<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 September 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>
============= ============
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Real estate, net $174,839,050 $172,784,964
Investment in partnerships 5,792,420 5,923,199
Mortgage loan receivable 3,183,107 3,220,191
Loans receivable from affiliate 2,317,965 2,077,886
Cash and cash equivalents 2,213,207 2,226,295
Accounts receivable and other assets 3,743,506 4,359,352
Deferred costs, net 3,681,512 2,800,537
------------ ------------
TOTAL ASSETS $195,770,767 $193,392,424
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 62,172,524 $ 59,239,944
Accounts payable and other liabilities 4,349,181 3,169,953
Due to Advisor and affiliates 375,001 344,428
Distributions payable 2,115,590 2,076,125
------------ ------------
TOTAL LIABILITIES 69,012,296 64,830,450
------------ ------------
Minority interest of unitholders in the
Operating Partnership 6,996,649 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 (5,657,722) (4,097,940)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 119,761,822 121,301,604
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $195,770,767 $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 Nine Months Ended
September 30, September 30,
======================== ========================
2000 1999 2000 1999
------------------------ ------------------------
REVENUES:
<S> <C> <C> <C> <C>
Rental income $4,883,709 $4,998,061 $15,047,323 $14,932,450
Tenant reimbursements 1,132,515 1,091,893 3,391,387 3,449,238
Income from equity investments 82,206 68,014 282,125 239,452
Interest income 139,391 126,412 424,381 366,467
Other 29,222 35,970 276,260 94,371
--------- --------- ---------- -----------
Total revenues 6,267,043 6,320,350 19,421,476 19,081,978
--------- --------- ---------- -----------
Expenses:
Repairs and maintenance 511,980 560,325 1,471,697 1,337,053
Operating 646,813 639,373 1,981,274 1,999,161
Real estate taxes 581,376 581,209 1,783,625 1,873,166
Interest expense 1,256,735 1,127,521 3,645,825 3,340,211
General and administrative 483,087 510,424 1,452,995 1,497,381
Depreciation and amortization 1,350,911 1,191,916 3,824,736 3,686,557
Other 231,520 160,981 727,562 728,487
--------- --------- ---------- ----------
Total expenses 5,062,422 4,771,749 14,887,714 14,462,016
--------- --------- ---------- ----------
Income before gain on sale of
real estate 1,204,621 1,548,601 4,533,762 4,619,962
Gain on sale of real estate 108,332 0 108,332 0
--------- --------- ---------- ---------
Income before minority interest 1,312,953 1,548,601 4,642,094 4,619,962
Minority interest in income of
the Operating Partnership (114,149) (98,454) (406,467) (285,891)
--------- --------- ---------- ---------
Net income $1,198,804 $1,450,147 $ 4,235,627 $ 4,334,071
========= ========= ========== =========
Net income per share:
Basic $ .15 $ .18 $ .53 $ .54
========= ========= ========== =========
Diluted $ .15 $ .18 $ .53 $ .53
========= ========= ========== =========
Weighted average shares
outstanding:
Basic 8,049,179 8,046,859 8,048,798 8,046,478
========= ========= ========== =========
Diluted 8,049,179 8,210,252 8,048,798 8,209,871
========= ========= ========== =========
</TABLE>
3
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional Distributions
---------------------- ---------------- Paid-in in Excess of
Shares Amount Shares Amount Capital Net Income Total
------ ------ ------ ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 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 4,235,627 4,235,627
Issuance of shares of
common stock 2,320 23 0 0 19,977 0 20,000
Distributions 0 0 0 0 0 (5,795,409) (5,795,409)
--------- ------ ------ ----- ----------- ---------- -----------
Balance at
September 30, 2000 8,055,479 $80,554 (6,300) $ (63) $125,339,053 $(5,657,722) $119,761,822
========= ====== ====== ===== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
===========================
Nine Months Ended
September 30,
---------------------------
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,235,627 $4,334,071
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of real estate (108,332) 0
Depreciation and amortization 3,867,519 3,729,300
Minority interest in income of
the Operating Partnership 406,467 285,891
Distributions from equity investments
in excess of income 98,799 76,168
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable
and other assets 615,846 (366,265)
Increase (decrease) in due to Advisor and affiliates 50,573 (69,937)
Increase in accounts payable and other liabilities 1,179,228 174,355
Increase in leasing commissions and costs (828,804) (500,516)
----------- -----------
Net cash provided by operating activities 9,516,923 7,663,067
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate (4,789,200) (845,310)
Acquisitions of real estate including acquisition
expenses (557,823) (570,916)
Net proceeds from sale of real estate 154,409 0
Increase in deferred acquisition expenses (542,774) (61,150)
Increase in loans made to affiliate (255,937) 0
Repayments of loans receivable from affiliate 15,858 3,107
Principal payments received on mortgage loans 26,281 24,039
----------- -----------
Net cash used in investing activities (5,949,186) (1,450,230)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 8,000,000 500,000
Repayments of notes payable (4,766,303) 0
Periodic principal payments of notes payable (301,117) (411,632)
Distributions paid to shareholders (5,794,852) (6,396,627)
Increase in deferred loan costs (87,273) (457,266)
Distributions paid to minority interest (631,280) (323,907)
----------- -----------
Net cash used in financing activities (3,580,825) (7,089,432)
----------- -----------
(continued)
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
==========================
Nine Months Ended
September 30,
--------------------------
2000 1999
----------- ----------
<S> <C> <C>
Net decrease in cash and cash equivalents (13,088) (876,595)
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 $2,213,207 $2,126,879
=========== ==========
SUPPLEMENTAL INFORMATION:
Interest paid $3,390,802 $3,691,879
=========== ==========
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
September 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 September 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
September 30, 2000. Also, at September 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 September 30, 2000 and the results
of its operations for the three and nine months ended September 30, 2000 and
1999 and its cash flows for the nine months ended September 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 accounting principles generally
accepted in the United States of America ("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
September 30, 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.
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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Land $ 40,267,037 39,798,459
Buildings and improvements 161,302,772 156,239,538
------------ -----------
201,569,809 196,037,997
Less: Accumulated depreciation (26,730,759) (23,253,033)
------------ -----------
$174,839,050 $172,784,964
============ ============
</TABLE>
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.
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.
Amounts estimated to be recoverable from future operations and ultimate sales
are greater than the carrying value of each property owned at September 30,
2000. However, the carrying value of certain properties may be in excess of
their fair value as of such date.
8
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
NOTE 3 - DEFERRED COSTS
The components of deferred costs are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Deferred loan costs $ 2,483,198 $ 2,395,925
Deferred leasing commissions and costs 2,140,605 1,426,098
Deferred acquisition expenses 640,763 97,989
---------- ----------
5,264,566 3,920,012
Less: Accumulated amortization (1,583,054) (1,119,475)
---------- ----------
$ 3,681,512 $ 2,800,537
========== ==========
</TABLE>
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 Sept. 30,
Noteholder Date Rate and Interest at 9/30/00 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 38,818,000 30,818,000(c)(h)
12/30/00 only
Heller 6/24/97(d) 8.50% $19,992 2,529,533 2,547,557 Barclay Place/
Financial, Inc. 7/1/17 $4,020,560
Nomura 10/28/97(e) 7.54% $33,130 3,826,323 3,902,472 Village At
Asset Capital 11/11/22 Waterford/
Corporation $6,279,249
Chase Bank 12/16/96(f) 8.875% $51,717 6,306,277 6,350,323 Oxford Mall/
1/1/07 $8,766,859
Merrill Lynch 9/18/97(g) 7.73% $79,509 10,692,391 10,776,168 Southgate/
Credit 10/1/07 $15,080,296
Corporation
Sellers of 12/10/98 $0 0 64,600(i) None
Southgate 12/10/99
Sellers of 12/10/98 $0 0 16,292(i) None
Crossroads East 12/10/99
Sellers of 12/10/98 $0 0 38,354(i) None
Crossroads East 12/9/99 ----------- ------------
$62,172,524 $ 59,239,944
=========== ============
</TABLE>
9
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
(a) The Credit Facility is shared among Fleet Bank (28.57%), KeyBank National
Association (28.57%), Citizens Bank of Rhode Island (28.57%) and Sovereign Bank
(14.29%). The Credit Facility matures on December 30, 2000. The Company has
entered into a preliminary agreement with Fleet Bank to extend the Credit
Facility for another three years.
(b) The interest rate under the Credit Facility can float 1/2% under Fleet
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 6.53% at September 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.
(g) Note was assumed upon purchase of the property by the Company on December 9,
1998.
(h) The Credit Facility was collateralized at September 30, 2000 by nineteen
Retail Properties, one investment in a partnership and one Mortgage Loan with
carrying values of $109,830,745, $5,104,133 and $3,183,107, respectively. In
addition, the obligation under the Credit Facility is guaranteed by the Company,
two of its subsidiaries and TCR-Pinehurst Limited Partnership.
(i) 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
September 30, 2000, the counter party would be required to pay the Company
approximately $20,000; 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 based
on the fair market value at the date of issuance. Beginning in calendar year
2000, the annual compensation for each independent
10
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
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 September 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.
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 nine months ended September 30,
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
------------------------- -------------------------
<S> <C> <C> <C> <C>
Acquisition fees $ 196 $ 12,320 $ 19,699 $ 12,320
Expense reimbursement 54,048 71,408 194,614 198,095
Property management fees 258,163 246,272 819,706 778,462
Leasing commissions and costs 275,595 116,940 604,446 335,981
Asset management fee 195,909 196,172 583,469 582,137
------- ------- --------- ---------
$783,911 $643,112 $2,221,934 $1,906,995
======= ======= ========= =========
</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
11
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
and the outstanding balances of the loans are repaid. As of September
30, 2000 and December 31, 1999, the balances of these OP Unit Loans totaled
$2,317,965 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 $.15 and $.18 and $.53 and $.54 for
the three and nine months ended September 30, 2000 and 1999, respectively,
equals net income for the periods ($1,198,804 and $1,450,147 and $4,235,627 and
$4,334,071, respectively), divided by the weighted average number of shares
outstanding for the periods (8,049,179 and 8,046,859 and 8,048,798 and
8,046,478, respectively).
Diluted net income per share in the amount of $.15 and $.18 and $.53 and $.53
for the three and nine months ended September 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 8,210,252 and
8,048,798 and 8,209,871, respectively).
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 nine months ended September 30, 2000 did not exceed the
exercise price of the options. During the nine months ended September 30, 2000,
23,000 of these option grants were terminated and 7,000 remain outstanding with
an option price of $9.50. 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
September 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 relating to the removal or remediation of hazardous or toxic substances.
However, the presence, with or
12
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
without the Company's knowledge, of hazardous or toxic substances at any
property held or operated by the Company could have an adverse effect on the
Company's business, operating results and financial condition.
Phase I Environmental Site Assessments have been undertaken on all of the
Company's properties. In certain cases, additional Phase II site investigations
have also been undertaken where deemed appropriate. Based on these reports, no
on-site hazardous chemicals or petroleum products were detected or found to
exist in the soil or in the groundwater at those properties which would result
in action by state environmental agencies and which would require additional
investigation and/or remediation, with the exception of the Mountain Park Plaza
property. A Phase II investigation at this property, in February 1998,
determined that there were detectable levels of certain hazardous materials
above threshold levels which are ascertained by the Georgia State Department of
Natural Resources Environmental Protection Division ("GAEPD"). Based on this
report and notification to GAEPD, additional investigation, monitoring and/or
remediation may be required by GAEPD. These hazardous materials were determined
to emanate from an on-site dry cleaner and an adjacent service station with a
pre-existing, and documented, leaking underground 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 was added to
the GAEPD Hazardous Site Inventory ("HSI"). Management has recently completed 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.
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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 September 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"), and held
one FHA insured participating mortgage secured by a suburban garden apartment
property (the "FHA Mortgage").
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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<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. 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. The Credit Facility, with a balance of $38,818,000 at September 30,
2000, matures December 30, 2000. The Company has entered into a preliminary
agreement with Fleet Bank to extend the Credit Facility for another three
years; however, there can be no assurances that the Credit Facility will be
extended. 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, to pay its debt service and to make distributions
to its shareholders. The primary source of the Company's short-term liquidity
needs is 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.
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.
(ii) 47% of total revenues for the nine months ended September 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 nine
months ended September 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.
At September 30, 2000 and 1999, the Company had cash and cash equivalents of
approximately $2,213,000 and $2,127,000, respectively. Cash flow from operating
activities for the nine months ended September 30, 2000, was approximately
$9,517,000 versus $7,663,000 for the same period in 1999. Approximately
$4,789,000 was reinvested as improvements to real estate and approximately
$558,000 was used to acquire additional real estate. The Company borrowed an
additional $8,000,000 through the Credit Facility at a floating rate, 8.155% at
September 30,
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<PAGE>
2000, and paid down approximately $5,067,000 in debt, of which approximately
$4,726,000 was at an interest rate of 9.25% Distributions paid to shareholders
and holders of minority interests totalled approximately $6,426,000.
As a REIT, the Company is required to distribute at least 95% (90% commencing in
2001) 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 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 September
30, 2000 is $15,528. 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.
(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. The Company and
A&P have an agreement in principal for A&P to buy out its lease. In addition,
the Company expects to enter into a new lease with Publix, with respect to the
A&P space, effective in 2001.
(iii) Three of White Oaks Plaza's anchors have vacated their space. Two, Walmart
and Winn Dixie, are still paying rent and are current in their lease payments.
Negotiations are currently ongoing to possibly sell a portion of the property.
For a discussion of environmental issues affecting one of the Company's Retail
Properties see Note 8 to the consolidated financial statements.
In November 2000, a distribution of $1,931,803 ($.24 per share), which was
declared in September 2000, was paid to the shareholders from cash flow from
operations for the quarter ended September 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
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Gross revenues decreased by approximately $53,000, or .8%, as compared to the
same period in 1999. This decrease was primarily due to a decrease in rental
income of approximately $114,000, partially offset by an increase in tenant
reimbursements of approximately $41,000.
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<PAGE>
Expenses increased by approximately $291,000, or 6.1%, as compared to the same
period in 1999. This increase is primarily due to an increase of approximately
$159,000 in depreciation and amortization and $129,000 in interest expense. The
increase in depreciation and amortization is primarily due to the increase in
the basis of improvements being made at various locations. The increase in
interest expense is due to higher borrowings.
During the three months ended September 30, 2000, the Company recorded a gain on
sale of real estate of approximately $108,000. There was no such item during
1999.
Net income decreased by approximately $251,000, or 17.3%, for the three months
ended September 30, 2000 as compared to the same period for the reasons stated
above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Gross revenues increased by approximately $339,000, or 1.8%, during the nine
months ended September 30, 2000 as compared to the same period in 1999. This
increase reflects increases of approximately $115,000 in rental income, $43,000
in income from equity investments, $58,000 in interest income and $182,000 in
other income, partially offset by a decrease of approximately $58,000 in tenant
reimbursements. The increase in rental income was primarily due to increased
occupancy and percentage rents at several properties. Other income increased due
to lease settlements relating to one tenant at Marion City Square and one tenant
at White Oaks Plaza.
Expenses increased by approximately $426,000, or 2.9%, during the nine months
ended September 30, 2000 as compared to the same period in 1999. This increase
was primarily due to increases of approximately $135,000 in repairs and
maintenance, $306,000 in interest expense and $138,000 in depreciation and
amortization, partially offset by a decrease of approximately $90,000 in real
estate taxes. Repairs and maintenance increased due to one time, non-recurring
expenditures at several properties. Interest expense increased due to increased
borrowings.
During the nine months ended September 30, 2000, the Company recorded a gain on
the sale of real estate of approximately $108,000. There was no such item during
1999.
Net income decreased by approximately $98,000, or 2.3%, for the nine months
ended September 30, 2000 as compared to the same period in 1999 for the reasons
stated above.
FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
Funds from operations ("FFO"), represents net income (computed in accordance
with accounting principles generally accepted in the United States of America,
"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 $(5,361) and $132,804 and
$182,055 and $268,451 for the three and nine months ended September 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
17
<PAGE>
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs.
Funds available for distribution ("FAD") represents FFO plus recurring principal
receipts from mortgage loans less reserves for lease commissions, recurring
capital expenditures (excluding property acquisitions) and debt principal
amortization. FAD should not be considered an alternative to net income as a
measure of the Company's financial performance or to cash flow from operating
activities (computed in accordance with GAAP) as a measure of the Company's
liquidity, nor is it necessarily indicative of sufficient cash flow to fund all
of the Company's needs.
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<PAGE>
FFO, as calculated in accordance with the NAREIT definition, and FAD for the
three and nine months ended September 30, 2000 and 1999 are summarized in the
following table:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
------------------------ -----------------------
<S> <C> <C> <C> <C>
Net income $1,198,804 $1,450,147 $4,235,627 $4,334,071
Gain on sale of real estate (108,332) 0 (108,332) 0
Depreciation and amortization of
real property 1,250,395 1,103,124 3,530,712 3,260,339
Amortization of insurance contract 0 0 0 200,195
Proportionate share of adjustments
to equity in income
from equity investments to arrive
at funds from operations 62,469 61,808 183,408 182,543
---------- ---------- --------- ----------
Funds From Operations ("FFO") 2,403,336 2,615,079 7,841,415 7,977,148
Amortization of deferred financing
costs 114,881 103,197 336,807 268,767
Principal payments received on
mortgage loans 8,957 8,193 26,281 24,039
Straight-lining of property rentals
for rent escalations 5,361 (132,804) (182,055) (268,451)
Improvements to real estate (2,011,334) (548,506) (4,789,200) (845,310)
Principal repayments on notes
payable (73,404) (146,534) (420,363) (411,632)
Leasing commissions (322,150) (139,861) (753,054) (445,516)
---------- ---------- ---------- ---------
Funds Available for Distribution
("FAD") $ 125,647 $ 1,758,764 $2,059,831 $ 6,299,045
========== ========== ========= =========
Distributions to shareholders $ 1,931,803 $ 1,931,246 $5,795,409 $ 5,793,738
========== ========== ========= =========
FFO payout ratio 80.4% 73.9% 73.9% 72.6%
=========== ========== ========= =========
Cash flows from:
Operating activities $ 2,774,900 $ 1,737,571 $9,516,923 $ 7,663,067
========== ========== ========== ==========
Investing activities $(2,115,490) $ (970,955) $(5,949,186) $(1,450,230)
========== =========== ========== ==========
Financing activities $(1,284,802) $(2,492,102) $(3,580,825) $(7,089,432)
========== ========== ========== ==========
</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
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<PAGE>
goods, availability and creditworthiness of prospective tenants, lease rents and
the terms and availability of financing; adverse changes in the real estate
markets including, among other things, competition with other companies; risks
of real estate development and acquisition; governmental actions and
initiatives; and environment/safety requirements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
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 September 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 $38,818,000
outstanding under the Credit Facility at September 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 $288,000 ; a 2% increase in the 30 day Euro-contract rate would
decrease annual net income by approximately $576,000. 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 was appointed to
the position of Chief Financial Officer and replaced 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: November 13, 2000 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Director, Chairman of the
Board, President and
Chief Executive Officer
Date: November 13, 2000 By: /s/ Michael I. Wirth
--------------------
Michael I. Wirth
Chief Financial Officer
