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 June 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>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Real estate, net $117,854,042 $ 94,638,187
Investment in partnerships 5,277,082 9,296,088
Mortgage loans receivable 11,728,020 30,980,995
Loan receivable from affiliate 0 3,060,000
Cash and cash equivalents 21,849,759 6,728,050
Accounts receivable-tenants, net of allowance for
doubtful accounts of $500,000 and $304,000,
respectively 869,462 1,169,526
Deferred costs, net 2,294,323 2,226,832
Other assets 687,779 539,650
------------ -----------
Total Assets $160,560,467 $148,639,328
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 29,176,753 $ 18,544,242
Accounts payable and other liabilities 2,255,143 1,871,394
Due to Advisor and affiliates 278,553 507,835
Distributions payable 1,950,764 1,943,415
------------ ------------
Total Liabilities 33,661,213 22,866,886
------------ ------------
Minority interest of unitholders in the
Operating Partnership 1,956,874 727,431
------------ ------------
Commitment 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 125,439,757 125,476,308
Distributions in excess of net income (577,888) (511,804)
------------ ------------
Total Shareholders' Equity 124,942,380 125,045,011
------------ ------------
Total Liabilities and Shareholders' Equity $160,560,467 $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 Six Months Ended
June 30, June 30,
---------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental income $2,933,050 $1,710,067 $5,657,035 $3,652,543
Recovery of common area
maintenance charges 390,142 207,119 616,765 414,239
Real estate tax reimbursements 620,619 260,207 912,063 520,414
Income from equity investments 81,467 0 223,588 0
Interest income 663,096 14,049 1,367,217 24,866
Other 32,611 52,347 81,424 102,611
---------- --------- --------- ---------
Total revenues 4,720,985 2,243,789 8,858,092 4,714,673
---------- --------- --------- ---------
Expenses:
Repairs and maintenance 236,934 257,124 510,792 531,722
Real estate taxes 414,866 268,894 786,473 537,787
Interest 470,691 124,311 836,251 246,435
General and administrative 819,785 259,313 1,421,970 492,848
Depreciation and amortization 892,386 621,466 1,652,158 1,241,265
Minority interest in income of
the Operating Partnership 14,877 0 28,007 0
Other 348,519 345,312 603,965 300,017
---------- --------- --------- ---------
Total expenses 3,198,058 1,876,420 5,839,616 3,350,074
---------- --------- --------- ---------
Income before gain on sale of
investment 1,522,927 367,369 3,018,476 1,364,599
Gain on sale of investment in
partnership 0 0 779,893 0
---------- --------- --------- ----------
Net income $1,522,927 $ 367,369 $3,798,369 $1,364,599
========== ========= ========== ==========
</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 3,798,369 3,798,369
Consolidation costs 0 0 (41,547) 0 (41,547)
Issuance of shares of
common stock 432 4 4,996 0 5,000
Distributions 0 0 0 (3,864,453) (3,864,453)
--------- ------- ------------- ----------- -------------
Balance at
June 30, 1998 8,051,159 $80,511 $ 125,439,757 $ (577,888) $ 124,942,380
========= ======= ============= =========== =============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,798,369 $ 1,364,599
------------ -----------
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 1,735,900 1,241,265
Minority interest in income of
the Operating Partnership 28,007 0
Distributions from equity investments
in excess of income 42,574 0
Changes in assets and liabilities:
Decrease in accounts receivable-tenants 103,661 25,659
Increase in allowance for doubtful accounts 196,403 33,358
(Increase) decrease in other assets (148,129) 12,513
(Decrease) increase in due to Advisor,
general partners and affiliates (229,282) 19,008
Increase in accounts payable and
other liabilities 383,749 27,713
------------ -----------
Total adjustments 1,405,957 1,359,516
------------ -----------
Net cash provided by operating activities 5,204,326 2,724,115
------------ -----------
Cash flows from investing activities:
Proceeds from sale of investment in partnership 4,727,500 0
Improvements to real estate (109,334) (10,583)
Acquisitions of real estate (16,414,814) 0
Increase in deferred acquisition expenses (134,169) 0
Leasing commissions (54,067) (71,790)
Principal payments received on mortgage loans 19,125,091 0
Repayment of loan receivable from affiliate 3,060,000 0
------------ -----------
Net cash provided by (used in) investing activities 10,200,207 (82,373)
------------ -----------
Cash flows from financing activities:
Repayments of notes payable (11,268,137) (302,332)
Proceeds from notes payable 15,250,000 0
Issuance of shares of common stock 5,000 0
Distributions paid (3,864,348) (1,927,003)
Increase in deferred loan costs (341,034) 0
Decrease in minority interest (30,002) 0
Consolidation costs (41,547) 0
Increase in distributions payable to minority interest 7,244 0
-----------
Net cash used in financing activities (282,824) (2,229,335)
------------ -----------
(continued)
See accompanying notes to consolidated financial statements
5
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
1998 1997
------------ -----------
Net increase in cash and cash equivalents 15,121,709 412,407
Cash and cash equivalents at beginning of period 6,728,050 2,398,013
------------ -----------
Cash and cash equivalents at end of period $ 21,849,759 $ 2,810,420
============ ===========
Supplemental information:
Interest paid $ 692,905 $ 248,121
============ ===========
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
============ ===========
Distributions declared $ (3,864,453) $(2,035,821)
Increase in distributions payable
to shareholders/general partners 105 108,818
------------ -----------
Distributions paid $ (3,864,348) $(1,927,003)
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 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 June 30, 1998, the Company owned a portfolio of
twenty retail properties, holds a partnership interest in one suburban garden
apartment property and holds two FHA insured participating mortgages secured by
suburban garden apartment properties.
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 interest in each
Partnership.
The Company has engaged Related Aegis LP, a Delaware limited partnership and an
affiliate of Related (the "Advisor"), to manage its day to day affairs.
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 June
30, 1998. Also, at June 30, 1998 1.16% and .57% of the OP Units are currently
held by the seller of Governor's Square 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 six months ended June
30, 1997 is only with respect to Insured I.
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 June 30, 1998, the results of its
operations for the three and six months ended June 30, 1998 and 1997
7
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
and its cash flows for the six months ended June 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:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Land $ 31,122,909 $27,622,941
Buildings and improvements 104,323,263 83,419,863
----------- -----------
135,446,172 111,042,804
Less: Accumulated depreciation (17,592,130) (16,404,617)
------------ -----------
$117,854,042 $ 94,638,187
============ ============
</TABLE>
During the period January 1, 1998 through June 30, 1998 the Company acquired
four neighborhood shopping centers for an aggregate purchase price of
$23,350,000, not including acquisition fees and expenses of approximately
$904,000. The acquisitions were accounted for under the purchase method of
accounting and financed through proceeds of an expandable $40 million senior
revolving credit facility with BankBoston, 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 four acquisitions is as follows:
<TABLE>
<CAPTION>
Purchase % Square
Price/ Gross Feet
Name, Type of Acquisition Assumption Leasable Leased at Main
Property 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 198,989
Village At 4/22/98 $6,250,000 $4,063,567 79,162 100% Winn
Waterford 260,255 Dixie
Midlothian, VA
Governor's Square 5/28/98 8,200,000 94,726(a) 183,340 83% Big Lots
Montgomery, AL 246,402 $1,231,438
Marion 6/25/98 5,100,000 163,970 83% Roses,
City Square 198,294 Bi-Lo &
Marion, NC CVS
</TABLE>
8
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(a) The OP Units are convertible to shares of common stock of the Company 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 (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 shall mean, with respect to any given date, the
average final closing price per share of the common stock of the Company as such
closing price is set forth in the Wall Street Journal, American Stock Exchange
Composite Transactions section, under the column "Close", unless otherwise
unavailable or inaccurate, during the twenty trading day period ending on such
date.
Amounts estimated to be recoverable from future operations and ultimate sales
were greater than the carrying value of each property owned at June 30, 1998.
However, the carrying value of certain properties may be in excess of their fair
value as of such dates.
Note 3 - Deferred Costs
The components of deferred costs are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Deferred insurance costs $6,005,804 $6,005,804
Deferred loan costs 1,286,734 945,700
Deferred leasing commissions 842,923 809,941
Deferred acquisition expenses 181,628 47,459
---------- -----------
8,317,089 7,808,904
Less: Accumulated amortization (6,022,766) (5,582,072)
---------- ----------
$2,294,323 $2,226,832
========== ==========
</TABLE>
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.
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 mil-
9
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
lion. 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. In July 1998, the Company used the repayment
proceeds to reduce its outstanding debt under the $40 million senior revolving
credit facility from BankBoston.
The interest income on the Cross Creek receivable recognized for the three and
six months ended June 30, 1998 was $404,661 and $837,802, respectively.
10
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
NOTE 6 - Notes Payable
As of June 30, 1998, the Company had notes payable with outstanding balances
totaling $29,176,753. 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 6/30/98 Collateral
- ---------- ---- ---- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
New York Life
Insurance 7/11/95 9.25% $55,984 $5,070,531 Forest Park &
Company 6/10/00 Highland Fair
BankBoston, N.A. 12/30/97 (a) Interest 17,475,000(b) Kokomo Plaza,
12/30/00 only Town West,
Applewood Centre,
Winery Square,
Southaven,
Pinehurst,
Weatherly Walk &
Woodgate Manor
Heller
Financial, Inc. 6/24/97(c) 8.50% $19,992 2,582,047 Barclay Place
7/1/17
Nomura 10/28/97(d) 7.54% $33,130 4,049,175 Village At
Asset Capital 11/11/22 Waterford
Corporation -----------
$29,176,753
===========
</TABLE>
(a) The interest rate under the 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 June 30,
1998 was 7.25%.
(b) Balance of a $40 million senior revolving credit facility.
(c) Note was assumed upon purchase of the property by the Company on March 31,
1998.
(d) 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
11
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
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 properties are being managed by RCC Property Advisors, Inc.
(the "Property Manager"), an affiliate of the Advisor.
Each independent director is entitled to receive compensation for serving as a
director at the rate of $5,000 per year in cash and shares of common stock
having an aggregate value of $10,000, 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 costs incurred to related parties for the three and six months ended June
30, 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
-------------------- ------------------
<S> <C> <C>
Acquisition fees $ 733,559 $ 877,388
Expense reimbursement 87,001 102,303
Property management fees 196,301 376,094
Asset management fee 154,092 301,394
Directors' fees 7,500 22,500
---------- ----------
$1,178,453 $1,679,679
========= =========
</TABLE>
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"). The general partners of
Insured I 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.
The expenses incurred to related parties for the three and six months ended June
30, 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
-------------------- ------------------
<S> <C> <C>
Expense reimbursement $ 28,209 $ 48,391
Property management fees 102,021 206,083
------- -------
$130,230 $254,474
======== ========
</TABLE>
12
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
The distributions earned by the general partners of Insured I for the three and
six months ended June 30, 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
-------------------- ------------------
<S> <C> <C>
Special Distributions $108,818 $217,636
Regular Distributions of
Adjusted Cash from
Operations 9,091 18,182
-------- --------
$117,909 $235,818
======== ========
</TABLE>
Note 8 - Earnings Per Share
Basic net income per share in the amount of $.19 and $.47 for the three and six
months ended June 30, 1998, respectively, is computed based on the net income
for the three and six months ended June 30, 1998 ($1,522,927 and $3,798,369,
respectively), divided by the weighted average number of shares outstanding for
the periods (8,050,855 and 8,050,791, 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
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 all of the Company's
properties in conformance with requirements for closing the senior revolving
credit facility with BankBoston. 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 any of the Company's
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 expo-
13
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
sure 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.
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 June 30, 1998, the Company owned a portfolio of twenty retail
properties (the "Retail Properties") containing a total of approximately 2.0
million gross leaseable square feet ("GLA"), holds a partnership interest in one
suburban garden apartment property (the "Multifamily Property"), holds two FHA
insured participating mortgages secured by suburban garden apartment properties
(the "FHA Mortgages") and has net assets of approximately $124,942,000.
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. Aegis
will use its affiliation with Related to establish a national acquisition
campaign. 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 plan will allow the Company
to maintain geographic diversity, which the Company believes reduces the risk
otherwise associated with focusing on one region. The Company will seek 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
15
<PAGE>
such cases, the Company will generally seek to acquire only those centers that
are expected to immediately increase FFO.
During the period January 1, 1998 through August 14, 1998 the Company acquired
four neighborhood shopping centers for an aggregate purchase price of
$23,350,000, not including acquisition fees and expenses of approximately
$904,000. The acquisitions were financed through proceeds of a $40 million
senior revolving credit facility with BankBoston, 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.
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 two 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 its asset dispositions to reduce
its outstanding debt under the credit facility from BankBoston.
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.
The Company's growth will be financed through proceeds of a $40 million senior
revolving credit facility with BankBoston, the issuance of REIT shares 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 conservative financial strategy dictates
leverage of no more than 50% of the value of the Company's market
capitalization.
As a REIT, Aegis 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 company
intends to maintain a dividend policy in the
16
<PAGE>
future whereby it distributes 95% - 100% of taxable income annually, but no more
than 90% of FFO.
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) 57% of total revenues (excluding gain on sale of investment in
partnerships) are earned from shopping center anchor tenants which are national
credit tenants and from interest payments on FHA-insured mortgages.
(iii) No single asset accounts for more than 10% of total revenue.
(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) Mortgage notes that are substantially guaranteed by FHA and a co-insurer
and that provide for participation in increases in operating results and market
values of the underlying collateral.
During the six months ended June 30, 1998, cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $15,122,000.
This increase was primarily due to cash provided by operating activities
($5,204,000), proceeds from the sale of Dominion ($4,728,000), principal
payments received on mortgage loans ($19,125,000), repayment of loan receivable
from affiliate ($3,060,000) and net proceeds from notes payable ($3,982,000)
which exceeded acquisitions of and improvements to real estate ($16,524,000),
distributions paid ($3,864,000), an increase in deferred acquisition expenses
($134,000) and an increase in deferred loan costs ($341,000). 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 ($1,736,000).
The Company maintains adequate cash reserves to provide for all major repairs,
replacements and tenant improvements on its real estate and anticipates that
cash generated from operations 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) FAI, Ltd. Weatherly Walk Apartments ("Weatherly Walk") has in the past
experienced recurring operating losses, working capital deficiencies and
negative cash flows which raised concerns of a potential default on the related
Mortgage Loan and Equity Loan. However, the Fayetteville, Georgia market has
improved and the partnership which owns the property is no longer experiencing
operating deficits, working capital deficiencies or negative cash flows and it
is currently meeting its operating obligations including required Mortgage Loan
payments to the Company.
(ii) 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
17
<PAGE>
lease which will expire in September 2006. There have been several proposals
received for leasing this space, but as of August 1, 1998, this space has not
been re-leased.
(iii) 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 August 1,
1998, this space has not been re-leased.
For a discussion of environmental issues affecting one of the Company's Retail
Properties see Note 8 to the financial statements.
In August 1998 a distribution of $1,932,278 (.24 per share) which was declared
in June 1998 was paid to the shareholders from cash flow from operations for the
quarter ended June 30, 1998.
Results of Operations
For the three and six months ended June 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 six shopping centers after the Consolidation. The Company's
results of operations for the three and six months ended June 30, 1998 consisted
primarily of the results of the Company's investment in twenty shopping centers,
two 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 six months ended June 30, 1997
consisted primarily of the results of Insured I's investment in eleven shopping
centers.
Rental income increased approximately $1,223,000 and $2,004,000 for the three
and six months ended June 30, 1998 as compared to 1997. $480,000 and $955,000 of
the increase, respectively, was due to the three shopping centers acquired from
Insured II in the Consolidation (the "Insured II Acquisitions"), and $614,000
and $887,000 of the increase, respectively, was due to the acquisition of six
shopping centers after the Consolidation (the "New Acquisitions"). Excluding
these acquisitions, rental income increased approximately $129,000 and $162,000
for the three and six months ended June 30, 1998 as compared to 1997.
Recovery of common area maintenance charges increased approximately $183,000 and
$203,000 for the three and six months ended June 30, 1998 as compared to 1997.
$52,000 and $63,000 of the increase, respectively, was due to the Insured II
Acquisitions, and $55,000 and $80,000 of the increase, respectively, was due to
the New Acquisitions. Excluding these acquisitions, recovery of common area
maintenance charges increased approximately $76,000 and $60,000 for the three
and six months ended June 30, 1998 as compared to 1997.
Real estate tax reimbursements increased approximately $360,000 and $392,000 for
the three and six months ended June 30, 1998 as compared to 1997. $132,000 and
$148,000 of the increase, respectively, was due to the Insured II Acquisitions,
and $27,000 and $37,000 of the increase, respectively, was due to the New
Acquisitions. Excluding these acquisitions, real estate tax reimbursements
increased approximately $201,000 and $207,000 for the three and six months ended
June 30, 1998 as compared to 1997.
Income from equity investments in the amounts of approximately $81,000 and
224,000, respectively, was recorded for the three and six months ended June 30,
1998 relating to the two partnership interests in Multifamily Properties
acquired from Summit Preferred in the Consolidation.
Interest income increased approximately $649,000 and $1,342,000 for the three
and six months ended June 30,1998 as compared to 1997. $625,000 and $1,279,000
of the increase, respectively, was 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 $24,000 and $63,000 for the
three and six months ended June 30, 1998 as compared to 1997.
Repairs and maintenance decreased approximately $20,000 for both the three and
six months ended June 30, 1998 as compared to 1997. Increases of $20,000 and
$89,000 due to the Insured II Acquisitions and $42,000 and $56,000 due to the
New Acquisitions were offset by an increase in plumbing repairs at Southhaven,
an increase in sewer charges at Winery Square and an increase in landscaping
expenses at Cactus Village and Winery Square which were three of the properties
which were owned by the Company in both 1998 and 1997.
Real estate taxes increased approximately $146,000 and $249,000 for the three
and six months ended June 30, 1998 as compared to 1997. $77,000 and $141,000 of
the increase, respectively, was due to the Insured II Acquisitions, and $54,000
and $81,000 of the increase, respectively, was due to the New Acquisitions.
Excluding these acquisitions, real estate taxes increased approximately $15,000
and $27,000 for the three and six months ended June 30, 1998 as compared to
1997.
Interest expense increased approximately $346,000 and $590,000 for the three and
six months ended June 30,1998 as compared to 1997 primarily due to interest
expense relating to the senior revolving credit facility with BankBoston.
General and administrative expenses increased approximately $560,000 and
$929,000 for the three and six months ended June 30, 1998 as compared to 1997.
$71,000 and $122,000 of the increase, respectively, was due to the Insured II
Acquisitions, and $516,000 and $856,000 of the increase, respectively, was due
to the New Acquisitions. Excluding these acquisitions, general and
administrative expenses decreased approximately $27,000 and $49,000 for the
three and six months ended June 30, 1998 as compared to 1997.
Depreciation and amortization increased approximately $271,000 and $411,000 for
the three and six months ended June 30, 1998 as compared to 1997. $98,000 and
$195,000 of the increase, respectively, was due to the Insured II Acquisitions,
and $187,000 and $242,000 of the increase, respectively, was due to the New
Acquisitions. Excluding these acquisitions, depreciation and amortization
increased approximately $14,000 and $26,000 for the three and six months ended
June 30, 1998 as compared to 1997.
Other expenses increased approximately $3,000 and $304,000 for the three and six
months ended June 30, 1998 as compared to 1997. $45,000 and $65,000 of the
increase, respectively, was due to the Insured II Acquisitions. Insured II
Acquisitions and $136,000 and $158,000 of the increase, respectively, was due to
the new acquisitions. Excluding these acquisitions, other expenses decreased and
increased approximately $178,000 and $81,000 for the three and six months ended
June 30, 1998 as compared to 1997. The decrease for the three months ended June
30, 1998 was primarily due to a decrease in bad debt expense resulting from an
increase in reserves at Cactus Village, Winery Square and Mountain Park Plaza
which were three of the shopping centers which were owned by the Company in both
1998 and 1997.
A gain on sale of investment in partnership was recorded for the six months
ended June 30, 1998 relating to the sale of the Company's limited partnership
interest in Dominion.
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 basis. Net income
computed in accordance with GAAP includes straight-lining of property rentals
for rent escalations in the amount of $47,867 and $84,960 for the three and six
months ended June 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 funds from operations.
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 funds from operations 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
18
<PAGE>
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.
FFO, as calculated in accordance with the NAREIT definition, and FAD for the
three and six months ended June 30, 1998 is summarized in the following table.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
----------- --------------
<S> <C> <C>
Net income $1,522,927 $ 3,798,369
Gain on sale of investment in partnership 0 (779,893)
Loss on repayment of Cross Creek debt 72,967 72,967
Depreciation and amortization of real property 698,236 1,343,973
Amortization of insurance contract 150,145 300,290
Proportionate share of adjustments to equity in
income from equity investments to
arrive at funds from operations 41,083 115,236
----------- -----------
Funds From Operations ("FFO") 2,485,358 4,850,942
Amortization of deferred financing costs 81,446 91,638
Principal payments received on mortgage loans 41,818 82,715
Straight-lining of property rentals for rent es-
calations (47,867) (84,960)
Improvements to real estate (33,366) (109,334)
Principal repayments of notes payable (69,351) (118,138)
Leasing commissions paid (42,434) (54,067)
Funds Available for Distribution ("FAD") $2,415,604 $ 4,658,796
=========== ===========
Cash flows from:
Operating activities $2,887,534 $ 5,204,326
=========== ===========
Investing activities $6,923,709 $10,200,207
=========== ===========
Financing activities $1,818,743 $ (282,824)
=========== ===========
</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.
19
<PAGE>
Year 2000 Compliance
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. The Advisor is in the process of working with the Company's service
providers to prepare for the year 2000. Based on information currently
available, the Company does not expect that it will incur significant operating
expenses or be required to incur material costs to be year 2000 compliant.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
A proxy and proxy statement soliciting the vote of the Company's
shareholders for the Company's annual meeting of shareholders was sent to
shareholders on or about May 6, 1998. Such meeting was held on June 18, 1998.
Peter T. Allen, Arthur P. Fisch, J. Michael Fried, Stuart J. Boesky and Alan P.
Hirmes were reelected as trustees.
Item 5. Other Information
Alan P. Hirmes ceased to serve as Chief Financial Officer effective June
18, 1998. 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).
(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.
<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: August 13, 1998 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Director, President and
Chief Operating Officer
Date: August 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,849,759
<SECURITIES> 0
<RECEIVABLES> 13,097,482
<ALLOWANCES> 500,000
<INVENTORY> 0
<CURRENT-ASSETS> 687,779
<PP&E> 135,446,172
<DEPRECIATION> 17,592,130
<TOTAL-ASSETS> 160,560,467
<CURRENT-LIABILITIES> 4,484,460
<BONDS> 29,176,753
0
0
<COMMON> 0
<OTHER-SE> 124,942,380
<TOTAL-LIABILITY-AND-EQUITY> 160,560,467
<SALES> 0
<TOTAL-REVENUES> 8,858,092
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,003,365
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 836,251
<INCOME-PRETAX> 3,798,369
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,798,369
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
