 31, as
indicated:
|
|
Quarter
|
|
|
|
|
2007
|
|
|
2006
|
|
Loss
to class A common shareholders*
|
|
|
(1,702
|
)
|
|
($1,813
|
)
|
Weighted
average class A common shares outstanding*
|
|
|
6,320
|
|
|
6,425
|
|
Basic
and diluted loss per share
|
|
|
(0.27
|
)
|
|
($0.28
|
)
|
*
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
March
31,
2007, the carrying value of our total debt obligations was $161.9 million,
$152.1 million of which represented fixed rate obligations and had an
estimated fair value of $153.4 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.
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
March 31, 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 $4.7 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 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 material effect on our consolidated financial
statements.
In
September 2006, The
Financial Accounting Standards Board (“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
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 decided if we will choose 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 (in thousands, except
for
per share data):
|
|
Quarter
|
|
|
|
|
2007
|
|
|
2006
|
|
Rental
revenue and earned income from DFL
|
|
$
|
24
|
|
$
|
28
|
|
Gain
on sale of real estate held for investment
|
|
|
-
|
|
|
(7
|
)
|
Gain
on sale of real estate held for resale
|
|
|
-
|
|
|
5
|
|
Total
revenues
|
|
|
24
|
|
|
26
|
|
Property
expense
|
|
|
-
|
|
|
(12
|
)
|
Other
general and administrative
|
|
|
(1
|
)
|
|
(15
|
)
|
Federal
income tax expense
|
|
|
(4
|
)
|
|
-
|
|
Legal
and professional
|
|
|
(1
|
)
|
|
(8
|
)
|
Depreciation
and amortization
|
|
|
(3
|
)
|
|
(10
|
)
|
Minority
interest
|
|
|
(6
|
)
|
|
-
|
|
Interest
expense
|
|
|
(5
|
)
|
|
(6
|
)
|
Total
expenses
|
|
|
(20
|
)
|
|
(51
|
)
|
Income
(loss) from discontinued operations
|
|
|
4
|
|
|
(25
|
)
|
Basic
and diluted income from discontinued operations
|
|
|
|
|
|
|
|
per
class A common share
|
|
$
|
0.00
|
|
$
|
0.00
|
|
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.
3.
INVESTMENTS IN MERCHANT DEVELOPMENT FUNDS
Merchant
Development Funds
As
of
March 31, 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 six 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 of AmREIT, 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 of 2002, and, as of March 31, 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, 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.
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, 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.
AmREIT
Monthly Income & Growth Fund IV (“MIG IV”)
- AmREIT
Monthly Income & Growth IV Corporation, 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 March 31, 2007,
had
raised approximately $10.1 million. We expect our limited partnership interest
at completion of the offering to be between 0.8% and 1.6%.
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):
Merchant
|
Capital
|
|
|
|
|
|
|
Development
|
under
|
LP
|
GP
|
Scheduled
|
Sharing
Ratios*
|
LP
|
Fund
|
Mgmt.
|
Interest
|
Interest
|
Liquidation
|
LP
|
GP
|
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
|
$10.1
million
|
7.9%
|
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. Thereafter, the LPs share in 90% of the cash distributions
until they receive a 10% preferred return.
4.
ACQUIRED LEASE INTANGIBLES
In
accordance with SFAS 141, we have identified and recorded the value of
intangibles at the property acquisition date. Such intangibles include
the value
of in-place leases and out-of-market leases. These assets are amortized
over the
leases’ remaining terms.
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 $631,000 and $900,000
during
the three months ended March 31, 2007 and March 31, 2006, respectively.
The
amortization of above-market leases, which was recorded as a reduction
of rental
income, was $107,000 and $134,000 during the three months ended March 31,
2007
and March 31, 2006, respectively.
In-place
and above-market lease amounts and their respective accumulated amortization
are
as follows (in thousands):
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
|
In-Place
leases
|
|
|
Above-market
leases
|
|
|
In-Place
leases
|
|
|
Above-market
leases
|
|
Cost
|
|
$
|
19,345
|
|
$
|
2,146
|
|
$
|
19,408
|
|
$
|
2,146
|
|
Accumulated
amortization
|
|
|
(5,297
|
)
|
|
(916
|
)
|
|
(4,728
|
)
|
|
(810
|
)
|
Intangible
lease cost, net
|
|
$
|
14,048
|
|
$
|
1,230
|
|
$
|
14,680
|
|
$
|
1,336
|
|
Acquired
lease intangible liabilities (below-market leases) of $5.0 million as of
March
31, 2007 and December 31, 2006, are net of previously accreted minimum rent
of
$1.2 million and $1.1 million at March 31, 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 $137,000 and $116,000 during the three months
ended March 31, 2007 and March 31, 2006, respectively.
5.
NOTES PAYABLE
Our
outstanding debt at March 31, 2007 and December 31, 2006 consists of the
following (in thousands):
|
|
March
31, 2007
|
|
|
|
December
31, 2006
|
|
|
|
Fixed
rate mortgage loans
|
|
$
|
152,059
|
|
|
|
|
$
|
132,524
|
|
Variable-rate
unsecured line of credit
|
|
|
9,855
|
|
|
|
|
|
11,929
|
|
Total
Notes Payable
|
|
$
|
161,914
|
|
|
|
|
$
|
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 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 March 31, 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 March 31,
2007,
the interest rate was LIBOR plus 1.55%. As of March 31, 2007, there was
a
balance outstanding of $9.9 million under the Credit Facility. We have
approximately $28.1 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.
As
of March 31, 2007, the weighted average interest rate on our
fixed-rate debt was 5.97%, and the weighted average remaining life of such
debt
was 7.3 years. We added fixed-rate debt of $19.9 million during the three
months ended March 31, 2007. We added fixed-rate debt of $20.0 million during
2006.
As
of
March 31, 2007, scheduled principal repayments on notes payable and the Credit
Facility were as follows (in thousands):
Scheduled
Payments by Year
|
|
Scheduled
Principal Payments
|
|
Term-Loan
Maturities
|
|
Total
Payments
|
|
2007
(includes Credit Facility)
|
|
$
|
950
|
|
|
9,855
|
|
|
10,805
|
|
2008
|
|
|
1,349
|
|
|
13,410
|
|
|
14,759
|
|
2009
|
|
|
1,449
|
|
|
-
|
|
|
1,449
|
|
2010
|
|
|
1,555
|
|
|
-
|
|
|
1,555
|
|
2011
|
|
|
1,607
|
|
|
3,075
|
|
|
4,682
|
|
Beyond
five years
|
|
|
3,663
|
|
|
124,185
|
|
|
127,848
|
|
Unamortized
debt premiums
|
|
|
-
|
|
|
816
|
|
|
816
|
|
Total
|
|
$
|
10,573
|
|
$
|
151,341
|
|
$
|
161,914
|
|
As
of
March 31, 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 58% of our rental income for the three months ended
March
31, 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 three month periods
ended
March 31 ($ in thousands):
|
|
Quarter
|
|
Tenant
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Kroger
|
|
$
|
585
|
|
$
|
570
|
|
IHOP
Corporation
|
|
|
562
|
|
|
562
|
|
Landry’s
|
|
|
261
|
|
|
128
|
|
CVS/Pharmacy
|
|
|
242
|
|
|
247
|
|
Hard
Rock Café International
|
|
|
178
|
|
|
153
|
|
Cosniac
Restaurant Group
|
|
|
154
|
|
|
126
|
|
Champps
Entertainment, Inc.
|
|
|
138
|
|
|
140
|
|
Starbucks
|
|
|
135
|
|
|
112
|
|
Linens
‘N Things
|
|
|
120
|
|
|
116
|
|
McCormick
& Schmicks
|
|
|
117
|
|
|
116
|
|
|
|
$
|
2,492
|
|
$
|
2,270
|
|
7.
SHAREHOLDERS’ EQUITY AND MINORITY INTEREST
Class A
Common Shares—
Our
class A common shares are listed on the American Stock Exchange (“AMEX”) and
traded under the symbol “AMY.” As of March 31, 2007, there were 6,580,305 of our
class A common shares outstanding, net of 177,984 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 stock. 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. As of March 31, 2007, there were 1,049,825
of our
class B common shares outstanding. In December 2006, we completed a tender
offer
for approximately 48% of our class B common shares. We repurchased 998,000
shares at $9.25 per share for a total purchase price of $9.2 million.
Class C
Common Shares—
The
class C common shares are not listed on an exchange and there is currently
no
available trading market for the class C common shares. The class C common
shares have voting rights, together with all classes of common shares,
as one
class of stock. The class C common shares were issued at $10.00 per share.
They
receive a fixed 7.0% 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. After three years
and
beginning in August 2006, subject to the issuance date of the respective
shares, 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 March 31, 2007, there were
4,167,338 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 stock. 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 March 31, 2007, there were 11,058,788 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.
8. RELATED
PARTY TRANSACTIONS
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. We own 100% of the stock of the companies that serve
as the
general partner for the funds. Real estate fee income of $713,000
and $767,000 was paid by our merchant development funds to us for the three
months ended March 31, 2007 and March 31, 2006, respectively. Additionally,
construction revenues of $876,000 and $1.2 million were earned from the
merchant
development funds during 2007 and 2006, respectively. The Company earns
asset
management fees from the funds for providing accounting related services,
investor relations, facilitating the deployment of capital, and other services
provided in conjunction with operating the fund. Asset management fees
of
$284,000 and $158,000 were paid by the funds to us for the three months
ended
March 31, 2007 and March 31, 2006, respectively.
As
a
sponsor of real estate investment opportunities to the NASD financial planning
broker-dealer community, we maintain an 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 this has happened, 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.
On
March 20, 2002, we
formed
AAA CTL Notes, Ltd. (“AAA”), a majority-owned subsidiary which is consolidated
in our financial statements, through which we purchased 15 IHOP leasehold
estate
properties and two IHOP fee simple properties.
9.
REAL ESTATE ACQUISITIONS AND DISPOSITIONS
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 quarter ended March 31,
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.
Additionally,
during the quarter ended March 31, 2006, we sold two properties which were
recorded as real estate held for sale at December 31, 2005. These sales
generated aggregate proceeds of $3.6 million which approximated the properties’
carrying values.
10.
COMMITMENTS
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 three months
ended
March 31, 2007 and 2006 was $70,000 and $61,000, respectively.
11.
SEGMENT REPORTING
The
operating segments presented are the segments of AmREIT for which separate
financial information is available, and revenue and operating performance
is
evaluated regularly by senior management in deciding how to allocate resources
and in assessing performance.
The
portfolio segment consists of our portfolio of single and multi-tenant
shopping
center projects. This segment consists of 49
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 three months ended March 31, 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 Business
|
|
|
|
|
|
For
the three months ended March 31, 2007
|
|
Portfolio
|
|
Real
Estate Development & Operations
|
|
Securities
Operations
|
|
Merchant
Development Funds
|
|
Eliminations
|
|
Total
|
|
Rental
income
|
|
$
|
7,589
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
7,589
|
|
Securities
commission income
|
|
|
-
|
|
|
-
|
|
|
993
|
|
|
-
|
|
|
-
|
|
|
993
|
|
Real
estate fee income
|
|
|
-
|
|
|
1,407
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,407
|
|
Construction
revenues
|
|
|
-
|
|
|
973
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
973
|
|
Asset
management fee income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
284
|
|
|
-
|
|
|
284
|
|
Total
revenues
|
|
|
7,589
|
|
|
2,380
|
|
|
993
|
|
|
284
|
|
|
-
|
|
|
11,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
435
|
|
|
1,223
|
|
|
486
|
|
|
66
|
|
|
-
|
|
|
2,210
|
|
Property
expense
|
|
|
1,694
|
|
|
36
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,730
|
|
Construction
costs
|
|
|
-
|
|
|
861
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
861
|
|
Legal
and professional
|
|
|
198
|
|
|
87
|
|
|
10
|
|
|
-
|
|
|
-
|
|
|
295
|
|
Real
estate commissions
|
|
|
-
|
|
|
421
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
421
|
|
Securities
commissions
|
|
|
-
|
|
|
-
|
|
|
829
|
|
|
-
|
|
|
-
|
|
|
829
|
|
Depreciation
and amortization
|
|
|
1,941
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,941
|
|
Total
expenses
|
|
|
4,268
|
|
|
2,628
|
|
|
1,325
|
|
|
66
|
|
|
-
|
|
|
8,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,229
|
)
|
|
(125
|
)
|
|
(3
|
)
|
|
-
|
|
|
-
|
|
|
(2,357
|
)
|
Other
income/(expense)
|
|
|
217
|
|
|
163
|
|
|
114
|
|
|
(97
|
)
|
|
-
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,309
|
|
$
|
(206
|
)
|
$
|
(221
|
)
|
$
|
121
|
|
$
|
-
|
|
$
|
1,003
|
|
|
|
|
|
|
|
Asset
Advisory Business
|
|
|
|
|
|
For
the three months ended
March
31, 2006
|
|
Portfolio
|
|
Real
Estate Development & Operations
|
|
Securities
Operations
|
|
Merchant
Development Funds
|
|
Eliminations
|
|
Total
|
|
Rental
income
|
|
$
|
6,480
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,480
|
|
Securities
commission income
|
|
|
-
|
|
|
-
|
|
|
1,391
|
|
|
-
|
|
|
-
|
|
|
1,391
|
|
Real
estate fee income
|
|
|
-
|
|
|
1,518
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,518
|
|
Construction
revenues
|
|
|
-
|
|
|
1,794
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,794
|
|
Asset
management fee income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
158
|
|
|
-
|
|
|
158
|
|
Total
revenues
|
|
|
6,480
|
|
|
3,312
|
|
|
1,391
|
|
|
158
|
|
|
-
|
|
|
11,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
372
|
|
|
1,001
|
|
|
489
|
|
|
17
|
|
|
-
|
|
|
1,879
|
|
Property
expense
|
|
|
1,004
|
|
|
11
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,015
|
|
Construction
costs
|
|
|
-
|
|
|
1,675
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,675
|
|
Legal
and professional
|
|
|
242
|
|
|
60
|
|
|
10
|
|
|
-
|
|
|
-
|
|
|
312
|
|
Real
estate commissions
|
|
|
-
|
|
|
540
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
540
|
|
Securities
commissions
|
|
|
-
|
|
|
-
|
|
|
1,257
|
|
|
-
|
|
|
-
|
|
|
1,257
|
|
Depreciation
and amortization
|
|
|
2,182
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,182
|
|
Total
expenses
|
|
|
3,800
|
|
|
3,287
|
|
|
1,756
|
|
|
17
|
|
|
-
|
|
|
8,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,579
|
)
|
|
(161
|
)
|
|
(3
|
)
|
|
-
|
|
|
-
|
|
|
(1,743
|
)
|
Other
income/ (expense)
|
|
|
309
|
|
|
58
|
|
|
(10
|
)
|
|
23
|
|
|
-
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
(27
|
)
|
|
2
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,383
|
|
$
|
(76
|
)
|
$
|
(378
|
)
|
$
|
164
|
|
$
|
-
|
|
$
|
1,093
|
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
FORWARD-LOOKING
STATEMENTS
Certain
information presented in this Form 10-Q constitutes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in such forward-looking statements
are
based upon reasonable assumptions, the Company’s actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference include the following: changes
in
general economic conditions, changes in real estate market conditions, continued
availability of proceeds from the Company’s debt or equity capital, the ability
of the Company to locate suitable tenants for its properties, the ability
of
tenants to make payments under their respective leases, timing of acquisitions,
development starts and sales of properties and the ability to meet development
schedules.
The
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 March 31, 2007:
· |
We
owned a real estate portfolio consisting of 49 properties located
in 15
states that had a book value of $340
million;
|
· |
We
directly managed, through our five actively managed merchant development
funds, a total of $131 million in contributed capital; and
|
· |
We
had over 1.2 million 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
March 31, 2007, we owned a real estate portfolio consisting of 49 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 March
31,
2007, 94% of our outstanding debt had a long-term fixed interest rate with
an
average term of 7.3 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.
Management
reviews its properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets, including
accrued
rental income, may not be recoverable through operations. Management
determines
whether an impairment in value occurred by comparing the estimated future
cash
flows (undiscounted and without interest charges), including the residual
value
of the property, with the carrying value of the individual property.
If
impairment is indicated, a loss will be recorded for the amount by which
the
carrying value of the asset exceeds its fair value.
Valuation
of Receivables—
An
allowance for the uncollectible portion of 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
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 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
Financial Accounting Standards Board (“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 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 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
March
31, 2007 and December 31, 2006, our cash and cash equivalents totaled
$7.3 million and $3.4 million, respectively. Cash flows provided by
(used in) operating activities, investing activities and financing activities
for the three months ended March 31, are as follows (in thousands):
|
|
2007
|
|
2006
|
|
Operating
activities
|
|
$
|
928
|
|
$
|
1,049
|
|
Investing
activities
|
|
$
|
(11,196
|
)
|
$
|
(19,128
|
)
|
Financing
activities
|
|
$
|
14,127
|
|
$
|
14,384
|
|
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.
We have
executed this strategy over the last couple of years 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 $121,000 for the 2007 period when compared to the
2006
period. This net decrease is primarily attributable to a $811,000 decrease
in
working capital cash flow during the first quarter of 2007. This decrease
was
driven primarily by a $1.0 million increase in accounts receivable caused
primarily by a difference in timing between when we provided certain real
estate
services to our merchant development funds and our receipt of payment for
those
services. This decrease was partially offset by an $875,000 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 $523,000 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 $19.1
million
in 2006 to a net investing outflow of $11.2 million in 2007. This
$7.9 million decrease is primarily attributable to a $14.8 million decrease
in property acquisitions during 2007 which was partially offset by a $4.2
million net decrease in loan payments from affiliates during 2006 and by
a $2.5
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 loan 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
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 $3.6 million.
Cash
flows provided by financing activities decreased from $14.4 million during
the 2006 period to $14.1 million during the 2007 period. This $300,000
decrease was the net result of several factors, the most significant of
which
were (1) a $975,000 reduction in share repurchase activity under our share
repurchase program which was substantially offset by (2) a reduction of
$1.1
million in net proceeds from notes payable during 2007. We did not repurchase
any of our Class A common shares during the 2007 period.
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 and provides that we may borrow up to $40 million subject
to
the value of unencumbered assets. Effective November 2005, we renewed our
credit
facility on terms and conditions substantially the same as the previous
facility. 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 March 31, 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
March 31, 2007, the interest rate was LIBOR plus 1.55%. As of March 31,
2007
there was $9.9 million outstanding on the credit facility, respectively.
As of
March 31, 2007, we have approximately $28.1 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.
During
the three months ended March 31, 2007, we paid dividends to our shareholders
of
$3.5 million, compared with $3.7 million in the three months ended March
31,
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2007 to the three months ended March
31,
2006
Total
revenues decreased by $95,000 or 1% in 2007 as compared to 2006 ($11.2
million
in 2007 versus $11.3 million in 2006). Rental revenues increased by $1.1
million, or 17%, 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 three months ended March 31,
2006.
AmREIT
Construction Company (“ACC”) generated revenues of $973,000 during 2007,
compared to $1.8 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 third party work. ACC has elected to
shift its
focus from performing work for third parties to performing work primarily
for
properties owned by our merchant development funds.
Securities
commission revenue decreased by $398,000 or 29% 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 first quarter, we raised
$8.6
million in capital for one of our merchant development funds, AmREIT Monthly
Income and Growth Fund IV, L.P. (MIG IV). 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 $573,000, or 6%, from $8.9 million in 2006
to
$8.3 million in 2007. This decrease was primarily attributable to decreases
in
construction costs, securities commissions and depreciation and amortization,
which were offset by increases in property expense and general and
administrative expenses.
ACC
recognized $861,000 in construction costs during 2007, compared to $1.7
million
in 2006. This reduction in construction costs is consistent with the reduction
in revenues described above.
Securities
commission expense decreased by $428,000 or 34% from $1.3 million in 2006
to
$829,000 in 2007. This decrease is attributable to decreased capital-raising
activity through ASC during 2007 as discussed in “Revenues”
above.
Depreciation
and amortization decreased by $241,000, or 11%, to $1.9 million in 2007
compared
to $2.2 million in 2006. The decrease in depreciation and amortization
is
attributable to a number of leases that expired after the first quarter
of 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.
Property
expense increased $715,000 or 70% in 2007 as compared to 2006 ($1.7 million
in
2007 versus $1.0 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 three months ended March 31, 2006.
General
and administrative expense increased by $331,000, or 18%, during 2007 to
$2.2
million compared to $1.9 million in 2006. This increase is primarily due
to
increases in personnel. We increased our total number of employees during
2006
and have continued to do so thus far in 2007 in order to appropriately
match our
resources with the growth in our portfolio as well as in our real estate
operating and development activities.
Other
Interest
expense increased by $614,000, or 35%, from $1.7 million in 2006 to $2.4
million
in 2007. The increase in interest expense is primarily attributable to
property
acquisitions, as well as 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:
|
|
2007
|
|
2006
|
|
Income
- before discontinued operations
|
|
$
|
999
|
|
$
|
1,118
|
|
Income
(loss) - from discontinued operations
|
|
|
4
|
|
|
(25
|
)
|
Plus
depreciation of real estate assets - from operations
|
|
|
1,940
|
|
|
2,164
|
|
Plus
depreciation of real estate assets - from discontinued
operations
|
|
|
3 |
|
|
10
|
|
Adjustments
for nonconsolidated affiliates
|
|
|
17
|
|
|
30
|
|
Less
class B, C & D distributions
|
|
|
(2,705
|
)
|
|
(2,906
|
)
|
Total
Funds From Operations available to class A shareholders
|
|
$ |
258
|
|
$ |
391
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
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. To achieve these objectives, we
borrow
primarily at fixed interest rates. We currently do not use interest-rate
swaps
or any other derivative financial instruments as part of our interest-rate
risk
management approach.
At
March
31, 2007, the carrying value of our total debt obligations was $161.9 million,
$152.1 million of which represented fixed-rate obligations with an estimated
fair value of $153.4 million. The remaining $9.9 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 March
31,
2007. In the event interest rates were to increase 100 basis points, annual
net
income, FFO and future cash flows would decrease by $99,000 based on the
variable-rate debt outstanding at March 31, 2007.
The
discussion above considers only those exposures that exist as of March
31, 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.
Item
4. Controls and Procedures
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 March
31,
2007. Based on that evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were effective as of March 31, 2007.
Changes
in Internal Controls
There
has
been no change to our internal control over financial reporting during
the
quarter ended March 31, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Part
II - OTHER INFORMATION
Item
1. Legal Proceedings.
We
are
not a party to any material pending legal proceedings.
Item
1A. Risk Factors.
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 March 31, 2007, we had no material changes in these risk
factors.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security
Holders.
None.
Item
5. Other Information.
Not
applicable.
Item
6. Exhibits.
*31.1 |
Rule
13a-4 Certification of Chief Executive
Officer
|
*31.2
*32.1
*32.2
|
Rule
13a-14 Certification of Chief Financial Officer
Section
1350 Certification of Chief Executive Officer
Section
1350 Certification of Chief Financial
Officer
|
Filed
herewith
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
14 of May 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 May 14, 2007
H.
KERR
TAYLOR
President,
Chairman of the Board, Chief Executive
Officer
and Director (Principal Executive Officer)
/s/
Robert S. Cartwright, Jr. May 14, 2007
ROBERT
S.
CARTWRIGHT, JR., Trust Manager
/s/
G.
Steven Dawson May 14, 2007
G.
STEVEN
DAWSON, Trust Manager
/s/
Philip W. Taggart May 14, 2007
PHILIP
W.
TAGGART, Trust Manager
/s/
Brett P. Treadwell May 14, 2007
BRETT
P.
TREADWELL, Vice President - Finance
(Principal
Accounting Officer)