SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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. FINANCIAL INFORMATION
Item 1. Financial Statements
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
============= =============
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Real estate, net $ 173,222,689 $ 174,876,580
Investment in partnerships 5,987,425 6,095,543
Mortgage loan receivable 3,232,205 3,267,037
Loans receivable from affiliates 2,077,908 2,081,015
Cash and cash equivalents 2,126,879 3,003,474
Accounts receivable-tenants, net of allowance for
doubtful accounts of $420,000 and $383,000,
respectively 2,607,831 2,442,896
Deferred costs, net 2,790,175 2,387,683
Other assets 1,437,072 1,235,742
------------- -------------
Total Assets $ 193,482,184 $ 195,389,970
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 58,952,467 $ 58,864,099
Accounts payable and other liabilities 3,749,854 3,575,499
Due to Advisor and affiliates 265,978 355,915
Distributions payable 2,062,241 2,607,054
------------- -------------
Total Liabilities 65,030,540 65,402,567
------------- -------------
Minority interest of unitholders in the
Operating Partnership 6,707,803 6,803,895
------------- -------------
Commitments and Contingencies
Shareholders' equity:
Common stock; $.01 par value;
50,000,000 shares authorized; 8,053,159 issued
and 8,046,859 outstanding and 8,051,159
issued and 8,044,859 outstanding in
1999 and 1998, respectively 80,531 80,511
Treasury stock; $.01 par value; 6,300 shares (63) (63)
Additional paid in capital 125,319,076 125,299,096
Distributions in excess of net income (3,655,703) (2,196,036)
------------- -------------
Total Shareholders' Equity 121,743,841 123,183,508
------------- -------------
Total Liabilities and Shareholders' Equity $ 193,482,184 $ 195,389,970
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
============================ ============================
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 4,998,061 $ 3,520,886 $ 14,932,450 $ 9,177,921
Tenant reimbursements 1,091,893 1,003,172 3,449,238 2,564,957
Income from equity investments 68,014 84,249 239,452 307,837
Interest income 126,412 189,795 366,467 1,557,012
Other 35,970 24,318 94,371 72,785
------------ ------------ ------------ ------------
Total revenues 6,320,350 4,822,420 19,081,978 13,680,512
------------ ------------ ------------ ------------
Expenses:
Repairs and maintenance 560,325 499,963 1,337,053 1,010,755
Real estate taxes 581,209 449,469 1,873,166 1,235,942
Interest 1,127,521 366,521 3,340,211 1,202,772
General and administrative 1,015,193 809,831 3,100,475 2,231,801
Depreciation and amortization 1,191,916 997,784 3,686,557 2,649,942
Other 295,585 191,332 1,124,554 795,297
------------ ------------ ------------ ------------
Total expenses 4,771,749 3,314,900 14,462,016 9,126,509
------------ ------------ ------------ ------------
Income before gain on sale of
investment 1,548,601 1,507,520 4,619,962 4,554,003
Gain on sale of investment in
partnership 0 0 0 779,893
------------ ------------ ------------ ------------
Income before minority interest 1,548,601 1,507,520 4,619,962 5,333,896
Minority interest in income of
the Operating Partnership (98,454) (26,049) (285,891) (54,056)
------------ ------------ ------------ ------------
Net income $ 1,450,147 $ 1,481,471 $ 4,334,071 $ 5,279,840
============ ============ ============ ============
Net income per share:
Basic $ .18 $ .18 $ .54 $ .66
============ ============ ============ ============
Diluted $ .18 $ .18 $ .53 $ .66
============ ============ ============ ============
Weighted average shares
outstanding:
Basic 8,046,859 8,051,159 8,046,478 8,050,915
============ ============ ============ ============
Diluted 8,210,252 8,051,159 8,209,871 8,050,915
============ ============ ============ ============
</TABLE>
3
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional Distributions
------------------- --------------------- Paid-in in Excess of
Shares Amount Shares Amount Capital Net Income Total
------ ------ ------ ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1999 8,051,159 $ 80,511 (6,300) $ (63) $125,299,096 $ (2,196,036) $123,183,508
Net income 0 0 0 0 0 4,334,071 4,334,071
Issuance of shares of
common stock 2,000 20 0 0 19,980 0 20,000
Distributions 0 0 0 0 0 (5,793,738) (5,793,738)
--------- ---------- ---------- ---------- ------------ ------------ ------------
Balance at
September 30, 1999 8,053,159 $ 80,531 (6,300) $ (63) $125,319,076 $ (3,655,703) $121,743,841
========= ========== ========== ========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
============================
Nine Months Ended
September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,334,071 $ 5,279,840
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of investment in partnership 0 (779,893)
Loss on repayments of mortgage loans receivable 0 72,967
Depreciation and amortization 3,729,300 2,752,643
Minority interest in income of
the Operating Partnership 285,891 54,056
Distributions from equity investments
in excess of income 76,168 40,945
Changes in operating assets and liabilities:
Accounts receivable-tenants (201,469) (108,482)
Allowance for doubtful accounts 36,534 (555)
Other assets (201,330) (386,344)
Due to Advisor and affiliates (69,937) (147,168)
Accounts payable and other liabilities 174,355 788,774
Leasing commissions and costs (500,516) (125,790)
------------ ------------
Total adjustments 3,328,996 2,161,153
------------ ------------
Net cash provided by operating activities 7,663,067 7,440,993
------------ ------------
Cash flows from investing activities:
Proceeds from sale of investment in partnership 0 4,727,500
Improvements to real estate (845,310) (439,824)
Acquisitions of real estate including acquisition
expenses (570,916) (41,798,217)
Increase in deferred acquisition expenses (61,150) (16,549)
Investment in partnership 0 (941,134)
Repayments of loans receivable from affiliates 3,107 3,060,000
Principal payments received on mortgage loans 24,039 27,566,524
------------ ------------
Net cash used in investing activities (1,450,230) (7,841,700)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 500,000 33,050,000
Repayments of notes payable (411,632) (28,847,733)
Distributions paid to shareholders (6,396,627) (5,796,626)
Increase in deferred loan costs (457,266) (356,112)
Distributions paid to minority interest (323,907) (40,969)
Consolidation costs 0 (41,453)
Consolidation costs allocated to
minority interest 0 (241)
------------ ------------
Net cash used in financing activities (7,089,432) (2,033,134)
------------ ------------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements
5
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
==========================
Nine Months Ended
September 30,
--------------------------
1999 1998
----------- -----------
Net decrease in cash and cash equivalents (876,595) (2,433,841)
Cash and cash equivalents at the beginning of
the period 3,003,474 6,728,050
----------- -----------
Cash and cash equivalents at the end of the period $ 2,126,879 $ 4,294,209
=========== ===========
Supplemental information:
Interest paid $ 3,691,879 $ 1,249,349
=========== ===========
Supplemental disclosure of noncash
investing and financing activities:
Notes payable assumed in acquisition of real estate $ 0 $ 6,650,648
=========== ===========
Real estate acquired for units in the Operating
Partnership $ 0 $ 1,231,438
=========== ===========
Issuance of shares of common stock for
director fees $ 20,000 $ 5,000
=========== ===========
Reclassification of deferred acquisition expenses
to real estate upon purchase $ 0 $ 47,459
=========== ===========
Distributions to shareholders declared $(5,793,738) $(5,796,731)
(Decrease) increase in distributions payable
to shareholders (602,889) 105
----------- -----------
Distributions paid to shareholders $(6,396,627) $(5,796,626)
=========== ===========
See accompanying notes to consolidated financial statements
6
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(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 is organized and managed as a single business segment. As
of September 30, 1999, the Company owned a portfolio of 28 retail properties
(the "Retail Properties"), held partnership interests in two suburban garden
apartment properties and held one FHA insured participating mortgage secured by
a suburban garden apartment property.
The Company was formed on October 1, 1997 as the result of the consolidation
(the "Consolidation") of four publicly registered, non-listed limited
partnerships, Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity
L.P. II ("Insured II"), Summit Preferred Equity L.P. and Eagle Insured, L.P.
(the "Partnerships", and each individually a "Partnership"). One of the general
partners of the Partnerships was an affiliate of Related Capital Company
("Related"). 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 partnership interest in each Partnership.
As of September 30, 1999, there were 8,046,859 shares of Common Stock
outstanding (an additional 545,812 shares were reserved for issuance upon
conversion of OP Units, as defined below).
The Company is governed by a board of directors comprised of two independent
directors and three directors who are affiliated with Related. The Company has
engaged Related Aegis LP (the "Advisor"), a Delaware limited partnership and an
affiliate of Related, to manage its day to day affairs.
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 93.65% of the units of partnership interest (the "OP Units") at
September 30, 1999. Also, at September 30, 1999, 3.35% and 3.00% of the OP Units
are held by the sellers of three of the Retail Properties and by affiliates of
Related, respectively.
The consolidated financial statements include the accounts of the Company and
its subsidiary partnerships. All intercompany accounts and transactions with the
subsidiary partnerships have been eliminated in consolidation.
The accompanying financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of September 30, 1999, the results of
its operations for the three and nine months ended September 30, 1999 and 1998
and its cash flows for the nine months ended September 30, 1999 and 1998.
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 ("GAAP") have been
7
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
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 for the year ended December 31, 1998.
The preparation of financial statements in conformity with GAAP requires the
Advisor to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") 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 the
Company beginning with the first quarter of 2001. Company management is
currently evaluating the impact that this statement will have on its hedging
strategies and is currently unable to predict the effect, if any, it will have
on the Company's financial statements.
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
Note 2 - Real Estate
The components of real estate are as follows:
September 30, December 31,
1999 1998
------------- -------------
Land $ 39,795,959 $ 39,467,426
Buildings and improvements 155,657,008 154,677,484
------------- -------------
195,452,967 194,144,910
Less: Accumulated depreciation (22,230,278) (19,268,330)
------------- -------------
$ 173,222,689 $ 174,876,580
============= =============
On September 8, 1999, the Company acquired an out-parcel of developable land
contiguous to the Rolling Hills Square Retail Property for a purchase price of
$325,000, not including acquisition fees and expenses of approximately $16,000.
The 470,789 OP Units which were issued to the sellers of Governor's Square,
Southgate and Crossroads East, three Retail Properties, are convertible to
shares of Common Stock on a one-to-one basis, subject to adjustment, on the one
year anniversary of their respective closing dates. The OP Units were issued at
an agreed upon value of $13 per unit. If as of the last trading day prior to the
first anniversary of the closing date (the "Post-Closing Adjustment Date"), the
"Average Price Per Share" (as defined below) is less than $13, the Company is
obligated to issue additional OP Units to the respective sellers in the amount
of the difference between (i) the quotient obtained by dividing the OP Unit
value at $13 per unit by the Average Price Per Share as of the Post-Closing
Adjustment Date and (ii) the number of OP Units issued on the closing date. The
Average Price Per Share means, with respect to any given date, the average final
closing price per share of Common Stock during the twenty trading day period
ending on
8
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
such date. An additional 28,187 OP Units were issued to the seller of Governor's
Square on the Post-Closing Adjustment Date (May 28, 1999) based on the Average
Price Per Share of $10.01875. An additional 163,393 OP Units would have to be
issued to the sellers of Southgate and Crossroads East on the Post-Closing
Adjustment Date (December 9, 1999), based on the closing price per share of 9
1/16 on September 30, 1999.
Amounts estimated to be recoverable from future operations and ultimate sales
are greater than the carrying value of each property owned at September 30,
1999. However, the carrying value of certain properties may be in excess of
their fair value as of such date.
Note 3 - Deferred Costs
The components of deferred costs are as follows:
September 30, December 31,
1999 1998
Deferred insurance costs $ 0 $ 6,005,804
Deferred loan costs 2,299,867 1,842,601
Deferred leasing commissions and costs 1,311,527 928,148
Deferred acquisition expenses 175,379 114,229
------------ -----------
3,786,773 8,890,782
Less: Accumulated amortization (996,598) (6,503,099)
------------ -----------
$ 2,790,175 $ 2,387,683
============ ===========
During the three months ended September 30, 1999, fully amortized deferred
insurance costs in the amount of $6,005,804 were written off.
9
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
NOTE 4 - Notes Payable
As of September 30, 1999 and December 31, 1998, the Company had notes payable
with outstanding balances totaling $58,952,467 and $58,864,099, respectively.
Further information regarding the notes is as follows:
<TABLE>
<CAPTION>
Collateral/
Date of Monthly Carrying
Note/ Payment Outstanding Outstanding Value at
Maturity Interest of Principal Balance Balance June 30,
Noteholder Date Rate and Interest at 9/30/99 at 12/31/98 1999
- ---------- ---------- --------- ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
New York Life 7/11/95 9.25% $55,984 $ 4,783,944 $ 4,967,164 Forest Park &
Insurance 6/10/00 Highland Fair/
Company $12,145,527
(a) 12/30/97 (b) Interest 29,818,000 29,318,000(c)(i)
12/30/00 (j) only
Heller 6/24/97(d) 8.50% $19,992 2,553,315 2,571,651 Barclay Place/
Financial, Inc. 7/1/17 $3,936,722
Nomura 10/28/97(e) 7.54% $33,130 3,926,357 4,004,897 Village At
Asset Capital 11/11/22 Waterford/
Corporation $6,393,954
Chase Bank 12/16/96(f) 8.875% $51,717 6,364,368 6,409,003 Oxford Mall/
1/1/07 $8,843,618
Merrill Lynch 9/18/97(g) 7.73% $79,509 10,801,483 10,888,384 Southgate/
Credit 10/1/07 $15,390,264
Corporation
Sellers of 12/10/98 (h) $0 200,000 200,000 None
Southgate 12/10/99
Sellers of 12/10/98 (h) $0 230,000 230,000 None
Crossroads East 12/10/99
Sellers of 12/10/98 (h) $0 275,000 275,000 None
Crossroads East 12/9/99 ----------- -----------
$58,952,467 $58,864,099
=========== ===========
</TABLE>
(a) The Credit Facility is shared among BankBoston, N.A. (28.57%), KeyBank
National Association (28.57%), Citizens Bank of Rhode Island (28.57%) and
Sovereign Bank (14.29%).
(b) The interest rate under the Credit Facility can float 1/2% under
BankBoston's base rate or can be fixed in 30, 60, 90 and 180 day periods at
1.625% over the indicated Euro-contract rate at the option of the Company. The
Company has currently elected the 30 day rate which was 5.4375% at September 30,
1999.
(c) Outstanding balance of a $70 million senior revolving credit facility
("Credit Facility").
(d) Note was assumed upon purchase of the property by the Company on March 31,
1998.
(e) Note was assumed upon purchase of the property by the Company on April 22,
1998.
10
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
(f) Note was assumed upon purchase of the property by the Company on November
24, 1998.
(g) Note was assumed upon purchase of the property by the Company on December 9,
1998.
(h) Note is non-interest bearing.
(i) The Credit Facility was collateralized at September 30, 1999 by thirteen
Retail Properties, one investment in a partnership and one Mortgage Loan with
carrying values of $76,798,530, $5,235,924 and $3,232,205, respectively. In
addition, the obligation under the Credit Facility is guaranteed by the Company,
Insured I, Insured II and TCR-Pinehurst Limited Partnership.
(j) The Company has an option to extend the maturity date to 12/30/03 upon
payment of certain fees.
On December 1, 1998, the Company entered into an interest rate swap agreement
with a notional amount of $10,000,000, intended to reduce the impact of changes
in interest rates on the Credit Facility. This agreement effectively changes the
Company's interest rate on $10,000,000 of the Credit Facility debt to a fixed
rate of 5.44% and matures on December 1, 2000. The Company accounts for the net
cash settlements under this swap agreement as adjustments to the interest
expense on the Credit Facility. The Company is exposed to credit loss in the
event of nonperformance by the other party to the interest rate swap agreement;
however, the Company does not anticipate nonperformance by the counter party.
The Company estimates that if it decided to terminate this swap agreement at
September 30, 1999, the counter party would be required to pay the Company
approximately $40,000; however, the Company currently has no intention of
terminating this agreement.
Note 5 - Common Stock
The Company has adopted an incentive stock option plan (the "Incentive Stock
Option Plan"), the purpose of which is to (i) attract and retain qualified
persons as directors and officers and (ii) to incentivize and more closely align
the financial interests of the Advisor and its affiliates and their respective
employees and officers with the interests of the stockholders by providing the
Advisor and its affiliates with substantial financial interest in the Company's
success. The Compensation Committee administers the Incentive Stock Option Plan.
Pursuant to the Incentive Stock Option Plan, if the Company's distributions per
share of common stock in the immediately preceding calendar year exceed $0.9869
per share, the Compensation Committee has the authority to issue options to
purchase, in the aggregate, that number of shares of common stock which is equal
to three percent of the shares outstanding as of December 31 of the immediately
preceding calendar year (or in the initial year, as of October 1, 1997),
provided that the Compensation Committee may only issue, in the aggregate,
options to purchase a maximum number of shares of common stock over the life of
the Incentive Stock Option Plan equal to 10% of the shares outstanding on
October 1, 1997.
Subject to the limitations described in the preceding paragraph, if the
Compensation Committee does not grant the maximum number of options in any year,
then the excess of the number of authorized options over the number of options
granted in such year will be added to the number of authorized options in the
next succeeding year and will be available for grant by the Compensation
Committee in such succeeding year.
11
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
All options granted will have an exercise price equal to or greater than the
fair market value of the shares of common stock on the date of the grant. The
maximum option term is ten years from the date of grant. All stock options
granted pursuant to the Incentive Stock Option Plan may vest immediately upon
issuance or in accordance with the determination of the Compensation Committee.
No options were granted for the year ended December 31, 1997. In 1998, the
Company distributed $1.035 per share of Common Stock ($0.96 from continuing
operations and a $0.075 special capital gains distribution), thus enabling the
Compensation Committee, at their discretion, to issue options. Three percent of
the shares outstanding as of the effective date of the Consolidation are equal
to 241,522 Shares.
On August 6, 1999, options to purchase 30,000 shares of Common Stock were
granted to an officer of the Company and certain employees of an affiliate of
the Advisor, who are not employees of the Company. The exercise price of these
options is $9.50 per share. The term of each option is ten years. The options
will vest in equal installments on August 6, 2000, 2001 and 2002. The Company
has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" for its stock options issued to non-employees. Accordingly,
compensation cost is accrued based on the estimated fair value of the options
issued, and amortized over the vesting period. Because vesting of the options is
contingent upon the recipient continuing to provide services to the Company to
the vesting date, the Company estimates the fair value of the non-employee
options at each period end up to the vesting date, and adjusts expensed amounts
accordingly. The compensation cost will be amortized over the vesting period of
the options. The 30,000 options granted on August 6, 1999 had an estimated fair
value at that date of $0.59 per option grant, or a total of $17,607. The fair
value of each option grant is estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in the
period ended September 30, 1999: dividend yield of 8%, expected volatility of
18%, risk-free interest rate of 6% and expected lives of ten years.
Each independent director is entitled to receive annual compensation for serving
as a director in the aggregate amount of $15,000 payable in cash (maximum of
$5,000 per year) and/or shares of Common Stock valued based on the fair market
value at the date of issuance. As of September 30, 1999 and December 31, 1998,
1,216 and 216 shares, respectively, having an aggregate value of $12,500 and
$2,500, respectively, have been issued to each independent director as
compensation for their services.
Note 6 - Related Party Transactions
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 Retail Properties are managed by RCC Property Advisors, Inc. (the
"Property Manager"), an affiliate of the Advisor, for a fee equal to 4.5% of the
gross rental receipts from the Retail Properties, which is competitive with such
fees paid in the areas in which the properties are located. The Property Manager
also receives standard leasing commissions for space leased to new tenants and
for lease renewals and is reimbursed for certain expenses.
12
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
The costs incurred to related parties for the three and nine months ended
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Acquisition fees $ 12,320 $ 919,658 $ 12,320 $1,797,046
Expense reimbursement 71,408 78,499 198,095 180,802
Property management fees 246,272 181,148 778,462 518,283
Leasing commissions and costs 116,940 40,274 335,981 83,891
Asset management fee 196,172 153,081 582,137 454,475
---------- ---------- ---------- ----------
$ 643,112 $1,372,660 $1,906,995 $3,034,497
========== ========== ========== ==========
</TABLE>
On December 9, 1998, in connection with the acquisition of two Retail
Properties, the Company made loans (the "OP Unit Loans") totaling $2,081,015 to
Standard Investment Company ("SIC"), a partner in the partnerships which owned
the properties; SIC is not affiliated with the Advisor or its affiliates but
affiliates of the Advisor were also partners in such partnerships. The loans are
secured by the 163,517 OP Units which were issued to SIC in exchange for its
partnership interests in the partnerships which owned the properties and also by
guarantees from the principals of SIC for 25% of the total loan amounts. The OP
Unit Loans bear interest at 7.613% and mature on December 9, 2015 or earlier if
the underlying shopping centers are sold. Interest and principal on the OP Unit
Loans are payable only to the extent of distributions with respect to the OP
Units. Such distributions will be retained by the Company until all accrued
interest and the outstanding balances of the loans are repaid. As of September
30, 1999, the balances of these OP Unit Loans totaled $2,077,908 and are shown
as loans receivable from affiliates on the consolidated balance sheets.
Note 7 - Earnings Per Share
Basic net income per share in the amount of $.18 and $.18 and $.54 and $.66 for
the three and nine months ended September 30, 1999 and 1998, respectively,
equals net income for the periods ($1,450,147 and $1,481,471 and $4,334,071 and
$5,279,840, respectively), divided by the weighted average number of shares
outstanding for the periods (8,046,859 and 8,051,159 and 8,046,478 and
8,050,915, respectively).
Diluted net income per share in the amount of $.18 and $.18 and $.53 and $.66
for the three and nine months ended September 30, 1999 and 1998, respectively,
equals net income for the periods, divided by the weighted average number of
diluted shares outstanding for the periods (8,210,252 and 8,051,159 and
8,209,871 and 8,050,915, respectively). The weighted average number of diluted
shares outstanding for the three and nine months ended September 30, 1999
reflects an additional 163,393 OP Units which would have to be issued to the
sellers of two Retail Properties on the Post-Closing Adjustment Date based on
the closing price per share on September 30, 1999 (see Note 2). For purposes of
this calculation, the additional OP Units are assumed to be immediately
converted to shares of Common Stock.
The stock options issued during 1999 (see Note 5) did not have a dilutive effect
under the treasury stock method, because the average market price of the
Company's common stock
13
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
during the period from issuance to September 30, 1999 did not exceed the
exercise price of the options.
There is no difference between basic and diluted net income per share with
respect to the conversion of the minority interests' OP Units outstanding at
September 30, 1999 and 1998 into an additional 545,812 and 141,562 shares,
respectively, of Common Stock because the earnings of an OP Unit are equivalent
to the earnings of a share of Common Stock.
Note 8 - 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.
A current or previous owner or operator of real property may be legally liable
for the costs of removal or remediation of hazardous or toxic substances on,
under or in such property. Such liability may exist whether or not the owner or
operator knew of, or was responsible for, such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances may adversely affect the
owner's ability to borrow funds using such real property as collateral. Certain
environmental laws impose liability for release of asbestos-containing materials
("ACMs") into the air and third parties may seek recovery from owners or
operators of real properties for personal injury associated with ACMs. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be liable for removal or
remediation costs, as well as certain other potential costs which could relate
to such hazardous or toxic substances or ACMs (including governmental fines and
injuries to persons and property). To date, the Company has not incurred any
costs of removal or remediations of such hazardous or toxic substances. However,
the presence, with or without the Company's knowledge, of hazardous or toxic
substances at any property held or operated by the Company could have an adverse
effect on the Company's business, operating results and financial condition.
Phase I Environmental Site Assessments have been undertaken on all of the
Company's properties. In certain cases, additional Phase II site investigations
have also been undertaken where deemed appropriate. Based on these reports, no
on-site hazardous chemicals or petroleum products were detected or found to
exist in the soil or in the groundwater at those properties which would result
in action by state environmental agencies and which would require additional
investigation and/or remediation, with the exception of the Mountain Park Plaza
property. A Phase II investigation at this property, in February 1998,
determined that there were detectable levels of certain hazardous materials
above threshold levels which are ascertained by the Georgia State Department of
Natural Resources Environmental Protection Division ("GAEPD"). Based on this
report and notification to GAEPD, additional investigation, monitoring and/or
remediation may be required by GAEPD. These hazardous materials were determined
to derive from an on-site dry cleaner and an adjacent service station with a
pre-existing, documented underground leaking storage tank. Property management
and the Company have taken preliminary steps in providing appropriate
notification to GAEPD on these matters together with notification and possible
remedies against both the on-site dry cleaner and adjacent service station.
Dependent on a numerical score "ranking" for the site which is dependent on
several factors (the most important being the potential for human exposure to
occur) the GAEPD may require additional investigation and/or remediation. On May
28, 1999
14
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
management received notification form GAEPD that the site is now listed on the
GAEPD Hazardous Site Inventory ("HSI") due, in part, to the presence of
detectable levels of certain hazardous materials at slightly higher than maximum
allowable levels. Management has recently undertaken a re-sampling to determine
if such levels continue to exist in order to potentially qualify for a
de-listing from the HSI. A preliminary verbal report indicated that no hazardous
materials remain detectable above the threshold levels which are acertained by
GAEPD to require remediation. A formal report is currently being submitted to
GAEPD to qualify the property for de-listing. Management has installed wells on
the site to monitor ongoing levels of hazardous materials in the ground water
pursuant to GAEPD policy. Management, at this time, is unable to predict further
requirements, if any, or the ultimate cost of remediation if it is necessary.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
Aegis Realty, Inc. (the "Company") is a Maryland corporation that has qualified
as a real estate investment trust ("REIT") under the Internal Revenue Code of
1986 as amended (the "Code"). The Company was formed to acquire, own, operate
and renovate primarily supermarket-anchored neighborhood and community shopping
centers. As of September 30, 1999, the Company owned a portfolio of 28 retail
properties (the "Retail Properties") containing a total of approximately 3.0
million gross leaseable square feet ("GLA"), held partnership interests in two
suburban garden apartment properties (the "Multifamily Properties"), held one
FHA insured participating mortgage secured by a suburban garden apartment
property (the "FHA Mortgage") and had net assets of approximately $121,744,000.
The Company was formed on October 1, 1997 as the result of the consolidation
(the "Consolidation") of four publicly registered, non-listed limited
partnerships, Summit Insured Equity L.P. ("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"). One of the general partners
of the Partnerships was an affiliate of Related Capital Company ("Related"). As
of September 30, 1999, there were 8,046,859 shares of Common Stock outstanding
(an additional 545,812 shares were reserved for issuance upon conversion of OP
Units).
The Company has initiated a focused business/strategic plan designed to increase
funds from operations ("FFO") and to enhance the value of its stock. The plan
concentrates principally on external growth and internal growth.
The Company's external growth will be accomplished through continued
acquisitions of Retail Properties either directly or in joint venture on an
individual or bulk basis. The Company believes that there are significant
opportunities available to acquire undervalued, undermanaged and/or
underutilized neighborhood and community shopping centers. Unlike most small
capitalized REITs, the Company has the ability to benefit from its affiliation
with a much larger company, Related, with a national presence. The Company is
using its affiliation with Related to establish a national acquisition program.
The Company believes that by acquiring shopping centers on a national basis,
rather than targeting a few markets or a region, it will be able to grow at a
meaningful rate, without the need for it to compromise asset quality or current
return. In addition, a national acquisition program allows the Company to
maintain geographic diversity, which the Company believes reduces the risk
otherwise associated with focusing on one region. The Company seeks to acquire
primarily, but not exclusively, supermarket-anchored shopping centers, which are
well located in primary and secondary markets. Acquisitions will be balanced
between stabilized centers that the Company believes are undervalued and centers
that may be enhanced through intensive management, leasing, redevelopment or
expansion efforts. In all such cases, the Company generally seeks to acquire
only those centers that are expected to immediately increase FFO.
On September 8, 1999, the Company acquired an out-parcel of developable land
contiguous to the Rolling Hills Square Retail Property for a purchase price of
$325,000, not including acquisition fees and expenses of approximately $16,000.
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
16
<PAGE>
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.
The Company's growth will be financed through proceeds of the Credit Facility,
the issuance of shares of the Company's common stock or OP Units in exchange for
real estate, funds generated from operations in excess of distributions and from
placements of equity. Although the Credit Facility may be increased, the
Company's Charter dictates leverage of no more than 50% of the Company's Total
Market Value.
On August 6, 1999, options to purchase 30,000 shares of Common Stock were
granted to an officer of the Company and certain employees of an affiliate of
the Advisor, who are not employees of the Company. Vesting of the options is
contingent upon the recipient continuing to provide services to the Company to
the vesting date. The exercise price of these options is $9.50 per share. The
term of each option is ten years. The options will vest in equal installments on
August 6, 2000, 2001 and 2002.
On December 1, 1998, the Company entered into an interest rate swap agreement
with a notional amount of $10,000,000, intended to reduce the impact of changes
in interest rates on the Credit Facility. This agreement effectively changes the
Company's interest rate on $10,000,000 of the Credit Facility debt to a fixed
rate of 5.44% and matures on December 1, 2000. The Company accounts for the net
cash settlements under this swap agreement as adjustments to the interest
expense on the Credit Facility. The Company is exposed to credit loss in the
event of nonperformance by the other party to the interest rate swap agreement;
however, the Company does not anticipate nonperformance by the counter party.
The Company estimates that if it decided to terminate this swap agreement at
September 30, 1999, the counter party would be required to pay the Company
approximately $40,000; however, the Company currently has no intention of
terminating this agreement.
As a REIT, the Company is required to distribute at least 95% of its taxable
income to maintain REIT status. Funds generated from operations are expected to
be sufficient to allow the Company to meet this requirement.
The Advisor believes that 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 its mortgage note.
(ii) 47% of total revenues for the nine months ended September 30, 1999 were
earned from shopping center anchor tenants which are national credit tenants and
from interest on an FHA Mortgage.
(iii) No single asset accounts for more than 8% of total revenues for the nine
months ended September 30, 1999.
(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.
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<PAGE>
(vi) A mortgage note which is substantially guaranteed by FHA and a co-insurer
and that provides for participation in increases in operating results and market
value of the underlying collateral.
During the nine months ended September 30, 1999, cash and cash equivalents of
the Company and its consolidated subsidiaries decreased approximately $877,000.
This decrease was primarily due to improvements to real estate ($845,000),
acquisitions of real estate including acquisition expenses ($571,000), an
increase in deferred acquisition expenses ($61,000), distributions paid to
shareholders ($6,397,000), an increase in deferred loan costs ($457,000) and
distributions paid to minority interest ($324,000) which exceeded net cash
provided by operating activities ($7,663,000) and net proceeds from notes
payable ($88,000). Included in the adjustments to reconcile the net income to
cash provided by operating activities is depreciation and amortization in the
amount of $3,729,000.
The Company anticipates that cash generated from operations will provide for all
major repairs, replacements and tenant improvements on its real estate and will
provide sufficient liquidity to fund, in future years, the Company's operating
expenditures, debt service and distributions.
The Company has the following problem assets which may adversely affect future
operations and liquidity:
(i) Safeway, the anchor tenant of Cactus Village Shopping Center closed its
facility in December 1991 due to poor sales. However, the tenant continues to
fully abide by all aspects of its lease which will expire in September 2006.
There have been several proposals received for leasing this space, but as of
November 12, 1999, this space has not been re-leased.
(ii) In July 1994, A&P closed its store in the Mountain Park Plaza Shopping
Center due to reduced sales and increased competition. The Company continues to
receive rental payments from the vacated tenant pursuant to the terms of the
lease which will expire in June 2007 and both the tenant and the Company are
actively pursuing potential sub-tenants or replacement tenants. As of November
12, 1999, this space has not been re-leased.
(iii) On March 1, 1999, Penn Traffic Co., parent of Big Bear Stores, an anchor
tenant in the Southgate Shopping Center, filed for Chapter 11 bankruptcy. Penn
Traffic originally had 60 days to affirm or reject the lease, subject to court
granted extensions. The Company expects (a) this lease will be affirmed, (b) the
rent for 60 days plus court granted extensions is post petition and will be paid
in full and (c) in the unlikely event this lease is rejected, there are
alternative grocery retailers which are ready to take over this location
immediately at a rent equal to or exceeding the present lease. As of November
12, 1999 (a) the lease has not been officially affirmed or rejected, (b) Penn
Traffic's reorganization plan was approved by the court on May 27, 1999 with
full implementation still awaiting completion of final creditor negotiations and
(c) the rent for the period March 2, 1999 through November 30, 1999 has been
paid leading the Company to believe the lease will be affirmed.
For a discussion of environmental issues affecting one of the Company's Retail
Properties see Note 8 to the consolidated financial statements.
In November 1999, a distribution of $1,931,246 ($.24 per share), which was
declared in September 1999, was paid to the shareholders from cash flow from
operations for the quarter ended September 30, 1999.
18
<PAGE>
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
Results of Operations
For the three and nine months ended September 30, 1999 as compared to 1998,
total revenues and total expenses increased due to the acquisition of 12 Retail
Properties during 1998. The Company's results of operations for the three and
nine months ended September 30, 1999 consisted primarily of the results of the
Company's investment in 28 Retail Properties, two partnership interests in
Multifamily Properties and one FHA Mortgage. The Company's results of operations
for the three months ended September 30, 1998 consisted primarily of the results
of the Company's investment in 24 Retail Properties, two partnership interests
in Multifamily Properties and two FHA Mortgages. The Company's results of
operations for the nine months ended September 30, 1998 consisted primarily of
the results of the Company's investment in 24 Retail Properties, three
partnership interests in Multifamily Properties, three FHA Mortgages, a gain on
the sale of a partnership interest in one Multifamily Property and a loss on the
repayment of one FHA Mortgage.
Rental income increased approximately $1,477,000 and $5,755,000 for the three
and nine months ended September 30, 1999 as compared to 1998. Increases of
$1,464,000 and $5,795,000 were due to the acquisition of 12 Retail Properties
during 1998 (the "1998 Acquisitions"). Excluding these acquisitions, rental
income increased less than 1% and decreased less than 1% for the three and nine
months ended September 30, 1999 as compared to 1998.
Tenant reimbursements increased approximately $89,000 and $884,000 for the three
and nine months ended September 30, 1999 as compared to 1998. Increases of
$338,000 and $1,331,000 were due to the 1998 Acquisitions. Excluding these
acquisitions, tenant reimbursements decreased approximately $249,000 and
$447,000 for the three and nine months ended September 30, 1999 as compared to
1998 primarily due to additional billings to tenants and increases in estimates
for recoverable amounts in 1998.
Income from equity investments decreased approximately $16,000 and $68,000 for
the three and nine months ended September 30, 1999 as compared to 1998. The
decrease for the nine months was primarily due to the sale of the Company's
limited partnership interest in Dominion on March 20, 1998.
Interest income decreased approximately $63,000 and $1,191,000 for the three and
nine months ended September 30, 1999 as compared to 1998 primarily due to the
repayment of the Cross Creek FHA Mortgage and the Cross Creek Loan in June 1998
and the repayment of the Weatherly Walk FHA Mortgage in August 1998.
Other income increased approximately $12,000 and $22,000 for the three and nine
months ended September 30, 1999 as compared to 1998. Increases of $10,000 and
$43,000 were due to the 1998 Acquisitions. Excluding these acquisitions, other
income increased approximately $2,000 and decreased approximately $21,000 for
the three and nine months ended September 30, 1999 as compared to 1998.
Repairs and maintenance increased approximately $60,000 and $326,000 for the
three and nine months ended September 30, 1999 as compared to 1998. Increases of
$178,000 and $483,000 were due to the 1998 Acquisitions. Excluding these
acquisitions, repairs and maintenance decreased approximately $118,000 and
$157,000 for the three and nine months ended September 30, 1999 as compared to
1998.
19
<PAGE>
Real estate taxes increased approximately $132,000 and $637,000 for the three
and nine months ended September 30, 1999 as compared to 1998. Increases of
$140,000 and $611,000 were due to the 1998 Acquisitions. Excluding these
acquisitions, real estate taxes decreased approximately $8,000 and increased
approximately $26,000 for the three and nine months ended September 30, 1999 as
compared to 1998.
Interest expense increased approximately $761,000 and $2,137,000 for the three
and nine months ended September 30, 1999 as compared to 1998 primarily due to a
higher outstanding balance of the Credit Facility during the three and nine
months ended September 30, 1999 and the assumption of existing debt with respect
to four of the 1998 Acquisitions.
General and administrative expenses increased approximately $205,000 and
$869,000 for the three and nine months ended September 30, 1999 as compared to
1998. Increases of $148,000 and $606,000 were due to the 1998 Acquisitions.
Excluding these acquisitions, general and administrative expenses increased
approximately $57,000 and $263,000 for the three and nine months ended September
30, 1999 as compared to 1998. The increase for the nine months was primarily due
to an increase in legal expenses at Westbird and Pablo Plaza, an increase in
security expenses at Birdneck, an increase in audit/tax fees due to the 1998
Acquisitions and an increase in asset management fees incurred to the Advisor
and its affiliates due to the 1998 Acquisitions.
Depreciation and amortization increased approximately $194,000 and $1,037,000
for the three and nine months ended September 30, 1999 as compared to 1998.
Increases of $259,000 and $1,076,000 were due to the 1998 Acquisitions,
increases of $48,000 and $118,000 were due to an increase in amortization of
deferred loan costs relating to the Credit Facility and decreases of $151,000
and $254,000 were due to deferred insurance costs becoming fully amortized
during the three months ended September 30, 1999. Excluding these increases and
decreases depreciation and amortization increased approximately 5% and 4% for
the three and nine months ended September 30, 1999 as compared to 1998.
Other expenses increased approximately $104,000 and $329,000 for the three and
nine months ended September 30, 1999 as compared to 1998. Increases of $65,000
and $365,000 were due to the 1998 Acquisitions. Excluding these acquisitions,
other expenses increased approximately $39,000 and decreased approximately
$36,000 for the three and nine months ended September 30, 1999 as compared to
1998. The increase for the three months was primarily due to an increase in bad
debt expense resulting from an increase in reserves at Kokomo Plaza.
A gain on sale of investment in partnership in the amount of approximately
$780,000 was recorded for the nine months ended September 30, 1998 relating to
the sale of the Company's limited partnership interest in Dominion in the first
quarter of 1998.
Minority interest in the income of the Operating Partnership increased
approximately $72,000 and $232,000 for the three and nine months ended September
30, 1999 as compared to 1998 primarily due to the issuance of OP Units with
respect to three of the 1998 Acquisitions.
Funds from Operations and Funds Available for Distribution
Funds from operations ("FFO"), represents net income (computed in accordance
with generally accepted accounting principles) ("GAAP"), excluding gains (or
losses) from debt restructuring or repayments 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 amounts of $132,804 and $42,298 and $268,451 and $133,258 for
the three and nine months ended September 30, 1999 and 1998, respectively. FFO
is calculated in accordance with
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<PAGE>
the National Association of Real Estate Investment Trusts ("NAREIT") definition
published in March 1995. FFO does not represent cash generated from operating
activities in accordance with GAAP and is not necessarily indicative of cash
available to fund cash needs which is disclosed in the Consolidated Statements
of Cash Flows included in the financial statements, for the applicable periods.
There are no material legal or functional restrictions on the use of FFO. FFO
should not be considered as an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flows as a measure
of liquidity. Management considers FFO a supplemental measure of operating
performance and along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs.
Funds available for distribution ("FAD") represents FFO plus recurring principal
receipts from mortgage loans less reserves for lease commissions, recurring
capital expenditures (excluding property acquisitions) and debt principal
amortization. FAD should not be considered an alternative to net income as a
measure of the Company's financial performance or to cash flow from operating
activities (computed in accordance with GAAP) as a measure of the Company's
liquidity, nor is it necessarily indicative of sufficient cash flow to fund all
of the Company's needs.
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<PAGE>
FFO, as calculated in accordance with the NAREIT definition, and FAD for the
three and nine months ended September 30, 1999 and 1998 are summarized in the
following table:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 1,450,147 $ 1,481,471 $ 4,334,071 $ 5,279,840
Gain on sale of investment in
partnership 0 0 0 (779,893)
Loss on repayment of Cross Creek
receivable 0 0 0 72,967
Depreciation and amortization of
real property 1,103,124 813,895 3,260,339 2,157,868
Amortization of insurance contract 0 150,145 200,195 450,435
Proportionate share of adjustments
to equity in income
from equity investments to arrive
at funds from operations 61,808 48,164 182,543 163,400
------------ ------------ ------------ ------------
Funds From Operations ("FFO") 2,615,079 2,493,675 7,977,148 7,344,617
Amortization of deferred financing
costs 103,197 52,702 268,767 144,340
Principal payments received on
mortgage loans 8,193 14,747 24,039 97,462
Straight-lining of property rentals
for rent escalations (132,804) (48,298) (268,451) (133,258)
Improvements to real estate (548,506) (330,490) (845,310) (439,824)
Principal repayments on notes
payable (146,534) (77,740) (411,632) (195,878)
Leasing commissions (139,861) (71,723) (445,516) (125,790)
------------ ------------ ------------ ------------
Funds Available for Distribution
("FAD") $ 1,758,764 $ 2,032,873 $ 6,299,045 $ 6,691,669
============ ============ ============ ============
Distributions to shareholders $ 1,931,246 $ 1,932,278 $ 5,793,738 $ 5,796,731
============ ============ ============ ============
FFO payout ratio 73.9% 77.5% 72.6% 78.9%
============ ============ ============ ============
Cash flows from:
Operating activities $ 1,737,571 $ 2,285,734 $ 7,663,067 $ 7,440,993
============ ============ ============ ============
Investing activities $ (970,955) $(18,095,974) $ (1,450,230) $ (7,841,700)
============ ============ ============ ============
Financing activities $ (2,492,102) $ (1,745,310) $ (7,089,432) $ (2,033,134)
============ ============ ============ ============
</TABLE>
Recently Issued Accounting Standards
The Financial Accounting Standards Board has 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 the Company
beginning with the first quarter of 2001. Company management is
22
<PAGE>
currently evaluating the impact that this statement will have on its hedging
strategies and is currently unable to predict the effect, if any, it will have
on the Company's financial statements.
Forward-Looking Statements
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the demand for retail space or retail goods, availability and
creditworthiness of prospective tenants, lease rents and the terms and
availability of financing; adverse changes in the real estate markets including,
among other things, competition with other companies; risks of real estate
development and acquisition; governmental actions and initiatives; and
environment/safety requirements. 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.
Year 2000 Compliance
The year 2000 compliance issue concerns the potential inability of certain
computerized systems to accurately record dates after 1999. The Company utilizes
the computer services of an affiliate of the Advisor. The affiliate of the
Advisor has upgraded its computer information systems to be year 2000 compliant
and beyond. The affiliate of the Advisor recently underwent a conversion of its
financial systems applications and upgraded all of its non-compliant, in-house
software and hardware inventory. The work stations which experienced problems
during the testing process were corrected with an upgrade patch. The costs
incurred by the Advisor are not being charged to the Company. The most likely
worst case scenario that the Company faces is that computer operations will be
suspended for a few days to a week at January 1, 2000. The Company's contingency
plan is to have a complete backup done on December 31, 1999 and to have both
electronic and printed reports generated for all critical data up to and
including December 31, 1999.
With regard to third parties, the Company's Advisor is in the process of
evaluating the potential adverse impact that could result from the failure of
material service providers to be year 2000 compliant. A detailed survey and
assessment was sent to material third parties in the fourth quarter of 1998. The
Company has received assurances from a majority of the third parties with which
it interacts that these third parties have addressed the year 2000 issues and is
evaluating these assurances for their adequacy and accuracy. In cases where the
Company has not received assurances from third parties, it is initiating further
mail and/or phone inquiries. The Company relies heavily on third parties and is
vulnerable to the failures of third parties to address their year 2000 issues.
There can be no assurance given that the third parties will adequately address
their issues.
Inflation
Inflation did not have a material effect on the Company's results for the
periods presented.
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Quantitative and Qualitative Disclosures About Market Risk
The debt financing used to raise capital for the acquisition of the Company's
investments expose the Company to fluctuations in market interest rates. Market
interest rates are highly sensitive to many factors, including governmental
policies, domestic and International political considerations and other factors
beyond the control of the Company.
Cash flows from the Company's investments do not fluctuate with changes in
market interest rates. In addition, as of September 30, 1999, approximately 49%
of the Company's total notes payable outstanding are either fixed rate or
non-interest bearing, and so the payments on these instruments do not fluctuate
with changes in market interest rates. In contrast, payments required under the
Credit Facility vary based on market interest rates, primarily the 30 day
Euro-contract rate. Thus, an increase in market interest rates would result in
increased payments under the Credit Facility, without a corresponding increase
in cash flows from the Company's investments in the same amounts. For example,
based on the $29,818,000 outstanding under the Credit Facility at September 30,
1999, the Company estimates that an increase of 1% in the 30 day Euro-contract
rate would decrease the Company's annual net income by approximately $198,000; a
2% increase in the 30 day Euro-contract rate would decrease annual net income by
approximately $396,000. These estimates include the impact of the interest rate
swap agreement discussed below. For the same reasons, a decrease in market
interest rates would generally benefit the Company, as a result of decreased
payments under the Credit Facility without corresponding decreases in cash flows
from the Company's investments. Various financial vehicles exist which would
allow Company management to mitigate the impact of interest rate fluctuations on
the Company's cash flows and earnings. On December 1, 1998, the Company entered
into an interest rate swap agreement with a notional amount of $10,000,000 to
reduce the impact of changes in interest rates on the Credit Facility floating
rate debt. Management may engage in additional hedging strategies in the future,
depending on management's analysis of the interest rate environment and the
costs and risks of such strategies.
24
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds - 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 April 30, 1999. Such meeting was held on June 16,
1999. Alan P. Hirmes was reelected as trustee for a three-year term
expiring in 2002. The proxy statement incorrectly noted that Stuart J.
Boesky's term had expired and his name was, therefore, listed on the proxy
for reelection. Although Mr. Boseky received sufficient votes for
reelection, he will continue to be treated as a trustee whose term expires
in 2000, at which time he will again be eligible for reelection to a new
three-year term.
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:
No reports on Form 8-K were filed during the quarter.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AEGIS REALTY, INC.
(Registrant)
Date: November 12, 1999 By: /s/ Stuart J. Boesky
-----------------------------------
Stuart J. Boesky
Director, President and
Chief Operating Officer
Date: November 12, 1999 By: /s/ John B. Roche
-----------------------------------
John B. Roche
Senior Vice President and
Chief Financial Officer
Date: November 12, 1999 By: /s/ Richard A. Palermo
-----------------------------------
Richard A. Palermo
Vice President, Treasurer,
Controller 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>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,126,879
<SECURITIES> 0
<RECEIVABLES> 8,337,944
<ALLOWANCES> 420,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,437,072
<PP&E> 195,452,967
<DEPRECIATION> 22,230,278
<TOTAL-ASSETS> 193,482,184
<CURRENT-LIABILITIES> 6,078,073
<BONDS> 58,952,467
0
0
<COMMON> 0
<OTHER-SE> 121,743,841
<TOTAL-LIABILITY-AND-EQUITY> 193,482,184
<SALES> 0
<TOTAL-REVENUES> 19,081,978
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,121,805
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,340,211
<INCOME-PRETAX> 4,334,071
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,334,071
<EPS-BASIC> .54
<EPS-DILUTED> .53
</TABLE>
