<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 March 31, 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>
------------ -------------
March 31, December 31,
2000 1999
------------ -------------
<S> <C> <C>
ASSETS
Real estate, net $172,695,224 $172,784,964
Investment in partnerships 5,892,600 5,923,199
Mortgage loan receivable 3,208,038 3,220,191
Loans receivable from affiliate 2,329,030 2,077,886
Cash and cash equivalents 2,341,465 2,226,295
Accounts receivable-tenants, net of allowance for
doubtful accounts of $383,000 and $343,000,
respectively 3,013,473 2,958,033
Deferred costs, net 2,921,905 2,800,537
Other assets 1,623,583 1,401,319
------------ ------------
TOTAL ASSETS $194,025,318 $193,392,424
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 59,988,030 $ 59,239,944
Accounts payable and other liabilities 3,189,617 3,169,953
Due to Advisor and affiliates 452,647 344,428
Distributions payable 2,118,334 2,076,125
------------ ------------
TOTAL LIABILITIES 65,748,628 64,830,450
------------ ------------
Minority interest of unitholders in the
Operating Partnership 7,233,696 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 (4,376,550) (4,097,940)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 121,042,994 121,301,604
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $194,025,318 $193,392,424
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
-----------------------
Three Months Ended
March 31,
-----------------------
2000 1999
-----------------------
<S> <C> <C>
REVENUES:
Rental income $ 5,187,635 $ 5,018,188
Tenant reimbursements 1,150,940 1,178,675
Income from equity investments 101,592 85,501
Interest income 133,679 115,177
Other 185,913 32,882
----------- -----------
Total revenues 6,759,759 6,430,423
----------- -----------
Expenses:
Repairs and maintenance 505,043 411,241
Operating 667,581 660,629
Real estate taxes 612,901 624,396
Interest 1,186,856 1,105,280
General and administrative 462,291 455,794
Depreciation and amortization 1,215,844 1,289,742
Other 296,194 369,319
----------- -----------
Total expenses 4,946,710 4,916,401
----------- -----------
Income before minority interest 1,813,049 1,514,022
Minority interest in income of
the Operating Partnership (159,856) (91,522)
----------- -----------
Net income $ 1,653,193 $ 1,422,500
=========== ===========
Net income per share:
Basic $ .21 $ .18
=========== ===========
Diluted $ .21 $ .17
=========== ===========
Weighted average shares
outstanding:
Basic 8,048,032 8,045,703
=========== ===========
Diluted 8,048,032 8,232,123
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Common Stock 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 1,653,193 1,653,193
Issuance of shares of
common stock 2,320 23 0 0 19,977 0 20,000
Distributions 0 0 0 0 0 (1,931,803) (1,931,803)
--------- ------- ------ ---- ------------ ----------- ------------
Balance at
March 31, 2000 8,055,479 $80,554 (6,300) $(63) $125,339,053 $(4,376,550) $121,042,994
========= ====== ====== === =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
----------------------
Three Months Ended
March 31,
----------------------
2000 1999
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,653,193 $1,422,500
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,230,053 1,303,833
Minority interest in income of
the Operating Partnership 159,856 91,522
Distributions from equity investments
in excess of income 19,978 19,822
Changes in operating assets and liabilities:
Accounts receivable-tenants (95,254) (15,545)
Allowance for doubtful accounts 39,814 215,097
Other assets (222,264) 396,644
Due to Advisor and affiliates 128,219 71,084
Accounts payable and other liabilities 19,664 (450,609)
Leasing commissions and costs (250,864) (178,878)
--------- ----------
Total adjustments 1,029,202 1,452,970
--------- ---------
Net cash provided by operating activities 2,682,395 2,875,470
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate (951,803) (95,371)
Acquisitions of real estate including acquisition
expenses 0 (71,224)
Increase in deferred acquisition expenses (23,920) (16,057)
Increase in loans made to affiliate (255,937) 0
Repayments of loans receivable from affiliate 4,793 3,075
Principal payments received on mortgage loans 8,565 7,835
--------- ---------
Net cash used in investing activities (1,218,302) (171,742)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,000,000 500,000
Repayments of notes payable (251,914) (163,014)
Distributions paid to shareholders (1,931,246) (2,534,135)
Increase in deferred loan costs (20,885) (56,397)
Distributions paid to minority interest (144,878) (72,921)
----------- -----------
Net cash used in financing activities (1,348,923) (2,326,467)
---------- ----------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements
5
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
------------------------
Three Months Ended
March 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net increase in cash and cash equivalents 115,170 377,261
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 $2,341,465 $3,380,735
========== ==========
SUPPLEMENTAL INFORMATION:
Interest paid $1,186,856 $1,456,946
========== ==========
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
March 31, 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 March 31, 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"). As of March 31, 2000, there were 8,049,179 shares of
Common Stock outstanding (an additional 777,213 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 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 91.19% of the units of partnership interest (the "OP Units") at March
31, 2000. Also, at March 31, 2000, 5.68% and 3.13% 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 March 31, 2000 and the results of
its operations and its cash flows for the three months ended March 31, 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.
7
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
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.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
NOTE 2 - REAL ESTATE
The components of real estate are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ -------------
<S> <C> <C>
Land $ 39,798,459 $ 39,798,459
Buildings and improvements 157,188,080 156,239,538
------------ ------------
196,986,539 196,037,997
Less: Accumulated depreciation (24,291,315) (23,253,033)
------------ ------------
$172,695,224 $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 March 31, 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>
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Deferred loan costs $ 2,416,810 $ 2,395,925
Deferred leasing commissions and costs 1,658,271 1,426,098
Deferred acquisition expenses 121,909 97,989
----------- -----------
4,196,990 3,920,012
Less: Accumulated amortization (1,275,085) (1,119,475)
----------- -----------
$ 2,921,905 $ 2,800,537
=========== ===========
</TABLE>
8
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
NOTE 4 - NOTES PAYABLE
As of March 31, 2000 and December 31, 1999, the Company had notes payable with
outstanding balances totaling $59,988,030 and $59,239,944, 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 March 31,
Noteholder Date Rate and Interest at 3/31/00 at 12/31/99 2000
- ---------- -------- -------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
New York Life 7/11/95 9.25% $55,984 $4,667,065 $ 4,726,178 Forest Park &
Insurance 6/10/00 Highland Fair/
Company $11,901,748
(a) 12/30/97 (b) Interest 31,818,000 30,818,000(c)(i)
12/30/00(j) only
Heller 6/24/97(d) 8.50% $19,992 2,541,676 2,547,557 Barclay Place/
Financial, Inc. 7/1/17 $3,993,162
Nomura 10/28/97 (e) 7.54% $33,130 3,877,303 3,902,472 Village At
Asset Capital 11/11/22 Waterford/
Corporation $6,288,421
Chase Bank 12/16/96 (f) 8.875% $51,717 6,335,964 6,350,323 Oxford Mall/
1/1/07 $8,761,711
Merrill Lynch 9/18/97 (g) 7.73% $79,509 10,748,022 10,776,168 Southgate/
Credit 10/1/07 $15,234,995
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 ----------- ------
$59,988,030 $59,239,944
=========== ===========
</TABLE>
(a) The Credit Facility is shared among Fleet National Bank (formerly
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 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 6.125% at March 31,
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.
9
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000
(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 March 31, 2000 by thirteen Retail
Properties, one investment in a partnership and one Mortgage Loan with carrying
values of $77,170,373, $5,182,184 and $3,208,038, 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.
(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
March 31, 2000, the counter party would be required to pay the Company
approximately $68,000; 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 March 31, 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.
10
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
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 (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 three months ended March 31, 2000
and 1999 were as follows:
Three Months Ended
March 31,
---------------------
2000 1999
---------------------
Acquisition fees $ 0 $ 2,537
Expense reimbursement 69,895 52,056
Property management fees 281,557 277,228
Leasing commissions and costs 183,495 113,125
Asset management fee 193,780 191,926
------- -------
$728,727 $636,872
======== ========
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 March 31,
2000 and December 31, 1999, the balances of these OP Unit Loans totaled
$2,329,030 and $2,077,886, respectively, and are shown as loans receivable from
affiliates on the consolidated balance sheets.
11
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
NOTE 7 - EARNINGS PER SHARE
Basic net income per share in the amount of $.21 and $.18 for the three months
ended March 31, 2000 and 1999, respectively, equals net income for the periods
($1,653,193 and $1,422,500, respectively), divided by the weighted average
number of shares outstanding for the periods (8,048,032 and 8,045,703,
respectively).
Diluted net income per share in the amount of $.21 and $.17 for the three months
ended March 31, 2000 and 1999, respectively, equals net income for the periods,
divided by the weighted average number of diluted shares outstanding for the
periods (8,048,032 and 8,232,123, respectively). The weighted average number of
diluted shares outstanding for the three months ended March 31, 1999 reflects
the weighted average impact of an additional 186,420 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 March
31, 1999. 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 three months ended March 31, 2000 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
March 31, 2000 and 1999 into an additional 777,213 and 517,625 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
12
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
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 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.
13
<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 March 31, 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 $121,043,000.
As of March 31, 2000, there were 8,049,179 shares of Common Stock outstanding
(an additional 777,213 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 nationwide,
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.
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.
14
<PAGE>
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. It is anticipated that a note
payable to New York Life Insurance Company in the amount of approximately
$4,667,000 at March 31, 2000, which matures on June 10, 2000, will be repaid
through additional proceeds from the Credit Facility. In addition, it is
currently anticipated that the Credit Facility in the amount of $31,818,000 at
March 31, 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 three months ended March 31, 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 three
months ended March 31, 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 three months ended March 31, 2000, cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $115,000. This
increase was primarily due to cash provided by operating activities ($2,682,000)
and net proceeds from notes payable
15
<PAGE>
($748,000) which exceeded improvements to real estate ($952,000), an increase in
loans made to affiliate ($256,000), an increase in deferred acquisition expenses
($24,000), an increase in deferred loan costs ($21,000), distributions paid to
shareholders ($1,931,000) and distributions paid to minority interest
($145,000). Included in the adjustments to reconcile the net income to cash
provided by operating activities is depreciation and amortization in the amount
of $1,230,000.
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 March 31,
2000 is $20,375. 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 May 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 May 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. The Company is currently in negotiations with Bi-Lo to take this
additional space and anticipates completing this transaction in the second
quarter of 2000.
For a discussion of environmental issues affecting one of the Company's Retail
Properties see Note 8 to the consolidated financial statements.
In May 2000, a distribution of $1,931,803 ($.24 per share), which was declared
in March 2000, was paid to the shareholders from cash flow from operations for
the quarter ended March 31, 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.
16
<PAGE>
RESULTS OF OPERATIONS
Rental income increased approximately $169,000 for the three months ended March
31, 2000 as compared to 1999 primarily due to an increase in occupancy at
Westbird, Pablo Plaza, Highland Fair, Winery Square and Rolling Hills Square and
an increase in percentage rents received at Pablo Plaza and Oxford Mall.
Income from equity investments increased approximately $16,000 for the three
months ended March 31, 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 $19,000 for the three months ended March
31, 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.
Other income increased approximately $153,000 for the three months ended March
31, 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 $94,000 for the three months
ended March 31, 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 and
an increase in rubbish removal at Westbird, Pablo Plaza, Mountain View Village
and Winery Square.
Other expenses decreased approximately $73,000 for the three months ended March
31, 2000 as compared to 1999 primarily due to a decrease in bad debt expense
resulting from a decrease in reserves at Winery Square, Mountain View Village,
Kokomo Plaza, Barclay Place, Southgate 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 $68,000 for the three months ended March 31, 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 $111,043 and $72,808 for the three months ended
March 31, 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
17
<PAGE>
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.
18
<PAGE>
FFO, as calculated in accordance with the NAREIT definition, and FAD for the
three months ended March 31, 2000 and 1999 are summarized in the following
table:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
Net income $ 1,653,193 $ 1,422,500
Depreciation and amortization of
real property 1,122,171 1,074,299
Amortization of insurance contract 0 150,145
Proportionate share of adjustments
to equity in income
from equity investments to arrive
at funds from operations 60,469 59,724
----------- -----------
Funds From Operations ("FFO") 2,835,833 2,706,668
Amortization of deferred financing
costs 107,882 79,389
Principal payments received on
mortgage loans 8,565 7,835
Straight-lining of property rentals
for rent escalations (111,043) (72,808)
Improvements to real estate (951,803) (95,371)
Principal repayments on notes
payable (132,668) (163,014)
Leasing commissions (222,364) (164,628)
----------- -----------
Funds Available for Distribution
("FAD") $ 1,534,402 $ 2,298,071
=========== ===========
Distributions to shareholders $ 1,931,803 $ 1,931,246
=========== ===========
FFO payout ratio 68.1% 71.4%
============ ===========
Cash flows from:
Operating activities $ 2,682,395 $ 2,875,470
=========== ===========
Investing activities $(1,218,302) $ (171,742)
=========== ===========
Financing activities $(1,348,923) $(2,326,467)
=========== ===========
</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
19
<PAGE>
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.
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 March 31, 2000, approximately 47% 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 $31,818,000
outstanding under the Credit Facility at March 31, 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 $218,000; a 2% increase in the 30 day Euro-contract rate would
decrease annual net income by approximately $436,000. 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.
20
<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 - None
Item 5. Other Information
John B. Roche will cease to serve as Chief Financial Officer effective
May 15, 2000. Alan P. Hirmes has been appointed interim Chief
Financial Officer effective May 15, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K:
Current report on Form 8-K relating to the resignation of J. Michael
Fried as Chairman of the Board of Directors and Chief Executive
Officer and Stuart J. Boesky as Chief Operating Officer and the
unanimous appointment of Stuart J. Boesky as Chairman of the Board of
Directors and Chief Executive Officer and Michael J. Brenner as a
Director was dated December 16, 1999 and was filed on
January 5, 2000.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AEGIS REALTY, INC.
(Registrant)
Date: May 12, 2000 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Director, Chairman of the
Board, President and
Chief Executive Officer
Date: May 12, 2000 By: /s/ John B. Roche
-----------------
John B. Roche
Senior Vice President and
Chief Financial Officer
Date: May 12, 2000 By: /s/ Richard A. Palermo
----------------------
Richard A. Palermo
Vice President, Treasurer,
Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS FOR AEGIS REALTY, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0001043324
<NAME> AEGIS REALTY, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,341,465
<SECURITIES> 0
<RECEIVABLES> 8,933,541
<ALLOWANCES> 383,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,623,583
<PP&E> 196,986,539
<DEPRECIATION> 24,291,315
<TOTAL-ASSETS> 194,025,318
<CURRENT-LIABILITIES> 5,760,598
<BONDS> 59,988,030
0
0
<COMMON> 0
<OTHER-SE> 121,042,994
<TOTAL-LIABILITY-AND-EQUITY> 194,025,318
<SALES> 0
<TOTAL-REVENUES> 6,759,759
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,919,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,186,856
<INCOME-PRETAX> 1,653,193
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,653,193
<EPS-BASIC> .21
<EPS-DILUTED> .21
</TABLE>
