UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the transition period from ---------- to ----------
Commission File Number: 0-28378
AMREIT, INC.
MARYLAND CORPORATION IRS IDENTIFICATION NO.
76-0410050
8 GREENWAY PLAZA, SUITE 824 HOUSTON, TX 77046
(713) 850-1400
Indicate by check mark whether the issuer (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 issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. X Yes No
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1999
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,014,282
Accounts receivable 90,688
Notes receivable 1,567,028
Investment in joint venture 348,936
Property:
Land 13,624,395
Buildings 17,832,096
Furniture, fixtures and equipment 69,792
-------------
31,526,283
Accumulated depreciation (814,053)
-------------
Total property 30,712,230
-------------
Net investment in direct financing leases 3,173,757
Other assets:
Preacquisition costs 368,332
Accrued rental income 271,291
Other 81,397
-------------
Total other assets 721,020
-------------
TOTAL ASSETS $ 37,627,941
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 15,080,111
Accounts payable 309,268
Security deposit 15,050
-------------
TOTAL LIABILITIES 15,404,429
-------------
Minority interest 5,210,538
Commitments (Note 9)
Shareholders' equity:
Preferred stock, $.01 par value,
10,001,000 shares authorized,
none issued
Common stock, $.01 par value,
100,010,000 shares authorized,
2,384,117 shares issued and outstanding 23,841
Capital in excess of par value 21,655,867
Accumulated distributions in excess of earnings (4,560,241)
Cost of treasury stock, 11,373 shares (106,493)
-------------
TOTAL SHAREHOLDERS' EQUITY 17,012,974
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,627,941
=============
See Notes to Consolidated Financial Statements.
2
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
---- ----
Revenues:
Rental income from operating leases $ 777,760 $ 436,009
Earned income from direct financing leases 85,375 85,103
Interest income 24,975 19,782
Service fees and other income 202,012 -
------------ ------------
Total revenues 1,090,122 540,894
------------ ------------
Expenses:
General operating and administrative 183,019 68,793
Reimbursements and fees to related party - 17,660
Interest 247,974 26,895
Depreciation 117,670 56,949
Amortization 15,688 15,688
Merger costs (Note 7) - 182,322
Potential acquisition costs 20,523 -
------------ ------------
Total expenses 584,874 368,307
------------ ------------
Income before federal income taxes and
minority interest in net income of
consolidated joint ventures 505,248 172,587
Federal income taxes from non-qualified
REIT subsidiaries (51,940) -
Minority interest in net income of
consolidated joint ventures (131,620) (135,359)
------------ ------------
Net income $ 321,688 $ 37,228
============ ============
Basic and diluted earnings per share $ 0.14 $ 0.02
============ ============
Weighted average number of common shares
outstanding 2,372,744 1,926,132
============ ============
Weighted average number of common shares
outstanding plus dilutive potential
common shares 2,372,744 1,926,132
============ ============
See Notes to Consolidated Financial Statements.
3
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 321,688 $ 37,228
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 15,688 15,688
Depreciation 117,670 56,949
(Increase) decrease in accounts receivable (77,550) 86,554
Decrease in prepaid expense 13,534 -
Increase (decrease) in accounts payable 107,988 (92,776)
Cash receipts from direct financing leases
less than income recognized (2,087) (2,544)
Decrease in escrow deposits, net of
minority interest partners 10,000 100
Increase in accrued rental income (25,703) (30,242)
Increase in other assets (47,743) -
Increase in minority interest 131,620 135,359
----------- -----------
Net cash provided by operating activities 565,105 206,316
----------- -----------
Cash flows from investing activities:
Acquisitions of real estate (1,961,104) (3,731,523)
Additions to furniture, fixtures and equipment (813) -
Investment in joint venture 13,213 -
Change in notes receivable (1,567,028) -
Change in prepaid acquisition costs (12,709) (29,076)
----------- -----------
Net cash used in investing activities (3,528,441) (3,760,599)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock, net - 1,142,674
Proceeds from notes payable 4,500,001 2,787,395
Distributions paid to shareholders (430,822) (341,965)
Distributions to minority interest partners (140,081) (140,088)
----------- -----------
Net cash provided by financing activities 3,929,098 3,448,016
----------- -----------
Net increase (decrease) in cash and cash equivalents 965,762 (106,267)
Cash and cash equivalents at beginning of period 48,520 1,401,740
----------- -----------
Cash and cash equivalents at end of period $ 1,014,282 $ 1,295,473
=========== ===========
See Notes to Consolidated Financial Statements.
4
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AmREIT, Inc., formerly American Asset Advisers Trust, Inc. ("Issuer" or the
"Company"), was incorporated in the state of Maryland on August 17, 1993.
The Company is a real estate investment trust (a "REIT") that acquires,
develops, owns and manages high-quality, freestanding properties leased to
major retail businesses under long-term commercial net leases. Through a
wholly-owned subsidiary, the Company also provides advisory services to
eleven real estate limited partnerships.
The consolidated financial statements include the accounts of AmREIT, Inc.,
its wholly-owned subsidiaries, AmREIT Realty Investment Corporation
("ARIC"), AmREIT Operating Corporation ("AOC"), AmREIT Opportunity
Corporation ("AOP"), and AmREIT SPE-1, Inc. ("SPE-1"), and its six joint
ventures with related parties. The four subsidiaries were formed in June,
July, April 1998 and February 1999, respectively. ARIC was organized to
acquire, develop, hold and sell real estate in the short-term for capital
gains and/or receive fee income. The Company owns 100% of the outstanding
preferred shares of ARIC. The preferred shares are entitled to receive
dividends equal to 95% of net income and are expected to be paid from cash
flows, if any. AOC and AOP were formed with the intention to qualify and
to operate as a real estate investment trust under federal tax laws. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The Company owns greater than 50% of the aforementioned
joint ventures and exercises control over operations.
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
reflected when incurred.
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. There has been no cash paid for income taxes
during 1999 or 1998. For the three months ended March 31, 1999, the Company
paid interest of $247,974. There was no other cash paid for interest during
the first three months of 1999 or 1998.
Real estate is leased to others on a net lease basis whereby all operating
expenses related to the properties including property taxes, insurance and
common area maintenance are the responsibility of the tenant. The leases
are accounted for under the operating method or the direct financing
method.
Under the operating lease method, the properties are recorded at cost.
Rental income is recognized ratably over the life of the lease and
depreciation is charged based upon the estimated useful life of the
property.
5
<PAGE>
Under the direct financing lease method, properties are recorded at their
net investment. Unearned income is deferred and amortized to income over
the life of the lease so as to produce a constant periodic rate of return.
Expenditures related to the development of real estate are carried at cost
plus capitalized carrying charges, acquisition costs and development costs.
Carrying charges, primarily interest and loan acquisition costs, and direct
and indirect development costs related to buildings under construction are
capitalized as part of construction in progress. The Company capitalizes
acquisition costs once the acquisition of the property becomes probable.
Management reviews its properties for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets, including
accrued rental income, may not be recoverable through operations.
Management determines whether an impairment in value occurred by comparing
the estimated future cash flows (undiscounted and without interest
charges), including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, a loss will
be recorded for the amount by which the carrying value of the asset exceeds
its fair value.
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years.
Issuance costs incurred in the raising of capital through the sale of
common stock are treated as a reduction of shareholders' equity.
The Company is qualified as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, and is, therefore, not subject to
Federal income taxes provided it meets all conditions specified by the
Internal Revenue Code for retaining its REIT status, including the
requirement that at least 95% of its real estate investment trust taxable
income is distributed by March 15 of the following year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company believes the carrying value of financial instruments consisting
of cash, cash equivalents, accounts receivable and accounts and notes
payable approximate their fair value.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and do not include all of
the disclosures required by generally accepted accounting principles. The
financial statements reflect all normal and recurring adjustments which
are, in the opinion of management, necessary to present a fair statement of
results for the three month periods ended March 31, 1999 and 1998.
The financial statements of AmREIT, Inc. contained herein should be read in
conjunction with the financial statements included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1998.
6
<PAGE>
2. NOTES RECEIVABLE
On March 15, 1999, the Company entered into a note agreement with AAA Net
Developers, Ltd. in the amount of $700,000 for the construction of a
property. As of March 31, 1999, the Company had advanced $700,000 on the
note. The note bears interest at the prime lending rate plus one percent
and is payable monthly. The note is secured by the land and construction in
progress and is due on March 14, 2000.
On January 19, 1999, the Company entered into a note agreement with KMH
Land Development, Inc. in the amount of $1,953,715 for the construction of
a property. As of March 31, 1999, the Company had advanced $867,028 on the
note. The note bears interest at the prime lending rate plus one percent
and is payable monthly. The note is secured by the land and construction in
progress and is due on February 1, 2000 and is payable monthly.
3. INVESTMENT IN JOINT VENTURE
On June 29, 1998, the Company entered into a joint venture agreement with
GDC, Ltd. The joint venture was formed to develop a multi-tenant retail
center and to sell to a third party upon completion. The Company's interest
in the joint venture is approximately 6.67% and is accounted for using the
cost method. In addition, the Company shall receive a preferred return on
its investment. The Company is not required to contribute any additional
money to the joint venture.
4. NOTES PAYABLE
In November 1998, the Company entered into an unsecured credit facility
(the "Credit Facility"), which is being used to provide funds for the
acquisition of properties and working capital, and repaid all amounts
outstanding under the Company's prior credit facility. Under the Credit
Facility, which has a one-year term, the Company may borrow up to $30
million subject to the value of unencumbered assets. The Credit Facility
contains covenants which, among other restrictions, require the Company to
maintain a minimum net worth, a maximum leverage ratio, and specified
interest coverage and fixed charge coverage ratios. The Credit Facility
bears interest at an annual rate of LIBOR plus a spread ranging from 1.625%
to 2.150% (6.625% as of March 31, 1999), set quarterly depending on the
Company's leverage ratio. As of March 31, 1999, $14,080,111 was outstanding
under the Credit Facility.
In March 1999, the Company entered into a ten year mortgage note payable
with NW L.L.C. for $1,000,000 at March 31, 1999. The interest rate is fixed
at 8.375% with payments of principal and interest due monthly. The note
matures April 1, 2009. The note is collateralized by a first lien mortgage
on property with an aggregate carrying value of approximately $1,259,064,
net of $26,790 of accumulated depreciation.
Aggregate annual maturity of the mortgage note payable for each of the
following five years ending December 31 are as follows:
1999 $ 68,400
2000 91,210
2001 91,210
2002 91,210
2003 91,210
Thereafter 1,362,724
---------
$ 1,795,964
7
<PAGE>
As part of the Merger (Note 7), the Company assumed a 5-year lease
agreement for its office telephone system. The lease terminates in
September 2000, at which time the Company has the option to purchase the
equipment. Monthly lease payments total $313. Future minimum lease payments
required under this lease are summarized as follows:
1999 $ 2,820
2000 $ 2,820
5. MAJOR TENANTS
The following schedule summarizes rental income by lessee for the three
months ended March 31, 1999 and 1998:
Year to Date
1999 1998
---- ----
Tandy Corporation $ 27,225 $ 27,225
America's Favorite Chicken Co. 23,905 24,566
Blockbuster Music Retail, Inc. 94,476 94,476
One Care Health Industries, Inc. 50,409 50,409
Just For Feet, Inc. 365,327 184,552
Bank United 39,449 39,449
Hollywood Entertainment Corp. 68,291 72,137
Don Pablos 19,612 -
Krispy Kreme 44,819 -
OfficeMax, Inc. 129,622 28,298
---------- ----------
$ 863,135 $ 521,112
========== ==========
6. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
share has been computed by dividing net income (as adjusted) by the
weighted average number of common shares outstanding plus dilutive
potential common shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
For the Three Months Ended March 31,
1999 1998
---- ----
BASIC EARNINGS PER SHARE
Weighted average common shares
outstanding 2,372,744 1,926,132
========== ==========
Basic earnings per share $ .14 $ .02
========== ==========
DILUTED EARNINGS PER SHARE
Weighted average common shares
outstanding 2,372,744 1,926,132
Shares issuable from assumed
conversion of warrants - -
Weighted average common shares ---------- ----------
outstanding, as adjusted 2,372,744 1,926,132
========== ==========
Diluted earnings per share $ .14 $ .02
========== ==========
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income to common shareholders
(basic and diluted Earnings per
share computation) $ 321,688 $ 37,228
========= ==========
8
<PAGE>
7. MERGER TRANSACTION
On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with American Asset Advisers Trust, Inc. ("AAA"),
whereby the stockholder of AAA agreed to exchange 100% of the outstanding
shares of common stock of AAA for up to 900,000 shares (the "Share
Consideration") of the Company's common stock (the "Merger"). The common
stock of AAA was wholly owned by the president and director of the Company.
As a result of the Merger, the Company became a fully integrated,
self-administered real estate investment trust ("REIT") effective June 5,
1998. Effective June 5, 1998, 213,260 shares were paid and the balance (the
"Share Balance") of the Share Consideration is to be paid over a six year
period to the extent certain goals are achieved after the Merger. None of
the Share Balance has been earned subsequent to June 5, 1998. The market
value of the common shares issued effective June 5, 1998 was $2,185,915 was
accounted for as expenses incurred in acquiring AAA from a related party.
In addition, the Company assumed an obligation to the stockholder of AAA in
the amount of $97,407. This obligation and the related accrued interest of
$3,157 were subsequently paid with the issuance of 9,811 shares. In
connection with the Merger, the Company incurred costs during the three
months ended March 31, 1998 of $182,322, consisting primarily of legal and
accounting fees, valuation opinions and fairness opinions. For accounting
purposes, AAA was not considered a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations," and therefore, the market value of
the common shares issued in excess of the fair value of the net tangible
assets acquired was charged to expense rather than capitalized as goodwill.
To the extent the Share Balance is paid over time, the market value of the
common shares issued will also be charged to expense. Upon consummation of
the Merger on June 5, 1998, certain employees of AAA became employees of
the Company, and any obligation to pay fees under the advisor agreement
between the Company and AAA was terminated.
8. RELATED PARTY TRANSACTIONS
See Note 7 regarding the Merger.
Related Party Transactions Subsequent to the Merger:
Beginning June 5, 1998, the Company provides property acquisition, leasing,
administrative and management services for eleven affiliated real estate
limited partnerships (the "Partnerships"). The president and director of
the Company owns between 45% and 100% of the stock of the companies that
serve as the general partner of the Partnerships.
Related Party Transactions Prior to the Merger:
The Company had entered into an Omnibus Services Agreement with AAA whereby
AAA provided property acquisition, leasing, administrative and management
services for the Company. Reimbursements and fees of $17,660 were incurred
and charged to expense for the three months ended March 31, 1998.
AAA had incurred certain costs in connection with the organization and
syndication of the Company. Reimbursement of these costs become obligations
of the Company in accordance with the terms of the offering. Costs of
$18,974 were incurred by AAA for the three months ended March 31, 1998, in
connection with the issuance and marketing of the Company's stock. These
costs are reflected as issuance costs and are recorded as a reduction to
capital in excess of par value.
9
<PAGE>
Acquisition fees, including real estate commissions, finders fees,
consulting fees and any other non-recurring fees incurred in connection
with locating, evaluating and selecting properties and structuring and
negotiating the acquisition of properties are included in the basis of the
properties. Acquisition fees of $55,428 were incurred and paid to AAA for
the three months ended March 31, 1998. Acquisition fees paid to AAA
included $401,762 that were earned prior to purchasing certain properties.
On October 16, 1997, the Company entered into a joint venture with AAA Net
Realty XI, Ltd., an entity with common management. The joint venture was
formed to purchase a property, which is being operated as a Hollywood Video
store in Lafayette, Louisiana. The property was purchased on October 31,
1997 after the construction was completed. The Company's interest in the
joint venture is 74.58%.
On February 11, 1997, the Company entered into a joint venture with AAA Net
Realty XI, Ltd. The joint venture was formed to purchase a property, which
is being operated as a Just For Feet retail store in Baton Rouge,
Louisiana. The property was purchased on June 9, 1997 after the
construction was completed. The Company's interest in the joint venture is
51%.
On September 23, 1996, the Company entered into a joint venture with AAA
Net Realty XI, Ltd. The joint venture was formed to purchase a parcel of
land in The Woodlands, Texas upon which the tenant, Bank United,
constructed a branch bank building at its cost. At the termination of the
lease the improvements will be owned by the joint venture. The Company's
interest in the joint venture is 51%.
On April 5, 1996, the Company entered into a joint venture with AAA Net
Realty Fund XI, Ltd. and AAA Net Realty Fund X, Ltd., entities with common
management, to purchase a property which is being operated as a Just For
Feet retail store in Tucson, Arizona. The property was purchased on
September 11, 1996 after the construction was completed. The Company's
interest in the joint venture is 51.9%.
On September 12, 1995, the Company entered into a joint venture agreement
with AAA Net Realty Fund XI, Ltd. to purchase a property, which is being
operated as a Blockbuster Music Store in Wichita, Kansas. The Company's
interest in the joint venture is 51%.
On October 27, 1994, the Company entered into a joint venture agreement
with AAA Net Realty Fund X, Ltd., an entity with common management. The
joint venture was formed to purchase a property, which is being operated as
a Blockbuster Music Store in Independence, Missouri. The Company's interest
in the joint venture is 54.84%.
9. COMMITMENTS
At March 31, 1999, the Company is committed to incur additional costs of
approximately $4,466,000, not to exceed $4,761,000, in connection with
properties under development.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company is a fully integrated, self-administered real estate investment
trust. The Company was organized on August 17, 1993 to acquire, either directly
or through joint venture arrangements, undeveloped, newly constructed and
existing net-lease real estate that is located primarily on corner or out-parcel
locations in strong commercial corridors, to lease on a net-lease basis to major
retail businesses and to hold the properties with the expectation of equity
appreciation producing a steadily rising income stream for its shareholders.
Through a wholly-owned subsidiary, the Company also provides advisory services
to eleven real estate limited partnerships.
The Year 2000 problem ("Y2K") concerns the inability of information and
non-information technology systems to properly recognize and process
date-sensitive information beyond January 1, 2000. The Company's information
technology system consists of a network of personal computers and servers built
using hardware and software from mainstream suppliers. The Company has no
internally generated programmed software coding to correct, as all of the
software utilized by the Company is purchased or licensed from external
providers.
In 1998, the Company formed a Year 2000 committee (the "Y2K Team") for the
purpose of identifying, understanding and addressing the various issues
associated with the Year 2000 problems. The Y2K Team consists of members from
the Company, including representatives from senior management, accounting and
computer consultants. The Y2K Team's initial step in assessing the Company's Y2K
readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Y2K problems. The Y2K Team is in the process
of conducting inspections, interviews and tests to identify which of the
Company's systems could have a potential Y2K problem.
The Company's information system is comprised of hardware and software
applications from mainstream suppliers; accordingly, the Y2K Team is in the
process of contacting the respective vendors and manufacturers to verify the Y2K
compliance of their products. In addition, the Y2K Team has also requested and
is evaluating documentation from other companies with which the Company has a
material third party relationship, including the Company's tenants, major
vendors, financial institutions and the Company's transfer agent. The Company
depends on its tenants for rents and cash flows, its financial institutions for
availability of cash and financing and its transfer agent to maintain and track
investor information. Although the Company continues to receive positive
responses from its third party relationships regarding their Y2K compliance, the
Company cannot be assured that the tenants, financial institutions, transfer
agent and other vendors have adequately considered the impact of the Year 2000.
The Company does not expect the Y2K impact of third parties to have a materially
adverse effect on its results of operation or financial position.
The Company has identified and has implemented upgrades for certain hardware
equipment. In addition, the Company has identified certain software applications
which will require upgrades to become Year 2000 compliant. The Company expects
all of these upgrades as well as any other necessary remedial measures on the
information technology systems used in the business activities and operations of
the Company to be completed by September 30, 1999. The Company does not expect
the aggregate cost of the Year 2000 remedial measures to exceed $10,000.
Based upon the progress the Company has made in addressing its Year 2000 issues,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. The Company plans to address its significant Year 2000
issues prior to being affected by them; therefore, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
risks related to its Year 2000 compliance, the Company will develop contingency
plans as deemed necessary at that time.
In June 1998, the Company changed transfer agents from Service Data Corporation
to The Bank of New York.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations has been the principal source of capital to fund the
Company's ongoing operations. The Company's issuance of common stock and the use
of the Company's credit facility have been the principal sources of capital
required to fund its growth.
In order to continue to expand and develop its portfolio of properties and other
investments, the Company intends to finance future acquisitions and growth
through the most advantageous sources of capital available to the Company at the
time. Such capital sources may include proceeds from public or private offerings
of the Company's debt or equity securities, secured or unsecured borrowings from
banks or other lenders, or the disposition of assets, as well as undistributed
funds from operations.
The Company's leases typically provide that the tenant bears responsibility for
substantially all property costs and expenses associated with ongoing
maintenance and operation, including utilities, property taxes and insurance. In
addition, the Company's leases generally provide that the tenant is responsible
for roof and structural repairs. Certain of the Company's properties are subject
to leases under which the Company retains responsibility for certain costs and
expenses associated with the property. Because many of the properties which are
subject to leases that place these responsibilities on the Company are recently
constructed, management anticipates that capital demands to meet obligations
with respect to these properties will be minimal for the foreseeable future and
can be met with funds from operations and working capital. The Company may be
required to use bank borrowing or other sources of capital in the event of
unforeseen significant capital expenditures.
The initial issuance of 20,001 shares of stock for $200,010 was to AAA. On March
17, 1994, the Company commenced an offering of 2,000,000 Shares of Common Stock,
together with 1,000,000 Warrants (collectively "Securities"). Until the
completion of the offering in March 1996, the Securities were offered on the
basis of two (2) Shares of Common Stock and one (1) Warrant for a total purchase
price of $20.00. The Shares and Warrants are separately transferable by an
investor. Each Warrant entitled the holder to purchase one Share for $9.00 until
March 15, 1998. The offering period for the initial public offering terminated
on March 15, 1996 with gross proceeds totaling $10,082,520 (1,008,252 shares).
In addition, $515,844 (57,316 warants) was received from the exercise of the
Warrants. On June 18, 1996, the Company commenced a follow-on offering of up to
$29,250,000 (2,853,659 shares) of additional shares of its common stock. The
offering terminated on May 22, 1998 with gross proceeds totaling $10,827,300
(1,056,946 shares).
In November 1998, the Company entered into an unsecured credit facility (the
"Credit Facility") with a borrowing capacity up to $30 million, subject to
certain covenants such as the value of unencumbered assets, through November
1999. The Credit Facility contains covenants which, among other restrictions,
require the Company to maintain a minimum net worth, a maximum leverage ratio,
and specified interest coverage and fixed charge coverage ratios. The Credit
Facility bears interest at an annual rate of LIBOR plus a spread ranging from
1.625% to 2.150%, set quarterly depending on the Company's leverage ratio. As of
March 31, 1999, $14,080,111 was outstanding under the Credit Facility. These
funds were used to acquire properties.
In March 1999, the Company entered into a ten year mortgage note payable with NW
L.L.C. for $1,000,000 at March 31, 1999. The interest rate is fixed at 8.375%
with payments of principal and interest due monthly. The note matures March 1,
2009. The note is collateralized by a first lien mortgage on property with an
aggregate carrying value of approximately $1,259,064, net of $26,790 of
accumulated depreciation.
12
<PAGE>
As of March 31, 1999, the Company had acquired ten properties directly and six
properties through joint ventures with entities with common management and had
invested $27,381,424, exclusive of any minority interests, including certain
acquisition expenses related to the Company's investment in these properties.
These expenditures resulted in a corresponding decrease in the Company's
liquidity.
Until the Company acquires properties, proceeds are held in short-term, highly
liquid investments that the Company believes to have appropriate safety of
principal. This investment strategy has allowed, and continues to allow, high
liquidity to facilitate the Company's use of these funds to acquire properties
at such time as properties suitable for acquisition are located. At March 31,
1999, the Company's cash and cash equivalents totaled $1,014,282.
Inflation has had very little effect on income from operations. Management
expects that increases in store sales volumes due to inflation as well as
increases in the Consumer Price Index (C.P.I.), may contribute to capital
appreciation of the Company properties. These factors, however, also may have an
adverse impact on the operating margins of the tenants of the properties.
FUNDS FROM OPERATIONS
Funds from operations (FFO) increased $183,382 or 66% to $459,881 for the three
months ended March 31, 1999 from $276,499 for the three months ended March 31,
1998. The Company has adopted the National Association of Real Estate Investment
Trusts (NAREIT) definition of FFO. FFO is calculated as net income (computed in
accordance with generally accepted accounting principles) excluding gains or
losses from sales of property, depreciation and amortization of real estate
assets, and nonrecurring items of income or expense. For purposes of the table
below, FFO excludes nonrecurring merger costs and potential acquisition costs.
Management considers FFO an appropriate measure of performance of an equity REIT
because it is predicated on cash flow analysis and does not necessarily
represent cash provided by operating activities in accordance with generally
accepted accounting principles and is not necessarily indicative of cash
available to meet cash needs. The Company's computation of FFO may differ from
the methodology for calculating FFO utilized by other equity REITs and,
therefore, may not be comparable to such other REITs. FFO is not defined by
generally accepted accounting principles and should not be considered an
alternative to net income as an indication of the Company's performance.
Below is the reconciliation of net income to funds from operations for the three
months ended March 31:
Year to Date
1999 1998
---- ----
Net income $ 321,688 $ 37,228
Plus depreciation 117,670 56,949
Plus merger costs - 182,322
Plus potential acquisition costs 20,523 -
--------- ---------
Total funds from operations $ 459,881 $ 276,499
========= =========
Cash distributions paid $ 430,822 $ 341,965
Distributions in excess of FFO $ (29,059) $ 65,466
13
<PAGE>
Cash flows from operating activities, investing activities, and financing
activities for the three months ended March 31 are presented below:
Year to Date
1999 1998
---- ----
Operating activities $ 565,105 $ 206,316
Investing activities $ (3,528,441) $ (3,760,599)
Financing activities $ 3,929,098 $ 3,448,016
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1999 to March 31, 1998:
During the three months ended March 31, 1999 and March 31, 1998, the Company
owned and leased 16 and 9 properties, respectively. During the three months
ended March 31, 1999 and March 31, 1998, the Company earned $863,135 and
$521,112, respectively, in rental income from operating leases and earned income
from direct financing leases. This 66 percent increase in rental income and
earned income is primarily attributable to rental income earned on the seven
additional properties owned during 1999.
During the three months ended March 31, 1999 and March 31, 1998, the Company's
expenses were $584,874 and $368,307, respectively. The $216,567 increase in
expenses is primarily attributable to a $221,079 increase in interest expense as
a result of higher average borrowing levels. The increase is also attributable
to (i) $20,523 in costs incurred during the first quarter of 1999 related to
potential acquisition costs related to the proposed acquisition of properties,
(ii) a $60,721 increase in depreciation as a result of the depreciation of the
additional properties owned during 1999, and (iii) a $114,226 increase in
general operating and administrative expenses. In addition, there was a decrease
of $182,322 in merger costs incurred during the first quarter of 1999 related to
the merger with AAA. Pursuant to the Merger, the Company acquired AAA and became
internally managed. Effective June 5, 1998, the reimbursements and fees paid to
AAA were replaced with the actual personnel and other operating costs associated
with being internally managed.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
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
NONE
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AmREIT, Inc.
------------
(Issuer)
May 14, 1999 /s/ H. Kerr Taylor
- ------------ ------------------
Date H. Kerr Taylor, President
May 14, 1999 /s/ L. Larry Mangum
- ------------ -------------------
Date L. Larry Mangum (Principal Accounting Officer)
16
<PAGE>
EXHIBIT 11
AMREIT, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1999 1998
---- ----
BASIC EARNINGS PER SHARE:
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,372,744 1,926,132
=========== ===========
NET INCOME $ 321,688 $ 37,228
=========== ===========
BASIC EARNINGS PER SHARE $ 0.14 $ 0.02
=========== ===========
DILUTED EARNINGS PER SHARE:
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,372,744 1,926,132
SHARES ISSUABLE FROM ASSUMED
CONVERSION OF STOCK WARRANTS - -
----------- -----------
TOTAL WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, AS ADJUSTED 2,372,744 1,926,132
=========== ===========
NET INCOME $ 321,688 $ 37,228
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.02
=========== ===========
17
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,014,282
<SECURITIES> 0
<RECEIVABLES> 1,657,716
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,671,998
<PP&E> 31,526,283
<DEPRECIATION> 814,053
<TOTAL-ASSETS> 37,627,941
<CURRENT-LIABILITIES> 15,404,429
<BONDS> 0
0
0
<COMMON> 23,841
<OTHER-SE> 16,989,133
<TOTAL-LIABILITY-AND-EQUITY> 37,627,941
<SALES> 863,135
<TOTAL-REVENUES> 1,090,122
<CGS> 0
<TOTAL-COSTS> 336,900
<OTHER-EXPENSES> 51,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 247,974
<INCOME-PRETAX> 321,688
<INCOME-TAX> 0
<INCOME-CONTINUING> 321,688
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 321,688
<EPS-PRIMARY> .14
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