SUPPLEMENT NO. 5
AMERICAN ASSET ADVISERS TRUST, INC.
SUPPLEMENT NO. 5 DATED FEBRUARY 11, 1998
TO PROSPECTUS DATED JUNE 18, 1996
THIS SUPPLEMENT IS IN ADDITION TO AND DOES NOT REPLACE
PRIOR SUPPLEMENTS TO THE MEMORANDUM.
ATTENTION PROSPECTIVE INVESTORS
THE INFORMATION CONTAINED IN THIS SUPPLEMENT SHOULD BE READ
CAREFULLY AND CONSIDERED IN CONNECTION WITH YOUR REVIEW OF THE
PROSPECTUS DATED JUNE 18, 1996 AND SUPPLEMENT NO. 2 DATED
FEBRUARY 28, 1997, SUPPLEMENT NO. 3 DATED OCTOBER 16, 1997 AND
SUPPLEMENT NO. 4 DATED DECEMBER 1, 1997 THERETO.
THE PURPOSE OF THIS SUPPLEMENT IS TO SET FORTH
INFORMATION CONCERNING THE FOLLOWING:
o Status of the Offering
o Acquisition of the Adviser
o Recent Acquisitions of Properties
STATUS OF THE OFFERING
As of January 30, 1998, the Company has received $8,719,750
in gross proceeds from the sale of 851,363 shares in the Offering
since it commenced on June 18, 1996.
CHANGE TO SELF-MANAGEMENT - PROPOSED ACQUISITION OF THE ADVISER
Adviser Acquisition. On January 28, 1998, the Independent
Directors of American Asset Advisers Trust, Inc. (the "Company")
approved the Company's becoming a self-managed REIT through the
acquisition by the Company of American Asset Advisers Realty
Corp., a Texas corporation, the Company's Adviser (the
"Acquisition Agreement").
Under the terms of the Acquisition Agreement, the Adviser
will be merged into a newly formed wholly owned subsidiary of the
Company, which will be the surviving corporation. As a result of
the merger, the Company will issue up to 900,000 shares of its
$.01 par value common stock (the "Share Consideration") to Mr.
Taylor as sole shareholder of the Adviser on the terms and
conditions set forth in the Acquisition Agreement. Mr. Taylor
would receive 213,260 Common Shares upon the closing date of the
merger (the "Initial Shares") and up to 686,740 additional shares
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(the "Share Balance") would be issuable at the end of each
calendar quarter following the quarter in which the closing date
occurs (the "Closing Quarter") in an amount which, when added to
the Initial Shares and any previously issued portion of the Share
Balance, would not exceed 9.8% of the total common shares of the
Company outstanding after giving effect to such issuance;
provided that no additional shares would be issuable after the
24th calendar quarter following the Closing Quarter. The
consummation of the Adviser Acquisition will be subject to
approval of the shareholders of the Company and to customary
closing conditions.
Following the acquisition of the Adviser, if it is
consumated, management will endeavor to significantly increase
the Company's asset base through an asset group acquisition
and/or secondary offering of its securities and in conjunction
therewith or immediately thereafter management intends to cause
the Company's common stock to be traded on a national securities
exchange. Management believes that by listing the common stock
on a national securities exchange the Company can provide
liquidity for its shareholders. There is no assurance that the
Company's attempts to significantly increase its asset base will
be successful or that a liquid secondary market for the Company's
common stock can be established within the time frame intended or
at all.
Upon consummation of the Adviser Acquisition, the Omnibus
Services Agreement, under which the Adviser currently provides
acquisition, property management and administrative services to
the Company, will be terminated. The Company will thereupon
internalize all of its acquisition, development, property
management and administrative functions and cease paying fees for
these external services.
If the Adviser Acquisition is consummated, Mr. Taylor will
become the full time employee of the Company. His base salary
during the initial two years of his employment would be $1.00 per
year, subject to increase to the extent dividends paid on these
shares during such period are less than the current rate. Mr.
Taylor would also be entitled to additional incentive
compensation as the Independent Directors may determine. The
Acquisition Agreement also contains certain continuing covenants
by Mr. Taylor restricting his non-company related real estate
activities.
A copy of the Acquisition Agreement, which includes as an
addendum the H. Kerr Taylor Employment Agreement, is available on
request.
The Independent Directors engaged Houlihan Lokey Howard &
Zukin Financial Advisors, Inc. ("Houlihan Lokey") and Bishop-
Crown Investment Research, Inc. ("Bishop-Crown") as their
financial advisers regarding the proposed Adviser Acquisition.
Houlihan Lokey has delivered its opinion regarding the value of
the Adviser and Bishop-Crown delivered its opinion that the
acquisition of the Adviser is fair, from a financial point of
view, to the Company and to its shareholders, other than Mr.
Taylor. Each opinion is subject to the terms, conditions and
limitations therein.
In approving the proposed Adviser Acquisition, the
Independent Directors considered the following factors which in
general weigh in favor of the Adviser Acquisition.
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o The terms of the Adviser Acquisition which would allow the
Company to become a self-managed REIT at its current asset size,
which the Independent Directors believe is sooner than it might
otherwise be able to afford a self-management structure.
o The Company's better position as a result of the Adviser
Acquisition to successfully compete with larger and more
established REITs in the areas of acquisition development and
management of its property investments.
o The Company's stronger ability, as a self-managed REIT, to
more efficiently and timely attract additional investment capital
and asset growth financed thereby.
o The structured payment of the Share Consideration which will
allow the Company to incur a substantial portion (more than 76%)
of the price for the Adviser only upon its growth in equity
capital investment (and resulting growth in assets), thereby
minimizing the dilution to the Company's shareholders both in
terms of reduction in percentage of shares owned and book value
per share.
o The Company's engagement, as a result of the Adviser
Acquisition of full time experienced and capable personnel who
have specific experience in the Company's properties and property
management procedures.
o The anti-competitive covenants imposed on Mr. Taylor under
the Acquisition Agreement whereby Mr. Taylor will be required to
devote substantially all of his time to the business of the
Company and substantially restrict any competitive real estate
related activities.
o The alignment of the interests of the Company and Mr. Taylor
on a long-term basis by reason of his substantial share ownership
of the Company resulting from the Adviser Acquisition.
o The savings to the Company resulting from its immediate
termination of the payment of fees for external acquisition and
management and administrative services, and prior to is full
payment of the Share Consideration and the Independent Directors'
belief that such savings will exceed the cost to the Company for
the Share Consideration.
In approving the Adviser Acquisition, the Independent
Directors considered the following factors which they found to be
generally negative.
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o The risk that the valuation of the Adviser for the purposes
of the Adviser Acquisition are inaccurate and/or that the overall
financial benefits to the Company anticipated to result from the
Adviser Acquisition are less than anticipated or, by operation of
federal income tax laws or other regulatory restrictions on the
operations of the Company, the Company is unable to fully benefit
from one or more aspects of the Adviser?s ongoing business
operations.
o The risk that the Company's financial performance following
the Adviser Acquisition, should it be consummated, with respect
to income, funds from operations (FFO) and earnings before
interest, taxes, depreciation and amortization ("EBITDA") will
not increase (or even decrease) following the Adviser
Acquisition.
o The risk that the issuance of the Share Consideration will
be more dilutive than anticipated to the Company's Shareholders,
although the Independent Directors believe that the structure of
the Acquisition, including the terms and conditions for the
issuance of the Share Consideration, would significantly reduce
the adverse effects on the Company and the Shareholders should
its financial performance be less than anticipated.
o The risks that continuing conflicts of interest between Mr.
Taylor and his other real estate business interests, including
his interest in the general partners of twelve (12) existing
public and private limited partnerships, will not be completely
mitigated or that additional conflicts of interest between the
Company and Mr. Taylor arise in the future.
In concluding that the share consideration to be paid for
the Adviser, from a financial point-of-view, is fair to the Company and its
shareholders (other than Mr. Taylor), the Independent Directors, without
assigning relative weights thereto, considered the following factors:
o The terms of the Adviser Acquisition whereby more than 76%
of the Share Consideration is to be paid over a future period of
time conditioned on the amount of additional equity investments
in the Company during such period;
o The structure of the Acquisition whereby the Company will
acquire, through the Adviser, the benefit of revenues from non-
Company related services which will in part, offset the
additional general administrative costs the Company is
anticipated to incur as a result of internalizing its
acquisition, development, property management and administration
functions;
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o The Independent Directors' belief that the current value of
the Share Consideration is less than the cumulative fees which
would otherwise be payable to the Adviser over the period for
payment of the Share Balance;
o The independent representation of the Independent Directors
by the legal counsel and Bishop-Crown and Houlihan Lokey in order
to assure that the determinations made by the Independent
Directors would not be affected by conflicts of interest between
Mr. Taylor and the Adviser and the Company;
o The conclusion of Deloitte and Touche, LLP that the
Acquisition will be treated, for Federal Income Tax purposes, as
a reorganization within the meaning of 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code") and that,
accordingly the Company will not recognize gain or loss on the
consummation of the Adviser Acquisition, should it occur;
o The Valuation Opinion of Houlihan Lokey, dated December 16,
1997, as to the current value of the Adviser, based on the terms
and assumptions stated therein;
o The Fairness Opinion of Bishop-Crown dated January 15, 1998
stating that on such date, and based on various assumptions and
considerations, the Adviser Acquisition is fair from a financial
point-of-view to the Company and its shareholders (other than Mr.
Taylor).
Also, in considering the fairness of the Adviser Acquisition
of the Company, the Independent Directors took into account,
among other things, (a) the amount of shares constituting the
Share Consideration; (b) the terms and conditions of payment of
the Share Balance, which in significant part matches the receipt
of benefits of the Adviser Acquisition, if any, to the timing of
payment of the Share Balance and to a substantial extent, as a
condition to the amount of the Share Balance actually paid; (c)
the surviving anti-competitive provisions of the Acquisition
Agreement by Mr. Taylor, whereby his non-Company related real
estate activities are restricted and regulated; (d) the ongoing
employment relationship to be established between Mr. Taylor and
the Company under his employment agreement and the substantial
stock ownership of Mr. Taylor in the Company resulting from the
Adviser Acquisition, each of which will greatly align Mr.
Taylor's long-term interest with those of the Company; and (e)
the continued oversight of the Independent Directors during the
period over which the Share Balance is to be paid, thereby
mitigating conflicts of interest that might result between the
Company and management during this time.
The Board plans to notice a Special Meeting of the
Shareholders to consider and approve the Adviser Acquisition and
the transactions related thereto including the proposed changes
in the Company's investment policies respecting restrictions on
leasing of its properties. The Company intends to set a Record
Date of January 31, 1998 for voting at the Special Meeting.
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Those Shareholders who purchased their shares after the Record
Date will not be entitled to vote at the Special Meeting.
Change in Investment Policies. Also, at the Special
Meeting, management will ask the Company's Shareholders to
consider and approve a change in the Company's investment
policies whereby it will no longer require its properties to be
subject to long-term net leases at the time of the acquisition or
restricting leases on its properties only to tenants who
demonstrate a net worth of at least $40 million. Management's
policy would instead be to determine appropriate tenant and lease
requirements on an individual property basis. In circumstances
where management deems appropriate, properties may be leased to
local tenants under shorter term "semi-gross" leases which
provide for greater and more frequent increases in tenant rents
in consideration for other Company's obligation to pay certain,
of the properties' operating expenses. Also, the Company will no
longer, as an investment policy, confine its property investments
to stand-alone single tenant properties. In circumstances deemed
appropriate by management, the Company may acquire and develop
multi-pad parcels which may be developed and leased to multiple
tenants. Also, where appropriate, the Company may also acquire
multi-unit properties.
Change in Name. At the Special Meeting, management will
also ask the Company's Shareholders to consider and approve a
change in the Company's name to "AmREIT, Inc." If approved, the
change in the Company's name would be effected only if the
Adviser Acquisition were also approved by the Shareholders and
consummated.
RECENT ACQUISITIONS OF PROPERTIES
Each of the Company's recent property acquisitions is financed
with a combination of net equity raised and line of credit
borrowings. As of January 31, 1998, the Company's total
borrowing amounted to $6,898,884.
Hollywood Video - Lafayette, Louisiana. The Company
acquired on October 29, 1997, through a joint venture, an
approximately 75% interest in a retail location of approximately
7,488 square feet in Lafayette, Louisiana leased to Hollywood
Entertainment Corporation. The Lafayette store is located on the
northeastern corner of the intersection of Ambassador Caffery and
Ridge Road. Ambassador Caffery is one of the major retail
corridors in Lafayette and passes our site, located only 1/4 of
a mile from the area's largest mall. The lease on this location
has an initial term of 15 years and allows for rent increases
every five years based on the rate of increase of the Consumer
Price Index. The lease also provides for four extensions of five
years each. The Company owns this property through a joint
venture with an Affiliate, AAA Net Realty Fund XI, Ltd. The
Company's total cost of the property was $863,407, including
Acquisition Fees paid to an Affiliate of $47,515 and Acquisition
Expenses paid to third parties of $2,660.
Hollywood Video - Ridgeland, Mississippi. The Company
acquired on December 30, 1997 a Hollywood Video retail store, of
approximately 7,488 square feet, located in Ridgeland,
Mississippi, a suburb of Jackson, the State's capital. The site
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has frontage on County Line Road, the major east/west artery in
the area, and the Mall Ring Road of NorthPark Shopping Center,
the dominant mall in greater Jackson, containing more than
1,000,000 square feet of retail space. The site is surrounded by
commercial development to the north, east and west. The lease on
the property is for an initial term of 15 years and provides for
four extensions of five years each. Rent increases are scheduled
after each five year period and are linked to the rate of
increase of the Consumer Price Index. The Company's total cost
of the property was $1,285,854, including Acquisition Fees paid
to an affiliate of $60,622 and Acquisition Expenses paid to third
parties of $12,585.
Tenant Information - Hollywood Entertainment Corporation operates
video rental stores under the name of "Hollywood Video."
Hollywood Video is the second largest video rental chain with
some 661 video retail superstores in 32 states. For the six
months ended June 30, 1997, Hollywood Video's revenues increased
71% to $220.5 million. These revenues reflect an increase in
same store sales and the addition of 110 new superstores opened.
OfficeMax - Lake Jackson. The Company has contracted to
purchase for closing in mid February, 1998 a newly constructed,
approximately 23,500 square foot OfficeMax retail store located
in Lake Jackson, Texas. Lake Jackson is the hub of a multi-city
community located around the natural harbor created at the mouth
of the Brazos and San Bernard rivers. Approximately 50 miles
south of Houston, this area is home to major industrial,
recreational, educational and commercial activities. The store
is located at an intersection along the major thoroughfare in
Lake Jackson, Highway 332, and near the mall at the intersection
of Highway 332 and Highway 288. Much of the growth in Lake
Jackson is occurring in this area of town. The initial term of
the lease is for 15 years, rent increases of $.50 per square foot
or approximately 5% are scheduled at the end of each five year
period of the lease. The lessee, OfficeMax, Inc., has three
renewal options of five years each. The Company's total cost of
the property will be approximately $2,392,607, which includes
Acquisition Fees paid to an affiliate of $111,284 and Acquisition
Expenses paid to third parties of $22,257.
OfficeMax - Dover, Delaware. The Company completed its
previously announced development of an OfficeMax retail store in
Dover, Delaware. This store went into operation on January 15,
1998. The Company's total cost of the property was approximately
$2,881,433, which includes Acquisition Fees paid to an affiliate
of $134,020 and Acquisition Expenses paid to third parties of
$26,804.
Tenant Information - Spun off from Kmart, OfficeMax, Inc., with
more than 600 superstore locations in more than 230 markets in 48
states and Puerto Rico, is the country's largest office products
superstore operator both in terms of number of stores as well as
geographic coverage. As of April 24, 1997, OfficeMax had
stockholders' equity of over $1 billion and market capitalization
of $1.4 billion. Last year OfficeMax became only the fourth
company in U.S. business history to exceed $3 billion in sales in
less than nine years from the date founded.
Just For Feet - Woodlands, Texas. The Company has
contracted to purchase a 16,922 square foot retail facility under
construction in The Woodlands, Texas. The Company's purchase of
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this property is subject to its timely completion and its lease
to Just For Feet of Texas, as guaranteed by its parent, Just For
Feet, Inc. The lease will be a net-lease with an initial term of
15 years and two five-year extensions at the tenant's election.
Under the lease, the Company is obligated to pay most operating
expenses of the property and the landlord is responsible for roof
and structure. Rental increases are scheduled in the sixth and
eleventh years and are based on a multiple of the Consumer Price
Index. The site is located on Lake Woodlands Drive, the ring
road that surrounds The Woodlands Mall and terminates in a major
interchange linking The Woodlands to I-45, its main
transportation artery. The mall is the dominant traffic
generator and has monthly car counts of 350,000 in the summer up
to 1,000,000 during the Christmas season. The site has good
proximity to the residential areas that surround the commercial
areas of The Woodlands, a master planned community approximately
40 miles north of Houston, Texas. The Company's total cost of the
property is approximately $3,571,775, which includes Acquisition
Fees paid to an affiliate of $167,689 and Acquisition Expenses
paid to third parties of $33,538.
Just For Feet - Sugar Land, Texas. The Company has
contracted to purchase a 16,922 square foot retail facility under
construction in Sugar Land, Texas. The Company's purchase of
this property is subject to its timely completion and its lease
to Just For Feet of Texas, as guaranteed by its parent, Just For
Feet, Inc. The lease that covers the completed retail superstore
is a net-lease with an initial term of 15 years and two five-year
extensions. Under the lease the tenant is obligated to pay most
operating expenses of the property and the Company is responsible
for roof and structure. Rental increases are scheduled in the
sixth and eleventh years based on a multiple of the Consumer
Price Index. Sugar Land is located in Fort Bend County, 20 miles
southwest of downtown Houston, Texas, and has received national
recognition for its phenomenal growth as one of the premiere
communities in Fort Bend County. The subject site is an out
parcel of the Colony Square power center located at the corner of
the frontage road of US 59 and First Colony Blvd. US 59 is the
busiest freeway in Texas with car-counts in excess of 44,000 per
day. This site enjoys excellent visibility from that highway and
as well as being on the "going home" side. The area's major
commercial traffic generator is the nearby First Colony Mall,
which has over 1,000,000 square feet of gross leasable area. The
subject site can be easily seen and accessed by traffic using the
mall. The Company's total cost of the property is approximately
$3,345,214, which includes Acquisition Fees paid to an affiliate
of $157,052 and Acquisition Expenses paid to third parties of
$31,410.
Tenant Information - Just For Feet is a rapidly growing national
shoe retailer that currently owns and operates 54 superstores and
franchises 8 additional superstores in 17 states. The company
expects to open a total of approximately 20 superstores during
fiscal 1997 and approximately 25 superstores during fiscal 1998.
The company is also growing by acquisition. In 1997 it acquired
Athletic Attic which operates 30 company owned stores in 9
states, with an additional 48 stores operated by 17 franchisees
in 15 states and Puerto Rico. Also in 1997 Just For Feet
acquired Imperial Sports, an outdoor footwear and apparel
retailer that operated 57 stores in Michigan, Illinois, Indiana
and Ohio. Just For Feet anticipates opening approximately 8
specialty stores during fiscal 1997 and approximately 25
specialty stores during fiscal 1998. Just For Feet had
stockholders equity of $276,000,000 and a market capitalization
of $469,000,000 as of April 30, 1997. It experienced same store
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sale growth of 5% in 1997 as well. Shares of the company are
traded on the NASDAQ National Market system.
Pro Forma Financial Information. The following table
presents unaudited pro forma consolidated balance sheet for the
Company giving effect to the acquisitions of the two OfficeMax
properties in Dover, Delaware and Lake Jackson, Texas and the two
Just For Feet properties in The Woodlands, Texas and Sugarland,
Texas as of December 31, 1997. Pro forma consolidated results of
operations of these properties are not included as of December
31, 1997 as the buildings had not been completed.
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Pro Forma Consolidated Balance Sheet
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
Cost Adjustments (1) Total
<S> <C> <C> <C> <C>
Cash $ 1,401,740 $ - $ 1,401,740
Property and Net Investment in Direct
Financing Leases 24,989,062 4,449,298 (2) 29,438,360
Other Assets 755,561 - 755,561
Total Assets $ 27,146,363 $ 4,449,298 $ 31,595,661
Liabilities $ 6,255,362 $ 4,449,298 (2) $ 10,704,660
Minority Interest 5,260,795 - 5,260,795
Shareholders' Equity 15,630,206 - 15,630,206
Total Liabilities and Shareholders'
Equity $ 27,146,363 $ 4,449,298 $ 31,595,661
___________________________________
<FN>
<F1>
(1) Adjustments are reflected as if the properties discussed in (2) below
were completed on December 31, 1997.
<F2>
(2) Includes $4,164,275 of construction costs for improvements, $171,014 of
property development costs paid to affiliates, and $114,009 of acquisition
costs paid to third parties. Costs to acquire the land have already been
included in the historical cost totals. These costs relate to the two
OfficeMax properties in Dover, Delaware and Lake Jackson, Texas and the
two Just For Feet properties in The Woodlands, Texas and Sugarland, Texas.
</FN>
The date of this Supplement No. 5 is February 11, 1998
</TABLE>
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