UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 1-13239
AEGIS REALTY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-3916825
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
<PAGE>
PART I
Item 1. Financial Statements
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Real estate, net $ 142,858,431 $ 94,638,187
Investment in partnerships 6,209,166 9,296,088
Mortgage loans receivable 3,278,307 30,980,995
Loan receivable from affiliate 0 3,060,000
Cash and cash equivalents 4,294,209 6,728,050
Accounts receivable-tenants, net of allowance for
doubtful accounts of $303,000 and $304,000,
respectively 1,278,563 1,169,526
Deferred costs, net 1,975,224 2,226,832
Other assets 925,994 539,650
------------- -------------
Total Assets $ 160,819,894 $ 148,639,328
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 29,397,157 $ 18,544,242
Accounts payable and other liabilities 2,660,168 1,871,394
Due to Advisor and affiliates 355,667 507,835
Distributions payable 1,966,253 1,943,415
------------- -------------
Total Liabilities 34,379,245 22,866,886
------------- -------------
Minority interest of unitholders in the
Operating Partnership 1,948,982 727,431
------------- -------------
Commitments and Contingencies
Shareholders' equity:
Common stock; $.01 par value;
50,000,000 shares authorized; 8,051,159 and
8,050,727 shares issued and outstanding,
respectively 80,511 80,507
Additional paid in capital 125,439,851 125,476,308
Distributions in excess of net income (1,028,695) (511,804)
------------- -------------
Total Shareholders' Equity 124,491,667 125,045,011
------------- -------------
Total Liabilities and Shareholders' Equity $ 160,819,894 $ 148,639,328
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income $3,520,886 $ 1,774,041 $ 9,177,921 $5,426,584
Recovery of common area
maintenance charges 461,961 174,124 1,078,726 588,363
Real estate tax reimbursements 503,364 241,105 1,415,427 761,519
Income from equity investments 84,249 0 307,837 0
Interest income 189,795 15,538 1,557,012 40,404
Other 62,165 15,286 143,589 117,897
---------- ----------- ----------- ----------
Total revenues 4,822,420 2,220,094 13,680,512 6,934,767
---------- ----------- ----------- ----------
Expenses:
Repairs and maintenance 499,963 203,166 1,010,755 734,888
Real estate taxes 449,469 327,300 1,235,942 865,087
Interest 366,521 121,002 1,202,772 367,437
General and administrative 809,831 368,663 2,231,801 861,511
Depreciation and amortization 997,784 621,261 2,649,942 1,862,526
Minority interest in income of
the Operating Partnership 26,049 0 54,056 0
Other 191,332 (74,825) 795,297 225,192
---------- ----------- ----------- ----------
Total expenses 3,340,949 1,566,567 9,180,565 4,916,641
---------- ----------- ----------- ----------
Income before gain on sale of
investment 1,481,471 653,527 4,499,947 2,018,126
Gain on sale of investment in
partnership 0 0 779,893 0
---------- ----------- ----------- ----------
Net income $1,481,471 $ 653,527 $ 5,279,840 $2,018,126
========== =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional Distributions
Common Stock Paid-in in Excess of
Shares Amount Capital Net Income Total
--------- ------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 8,050,727 $80,507 $ 125,476,308 $ (511,804) $ 125,045,011
Net income 0 0 0 5,279,840 5,279,840
Consolidation costs 0 0 (41,453) 0 (41,453)
Issuance of shares of
common stock 432 4 4,996 0 5,000
Distributions 0 0 0 (5,796,731) (5,796,731)
--------- ------- ------------- ----------- -------------
Balance at
September 30, 1998 8,051,159 $80,511 $ 125,439,851 $(1,028,695) $ 124,491,667
========= ======= ============= =========== =============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,279,840 $ 2,018,126
------------ -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of investment in partnership (779,893) 0
Loss on repayment of mortgage loan receivable 72,967 0
Depreciation and amortization 2,752,643 1,862,526
Minority interest in income of
the Operating Partnership 54,056 0
Distributions from equity investments
in excess of income 40,945 0
Changes in assets and liabilities:
Increase in accounts receivable-tenants (108,482) (127,559)
Decrease in allowance for doubtful accounts (555) (4,451)
Increase in other assets (386,344) (113)
(Decrease) increase in due to Advisor,
general partners and affiliates (147,168) 73,457
Increase in accounts payable and
other liabilities 788,774 293,832
------------ -----------
Total adjustments 2,286,943 2,097,692
------------ -----------
Net cash provided by operating activities 7,566,783 4,115,818
------------ -----------
Cash flows from investing activities:
Proceeds from sale of investment in partnership 4,727,500 0
Improvements to real estate (439,824) (124,035)
Acquisitions of real estate (41,798,217) 0
Increase in deferred acquisition expenses (16,549) 0
Leasing commissions (125,790) (35,516)
Principal payments received on mortgage loans 26,625,390 0
Repayment of loan receivable from affiliate 3,060,000 0
------------ -----------
Net cash used in investing activities (7,967,490) (159,551)
------------ -----------
Cash flows from financing activities:
Repayments of notes payable (28,847,733) (348,922)
Proceeds from notes payable 33,050,000 0
Distributions paid (5,796,626) (3,053,731)
Increase in deferred loan costs (356,112) 0
Decrease in minority interest (63,943) 0
Consolidation costs (41,453) 0
Increase in distributions payable to minority interest 22,733 0
------------ -----------
Net cash used in financing activities (2,033,134) (3,402,653)
------------ -----------
(continued)
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents (2,433,841) 553,614
Cash and cash equivalents at beginning of period 6,728,050 2,398,013
----------- -----------
Cash and cash equivalents at end of period $ 4,294,209 $ 2,951,627
=========== ===========
Supplemental information:
Interest paid $ 1,249,349 $ 367,437
=========== ===========
Supplemental disclosure of noncash
investing and financing activities:
Note payable assumed in acquisition of real estate $ 6,650,648 $ 0
=========== ===========
Real estate acquired for units
in the Operating Partnership $ 1,231,438 $ 0
=========== ===========
Conversion of mortgage loan receivable to
investment in partnership $ 941,134 $ 0
=========== ===========
Issuance of shares of common stock for
director fees $ 5,000 $ 0
=========== ===========
Reclassification of deferred acquisition expenses
to real estate upon purchase $ 47,459 $ 0
=========== ===========
Distributions declared $(5,796,731) $(3,962,823)
Increase in distributions payable
to shareholders/partners 105 909,092
----------- -----------
Distributions paid $(5,796,626) $(3,053,731)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
Note 1 - General
Aegis Realty, Inc. (the "Company") is a Maryland corporation that has qualified
as a real estate investment trust ("REIT") under the Internal Revenue Code of
1986 as amended (the "Code"). The Company was formed to acquire, own, operate
and renovate primarily supermarket-anchored neighborhood and community shopping
centers. The Company operates in a single business segment, investment in real
estate related assets. As of September 30, 1998, the Company owned a portfolio
of twenty four retail properties, held a partnership interest in two suburban
garden apartment properties and held one FHA insured participating mortgage
secured by a suburban garden apartment property.
The Company was formed on October 1, 1997 as the result of the consolidation
(the "Consolidation") of four publicly registered, non-traded limited
partnerships, Summit Insured Equity ("Insured I"), Summit Insured Equity L.P.
II, Summit Preferred Equity L.P. and Eagle Insured, L.P. (the "Partnerships").
The Partnerships were co-sponsored by an affiliate of Related Capital Company
("Related"). Unless otherwise indicated, the "Company", as hereinafter used,
refers to Aegis Realty, Inc. and subsidiaries and, prior to October 1, 1997,
Insured I. Pursuant to the Consolidation, the Company issued shares of its
common stock, par value $.01 per share (the "Common Stock") to all partners in
the Partnerships in exchange for their limited partnership interests in each
Partnership.
The Company is governed by a board of directors comprised of two independent
directors and three directors who are affiliated with Related. The Company has
engaged Related Aegis LP (the "Advisor"), a Delaware limited partnership and an
affiliate of Related, to manage its day to day affairs. Each independent
director is entitled to receive compensation for serving as a director in the
aggregate amount of $15,000 payable in cash (maximum of $5,000 per year) and/or
shares of Common Stock valued based on the fair market value at the date of
issuance. On June 4, 1998, 216 shares, having an aggregate value of $2,500, were
issued to each independent director relating to their services for the quarter
ended December 31, 1997.
The Company owns all of its assets directly or indirectly through Aegis Realty
Operating Partnership, LP, a Delaware limited partnership (the "Operating
Partnership" or "OP"), of which the Company is the sole general partner and
holder of 98.27% of the units of partnership interest (the "OP Units") at
September 30, 1998. Also, at September 30, 1998 1.16% and .57% of the OP Units
are held by the seller of one of the retail properties and by affiliates of
Related, respectively.
For financial accounting and reporting purposes, the Consolidation was accounted
for using the purchase method of accounting. Under this method, the Partnership
with the investor group receiving the largest ownership in the Company, in this
case Insured I, is deemed to be the acquirer. As the surviving entity for
accounting purposes, Insured I's assets and liabilities were recorded by the
Company at their historical cost, with the assets and liabilities of the other
Partnerships recorded at their estimated fair values for each Partnership. No
goodwill was recorded in the Consolidation. Results of operations and other
operating financial data for the Company for the three and nine months ended
September 30, 1997 is only with respect to Insured I.
7
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
The consolidated financial statements include the accounts of the Company and
its subsidiary partnerships. All intercompany accounts and transactions with the
subsidiary partnerships have been eliminated in consolidation.
The accompanying financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of September 30, 1998, the results of
its operations for the three and nine months ended September 30, 1998 and 1997
and its cash flows for the nine months ended September 30, 1998 and 1997.
However, the operating results for the interim periods may not be indicative of
the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K/A-1 for the year ended December 31,
1997.
Certain reclassifications have been made to prior year amounts to conform with
the current year's presentation.
Note 2 - Real Estate
The components of real estate are as follows:
September 30, December 31,
1998 1997
------------- -------------
Land $ 34,751,582 $ 27,622,941
Buildings and improvements 126,455,941 83,419,863
------------- -------------
161,207,523 111,042,804
Less: Accumulated depreciation (18,349,092) (16,404,617)
------------- -------------
$ 142,858,431 $ 94,638,187
============= =============
8
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
During the period January 1, 1998 through September 30, 1998 the Company
acquired eight neighborhood shopping centers for an aggregate purchase price of
$47,365,000, not including acquisition fees and expenses of approximately
$2,294,000. The acquisitions were financed through proceeds of an expandable $40
million senior revolving credit facility shared equally between BankBoston and
KeyBank National Association (the "Credit Facility"), the assumption of
$6,650,648 of existing debt with respect to two of the acquisitions and the
issuance of 94,726 OP Units valued at $1,231,438 with respect to one of the
acquisitions. Further information regarding the eight acquisitions is as
follows:
<TABLE>
<CAPTION>
Purchase % Square
Price/ Gross Feet
Acquisition Assumption Leasable Leased at Main
Name and Date Fees and of Existing OP Units/ Square Date of Anchor
Location Purchased Expenses Debt Value Feet Purchase Tenant
- ----------------- --------- ------------ ----------- ----------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Barclay Place 3/31/98 $3,800,000 $2,587,081 81,459 85% Food Lion
Lakeland, FL $ 220,030
The Village At 4/22/98 $6,250,000 $4,063,567 79,162 100% Winn-
Waterford $ 318,425 Dixie
Midlothian, VA
Governor's Square 5/28/98 $8,200,000 94,726(a) 183,340 83% Odd Lots
Montgomery, AL $ 285,569 $1,231,438
Marion 6/25/98 $5,100,000 163,970 83% Roses,
City Square $ 253,032 Bi-Lo &
Marion, NC CVS
Dunlop Village 9/1/98 $5,000,000 77,315 96% Food Lion
Colonial Heights, $ 219,622 & CVS
VA
Centre Stage 9/2/98 $6,990,000 146,549 98% K-Mart &
Springfield, TN $ 327,886 Food Lion
White Oaks Plaza 9/9/98 $8,125,000 186,758 100% Winn-
Spindale, NC $ 489,750 Dixie &
Wal-Mart
Cape Henry 9/29/98 $3,900,000 55,075 100% Food Lion
Virginia Beach, $ 179,675 &
VA Rite-Aid
</TABLE>
(a) The OP Units are convertible to shares of Common Stock on a one-to-one
basis, subject to adjustment, on the one year anniversary of the closing date.
The OP Units were issued at an agreed upon value of $13 per share. If as of the
last trading day prior to the first anniversary of the closing date (the
"Post-Closing Adjustment Date"), the "Average Price Per Share" (as defined
below) is less than $13.00, the Company is obligated to issue additional OP
Units to the seller in the amount of the difference between (i) the quotient
obtained by dividing $1,231,438 by the Average Price Per Share as of the
Post-Closing Adjustment Date and (ii) 94,726. The Average Price Per Share means,
with respect to any given date, the average final closing price per share of
Common Stock during the twenty trading day period ending on such date.
Amounts estimated to be recoverable from future operations and ultimate sales
are greater than the carrying value of each property owned at September 30,
1998. However, the carrying value of certain properties may be in excess of
their fair value as of such date.
9
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
Note 3 - Deferred Costs
The components of deferred costs are as follows:
September 30, December 31,
1998 1997
----------- -----------
Deferred insurance costs $ 6,005,804 $ 6,005,804
Deferred loan costs 1,301,812 945,700
Deferred leasing commissions 914,395 809,941
Deferred acquisition expenses 16,549 47,459
----------- -----------
8,238,560 7,808,904
Less: Accumulated amortization (6,263,336) (5,582,072)
----------- -----------
$ 1,975,224 $ 2,226,832
=========== ===========
Note 4 - Investments in Partnerships
The Company owned a limited partnership investment in the Dominion Totem Park
Limited Partnership ("Dominion"), which acquired and operated the Chateau Creste
apartment complex in Kirkland, Washington. On March 20, 1998, Dominion Chateau
Creste Limited Partnership, the general partner of Dominion, purchased the
Company's limited partnership interest in Dominion pursuant to its rights under
the partnership agreement. The purchase price was determined by independent
appraisals and resulted in a cash payment to the Company of $4,727,500, which
was $779,893 in excess of the carrying value of this investment at the date of
sale.
On August 26, 1998, an uninsured equity loan in the amount of $895,200 was
converted to a 40% equity interest in the limited partnership which owns
Weatherly Walk Apartments (see Note 5).
Note 5 - Mortgage Loans Receivable
On June 24, 1998, Walsh/Cross Creek L.P. (the "Owner"), the owner of Cross Creek
Apartments ("Cross Creek") and an affiliate of the Advisor, sold Cross Creek to
a third party for $23.4 million. The Owner then fully repaid its outstanding
debt due to the Company totaling $22,199,045 including a $16,971,528 FHA first
mortgage loan, a $1,783,900 equity loan, a $3,060,000 additional loan made by
the Company to the Owner, a $286,948 prepayment penalty due the Company on the
FHA loan and accrued interest through the closing date of $96,669 resulting in a
loss on the repayment (including the prepayment penalty) in the amount of
$72,967 which is included in other expenses. The interest income on the Cross
Creek receivable recognized for the three and nine months ended September 30,
1998 was $404,661 and $837,802, respectively.
On August 26, 1998, the obligor of the FHA co-insured mortgage loan secured by
Weatherly Walk Apartments ("Weatherly Walk") repaid in full (after completing a
refinancing) the outstanding balance of the loan in the amount of $7,485,552
plus accrued interest through August 26, 1998 of $48,189. In addition, an
uninsured equity loan in the amount of $895,200 to the
10
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
partners of the obligor, FAI, Ltd. ("FAI"), was simultaneously converted to a
40% equity interest in FAI, the limited partnership which owns Weatherly Walk.
This equity interest will earn a monthly preferred return of 10.5% on $895,200
plus 40% of excess cash flow and sale or refinancing proceeds. For financial
accounting and reporting purposes, the basis of the equity interest in FAI is
$941,134 which is equal to the carrying value of the Weatherly Walk debt
(including purchase price adjustments) in excess of the repayment proceeds. The
interest income on the Weatherly Walk receivable recognized for the three and
nine months ended September 30, 1998 was $317,982 and $416,919, respectively.
NOTE 6 - Notes Payable
As of September 30, 1998, the Company had notes payable with outstanding
balances totaling $29,397,157. Further information regarding the notes is as
follows:
<TABLE>
<CAPTION>
Date of Monthly
Note/ Payment Outstanding
Maturity Interest of Principal Balance
Noteholder Date Rate and Interest at 9/30/98 Collateral
- -------------- -------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
New York Life
Insurance 7/11/95 9.25% $55,984 $5,002,150 Forest Park &
Company 6/10/00 Highland Fair
BankBoston, 12/30/97 (b) Interest 17,800,000(c) Kokomo Plaza,
N.A. (a) 12/30/00 only Town West,
KeyBank Applewood Centre,
National Winery Square,
Association Southaven,
(a) Pinehurst &
Woodgate Manor
Heller
Financial, Inc. 6/24/97 (d) 8.50% $19,992 2,575,165 Barclay Place
7/1/17
Nomura 10/28/97 (e) 7.54% $33,130 4,019,842 Village At
Asset Capital 11/11/22 ----------- Waterford
Corporation
$29,397,157
===========
</TABLE>
(a) The Credit Facility is shared equally between BankBoston, N.A. and KeyBank
National Association.
(b) The interest rate under the Credit Facility can float 1/2% under
BankBoston's base rate or can be fixed in 30, 60, 90 and 180 day periods
at 1.625% over the indicated Euro-contract rate at the option of the
Company. The rate at September 30, 1998 was 7.25%.
(c) Outstanding balance of a $40 million senior revolving credit facility.
(d) Note was assumed upon purchase of the property by the Company on March 31,
1998.
11
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(e) Note was assumed upon purchase of the property by the Company on April 22,
1998.
Note 7 - Related Party Transactions
Aegis Realty, Inc. (After the Consolidation)
Pursuant to the Advisory Agreement, the Advisor receives (i) acquisition fees
equal to 3.75% of the acquisition prices of properties acquired; (ii) mortgage
selection fees based on the principal amount of mortgage loans funded; (iii)
asset management fees equal to .375% of the total invested assets of the
Company; (iv) a liquidation fee based on the gross sales price of the assets
sold by the Company in connection with a liquidation of the Company's assets;
and (v) reimbursement of certain administrative costs incurred by the Advisor on
behalf of the Company.
The Company's twenty four properties are being managed by RCC Property Advisors,
Inc. (the "Property Manager"), an affiliate of the Advisor.
The costs incurred to related parties for the three and nine months ended
September 30, 1998 were as follows:
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
Acquisition fees $ 919,658 $1,797,046
Expense reimbursement 78,499 180,802
Property management fees 228,938 605,032
Asset management fee 153,081 454,475
---------- ----------
$1,380,176 $3,037,355
========== ==========
Insured I (Prior to the Consolidation)
Prior to the Consolidation, the general partners of Insured I were Related
Insured Equity Associates, Inc., a Delaware corporation and Prudential-Bache
Properties, Inc., a Delaware corporation ("PBP"), together (the "General
Partners"). The General Partners managed and controlled the affairs of Insured I
prior to the Consolidation.
The General Partners and their affiliates performed services for Insured I which
included: accounting and financial management; registrar; transfer and
assignment functions; asset management; investor communications; printing and
other administrative services. The amount of reimbursement from Insured I was
limited by the provisions of Insured I's Partnership Agreement. Insured I's
eleven properties were being managed by the Property Manager.
12
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
The expenses incurred by Insured I to related parties for the three and nine
months ended September 30, 1997 were as follows:
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Expense reimbursement $ 31,544 $ 79,935
Property management fees 146,314 352,397
-------- --------
$177,858 $432,332
======== ========
The distributions earned by the General Partners for the three and nine months
ended September 30, 1997 were as follows:
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Special Distributions $108,818 $326,454
Regular Distributions of
Adjusted Cash from
Operations 18,182 36,364
-------- --------
$127,000 $362,818
======== ========
Note 8 - Earnings Per Share
Basic net income per share in the amount of $.18 and $.66 for the three and nine
months ended September 30, 1998, respectively, is computed based on the net
income for the three and nine months ended September 30, 1998 ($1,481,471 and
$5,279,840, respectively), divided by the weighted average number of shares
outstanding for the periods (8,051,159 and 8,050,915, respectively). Net income
per unit information for 1997 is not presented because it is not indicative of
the Company's continuing capital structure.
Diluted net income per share, which would reflect conversion of the minority
interests' OP Units into an additional 141,562 shares of Common Stock, is the
same as basic income per share because the earnings of an OP unit are equivalent
to the earnings of a share of Common Stock.
Note 9 - Commitments and Contingencies
As part of the settlement of class action litigation relating to the
Partnerships, counsel ("Class Counsel") for the partners of the Partnerships
have the right to petition the United States District Court for the Southern
District of New York (the "Court") for additional attorneys' fees ("Counsel's
Fee Shares") in an amount to be determined in the Court's sole discretion. The
Counsel's Fee Shares will be based upon a percentage (which Class Counsel have
said they will propose to be 25%) of the increase in value of the Company, ("the
Added Value") if any, as of October 10, 1998 based upon the difference between
(i) the trading prices of the Company's shares of Common Stock during the
six month period ended October 10, 1998 and (ii) the trading prices of the
limited partnership units and the asset values of the Partnerships prior to
10/1/97. One-half of such fees, if any, will be paid in the form of Restricted
Securities (restricted only with respect to the sale, assignment, pledge or
other transfer of such securities)
13
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
and the remaining one-half of such fees will be paid in the form of unrestricted
securities. The number of Counsel's Fee Shares issued shall be subject to a
maximum amount not to exceed 3.95% of the total number of outstanding shares of
the Company on October 10, 1998. The Counsel's Fee Shares will be distributed to
Class Counsel quarterly in eight equal distributions commencing thirty days
after October 10, 1998 and restrictions on the Restricted Securities expire one
year from the date of issuance. As of October 10, 1998, there was no Added
Value. As of November 13, 1998, Class Counsel has not filed a petition for
Counsel's Fee Shares and there can be no assurance as to what action the Court
would take if such petition is filed. Accordingly, management cannot determine
with any certainty at this time the amount of shares, if any, that might be
issued under this arrangement.
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
Phase I Environmental Site Assessments were undertaken on seventeen of the
Company's properties pursuant to requirements for closing the Credit Facility.
In certain cases, additional Phase II site investigations were also undertaken
where deemed appropriate. Based on these reports, no on-site hazardous chemicals
or petroleum products were detected or found to exist in the soil or in the
groundwater at those properties which would result in action by state
environmental agencies and which would require additional investigation and/or
remediation, with the exception of the Mountain Park Plaza property. A Phase II
investigation at this property determined that there were detectable levels of
certain hazardous materials above threshold levels ascertained by the Georgia
State Department of Natural Resources Environmental Protection Division
("GAEPD"). Based on this report and notification to GAEPD, additional
investigation, monitoring and/or remediation may be required by GAEPD. These
hazardous materials were determined to derive from an on-site dry cleaner and an
adjacent service station with a pre-existing, documented underground leaking
storage tank. Property management and the Company have taken preliminary steps
in providing appropriate notification to GAEPD on these matters together with
notification and possible remedies against both the on-site dry cleaner and
adjacent service station. Dependent on a numerical score "ranking" for the site
which is dependent on several factors (the most important being the potential
for human exposure to occur) the GAEPD may require additional investigation
and/or remediation. Management is unable, at this time, to predict further
requirements, if any, or the associated costs of monitoring or remediation.
Note 10 - Subsequent Events
On October 9, 1998, the Board of Directors authorized the implementation of a
stock repurchase plan, enabling the Company to repurchase, from time to time, up
to 500,000 shares of its common stock. The repurchases will be made in the open
market and the timing will be dependent on the availability of shares and other
market conditions. During the period October 9, 1998 through November 13, 1998
the Company acquired 6,300 shares of its common stock for an aggregate purchase
price of $58,579 (including commissions and service charges). Repurchased shares
will be accounted for as treasury stock.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
When used in this quarterly report on Form 10-Q, the words "believes,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements. Statements looking forward in time are included in
this quarterly report on Form 10-Q pursuant to the "safe harbor" provision of
the private securities litigation reform act of 1995. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially, including, but not limited to, those set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
Liquidity and Capital Resources
Aegis Realty, Inc. (the "Company") is a Maryland corporation that has qualified
as a real estate investment trust ("REIT") under the Internal Revenue Code of
1986 as amended (the "Code"). The Company was formed to acquire, own, operate
and renovate primarily supermarket-anchored neighborhood and community shopping
centers. As of September 30, 1998, the Company owned a portfolio of twenty four
retail properties (the "Retail Properties") containing a total of approximately
2.5 million gross leaseable square feet ("GLA"), held partnership interests in
two suburban garden apartment properties (the "Multifamily Properties"), held
one FHA insured participating mortgage secured by a suburban garden apartment
property (the "FHA Mortgage") and had net assets of approximately $124,492,000.
The Company was formed on October 1, 1997 as the result of the consolidation
(the "Consolidation") of four publicly registered, non-traded limited
partnerships, Summit Insured Equity ("Insured I"), Summit Insured Equity L.P. II
("Insured II"), Summit Preferred Equity L.P. ("Summit Preferred") and Eagle
Insured, L.P. ("Eagle") (the "Partnerships"). The Partnerships were co-sponsored
by an affiliate of Related Capital Company ("Related").
The Company has initiated a focused business/strategic plan designed to increase
funds from operations ("FFO") and enhance the value of its stock. The plan
concentrates principally on three areas: i) external growth, ii) internal growth
and iii) the increase in the amount of stock owned in the Company by affiliates
of the Advisor and the Property Manager.
The Company's external growth will be accomplished through acquisitions, on an
individual or bulk basis, of shopping centers. The Company believes that there
are significant opportunities available to acquire under valued, under managed
and/or under utilized neighborhood and community shopping centers. Unlike most
small capitalization REITs, the Company has the ability to benefit from its
affiliation with a much larger company, Related, with a national presence. The
Company is using its affiliation with Related to establish a national
acquisition program. The Company believes that by acquiring shopping centers on
a national basis, rather than targeting a few markets or a region, it will be
able to grow at a meaningful rate, without the need for it to compromise asset
quality or current return. In addition, a national acquisition program allows
the Company to maintain geographic diversity, which the Company believes reduces
the risk otherwise associated with focusing on one region. The Company seeks to
acquire primarily, but not exclusively, supermarket-anchored shopping centers,
which are well located in primary and secondary markets. Acquisitions will be
balanced between stabilized centers that the Company believes are undervalued
and centers that may be enhanced through intensive management, leasing,
redevelopment or expansion efforts. In all such cases,
15
<PAGE>
the Company generally seeks to acquire only those centers that are expected to
immediately increase FFO.
During the period January 1, 1998 through November 13, 1998 the Company acquired
eight neighborhood shopping centers for an aggregate purchase price of
$47,365,000, not including acquisition fees and expenses of approximately
$2,294,000. The acquisitions were financed through proceeds of an expandable $40
million senior revolving credit facility shared equally between BankBoston and
KeyBank National Association (the "Credit Facility"), the assumption of
$6,650,648 of existing debt with respect to two of the acquisitions and the
issuance of 94,726 OP Units (subject to adjustment) valued at $1,231,438 with
respect to one of the acquisitions.
Internal growth will occur from the re-deployment of proceeds from the sale or
other disposition of non-core assets currently in the portfolio and through
intensive management, leasing and redevelopment services provided to the Company
by the Property Manager and the Advisor. The Company considers non-core assets
to be those assets the Company has enhanced and no longer offer above market
rates of return or those assets which due to location, configuration or tenant
profile no longer offer the Company the prospects of better than market rates of
growth. The Company regularly reviews its portfolio to identify non-core assets
and to determine whether the time is appropriate to sell or otherwise dispose of
such assets whose characteristics are no longer suited to the Company's overall
growth strategy or operating goals.
During 1998, the Company disposed of three non-core assets. On March 20, 1998,
Dominion Chateau Creste Limited Partnership, the general partner of Dominion,
purchased the Company's limited partnership interest in Dominion pursuant to its
rights under the partnership agreement. The purchase price was determined by
independent appraisals and resulted in a cash payment to the Company of
$4,727,500, which was $779,893 in excess of the carrying value of this
investment at the date of sale. On June 24, 1998 Walsh/Cross Creek L.P. (the
"Owner"), the owner of Cross Creek Apartments ("Cross Creek") and an affiliate
of the Advisor, sold Cross Creek to a third party for $23.4 million. The Owner
then fully repaid its outstanding debt due to the Company totaling $22,199,045
including a $16,971,528 FHA first mortgage loan, a $1,783,900 equity loan, a
$3,060,000 additional loan made by the Company to the Owner, a $286,948
prepayment penalty due the Company on the FHA loan and accrued interest through
the closing date of $96,669 resulting in a loss on the repayment (including the
prepayment penalty) in the amount of $72,967 which is included in other
expenses. The Company used the proceeds from the Dominion and Cross Creek asset
dispositions to reduce its outstanding debt under the Credit Facility. On August
26, 1998, the obligor of the FHA co-insured mortgage loan secured by Weatherly
Walk Apartments ("Weatherly Walk") repaid in full (after completing a
refinancing) the outstanding balance of the loan in the amount of $7,485,552
plus accrued interest through August 26, 1998 of $48,189. In addition, an
uninsured equity loan in the amount of $895,200 to the partners of the obligor,
FAI, Ltd. ("FAI"), was simultaneously converted to a 40% equity interest in FAI,
the partnership which owns Weatherly Walk. This equity interest will earn a
monthly preferred return of 10.5% on $895,200 plus 40% of excess cash flow and
sale or refinancing proceeds. In September 1998, the Company used the repayment
proceeds as well as proceeds from the Credit Facility to purchase two shopping
centers.
Finally, the Company will encourage the Advisor and its affiliates to increase
their ownership in the Company. The Company believes that this is necessary in
order to more closely align the interest of management with that of the Company
and to demonstrate that the Advisor has a long-term commitment to the success of
the Company.
16
<PAGE>
The Company's growth will be financed through proceeds of the Credit Facility,
the issuance of shares of the Company's common stock or OP Units in exchange for
real estate, funds generated from operations in excess of dividend payments and
private placements of equity. Although the Credit Facility may be increased, the
Company's Charter dictates leverage of no more than 50% of the value of the
Company's market capitalization.
As a REIT, the Company is required to distribute at least 95% of its taxable
income to maintain REIT status. Funds generated from operations are expected to
be more than sufficient to allow the Company to meet this requirement.
The stability of the Company's operations and its ability to maintain liquidity
are enhanced by:
(i) Geographic diversity of its portfolio of real estate and mortgage notes.
(ii) 54% of total revenues for the nine months ended September 30, 1998
(excluding gain on sale of investment in partnerships) are earned from shopping
center anchor tenants which are national credit tenants and from interest on
FHA-insured mortgages.
(iii) No single asset accounts for more than 7% of total revenue for the nine
months ended September 30, 1998.
(iv) Leases that provide for recovery of actual common area maintenance charges
and real estate taxes, thereby minimizing any effects from inflation.
(v) Leases that provide for increases in rents based on a percentage of
tenants' sales.
(vi) A mortgage note which is substantially guaranteed by FHA and a co-insurer
and that provides for participation in increases in operating results and market
value of the underlying collateral.
During the nine months ended September 30, 1998, cash and cash equivalents of
the Company and its consolidated subsidiaries decreased approximately
$2,434,000. This decrease was primarily due to acquisitions of and improvements
to real estate ($42,238,000), distributions paid ($5,797,000), leasing
commissions ($126,000) and an increase in deferred loan costs ($356,000) which
exceeded cash provided by operating activities ($7,567,000), proceeds from the
sale of Dominion ($4,728,000), principal payments received on mortgage loans
($26,625,000), repayment of loan receivable from affiliate ($3,060,000) and net
proceeds from notes payable ($4,202,000). Included in the adjustments to
reconcile the net income to cash provided by operating activities is a gain on
sale of investment in partnerships ($780,000), a loss on repayment of Cross
Creek debt ($73,000) and depreciation and amortization ($2,753,000).
The Company anticipates that cash generated from operations will provide for all
major repairs, replacements and tenant improvements on its real estate and will
provide sufficient liquidity to fund, in future years, the Company's operating
expenditures, debt service and distributions.
The Company has the following problem assets which may adversely affect future
operations and liquidity:
(i) Safeway, the anchor tenant of Cactus Village Shopping Center closed its
facility in December 1991 due to poor sales. However, the tenant continues to
fully abide by all aspects of its lease which will expire in September 2006.
There have been several proposals received for leasing this space, but as of
November 1, 1998, this space has not been re-leased.
17
<PAGE>
(ii) In July 1994, A&P closed its store in the Mountain Park Plaza Shopping
Center due to reduced sales and increased competition. The Company continues to
receive rental payments from the vacated tenant pursuant to the terms of the
lease which will expire in June 2007 and both the tenant and the Company are
actively pursuing potential sub-tenants or replacement tenants. As of November
1, 1998, this space has not been re-leased.
As part of the settlement of class action litigation relating to the
Partnerships, counsel ("Class Counsel") for the partners of the Partnerships
have the right to petition the United States District Court for the Southern
District of New York (the "Court") for additional attorneys' fees ("Counsel's
Fee Shares") in an amount to be determined in the Court's sole discretion. The
Counsel's Fee Shares will be based upon a percentage (which Class Counsel have
said they will propose to be 25%) of the increase in value of the Company, ("the
Added Value") if any, as of October 10, 1998 based upon the difference between
(i) the trading prices of the Company's shares of Common Stock during the
six month period ended October 10, 1998 and (ii) the trading prices of the
limited partnership units and the asset values of the Partnerships prior to
10/1/97. One-half of such fees, if any, will be paid in the form of Restricted
Securities (restricted only with respect to the sale, assignment, pledge or
other transfer of such securities) and the remaining one-half of such fees will
be paid in the form of unrestricted securities. The number of Counsel's Fee
Shares issued shall be subject to a maximum amount not to exceed 3.95% of the
total number of outstanding shares of the Company on October 10, 1998. The
Counsel's Fee Shares will be distributed to Class Counsel quarterly in eight
equal distributions commencing thirty days after October 10, 1998 and
restrictions on the Restricted Securities expire one year from the date of
issuance. As of October 10, 1998, there was no Added Value. As of November 13,
1998, Class Counsel has not filed a petition for Counsel's Fee Shares and there
can be no assurance as to what action the Court would take if such petition is
filed. Accordingly, management cannot determine with any certainty at this time
the amount of shares, if any, that might be issued under this arrangement.
For a discussion of environmental issues affecting one of the Company's Retail
Properties see Note 9 to the financial statements.
In November 1998, a distribution of $1,932,278 (.24 per share) which was
declared in September 1998 was paid to the shareholders from cash flow from
operations for the quarter ended September 30, 1998.
On October 9, 1998, the Board of Directors authorized the implementation of a
stock repurchase plan, enabling the Company to repurchase, from time to time, up
to 500,000 shares of its common stock. The repurchases will be made in the open
market and the timing will be dependent on the availability of shares and other
market conditions. During the period October 9, 1998 through November 13, 1998
the Company acquired 6,300 shares of its common stock for an aggregate purchase
price of $58,579 (including commissions and service charges). Repurchased shares
will be accounted for as treasury stock.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
Results of Operations
For the three and nine months ended September 30, 1998 as compared to 1997,
total revenues, total expenses and net income increased and the results of
operations are not comparable due to the Consolidation of Insured I with three
other Partnerships on October 1, 1997, which resulted in the formation of the
Company, and the purchase of ten shopping centers after the Consolidation. The
Company's results of operations for the three months ended September 30, 1998
consisted primarily of the results of the Company's investment in twenty four
shopping centers, two garden apartment complexes and two participating FHA
co-insured Mortgage Loans. The Company's results of operations for the nine
months ended September 30, 1998 consisted primarily of the results of the
Company's investment in twenty four shopping centers, three garden apartment
complexes, three participating FHA co-insured Mortgage Loans and a gain on sale
of an investment in one garden apartment complex. The Company's results of
operations for the three and nine months ended September 30, 1997 consisted
primarily of the results of Insured I's investment in eleven shopping centers.
Rental income increased approximately $1,747,000 and $3,751,000, respectively,
for the three and nine months ended September 30, 1998 as compared to 1997.
Increases of $484,000 and $1,438,000, respectively, were due to the three
shopping centers acquired from Insured II in the Consolidation (the "Insured II
Acquisitions") and increases of $1,162,000 and $2,049,000, respectively, were
due to the acquisition of ten shopping centers after the Consolidation (the "New
Acquisitions"). Excluding these acquisitions, rental income increased
approximately $101,000 and $264,000 for the three and nine months ended
September 30, 1998 as compared to 1997 primarily due to an increase in rental
rates at Westbird, Pablo Plaza and Highland Fair and an increase in percentage
rents received at Pablo Plaza, Town West and Mountain Park Plaza.
18
<PAGE>
Recovery of common area maintenance charges increased approximately $288,000 and
$490,000, respectively, for the three and nine months ended September 30, 1998
as compared to 1997. Increases of $58,000 and $121,000, respectively, were due
to the Insured II Acquisitions and increases of $92,000 and $172,000,
respectively, were due to the New Acquisitions. Excluding these acquisitions,
recovery of common area maintenance charges increased approximately $138,000 and
$197,000 for the three and nine months ended September 30, 1998 as compared to
1997 primarily due to an underaccrual of such charges in 1997.
Real estate tax reimbursements increased approximately $262,000 and $654,000,
respectively, for the three and nine months ended September 30, 1998 as compared
to 1997. Increases of $100,000 and $247,000, respectively, were due to the
Insured II Acquisitions and increases of $17,000 and $54,000, respectively, were
due to the New Acquisitions. Excluding these acquisitions, real estate tax
reimbursements increased approximately $145,000 and $353,000 for the three and
nine months ended September 30, 1998 as compared to 1997 primarily due to an
underaccrual of such reimbursements in 1997.
Income from equity investments in the amounts of approximately $84,000 and
308,000, respectively, was recorded for the three and nine months ended
September 30, 1998 relating to three partnership interests in Multifamily
Properties, two of which were acquired from Summit Preferred in the
Consolidation and one of which resulted from the conversion, on August 26, 1998,
of an uninsured equity loan acquired from Eagle.
Interest income increased approximately $174,000 and $1,517,000, respectively,
for the three and nine months ended September 30, 1998 as compared to 1997.
Increases of $160,000 and $1,439,000, respectively, were due to interest income
relating to the three FHA Mortgages and the Cross Creek Loan acquired from
Eagle. Excluding such income, interest income increased approximately $14,000
and $78,000 for the three and nine months ended September 30, 1998 as compared
to 1997 primarily due to higher invested cash balances in 1998.
Other income increased approximately $47,000 and $26,000, respectively, for the
three and nine months ended September 30, 1998 as compared to 1997. Increases of
$16,000 and $36,000, respectively, were due to the Insured II Acquisitions and
increases of $7,000 and $13,000, respectively, were due to the New Acquisitions.
Excluding these acquisitions, other income increased and decreased approximately
$24,000 and $23,000, respectively, for the three and nine months ended September
30, 1998 as compared to 1997.
Repairs and maintenance increased approximately $297,000 and $276,000,
respectively, for the three and nine months ended September 30, 1998 as compared
to 1997. Increases of $107,000 and $196,000 were due to the Insured II
Acquisitions and increases of $99,000 and $155,000 were due to the New
Acquisitions. Excluding these acquisitions, repairs and maintenance increased
and decreased approximately $91,000 and $75,000, respectively, for the three and
nine months ended September 30, 1998 as compared to 1997. The decrease for the
nine months was primarily due to a decrease in sewer charges at Highland Fair
and Winery Square, a decrease in landscaping expenses at Cactus Village and
Winery Square and a decrease in exterminating expenses at Westbird. The decrease
for the nine months was partially offset by an increase for the three months
primarily due to an increase in painting expenses at Town West and Kokomo Plaza,
an increase in roof repairs at Pablo Plaza and an increase in parking lot
lighting repairs at Westbird and Pablo Plaza.
Real estate taxes increased approximately $122,000 and $371,000, respectively,
for the three and nine months ended September 30, 1998 as compared to 1997.
Increases of $68,000 and $208,000, respectively, were due to the Insured II
Acquisitions and increases of $92,000 and $172,000, respectively, were due to
the New Acquisitions. Excluding these acquisitions, real
19
<PAGE>
estate taxes decreased approximately $38,000 and $9,000 for the three and nine
months ended September 30, 1998 as compared to 1997. The decrease for the three
months was primarily due to an underaccrual at Forest Park Square at June 30,
1997.
Interest expense increased approximately $246,000 and $835,000, respectively,
for the three and nine months ended September 30, 1998 as compared to 1997
primarily due to interest expense relating to the Credit Facility and the
assumption of existing debt with respect to two of the New Acquisitions.
General and administrative expenses increased approximately $441,000 and
$1,370,000, respectively, for the three and nine months ended September 30, 1998
as compared to 1997. Increases of $67,000 and $189,000, respectively, were due
to the Insured II Acquisitions and increases of $116,000 and $188,000,
respectively, were due to the New Acquisitions. Excluding these acquisitions,
general and administrative expenses increased approximately $258,000 and
$993,000 for the three and nine months ended September 30, 1998 as compared to
1997. The increases were primarily due to fees relating to the unused portion of
the Credit Facility, state income taxes resulting from qualification as a REIT,
an increase in printing and investor service expenses resulting from an increase
in investors, an increase in audit/tax fees and expense reimbursements to the
Advisor and its affiliates due to the Insured II Acquisitions and the New
Acquisitions and fees to the independent directors relating to their services
for 1998.
Depreciation and amortization increased approximately $377,000 and $787,000,
respectively, for the three and nine months ended September 30, 1998 as compared
to 1997. Increases of $98,000 and $293,000, respectively, were due to the
Insured II Acquisitions and increases of $228,000 and $375,000, respectively,
were due to the New Acquisitions. Excluding these acquisitions, depreciation and
amortization increased approximately $51,000 and $119,000 for the three and nine
months ended September 30, 1998 as compared to 1997.
Minority interest in income of the Operating Partnership was recorded for the
three and nine months ended September 30, 1998.
Other expenses increased approximately $266,000 and $570,000, respectively, for
the three and nine months ended September 30, 1998 as compared to 1997.
Increases of $31,000 and $96,000, respectively, were due to the Insured II
Acquisitions and increases of $58,000 and $187,000, respectively, were due to
the New Acquisitions. Excluding these acquisitions, other expenses increased
approximately $177,000 and $287,000 for the three and nine months ended
September 30, 1998 as compared to 1997 primarily due to an increase in utilities
at Highland Fair, Winery Square and Mountain Park Plaza and an increase in bad
debt expense resulting from an increase in reserves at Westbird, Highland Fair,
Winery Square and Forest Park Square.
A gain on sale of investment in partnership was recorded for the nine months
ended September 30, 1998 relating to the sale of the Company's limited
partnership interest in Dominion.
Westbird, Pablo Plaza, Highland Fair, Town West, Mountain Park Plaza, Winery
Square, Cactus Village, Kokomo Plaza, Forest Park Square, Hickory Plaza and
Southhaven were shopping centers which were owned by the Company in both 1998
and 1997.
Funds from Operations and Funds Available for Distribution
Funds from operations ("FFO"), represents net income (computed in accordance
with generally accepted accounting principles) ("GAAP"), applicable to common
shares excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization and including funds from operations
for unconsolidated joint ventures calculated on the same
20
<PAGE>
basis. Net income computed in accordance with GAAP includes straight-lining of
property rentals for rent escalations in the amount of $48,298 and $133,258 for
the three and nine months ended September 30, 1998. FFO is calculated in
accordance with the National Association of Real Estate Investment Trusts
("NAREIT") definition published in March 1995. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs which is disclosed
in the Consolidated Statements of Cash Flows included in the financial
statements, for the applicable periods. There are no material legal or
functional restrictions on the use of FFO. FFO should not be considered as an
alternative to net income as an indicator of the Company's operating performance
or as an alternative to cash flows as a measure of liquidity. Management
considers FFO a supplemental measure of operating performance and along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs.
Funds available for distribution ("FAD") represents FFO plus recurring principal
receipts from mortgage loans less reserves for lease commissions, capital
expenditures (excluding property acquisitions) and debt principal amortization.
FAD should not be considered an alternative to net income as a measure of the
Company's financial performance or to cash flow from operating activities
(computed in accordance with GAAP) as a measure of the Company's liquidity, nor
is it necessarily indicative of sufficient cash flow to fund all of the
Company's needs.
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<PAGE>
FFO, as calculated in accordance with the NAREIT definition, and FAD for the
three and nine months ended September 30, 1998 is summarized in the following
table.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net income $ 1,481,471 $ 5,279,840
Gain on sale of investment in partnership 0 (779,893)
Loss on repayment of Cross Creek receivable 0 72,967
Depreciation and amortization of real property 813,895 2,157,868
Amortization of insurance contract 150,145 450,435
Proportionate share of adjustments to equity in
income from equity investments to
arrive at funds from operations 48,164 163,400
------------ -----------
Funds From Operations ("FFO") 2,493,675 7,344,617
Amortization of deferred financing costs 52,702 144,340
Principal payments received on mortgage loans 14,747 97,462
Straight-lining of property rentals for rent escalations (48,298) (133,258)
Improvements to real estate (330,490) (439,824)
Principal repayments of notes payable (77,740) (195,878)
Leasing commissions (71,723) (125,790)
------------ -----------
Funds Available for Distribution ("FAD") $ 2,032,873 $ 6,691,669
============ ===========
Distributions to shareholders $ 1,932,278 $ 5,796,731
============ ===========
FFO payout ratio 77.5% 78.9%
============ ===========
Cash flows from:
Operating activities $ 2,362,547 $ 7,566,783
============ ===========
Investing activities $(18,167,697) $(7,967,490)
============ ===========
Financing activities $ (1,750,310) $(2,033,134)
============ ===========
</TABLE>
Recently Issued Accounting Standards
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Because the
Company does not currently utilize derivatives or engage in hedging activities,
management does not anticipate that implementation of this statement will have a
material effect on the Company's financial statements.
Year 2000 Compliance
The Company utilizes the computer services of an affiliate of the Advisor. The
affiliate of the Advisor is in the process of upgrading its computer information
systems to be year 2000 compliant and beyond. The Year 2000 compliance issue
concerns the inability of a computerized system to accurately record dates after
1999. The affiliate of the Advisor recently underwent a conversion of its
financial systems applications and is in the process of upgrading and testing
22
<PAGE>
the in house software and hardware inventory. The workstations that experienced
problems from this process were corrected with an upgrade patch. The affiliate
of the Advisor has incurred costs of approximately $1,000,000 to date and
estimates the total costs to be approximately $2,000,000. These costs are not
being charged to the Company. In regard to third parties, the Advisor is in the
process of evaluating the potential adverse impact that could result from the
failure of material service providers, major tenants and a mortgagor to be year
2000 compliant. A detailed survey and assessment of third party readiness will
be sent to material third parties in the fourth quarter of 1998. The results of
the surveys will be compiled in early 1999. No estimate can be made at this time
as to the impact of the readiness of such third parties. The Advisor plans to
have these issues fully assessed by early 1999, at which time the risks will be
addressed and a contingency plan will be implemented if necessary.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
This information is incorporated by reference to Note 9 to the
financial statements filed herewith in Item 1 of Part I of the Registrant's
Quarterly Report.
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Equity Securities
(i) Securities Sold
The following table sets forth the date of sale, title and
amount of unregistered securities sold by the Company since December 31, 1997:
Date of Sale Title Amount
------------ -------- -------
05/28/98 OP Units 94,726
(ii) Underwriters and Other Purchasers
May 28, 1998 Sale. Underwriters were not retained in
connection with the sale of these securities. These OP Units were sold to the
contributor of Governor's Square, an "accredited investor".
(iii) Consideration
May 28, 1998 Sale. These OP Units were issued in exchange
for property having a value of approximately $1.23 million. There were no
underwriting discounts or commissions with respect to such securities.
(iv) Exemption from Registration Claimed
The OP Units were issued to an "accredited investor" in a
transaction which was exempt from registration under Section 4 (2) of the
Securities Act of 1933.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
Alan P. Hirmes ceased to serve as Chief Financial Officer effective June
18, 1998. Mr. Hirmes remains as Director, Senior Vice President and Assistant
Secretary. Effective June 18, 1998, John B. Roche was elected Chief Financial
Officer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed herewith).
24
<PAGE>
(b) Reports on Form 8-K:
Current report on Form 8-K relating to the purchase of Governor's
Square and Marion City Square and the repayment of the Cross Creek debt was
dated May 28, 1998 and filed July 9, 1998.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AEGIS REALTY, INC.
(Registrant)
Date: November 13, 1998 By: /s/ Stuart J. Boesky
-----------------------------
Stuart J. Boesky
Director, President and
Chief Operating Officer
Date: November 13, 1998 By: /s/ John B. Roche
-----------------------------
John B. Roche
Senior Vice President,
Chief Financial Officer
and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the financial
statements for Aegis Realty, Inc. and is qualified in its entirety by reference
to such financial statements
</LEGEND>
<CIK> 0001043324
<NAME> Aegis Realty, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,294,209
<SECURITIES> 0
<RECEIVABLES> 4,859,870
<ALLOWANCES> 303,000
<INVENTORY> 0
<CURRENT-ASSETS> 925,994
<PP&E> 161,207,523
<DEPRECIATION> 18,349,092
<TOTAL-ASSETS> 160,819,894
<CURRENT-LIABILITIES> 4,982,088
<BONDS> 29,397,157
0
0
<COMMON> 0
<OTHER-SE> 124,491,667
<TOTAL-LIABILITY-AND-EQUITY> 160,819,894
<SALES> 0
<TOTAL-REVENUES> 13,680,512
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,977,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,202,772
<INCOME-PRETAX> 5,279,840
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,279,840
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
