<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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>
============= =============
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Real estate, net $ 174,001,991 $ 172,784,964
Investment in partnerships 5,850,571 5,923,199
Mortgage loan receivable 3,195,691 3,220,191
Loans receivable from affiliate 2,323,247 2,077,886
Cash and cash equivalents 2,838,599 2,226,295
Accounts receivable-tenants, net of allowance for
doubtful accounts of $330,000 and $343,000,
respectively 2,791,073 2,958,033
Deferred costs, net 3,269,466 2,800,537
Other assets 845,829 1,401,319
------------- -------------
TOTAL ASSETS $ 195,116,467 $ 193,392,424
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 61,245,928 $ 59,239,944
Accounts payable and other liabilities 3,701,673 3,169,953
Due to Advisor and affiliates 409,415 344,428
Distributions payable 2,117,421 2,076,125
------------- -------------
TOTAL LIABILITIES 67,474,437 64,830,450
------------- -------------
Minority interest of unitholders in the
Operating Partnership 7,147,209 7,260,370
------------- -------------
Commitments and Contingencies
SHAREHOLDERS' EQUITY:
Common stock; $.01 par value;
50,000,000 shares authorized; 8,055,479 issued and
8,049,179 outstanding and 8,053,159 issued and
8,046,859 outstanding in 2000 and 1999, respectively 80,554 80,531
Treasury stock; $.01 par value; 6,300 shares (63) (63)
Additional paid in capital 125,339,053 125,319,076
Distributions in excess of net income (4,924,723) (4,097,940)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 120,494,821 121,301,604
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 195,116,467 $ 193,392,424
============= =============
</TABLE>
See accompanying notes to consolidated fiancial statements
2
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
==================== ====================
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rental income $ 4,975,979 $ 4,916,201 $ 10,163,614 $ 9,934,389
Tenant reimbursements 1,107,932 1,178,670 2,258,872 2,357,345
Income from equity investments 98,327 85,937 199,919 171,438
Interest income 151,311 124,878 284,990 240,055
Other 61,125 25,519 247,038 58,401
------------ ------------ ------------ ------------
Total revenues 6,394,674 6,331,205 13,154,433 12,761,628
------------ ------------ ------------ ------------
Expenses:
Repairs and maintenance 454,674 365,487 959,717 776,728
Operating 666,880 699,159 1,334,461 1,359,788
Real estate taxes 589,348 667,561 1,202,249 1,291,957
Interest 1,202,234 1,107,410 2,389,090 2,212,690
General and administrative 507,617 531,163 969,908 986,957
Depreciation and amortization 1,257,981 1,204,899 2,473,825 2,494,641
Other 199,848 198,187 496,042 567,506
------------ ------------ ------------ ------------
Total expenses 4,878,582 4,773,866 9,825,292 9,690,267
------------ ------------ ------------ ------------
Income before minority interest 1,516,092 1,557,339 3,329,141 3,071,361
Minority interest in income of
the Operating Partnership (132,462) (95,915) (292,318) (187,437)
------------ ------------ ------------ ------------
Net income $ 1,383,630 $ 1,461,424 $ 3,036,823 $ 2,883,924
============ ============ ============ ============
Net income per share:
Basic $ .17 $ .18 $ .38 $ .36
============ ============ ============ ============
Diluted $ .17 $ .18 $ .38 $ .35
============ ============ ============ ============
Weighted average shares
outstanding:
Basic 8,049,179 8,046,859 8,048,605 8,046,284
============ ============ ============ ============
Diluted 8,049,179 8,169,020 8,048,605 8,168,445
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated fiancial statements
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, 2000 8,053,159 $80,531 (6,300) $(63) $125,319,076 $(4,097,940) $121,301,604
Net income 0 0 0 0 0 3,036,823 3,036,823
Issuance of shares of
common stock 2,320 23 0 0 19,977 0 20,000
Distributions 0 0 0 0 0 (3,863,606) (3,863,606)
--------------- ---------- -------- --------------------- ---------- ----------
Balance at
June 30, 2000 8,055,479 $80,554 (6,300) $(63) $125,339,053 $(4,924,723) $120,494,821
========= ====== ======= ==== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
================
Six Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,036,823 $2,883,924
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,502,243 2,522,980
Minority interest in income of
the Operating Partnership 292,318 187,437
Distributions from equity investments
in excess of income 51,386 39,092
Changes in operating assets and liabilities:
Accounts receivable-tenants 180,587 58,654
Allowance for doubtful accounts (13,627) 117,535
Other assets 555,490 479,598
Due to Advisor and affiliates 84,987 89,768
Accounts payable and other liabilities 531,720 (120,337)
Leasing commissions and costs (479,904) (333,155)
---------- ----------
Total adjustments 3,705,200 3,041,572
--------- ---------
Net cash provided by operating activities 6,742,023 5,925,496
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate (2,777,866) (296,804)
Acquisitions of real estate including acquisition
expenses (541,925) (157,179)
Increase in deferred acquisition expenses (285,868) (44,224)
Increase in loans made to affiliate (255,937) 0
Repayments of loans receivable from affiliate 10,576 3,086
Principal payments received on mortgage loans 17,324 15,846
------------ ------------
Net cash used in investing activities (3,833,696) (479,275)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 7,000,000 500,000
Repayments of notes payable (4,994,016) (265,098)
Distributions paid to shareholders (3,863,049) (4,465,381)
Increase in deferred loan costs (74,218) (169,701)
Distributions paid to minority interest (364,740) (197,150)
----------- -----------
Net cash used in financing activities (2,296,023) (4,597,330)
---------- ----------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements
5
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
================
Six Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Net increase in cash and cash equivalents 612,304 848,891
Cash and cash equivalents at the beginning of
the period 2,226,295 3,003,474
---------- ----------
Cash and cash equivalents at the end of the period $2,838,599 $3,852,365
========== ==========
SUPPLEMENTAL INFORMATION:
Interest paid $2,389,090 $2,259,284
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Payable to directors liquidated through the
issuance of shares of common stock $ 20,000 $ 20,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(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. As of June 30, 2000, the Company owned a portfolio of 28 retail
properties (the "Retail Properties") containing a total of approximately 3.0
million gross leaseable square feet, held partnership interests in two suburban
garden apartment properties (the "Multifamily Properties") and held one FHA
insured participating mortgage secured by a suburban garden apartment property
(the "FHA Mortgage").
The Company is governed by a board of directors comprised of two independent
directors and three directors who are affiliated with Related Capital Company
("Related"), a nationwide, fully integrated real estate services firm. 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 91.31 % of the units of partnership interest (the "OP Units") at June
30, 2000. Also, at June 30, 2000, 5.54% and 3.15% 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 June 30, 2000 and the results of its
operations for the three and six months ended June 30, 2000 and 1999 and its
cash flows for the six months ended June 30, 2000 and 1999. 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 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, 1999.
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.
Because the Company has no items of other comprehensive income, the Company's
net income and comprehensive income are the same for all periods presented.
7
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
In December of 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company's management believes that the guidance expressed in the
bulletin does not affect the Company's current revenue recognition policies.
NOTE 2 - REAL ESTATE
The components of real estate are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Land $ 40,302,630 $ 39,798,459
Buildings and improvements 158,998,204 156,239,538
------------- -------------
199,300,834 196,037,997
Less: Accumulated depreciation (25,298,843) (23,253,033)
------------- -------------
$ 174,001,991 $ 172,784,964
============= =============
</TABLE>
Amounts estimated to be recoverable from future operations and ultimate sales
are greater than the carrying value of each property owned at June 30, 2000.
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:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Deferred loan costs $ 2,470,143 $ 2,395,925
Deferred leasing commissions and costs 1,804,110 1,426,098
Deferred acquisition expenses 383,857 97,989
----------- -----------
4,658,110 3,920,012
Less: Accumulated amortization (1,388,644) (1,119,475)
----------- -----------
$ 3,269,466 $ 2,800,537
=========== ===========
</TABLE>
8
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
NOTE 4 - NOTES PAYABLE
Information regarding the Company's notes payable 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 6/30/00 at 12/31/99 2000
---------- ---------- --------- ------------ ---------- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
New York Life 7/11/95 9.25% $55,984 $0 $4,726,178 Forest Park &
Insurance 6/10/00 Highland Fair/
Company N/A
(a) 12/30/97 (b) Interest 37,818,000 30,818,000 (c) (i)
12/30/00 (j) only
Heller 6/24/97 (d) 8.50% $19,992 2,535,669 2,547,557 Barclay Place/
Financial, Inc. 7/1/17 $4,033,888
Nomura 10/28/97 (e) 7.54% $33,130 3,851,651 3,902,472 Village At
Asset Capital 11/11/22 Waterford/
Corporation $6,279,482
Chase Bank 12/16/96 (f) 8.875% $51,717 6,321,285 6,350,323 Oxford Mall/
1/1/07 $8,805,635
Merrill Lynch 9/18/97 (g) 7.73% $79,509 10,719,323 10,776,168 Southgate/
Credit 10/1/07 $15,157,353
Corporation
Sellers of 12/10/98 (h) $0 0 64,600 (k) None
Southgate 12/10/99
Sellers of 12/10/98 (h) $0 0 16,292 (k) None
Crossroads East 12/10/99
Sellers of 12/10/98 (h) $0 0 38,354 (k) None
Crossroads East 12/9/99
----------- -----------
$61,245,928 $59,239,944
=========== ===========
</TABLE>
(a) The Credit Facility is shared among Fleet National Bank (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 Fleet
National Bank'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 6.66% at June 30, 2000.
(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.
(f) Note was assumed upon purchase of the property by the Company on November
24, 1998.
9
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(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 June 30, 2000 by nineteen Retail
Properties, one investment in a partnership and one Mortgage Loan with carrying
values of $108,908,816, $5,144,444 and $3,195,691, respectively. In addition,
the obligation under the Credit Facility is guaranteed by the Company, two of
its subsidiaries 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.
(k) The note payable to the sellers of Southgate and the two notes payable to
the sellers of Crossroads East in the amounts of $200,000, $230,000 and
$275,000, respectively, were partially repaid in the amounts of $135,400,
$213,708 and $236,646 through the issuance of 15,030, 23,716 and 26,259 OP Units
on December 9, 1999 based on an Average Price Per Share (see Note 3) of $9.0125.
The balances due of $64,600, $16,292 and $38,354, respectively, were repaid in
cash on January 4, 2000.
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
June 30, 2000, the counter party would be required to pay the Company
approximately $42,000; however, the Company currently has no intention of
terminating this agreement.
NOTE 5 - COMMON STOCK
Through calendar year 1999, each independent director was 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. Beginning in
calendar year 2000, the annual compensation for each independent director was
increased from $15,000 to $17,500 and the maximum payable in cash was increased
from $5,000 to $7,500. As of June 30, 2000 and December 31, 1999, 2,376 and
1,216 shares, respectively, having an aggregate value at the date of issuance of
$22,500 and $12,500, respectively, have been issued to each of the Company's two
independent directors 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.
10
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
The Company's Retail Properties are managed by RCC Property Advisors (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.
The costs incurred to related parties for the six months ended June 30, 2000 and
1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Acquisition fees $ 19,503 $ 2,915 $ 19,503 $ 5,452
Expense reimbursement 70,671 74,631 140,566 126,687
Property management fees 279,986 254,962 561,543 532,190
Leasing commissions and costs 145,356 105,916 328,851 219,041
Asset management fee 193,780 194,039 387,560 385,965
---------- ---------- ---------- ----------
$ 709,296 $ 632,463 $1,438,023 $1,269,335
========== ========== ========== ==========
</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. On January 4,
2000, due to an additional 101,518 OP Units issued to SIC on the first
anniversary of the closing date and in connection with the repayment of seller
notes payable, the OP Unit Loans were increased in the amount of $255,937 and
the Initial Interest Rate of 7.613% was changed to a Modified Rate of 10.0153%
in accordance with the secured promissory notes. The loans are secured by the
265,035 OP Units which were issued to SIC in exchange for its partnership
interests in the partnerships which owned the properties and in connection with
the repayment of seller notes and also by guarantees from the principals of SIC
for 25% of the total loan amounts. The OP Unit Loans mature on December 9, 2015
or earlier if the underlying shopping centers are sold, and interest and
principal 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 June 30,
2000 and December 31, 1999, the balances of these OP Unit Loans totaled
$2,323,247 and $2,077,886, respectively, 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 $.17 and $.18 and $.38 and $.36 for
the three and six months ended June 30, 2000 and 1999, respectively, equals net
income for the periods ($1,383,630 and $1,461,424 and $3,036,823 and $2,883,924,
respectively), divided by the weighted average number of shares outstanding for
the periods (8,049,179 and 8,046,859 and 8,048,605 and 8,046,284, respectively).
Diluted net income per share in the amount of $.17 and $.18 and $.38 and $.35
for the three and six months ended June 30, 2000 and 1999, respectively, equals
net income for the periods, divided by the weighted average number of diluted
shares outstanding for the periods (8,049,179 and 8,169,020 and 8,048,605 and
8,168,445, respectively). The weighted average number of diluted shares
outstanding for the three and six months ended June 30, 1999 reflects the
weighted average impact of an additional
11
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
122,161 OP Units which would have to have been issued to the sellers of three
Retail Properties on the first anniversary of the closing date based on the
closing price per share on June 30, 2000. For purposes of this calculation, the
additional OP Units were assumed to be immediately converted to shares of Common
Stock.
Options to purchase shares of Common Stock which were granted in August 1999, to
an officer of the Company and certain employees of an affiliate of the Advisor,
who are not employees of the Company, did not have a dilutive effect under the
treasury stock method, because the average market price of the Company's Common
Stock during the six months ended June 30, 2000 did not exceed the exercise
price of the options. During the six months ended June 30, 2000, 23,000 of these
option grants were terminated and 7,000 remain outstanding. None have been
exercised.
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
June 30, 2000 and 1999 into an additional 765,780 and 545,812 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
12
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
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 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. The re-sampling indicated that no hazardous materials
remain detectable above the threshold levels which are ascertained by GAEPD to
require remediation and a formal report has been submitted to GAEPD to indicate
such and 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. GAEPD has not yet responded to management's submission
and management, at this time, is unable to predict further requirements.
NOTE 9 - SUBSEQUENT EVENT
As part of the renewal of the lease for the anchor tenant at Westbird, the
Company agreed to make $1,000,000 in tenant improvements. Such amount was
incurred during August 2000, and financed using the Credit Facility. The term of
the new lease is 20 years with a minimum annual rent of $246,000. The minimum
annual rent of the old lease was $103,000.
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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 June 30, 2000, 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 $120,495,000.
As of June 30, 2000, there were 8,049,179 shares of Common Stock outstanding (an
additional 765,780 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 Capital Company ("Related"), a fully
integrated real estate financial services firm, with a national presence. The
Company is using its affiliation with Related to acquire properties on a
national basis. 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. In addition, the Company will consider strategic combinations in the form
of portfolio acquisitions, joint ventures or mergers in order to maximize
shareholder value.
On May 19, 2000, the Company acquired an out-parcel of developable land
contiguous to the Forest Park Square Retail Property for a purchase price of
$500,000, not including acquisition fees and expenses of approximately $23,000.
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 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.
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The Company requires long-term financing in order to invest in and hold its
portfolio of Retail Properties and other investments. To date, this long-term
liquidity has come from proceeds from the Credit Facility, notes payable assumed
upon the purchase of certain properties and the issuance of shares of the
Company's Common Stock or OP Units in exchange for real estate. 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. A note payable to New York
Life Insurance Company in the amount of approximately $4,647,000 was prepaid on
June 9, 2000, through additional proceeds from the Credit Facility. In addition,
it is currently anticipated that the Credit Facility in the amount of
$37,818,000 at June 30, 2000, which matures on December 30, 2000, will be
extended, which is at the Company's option upon payment of certain fees. On a
short-term basis, the Company requires funds to pay its operating expenses and
those of the Retail Properties, to make improvements to the Retail Properties,
pay its debt service and make distributions to its shareholders. The primary
source of the Company's short-term liquidity needs are the cash flow received
from the Retail Properties and interest income.
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.
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 six months ended June 30, 2000 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 six
months ended June 30, 2000.
(iv) Leases that provide for recovery of actual common area maintenance charges
and real estate taxes, thereby minimizing any effects from inflation.
(v) Leases that provide for increases in rents based on a percentage of tenants'
sales.
(vi) A mortgage note which is substantially guaranteed by FHA and a co-insurer
and that provides for participation in increases in operating results and market
value of the underlying collateral.
During the six months ended June 30, 2000, cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $612,000. This
increase was primarily due to cash provided by operating activities ($6,742,000)
and net proceeds from notes payable ($2,006,000) which exceeded improvements to
real estate ($2,778,000), acquisitions of real estate including acquisition
expenses ($542,000), an increase in loans made to affiliate ($256,000), an
increase in deferred acquisition expenses ($286,000), an increase in deferred
loan costs ($74,000), distributions paid to shareholders ($3,863,000) and
distributions paid to minority interest ($365,000). Included in the adjust-
15
<PAGE>
ments to reconcile the net income to cash provided by operating activities is
depreciation and amortization in the amount of $2,502,000.
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. The tenant is currently in arrears
as it relates to a contractual increase in minimum rent of $.10 per square foot
per year (approximately $4,200 per year). The aggregate arrears as of June 30,
2000 is $15,505. The arrearage is due to different interpretations of the lease,
and is expected to be resolved in 2000. With the exception of this amount, the
tenant continues to fully abide by all aspects of its lease which will expire in
September 2006. There have been proposals received for leasing this space, but
as of August 1, 2000, 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 August 1,
2000, this space has not been re-leased.
(iii) On November 30, 1999, CVS closed its store in the Marion City Square
Shopping Center due to the construction of a new store in the area. On February
15, 2000, the Company negotiated a buy-out of the remaining lease term for
$100,000. In August 2000, the Company leased this additional space to Bi-Lo and
rents are due to commence effective September 1, 2000.
For a discussion of environmental issues affecting one of the Company's Retail
Properties see Note 8 to the consolidated financial statements.
In August 2000, a distribution of $1,931,803 ($.24 per share), which was
declared in June 2000, was paid to the shareholders from cash flow from
operations for the quarter ended June 30, 2000.
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
Rental income increased approximately $60,000 and $229,000 for the three and six
months ended June 30, 2000 as compared to 1999 primarily due to an increase in
occupancy at Pablo Plaza, Highland Fair, Winery Square and Rolling Hills Square
and an increase in percentage rents received at Pablo Plaza, Oxford Mall and
White Oaks Plaza.
Income from equity investments increased approximately $12,000 and $28,000 for
the three and six months ended June 30, 2000 as compared to 1999 primarily due
to an increase in income from the Company's partnership interest in Weatherly
Walk in 2000.
Interest income increased approximately $26,000 and $45,000 for the three and
six months ended June 30, 2000 as compared to 1999 primarily due to an increase
in the balance of, and an increase in the interest rate on, OP Unit Loans made
in connection with the acquisition of two Retail Properties in 1998.
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Other income increased approximately $36,000 and $189,000 for the three and six
months ended June 30, 2000 as compared to 1999 primarily due to lease settlement
income relating to one tenant at Marion City Square and one tenant at White Oaks
Plaza in 2000.
Repairs and maintenance increased approximately $89,000 and $183,000 for the
three and six months ended June 30, 2000 as compared to 1999 primarily due to an
increase in roofing repairs at Winery Square, an increase in snow removal
expenses at The Village at Waterford, Dunlop Village and White Oaks Plaza, an
increase in plumbing repairs at Hickory Plaza, an increase in janitorial
cleaning expenses at Oxford Mall, an increase in rubbish removal at Westbird,
Pablo Plaza, Mountain View Village and Winery Square, an increase in
grounds-paving/striping at Winery Square and Centre Stage, an increase in
parking light repairs at Westbird, Hickory Plaza and Oxford Mall and an increase
in painting at Winery Square.
Other expenses increased approximately $2,000 and decreased approximately
$71,000 for the three and six months ended June 30, 2000 as compared to 1999
primarily due to a decrease in bad debt expense resulting from a decrease in
reserves at Westbird, Mountain View Village, Kokomo Plaza, Barclay Place, Market
Place and Birdneck Center, partially offset by the write off, in 2000, of costs
incurred in connection with proposed purchases of Retail Properties which are
currently not anticipated to be acquired.
Minority interest in the income of the Operating Partnership increased
approximately $37,000 and $105,000 for the three and six months ended June 30,
2000 as compared to 1999 primarily due to the issuance of OP Units on the first
anniversary of the closing date and in connection with the repayment of seller
notes payable during 1999 with respect to three of the Retail Properties
acquired during 1998.
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 $76,373 and $62,839 and $187,416 and $135,647 for
the three and six months ended June 30, 2000 and 1999, respectively. FFO is
calculated in accordance with the National Association of Real Estate Investment
Trusts ("NAREIT") definition. FFO does not represent cash generated from
operating activities in accordance with GAAP which is disclosed in the
Consolidated Statements of Cash Flows included in the financial statements, for
the applicable periods and is not necessarily indicative of cash available to
fund cash needs. 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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FFO, as calculated in accordance with the NAREIT definition, and FAD for the
three and six months ended June 30, 2000 and 1999 are summarized in the
following table:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,383,630 $ 1,461,424 $ 3,036,823 $ 2,883,924
Depreciation and amortization of
real property 1,158,146 1,082,916 2,280,317 2,157,215
Amortization of insurance contract 0 50,050 0 200,195
Proportionate share of adjustments
to equity in income
from equity investments to arrive
at funds from operations 60,470 61,011 120,939 120,735
----------- ----------- ----------- -----------
Funds From Operations ("FFO") 2,602,246 2,655,401 5,438,079 5,362,069
Amortization of deferred financing
costs 114,044 86,181 221,926 165,570
Principal payments received on
mortgage loans 8,759 8,011 17,324 15,846
Straight-lining of property rentals
for rent escalations (76,373) (62,839) (187,416) (135,647)
Improvements to real estate (1,826,063) (201,433) (2,777,866) (296,804)
Principal repayments on notes
payable (214,291) (102,084) (346,959) (265,098)
Leasing commissions (208,540) (141,027) (430,904) (305,655)
----------- ----------- ----------- -----------
Funds Available for Distribution
("FAD") $ 399,782 $ 2,242,210 $ 1,934,184 $ 4,540,281
=========== =========== =========== ===========
Distributions to shareholders $ 1,931,803 $ 1,931,246 $ 3,863,606 $ 3,862,492
=========== =========== =========== ===========
FFO payout ratio 74.2% 72.7% 71.0% 72.0%
=========== =========== =========== ===========
Cash flows from:
Operating activities $ 4,059,628 $ 3,050,026 $ 6,742,023 $ 5,925,496
=========== =========== =========== ===========
Investing activities $(2,615,394) $ (307,533) $(3,833,696)$ (479,275)
=========== =========== =========== ===========
Financing activities $ (947,100) $(2,270,863) $(2,296,023) $(4,597,330)
=========== =========== =========== ===========
</TABLE>
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,
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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.
INFLATION
Inflation did not have a material effect on the Company's results for the
periods presented.
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 June 30, 2000, approximately 38% of
the Company's total notes payable outstanding are fixed rate notes, 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 $37,818,000
outstanding under the Credit Facility at June 30, 2000, and taking into account
the impact of the interest rate swap agreement in place throughout 2000 as
described below, 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 $278,000 ; a 2% increase in the 30 day Euro-contract rate would
decrease annual net income by approximately $556,000. 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.
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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 - None
Item 5. Other Information
John B. Roche ceased to serve as Chief Financial Officer effective
May 15, 2000. Alan P. Hirmes was appointed interim Chief Financial
Officer effective May 15, 2000. Michael I. Wirth has been appointed to
the position of Chief Financial Officer and will replace Alan P. Hirmes
effective August 16, 2000.
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 this quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AEGIS REALTY, INC.
(Registrant)
Date: August 13, 2000 By: /s/ Stuart J. Boesky
-----------------------------
Stuart J. Boesky
Director, Chairman of the
Board, President and
Chief Executive Officer
Date: August 13, 2000 By: /s/ Alan P. Hirmes
-----------------------------
Alan P. Hirmes
Interim Chief Financial Officer
