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 March 31, 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>
------------ ------------
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Real estate, net $ 98,141,340 $ 94,638,187
Investment in partnerships 5,288,915 9,296,088
Mortgage loans receivable 30,911,941 30,980,995
Loan receivable from affiliate 3,060,000 3,060,000
Cash and cash equivalents 10,219,773 6,728,050
Accounts receivable-tenants, net of allowance for
doubtful accounts of $424,000 and $304,000,
respectively 991,994 1,169,526
Deferred costs, net 2,070,971 2,179,373
Other assets 718,745 587,109
------------ ------------
Total Assets $151,403,679 $148,639,328
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 21,082,536 $ 18,544,242
Accounts payable and other liabilities 1,965,242 1,871,394
Due to Advisor and affiliates 328,709 507,835
Distributions payable 1,943,415 1,943,415
------------ ------------
Total Liabilities 25,319,902 22,866,886
------------ ------------
Minority interest of unitholders in the OP 729,124 727,431
------------ ------------
Commitment and Contingencies
Shareholders' equity:
Common stock; $.01 par value;
50,000,000 shares authorized;
8,050,727 shares issued and outstanding 80,507 80,507
Additional paid in capital 125,442,682 125,476,308
Distributions in excess of net income (168,536) (511,804)
------------ -------------
Total Shareholders' Equity 125,354,653 125,045,011
------------ -------------
Total Liabilities and Shareholders' Equity $151,403,679 $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
March 31,
-----------------------
1998 1997
--------- -----------
<S> <C> <C>
Revenues:
Rental income $2,723,985 $1,942,476
Recovery of common area maintenance charges 226,623 207,120
Real estate tax reimbursements 291,444 260,207
Income from equity investments 142,121 0
Interest income 704,121 10,817
Other 48,813 50,264
---------- -----------
Total revenues 4,137,107 2,470,884
---------- -----------
Expenses:
Repairs and maintenance 273,858 274,598
Real estate taxes 371,607 268,893
Interest 365,560 122,124
General and administrative 602,185 233,535
Depreciation and amortization 759,772 619,799
Minority interest in income of the OP 13,130 0
Other 255,446 (45,295)
---------- -----------
Total expenses 2,641,558 1,473,654
---------- -----------
Income before gain on sale of investment 1,495,549 997,230
Gain on sale of investment in partnership 779,893 0
---------- ------------
Net income $2,275,442 $ 997,230
========== ===========
</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>
Common Stock Additional Distributions
--------------------- 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 2,275,442 2,275,442
Consolidation costs 0 0 (33,626) 0 (33,626)
Distributions 0 0 0 (1,932,174) (1,932,174)
--------- --------- ------------ ----------- ------------
Balance at
March 31, 1998 8,050,727 $ 80,507 $125,442,682 $ (168,536) $125,354,653
========= ========= ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
-----------------------
Three Months Ended
March 31,
-----------------------
1998 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $2,275,442 $ 997,230
---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of investment in partnership (779,893) 0
Depreciation and amortization 806,074 619,799
Minority interest in income of OP 13,130 0
Distributions from equity investments
in excess of income 41,421 0
Changes in assets and liabilities:
Decrease in accounts receivable-tenants 57,378 106,298
Increase (decrease) in allowance for
doubtful accounts 120,154 (195,451)
Increase in other assets (131,636) (27,760)
(Decrease) increase in due to Advisor,
general partners and affiliates (179,126) 23,241
Increase (decrease) in accounts payable and
other liabilities 93,848 (9,907)
----------- ----------
Total adjustments 41,350 516,220
----------- ----------
Net cash provided by operating activities 2,316,792 1,513,450
----------- ----------
Cash flows from investing activities:
Proceeds from sale of investment in partnership 4,727,500 0
Improvements to real estate (75,968) (5,333)
Acquisitions of real estate (1,404,298) 0
Leasing commissions paid (11,633) (22,863)
Principal payments received on mortgage loans 40,897 0
----------- -----------
Net cash provided by (used in) investing activities 3,276,498 (28,196)
------------ -----------
Cash flows from financing activities:
Repayments of notes payable (2,048,787) (256,802)
Proceeds from notes payable 2,000,000 0
Distributions paid (1,932,174) (909,092)
Increase in deferred loan costs (75,543) 0
Decrease in minority interest (11,437) 0
Consolidation costs paid (33,626) 0
----------- -----------
Net cash used in financing activities (2,101,567) (1,165,894)
----------- -----------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements
5
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
-------------------------
Three Months Ended
March 31,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Net increase in cash and cash equivalents 3,491,723 319,360
Cash and cash equivalents at beginning of period 6,728,050 2,398,013
----------- -----------
Cash and cash equivalents at end of period $10,219,773 $2,717,373
=========== ===========
Supplemental information:
Interest paid $ 290,034 $ 123,459
=========== ===========
Supplemental disclosure of noncash
investing and financing activities:
Note payable assumed in acquistion of real estate 2,587,081 0
=========== ===========
Distributions declared $(1,932,174 $(1,017,910)
Increase in distributions payable
to shareholders 0 108,818
----------- -----------
Distributions paid $(1,932,174) $ (909,092)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 March 31, 1998, the Company owned a portfolio of
seventeen retail properties, holds partnership interest in one suburban garden
apartment property and holds three 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 "OP"), of which
the Company is the sole general partner and holder of 99.42% of the units of
partnership interest (the "OP Units"). The balance of the OP Units are currently
held by affiliates of Related.
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. Results of
operations and other operating financial data for the Company for the three
months ended March 31, 1997 is only with respect to Insured I.
Basic income per share in the amount of $.28 is computed based on the net income
for the three months ended March 31, 1998 ($2,275,442), divided by the weighted
average number of shares outstanding for the period (8,050,727). 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 46,836 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.
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 March 31, 1998 and the results of
its operations and its cash flows for the three months ended March 31, 1998 and
1997. However, the operating results for the interim periods may not be
indicative of the results for the full year.
7
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
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
current year's presentation.
Note 2 - Real Estate
The components of real estate are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ -------------
<S> <C> <C>
Land $ 28,196,021 $ 27,622,941
Buildings and improvements 86,911,073 83,419,863
------------ ------------
115,107,094 111,042,804
Less: Accumulated depreciation (16,965,754) (16,404,617)
------------ ------------
$ 98,141,340 $ 94,638,187
============ ============
</TABLE>
On March 31, 1998, the Company purchased one shopping center, Barclay Place, for
a purchase price of $3,800,000, not including acquisition fees and expenses of
approximately $188,000. A mortgage note payable of $2,587,081 was assumed in
connection with this acquisition.
Amounts estimated to be recoverable from future operations and ultimate sales
were greater than the carrying value of each property owned at March 31, 1998.
However, the carrying value of certain properties may be in excess of their fair
value as of such dates.
8
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
Note 3 - Deferred Costs
The components of deferred costs are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Deferred insurance costs $6,005,804 $6,005,804
Deferred loan costs 1,021,243 945,700
Deferred leasing commissions 814,144 809,941
---------- ----------
7,841,191 7,761,445
Less: Accumulated amortization (5,770,220) (5,582,072)
---------- ----------
$2,070,971 $2,179,373
========== ==========
</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 resulting in a gain.
Note 5 - Mortgage Loans Receivable
The present owner of the Cross Creek property, Walsh/Cross Creek Limited
Partnership ("Walsh/Cross Creek"), acquired title to the property upon the
default of the original developer. Significant interests in Walsh/Cross Creek
are held by affiliates of the Advisor. In 1988, the Company made a loan of
$3,060,000 to Walsh/Cross Creek (the "Cross Creek Loan") to pay for costs
incurred to complete construction and to fund operating deficits. The Cross
Creek Loan bears interest at the prime rate plus 1% (9.5% at March 31, 1998) and
is due on January 1, 2030 or on the occurrence of certain events. The amount
loaned to Walsh/Cross Creek is classified as a loan receivable from affiliate
and is anticipated to be repaid from cash flows from the Cross Creek property.
Stephen M. Ross holds a majority interest in the Advisor and has guaranteed the
repayment of the principal and interest on the Cross Creek Loan (as amended, the
"Guarantee Agreement") to the Company, subject to certain conditions.
In accordance with the Guarantee Agreement and except as otherwise required by
HUD, available cash flow or capital proceeds from the Cross Creek property will
be applied first to all expenses of operating and maintaining the property, debt
service and/or satisfaction of the mortgage loan, equity loan and Cross Creek
Loan, then to reimburse Stephen M. Ross for operating deficit payments which he
has made (amounting to $75,000 for the three months ended March 31, 1998 and
$3,613,546, cumulatively), then to additional interest, default rate and
9
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
guaranteed rate payments as set forth in the Subordinated Note and the
Additional Interest Guarantee.
Note 6 - 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 seventeen 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 months ended March 31, 1998
were as follows:
<TABLE>
<S> <C>
Acquisition fees $143,829
Expense reimbursement 15,302
Property management fees 179,793
Asset management fee 147,302
--------
$486,226
========
</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 months ended March 31,
1997 were as follows:
<TABLE>
<S> <C>
Expense reimbursement $ 20,182
Property management fees 104,062
--------
$124,244
========
</TABLE>
10
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
The distributions earned by the general partners of Insured I for the three
months ended March 31, 1997 were as follows:
<TABLE>
<S> <C>
Special Distributions $108,818
Regular Distributions of Adjusted Cash
from Operations 9,091
--------
$117,909
========
</TABLE>
Note 7 - 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. Propery 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 8 - Subsequent Event
On April 22, 1998 the Company acquired The Village at Waterford, a 76,929-square
foot neighborhood shopping center located in Midlothian, Va., for $6.25 million.
The Village at Waterford is anchored by Winn Dixie, is currently 100% leased and
is located in an upscale suburban planned unit development located six miles
from Richmond.
The acquisition was financed with $2.15 million of proceeds from the senior
revolving credit facility with BankBoston and the assumption of $4.1 million of
existing debt on the property.
11
<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 March 31, 1998, the Company owned a portfolio of seventeen retail
properties (the "Retail Properties") containing a total of approximately 1.6
million gross leaseable square feet ("GLA"), holds a partnership interest in one
suburban garden apartment property (the "Multifamily Property"), holds three FHA
insured participating mortgages secured by suburban garden apartment properties
(the "FHA Mortgages") and has net assets of approximately $125,355,000. On March
31, 1998, the Company purchased one shopping center, Barclay Place, for a
purchase price of $3,800,000, not including acquisition fees and expenses of
approximately $188,000. A mortgage note payable of $2,587,081 was assumed in
connection with this acquisition.
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").
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 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
12
<PAGE>
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, the Company will generally seek to acquire only
those centers that are expected to immediately increase FFO.
Internal growth will occur from the re-deployment of proceeds from the sale or
other disposition of stabilized 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. 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 resulting in a gain.
Finally, the Company will encourage the Advisor, Property Manager, Related and
their respective affiliates to increase their ownership in the Company. The
Company believes that this is necessary in order to more closely align the
interest of the management with that of the Company and to demonstrate that the
Advisor and Property Manager have a long-term commitment to the success of the
Company.
The Company's growth will be financed through proceeds of an expandable $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. For the quarter
ended March 31, 1998 the distribution represented approximately 85% of taxable
income. The company intends to maintain a dividend policy in the 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
receivable
(ii) 55% 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 mortgage notes
receivable.
(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
13
<PAGE>
(v) Leases that provide for increases in rents based on a percentage of tenants'
sales
(vi) Mortgage notes receivable 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 three months ended March 31, 1998, cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $3,492,000.
This increase was primarily due to cash provided by operating activities
($2,317,000) and proceeds from the sale of Dominion ($4,728,000) which exceeded
acquisitions of and improvements to real estate ($1,480,000), distributions paid
($1,932,000) and an increase in deferred loan costs ($76,000). Included in the
adjustments to reconcile the net income to cash provided by operating activities
is gain on sale of investment in partnerships ($780,000) and depreciation and
amortization ($806,000).
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) In prior years, the Company made the Cross Creek Loan to Walsh/Cross Creek
to enable it to complete construction and to fund operating deficits. Stephen M.
Ross, who holds a majority interest in the Advisor, has guaranteed repayment of
the principal and interest on the Cross Creek Loan (as amended, the "Guarantee
Agreement"). Mr. Ross remains in compliance with his obligations under the
Guarantee Agreement. However, significant portions of his assets are in the form
of partnership interests and corporate stock which are pledged or are otherwise
illiquid. Furthermore, a significant portion of the cash flow which Mr. Ross
would otherwise be expected to receive from his business operations is presently
pledged to meet other obligations. Mr. Ross also has contingent liabilities
that, if simultaneously called upon, could result in Mr. Ross having
insufficient liquid assets to meet all of his current liabilities. There can be
no assurance that Mr. Ross will have the liquidity necessary to continue to
comply with his obligations under the Guarantee Agreement.
(ii) FAI, Ltd. Weatherly Walk Apartments ("Weatherly Walk") and Walsh/Cross
Creek have 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 Loans and Equity Loans. With respect to
Weatherly Walk, 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. With respect to Cross Creek, which continues to experience recurring
operating losses, as indicated above, Stephen M. Ross has guaranteed the
performance of all obligations for the payment of interest (at 8.95%) and
principal of the Mortgage Loan together with the Equity Loan and has contributed
$75,000 during 1998 ($3,613,546 cumulatively) to cover operating losses and
working capital deficiencies, allowing this property to meet all required
Mortgage Loan payments.
(iii) 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
14
<PAGE>
its lease which will expire in September 2006. There have been several proposals
received for leasing this space, but as of May 1, 1998, this space has not been
re-leased.
(iv) 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 May 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 7 to the financial statements.
The Company has received $137,000 in 1998 from contingent payments from its
investments in real estate. These payments are generally reflected in income
when received and although there can be no assurance that the Company will
realize such payments in the future, the Company provides for participation in
the upside of its investments through percentage rents and participations in the
upside of underlying collateral for its mortgage notes receivable.
In January 1998 and May 1998, distributions of $1,932,174 (.24 per share) which
were declared in December 1997 and March 1998 were paid to the shareholders from
cash flow from operations for the quarters ended December 31, 1997 and March 31,
1998, respectively.
Results of Operations
- - ---------------------
For the three months ended March 31, 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. The
Company's results of operations for the three months ended March 31, 1998
consisted primarily of the results of the Company's investment in sixteen
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 months
ended March 31, 1997 consisted primarily of the results of the Company's
investment in eleven shopping centers.
Other
- - -----
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 $37,093. 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.
15
<PAGE>
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.
FFO, as calculated in accordance with the NAREIT definition, and FAD for the
quarter ended March 31, 1998 is summarized in the following table.
<TABLE>
<CAPTION>
<S> <C>
Net income $2,275,442
Gain on sale of investment in partnership (779,893)
Depreciation and amortization of real property 645,737
Amortization of insurance contract 150,145
Proportionate share of adjustments to equity in income from
equity investments to arrive at funds from operations 74,153
----------
Funds from operations 2,365,584
Amortization of deferred financing costs 10,192
Principal payments received on mortgage loans 40,897
Straight-lining of property rentals for rent escalations (37,093)
Improvements to real estate (75,968)
Principal repayments of notes payable (48,787)
Leasing commissions paid (11,633)
----------
Funds available for distribution $2,243,192
==========
</TABLE>
16
<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 - None
Item 5. Other Information - None
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 resignation of one officer
and the election of one officer was dated February 6, 1998 and was filed on
March 19, 1998.
17
<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: May 14, 1998 By: ------------------------------
Alan P. Hirmes
Senior Vice President
(Principal Financial Officer)
Date: May 14, 1998 By: ------------------------------
Richard A. Palermo
Treasurer
(Principal Accounting Officer)
<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: May 14, 1998 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Senior Vice President
(Principal Financial Officer)
Date: May 14, 1998 By: /s/ Richard A. Palermo
----------------------
Richard A. Palermo
Treasurer
(Principal 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,219,773
<SECURITIES> 0
<RECEIVABLES> 35,387,935
<ALLOWANCES> 424,000
<INVENTORY> 0
<CURRENT-ASSETS> 718,745
<PP&E> 115,107,094
<DEPRECIATION> 16,965,754
<TOTAL-ASSETS> 151,403,679
<CURRENT-LIABILITIES> 4,237,366
<BONDS> 21,082,536
0
0
<COMMON> 0
<OTHER-SE> 125,354,653
<TOTAL-LIABILITY-AND-EQUITY> 151,403,679
<SALES> 0
<TOTAL-REVENUES> 4,137,107
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,275,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 365,560
<INCOME-PRETAX> 2,275,442
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,275,442
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
