AMREIT
Supplement No. One, Dated December 23, 2003
To Prospectus, Dated August 12, 2003
This Supplement is part of, and should be read in conjunction with,
the Prospectus dated August 12, 2003. Capitalized terms used in this
Supplement have the same meanings as in the Prospectus unless otherwise stated
herein.
Information as to proposed properties for which AmREIT has entered
into initial commitments to acquire and as to the number and types of
properties acquired by AmREIT is presented as of December 11, 2003 and all
references to commitments or property acquisitions should be read in that
context. Proposed properties for which AmREIT enters into initial commitments
to acquire, as well as property acquisitions that occur after December 11,
2003, will be reported in a subsequent Supplement.
RECENT DEVELOPMENTS
On November 17, 2003, AmREIT acquired San Felipe @ Winrock, a 2.0 acre
tract of land located at the intersection of San Felipe and Winrock in the
prestigious Tanglewood residential community in Houston, Texas. Situated on the
property are 63 multifamily apartment units that are 50% occupied. All tenants
are required to fully vacate the premise no later than December 31, 2003.
Demolition and abatement of the apartment units is anticipated to begin
January 15, 2004. Approximately 1.0 acre has been leased under a 20-year ground
lease to Bank of America. The property was purchased for $4,555,000 in cash.
Additionally, a $130,680 escrow was established for demolition and abatement,
with any demolition and abatement costs is excess of that amount to be paid by
the seller. Construction of the Bank of America branch is anticipated to begin
during the first quarter of 2004.
The Bank of America ground lease, which encompasses approximately 45,000
square feet, is a 20-year lease and includes multiple 5-year extension options.
The ground lease is anticipated to commence on October 15, 2004, upon
construction completion, and initial annual rental payments will be $214,000.
AmREIT is currently marketing the remaining 1.0 acre to a number of tenants
including other banks and financial institutions as well as multiple drug store
and general retail operators.
On December 11, 2003, AmREIT acquired Uptown Plaza, consisting of a
12,000 square foot CVS pharmacy and a 16,000 square foot shopping center,
anchored by The Grotto, a Landry's restaurant concept. This property, which
was constructed in 2002, is located at the intersection of Loop 610 and
Westheimer in Houston, Texas. This intersection is one of the most visible,
highest traffic count intersections in Houston. The property was acquired for
$13 million in cash.
The CVS has a 22-year lease expiring in August 2025 and currently provides
for annual rental payments of $546,600. CVS occupies approximately 12,000
square feet in a free standing building on the direct corner of Loop 610 and
Westheimer. The Grotto has a 10-year lease expiring in September 2012 and
1
currently provides for annual rental payments of $310,000. The Grotto occupies
approximately 8,000 square feet on the southeast corner of the shopping center.
IS Images, a women's clothing boutique, has a five-year lease expiring in March
2008. IS Images occupies approximately 1,600 square feet of the shopping
center. Nextel, a leading cellular and wireless company, has a seven-year lease
expiring in March 2009. Nextel occupies approximately 1,600 square feet of the
shopping center. There is approximately 4,800 square feet of vacant space that
is being marketed for lease. Each lease contains various provisions for lease
extensions, ranging from three to five years each, at the then prevalent market
rental rate.
Neither AmREIT nor any of its affiliates received any compensation or
fees as a result of the acquisition of this property.
On 12/19/03 AmREIT purchased Terrace Shops, a 16,395 square foot
shopping center anchored by Starbucks Coffee. The purchase price for this
property is $4,800,000, which will be payable $2,000,000 in cash and the
assumption of a $2,800,000 loan held by Lehman Brothers. The loan is a
non-recourse permanent loan which is secured by the property. The loan bears
a fixed interest rate of 7.58% with a 10 year term and a 30 year debt
amortization schedule. The center is located at the intersection of Westpark
and Buffalo Speedway in Houston, Texas. This intersection is the gateway to
the affluent West University residential community and within close proximity
to the Texas Medical Center and Greenway Plaza business district. The table
below summarizes the tenants and their respective lease terms:
Tenant Square Footage Lease Term Expiration Annual Rent
Starbucks Coffee 2,039 Ten Years February 2011 $ 59,131
Style Boutique 1,465 Five Years January 2007 $ 32,963
LeBon Cleaners 1,728 Ten Years June 2010 $ 44,928
Q Designer Nails 1,425 Five Years May 2005 $ 39,900
Sports Clips 1,443 Five Years August 2005 $ 36,537
Copy Dr. 2,979 Five Years June 2005 $ 78,944
Grand Panda 4,099 Ten Years August 2011 $106,574
Vacant 1,217 -- -- --
2
On October 10, 2003, our board of trust managers declared a quarterly
distribution of $.175 per share per class C common share, payable in equal
monthly installments of $.0583 on October 31, 2003, November 28, 2003, and
December 31, 2003 to shareholders of record on October 20, 2003, November 20,
2003 and December 19, 2003, respectively.
THE OFFERING
As of November 30, 2003, AmREIT had received subscriptions from this
offering for approximately 885,485 class C common shares, totaling $8,854,850
in gross proceeds. Of this amount, AmREIT has paid $929,760 to AmREIT
Securities Company, the dealer manager of this offering, pursuant to the terms
of the dealer manager agreement between AmREIT and AmREIT
Securities Company. Additionally, AmREIT Securities Company has paid out
approximately $708,000 in commissions to other non-affiliated NASD broker
dealer firms. As of November 30, 2003, AmREIT had issued 5,442 class C common
shares pursuant to the Reinvestment Plan relating to this offering.
SUMMARY OF THE OFFERING
Prior Offering Summary
The following paragraph updates and replaces the paragraph on page 9
of the Prospectus.
AmREIT's affiliates have previously sponsored three publicly offered and
12 privately placed real estate limited partnerships, all of which were on an
unspecified property or "blind pool" basis. As of September 30, 2003, AmREIT
and its affiliates have raised approximately $82 million from 3,260 investors.
The disclosure under the caption "Prior Performance" on page 43 of the
Prospectus contains a discussion of the AmREIT program sponsored to date.
RISK FACTORS
Risks Associated with an Investment in AmREIT
AmREIT may increase its leverage without shareholder approval.
The following paragraph updates and replaces the second paragraph
under this caption on page 13 of the Prospectus.
On September 30, 2003, AmREIT had outstanding debt totaling $38.3
million of which $19.2 million was unsecured. This debt represents
approximately 47% of AmREIT's total assets.
AmREIT depends on a few major tenants.
The following sentence updates and replaces the fourth sentence under
this caption on page 14 of the Prospectus.
3
IHOP, Corp. and Footstar, Inc. accounted for 32% and 13%, respectively,
of AmREIT's total rental revenues for the year ended December 31, 2002 and
35.09% and 9.69%, respectively for the nine months ended September 30, 2003.
With the acquisition of Uptown Plaza, IHOP, Corp. and Footstar, Inc.
are anticipated to account for approximately 29.91% and 8.77%, respectively,
of AmREIT's total rental revenue as of December 31, 2003.
Anticipated Borrowing Creates Risks.
The following sentence updates and replaces the third sentence under
this caption on page 20 of the Prospectus.
We currently have a revolving line of credit in an aggregate amount of
up to $30 million to provide financing for the acquisition of assets, of which
$15 million was outstanding as of September 30, 2003.
4
BUSINESS AND PROPERTIES
General
The following sentence updates and replaces the last sentence of the
first paragraph under this caption on page 30 of the Prospectus.
As of September 30, 2003, AmREIT has outstanding 2,812,502 million
class A common shares, listed on the American Stock Exchange (AMEX: AMY),
2,384,002 million class B common shares, that are not listed on an exchange,
which may be converted into class A common shares on a one-for-one basis at
any time at the holder's option, and 339,455 class C common shares.
The following sentences update and replace the third, fourth and
fifth sentences of the fourth paragraph under this caption on page 30 of the
Prospectus.
Through a wholly-owned subsidiary, we also provide advisory services
to twelve real estate limited partnerships. As of September 30, 2003, AmREIT
and its affiliated investment funds owned 63 properties (50 properties owned
directly by AmREIT or a majority-controlled subsidiary and 13 properties owned
through affiliated-invested funds). AmREIT currently has 2,900 shareholders
and 800 partners in the limited partnerships.
Properties
Description.
The following sentence updates and replaces the fifth sentence in the
first paragraph under this caption on page 31 of the Prospectus.
Information concerning the properties owned solely by AmREIT as of
September 30, 2003, is presented in the following table:
AMREIT WHOLLY-OWNED PROPERTY INFORMATION
CURRENT LEASE
DATE PURCHASE LEASEABLE ANNUAL EXPIRATION
PROPERTY (LOCATION) ACQUIRED PRICE AREA RENT DATE
------------------- -------- -------- --------- ------- ----------
Radio Shack
(Dallas, Texas)......... 06/15/94 $1,062,000 5,200 $108,900 11/30/06
Wherehouse Entertainment
(Independence, MO) ..... 11/14/94 1,550,000 14,047 187,655 04/30/04
Copperfield Medical Plaza
(Houston, TX) .......... 07/01/95 1,680,000 14,000 201,072 04/30/07
Wherehouse Entertainment
(Wichita, KS) .......... 09/12/95 1,700,000 15,158 206,833 12/31/04
FootStar, Inc.
(Tucson, AZ) ........... 09/11/96 3,351,000 19,550 419,026 09/30/16
Washington Mutual
(The Woodlands, TX) .... 09/23/96 500,000 3,685 59,461 09/30/11
5
CURRENT LEASE
DATE PURCHASE LEASEABLE ANNUAL EXPIRATION
PROPERTY (LOCATION) ACQUIRED PRICE AREA RENT DATE
------------------- -------- -------- --------- ------- ----------
Washington Mutual
(Houston, TX) .......... 12/11/96 828,000 3,685 97,861 12/31/11
FootStar, Inc.
(Baton Rouge, LA) ...... 06/09/97 2,806,000 20,575 300,539 05/15/12
Hollywood Video
(Lafayette, LA) ........ 10/31/97 1,124,000 7,488 134,709 09/24/12
Hollywood Video
(Ridgeland, MS) ........ 12/30/97 1,208,000 7,488 138,453 12/22/12
OfficeMax
(Dover, DE) ............ 04/14/98 2,548,000 23,500 264,679 04/30/13
Woodlands Plaza
(The Woodlands, TX)..... 06/03/98 3,542,000 16,922 (1) (1)
Sugar Land Plaza
(Sugar Land, TX) ....... 07/01/98 3,635,000 16,922 330,875 07/01/13
Dardin
(Peachtree City, GA) ... 12/18/98 738,000 Land Lease 75,000 12/17/08
IHOP, Corp.
(Sugarland, TX) ........ 9/30/99 1,608,000 4,020 165,180 9/30/24
IHOP, Corp.
(Topeka, KS) ............ 9/30/99 1,335,000 4,020 137,340 9/30/24
Foodmaker
(Dallas, TX) ............ 7/23/02 (2) 715,100 2,238 68,998 7/11/09
Baptist Memorial Health
(Memphis, TN)............ 7/23/02 (2) 2,079,200 15,000 204,375 8/31/07
Payless Shoes
(Austin, TX)............. 7/23/02 (2) 698,300 4,000 82,000 1/30/08
Golden Corral
(Houston, TX)............ 7/23/02 (2) 1,811,800 12,000 182,994 11/30/07
Golden Corral
(Houston, TX)............ 7/23/02 (2) 1,843,400 12,000 181,688 3/14/08
TGI Friday's
(Houston, TX)............ 7/23/02 (2) 2,036,900 8,500 180,500 1/30/08
Goodyear Tire
(Houston, TX)............ 7/23/02 (2) 535,900 5,209 51,756 3/31/09
Guitar Center
(Minneapolis, MN)........ 7/23/02 (2) 2,541,700 15,000 246,750 8/31/09
AFC, Inc. (Popeye's
Chicken) (Atlanta, GA)... 7/23/02 (2) 1,113,900 2,583 105,563 7/19/14
Memorial Herman Hospital
(Houston, TX)............ 7/23/02 (2) 1,816,800 15,000 171,360 1/31/09
Blockbuster Video
(Oklahoma City, OK)...... 7/23/02 (2) 973,800 15,000 92,610 8/31/05
Pier One
(Longmont, CO)........... 7/23/02 (2) 1,423,600 8,014 135,560 2/29/08
IHOP. Corp.
(Grand Prairie, TX) 4/15/03 1,940,400 4,020 174,332 4/14/28
6
CURRENT LEASE
DATE PURCHASE LEASEABLE ANNUAL EXPIRATION
PROPERTY (LOCATION) ACQUIRED PRICE AREA RENT DATE
------------------- -------- -------- --------- ------- ----------
IHOP. Corp.
(Bridgeton, MO) 4/15/03 1,846,800 4,020 182,593 4/14/28
IHOP. Corp.
(Merriville, IN) 4/15/03 1,665,900 4,020 157,106 4/14/28
TGI Friday's
(Hanover, MD) 9/16/03 1,474,700 8,500 134,962 9/30/13
----------- ------- ----------
TOTAL ..................... $53,733,200 311,364 $5,180,730
(1) Due to the bankruptcy of Just For Feet, this property is being remodeled
to accommodate multiple tenants with approximately 70% of the property
currently leased.
(2) These properties were acquired as part of the merger of the affiliated
partnerships (Funds IX, X and XI) on July 23, 2002. The
purchase price reflects the pro-rata portion of the negotiated price
allocated to the properties that AmREIT paid the partnerships, in
common shares.
The following paragraphs are inserted following the first paragraph on
page 33 of the Prospectus.
Recent Acquisitions and Dispositions.
On November 17, 2003, AmREIT acquired San Felipe @ Winrock, a 2.0 acre
tract of land located at the intersection of San Felipe and Winrock in the
prestigious Tanglewood residential community in Houston, Texas. Situated on the
property are 63 multifamily apartment units that are 50% occupied. All tenants
are required to fully vacate the premise no later than December 31, 2003.
Demolition and abatement of the apartment units is anticipated to begin
January 15, 2004. Approximately 1.0 acre has been leased under a 20-year ground
lease to Bank of America. The property was purchased for $4,555,000 in cash.
Additionally, a $130,680 escrow was established for demolition and abatement,
with any demolition and abatement costs is excess of that amount to be paid by
the seller. Construction of the Bank of America branch is anticipated to begin
during the first quarter of 2004.
The Bank of America ground lease, which encompasses approximately 45,000
square feet, is a 20-year lease and includes multiple 5-year extension options.
The ground lease is anticipated to commence on October 15, 2004, upon
construction completion, and initial annual rental payments will be $214,000.
AmREIT is currently marketing the remaining 1.0 acre to a number of tenants
including other banks and financial institutions as well as multiple drug store
and general retail operators.
On December 11, 2003, AmREIT acquired Uptown Plaza, consisting of a
12,000 square foot CVS pharmacy and a 16,000 square foot shopping center,
anchored by The Grotto, a Landry's restaurant concept. This property, which
was constructed in 2002, is located at the intersection of Loop 610 and
Westheimer in Houston, Texas. This intersection is one of the most visible,
highest traffic count intersections in Houston. The property was acquired for
$13 million in cash.
7
The CVS has a 22-year lease expiring in August 2025 and currently provides
for annual rental payments of $546,600. CVS occupies approximately 12,000
square feet in a free standing building on the direct corner of Loop 610 and
Westheimer. The Grotto has a 10-year lease expiring in September 2012 and
currently provides for annual rental payments of $310,000. The Grotto occupies
approximately 8,000 square feet on the southeast corner of the shopping center.
IS Images, a women's clothing boutique, has a five-year lease expiring in March
2008. IS Images occupies approximately 1,600 square feet of the shopping
center. Nextel, a leading cellular and wireless company, has a seven-year lease
expiring in March 2009. Nextel occupies approximately 1,600 square feet of the
shopping center. There is approximately 4,800 square feet of vacant space that
is being marketed for lease. Each lease contains various provisions for lease
extensions, ranging from three to five years each, at the then prevalent market
rental rate.
AmREIT has contracted to purchase Terrace Shops, a 16,395 square foot
shopping center anchored by Starbucks Coffee. This acquisition, which is
expected to close on or about December 19, 2003, is subject to a number of
closing conditions, including common area maintenance agreements and
reconfiguration of parking lot to allow for additional parking
spaces. The purchase price for this property is $4,800,000, which will be
payable $2,000,000 in cash and the assumption of a $2,800,000 loan held by
Lehman Brothers. The loan is a non- recourse permanent loan which is secured by
the property. The loan bears a fixed interest rate of 7.58% with a 10 year term
and a 30 year debt amortization schedule. The center is located at the
intersection of Westpark and Buffalo Speedway in Houston, Texas. This
intersection is the gateway to the affluent West University residential
community and within close proximity to the Texas Medical Center and Greenway
Plaza business district. The table below summarizes the tenants and their
respective lease terms:
Tenant Square Footage Lease Term Expiration Annual Rent
Starbucks Coffee 2,039 Ten Years February 2011 $ 59,131
Style Boutique 1,465 Five Years January 2007 $ 32,963
LeBon Cleaners 1,728 Ten Years June 2010 $ 44,928
Q Designer Nails 1,425 Five Years May 2005 $ 39,900
Sports Clips 1,443 Five Years August 2005 $ 36,537
Copy Dr. 2,979 Five Years June 2005 $ 78,944
Grand Panda 4,099 Ten Years August 2011 $106,574
Vacant 1,217 -- -- --
8
In August AmREIT Fidelity Corporation, a wholly owned subsidiary of
AmREIT, sold an IHOP property located in Milwaukee, Wisconsin. The property was
purchased in April 2003 and has a net book value of approximately $1,780,000.
In August 2003 the property was sold for approximately $2,017,000 net of all
closing and financing costs, resulting in a net profit to AmREIT Fidelity
Corporation of approximately $237,000.
In December 2003, AmREIT sold an OfficeMax property located in Dover,
Delaware. The property was purchased in April 1998 by AmREIT and has a net book
value of approximately $2,570,000. In December 2003, the property was sold for
approximately $3,112,000 net of all closing and financing costs, resulting in a
net profit to AmREIT of approximately $542,000
AmREIT has contracted to sell a Goodyear Tire Store property located in
Houston, Texas during January, 2004. The property was purchased in March 1994
and has a net book value of approximately $523,000. Estimated sales proceeds
net of all closing and financing costs are anticipated to be $525,000,
including a $135,000 lease buyout by Goodyear, resulting in a net profit
to AmREIT of approximately $2,000.
AmREIT Fidelity Corporation has contracted to sell an IHOP property
located in Merriville, Indiana during December 2003. The property was purchased
in April 2003 and has a net book value of approximately $1,666,000. Estimated
sales proceeds net of all closing and financing costs are anticipated to be
$2,154,000, resulting in a net profit to AmREIT of approximately $488,000.
Closing of this sale is subject to customary closing conditions.
Renovation and Improvements.
The following sentence updates and replaces the penultimate sentence
of the paragraph under this caption on page 33 of the Prospectus.
Through September 30, 2003, approximately $147,000 thousand had been
spent on renovation.
Significant Tenants.
The following sentence updates and replaces the first paragraph under
this caption on page 35 of the Prospectus.
IHOP, Corp. and Footstar, Inc. individually accounted for 32% and 13%,
respectively, of AmREIT's total rental revenues for the year ended December
31, 2002 and 35% and 10% for the nine months ended September 30, 2003.
Following the acquisition of Uptown Plaza, IHOP, Corp. and Footstar,
Inc. are expected to individually account for approximately 29% and 9%,
respectively, of AmREIT's total rental revenues as of December 31, 2003.
PRICE RANGE OF CLASS A COMMON SHARES
The following sentence updates and replaces the first sentence under
this caption on page 56 of the Prospectus.
As of November 30, 2003, there were approximately 807 record holders
of 2,832,733 class A common shares, net of 104,567 shares held in treasury.
9
The following sentences update and replace the Third Quarter
presentation under "2003" in the table appearing under this caption on page 56
of the Prospectus.
High Low Dividend
Third Quarter.......................... $6.55 $6.15 $0.1120
Fourth Quarter (through
December 1,2003)................... $6.57 $6.30 $0.0758
SELECTED HISTORICAL FINANCIAL DATA
The following sentence updates and replaces the third sentence in the
first paragraph under this caption on page 58 of the Prospectus.
The selected historical operating balance sheet and cash flow data for
AmREIT for the nine months ended September 30, 2003 and 2002 are derived from
AmREIT's unaudited financial statements and include, in management's opinion,
all adjustments necessary to present fairly the data for such periods.
The following table updates and replaces the table under this caption
on pages 59 and 60 of the Prospectus.
10
AmREIT
Selected Historical
Consolidated Financial and Other Data
December 31, December 31, December 31, December 31,
2002 2001 2000 1999
Balance sheet data (at end of period)
Total Property ................................... $47,979,848 $ 30,726,025 $ 31,622,098 $31,136,268
Accumulated depreciation ......................... (2,136,376) (2,066,067) (1,601,758) (1,148,503)
Total Property Held For Sale...................... - - - -
Cash and cash equivalents ........................ 2,506,868 227,117 935,867 1,118,746
Total assets ..................................... 73,975,753 38,828,393 36,522,276 37,018,186
Notes payable .................................... 33,586,085 16,971,549 15,472,183 15,480,378
Total liabilities ................................ 34,958,534 18,399,279 16,063,221 16,048,366
Minority interest ................................ 810,971 5,075,333 5,130,337 5,180,546
Shareholders' equity ............................. 38,206,248 15,353,781 15,328,718 15,789,274
Fully diluted class A common shares issued ....... 5,236,547 2,384,117 2,384,117 2,384,117
Treasury shares .................................. 65,379 39,323 11,373 11,373
Other data
Cash flows provided by (used in):
Operating .................... 3,729,090 1,625,417 676,430 469,700
Investing .................... (15,268,195) (2,332,891) (25,720) (2,439,262)
Financing .................... 13,818,856 (1,276) (833,589) 3,039,788
Net increase (decrease) in cash and cash
equivalents ...................................... 2,279,751 (708,750) (182,879) 1,070,226
Funds from operations (1) ........................ 6,000 978,565 222,767 1,605,091
Adjusted funds from operations (2) ............... 1,910,370 978,565 222,767 1,605,091
Book value per share ............................. 13.78 6.44 6.43 6.62
"Un-Audited"
December 31, September 30, September 30,
1998 2003 2002
Balance sheet data (at end of period)
Total Property ................................... $ 29,574,366 $ 48,581,530 $51,505,614
Accumulated depreciation ......................... (696,384) (2,731,637) (2,198,836)
Total Property Held For Sale...................... - 8,850,670 -
Cash and cash equivalents ........................ 48,520 1,348,385 751,019
Total assets ..................................... 33,137,546 80,771,842 74,225,487
Notes payable .................................... 10,580,110 38,308,124 33,634,770
Total liabilities ................................ 10,796,439 39,697,066 34,530,636
Minority interest ................................ 5,218,999 821,380 629,845
Shareholders' equity ............................. 17,122,108 40,253,396 39,065,006
Fully diluted class A common shares issued ....... 2,384,117 2,917,924 2,702,242
Treasury shares .................................. 11,373 105,422 19,471
Other data
Cash flows provided by (used in):
Operating .................... 1,510,069 (1,435,112) 2,616,765
Investing .................... (7,687,454) (4,517,354) (17,434,888)
Financing .................... 4,824,165 4,793,983 15,342,025
Net increase (decrease) in cash and cash
equivalents ...................................... (1,353,220) (1,158,483) 523,902
Funds from operations (1) ........................ 1,436,063 2,408,000 (463,000)
Adjusted funds from operations (2) ............... 1,436,063 2,408,000 1,441,000
Book value per share ............................. 7.18 13.80 14.46
(1) AmREIT has adopted the National Association of Real Estate Investment
Trusts (NAREIT) definition of FFO. FFO is calculated as net income
(computed in accordance with generally accepted accounting principles)
excluding gains or losses from sales of depreciable operating property,
depreciation and amortization of real estate assets, and excluding results
defined as "extraordinary items" under generally accepted accounting
principles. FFO should not be considered an alternative to cash flows from
operating, investing and financing activities in accordance with general
accepted accounting principles and is not necessarily indicative of cash
available to meet cash needs. AmREIT's computation of FFO may differ from
the methodology for calculating FFO utilized by other equity REITs and,
therefore, may not be comparable to such other REITS. FFO is not defined
by generally accepted accounting principles and should not be considered
an alternative to net income as an indication of AmREIT's performance, or
of cash flows as a measure of liquidity. Please see the reconciliation of
Net Income to FFO on page 15.
(2) Based on the adherence to the NAREIT definition of FFO, we have not added
back the $1.90 million charge to earnings in the third quarter of 2002
resulting from shares issued to Mr. Taylor as deferred merger cost
stemming from the sale of his advisory company to AmREIT in June 1998.
Adding this $1.90 million charge back to earnings would result in Adjusted
FFO of $1.91 million.
11
AmREIT
Selected Historical
Consolidated Financial and Other Data (3)
December 31, December 31, December 31, December 31,
2002 2001 2000 1999
(revised)(3) (revised)(3) (revised)(3) (revised)(3)
Operating Data
Revenues:
Rental income and earned income from DFL ................$ 5,193,147 $ 3,009,330 $ 2,848,850 $ 3,373,374
Interest income ......................................... 4,206 10,555 31,630 199,448
Service fee, other income, and gain and loss
on sale of property...................................... 2,691,260 2,650,113 793,268 754,059
___________ ____________ ____________ ___________
Total revenues ...................... 7,888,613 5,669,998 3,673,748 4,326,881
Expenses:
General operating, administrative, legal and
professional ............................................ 4,134,134 2,956,061 1,688,799 1,290,433
Reimbursements and fees to realted party................. - - - -
Interest ................................................ 1,774,973 1,063,574 1,339,622 1,134,919
Depreciation and amortization ........................... 611,084 413,583 403,181 444,072
Merger related acquisition costs ........................ - - - 262,495
Bad debts ............................................... - - - 189,490
Merger costs ............................................ - - - -
Deferred merger costs.................................... 1,904,370 - - -
Potential acquisition costs ............................. - - 153,236 743,001
__________ ____________ ____________ ___________
Total expense ....................... 8,424,561 4,433,218 3,584,838 4,064,410
Income (loss) before federal income taxes and minority
interest in net income of consolidated joint ventures ...... (535,948) 1,236,780 88,910 262,471
Federal income tax expense ................................. 60,656 144,420 - -
Minority interest in net income of consolidated joint
ventures ................................................... (308,010) (527,571) (527,121) (526,052)
___________ ____________ ____________ ___________
Income from continuing operations........................... (904,614) 564,789 (438,211) (263,581)
Income from discontinued operations (3)..................... 245,841 225,719 225,719 225,719
___________ ____________ ____________ ___________
Net income (loss) .......................................... (658,773) $ 790,508 $ (212,492) $ (37,862)
Less distributions to class B & C shareholders.............. (865,293) - - -
___________ ____________ ____________ ___________
Net income (loss) available to class A shareholders......... (1,524,066) 790,508 (212,492) (37,862)
Basic and diluted income (loss) from continuing operations
per share.................................................$ (0.72) $ 0.24 $ (0.18) $ (0.11)
Net income (loss) per common share - basic and diluted...... (0.62) $ 0.34 $ (0.09) $ (0.02)
Distributions per share - class A ..........................$ 0.34 $ 0.26 $ 0.10 $ 0.55
Weighted average number of Series A common shares
outstanding ................................................ 2,469,725 2,354,572 2,373,060 2,372,744
Weighted average number of common shares plus dilutive
potential common shares .................................... 2,469,725 2,354,572 2,373,060 2,372,744
"Un-Audited"
December 31, September 30, September 30,
1998 2003 2002
(revised)(3)
Operating Data
Revenues:
Rental income and earned income from DFL ................$ 2,544,964 $ 5,526,601 $ 3,482,685
Interest income ......................................... 98,692 5,289 2,595
Service fee, other income, and gain and loss
on sale of property...................................... 187,577 2,522,994 1,948,405
___________ ___________ __________
Total revenues ...................... 2,831,233 8,054,884 5,433,685
Expenses:
General operating, administrative, legal and
professional ............................................ 562,110 4,004,549 2,589,697
Reimbursements and fees to realted party................. 40,607 - -
Interest ................................................ 402,707 1,743,535 1,183,345
Depreciation and amortization ........................... 388,278 617,946 454,356
Merger related acquisition costs ........................ - - -
Bad debts ............................................... - - -
Merger costs ............................................ 2,427,658 - -
Deferred merger costs.................................... - - 1,904,370
Potential acquisition costs ............................. 464,303 - -
___________ ___________ __________
Total expense ....................... 4,285,663 6,366,030 6,131,768
Income (loss) before federal income taxes and minority
interest in net income of consolidated joint ventures ...... (1,454,430) 1,688,854 (698,083)
Federal income tax expense ................................. - - 90,000
Minority interest in net income of consolidated joint
ventures ................................................... (518,559) (128,790) (307,284)
___________ ___________ _________
Income from continuing operations........................... (1,972,989) 1,560,064 (1,095,367)
Income from discontinued operations (3)..................... 167,203 205,917 168,943
___________ ___________ _________
Net income (loss) ..........................................$ (1,805,786) $ 1,765,981 $ (926,424)
Less distributions to class B & C shareholders.............. - (1,349,010) (423,732)
___________ ___________ _________
Net income (loss) available to class A shareholders......... (1,805,786) 416,971 (1,350,156)
Basic and diluted income (loss) from continuing operations
per share................................................. (0.89) 0.08 (0.64)
Net income (loss) per common share - basic and diluted...... (0.81) 0.15 (0.57)
Distributions per share - class A ..........................$ 0.71 $ 0.33 $ 0.24
Weighted average number of Series A common shares
outstanding ................................................ 2,226,403 2,788,303 2,376,569
Weighted average number of common shares plus dilutive
potential common shares .................................... 2,226,403 2,788,303 2,376,569
(3) In accordance with Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" issued by
the Financial Accounting Standards Board, the consolidated statement of
operations have been revised from those originally reported for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998 to reflect separately
the results of discontinued operations for properties held for sale during
the nine months ended September 30, 2003. The revision had no impact on
the consolidated balance sheet data, statements of shareholders'
equity or statements of cash flows. The revisions had no impact on net
earnings or net earnings per share for the years ended December 31, 2002,
2001, 2000, 1999 and 1998.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following sentence updates and replaces the first sentence of the
second paragraph under this caption on page 61 of the Prospectus.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Form 10-KSB for the fiscal year ended December 31, 2002 and Form 10-QSB for the
fiscal quarter ended September 30, 2003 and the selected financial data
appearing elsewhere in this Prospectus.
The following sentence updates and replaces the first sentence of the
third paragraph under this caption on page 61 of the Prospectus.
AmREIT, a Texas real estate investment trust, is listed on the
American Stock Exchange (AMY), owns a portfolio of 50 properties, 27 tenants
located in 20 states, and a sponsor of high quality real estate investment
opportunities to the financial planning community.
Liquidity and Capital Resources
The following paragraphs update and replace the second, third and
fourth paragraphs under this caption on pages 61-62 of the Prospectus.
Comparison of the Three Months Ended September 30, 2003 to September
30, 2002:
Net cash provided by operating activities increased $505 thousand for
the three months ended September 30, 2003 when compared with the three months
ended September 30, 2002. The increase in cash provided by operating activities
was due primarily to the following: (1) a $2.05 million increase in proceeds
from the sale of real estate acquired for resale, from $0 in 2002 to $2.05
million in 2003; (2) net income increased $2.03 million, from a $1.37 million
loss in 2002 to net income of $659 thousand in 2003. The increase in net income
is primarily due to a non-cash charge of $1.9 million, representing deferred
merger costs that were incurred in 2002, therefore, the transaction has no net
effect on the cash flow; (3) accounts payable increased by $297 thousand in
2003, compared to a $135 thousand increase in 2002. The above increases in cash
are offset by the following: (1) accounts receivable increased by $88 thousand
in 2003, compared to a $1.079 million decrease in 2002; (2) other assets
decreased $200 thousand in 2003, compared to a $106 thousand increase in 2002.
Net cash used in investing activities decreased $6.07 million for the
three month period ended September 30, 2003 when compared to the three month
period ended September 30, 2002. The decrease in cash used in investing
activities was primarily due to a $6.75 million decrease in cash used for
acquisitions of investment properties, from $8.22 million in 2002 to $1.47
million in 2003. This decrease in cash used is offset by a decrease in
proceeds from the sale of investment properties of $1.1 million, from $1.1
million in 2002 to $0 in 2003.
Net cash used in financing activities increased $6.31 million for the
three month period ended September 30, 2003 compared to the three month
period ended September 30, 2002. The increase was primarily due to a $5.99
million decrease in proceeds from notes payable, from $7.89 million in
2002 to $1.9 million in 2003. This increase in cash is offset by a $3.15
million increase in payments of notes payable, from $1.44 million in 2002
to $4.59 million in 2003.
13
In August 2003 the Company began selling class C common shares. The
offering is a $44 million offering, issued on a best efforts basis through the
independent financial broker dealer community. The Company will primarily use
the proceeds for the acquisition of new properties and pay down existing debt.
At September 30, 2003, the Company had issued approximately 339 thousand
shares, representing approximately $3.4 in proceeds from selling class C
shares.
Comparison of the Nine Months Ended September 30, 2003 to September
30, 2002:
Net cash used in operating activities increased $4.05 million for the
nine months ended September 30, 2003 when compared to the nine months ended
September 30, 2002. The increase in cash used in operating activities was
primarily due to the following: (1) investment in real estate acquired for
sale increased $7.23 million, from $0 in 2002 to $7.23 million in 2003; (2)
accounts receivable increased by $280 thousand in 2003, compared to a $1.72
million decrease in 2002. The above increases in cash used are offset by the
following: (1) a $2.69 million increase in net income, from a loss of $926
thousand in 2002 to net income of $1.76 million in 2003. The increase in net
income is primarily due to a non-cash charge of $1.9 million, representing
deferred merger costs that were incurred in 2002, therefore, the transaction
has no net effect on the cash flow; (2) an increase in proceeds from the sale
of real estate acquired for resale of $3.95 million, from $0 in 2002 to $3.95
million in 2003; (3) a decrease in accounts payable of $6 thousand in 2003,
compared to a decrease of $654 thousand in 2002.
Net cash used in investing activities decreased $12.92 million for the
nine months ended September 30, 2003 when compared to the nine months ended
September 30, 2002. The decrease in cash used was primarily due to a decrease
in acquisitions of investment properties of $13.87 million, from $18.03
million in 2002 to $4.16 million in 2003. This decrease in cash used is offset
by a $1.1 million decrease in proceeds from the sale of investment properties,
from $1.1 million in 2002 to $0 in 2003.
Net cash provided by financing activities decreased $10.55 million for
the nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002. The decrease was primarily due to the following components:
(1) a decrease in proceeds from notes payable of $6.22 million, from $17.38
million in 2002 to $11.16 in 2003; (2) an increase in payments of notes payable
of $4.96 million; (3) an increase in common dividends paid of $1.26 million,
from $1.01 million in 2002 to $2.27 million in 2003; (4) a decrease in
contributions from minority interests of $621 thousand; (5) an increase in the
purchase of treasury shares of $591 thousand. The above decreases in cash are
offset by a $3.40 million increase in the issuance of common shares.
The following paragraphs update and replace the eleventh, twelfth,
thirteenth, and fourteenth paragraphs under this caption on pages 63-64 of the
Prospectus.
In September 2003, the Company renewed its unsecured credit facility
(the "Credit Facility"), which is being used to provide funds for the
acquisition of properties and working capital. Under the Credit Facility, which
has a term of one year, the Company may borrow up to $20 million subject to the
value of unencumbered assets. The Credit Facility contains covenants which,
among other restrictions, require the Company to maintain a minimum net worth,
a maximum leverage ratio, specified interest coverage and fixed charge coverage
ratios and allow the lender to approve all distributions. At September 30,
2003, the Company was in compliance with all applicable financial covenants.
The Credit Facility's annual interest rate varies depending upon leverage, from
LIBOR plus a spread of 1.4% to LIBOR plus 2.35%. As of September 30, 2003, the
interest rate was LIBOR plus 2.0%. As of September 30, 2003, $15.0 million was
outstanding under the Credit Facility. Thus the Company has approximately $5.0
million available under its line of credit, subject to lender approval on the
use of the proceeds.
14
As of September 30, 2003, the Company owned 50 properties directly
and, since its inception, had invested $79 million, exclusive of any minority
interests, including certain acquisition expenses related to the Company's
investment in these properties. These expenditures resulted in a corresponding
decrease in the Company's liquidity.
Until properties are acquired by the Company, cash is held in
short-term, highly liquid investments that the Company believes to have
appropriate safety of principal. This investment strategy has allowed, and
continues to allow, high liquidity to facilitate the Company's use of these
funds to acquire properties at such time as properties suitable for acquisition
are located. At September 30, 2003 and 2002, the Company's cash and cash
equivalents totaled $1.348 million and $751 thousand respectively.
The Company paid aggregate cash dividends to the holders of its class
A, class B and class C common shares, for the three months ended of September
30, 2003 and 2002 of $765 thousand and $681 thousand, respectively.
Funds From Operations
The following sentences update and replace the third sentence of the
first paragraph under this caption on page 64 of the Prospectus.
Funds from operations (FFO) increased $2.013 million to $874 thousand
for the three months ended September 30, 2003 from $(1.139) million for the
three months ended September 30, 2002. For the nine month period ended
September 30, 2003 FFO increased $2.871 million, from $(463) thousand in 2002
to $2.408 million in 2003.
The following tables updates and replaces the second and fourth table
on page 65 of the Prospectus, which reconciles net income to funds from
operations and presents cash flows from operating activities, investing
activities and financing activities.
Below is the reconciliation of net income to funds from operations in
thousands for the three and nine months ended September 30:
Quarter Year to Date
2003 2002 2003 2002
-------------------------------------------------
----
Net income (loss) $ 659 $ (1,370) $ 1,766 $ (926)
Depreciation and amortization:
Continuing operations 215 216 612 422
Discontinued operations - 15 30 41
Total funds from operations * $ 874 $ (1,139) $ 2,408 $ (463)
-----------------------------------------------------
Cash distributions paid to class A, B
and C shareholders $ 765 $ 681 $ 2,275 $ 1,012
FFO in excess of (less than) distributions* $ 109 $ (1,820) $ 133 $(1,475)
* Based on adherence to the NAREIT definition of FFO, we did not add back the
$1.904 million charge to earnings in the third quarter 2002 resulting from
shares issued to Mr. Taylor, president of the Company. Adding this $1.904
million charge to earnings back to earnings would result in adjusted funds from
15
operations of $765 thousand for the three months ended September 30, 2002 and
$1.441 million for the nine months ended September 30, 2002, respectively.
Adding the charge to earnings would also result in dividends paid being less
than adjusted FFO of $84 thousand for the three months ended September 30, 2002
and $429 thousand for the nine months ended September 30, 2002.
Cash flows provided by (used in) operating activities, investing
activities, and financing activities for the three and nine months ended
September 30 are presented below in thousands:
Quarter Year to Date
2003 2002 2003 2002
--------------------------------------------------------
Operating activities $ 2,655 $ 2,150 $(1,435) $ 2,617
Investing activities $ (1,420) $(7,495) $(4,517) $(17,435)
Financing activities $ (623) $ 5,683 $ 4,794 $ 15,342
Results of Operations
The following paragraphs update and replace the first two paragraphs
under this caption on page 66 of the Prospectus.
Comparison of the Three Months Ended September 30, 2003 to September
30, 2002.
During the three months ended September 30, 2003 and September 30,
2002, the Company earned $1.9 million and $1.6 million, respectively, in
rental income from operating leases and earned income from direct financing
leases. Additional property purchases resulted in the increased income from
rents and earned income from direct financing leases. Service fee income
increased $219 thousand, from $726 thousand in 2002 to $945 thousand in 2003.
The increase in service fee income was primarily due to an increase in
commission income from an increase in equity raised in our real estate
investment sponsorship activities. Gain on sale of real estate acquired for
resale increased $275 thousand, from a loss of $37 thousand in 2002 to a $238
thousand gain in 2003. The gain recorded in 2003 is related to the sale of an
IHOP property in Milwaukee, WI.
During the three months ended September 30, 2003 and September 30,
2002, the Company's expenses were $2.5 million and $3.7 million, respectively.
The $1.2 million decrease in expenses is primarily attributable to a
non-recurring charge in 2002 of $1.9 million, which was a deferred payment of
merger related expenses. This decrease in expense was partially offset by the
following increases: (1) an increase in general operating and administrative
expense of $221 thousand, from $649 thousand in 2002 to $870 thousand in 2003,
which was primarily attributable to an increase in salary expense due to
additional positions; and (2) an increase in legal and professional fees of
$500 thousand, from $365 thousand in 2002 to $865 thousand in 2003, which was
primarily due to an increase in commissions paid to third party security
brokerage companies.
Comparison of the Nine Months Ended September 30, 2003 to September
30, 2002.
During the nine months ended September 30, 2003 and September 30,
2002, the Company earned $5.5 million and $3.5 million, respectively, in
rental income from operating leases and earned income from direct financing
leases. Additional property purchases as well as the merged properties from
the three affiliated partnerships resulted in the increased income from rents
and earned income from direct financing leases. Service fee income increased
16
$539 thousand, from $1.466 million in 2002 to $2.004 million in 2003. The
increase is primarily due to an increase in commission income, which is
partially offset by a decrease in advisory fee income. Gain on sale of real
estate acquired for resale increased $275 thousand, from a loss of $37
thousand in 2002 to a $238 gain in 2003. The gain recorded in 2003 is related
to the sale of an IHOP property in Milwaukee, WI.
During the nine months ended September 30, 2003 and September 30,
2002, the Company's expenses were $6.37 million and $6.13 million,
respectively. The $234 thousand increase in expenses is primarily due to (1) an
increase in legal and professional fees of $902 thousand, from $695 thousand in
2002 to $1.6 million in 2003. The increase in legal and professional fees is
primarily attributable to increased commission expense paid to third party
security brokerage companies; (2) an increase in interest expense of $560
thousand, from $1.2 million in 2002 to $1.7 million in 2003. The increase in
interest expense is due to additional debt used to finance the acquisition of
additional properties; (3) an increase in general operating and administrative
expenses of $513 thousand, from $1.9 million in 2002 to $2.4 million in 2003,
which is due to an increase in salary expense due to additional positions.
These increases in expense are offset by a decrease in deferred merger costs
of $1.9 million, which is attributable to the deferred payment of merger
related expenses that was expensed in 2002.
DESCRIPTION OF AMREIT'S CAPITAL SHARES
General
The following sentence updates and replaces the second sentence under
this caption on page 83 of the Prospectus.
As of November 30, 2003, AmREIT had outstanding 2,832,733 class A
common shares, 2,364,770 class B common shares, 887,885 class C common shares
and no preferred shares.
EXPERTS
General
The following paragraph updates and replaces the first paragraph under
this caption on page 115 of the Prospectus.
The consolidated financial statements and schedule of AmREIT, Inc. and
subsidiaries as of and for the year ending December 31, 2002, and the
historical summary of gross income and direct operating expenses of 610
Westheimer-2000 for the period from September 29, 2002 (commencement of
operations) to December 31, 2002 have been included herein in reliance upon
the reports of KPMG LLP, independent accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
17
AMREIT AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
FINANCIAL STATEMENTS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2003 AND 2002:
Consolidated Balance Sheet as of September 30,2003 (unaudited).............................................. 20
Consolidated Statements of Operations for the three and nine months
ended September 30,2003 and 2002 (unaudited)............................................................. 21
Consolidated Statements of Cash Flows for the three and nine months
ended September 30,2003 and 2002 (unaudited)............................................................. 22
Notes to Consolidated Financial Statements for the three and nine months
ended September 30,2003 and 2002......................................................................... 23
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2002 AND 2001:
Independent Auditors' Report................................................................................ 35
Independent Auditors' Report................................................................................ 36
Consolidated Balance Sheet, December 31,2002................................................................ 37
Consolidated Statements of Operations for the Years Ended
December 31,2002 and 2001................................................................................ 38
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31,2002 and 2001............................................................ 39
Consolidated Statements of Cash Flows for the Years Ended
December 31,2002 and 2001................................................................................ 40
Notes to Consolidated Financial Statements for the Years Ended
December 31,2002 and 2001................................................................................ 41
FINANCIAL STATEMENT SCHEDULE:
Schedule III Consolidated Real Estate Owned and Accumulated
Depreciation for the Year Ended December 31,2002......................................................... 57
18
610 WESTHEIMER - 2000 HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT OPERATING
EXPENSES FOR THE PERIOD SEPTEMBER 29, 2002 (COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 2002 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
Independent Auditors' Report................................................................................ 61
Historical Summary of Gross Income and Direct Operating Expenses for the
Period September 29,2002 (commencement of operations ) through
December 31,2002 and the Nine Months Ended September 30,2003
(Unaudited).............................................................................................. 62
Notes to Historical Summary of Gross Income and Direct Operating Expenses
for the Period September 29,2002 (commencement of operations) through
December 31,2002 and the Nine Months Ended September 30, 2003
(Unaudited).............................................................................................. 63
All other financial statement schedules are omitted as the required
information is either inapplicable or is included in the financial statements
or related notes.
19
AMREIT AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2003
(unaudited)
ASSETS
Property:
Land $21,531,368
Buildings 26,466,459
Tenant improvements 351,561
Furniture, fixtures and equipment 232,142
___________
48,581,530
Less accumulated depreciation (2,731,637)
___________
Net real estate held for investment 45,849,893
Real estate held for sale, net 8,850,670
Net investment in direct financing leases held for ivestment 22,048,739
Cash and cash equivalents 1,348,385
Accounts receivable 372,600
Accounts receivable - related party 150,432
Escrow deposits 257,925
Prepaid expenses, net 324,419
Other assets:
Preacquisition costs 17,088
Loan acquisition cost, net of $117,356 in accumulated
amortization 328,230
Accrued rental income 498,802
Intangible lease cost, net of $52,813 in accumulated
amortization 204,786
Investment in non-consolidated affiliates 519,873
___________
Total other assets 1,568,779
___________
TOTAL ASSETS $80,771,842
___________
___________
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $38,308,124
Accounts payable 1,321,795
Accounts payable - related party 24,656
Security deposit 35,930
Prepaid rent 6,561
___________
TOTAL LIABILITIES 39,697,066
___________
Minority interest 821,380
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, 2,917,924 shares issued 29,179
Class B Common shares, $.01 par value, 3,000,000 shares
authorized, 2,384,002 shares issued 23,840
Class C Common shares, $.01 par value, 4,400,000 shares
authorized, 339,455 shares issued 3,395
Capital in excess of par value 50,058,297
Accumulated distributions in excess of earnings (8,935,391)
Deferred compensation (267,330)
Cost of treasury shares, 105,422 shares (658,594)
___________
TOTAL SHAREHOLDERS' EQUITY 40,253,396
___________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $80,771,842
___________
___________
See Notes to Condensed Consolidated Financial Statements.
20
AMREIT AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Quarter ended September 30, Year to date September 30,
2003 2002 2003 2002
Revenues:
Rental income from operating leases $1,243,067 $ 1,007,891 $3,575,964 $ 2,259,905
Earned income from direct financing leases 681,309 594,429 1,950,637 1,222,780
Service fee income 944,530 725,967 2,004,390 1,465,641
Management fees 78,302 50,910 188,549 236,316
Income from non-consolidated affiliates 7,138 - 92,476 283,509
Gain on sales of real estate acquired for resale 237,579 (37,061) 237,579 (37,061)
Interest and other income 1,459 542 5,289 2,595
__________ ___________ __________ ___________
Total revenues 3,193,384 2,342,678 8,054,884 5,433,685
__________ ___________ __________ ___________
Expenses:
General operating and administrative 869,675 648,849 2,407,338 1,894,836
Legal and professional 864,535 365,400 1,597,211 694,861
Interest 598,189 519,665 1,743,535 1,183,345
Depreciation and amortization 216,375 226,049 617,946 454,356
Deferred merger costs - 1,904,370 - 1,904,370
__________ ___________ __________ ___________
Total expenses 2,548,774 3,664,333 6,366,030 6,131,768
__________ ___________ __________ ___________
Income (loss) before federal income taxes and
minority interest in income of consolidated joint
ventures 644,610 (1,321,655) 1,688,854 (698,083)
Federal income tax expense for taxable REIT
subsidiary (15,300) (75,000) - (90,000)
Minority interest in income of consolidated joint
ventures (45,841) (35,339) (128,790) (307,284)
__________ ___________ __________ ___________
Income from continuing operations 583,469 (1,431,994) 1,560,064 (1,095,367)
Income from discontinued operations 75,531 $ 61,966 205,917 $ 168,943
Net income (loss) $ 659,000 $(1,370,028) $1,765,981 $ (926,424)
Distributions paid to class B and class C
shareholders (457,343) (423,732) (1,349,010) (423,732)
__________ ___________ __________ ___________
Net income (loss) available to class A
shareholders $ 201,657 $(1,793,760) $ 416,971 $(1,350,156)
__________ ___________ __________ ___________
__________ ___________ __________ ___________
Basic income (loss) from continuing operations
per common share $ 0.045 $ (0.769) $ 0.076 $ (0.639)
__________ ___________ __________ ___________
__________ ___________ __________ ___________
Net income (loss) per common share - basic and
diluted $ 0.072 $ (0.744) $ 0.150 $ (0.568)
__________ ___________ __________ ___________
__________ ___________ __________ ___________
Weighted avergage common shares used to compute
net income per share, basic and diluted 2,805,753 2,412,544 2,788,303 2,376,569
__________ ___________ __________ ___________
__________ ___________ __________ ___________
See Notes to Condensed Consolidated Financial Statements.
21
AMREIT AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Quarter ended September 30, Year to date September 30,
2003 2002 2003 2002
Cash flows from operating activities:
Net income (loss) $ 659,000 $(1,370,028) $ 1,765,981 $ (926,424)
Adjustments to reconcile net income to net cash
provided by operating activities:
Investment in real estate acquired for resale - - (7,233,069) -
Proceeds from sales of real estate acquir 2,049,627 - 3,947,983 -
(Gain) loss on sales of real estate acquired for resale (237,579) 37,061 (237,579) 37,061
Depreciation and amortization 241,521 241,275 708,537 494,945
Amortization of (increase in) deferred compensation 15,457 15,457 90,842 (63,544)
Minority interest in net income of consolidated
joint ventures 45,841 35,339 128,790 307,284
Deferred merger costs - 1,904,370 - 1,904,370
(Increase) decrease in accounts receivable (85,708) 256,697 (198,941) 451,754
(Increase) decrease in accounts receivable
- related party (2,623) 821,982 (81,498) 1,263,680
Increase (decrease) in prepaid expenses, net 39,138 65,519 22,679 7,099
Cash receipts from direct financing leases
(less) more than income recognized (3,476) (81,282) 9,319 (158,047)
Increase in accrued rental income (79,431) (14,683) (159,278) (35,900)
(Increase) decrease in other assets (199,550) 105,554 (192,906) (1,019)
Increase (decrease) in accounts payable 452,309 256,568 175,111 (507,861)
Decrease in accounts payable- related party (155,042) (121,440) (181,467) (146,440)
(Decrease) increase in prepaid rent (84,418) (7,438) 384 -
Decrease in security deposits - 4,857 - (10,193)
___________ ___________ ___________ ___________
Net cash provided by (used in) operating activities 2,655,066 2,149,808 (1,435,112) 2,616,765
___________ ___________ ___________ ___________
Cash flows from investing activities:
Improvements to real estate (45,518) (71,107) (323,087) (497,169)
Acquisition of investment properties (1,474,694) (8,217,958) (4,163,689) (18,028,973)
Additions to furniture, fixtures and equipment (3,124) (8,329) (44,717) (12,503)
(Investment in) distributions from non-consolidating
affiliates 110,294 (91,001) 29,462 281,810
Proceeds from sale of investment property - 1,097,562 - 1,097,562
Increase in preacquisition costs (7,313) (204,056) (15,323) (275,615)
___________ ___________ ___________ ___________
Net cash provided by (used in) investing activities (1,420,355) (7,494,889) (4,517,354) (17,434,888)
___________ ___________ ___________ ___________
Cash flows from financing activities:
Proceeds from notes payable 1,900,000 7,885,573 11,160,758 17,382,782
Payments of notes payable (4,588,257) (1,440,734) (6,438,719) (1,479,971)
Loan acquisition costs - (46,584) - (9,446)
(Purchase) issuance of treasury shares (23,080) (8,442) (414,224) 176,678
Issuance of common shares 3,393,764 (2,000) 3,393,764 (2,000)
Issuance costs (514,689) - (514,689) -
Common dividends paid (765,467) (680,898) (2,274,526) (1,012,075)
Contributions from minority interests - 11,542 - 620,542
Distributions to minority interests (25,031) (35,339) (118,381) (334,485)
___________ ___________ __________ ___________
Net cash (used in) provided by financing (622,760) 5,683,118 4,793,983 15,342,025
___________ ___________ __________ ___________
Net increase (decrease) in cash and cash equiv 611,951 338,037 (1,158,483) 523,902
Cash and cash equivalents, beginning of period 736,434 412,982 2,506,868 227,117
___________ ___________ __________ ___________
Cash and cash equivalents, end of period $ 1,348,385 $ 751,019 $1,348,385 $ 751,019
___________ ___________ __________ ___________
___________ ___________ __________ ___________
Supplemental schedule of noncash investing and financing activities On July 23,
2002, the Company merged with three of its affiliated partnerships, AAA Net
Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd. and AAA Net Realty Fund XI,
Ltd. In conjunction with the merger, the Company acquired $23,890,318 worth of
property and issued 2,589,179 shares of Class B common shares.
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest 490,828 384,132 1,618,249 979,296
Income taxes 15,884 - 46,987 133,841
See Notes to Condensed Consolidated Financial Statements.
22
AMREIT AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-QSB and
include all of the disclosures required by accounting principles generally
accepted in the United States of America. The condensed consolidated
financial statements reflect all normal and recurring adjustments, which
are, in the opinion of management, necessary to present a fair statement
of results for the three month and nine-month periods ended September 30,
2003 and 2002.
The condensed consolidated financial statements of AmREIT contained herein
should be read in conjunction with the consolidated financial statements
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2002.
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT, formerly AmREIT, Inc. and previously American Asset Advisers
Trust, Inc. (the "Company"), was organized in the state of Maryland in
August 1993, is a real estate investment trust ("REIT") based in Houston ,
Texas, is listed on the American Stock Exchange (AMY) and re-organized in
the state of Texas in December 2002. AmREIT is both an owner of net-leased
properties and a sponsor of real estate direct participation programs to
the financial planning community. For more than 18 years, the Company (and
its predecessors) has established a track record of investing in
commercial real estate leased primarily to parent companies of corporate
tenants in the retail, financial services and banking, medical and
restaurant sectors. AmREIT's real estate team focuses on development,
management, brokerage and ownership of freestanding credit tenant leased
("CTL") and frontage shopping centers ("FSC") that are located contiguous
to major thoroughfares and traffic generators. AmREIT's customer list
includes national and regional tenants such as: Walgreens, Goodyear Tire,
Washington Mutual, IHOP, McDonald's, Herman Hospital, Sprint, Radio Shack,
Coldwell Banker, Guaranty Federal, Bennigan's, Chili's, Texas Children's
Pediatric Associates, Discount Tire, etc.
AmREIT owns a real estate portfolio that consists of 50 properties located
in 20 states. Its properties include single-tenant, free standing credit
tenant leased projects and multi-tenant frontage projects. The single
tenant projects are located coast to coast and are primarily leased to
corporate tenants where the lease is the direct obligation of the parent
companies. As a result, the dependability of lease payments is based on
the strength and viability of the entire company, not just that location.
The multi-tenant projects are situated primarily throughout Texas.
Supporting the real estate portfolio is an operating company subsidiary of
AmREIT that provides a complete range of services including development,
construction management, property management, brokerage and leasing.
On July 23, 2002, the Company completed a merger with three of its
affiliated partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund
X, Ltd., and AAA Net Realty Fund XI, Ltd. With the merger of these
affiliated partnerships, AmREIT increased its real estate assets by
approximately $24.3 million and issued approximately 2.6 million class B
common shares to the limited partners in the affiliated partnerships.
Approximately $760 thousand in 8 year, interest only, subordinated notes
were issued to limited partners of the affiliated partnerships who
exercised their dissenters' rights. The acquired properties are
unencumbered, single tenant, free standing properties on lease to national
and regional tenants, where the lease is the direct obligation of the
23
parent company. The following selected unaudited pro forma consolidated
statement of operations for AmREIT and subsidiaries gives effect to the
merger with its three affiliated partnerships, which assumes that the
merger occurred on January 1, 2002. Additionally, we have presented a
summary of assets acquired and liabilities assumed as of the date of the
merger, July 23, 2002.
Pro Forma Consolidated Operating Information
(Unaudited)
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
Revenues
Rental income and earned income $ 1,750,489 $ 4,668,458
Other income 768,699 1,867,007
______________ ____________
Total Revenues 2,519,188 6,535,465
______________ ____________
Total expenses 3,756,895 6,579,355
______________ ____________
Proforma income before minority interest in income of
consolidated joint ventures (1,237,707) (43,890)
Federal income tax benefit from taxable REIT subsidiary (75,000) (90,000)
Minority interest in income of consolidated joint ventures (9,795) (18,098)
______________ ____________
Pro forma net income (loss) $ (1,322,502) $ (151,988)
______________ ____________
______________ ____________
Summary of Assets Acquired and Liabilities Assumed
As of July 23, 2002,
Assets
Buildings $ 16,330,088
Land 7,560,231
Accounts receivable 1,105,612
Prepaid expenses 15,757
_____________
Total Assets $ 25,011,688
Liabilities 132,630
_____________
Net assets acquired $ 24,879,058
_____________
_____________
Class B common stock issued 24,118,648
Subordinated notes issued 760,410
24
In August 2003 the Company began selling class C common shares. The
offering is a $44 million offering, issued on a best efforts basis through
the independent financial broker dealer community. The Company will
primarily use the proceeds for the acquisition of new properties and to
pay down existing debt. At September 30, 2003, the Company had issued
approximately 339 thousand shares, representing approximately $3.4 in
proceeds from selling class C shares.
REAL ESTATE HELD FOR SALE
Properties are classified as real estate held for sale if the properties
were purchased with intent to hold the properties for less than a year or
if the properties are listed for sale. At September 30, 2003, AmREIT owned
five properties that are classified as real estate held for sale. The five
properties have a combined carrying value of $8.85 million. Three of the
properties have separate notes payable, which have a one year term and a
combined balance of $3.46 million at September 30, 2003.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT and
its wholly or majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NEW ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The disclosure requirements are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002 and did not have a material effect on our
consolidated financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15,
2002, however, these disclosure modifications are not applicable to the
Company as the Company does not have stock based compensation other than
restricted stock grants. The Company has adopted SFAS 148 and the adoption
of SFAS 148 did not have a material impact on our consolidated financial
position, results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003.
The implementation of the Interpretation has been delayed until periods
ending after December 15, 2003. The Interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that the Company will consolidate or disclose
information about variable interest entities when the Interpretation
becomes effective. The Company believes it has no variable interest
entities which would require consolidation or disclosure.
25
In May 2003, the Financial Accounting Standards Board issued Statement No.
150 ("Statement 150") "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". Statement 150 requires
certain financial instruments that have characteristics of both
liabilities and equity to be classified as a liability on the balance
sheet. Statement 150 is effective for financial instruments entered into
or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. Statement 150
will be effected by reporting the cumulative effect of a change in
accounting principle for contracts created before the issuance date and
still existing at the beginning of that interim period. The adoption of
Statement 150 did not have an impact on our consolidated financial
position, results of operations, or cash flows.
RECLASSIFICATION
Certain amounts in the interim unaudited 2002 and 2003 condensed
consolidated financial statements have been reclassified to conform to the
presentation used in the interim unaudited 2003 condensed consolidated
financial statements. Such reclassifications had no effect on previously
reported net income or loss or shareholders' equity.
2. NOTES PAYABLE
In September 2003, the Company renewed its unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the
acquisition of properties and working capital. Under the Credit Facility,
which has a term of one year, the Company may borrow up to $20 million
subject to the value of unencumbered assets. The Credit Facility contains
covenants which, among other restrictions, require the Company to maintain
a minimum net worth, a maximum leverage ratio, specified interest coverage
and fixed charge coverage ratios and allow the lender to approve all
distributions. At September 30, 2003, the Company was in compliance with
all financial covenants. The Credit Facility's annual interest rate varies
depending upon leverage, from LIBOR plus a spread of 1.40% to LIBOR plus
2.35%. As of September 30, 2003, the interest rate was LIBOR plus 2.0%. As
of September 30, 2003, $15.0 million was outstanding under the Credit
Facility. Thus the Company has approximately $5.0 million available under
its line of credit, subject to Lender approval on the use of the proceeds.
3. MAJOR TENANTS
As of September 30, 2003, there have been no significant changes in the
tenant make-up from year end December 31, 2002.
4. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income
available to class A shareholders by the weighted average number of class
A common shares outstanding. Diluted earnings per share has been computed
by dividing net income (as adjusted) by the weighted average number of
class A common shares outstanding plus dilutive potential common shares.
26
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
Quarter Year to Date
2003 2002 2003 2002
---- ---- ---- ----
BASIC EARNINGS PER SHARE
Weighted average class A common shares outstanding 2,805,753 2,412,544 2,788,303 2,376,569
Basic earnings (loss) per share $ 0.072 $ (0.744) $ 0.150 $ (0.568)
========== =========== ========= ==========
EARNINGS (LOSS) FOR BASIC COMPUTATION
Net income (loss) available to class A common shareholders
(basic earnings (loss) per share computation) $ 201,657 $(1,793,760) $ 416,971 $(1,350,156)
========= =========== ========= ===========
Diluted earnings per share information is not disclosed due to the
accretive nature of the common class B and class C shares.
5. DISCONTINUED OPERATIONS
The operations of two properties listed as held for sale at September 30,
2003 were reported as discontinued operations. The following is a summary
of our discontinued operations:
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/2003 9/30/2002 9/30/2003 9/30/2002
--------- --------- --------- ---------
Rental revenue $82,540 $77,192 $247,618 $209,532
Depreciation and amortization - (15,226) (30,136) (40,589)
Property expenses (7,009) - (11,565) -
________ _______ ________ ________
Income from discontinued operations $ 75,531 $61,966 $205,917 $168,943
Basic income from discontinued operations
per common share $ 0.027 $ 0.026 $ 0.074 $ 0.071
6. COMMITMENTS
In June 1998, the AmREIT shareholders approved the acquisition of an
advisory company then owned by H. Kerr Taylor's, President and CEO of
AmREIT. In conjunction with this acquisition, Mr. Taylor agreed to defer a
portion of the consideration owed to him, which would be paid based on a
specified formula if and when the Company raised additional equity to
grow AmREIT's equity and assets. As of September 30, 2003, Mr. Taylor is
eligible to receive an additional 384 thousand class A shares as the
Company raises additional equity. Based on equity raised through the class
C common share offering subsequent to September 30, 2003, and equity
anticipated to be raised through December 31, 2003, Mr. Taylor will be
issued between 150 thousand and 170 thousand of these additional class A
shares, valued at market price on the date of issuance. Upon issuance of
these shares, based on the terms of the deferred consideration agreement
which expires June 2006, approximately 234 thousand to 214 thousand shares
remain available to be issued to Mr. Taylor.
As of September 30, 2003, AmREIT has contracted for approximately $22.4
million of single tenant and multi-tenant real estate projects that are
anticipated to close during the fourth quarter 2003 and first quarter
2004.
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FORWARD-LOOKING STATEMENTS
Certain information presented in this Form 10-QSB constitutes
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Although the Company believes that the expectations reflected in
these forward-looking statements are based upon reasonable assumptions,
the Company's actual results could differ materially from those set forth
in the forward-looking statements. Certain factors that might cause such a
difference include the following: changes in general economic conditions,
changes in real estate market conditions, continued availability of
proceeds from the Company's debt or equity capital, the ability of the
Company to locate suitable tenants for its properties and the ability of
tenants to make payments under their respective leases.
CRITICAL ACCOUNTING POLICIES
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. Historical results
and trends which might appear should not be taken as indicative of future
operations. The results of operations and financial condition of the
Company, as reflected in the accompanying statements and related
footnotes, are subject to management's evaluation and interpretation of
business conditions, retailer performance, changing capital market
conditions and other factors, which could affect the ongoing viability of
the Company's tenants. Management believes the most critical accounting
policies in this regard are the accounting for lease revenues (including
the straight-line rent), the regular evaluation of whether the value of a
real estate asset has been impaired and the allowance for doubtful
accounts. Each of these issues requires management to make judgments that
are subjective in nature. Management relies on its experience, collects
historical data and current market data, and analyzes these assumptions in
order to arrive at what it believes to be reasonable estimates.
GENERAL
AmREIT, a Texas real estate investment trust, is listed on the American
Stock Exchange (AMY), and is committed to providing our shareholders with
an opportunity to earn dependable, monthly income through investing in
high-quality commercial retail real estate. Our strategy is to acquire or
develop high-quality properties that are leased to strong national or
regional parent companies. Today, AmREIT owns a portfolio of 50
properties, leased to 27 different tenants located in 20 states. As our
capital base continues to expand, we are forming additional relationships
in the real estate community, identifying investment opportunities that
fit our approach, and carrying out our pledge to our shareholders to
deliver dependable monthly income.
For 18 years we have established a track record of investing in commercial
real estate leased primarily to corporate tenants in the retail, financial
services and banking, medical and restaurant sectors. AmREIT's real estate
team focuses on development, management, brokerage and ownership of
freestanding credit tenant leased and frontage shopping center properties
that are located contiguous to major thoroughfares and traffic generators.
AmREIT's real estate customer list includes national and regional tenants
such as: Walgreens, Goodyear Tire, Washington Mutual, IHOP, McDonald's,
Herman Hospital, Radio Shack, Sprint, Coldwell Banker, Guaranty Federal,
Bennigan's, Chili's, Texas Children's Pediatric Associates and Discount
Tire.
AmREIT, or an affiliate, has previously sponsored 14 investment funds
through the NASD broker-dealer community. It is currently both a limited
partner and general partner in three of these funds. Through this
ownership, AmREIT receives commissions, fees and a carried interest in the
profits and cash flows of these investment funds. Although this carried
interest is not currently reflected in the balance sheet or statement of
operations of AmREIT, it is anticipated to generate profits and cash flows
to AmREIT as certain returns are met for the investors in these affiliated
investment funds.
28
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations has been the principal source of capital to fund
the Company's ongoing operations. The Company's issuance of common shares
and the use of the Company's credit facility have been the principal
sources of capital required to fund its growth. In order to continue to
expand and develop its portfolio of properties and other investments, the
Company intends to finance future acquisitions and growth through the most
advantageous sources of capital available to the Company at the time. Such
capital sources may include proceeds from public or private offerings of
the Company's debt or equity securities, secured or unsecured borrowings
from banks or other lenders, a merger with certain affiliated partnerships
or other unrelated companies, or the disposition of assets, as well as
undistributed funds from operations.
Comparison of the Three Months Ended September 30, 2003 to September 30,
2002:
Net cash provided by operating activities increased $505 thousand for the
three months ended September 30, 2003 when compared with the three months
ended September 30, 2002. The increase in cash provided by operating
activities was due primarily to the following: (1) a $2.05 million
increase in proceeds from the sale of real estate acquired for resale,
from $0 in 2002 to $2.05 million in 2003; (2) net income increased $2.03
million, from a $1.37 million loss in 2002 to net income of $659 thousand
in 2003. The increase in net income is primarily due to a non-cash charge
of $1.9 million, representing deferred merger costs that were incurred in
2002, therefore, the transaction has no net effect on the cash flow; (3)
accounts payable increased by $297 thousand in 2003, compared to a $135
thousand increase in 2002. The above increases in cash are offset by the
following: (1) accounts receivable increased by $88 thousand in 2003,
compared to a $1.079 million decrease in 2002; (2) other assets decreased
$200 thousand in 2003, compared to a $106 thousand increase in 2002.
Net cash used in investing activities decreased $6.07 million for the
three month period ended September 30, 2003 when compared to the three
month period ended September 30, 2002. The decrease in cash used in
investing activities was primarily due to a $6.75 million decrease in cash
used for acquisitions of investment properties, from $8.22 million in 2002
to $1.47 million in 2003. This decrease in cash used is offset by a
decrease in proceeds from the sale of investment properties of $1.1
million, from $1.1 million in 2002 to $0 in 2003.
Net cash used in financing activities increased $6.31 million for the
three month period ended September 30, 2003 compared to the three month
period ended September 30, 2002. The increase was primarily due to a $5.99
million decrease in proceeds from notes payable, from $7.89 million in
2002 to $1.9 million in 2003. This increase in cash is offset by a $3.15
million increase in payments of notes payable, from $1.44 million in 2002
to $4.59 million in 2003.
In August 2003 the Company began selling class C common shares. The
offering is a $44 million offering, issued on a best efforts basis through
the independent financial broker dealer community. The Company will
primarily use the proceeds for the acquisition of new properties and pay
down existing debt. At September 30, 2003, the Company had issued
approximately 339 thousand shares, representing approximately $3.4 million
in proceeds from selling class C shares .
Comparison of the Nine Months Ended September 30, 2003 to September 30,
2002:
Net cash used in operating activities increased $4.05 million for the nine
months ended September 30, 2003 when compared to the nine months ended
September 30, 2002. The increase in cash used in operating activities was
29
primarily due to the following: (1) investment in real estate acquired for
sale increased $7.23 million, from $0 in 2002 to $7.23 million in 2003;
(2) accounts receivable increased by $280 thousand in 2003, compared to a
$1.72 million decrease in 2002. The above increases in cash used are
offset by the following: (1) a $2.69 million increase in net income, from
a loss of $926 thousand in 2002 to net income of $1.76 million in 2003.
The increase in net income is primarily due to a non-cash charge of $1.9
million, representing deferred merger costs that were incurred in 2002,
therefore, the transaction has no net effect on the cash flow; (2) an
increase in proceeds from the sale of real estate acquired for resale of
$3.95 million, from $0 in 2002 to $3.95 million in 2003; (3) a decrease in
accounts payable of $6 thousand in 2003, compared to a decrease of $654
thousand in 2002.
Net cash used in investing activities decreased $12.92 million for the
nine months ended September 30, 2003 when compared to the nine months
ended September 30, 2002. The decrease in cash used was primarily due to a
decrease in acquisitions of investment properties of $13.87 million, from
$18.03 million in 2002 to $4.16 million in 2003. This decrease in cash
used is offset by a $1.1 million decrease in proceeds from the sale of
investment properties, from $1.1 million in 2002 to $0 in 2003.
Net cash provided by financing activities decreased $10.55 million for the
nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002. The decrease was primarily due to the following
components: (1) a decrease in proceeds from notes payable of $6.22
million, from $17.38 million in 2002 to $11.16 in 2003; (2) an increase in
payments of notes payable of $4.96 million; (3) an increase in common
dividends paid of $1.26 million, from $1.01 million in 2002 to $2.27
million in 2003; (4) a decrease in contributions from minority interests
of $621 thousand; (5) an increase in the purchase of treasury shares of
$591 thousand. The above decreases in cash are offset by a $3.40 million
increase in the issuance of common shares.
Cash flows provided by (used in) operating activities, investing
activities, and financing activities for the three and nine months ended
September 30 are presented below in thousands:
Quarter Year to date
2003 2002 2003 2002
Operating activities $ 2,655 $ 2,150 $(1,435) $ 2,617
Investing activities $(1,420) $(7,495) $(4,517) $(17,435)
Financing activities $ (623) $ 5,683 $ 4,794 $ 15,342
On July 23, 2002, the Company completed a merger with three of its
affiliated partnerships, which increased the Company's real estate assets
by approximately $24.3 million. Pursuant to the merger, the Company issued
approximately 2.6 million class B common shares to the limited partners in
the Affiliated Partnerships. Approximately $760 thousand in 8 year,
interest only, subordinated notes were issued to limited partners of the
Affiliated Partnerships who exercised their dissenters rights. The
acquired properties are unencumbered, single tenant, free standing
properties on lease to national and regional tenants, where the lease is
the direct obligation of the parent company.
The Company's leases typically provide that the tenant bears
responsibility for substantially all property costs and expenses
associated with ongoing maintenance and operation, including utilities,
property taxes and insurance. In addition, the Company's leases generally
provide that the tenant is responsible for roof and structural repairs.
Some of the tenant's leases require the Company to be responsible for roof
and structural repairs. In these instances, the Company normally requires
warranties, and/or guarantees from the related vendors, suppliers and/or
contractors, to mitigate the potential costs of repairs during the primary
terms of the leases. Because many of the properties which are subject to
leases that place these responsibilities on the Company are recently
constructed, management anticipates that capital demands to meet
obligations with respect to these properties will be minimal for the
foreseeable future and can be met with funds from operations and working
capital. The Company may be required to use bank borrowings or other
sources of capital in the event of unforeseen significant capital
expenditures.
30
In September 2003, the Company renewed its unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the
acquisition of properties and working capital. Under the Credit Facility,
which has a term of one year, the Company may borrow up to $20 million
subject to the value of unencumbered assets. The Credit Facility contains
covenants which, among other restrictions, require the Company to maintain
a minimum net worth, a maximum leverage ratio, specified interest coverage
and fixed charge coverage ratios and allow the lender to approve all
distributions. At September 30, 2003, the Company was in compliance with
all applicable financial covenants. The Credit Facility's annual interest
rate varies depending upon leverage, from LIBOR plus a spread of 1.4% to
LIBOR plus 2.35%. As of September 30, 2003, the interest rate was LIBOR
plus 2.0%. As of September 30, 2003, $15.0 million was outstanding under
the Credit Facility. Thus the Company has approximately $5.0 million
available under its line of credit, subject to lender approval on the use
of the proceeds.
As of September 30, 2003, the Company owned 50 properties directly and,
since its inception, had invested $79 million, exclusive of any minority
interests, including certain acquisition expenses related to the Company's
investment in these properties. These expenditures resulted in a
corresponding decrease in the Company's liquidity.
Until properties are acquired by the Company, cash is held in short-term,
highly liquid investments that the Company believes to have appropriate
safety of principal. This investment strategy has allowed, and continues
to allow, high liquidity to facilitate the Company's use of these funds to
acquire properties at such time as properties suitable for acquisition are
located. At September 30, 2003 and 2002, the Company's cash and cash
equivalents totaled $1.348 million and $751 thousand respectively.
The Company paid aggregate cash dividends to the holders of its class A,
class B and class C common shares, for the three months ended of September
30, 2003 and 2002 of $765 thousand and $681 thousand, respectively.
INFLATION
Inflation has had very little effect on income from operations. Management
expects that increases in store sales volumes due to inflation as well as
increases in the Consumer Price Index (C.P.I.), may contribute to capital
appreciation of the Company properties. These factors, however, also may
have an adverse impact on the operating margins of the tenants of the
properties.
FUNDS FROM OPERATIONS
Funds from operations (FFO) increased $2.013 million to $874 thousand for
the three months ended September 30, 2003 from $(1.139) million for the
three months ended September 30, 2002. For the nine month period ended
September 30, 2003 FFO increased $2.871 million, from $(463) thousand in
2002 to $2.408 million in 2003. Management considers FFO to be an
appropriate measure of operating performance for an equity REIT. The
Company has adopted the National Association of Real Estate Investment
Trusts (NAREIT) definition of FFO. FFO is calculated as net income
(computed in accordance with generally accepted accounting principles)
excluding gains or losses from sales of depreciable operating property,
depreciation and amortization of real estate assets, and excluding results
defined as "extraordinary items" under generally accepted accounting
principles. We believe that in order to facilitate a clear understanding
of our historic operating results, FFO should be examined in conjunction
with net income as presented in the consolidated statement of operations
and data included elsewhere in this report. FFO should not be considered
31
an alternative to cash flows from operating, investing and financing
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to meet cash needs. The
Company's computation of FFO may differ from the methodology for
calculating FFO utilized by other equity REITs and, therefore, may not be
comparable to such other REITs. FFO is not defined by generally accepted
accounting principles and should not be considered an alternative to net
income as an indication of the Company's performance. Below is the
reconciliation of net income to funds from operations in thousands for the
three and nine months ended September 30:
Quarter Year to Date
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ 659 $ (1,370) $ 1,766 $ (926)
Depreciation and amortization:
Continuing operations 215 216 612 422
Discontinued operations - 15 30 41
__________ ________ _______ _______
Total funds from operations * $ 874 $ (1,139) $ 2,408 $ (463)
========== ======== ======= =======
Cash distributions paid to class A, B
and C shareholders $ 765 $ 681 $ 2,275 $ 1,012
FFO in excess of (less than) distributions* $ 109 $ (1,820) $ 133 $(1,475)
* Based on adherence to the NAREIT definition of FFO, we did not add back the
$1.904 million charge to earnings in the third quarter 2002 resulting from
shares issued to Mr. Taylor, president of the Company. Adding this $1.904
million charge to earnings back to earnings would result in adjusted funds from
operations of $765 thousand for the three months ended September 30, 2002 and
$1.441 million for the nine months ended September 30, 2002, respectively.
Adding the charge to earnings would also result in dividends paid being less
than adjusted FFO of $84 thousand for the three months ended September 30, 2002
and $429 thousand for the nine months ended September 30, 2002.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2003 to September 30,
2002:
During the three months ended September 30, 2003 and September 30, 2002,
the Company earned $1.9 million and $1.6 million, respectively, in rental
income from operating leases and earned income from direct financing
leases. Additional property purchases resulted in the increased income
from rents and earned income from direct financing leases. Service fee
income increased $219 thousand, from $726 thousand in 2002 to $945
thousand in 2003. The increase in service fee income was primarily due to
an increase in commission income from an increase in equity raised in our
real estate investment sponsorship activities. Gain on sale of real estate
acquired for resale increased $275 thousand, from a loss of $37 thousand
in 2002 to a $238 thousand gain in 2003. The gain recorded in 2003 is
related to the sale of an IHOP property in Milwaukee, WI.
During the three months ended September 30, 2003 and September 30, 2002,
the Company's expenses were $2.5 million and $3.7 million, respectively.
The $1.2 million decrease in expenses is primarily attributable to a
non-recurring charge in 2002 of $1.9 million, which was a deferred payment
of merger related expenses. This decrease in expense was partially offset
by the following increases: (1) an increase in general operating and
administrative expense of $221 thousand, from $649 thousand in 2002 to
$870 thousand in 2003, which was primarily attributable to an increase in
salary expense due to additional positions; and (2) an increase in legal
and professional fees of $500 thousand, from $365 thousand in 2002 to $865
thousand in 2003, which was primarily due to an increase in commissions
paid to third party security brokerage companies.
32
Comparison of the Nine Months Ended September 30, 2003 to September 30,
2002:
During the nine months ended September 30, 2003 and September 30, 2002,
the Company earned $5.5 million and $3.5 million, respectively, in rental
income from operating leases and earned income from direct financing
leases. Additional property purchases as well as the merged properties
from the three affiliated partnerships resulted in the increased income
from rents and earned income from direct financing leases. Service fee
income increased $539 thousand, from $1.466 million in 2002 to $2.004
million in 2003. The increase is primarily due to an increase in
commission income, which is partially offset by a decrease in advisory fee
income. Gain on sale of real estate acquired for resale increased $275
thousand, from a loss of $37 thousand in 2002 to a $238 gain in 2003. The
gain recorded in 2003 is related to the sale of an IHOP property in
Milwaukee, WI.
During the nine months ended September 30, 2003 and September 30, 2002,
the Company's expenses were $6.37 million and $6.13 million, respectively.
The $234 thousand increase in expenses is primarily due to (1) an increase
in legal and professional fees of $902 thousand, from $695 thousand in
2002 to $1.6 million in 2003. The increase in legal and professional fees
is primarily attributable to increased commission expense paid to third
party security brokerage companies; (2) an increase in interest expense of
$560 thousand, from $1.2 million in 2002 to $1.7 million in 2003. The
increase in interest expense is due to additional debt used to finance the
acquisition of additional properties; (3) an increase in general operating
and administrative expenses of $513 thousand, from $1.9 million in 2002 to
$2.4 million in 2003, which is due to an increase in salary expense due to
additional positions. These increases in expense are offset by a decrease
in deferred acquisition costs of $1.9 million, which is attributable to
the deferred payment of merger related expenses that was expensed in 2002.
Discontinued Operations
The operations of two properties listed as held for sale at September 30, 2003
were reported as discontinued operations. The following is a summary of our
discontinued operations:
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/2003 9/30/2002 9/30/2003 9/30/2002
--------- --------- --------- ---------
Rental revenue $82,540 $77,192 $247,618 $209,532
Depreciation and amortization - (15,226) (30,136) (40,589)
Property expenses (7,009) - (11,565) -
_______ _______ ________ ________
Income from discontinued operations $75,531 $61,966 $205,917 $168,943
Basic income from discontinued operations
per common share $ 0.027 $ 0.026 $ 0.074 $ 0.071
33
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
AND FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 2002
AMREIT AND SUBSIDIARIES
34
INDEPENDENT AUDITORS' REPORT
To the Board of Trust Managers
AmREIT:
We have audited the accompanying consolidated balance sheet of AmREIT and
subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year ended December 31, 2002. In connection with our audit of the
consolidated financial statements, we have also audited the related financial
statement schedule. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AmREIT and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The consolidated financial statements of AmREIT and subsidiaries for 2001
prior to their restatement as required under Financial Accounting
Standards Board Statement No. 144 (Statement 144) as described in Note 10 to
the consolidated financial statements, were audited by other auditors whose
report is presented separately herein. We audited the reclassifications that
were applied to revise the 2001 financial statements. In our opinion, such
reclassifications are appropriate and have been properly applied. However, we
were not engaged to audit, review, or apply any procedures to the 2001
financial statements of AmREIT and subsidiaries other than with respect to
such reclassifications and, accordingly, we do not express an opinion or any
other form of assurance on the 2001 consolidated financial statements taken as
a whole.
KPMG LLP
Houston, Texas
March 31, 2003, except for the 5th paragraph of
Note 1, Item 5 of Note 6 and Note 10,
which are as of December 17, 2003.
35
INDEPENDENT AUDITORS' REPORT
To the Board of Trust Managers
AmREIT
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of AmREIT (formerly AmREIT,Inc.) and subsidiaries (the "Company")
for the year ended December 31, 2001 (none of which are presented herein in
their original format). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, AmREIT and subsidiaries results of operations and cash flows
for the year ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America
DELOITTE & TOUCHE LLP
Houston, Texas
March 15, 2002
36
AMREIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2002
2002
ASSETS
Property:
Land $18,945,607
Buildings 28,652,858
Furniture, fixtures and equipment 381,383
__________
47,979,848
Accumulated depreciation (2,136,376)
__________
Total property, net 45,843,472
Net investment in direct financing leases 23,405,324
Cash and cash equivalents 2,506,868
Accounts receivable 173,659
Accounts receivable - related party 68,934
Escrow deposits 120,466
Prepaid expenses, net 438,696
Other assets:
Preacquisition costs 1,765
Loan acquisition cost, net of $85,579 in accumulated amortization 249,572
Accrued rental income 360,062
Intangible lease cost 257,600
Investment in non-consolidated affiliates 549,335
__________
Total other assets 1,418,334
__________
TOTAL ASSETS $73,975,753
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $33,586,085
Accounts payable 1,126,219
Accounts payable - related party 206,123
Security deposit 33,930
Prepaid rent 6,177
___________
TOTAL LIABILITIES 34,958,534
___________
Minority interest 810,971
Shareholders' equity:
Preferred stock, $.01 par value, 10,001,000 shares authorized, none issued -
Class A Common stock, $.01 par value, 100,010,000 shares authorized,
2,772,340 shares issued and outstanding 27,723
Class B Common stock, $.01 par value, 3,000,000 shares authorized,
2,464,207 shares issued and outstanding 24,642
Capital in excess of par value 47,183,271
Accumulated distributions in excess of earnings (8,426,846)
Deferred compensation (205,353)
Cost of treasury stock, 65,379 shares (397,189)
___________
TOTAL SHAREHOLDERS' EQUITY 38,206,248
___________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $73,975,753
===========
See Notes to Consolidated Financial Statements.
37
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2002 2001
Revenues:
Rental income from operating leases $ 3,386,030 2,371,793
Earned income from direct financing leases 1,807,117 637,537
Service fees and other income 2,041,999 2,033,008
Management fees 279,910 342,349
Income from non-consolidated affiliates 416,904 20,743
(Loss) gain on sale of property (47,553) 254,013
Interest income 4,206 10,555
_________ _________
Total revenues 7,888,613 5,669,998
_________ _________
Expenses:
General operating and administrative 2,801,946 1,953,285
Legal and professional 1,332,188 1,002,776
Interest 1,774,973 1,063,574
Depreciation 611,084 413,583
Deferred merger costs 1,904,370 -
_________ _________
Total expenses 8,424,561 4,433,218
_________ _________
(Loss) income before federal income taxes and minority
interest in net income of consolidated joint ventures (535,948) 1,236,780
Federal income tax expense for taxable REIT subsidiary 60,656 144,420
Minority interest in net income of consolidated joint ventures (308,010) (527,571)
__________ _________
(Loss) income from continuing operations (904,614) 564,789
Income from discontinued operations 245,841 225,719
__________ _________
Net (loss) income (658,773) 790,508
Distributions paid to Class B shareholders (865,293) -
__________ _________
Net (loss) income available to Class A shareholders $(1,524,066) 790,508
========== =========
Basic and diluted (loss) income from continuing operations per share (0.72) 0.24
Net (loss) income per common share, basic and diluted (0.62) 0.34
========== =========
Common shares used to compute net (loss) and income
per share, basic and diluted 2,469,725 2,354,572
========== =========
See Notes to Consolidated Financial Statements.
38
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2002 and 2001
Capital in
Common Shares excess of
Number Amount par value
Balance at December 31, 2000 2,384,117 $ 23,841 $ 21,655,867
Net income - - -
Repurchase of common shares, Class A (24,723 shares) - - -
Distributions - - -
_________ ______ __________
Balance at December 31, 2001 2,384,117 23,841 21,655,867
_________ ______ __________
Net loss - - -
Issuance of common shares Class A 388,200 3,882 2,057,755
Issuance of common shares Class B, net of 124,750 that
converted to Class A 2,464,207 24,642 23,469,649
Issuance of restricted shares Class A - - -
Repurchase of common shares Class A (46,069 shares) - - -
Distributions - - -
_________ ______ __________
Balance at December 31, 2002 5,236,524 $52,365 $47,183,271
========= ====== ==========
Accumulated
distributions Defered Cost of
in excess of Compensation treasury
earnings Obligation shares Total
Balance at December 31, 2000 $ (6,223,523) $ - $ (127,467) $ 15,328,718
Net income 790,508 - - 790,508
Repurchase of common shares Class A (24,723 shares) - - (160,703) (160,703)
Distributions (604,742) - - (604,742)
_________ _________ ________ __________
Balance at December 31, 2001 (6,037,757) - (288,170) 15,353,781
_________ _________ ________ __________
Net loss (658,773) - - (658,773)
Issuance of common shares, Class A - - - 2,061,637
Issuance of common shares, Class B, net of 124,750 that
converted to Class A - - - 23,494,291
Issuance of restricted shares Class A - (205,353) 185,119 (20,234)
Repurchase of common shares Class A (46,069 shares) - - (294,138) (294,138)
Distributions (1,730,316) - - (1,730,316)
_________ _______ _______ __________
Balance at December 31, 2002 $(8,426,846) $ (205,353) $(397,189) $38,206,248
========= ======== ======= ==========
See Notes to Consolidated Financial Statements.
39
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2002 2001
Cash flows from operating activities:
Net (loss) income $ (658,773) 790,508
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Loss (gain) on sale of property 47,553 (254,013)
Depreciation and amortization 723,607 481,265
Increase in minority interest in net income of consolidated
joint ventures 308,010 527,571
Deferred merger costs 1,904,370 -
Decrease (increase) in accounts receivable 1,155,875 (89,921)
Decrease (increase)in accounts receivable - related party 378,494 (298,521)
Increase in prepaid expenses, net (170,028) (128,324)
(Decrease) increase in accounts payable (365,018) 821,168
Increase in accounts payable- related party 181,123 15,524
Cash receipts from direct financing leases
less than income recognized 282,805 (38,581)
Decrease (increase) in accrued rental income 32,095 (102,757)
Increase in prepaid rent 6,177 -
Increase in other assets (49,114) (81,545)
Increase in deferred compensation (48,086) -
_________ _________
Net cash provided by operating activities 3,729,090 1,642,374
_________ _________
Cash flows from investing activities:
Improvements to real estate (623,124) (432,276)
Acquisitions of real estate (18,951,523) (3,445,279)
Additions to furniture, fixtures and equipment (25,131) (37,061)
Distributions from (investment in) joint ventures 431,604 (729,958)
Proceeds from sale of property 3,692,544 2,520,259
Decrease (increase) in preacquisition costs 207,435 (208,576)
__________ _________
Net cash used in investing activities (15,268,195) (2,332,891)
__________ _________
Cash flows from financing activities:
Proceeds from notes payable 19,253,403 8,038,500
Payments of notes payable (3,399,277) (6,539,134)
Loan acquisition costs (38,035) (169,579)
Issuance of treasury stock 185,119 -
Purchase of treasury stock (294,138) (160,703)
Issuance of common stock (517,857) -
Retirement of common stock (106,500) -
Common dividends paid (1,730,316) (604,742)
Contributions from minority interests 809,971 -
Distributions to minority interests (343,514) (582,575)
__________ ___________
Net cash provided by (used in) financing activities 13,818,856 (18,233)
__________ ___________
Net increase (decrease) in cash and cash equivalents 2,279,751 (708,750)
Cash and cash equivalents at January 1 227,117 935,867
__________ ___________
Cash and cash equivalents at December 31 $ 2,506,868 $ 227,117
========== ===========
Supplemental schedule of noncash investing and financing activities
On July 23, 2002, the Company merged with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd. and
AAA Net Realty Fund XI, Ltd. In conjunction with the merger, the Company
acquired $23,890,319 worth of property and issued 2,589,179 shares of Class
B common stock.
Supplemental schedule of cash flow information: Cash paid during the year
for:
Interest 1,691,927 1,063,574
Income taxes 133,841 -
See Notes to Consolidated Financial Statements.
40
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT, ("AmREIT" or the "Company") formally AmREIT, Inc., which was
incorporated in the state of Maryland in August 1993, is a real estate
investment trust ("REIT") based in Houston, Texas and is listed on the
American Stock Exchange (AMY). AmREIT was organized in the state of Texas on
December 22, 2002 and is a pre-eminent sponsor of real estate direct
participation programs to the financial planning community. For more than 17
years, the Company has established a track record of investing in commercial
real estate leased to parent companies in the retail, financial services and
banking, medical and restaurant sectors. AmREIT's real estate team focuses on
development, management, brokerage and ownership of freestanding credit tenant
leased ("CTL") and frontage shopping centers ("FSC") that are located
contiguous to major thoroughfares and traffic generators. AmREIT's customer
list includes national and regional tenants such as: Walgreens, Goodyear Tire,
Washington Mutual, IHOP, McDonald's, Herman Hospital, Radio Shack, Coldwell
Banker, Guaranty Federal, Bennigan's, Chili's, Texas Children's Pediatric
Associates, Discount Tire, etc.
AmREIT owns a real estate portfolio that consists of over 46 properties located
in 18 states. Its properties include single-tenant; free standing credit tenant
leased projects and multi-tenant frontage projects. The single tenant projects
are located from coast to coast and are primarily leased to corporate tenants
where the lease is the direct obligation of the parent companies. In so doing,
the dependability of the lease payments are based on the strength and viability
of the entire company, not just that location. The multi-tenant projects are
situated primarily throughout Texas. Supporting the real estate portfolio is an
operating company subsidiary of AmREIT that provides a complete range of
services including development, construction management, property management,
brokerage and leasing.
Through AmREIT's direct participation programs, it creates new investment
entities that buy and develop commercial real estate with proceeds raised from
third-party investors. AmREIT has extensive experience and long-term
relationships in the commercial real estate market - the basis of its ability
to sponsor real estate investment opportunities while creating fee income and
carried interests for AmREIT and its shareholders.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
AAA Net Realty Fund XI, Ltd. With the merger of the affiliated partnerships,
AmREIT increased its real estate assets by approximately $24.3 million and
issued approximately 2.6 million Class B common shares to the limited
partners in the affiliated partnerships. Approximately $760 thousand in 8 year,
interest only, subordinated notes were issued to limited partners of the
affiliated partnerships who dissented against the merger. The acquired
41
properties are unencumbered, single tenant, free standing properties on lease
to national and regional tenants, where the lease is the direct obligation of
the parent company. This merger transaction triggered a payment under the
deferred consideration agreement between AmREIT and H. Kerr Taylor, President
and Chief Executive Officer. The deferred consideration agreement was approved
by the shareholders in 1998 as part of the sale of Mr. Taylor's advisory
company to AmREIT. In the agreement, Mr. Taylor would receive additional class
A common shares, in exchange for the sale of his advisory company, as AmREIT
issued additional capital. Mr. Taylor was issued approximately 302 thousand
Class A common shares, which resulted in a deferred merger expense of $1.9
million in the third quarter 2002. Under the deferred consideration agreement,
approximately 384 thousand shares remain to be issued to Mr. Taylor in the
event the Company issues additional shares prior to June 4, 2004, the
expiration date of the agreement.
In accordance with Statement of Financial Accounting Standard ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" issued by the
Financial Accounting Standards Board, the consolidated statements of operations
have been restated from those originally reported for the years ended December
31, 2002 and 2001 to reflect separately the results of discontinued operations
for properties held for sale during the nine-months ended September 30, 2003.
The restatement had no impact on the consolidated balance sheets, consolidated
statement of shareholders equity or statements of cash flows. The restatement
had no impact on net (loss) income or net (loss) income per share for the years
ended December 31, 2002 and 2001, see Note 10.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT, and its
wholly or majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
recorded when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of demand deposits at commercial banks and money market
funds.
PROPERTY
Property is leased to others, primarily on a net lease basis, whereby the
operating expenses related to the properties, including property taxes,
insurance and common area maintenance are the responsibility of the tenant. The
leases are accounted for under the operating method or the direct financing
method in accordance with generally accepted accounting principles. Under the
operating lease method, the properties are recorded at cost. Rental income is
42
recognized ratably over the life of the lease and depreciation is charged based
upon the estimated useful life of the property. Under the direct financing
lease method, properties are recorded at their net investment. Unearned income
is deferred and amortized to income over the life of the lease so as to produce
a constant periodic rate of return.
Expenditures related to the development of real estate are carried at cost plus
capitalized carrying charges, acquisition costs and development costs. Carrying
charges, primarily interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are capitalized as
part of construction in progress. The Company capitalizes acquisition costs
once the acquisition of the property becomes probable. Prior to that time, the
Company expenses these costs as acquisition expense.
Management reviews its properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets, including
accrued rental income, may not be recoverable through operations. Management
determines whether an impairment in value occurred by comparing the estimated
future cash flows (undiscounted and without interest charges), including the
residual value of the property, with the carrying cost of the individual
property. If impairment is indicated, a loss will be recorded for the amount by
which the carrying value of the asset exceeds its fair value.
DEPRECIATION
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years. Leasehold estate properties, where the Company owns
the building and improvements but not the related ground, therefore there is no
residual value beyond the lease, are depreciated over the life of the lease.
INVESTMENT IN NON-CONSOLIDATED AFFILIATES
AmREIT invested $250 thousand as a limited partner and $1,000 as a general
partner in AmREIT Opportunity Fund, Ltd. ("AOF"), which is accounted for using
the equity method. The limited partners have the right to remove and replace
the general partner by a vote of the limited partners owning two-thirds of the
outstanding units. AmREIT currently owns a 10.5% limited partner interest in
AOF. AOF was formed to develop, own, manage, and hold for investment and, or
resell property and to make or invest in loans for the development or
construction of property. Liquidation of AOF commenced in July of 2002. Based
on the general partner's analysis of owned real estate as of December 31, 2002,
none of the assets owned or in liquidation by AOF are impaired.
AmREIT invested $200 thousand as a limited partner and $1,000 as a general
partner in AmREIT Income & Growth Fund, Ltd. ("AIG") that is accounted for
using the equity method. The limited partners have the right to remove and
replace the general partner by a vote of the limited partners owning a majority
of the outstanding units. AmREIT currently owns an approximately 3.9% limited
partner interest in AIG. AIG was formed to develop, own, manage, and hold for
investment and, or resell property and to make or invest in loans for the
development or construction of property.
AmREIT invested $70 thousand as a limited partner in AmREIT CDP #27, LP that is
accounted for using the equity method. AmREIT CDP #27, LP was formed to acquire
43
commercial real property and to develop, operate, lease, manage, and or sell
real property. AmREIT CDP #27, LP purchased two IHOP properties in 2001 located
in Memphis, Tennessee and Tupelo, Mississippi. The Memphis, Tennessee property
was sold for a profit in the first quarter of 2002.
ARIC invested $122 thousand as a limited partner in AmREIT CDP SPE #33, Ltd.
that is accounted for using the equity method. AmREIT CDP SPE #33, Ltd. was
formed to acquire commercial real property and to develop, operate, lease,
manage, and or sell real property. In December 2001, AmREIT CDP #33, Ltd.
purchased three IHOP leasehold estate properties located in Houston, Texas,
Orem, Utah, and Hagerstown, Maryland.
AmREIT invested $330 thousand as a member in AmREIT CDP #31, LLC ("CDP 31")
that is accounted for using the equity method. CDP 31 was formed to acquire
commercial real property and to develop, operate, lease, manage, and or sell
real property. CDP 31 purchased two IHOP properties in 2001 located in
Cookeville, Tennessee and Scottsdale, Arizona. Both properties were sold during
the first quarter 2002, and CDP 31 does not own any real property as of
December 31, 2002.
OTHER ASSETS
Other assets include loan acquisition costs, net of accumulated amortization,
of $250 thousand. Loan acquisitions costs are incurred in obtaining property
financing and are amortized to interest expense on the effective interest
method over the term of the debt agreements. Accumulated amortization related
to loan acquisition costs as of December 31, 2002 totaled $86 thousand.
DEFERRED COMPENSATION
Deferred compensation includes stock grants to employees as a form of long term
compensation. The stock grants vest over a period of time not to exceed four
years. This allows the Company to align the interest of its employees with the
interest of our shareholders. As the stock grants vest, the Company will
amortize the vested portion to compensation expense. The expense will be
calculated by taking the number of shares vested multiplied by the market price
per share as determined on the vesting dates.
Effective January 1, 2003, AmREIT will adopt SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123".
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the sale of common
stock are treated as a reduction of shareholders' equity.
REVENUE RECOGNITION
Properties are primarily leased on a net lease basis. Revenue is recognized on
a straight-line basis over the terms of the individual leases. Service fees are
recognized when earned.
44
FEDERAL INCOME TAXES
AmREIT is qualified as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, and is, therefore, not subject to Federal income
taxes to the extent of dividends paid, provided it meets all conditions
specified by the Internal Revenue Code for retaining its REIT status, including
the requirement that at least 90% of its real estate investment trust taxable
income is distributed by March 15 of the following year.
AmREIT Realty Investment Corporation ("ARIC"), a wholly owned subsidiary of
AmREIT, is treated as a taxable REIT subsidiary for Federal income tax
purposes. As such, ARIC and its consolidated subsidiaries have recorded a
Federal income tax expense at December 31, 2002 of $61 thousand, which
represents the Federal income tax obligations on the consolidated taxable REIT
subsidiary's taxable net income. Additionally, in 2002, a deferred tax
liability of $28 thousand was established to record the taxes on certain
real estate assets of ARIC.
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income 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) by the weighted average number of common shares
outstanding plus the weighted average number of dilutive potential common
shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
For the Years Ended December 31,
BASIC AND DILUTED EARNINGS PER SHARE 2002 2001
Weighted average common shares outstanding (in thousands) 2,470 2,355
Basic and diluted (loss)/earnings per share * $(0.62) $0.34
------- -----
EARNINGS FOR BASIC AND DILUTED COMPUTATION
(Loss) earnings to Class A common shareholders (in thousands) * $(1,524) $791
====== ====
* For 2002, the loss of $1.524 million includes the charge taken against
earnings during the third quarter of $1.9 million, which was the market value
of the Class A common shares issued to H. Kerr Taylor, President & CEO, related
to the sale of his advisory company to AmREIT in 1998. The charge was for the
deferred merger cost due from this sale that was triggered by the issuance of
additional common stock as part of the merger with AmREIT's affiliated
partnerships during the third quarter of 2002.
45
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the 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
The Company's consolidated financial instruments consist primarily of cash,
cash equivalents, accounts receivable and accounts and notes payable. The
carrying value of cash, cash equivalents, accounts receivable and accounts
payable are representative of their respective fair values due to the
short-term maturity of these instruments. The Company's total debt obligations
are $33.6 million, of which $13.42 million has variable rate terms and
therefore, the fair value is representative of its carry value. Approximately
$20.18 million has fixed rate terms, of which approximately $15.5 million was
entered into during 2002. Based on the dates that the debt obligations were
entered into and the pricing on current debt obligations, the Company believes
that the fair value of its fixed rate debt obligations is materially
representative of its carry value.
NEW ACCOUNTING STANDARDS
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the
Financial Accounting Standards Board ("FASB"). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Goodwill and certain intangible assets will remain on the
balance sheet and not be amortized. On an annual basis, and when there is
reason to suspect that their values have been diminished or impaired, these
assets must be tested for impairment, and write-downs may be necessary. The
Company implemented SFAS No. 141 on July 1, 2001. The adoption of this
Statement had no effect on the Company's consolidated financial position or
results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets " was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company implemented SFAS No. 142 on January 1,
2002. The adoption of SFAS No. 142 did not have a material impact on our
consolidated financial position, results of operations, or cash flows.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which is effective for fiscal years beginning after June 15,
2002. SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of SFAS No. 143 did not have a material
impact on our consolidated financial position, results of operations, or cash
flows.
On January 1, 2002, the company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses accounting
46
and reporting for the impairment or disposal of a segment of a business. More
specifically, this statement broadens the presentation of discontinued
operations to include a component of an entity whose operations and cash flows
can be clearly distinguished, opertionally and for financial reporting
purposes, from the rest of the entity. The adoption of SFAS No. 144 did not
have a material impact on our consolidated financial position, results of
operations, or cash flows.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The initial
recognition and measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002 and are not expected to
have a material effect on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002, however, these disclosure
modifications are not applicable to the Company and adoption of SFAS 148 is not
anticipated to have a material impact on our consolidated financial position,
results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements. The
Interpretation requires certain disclosures in financial statements issued
after January 31, 2003 if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when the
Interpretation becomes effective.
Reclassification
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the presentation used in the 2002 consolidated
financial statements.
47
2. OPERATING LEASES
A summary of minimum future rentals to be received, exclusive of any renewals,
under noncancellable operating leases in existence at December 31, 2002 is as
follows:
2003 4,342,650
2004 4,260,343
2005 4,015,934
2006 3,994,020
2007 3,754,100
2008-2027 15,285,089
----------
$35,652,136
3. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in its direct financing leases at December 31,
2002 included:
Minimum lease payments receivable $ 61,306,182
Unguaranteed residual value 3,858,403
Less: Unearned income (41,759,261)
------------
$ 23,405,324
A summary of minimum future rentals, exclusive of any renewals, under the
noncancellable direct financing leases follows:
2003 2,444,944
2004 2,453,682
2005 2,462,421
2006 2,471,778
2007 2,605,857
2008 - 2027 48,867,500
-----------
Total $61,306,182
===========
4. INVESTMENT IN NON-CONSOLIDATED AFFILIATES
AmREIT owns interests in 5 limited liability companies or limited
partnerships, which are accounted for under the equity method since
AmREIT exercises significant influence. Our interests in these joint ventures
and limited partnerships range from 2% to 40%, which are primarily single and
multi-tenant net lease retail real estate assets. Combined condensed financial
information of these ventures (at 100%) is summarized as follows:
48
Combined Balance Sheet December 31, 2002
Assets
Property, net $ 8,698,634
Cash 4,172,585
Other assets 2,456,268
-------------
TOTAL ASSETS $15,327,487
===========
Liabilities and partners' capital
Notes payable $ 3,859,810
Other liabilities 493,454
Partners capital 10,974,223
------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $15,327,487
===========
Combined Statement of Operations
2002 2001
Total Revenue $ 2,624,850 $ 582,001
Expense
Interest 358,672 83,110
Depreciation and amortization 189,066 71,640
Other 188,834 188,598
-------------- ---------
TOTAL EXPENSE 736,572 343,348
-------------- ---------
NET INCOME $ 1,888,278 $ 238,653
============= ============
5. NOTES PAYABLE
In November 1998, the Company entered into an unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the acquisition of
properties and working capital, and repaid all amounts outstanding under the
Company's prior credit facility. Under the Credit Facility, which had an
original term of one year, and has been extended through April 2003, the
Company may borrow up to $20 million subject to the value of unencumbered
assets. The Company is negotiating with the Lender for an extension of the
Credit Facility, which would extend the maturity of the Credit Facility beyond
December 31, 2003. The Credit Facility contains covenants, which among other
restrictions, require the Company to maintain a minimum net worth and a maximum
leverage ratio. As of December 31, 2002, the Lender had waived these financial
covenants. The Credit Facility bears interest at an annual rate of LIBOR plus a
spread of 2.0% (3.4375% as of December 31, 2002). On December 31, 2002, $11.76
million was outstanding under the Credit Facility. Thus the Company has
approximately $8.24 million available under its line of credit subject to use
of proceeds by the lender.
49
In March 1999, the Company entered into a ten-year mortgage note, amortized
over 30 years, for $1 million with $968 thousand being outstanding at December
31, 2002. The interest rate is fixed at 8.375% with payments of principal and
interest due monthly. The note matures April 1, 2009 and as of December 31,
2002 the Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on property with an aggregate carrying
value of $1.179 million, net of $107 thousand of accumulated depreciation.
In February 2001, the Company entered into a ten-year mortgage note, amortized
over 20 years, for $1.35 million with $1.3 million being outstanding at
December 31, 2002. The interest rate is fixed at 8.25% with payments of
principal and interest due monthly. The note matures February 28, 2011 and as
of December 31, 2002 the Company is in compliance with all terms of the
agreement. The note is collateralized by a first lien mortgage on property,
which is accounted for as a direct financing lease with a net investment in
direct financing lease of $1 million and land of $741 thousand.
In October 2001, the Company entered into a ten-year mortgage note amortized
over 30 years, for $2.4 million with $2.378 million being outstanding at
December 31, 2002. The interest rate is fixed at 7.60% with payments of
principal and interest due monthly. The note matures November 1, 2011 and as of
December 31, 2002 the Company is in compliance with all terms of the agreement.
The note is collateralized by a first lien mortgage on property with an
aggregate carrying value of $3.967 million, net of $330 thousand of accumulated
depreciation.
In October 2001, the Company entered into a note payable for $1.658 million
with $1.658 million being outstanding at December 31, 2002. The interest rate
is equal to the thirty day LIBOR rate plus 280 basis points, but in no event
lower than 6.75%, which equated to 6.75% at December 31, 2002. The note matures
November 1, 2004 and as of December 31, 2002 the Company is in compliance with
all terms of the agreement. The note is collateralized by a first lien mortgage
on property, which is accounted for as a direct financing lease with a net
investment in direct financing lease of $1.33 million and land of $564
thousand.
Beginning in April 2002, AAA CTL Notes, Ltd., a majority owned subsidiary of
AmREIT, began entering into non-recourse ten-year mortgages, amortized over 20
years, related to the purchase of seventeen IHOP properties. The following
table summarizes the terms of loan agreements and the property collateralizing
the non-recourse notes. As of December 31, 2002 the Company is in compliance
with all terms of the agreement. The non-recourse notes have
cross-collateralization and default provisions with each other.
50
Loan amount at Net investment in
Location Original loan December 31, Fixed direct financing
amount 2002 interest Date loan lease
(in thousands) (in thousands) rate matures (in thousands)
Shawnee, KS $ 751 $ 741 7.82% May 1, 2012 $ 889
El Paso, TX 760 751 7.82% May 1, 2012 897
Beaverton, OR 887 876 7.82% May 1, 2012 1,046
Rochester, NY 951 939 7.82% May 1, 2012 1,136
Baton Rouge, LA 1,250 1,235 7.82% May 1, 2012 1,460
Charlottesville, VA 630 622 7.82% May 1, 2012 749
Albuquerque, NM 767 747 7.82% May 1, 2012 887
Springfield, MO 1,030 1,019 7.82% June 1, 2012 1,208
Salem, OR 621 614 7.82% June 1, 2012 732
Roanoke, VA 712 706 7.89% July 1, 2012 845
Alexandria, LA 716 711 7.89% Aug. 1, 2012 855
Centerville, UT 1,242 1,233 7.89% Aug. 1, 2012 1,078
Memphis, TN 1,342 1,333 7.89% Aug. 1, 2012 1,088
La Verne, CA 745 741 7.89% Sept. 1, 2012 998
El Paso, TX 894 890 7.89% Sept. 1, 2012 1,156
Memphis, TN 777 773 7.89% Sept. 1, 2012 1,062
Parker, CO 835 831 7.89% Sept. 1, 2012 1,112
----------------- ----------------- --------------------
Total $14,910 $14,762 $17,198
================= ================= ====================
In July of 2002, the Company issued thirteen, 8 year subordinated, 5.47%
interest-only notes totaling $760 thousand, maturing July 2010. The notes,
which are callable by the Company at par plus accrued interest, were issued to
partners who dissented against the Company's merger with three affiliated
public partnerships.
Aggregate annual maturity of the notes payable for each of the following five
years ending December 31 are as follows:
(in thousands)
2003 $ 12,172
2004 447
2005 483
2006 522
2007 565
Thereafter 19,397
------------
$ 33,586
51
6. MAJOR TENANTS
The following schedule summarizes rental income by lessee for 2002 and 2001 (in
thousands):
2002 2001
International House of Pancakes $ 1,784 $ 510
Footstar, Inc. 735 713
OfficeMax, Inc. (5) 509 518
Wherehouse Entertainment 381 378
Hollywood Entertainment Corp. 273 273
Sugar Land Imaging Affiliates Ltd. 264 217
Mattress Giant, Inc. 168 106
Washington Mutual 158 158
Radio Shack 109 109
Golden Corral (4) 167 0
Texas Children's Pediatrics (2) 137 0
Don Pablos 78 79
One Care Health Industries, Inc. (1) 57 204
Comp USA (4) 123 0
Baptist Memorial Hospital (4) 102 0
TGI Friday's (4) 83 0
Dr. Pucillo (4) 87 0
Pier 1 62 0
America's Favorite Chicken Co. (3) (4) 55 21
Blockbuster (4) 42 0
Waldenbooks (4) 38 0
Jack in the Box (4) 34 0
Goodyear (4) (5) 25 0
Skewers 18 0
Hope Rehab 5 0
------- -------
Total $ 5,494 $ 3,286
======= =======
(1) One Care Health Industries, Inc. was a tenant at Copperfield Medical
Plaza. In April of 2002, AmREIT negotiated a lease buy out agreement
with One Care for approximately $190 thousand. As a result, AmREIT
immediately released approximately 75% of the available space to Texas
Children's Pediatrics and the Company has negotiated a lease for
balance of the space.
(2) Texas Children's Pediatrics entered into a long-term lease with
AmREIT, beginning in May 2002, at Copperfield Medical Plaza. The lease
was entered into as a result of the negotiated lease buy out by AmREIT
and One Care Health Industries, Inc.
(3) The America's Favorite Chicken Co. restaurant located in Atlanta
was sold by AmREIT during the first quarter 2001.
(4) Properties were purchased from three affiliated partnerships in
July 2002.
(5) In accordance with Statement of Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets"
issued by the Financial Accounting Standards Board, the rental income
from the Office Max located in Dover, DE (2002 and 2001) and the
Goodyear Tire Store located in Houston, TX (2002) have been restated
to reflect separately the results from discontinued operations for
these properties, which were held for sale during the nine months
ended September 30, 2003. Accordingly, the above table reflects
income from continuing operations and discontinued operations.
52
7. FEDERAL INCOME TAXES
The differences between net income for financial reporting purposes and taxable
income before distribution deductions relate primarily to temporary
differences, merger costs and potential acquisition costs which are expensed
for financial reporting purposes.
For income tax purposes, distributions paid to shareholders consist of ordinary
income, capital gains and return of capital as follows (in thousands):
2002 2001
-------- --------
Ordinary income $ - $ 6
Return of capital 1,730 143
Capital gain - 456
-------- --------
$ 1,730 $ 605
======== ========
8. RELATED PARTY TRANSACTIONS
See Note 4 regarding investments in non-consolidated affiliates.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
AAA Net Realty Fund XI, Ltd. AmREIT accounted for this merger as a purchase,
whereby the assets of the partnerships have been recorded at fair market value.
AmREIT increased its real estate assets by approximately $24.3 million and
issued approximately 2.6 million shares of Class B common stock to the limited
partners in the affiliated partnerships as a result of the merger.
Approximately $760 thousand in 8 year, 5.47% interest only, subordinated notes
were issued to limited partners of the affiliated partnerships who dissented to
the merger. The acquired properties are unencumbered, single tenant, free
standing properties on lease to national and regional tenants, where the lease
is the direct obligation of the parent company. A deferred merger expense
stemmed from stock issued to H. Kerr Taylor, President and Chief Executive
Officer, based on a deferred consideration that was approved by the
stockholders in 1998. Mr. Taylor was issued 302 thousand shares of Class A
common stock, which resulted in a $1.9 million charge to earnings in the third
quarter 2002. As the Company raises additional equity, Mr. Taylor is eligible
to receive up to an additional 384 thousand shares of Class A common stock
pursuant to the deferred consideration agreement approved by the stockholders
in 1998 related to the sale of Mr. Taylor's advisory company to AmREIT.
The Company provides property acquisition, leasing, administrative and
management services for ten affiliated real estate limited partnerships that
are under common management (the "Partnerships"). The president and director of
the Company owns between 45% and 100% of the stock of the companies that serve
as the general partner of the Partnerships. Service fees of $245 thousand and
$335 thousand were paid by the Partnerships to the Company for 2002 and 2001
respectively.
53
As a sponsor of real estate investment opportunities to the NASD financial
planning broker dealer community, the Company maintains a 1% general partner
interest in the investment funds that it sponsors. 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. The
Company also assigns a portion of this general partner interest in these
investment funds to its employees as long term, contingent compensation. In so
doing, the Company believes that it will align the interest of management with
that of the shareholders, while at the same time allowing for a competitive
compensation structure in order to attract and retain key management positions
without increasing the overhead burden.
On March 20, 2002, the Company formed AAA CTL Notes, Ltd. ("AAA"), a majority
owned subsidiary which is consolidated in the financial statements of AmREIT,
through which the Company purchased fifteen IHOP leasehold estate properties
and two IHOP fee simple properties.
Locke Liddell and Sapp, LLP acts as the Company's corporate attorneys. Bryan
Goolsby is the managing director of Locke Liddell and Sapp LLP and is a member
of the Company's board of trust managers. During 2002 and 2001, the Company
paid Locke Liddell and Sapp LLP approximately $777 thousand and $133 thousand,
respectively, for legal services rendered.
9. PROPERTY ACQUISITIONS AND DISPOSITIONS
During the third quarter, the Company purchased seventeen IHOP restaurant
properties. Fifteen of the properties are leasehold estate properties, whereby
the Company owns the physical improvements, but does not own the underlying
land. Two of the properties were purchased in fee simple. The total purchase
price was $17.25 million. The properties were purchased utilizing $2.34 million
cash and $14.91 million non-recourse, 10-year debt with an average
interest rate of 7.85%. Each lease agreement extends for a period of 18-25
years, however, the tenant has the ability to extend the primary term of the
lease for two to three additional terms of five years each. Additionally, each
lease is subject to a corresponding ground lease with the same term of 18-25
years and two to three additional terms of five years each. The Company
recorded $1.18 million in rental income during 2002 from properties acquired
in this transaction.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
AAA Net Realty Fund XI, Ltd., which was accounted for as an acquisition. With
the merger of the affiliated partnerships, AmREIT increased its real estate
assets by approximately $24.3 million and issued approximately 2.6 million
shares of Class B common stock to the limited partners in the affiliated
partnerships. 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 do not have voting rights, receive a fixed 8%
54
cumulative and preferred dividend, and are convertible into the class A common
shares on a one-for-one basis at any time, at the holder's option.
Approximately $760 thousand in 8 year, interest only, subordinated notes were
issued to limited partners of the affiliated partnerships who dissented against
the merger. The acquired properties are unencumbered, single tenant, free
standing properties on lease to national and regional tenants, where the lease
is the direct obligation of the parent company.
The following selected unaudited pro forma consolidated statement of operations
for AmREIT and subsidiaries gives effect to the merger with its three
affiliated partnerships, which assumes that the merger occurred on January 1,
2002 and January 1, 2001, respectively. Additionally, we have presented a
summary of assets acquired and liabilities assumed as of the date of the
merger, July 23, 2002.
Pro Forma Consolidated Statement of Operations
For the Twelve Months Ended December 31,
(Unaudited)
2002 2001
Revenues
Rental income and earned income $ 6,399,475 $ 5,012,747
Other income 2,542,974 2,459,287
----------- -----------
Total Revenues 8,942,449 7,472,034
----------- -----------
Total Expense 8,806,471 6,811,762
----------- -----------
Proforma Income Before Minority Interest in Net Income of
Consolidated Joint Ventures 135,978 660,272
Federal Income Tax Expense from Non-Qualified Subsidiary (20,524) (144,420)
------------ ------------
Minority Interest in Net Income of Consolidated Joint Ventures (46,419) -
Pro Forma Net Income $ 69,035 $ 515,852
Distributions to Class B Shareholders (1,822,262) (1,915,992)
____________ ____________
Net (Loss) available to Class A Shareholders (1,753,227) (1,400,140)
Pro Forma Basic and Diluted (Loss)Per Share $ (0.65) $ (0.52)
============ ============
Pro Forma Weighted Average Common Shares Outstanding 2,691,580 2,706,961
55
Summary of Assets Acquired and Liabilities Assumed
As of July 23, 2002,
(Unaudited)
Assets
Buildings $ 16,330,088
Land 7,560,231
Accounts receivable 1,105,612
Prepaid expenses 15,757
-------------
TOTAL ASSETS $ 25,011,688
=============
Liabilities $ 132,630
-------------
Net assets acquired $ 24,879,058
=============
Class B common shares issued $ 24,118,648
Subordinated notes issued 760,410
=============
10. DISCONTINUED OPERATIONS
The operations of two properties reported as held for sale at September 30, 2003
have been restated as discontinued operations for 2002 and 2001 as required
by SFAS No. 144. The following is a summary of our discontinued operations:
December 31,
2002 2001
Rental Revenue $301,064 $276,444
Depreciation and amortization (55,223) (50,725)
________ ________
Income from discontinued operations $245,841 $225,719
Basic and diluted income from
discontinued operations per common share $0.10 $0.10
11. COMMITMENT
The Company has a one-year lease agreement for its office facilities through
December 31, 2003. Rental expense for the years ended December 31, 2002 and
2001 was $77 thousand and $71 thousand, respectively.
56
AmREIT and subsidiaries
SCHEDULE III - Consolidated Real Estate Owned and Accumulated Depreciation For
the year ended December 31, 2002
Cost at
Property Encum- Improve- Close of Year
Description brances Building Land ments Building
Properties Invested in
Under Operating Leases
Radio Shack Retail Store, Texas $ - $ 788,330 $ 337,856 $ - $ 788,330
Blockbuster Music Store, Missouri $ - $ 1,247,461 $ 534,483 $ - $ 1,247,461
OneCare Health Industries, Inc., Texas $ - $ 1,436,615 $ 534,086 $ - $ 1,436,615
Blockbuster Music Store, Kansas $ - $ 1,382,846 $ 592,648 $ - $ 1,382,846
Just For Feet Store, Arizona $ - $ - $ 1,214,046 $ - $ -
Bank United, Woodlands, Texas $ - $ - $ 562,846 $ - $ -
Bank United, Houston, Texas $ - $ - $ 851,973 $ - $ -
Just For Feet Store, Louisiana $ - $ 2,254,537 $ 966,230 $ - $ 2,254,537
Hollywood Video Store, Louisiana $ - $ 784,123 $ 443,544 $ - $ 784,123
Hollywood Video Store, Mississippi $ - $ 835,854 $ 450,000 $ - $ 835,854
OfficeMax, Delaware $ - $ 1,978,313 $ 870,480 $ - $ 1,978,313
Lake Woodlands Plaza $ - $ 2,832,540 $ 1,369,065 $ - $ 2,832,540
Sugar Land Plaza $ - $ 2,902,157 $ 1,280,043 $ - $ 2,902,157
Don Pablo's, Georgia $ - $ - $ 773,800 $ - $ -
IHOP, Topeka $ - $ - $ 450,984 $ - $ -
IHOP, Sugarland $ - $ - $ 740,882 $ - $ -
IHOP, St. Peters $ - $ - $ 564,096 $ - $ -
Jack in the Box $ - $ 504,230 $ 216,099 $ - $ 504,230
Baptist Memorial Health $ - $ 1,456,017 $ 624,006 $ - $ 1,456,017
Payless Shoe Source $ - $ 498,098 $ 212,907 $ - $ 498,098
Golden Corral $ - $ 1,097,215 $ 725,552 $ - $ 1,097,215
Golden Corral $ - $ 1,297,851 $ 556,221 $ - $ 1,297,851
TGI Friday's $ - $ 1,453,769 $ 623,043 $ - $ 1,453,769
Goodyear Tire $ - $ 376,172 $ 161,217 $ - $ 376,172
Guitar Center $ - $ 1,782,470 $ 763,917 $ - $ 1,782,470
Popeye's $ - $ 778,771 $ 333,758 $ - $ 778,771
Dr. Pucillo $ - $ 1,276,836 $ 547,214 $ - $ 1,276,836
Blockbuster Video $ - $ 688,091 $ 294,896 $ - $ 688,091
Pier One Imports $ - $ 1,000,562 $ 422,722 $ - $ 1,000,562
IHOP, Memphis $ - $ - $ 469,502 $ - $ -
IHOP, Centerville $ - $ - $ 457,492 $ - $ -
________________________________________________________________________________
Total $ - $ 28,652,858 $ 18,945,608 $ - $ 28,652,858
===============================================================================================================================
Properties Invested in Under
Direct Financing Lease
Just For Feet Store, Arizona $ - $ 2,848,151 $ - $ - $ 2,848,151
IHOP, Topeka $ - $ 993,774 $ - $ - $ 993,774
IHOP, Sugarland $ - $ 999,517 $ - $ - $ 999,517
IHOP, St. Peters $ - $ 1,331,121 $ - $ - $ 1,331,121
IHOP, Albuquerque $ - $ 886,692 $ - $ - $ 886,692
IHOP, Baton Rouge $ - $ 1,460,170 $ - $ - $ 1,460,170
IHOP, Beaverton $ - $ 1,045,672 $ - $ - $ 1,045,672
IHOP, Charlottesville $ - $ 748,859 $ - $ - $ 748,859
IHOP, El Paso #1934 $ - $ 896,644 $ - $ - $ 896,644
IHOP, Roanoke $ - $ 845,051 $ - $ - $ 845,051
IHOP, Rochester $ - $ 1,135,950 $ - $ - $ 1,135,950
IHOP, Salem $ - $ 731,642 $ - $ - $ 731,642
IHOP, Shawnee $ - $ 889,229 $ - $ - $ 889,229
IHOP, Springfield $ - $ 1,207,602 $ - $ - $ 1,207,602
IHOP, Alexandria $ - $ 854,837 $ - $ - $ 854,837
IHOP, Centerville $ - $ 1,077,649 $ - $ - $ 1,077,649
IHOP, Memphis #4462 $ - $ 1,088,114 $ - $ - $ 1,088,114
IHOP, La Verne $ - $ 997,980 $ - $ - $ 997,980
IHOP, El Paso #1938 $ - $ 1,156,194 $ - $ - $ 1,156,194
IHOP, Memphis #4482 $ - $ 1,098,749 $ - $ - $ 1,098,749
IHOP, Parker $ - $ 1,111,727 $ - $ - $ 1,111,727
________________________________________________________________________________
Total $ - $ 23,405,324 $ - $ - $ 23,405,324
===============================================================================================================================
57
Life on Which
Depreciation
Cost at in Latest Income
Close of Year Accumulated Date of Date Statement
Land Depreciation Construction Acquired is Computed
Properties Invested in
Under Operating Leases
Radio Shack Retail Store, Texas $ 337,856 $ 172,606 N/A 06-15-94 39 Years
Blockbuster Music Store, Missouri $ 534,483 $ 138,644 N/A 11-14-94 39 Years
OneCare Health Industries, Inc., Texas $ 534,086 $ 236,890 N/A 09-26-95 39 Years
Blockbuster Music Store, Kansas $ 592,648 $ 128,969 N/A 09-12-95 39 Years
Just For Feet Store, Arizona $ 1,214,046 N/A N/A 09-11-96 N/A
Bank United, Woodlands, Texas $ 562,846 N/A N/A 09-23-96 N/A
Bank United, Houston, Texas $ 851,973 N/A N/A 12-11-96 N/A
Just For Feet Store, Louisiana $ 966,230 $ 165,360 N/A 06-09-97 39 Years
Hollywood Video Store, Louisiana $ 443,544 $ 75,635 N/A 10-31-97 39 Years
Hollywood Video Store, Mississippi $ 450,000 $ 107,161 N/A 12-30-97 39 Years
OfficeMax, Delaware $ 870,480 $ 232,494 N/A 4-14-98 39 Years
Lake Woodlands Plaza $ 1,369,065 $ 288,585 N/A 6-3-98 39 Years
Sugar Land Plaza $ 1,280,043 $ 330,195 N/A 7-1-98 39 Years
Don Pablo's, Georgia $ 773,800 N/A N/A 12-18-98 N/A
IHOP, Topeka $ 450,984 N/A N/A 9-30-99 N/A
IHOP, Sugarland $ 740,882 N/A N/A 9-22-99 N/A
IHOP, St. Peters $ 564,096 N/A N/A 11-30-01 N/A
Jack in the Box $ 216,099 $ 6,003 N/A 7-23-02 39 Years
Baptist Memorial Health $ 624,006 $ 17,453 N/A 7-23-02 39 Years
Payless Shoe Source $ 212,907 $ 5,866 N/A 7-23-02 39 Years
Golden Corral $ 725,552 $ 13,109 N/A 7-23-02 39 Years
Golden Corral $ 556,221 $ 15,474 N/A 7-23-02 39 Years
TGI Friday's $ 623,043 $ 17,098 N/A 7-23-02 39 Years
Goodyear Tire $ 161,217 $ 4,498 N/A 7-23-02 39 Years
Guitar Center $ 763,917 $ 21,336 N/A 7-23-02 39 Years
Popeye's $ 333,758 $ 9,351 N/A 7-23-02 39 Years
Dr. Pucillo $ 547,214 $ 15,251 N/A 7-23-02 39 Years
Blockbuster Video $ 294,896 $ 8,174 N/A 7-23-02 39 Years
Pier One Imports $ 422,722 $ 12,000 N/A 7-23-02 39 Years
IHOP, Memphis $ 469,502 N/A N/A 7-26-02 N/A
IHOP, Centerville $ 457,492 N/A N/A 7-25-02 N/A
____________________________________________________________________
Total $ 18,945,608 $ 2,022,152
========================================================================
Properties Invested in Under
Direct Financing Lease
Just For Feet Store, Arizona $ - (1) N/A 09-11-96 N/A
IHOP, Topeka $ - (1) N/A 9-30-99 N/A
IHOP, Sugarland $ - (1) N/A 9-22-99 N/A
IHOP, St. Peters $ - (1) N/A 11-30-01 N/A
IHOP, Albuquerque $ - (1) N/A 4-23-02 N/A
IHOP, Baton Rouge $ - (1) N/A 4-23-02 N/A
IHOP, Beaverton $ - (1) N/A 4-16-02 N/A
IHOP, Charlottesville $ - (1) N/A 4-23-02 N/A
IHOP, El Paso #1934 $ - (1) N/A 4-16-02 N/A
IHOP, Roanoke $ - (1) N/A 6-21-02 N/A
IHOP, Rochester $ - (1) N/A 4-16-02 N/A
IHOP, Salem $ - (1) N/A 5-17-02 N/A
IHOP, Shawnee $ - (1) N/A 4-16-02 N/A
IHOP, Springfield $ - (1) N/A 5-17-02 N/A
IHOP, Alexandria $ - (1) N/A 7-18-02 N/A
IHOP, Centerville $ - (1) N/A 7-25-02 N/A
IHOP, Memphis #4462 $ - (1) N/A 7-26-02 N/A
IHOP, La Verne $ - (1) N/A 8-23-02 N/A
IHOP, El Paso #1938 $ - (1) N/A 8-23-02 N/A
IHOP, Memphis #4482 $ - (1) N/A 8-23-02 N/A
IHOP, Parker $ - (1) N/A 8-23-02 N/A
____________________________________________________________________
Total $ - (1)
=================================================================================================================
(1) The portion of the lease relating to the building of this property has been
recorded as a direct financing lease for financial reporting purposes.
Consequently, depreciation is not applicable.
58
(2) Transactions in real estate and accumulated depreciation during 2002, 2001
and 2000 for operating lease properties are summarized as follows:
Accumulated
Cost Depreciation
Balance at December 31, 1999 29,861,678 1,123,790
Acquisitions / additions 33,430 -
Depreciation expense - 435,259
__________ _________
Balance at December 31, 2000 29,895,108 1,559,049
Acquisitions / additions 1,351,201 -
Disposals (797,237) -
Depreciation expense - 439,652
__________ _________
Balance at December 31, 2001 $ 30,449,072 $ 1,998,701
Acquisitions / additions $ 20,024,562 $ -
Disposals $ (2,875,168) $ (238,591)
Depreciation expense $ - $ 262,042
__________ _________
Balance at December 31, 2002 $ 47,598,466 $ 2,022,152
(3) The aggregate cost of all properties for Federal Income Tax purposes is
$71,261,389 at December 31, 2002.
59
610 Westheimer - 2000
Historical Summary of Gross Income
and Direct Operating Expenses
Period September 29, 2002 (commencement of
operations) through December 31, 2002
and nine months ended September 30,
2003 (unaudited)
(With Independent Auditors' Report Thereon)
60
Independent Auditors' Report
The Board of Trust Managers
AmREIT:
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses (Historical Summary) of 610 Westheimer - 2000 (the Property)
for the period September 29, 2002 (commencement of operations) through December
31, 2002. This Historical Summary is the responsibility of the management of
AmREIT. Our responsibility is to express an opinion on the Historical Summary
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the Historical
Summary is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the Historical
Summary. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the Historical Summary. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission and
for inclusion in Post-Effective Amendment No. 1 to the Registration Statement
on Form S-11 of AmREIT, as described in note 2. The presentation is not
intended to be a complete presentation of the Property's revenues and expenses.
In our opinion, the Historical Summary referred to above presents fairly, in
all material respects, the gross income and direct operating expenses, as
described in note 2, of 610 Westheimer - 2000 for the period September 29, 2002
(commencement of operations) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
KPMG, LLP
Houston, Texas
December 11, 2003
61
610 WESTHEIMER 2000
Historical Summary of Gross Income
and Direct Operating Expenses
Period September 29, 2002 (commencement of operations) through December 31,
2002 and nine months ended September 30, 2003 (unaudited)
Period
September 29,
2002
(commencement
of operations) Nine months
through ended
December 31, September 30,
2002 2003
_____________ _____________
(Unaudited)
Gross income:
Base rental income $215,265 751,748
Common area, real estate tax and insurance recoveries 27,150 166,923
________ _______
Total gross income 242,415 918,671
________ _______
Direct operating expenses:
Operating expenses 9,158 39,990
Real estate taxes 26,342 139,771
Management fees 6,000 16,500
Insurance 4,656 10,535
________ _______
Total direct operating expenses 46,156 206,796
________ _______
Excess of gross income over direct operating expenses $196,259 711,875
======== =======
See accompanying notes to historical summary of gross income and direct
operating expenses.
62
610 Westheimer - 2000
Notes to Historical Summary of Gross Income
and Direct Operating Expenses
Period September 29, 2002 (commencement of
operations) through December 31, 2002
and nine months ended September 30,
2003 (unaudited)
(1) Business
610 Westheimer - 2000 (the Property) is located in Houston, Texas. The
Property consists of approximately 28,000 square feet of gross leasable
area and was approximately 71% occupied by two tenants at December 31,
2002. As of September 30, 2003, the Property was 83% occupied by four
tenants. On December 11, 2003, AmREIT acquired the Property.
(2) Basis of Presentation and Combination
The Historical Summary of Gross Income and Direct Operating Expenses
(Historical Summary) has been prepared for the purpose of complying with
Rule 3-14 of the Securities and Exchange Commission Regulation S-X and
for inclusion in Post-Effective Amendment No. 1 to the Registration
Statement on Form S-11 of AmREIT and is not intended to be a complete
presentation of the Property's revenues and expenses. The Historical
Summary has been prepared on the accrual basis of accounting. Management
of the Property is required to make estimates and assumptions that
affect the reported amounts of the revenues and expenses during the
reporting period. Actual results may differ from those estimates.
In the opinion of management, all adjustments necessary for a fair
presentation are of a recurring nature and have been made to the
accompanying unaudited amounts for the nine months ended September 30,
2003.
(3) Gross Income
The Property leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. The leases
include provisions under which the Property is reimbursed for common
area, real estate, and insurance costs. Revenue related to these
reimbursed costs is recognized in the period the applicable costs are
incurred and billed to tenants pursuant to the lease agreements. Certain
leases contain renewal to options at various periods at various rental
rates. Certain of the leases contain provisions for contingent rentals.
No contingent rent was earned during the year ended December 31, 2002.
Although certain leases may provide for tenant occupancy during periods
for which no rent is due and/or increases exist in minimum lease
payments over the term of the lease, rental income is recognized for the
full period of occupancy on a straight-line basis. Related adjustments
increased base rental income by $16,000 for the period ended December
31, 2002.
Minimum rents to be received from tenants under operating leases, which
terms range from five years to twenty-two years, in effect at December
31, 2002 are as follows:
2003 $ 856,600
2004 856,600
2005 856,600
2006 856,600
2007 871,766
Thereafter 12,089,393
__________
Total $16,387,559
__________
__________
63
(4) Direct Operating Expenses
Direct operating expenses include only those costs expected to be
comparable to the proposed future operations of the Property. Repairs
and maintenance expenses are charged to operations as incurred. Costs
such as depreciation, amortization, interest expense related to mortgage
debt not assumed, and professional fees are excluded from the Historical
Summary.
(5) Related-Party Transactions
During the period ended December 31, 2002, management fees of $6,000
were paid by the Property to the General Partner of the owner.
64