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 June 30, 2003
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
(Name of Small Business Issuer in its Charter)
TEXAS 76-0410050
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8 GREENWAY PLAZA, SUITE 824
HOUSTON, TX 77046
(Address of Principal Executive Offices) (Zip Code)
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
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMREIT AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2003
(unaudited)
ASSETS
Property:
Land $23,203,522
Buildings 28,820,964
Tenant improvements 306,043
Furniture, fixtures and equipment 229,018
52,559,547
Accumulated depreciation (2,525,907)
Total property, net 50,033,640
Net investment in direct financing leases 27,155,700
Cash and cash equivalents 736,434
Accounts receivable 286,892
Accounts receivable - related party 147,809
Escrow deposits 59,875
Prepaid expenses, net 443,717
Other assets:
Preacquisition costs 9,775
Loan acquisition cost, net of $70,338 in accumulated amortization 281,642
Accrued rental income 439,909
Intangible lease cost, net of $42,169 in accumulated amortization 215,430
Investment in non-consolidated affiliates 630,167
Total other assets 1,576,923
TOTAL ASSETS $80,440,990
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $40,996,381
Accounts payable 849,021
Accounts payable - related party 179,698
Security deposit 35,930
Prepaid rent 90,979
TOTAL LIABILITIES 42,152,009
Minority interest 800,570
Shareholders' equity:
Preferred shares, $.01 par value, 10,000,000 shares authorized,
none issued
Class A Common shares, $.01 par value, 50,000,000 shares authorized,
2,894,876 shares issued 28,949
Class B Common shares, $.01 par value, 3,000,000 shares authorized,
2,407,050 shares issued 24,071
Capital in excess of par value 47,182,617
Accumulated distributions in excess of earnings (8,828,925)
Deferred compensation (282,787)
Cost of treasury shares, 101,822 shares (635,514)
TOTAL SHAREHOLDERS' EQUITY 37,488,411
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $80,440,990
See Notes to Condensed Consolidated Financial Statements.
1
AMREIT AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Quarter ended June 30, Year to date
2003 2002 2003 2002
Revenues:
Rental income from operating leases $ 1,265,235 $ 677,614 $2,497,975 $1,384,354
Earned income from direct financing leases 670,608 437,169 1,269,328 628,351
Service fee income 848,863 52,378 1,059,860 531,396
Management fees 52,616 94,276 110,247 185,406
Income from non-consolidated affiliates 45,033 1,467 85,338 283,509
Interest and other income 1,991 208,303 3,830 210,331
Total revenues 2,884,346 1,471,207 5,026,578 3,223,347
Expenses:
General operating and administrative 785,090 439,962 1,542,219 1,203,523
Legal and professional 545,942 161,998 732,676 371,925
Interest 593,905 410,032 1,145,346 663,680
Depreciation and amortization 209,404 126,822 431,707 253,670
Total expenses 2,134,341 1,138,814 3,851,948 2,492,798
Income before federal income taxes and minority
interest in income of consolidated joint ventures 750,005 332,393 1,174,630 730,549
Federal income tax (expense) benefit for taxable REIT subsidiary (57,700) 69,000 15,300 (15,000)
Minority interest in income of consolidated joint ventures (43,161) (140,100) (82,949) (271,945)
Net income 649,144 261,293 1,106,981 443,604
Distributions paid to class B shareholders (439,124) - (891,667) -
Net income available to class A shareholders $ 210,020 $ 261,293 215,314 443,604
Net income per common share - basic $ 0.075 $ 0.110 0.077 0.188
Weighted avergage common shares used to compute
net income per share, basic 2,790,492 2,364,807 2,779,434 2,358,283
See Notes to Condensed Consolidated Financial Statements.
2
AMREIT AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(Unaudited)
Quarter Year to Date
2003 2002 2003 2002
---- ---- ---- ----
Cash flows from operating activities:
Net income $ 649,144 $ 261,293 $1,106,981 $ 443,604
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 237,319 126,822 467,016 253,670
Amortization of deferred compensation 15,457 15,457 75,385 ( 79,001)
Minority interest in net income of
consolidated joint ventures 43,161 140,100 82,949 271,945
(Increase) Decrease in accounts receivable (151,253) 138,387 (113,233) 195,057
(Increase) decrease in accounts receivable-
related party ( 22,966) 12,530 ( 78,875) 441,698
Increase in prepaid expense, net ( 30,536) (103,256) ( 16,459) ( 58,420)
Cash recepits from direct financing leases
(less) more than income recognized ( 4,265) ( 72,505) 12,795 ( 76,765)
Increase in accrued rental income ( 30,328) ( 18,992) ( 79,847) ( 21,217)
(Increase) decrease in other assets ( 76,447) (130,284) 6,644 (106,573)
Increase (decrease) in accounts payable 270,726 ( 7,263) (277,198) (764,429)
Increase (decrease) in accounts payable -
related party 7,561 ( 25,000) ( 26,425) ( 25,000)
Increase in prepaid rent 84,802 7,438 84,802 7,438
Decrease in security deposit - ( 15,050) - ( 15,050)
------------- ----------- ------------ -----------
Net cash provided by operating activities 992,375 329,677 1,244,535 466,957
------------- ----------- ------------ -----------
Cash flows used in investing activities:
Improvements to real estate ( 121,806) ( 126,057) ( 277,569) ( 426,062)
Acquisitions of real estate ( 7,233,907) ( 9,811,015) ( 9,922,064) (9,811,015)
Additions to furniture, fixtures and equipment ( 17,553) ( 236) ( 41,593) ( 4,174)
(Investment in) distributions from joint ventures 80,939 ( 8,035) ( 80,832) 372,811
Proceeds from sale of property 1,898,356 - 1,898,356 -
Decrease (Increase) in preacqusitions costs 18,703 ( 58,647) ( 8,010) ( 71,559)
------------- ----------- ------------ -----------
Net cash (used in) investing activities ( 5,375,268) (10,003,990) ( 8,431,712) (9,939,999)
------------- ----------- ------------ -----------
Cash flows used in financing activities:
Proceeds from notes payable 6,892,959 9,127,257 9,260,758 9,497,209
Payments of notes payable ( 1,749,299) ( 24,461) (1,850,462) ( 39,237)
Loan acquisitions costs - 15,408 - 37,138
(Purchase) issuance of treasury stock ( 75,425) - ( 391,144) 185,120
Common dividends paid ( 749,437) ( 169,637) (1,509,059) ( 331,177)
Contributions from minority interests - 609,000 - 609,000
Distributions to minority interests ( 25,031) ( 149,574) ( 93,350) ( 299,146)
------------- ----------- ------------ -----------
Net cash provided by financing activities 4,293,767 9,407,993 5,416,743 9,658,907
------------- ----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents ( 89,126) ( 266,320) (1,770,434) 185,865
Cash and cash equivalents, beginning of period 825,560 679,302 2,506,868 227,117
------------- ----------- ------------ -----------
Cash and cash equivalents, end of period $ 736,434 $ 412,982 $ 736,434 $ 412,982
============= =========== ============ ===========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest 603,232 358,725 1,127,421 595,164
Income taxes - - 31,103 133,841
See Notes to Financial Statements.
3
AMREIT AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-QSB and
include all of the disclosures required by accounting principles generally
accepted in the United States of America. The condensed consolidated
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 six-month periods ended June 30, 2003 and 2002.
The consolidated financial statements of AmREIT contained herein should be
read in conjunction with the consolidated financial statements included in
the Company's annual report on Form 10-KSB for the year ended December 31,
2002.
DESCRIPTION OF BUSINESS AND NATURE OF OPERTATIONS
AmREIT, formerly AmREIT, Inc. or American Asset Advisers Trust, Inc. (the
"Company"), was organized in the state of Maryland in August 1993, is a
real estate investment trust ("REIT") based in Houston, Texas and is
listed on the American Stock Exchange (AMY). AmREIT was re-organized in
the state of Texas on December 22, 2002, and is a sponsor of real estate
direct participation programs to the financial planning community. For
more than 18 years, the Company (and its predecessors) has established a
track record of investing in commercial real estate leased to parent
companies in the retail, financial services and banking, medical and
restaurant sectors. AmREIT's real estate team focuses on development,
management, brokerage and ownership of freestanding credit tenant leased
("CTL") and frontage shopping centers ("FSC") that are located contiguous
to major thoroughfares and traffic generators. AmREIT's customer list
includes national and regional tenants such as: Walgreens, Goodyear Tire,
Washington Mutual, IHOP, McDonald's, Herman Hospital, Radio Shack,
Coldwell Banker, Guaranty Federal, Bennigan's, Chili's, Texas Children's
Pediatric Associates, Discount Tire, etc.
AmREIT owns a real estate portfolio that consists of 50 properties located
in 20 states. Its properties include single-tenant, free standing credit
tenant leased projects and multi-tenant frontage projects. The single
tenant projects are located coast to coast and are primarily leased to
corporate tenants where the lease is the direct obligation of the parent
companies. In so doing, the dependability of the lease payments are based
on the strength and viability of the entire company, not just that
location. The multi-tenant projects are situated primarily throughout
Texas. Supporting the real estate portfolio is an operating company
subsidiary of AmREIT that provides a complete range of services including
development, construction management, property management, brokerage and
leasing.
On July 23, 2002, the Company completed a merger with three of its
affiliated partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund
X, Ltd., and AAA Net Realty Fund XI, Ltd. With the merger of the
affiliated partnerships, AmREIT increased its real estate assets by
approximately $24.3 million and issued approximately 2.6 million class B
common shares to the limited partners in the affiliated partnerships.
Approximately $760 thousand in 8 year, interest only, subordinated notes
were issued to limited partners of the affiliated partnerships who
dissented against the merger. The acquired properties are unencumbered,
single tenant, free standing properties on lease to national and regional
tenants, where the lease is the direct obligation of the parent company.
The following selected unaudited pro forma consolidated statement of
operations for AmREIT and subsidiaries gives effect to the merger with its
three affiliated partnerships, which assumes that the merger occurred on
January 1, 2002. Additionally, we have presented a summary of assets
acquired and liabilities assumed as of the date of the merger, July 23,
2002.
Pro Forma Consolidated Operating Information
(Unaudited)
Three Months Ended June Six Months Ended June
30, 2002 30, 2002
Revenues
Rental income and earned income $1,546,110 $2,917,969
Other income 306,366 1,098,308
Total Revenues 1,852,476 4,016,277
Total Expense 1,281,707 2,822,460
Proforma income before minority interest in
income of consolidated joint ventures 570,769 1,193,817
Federal income tax benefit from non-qualified subsidiary 69,000 (15,000)
Minority interest in income of consolidated joint ventures (8,303) (8,303)
Pro forma net income $ 631,466 $1,170,514
Summary of Assets Acquired and Liabilities Assumed
As of July 23, 2002,
Assets
Buildings $ 16,330,088
Land 7,560,231
Accounts receivable 1,105,612
Prepaid expenses 15,757
Total Assets $ 25,011,688
Liabilities 132,630
Net assets acquired $ 24,879,058
Class B common stock issued 24,118,648
Subordinated notes issued 760,410
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT, and
its wholly or majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NEW ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The disclosure requirements are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002 and did not have a material effect on the
Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15,
2002, however, these disclosure modifications are not applicable to the
Company as the Company does not have stock based compensation other than
restricted stock grants. The Company has not adopted SFAS No. 148 because
it was anticipated that the adoption of SFAS 148 would not have a
material impact on our consolidated financial position, results of
operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003.
The application of this Interpretation did not have a material effect on
the Company's consolidated financial statements. The Interpretation
requires certain disclosures in financial statements issued after January
31, 2003 if it is reasonably possible that the Company will consolidate or
disclose information about variable interest entities when the
Interpretation becomes effective. The Company has no variable interest
entities which would require consolidation or disclosure.
In May 2003, the Financial Accounting Standards Board issued Statement No.
150 ("Statement 150") "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". Statement 150 requires
certain financial instruments that have characteristics of both
liabilities and equity to be classified as a liability on the balance
sheet. Statement 150 is effective for financial instruments entered into
or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. Statement 150
will be effected by reporting the cumulative effect of a change in
accounting principle for contracts created before the issuance date and
still existing at the beginning of that interim period. The adoption of
Statement 150 did not have an impact in the Company consolidated financial
statements.
RECLASSIFICATION
Certain amounts in the interim unaudited 2002 condensed consolidated
financial statements have been reclassified to conform to the presentation
used in the interim unaudited 2003 condensed consolidated financial
statements. Such reclassifications had no effect on previously reported
net income or shareholders' equity.
2. 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 had an original term of one year, and has been extended
through August 2003, the Company may borrow up to $20 million subject to
the value of unencumbered assets. The Lender has given AmREIT a commitment
to extend the Credit Facility for a period of 12 months from the date of
execution. The Company and Lender are currently finalizing the
documentation of the Credit Facility. The Credit Facility contains
covenants which, among other restrictions, require the Company to maintain
a minimum net worth, a maximum leverage ratio, specified interest coverage
and fixed charge coverage ratios and allow the lender to approve all
distributions. At June 30, 2003, the Company was in compliance with all
applicable financial covenants. The Credit Facility bears interest at an
annual rate of LIBOR plus a spread of 2.00%. As of June 30, 2003, $14.6
million was outstanding under the Credit Facility. Thus the Company has
approximately $5.4 million available under its line of credit, subject to
Lender approval on the use of the proceeds.
3. MAJOR TENANTS
There were no significant changes in the tenant make-up from year end
December 31, 2002.
4. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income by the
weighted average number of class A common shares outstanding. Diluted
earnings per share has been computed by dividing net income (as adjusted)
by the weighted average number of class A 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:
Quarter Year to Date
2003 2002 2003 2002
BASIC EARNINGS PER SHARE
Weighted average class A common shares outstanding 2,790,492 2,364,807 2,779,434 2,358,283
Basic earnings per share $ 0.075 $ 0.110 $ 0.077 $ 0.188
EARNINGS FOR BASIC COMPUTATION
Net income available to class A common shareholders
(basic earnings per share computation) $ 210,020 $ 261,293 $ 215,314 $ 443,604
Diluted earnings per share information is not disclosed due to the
accretive nature of the common class B shares.
5. SUBSEQUENT EVENTS
On August 7, 2003, the Company filed Amendment No. 1 to its registration
statement on Form S-11 (the "Registration Statement") with the Securities
and Exchange Commission ("SEC"). Additionally, the Company filed for an
acceleration of effectiveness with the SEC, requesting that the
Registration Statement become effective on or before August 12, 2003. The
Registration Statement, among other things, registers to issue $44 million
of class C common shares through the NASD broker dealer community,
pursuant to the terms and conditions described in the Registration
Statement.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING STATEMENTS
Certain information presented in this Form 10-QSB constitutes
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in
the forward-looking statements. Certain factors that might cause such a
difference include the following: changes in general economic conditions,
changes in real estate market conditions, continued availability of
proceeds from the Company's debt or equity capital, the ability of the
Company to locate suitable tenants for its properties and the ability of
tenants to make payments under their respective leases.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. Historical results
and trends which might appear should not be taken as indicative of future
operations. The results of operations and financial condition of the
Company, as reflected in the accompanying statements and related
footnotes, are subject to management's evaluation and interpretation of
business conditions, retailer performance, changing capital market
conditions and other factors, which could affect the ongoing viability of
the Company's tenants. Management believes the most critical accounting
policies in this regard are the accounting for lease revenues (including
the straight-line rent), the regular evaluation of whether the value of a
real estate asset has been impaired and the allowance for doubtful
accounts. Each of these issues requires management to make judgments that
are subjective in nature. Management relies on its experience, collects
historical data and current market data, and analyzes these assumptions in
order to arrive at what it believes to be reasonable estimates.
AmREIT, a Texas real estate investment trust, is listed on the American
Stock Exchange (AMY), owns a portfolio of 50 properties, leased to 27
different tenants located in 20 states and is a sponsor of high quality
real estate investment opportunities to the financial planning community.
The Company researches, identifies and participates in real estate
opportunities and works hand in hand with the broker-dealer community to
sponsor real estate investment products and services.
For 18 years we have established a track record of investing in commercial
real estate leased primarily to corporate tenants in the retail, financial
services and banking, medical and restaurant sectors. AmREIT's real estate
team focuses on development, management, brokerage and ownership of
freestanding credit tenant leased and frontage shopping center properties
that are located contiguous to major thoroughfares and traffic generators.
AmREIT's real estate customer list includes national and regional tenants
such as: Walgreen's, Goodyear Tire, Washington Mutual, IHOP, McDonald's,
Herman Hospital, Radio Shack, Sprint, Coldwell Banker, Guaranty Federal,
Bennigan's, Chili's, Texas Children's Hospital, Discount Tire, etc.
AmREIT, or an affiliate, has previously sponsored 14 affiliated investment
funds through the NASD broker-dealer community. It is currently both a
limited partner and general partner in three of these funds. Through this
ownership, AmREIT receives commissions, fees and a carried interest in the
profits and cash flows of these investment funds. Although this carried
interest is not currently reflected in the balance sheet or statement of
operations of AmREIT, it is anticipated to generate profits and cash flows
to AmREIT as certain returns are met for the investors in these affiliated
investment funds.
LIQUIDITY AND CAPITAL RESOURCES
Comparison of the Three Months Ended June 30, 2003 to June 30, 2002:
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. Net cash provided by
operating activities increased for the three months ended June 30, 2003
and June 30, 2002 from $330 thousand in 2002 to $992 thousand in 2003. The
increase in cash provided by operating activities was due primarily to the
following components: (1) an increase in net income of $388 thousand, from
$261 thousand in 2002 to $649 thousand in 2003, and (2) a net increase in
accounts payable, including related party accounts payable, of $311
thousand, from a paydown of accounts payable of $32 thousand in 2002 to an
increase of $278 thousand in 2003.
Net cash used in investing activities decreased $4.6 million for the three
month period ended June 30, 2003 when compared to the three month period
ended June 30, 2002. The decrease in cash used was primarily due to a
decrease in acquisitions of real estate of $2.6 million, from $9.8 million
in 2002 to $7.2 million in 2003. In addition, proceeds from the sale of
property increased $1.9 million, from $0 in 2002 to $1.9 million in 2003.
Net cash provided by financing activities decreased $5.1 million for the
three month period ended June 30, 2003 compared to the three month period
ended June 30, 2002. The decrease was primarily due to proceeds from notes
payable, which totaled $9.1 million in 2002, compared to $6.9 million in
2003. Additionally, payments of notes payable increased from $24 thousand
in 2002 to $1.7 million in 2003. Common dividends paid also increased $580
thousand from 2002 and contributions from minority interests decreased
$609 thousand.
Comparison of the Six Months Ended June 30, 2003 to June 30, 2002:
Net cash provided by operating activities increased for the six months
ended June 30, 2003 and June 30, 2002 from $467 thousand in 2002 to $1.2
million in 2003. The increase in cash provided by operating activities was
primarily due to the following components: (1) an increase in net income
of $663 thousand, from $444 thousand in 2002 to $1.1 million in 2003, (2)
a decrease in the paydown of accounts payable, including related party
accounts payable, of $486 thousand, from $789 thousand in 2002 to $304
thousand in 2003, and (3) an increase in depreciation and amortization of
$202 thousand, from $254 thousand in 2002 to $456 thousand in 2003. The
above increases are offset somewhat by a decrease in accounts receivable
collections of $829 thousand.
Net cash used in investing activities decreased $1.5 million for the six
months ended June 30, 2003 when compared to the six months ended June 30,
2002. The decrease in cash used was primarily due to an increase in
proceeds from the sale of property of $1.9 million, from $0 in 2002 to
$1.9 million in 2003.
Net cash provided by financing activities decreased $4.2 million for the
six months ended June 20, 2003 compared to the six months ended June 30,
2002. The decrease was primarily due to the following components: (1)
payments of notes payable, which totaled $1.9 million in 2003, compared to
$39 thousand in 2002, (2) an increase in common dividends paid, which was
$331 thousand in 2002, compared to $1.5 million in 2003, (3) a decrease in
contributions from minority interests, from $609 thousand in 2002 to $0 in
2003, and (4) purchase of treasury shares of $391 thousand in 2003,
compared to an issuance of treasury shares of $185 thousand in 2002.
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, a merger with certain
affiliated partnerships or other unrelated companies, or the disposition
of assets, as well as undistributed funds from operations.
On July 23, 2002, the Company completed a merger with the Affiliated
Partnerships, which increased the Company's real estate assets by
approximately $24.3 million. Pursuant to the merger, the Company issued
approximately 2.6 million class B common shares to the limited partners in
the Affiliated Partnerships. Approximately $760 thousand in 8 year,
interest only, subordinated notes were issued to limited partners of the
Affiliated Partnerships who dissented against the merger. The acquired
properties are unencumbered, single tenant, free standing properties on
lease to national and regional tenants, where the lease is the direct
obligation of the parent company. 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. Some of the tenant's leases require the Company to be responsible
for roof and structural repairs. In these instances, the Company normally
requires warranties, and/or guarantees from the related vendors, suppliers
and/or contractors, to mitigate the potential costs of repairs during the
primary terms of the leases. 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 borrowings or other
sources of capital in the event of unforeseen significant capital
expenditures.
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 had an original term of one year, and has been extended
through August 2003, the Company may borrow up to $20 million subject to
the value of unencumbered assets. The Lender has given AmREIT a commitment
to extend the Credit Facility for a period of 12 months from the date of
execution. The Company and Lender are currently finalizing the
documentation of the Credit Facility and expect that it will be completed
prior to September. 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. At June 30, 2003, the Company was in compliance with all
applicable financial covenants. The Credit Facility bears interest at an
annual rate of LIBOR plus a spread of 2.00. As of June 30, 2003, $14.6
million was outstanding under the Credit Facility. The Company has
approximately $5.4 million availability under its line of credit, subject
to use of proceeds approval by the lender.
As of June 30, 2003, the Company owned 50 properties directly and, since
its inception, had invested $79 million, 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 properties are acquired by the Company, cash is 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 June 30, 2003, the Company's cash and cash equivalents totaled
$736 thousand.
The Company paid aggregate cash dividends to the holders of its class A
and class B common shares, for the three months ended of June 30, 2003 and
2002 of $749 thousand and $170 thousand, respectively.
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 $489 thousand or 126% to $877
thousand for the three months ended June 30, 2003 from $388 thousand for
the three months ended June 30, 2002. For the six month period ended June
30, 2003 FFO increased $873 thousand, from $697 thousand in 2002 to $1.57
million in 2003. Management considers FFO to be an appropriate measure of
operating performance for an equity REIT. 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 depreciable operating property, depreciation and amortization of
real estate assets, and excluding results defined as "extraordinary items"
under generally accepted accounting principles. We believe that in order
to facilitate a clear understanding of our historic operating results, FFO
should be examined in conjunction with net income as presented in the
consolidated statement of operations and data included elsewhere in this
report. FFO should not be considered an alternative to cash flows from
operating, investing and financing 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 and six months ended June 30:
Quarter Year to Date
2003 2002 2003 2002
Net income $ 649,144 $ 261,293 $ 1,106,981 $ 443,604
Plus depreciation 228,053 126,822 462,689 253,670
Total funds from operations $ 877,197 $ 388,115 $ 1,569,670 $ 697,274
Cash distributions paid $ 749,437 $ 169,637 $ 1,509,059 $ 331,177
FFO in excess of distributions $ 127,760 $ 218,478 $ 60,611 $ 366,097
Cash flows provided by (used in) operating activities, investing activities,
and financing activities for the three and six months ended June 30 are
presented below:
Quarter Year to Date
2003 2002 2003 2002
Operating activities $ 992,375 $ 329,677 $ 1,244,535 $ 466,957
Investing activities $ (5,375,268) $ (10,003,990) $ (8,431,712) $(9,939,999)
Financing activities $ 4,293,767 $ 9,407,993 $ 5,416,743 $ 9,658,907
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 2003 to June 30, 2002:
During the three months ended June 30, 2003 and June 30, 2002, the Company
earned $1.9 million and $1.1 million, respectively, in rental income from
operating leases and earned income from direct financing leases.
Additional property purchases as well as the newly merged properties from
the three affiliated partnerships resulted in the increased income from
rents and earned income from direct financing leases. Service fee income
increased $796 thousand, from $52 thousand in 2002 to $849 thousand in
2003. The increase in service fee income was primarily due to an increase
in commission income, and fee income that was recognized related to a
transaction brokered between third parties.
During the three months ended June 30, 2003 and June 30, 2002, the
Company's expenses were $2.1 million and $1.1 million, respectively. The
$1 million increase in expenses is primarily attributable to (1) an
increase in general operating and administrative expense of $345 thousand,
from $440 thousand in 2002 to $785 thousand in 2003, which was primarily
due to an increase in salary expense due to additional positions; (2) an
increase in legal and professional fees of $384 thousand, from $162
thousand in 2002 to $546 thousand in 2003, which was primarily
attributable to an increase in commission expense paid to third party
security brokerage companies; and (3) an increase in interest expense of
$184 thousand, from $410 thousand in 2002 to $594 thousand in 2003. The
increase in interest expense is due to additional debt used to finance the
acquisition of additional properties.
Comparison of the Six Months Ended June 30, 2003 to June 30, 2002:
During the six months ended June 30, 2003 and June 30, 2002, the Company
earned $3.8 million and $2.0 million, respectively, in rental income from
operating leases and earned income from direct financing leases.
Additional property purchases as well as the merged properties from the
three affiliated partnerships resulted in the increased income from rents
and earned income from direct financing leases. Service fee income
increased $528 thousand, from $531 thousand in 2002 to $1.06 million in
2003. The increase is primarily due to fee income recognized related to a
transaction brokered between third parties.
During the six months ended June 30, 2003 and June 30, 2002, the Company's
expenses were $3.9 million and $2.5 million, respectively. The $1.4
million increase in expenses is primarily due to (1) an increase in
interest expense of $482 thousand, from $664 thousand in 2002 to $1.145
million in 2003. The increase in interest expense is due to additional
debt used to finance the acquisition of additional properties; (2) an
increase in general operating and administrative expenses of $339
thousand, from $1.20 million in 2002 to $1.54 million in 2003, which is
due to an increase in salary expense due to additional positions, and (3)
an increase in legal and professional fees of $361 thousand, from $372
thousand in 2002 to $733 thousand in 2003, which is primarily attributable
to increased commission expense paid to third party security brokerage
companies.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities
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
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
______________________________________
(Issuer)
August 13, 2003 /s/ H. Kerr Taylor
______________________________________
Date H. Kerr Taylor, President
August 13, 2003 /s/ Chad C. Braun
______________________________________
Date Chad C. Braun (Principal Accounting Officer)
Item 6. Exhibits
(a) Exhibits
31.1 Chief Executive Officer Section 302 Certification
31.2 Chief Financial Officer Section 302 Certification
32.1Chief Executive Officer certification pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2Chief Financial Officer certification pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 31.1
FORM OF SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, H. Kerr Taylor, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of AmREIT;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the consolidated financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures presented in this report, our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2003 By: /s/
________________________________________
H. Kerr Taylor, Chief Executive Officer
Exhibit 31.2
FORM OF SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, Chad C. Braun, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of AmREIT;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the consolidated financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures presented in this report, our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2003 By: /s/
__________________________________________
Chad C. Braun, Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AmREIT (the "Company") on
Form 10-QSB for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, H. Kerr Taylor, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ H. Kerr Taylor
______________________________
H. Kerr Taylor
Chief Executive Officer
August 13, 2003
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AmREIT (the "Company") on
Form 10-QSB for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Chad C. Braun, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Chad C. Braun
_______________________
Chad C. Braun
Chief Financial Officer
August 13, 2003