U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
or
[ ] Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File No. 0-28378
AMREIT
(Name of small business issuer in its charter)
Texas 76-0410050
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
8 Greenway Plaza, Suite 824
Houston, Texas 77046
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (713) 850-1400
Securities registered under
Section 12(b)of the Exchange Act: NAME OF EXCHANGE
TYPE OF CLASS ON WHICH REGISTERED
CLASS A COMMON SHARES AMERICAN STOCK
EXCHANGE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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: Yes X No_____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Registration S-B is not contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or
informative statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $13.6 Million
Aggregate market value of the voting stock
held by non-affiliates of the issuer: $42.1 Million
State the number of shares outstanding of the issuer's common equity, as of the
latest practicable date: 2,939,404 class A shares, 2,362,522 class B shares, and
1,402,788 class C shares as of March 7, 2004
DOCUMENTS INCORPORATED BY REFERENCE
Issuer incorporates by reference into Part III portions of its Proxy Statement
for the 2004 Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format(check one):Yes ____ No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
AmREIT is a Texas real estate investment trust ("REIT") that has elected to be
taxed as a REIT for federal income tax purposes. AmREIT is a self-managed,
self-advised REIT with, along with its predecessor, a 19-year history and a
record of investing in quality income producing retail real estate. AmREIT's
class A common shares are traded on the American Stock Exchange under the symbol
"AMY". AmREIT directly owns over $100 million in assets, up 37% from 2002, and
manages an additional $30 million through affiliated retail partnerships. As of
December 31, 2003, AmREIT owned 51 properties located in 18 states.
AmREIT's initial predecessor, American Asset Advisers Trust, Inc., was formed as
a Maryland corporation in 1993. Following the merger of our external adviser
into the Company in June 1998, we changed our name to AmREIT, Inc., which was a
Maryland corporation. In December 2002, we reorganized as a real estate
investment trust.
As of December 31, 2003, AmREIT had 23 full time employees, 3 full time
dedicated brokers and 4 independent trust managers.
Operating Strategy
Our business organization consists of a portfolio of high-end single and
multi-tenant retail centers, a full service real estate operating and
development subsidiary, an NASD registered broker-dealer subsidiary, and a
retail partnership business. This unique combination provides AmREIT the
opportunity to access capital through both Wall Street and the independent
financial planning marketplace for flexibility and dependable growth. We finance
our growth and working capital needs with a combination of equity offerings and
a conservative debt philosophy. Currently, the Company is raising capital
through its class C common share offering, being offered exclusively through the
independent financial planning community. As of December 31, 2003, the Company
had raised approximately $14 million through its class C offering. Through its
by-laws, the Company's debt is limited to 55% recourse debt as compared to its
gross assets. As of December 31, 2003, the Company's debt to asset ratio was
approximately 51%.
Our operating strategy and investment criteria discussed herein are reviewed by
our Board of Trust Managers on a regular basis and may be modified or changed
without a vote of our shareholders.
Portfolio
We focus on acquiring "irreplaceable corners" - premier retail frontage
properties in high-traffic, highly populated areas - which create dependable
income and long-lasting value. These premium properties provide high leasing
income and high occupancy rates for a strong income stream. As of December 31,
2003, the occupancy rate was 92.4%. Our properties attract a wide array of
established commercial tenants, and offer attractive opportunities for
dependable monthly income and potential capital appreciation. These properties
are typically located in high traffic areas within a three-mile radius of a
population of 100,000 with an average household income of $70 thousand or more.
On average, more than 30,000 cars per day pass by these properties. In addition,
management believes that the location and design of its properties provide
flexibility in use and tenant selection and an increased likelihood of
advantageous re-lease terms.
3
Our revenues are substantially generated by corporate retail tenants such as
Starbucks, Landry's, CVS Pharmacy, International House of Pancakes ("IHOP"),
Eckerd, Nextel, Washington Mutual, TGI Friday's, and others. We own, and may
purchase in the future, fee simple retail properties (we own the land and the
building), ground lease properties (we own the land, but not the building and
receive rental income from the owner of the building) or leasehold estate
properties (we own the building, but not the land, and therefore are obligated
to make a ground lease payment to the owner of the land). AmREIT may also
develop properties for its portfolio or enter into joint ventures, partnerships
or co-ownership for the development of retail properties.
AmREIT owns a real estate portfolio consisting of 51 properties located in 18
states at December 31, 2003. Our multi-tenant shopping center properties are
primarily located throughout Texas and are leased to national, regional and
local tenants. Our single tenant properties are located throughout the United
States and are generally leased to corporate tenants where the lease is the
direct obligation of the parent company, not just the local operator, and in
most other cases, our leases are guaranteed by the parent company. In so doing,
the dependability of the lease payments is based on the strength and viability
of the entire company, not just the leased location. Properties that we acquire
are generally newly constructed or recently constructed at the time of
acquisition.
As of December 31, 2003, no single property accounted for more than 10% of the
Company's total assets. As of December 31, 2003, IHOP accounted for 21.7% of the
Company's total revenue and no other tenant accounted for more than 10% of the
Company's rental and property income.
According to its fourth quarter 2003 earnings release announced on February 26,
2004, IHOP was founded in July 1958 and operates over 1,100 restaurants in three
countries and forty-five states. IHOP is a family restaurant, serving breakfast,
lunch and dinner. IHOP is a New York Stock Exchange, publicly-held company with
a current market capitalization over $817 million. For the twelve months ended
December 31, 2003, comparable store sales increased by 4.8% compared to 2002,
and net income decreased 10% compared to 2002. The decrease in net income is due
to a $9.1 million reorganization charge to earnings. Excluding this charge to
earnings, IHOP's net income increased 3.9% compared to 2002.
Real Estate Operating and Development Company AmREIT's real estate operating and
development subsidiary AmREIT Realty Investment Corporation ("ARIC") is a fully
integrated group of brokers and real estate professionals that provide
brokerage, leasing, construction management, development and property management
services to our tenants as well as third parties. This operating subsidiary,
which is a taxable REIT subsidiary, compliments our portfolio of retail
properties by providing a high level of service to our tenants, as well as
maintaining our portfolio of properties to meet our standards.
Having an internal real estate group also helps secure strong tenant
relationships for both us and our retail partnerships. Our growing roster of
leases with well-known national and regional tenants includes IHOP, Washington
Mutual, Starbucks, TGI Friday's, CVS Pharmacy, and others. Equally important, we
have affiliations with these parent company tenants that extend across multiple
sites.
Not only does our real estate operating and development company create value
through relationships, but it also provides an additional source of fee income
and profits. Through the development, construction, management, leasing and
brokerage services provided to our affiliated actively managed retail
partnerships, as well as for third parties, our real estate team continues to
generate fees and profits for us. Through ARIC, we are able to generate
additional profits through the selective acquisitions and dispositions of
properties within a short time period (twelve to eighteen months). These assets
are listed as real estate assets acquired for sale on our consolidated balance
sheet, and at December 31, 2003, represented approximately $4.4 million.
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Securities Company
The part of our business structure and operating strategy that really separates
us from other publicly traded REITs is AmREIT Securities Company (ASC), a wholly
owned subsidiary of ARIC. Through ASC, we are able to raise capital through the
National Association of Securities Dealers (NASD) independent financial planning
community. Traditionally, we have raised capital in two ways: first for our
actively managed retail partnerships, and second, directly for AmREIT through
non-traded classes of common shares.
During 2003, ASC raised approximately $15 million for AmREIT Monthly Income &
Growth Fund, Ltd., an affiliated retail partnership sponsored bya subsidiary of
AmREIT. Additionally, ASC raised approximately $14 million directly for the us
through a class C common share offering. During 2004, through a combination of
our actively managed retail partnerships, as well as direct equity for AmREIT,
ASC projects to raise approximately $60 million directly through the NASD
independent financial planning community. Since capital is the lifeblood of any
real estate company, having the unique opportunity to raise capital through both
Wall Street and the independent financial planning community adds additional
financial flexibility and dependability to our income stream.
Retail Partnerships
AmREIT has retail partnership subsidiaries that sell limited partnership
interests to retail investors, in which AmREIT indirectly invests through both
the general partner and as a limited partner. We wanted to create a structure
that aligns the interest of our shareholders with that of our unit holders.
Through our subsidiary general partners of the retail partnerships value is
created for AmREIT through managing money from the sponsored funds, and in
return, receiving management fees and profit participation interests.
AmREIT's retail partnerships are structured so that an affiliate as the general
partner, receives a significant profit only after the limited partners in the
funds have received their targeted return, again, linking AmREIT's success to
that of its unit holders.
As of December 31, 2003, AmREIT directly managed, through its three actively
managed and previously sponsored retail partnerships, a total of $30 million in
equity. These three partnerships will enter their liquidation phases in
2003/2004, 2009/2010, and 2010/2011, respectively. As these partnerships enter
into liquidation, we will receive economic benefit from our profit
participation, after certain preferred returns have been paid to the
partnership's limited partners. In accordance with generally accepted accounting
principles, any unrealized gains associated with this potential profit
participation has not been reflected on our balance sheet or statement of
operations.
Financial Information
Additional financial information related to AmREIT is included in the
Consolidated Financial Statements located on pages 28 through 49, included
herein.
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ITEM 2. DESCRIPTION OF PROPERTY
General
At December 31, 2003, we owned 51 properties. The properties are leased to 38
tenants in 18 different states. Reference is made to the Schedule III -
Consolidated Real Estate Owned and Accumulated Depreciation filed with this Form
10-KSB for a listing of the properties and their respective costs.
We have been developing and acquiring multi-tenant shopping centers for over ten
years in our retail partnership business. During that time, we believe we have
developed the ability to recognize the high-end multi-tenant properties that can
create long-term value, and with the downward pressure on single tenant cap
rates, resulting in higher priced real estate, management anticipates
strategically increasing its holdings of multi-tenant shopping centers.
Land - Our property sites, on which our leased buildings sit, range from
approximately 34,000 to 125,000 square feet, depending upon building size and
local demographic factors. Sites purchased by the Company are in high traffic
corridors and have been reviewed for traffic and demographic pattern and
history.
Buildings - The buildings are single and multi-tenant properties and are located
at "main and main" locations throughout the United States. They are positioned
for good exposure to traffic flow and are constructed from various combinations
of stucco, steel, wood, brick and tile. Single tenant buildings range from
approximately 2,000 to 20,000 square feet, and multi-tenant buildings are
generally 15,000 square feet and greater. Buildings are suitable for possible
conversion to various uses, although modifications may be required prior to use
for other operations.
Leases - The primary term of the leases ranges from ten to twenty-five years.
Generally, leases also provide for one to four five-year renewal options. The
freestanding properties are primarily leased on a "triple-net" basis whereby the
tenants are responsible for the property taxes, insurance and operating costs.
Generally, the leases provide for either percentage rents based on sales in
excess of certain amounts, periodic escalations in the annual rental rates or
both.
LOCATION OF PROPERTIES
AmREIT's focus is on property investments in Texas. Of our 51 properties, 22 are
located in Texas, with 16 being located in the greater Houston metropolitan
statistical area. Our portfolio of assets tends to be located in areas we know
well, and where we can keep an eye on them. For that reason, we believe AmREIT
delivers an extra degree of hands on management to our real estate investments.
Because of our investments in the greater Houston area, and throughout Texas,
the Houston and Texas economy have a significant impact on our business and on
the viability of our properties. During 2003, Houston ranked nationally among
the 10 most populous metro areas, ranked fourth in nominal employment growth and
fifth in employment growth rate.
At December 31, 2003, we owned 51 properties leased to 38 tenants in 18 states
(however, 20 states are shown in the below table due to income being received
during the year from properties located in Wisconsin and Indiana). The rental
income by states is as follows:
Rental Rental
State Income concentration
------------------------ ------- ---------------------- -----------------------------------------
------------------------ ------- ---------------------- -----------------------------------------
Texas $3,001,731 39.5%
Louisiana 711,545 9.4%
Tennessee 507,410 6.7%
Missouri 498,910 6.6%
Kansas 453,884 6.0%
Arizona 409,817 5.4%
Minnesota 267,586 3.5%
Colorado 246,423 3.2%
Georgia 202,322 2.7%
Oregon 182,717 2.4%
Virginia 170,804 2.3%
Utah 160,068 2.1%
Mississippi 155,514 2.1%
New York 123,619 1.6%
Indiana 112,156 1.5%
California 110,099 1.5%
Oklahoma 92,612 1.2%
New Mexico 85,606 1.1%
Wisconsin 50,022 0.7%
Maryland 41,321 0.5%
---------------------- -----------------------------------------
---------------------- -----------------------------------------
Total $7,584,166 100.00%
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Multi-Tenant Properties
As of December 31, 2003, AmREIT owned five multi-tenant properties, representing
approximately 86,000 leaseable square feet. Our multi-tenant properties are
primarily neighborhood and community strip centers, ranging from 16,000 to
20,000 square feet. None of the centers have internal common areas, but instead
are designed for maximum retail visibility and ease of access and parking for
the consumer. These properties have a mix of national, regional and local
tenants, leased in a manner to provide a complimentary array of services to
support the local retail consumer. All of our strip centers are located in the
greater Houston area, and are typically located at an intersection guided by a
traffic light, with high visibility, significant daily traffic counts, and in
close proximity to neighborhoods and communities with household incomes above
those of the national average.
All of our multi-tenant leases provide for the monthly payment of base rent plus
operating expenses. This monthly operating expense payment is based an estimate
of the tenant's pro rata share of property taxes, insurance, utilities,
maintenance and other common area maintenance charges. Annually these operating
expenses are reconciled with any overage being reimbursed to the tenants, with
any underpayment being billed to the tenant.
Our multi-tenant leases range from five to ten years and generally include one
or more five-year renewal options. Annual rental income from these leases ranges
from $24 thousand to $310 thousand per year.
In December 2003, as part of the Uptown Plaza purchase, we purchased a 16,000
square foot strip center anchored by Grotto, a Landry's Restaurant (NYSE:LNY)
concept. This "irreplaceable corner" is located at the intersection of
Westheimer and Loop 610 in the Houston, Texas Galleria area. The property was
built in 2002 and is 70% occupied.
In December 2003, we purchased The Terrace Shops, a 16,395 square foot strip
center anchored by Starbucks (Nasdaq:SBUX). This "irreplaceable corner" is
located at the intersection of Buffalo Speedway and Westpark in Houston, Texas,
the gateway to the prestigious West University residential community, Rice
University and the Texas Medical Center. The property was built in 2002 and is
93% occupied.
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Single Tenant Properties
As of December 31, 2003, AmREIT owned 46 single tenant properties, representing
approximately 322,000 leaseable square feet. Our single tenant leases typically
provide that the tenant bears responsibility for substantially all property
costs and expenses associated with ongoing maintenance and operation of the
property such as utilities, property taxes and insurance. Some of the leases
require that we will be responsible for roof and structural repairs. In these
instances, we normally require warranties and/or guarantees from the related
vendors, suppliers and/or contractors to mitigate the potential costs of repairs
during the primary term of the lease.
Because our leases are entered into with or guaranteed by the corporate, parent
tenant, they typically do not limit the Company's recourse against the tenant
and any guarantor in the event of a default, and for this reason are designated
by us to be "Credit Tenant Leases", because they are supported by the assets of
the entire company, not just the individual store location.
The primary term of the leases ranges from ten to twenty-five years. All of the
leases also provide for one to four five-year renewal options. Annual rental
income ranges from $59 thousand to $547 thousand per year.
In May 2003, we acquired four IHOP restaurants located in Bridgeton, Missouri,
Grand Prairie, Texas (part of the Dallas Metropolitan Statistical Area),
Wilwaukee, Wisconsin and Merrillville, Indiana, each representing approximately
4,020 leaseable square feet and each are 100% occupied. The Wisconsin and
Indiana locations were both sold for a significant profit during 2003.
In September 2003, we acquired a TGI Friday's restaurant located in Hanover,
Maryland. The property is approximately 6,800 square feet and is 100% occupied.
In December 2003, as part of the Uptown Plaza purchase, we purchased a CVS
Pharmacy at the corner of Westheimer and Loop 610, located in the Houston,
Texas Galleria area. The property is approximately 12,000 leaseable square feet
and is 100% occupied.
Land To be Developed
As part of our investment objectives, we will invest in land to be developed on
"irreplaceable corners" across Texas. A typical investment in land to be
developed will result in a six to twelve month holding period, followed by the
execution of a ground lease with a national or regional retail tenant, or the
development of a single tenant property or multi-tenant strip center. As of
December 31, 2003, AmREIT held three sites to be developed.
Westheimer and Yorktown is an approximately one acre pad site located at the
intersection of Westheimer and Yorktown in the Galleria area of Houston, Texas.
The property was purchased in January of 2003. Subsequent to the purchase,
AmREIT entered into a long-term ground lease with Eckerd for the entire site.
Rental income under the ground lease is scheduled to commence on January 15,
2004. AmREIT also provided the construction management and development for the
Eckerd building.
San Felipe and Winrock is an approximately two acre pad site located at the
intersection of San Felipe and Winrock in the prestigious Tanglewood residential
community in Houston, Texas. The property was purchased in November 2003.
Subsequent to the purchase, AmREIT entered into a long-term lease with a
national bank for approximately once acre, off the corner intersection. Rental
income under the ground lease is scheduled to commence in November 2004. AmREIT
is holding the remaining one acre and is in discussion with a number of national
tenants.
8
I-45 and West Road is a .75 acre pad site located at the intersection of
Interstate 45 and West Road in Houston, Texas. AmREIT, as a 50% joint venture
partner, purchased the land and subsequently entered into a long-term ground
lease with YUM Brands (NYSE:YUM), which will construct a restaurant under one of
their many franchisee concepts. Rental income under the ground lease is
scheduled to commence during the third quarter 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company does not have any material legal proceedings pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of the
fiscal year.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES
As of March 6, 2004, there were approximately 794 holders of record for
2,979,125 of the Company's class A common shares outstanding on such date, net
of 133,822 shares held in treasury. AmREIT's class A common shares are listed on
the American Stock Exchange ("AMEX") and traded under the symbol "AMY." The
following table sets forth for the calendar periods indicated high and low sale
prices per class A common share as reported on the AMEX and the dividends paid
per share for the corresponding period since the commencement of trading on July
23, 2002.
Calendar Period
High Low Dividends
2003
First Quarter................................................ $6.80 $6.05 $.109
Second Quarter............................................... $6.80 $6.10 $.111
Third Quarter ............................................... $6.56 $6.15 $.112
Fourth Quarter............................................... $6.68 $6.30 $.114
2002
Third Quarter (July 23 through September 30)................. $7.50 $6.20 $.095
Fourth Quarter............................................... $6.55 $6.15 $.100
The payment of any future dividends by AmREIT is dependent upon applicable legal
and contractual restrictions, including the provisions of the class B and class
C common shares, as well as its earnings and financial needs.
As of March 6, 2004, there were approximately 1,108 holders of record for
2,350,271 of the Company's class B common shares. The class B common shares are
not listed on an exchange and there is currently no available trading market for
the class B common shares. The class B common shares have voting rights,
together with the class A and C, as one class of stock. They receive a fixed
8.0% cumulative and preferred dividend, and are convertible into the class A
common shares on a one-for-one basis at any time, at the holder's option.
As of March 6, 2004, there were approximately 865 holders of record for
2,316,744 of the Company's class C common shares. The class C common shares are
not listed on an exchange and there is currently no available trading market for
the class C common shares. The class C common shares have voting rights,
together with the class A and B, as one class of stock. The class C common
shares receive a fixed 7.0% preferred annual dividend, paid in monthly
installments, and are convertible into the class A common shares after a 7-year
lock out period based on 110% of invested capital, at the holder's option.
For the year, the Company repurchased, primarily through open market
transactions, a total of 92,700 class A common shares at an average price of
$6.50 per share. These shares were repurchased through the share repurchase
program authorized by the board of trust managers.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Certain information presented in this Form 10-KSB 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 and the comparative summary of selected
financial data appearing elsewhere in this report. Historical results and trends
which might appear should not be taken as indicative of future operations.
Executive Overview
AmREIT (AMEX:AMY) is a rapidly growing, self-managed and self-advised REIT with
a 19-year history of delivering results to its investors. Its business model
consists of a portfolio of retail properties, including "irreplaceable corners",
single tenant properties and multi-tenant properties, a full service real estate
operating and development business, an NASD-registered broker dealer securities
business and a retail partnership business - a unique combination that provides
AmREIT the opportunity to access multiple sources of capital and generate fees
and profits from multiple sources, resulting in added financial flexibility and
the opportunity for dependable growth and income.
AmREIT's goal is to deliver increasing, dependable, monthly income for its
shareholders. In so doing, AmREIT strives to increase and maximize Funds from
Operations by issuing long term capital through both the NASD independent
financial planning marketplace as well as through Wall Street, and investing the
capital in accretive real estate properties, acquired or developed, on
irreplaceable corners. Additionally, we strive to maintain a conservative
balance sheet. To that regard, we strive to maintain a debt to total asset ratio
of less than 55%. As of December 31, 2003, our debt to total asset ratio was
51%.
At December 31, 2003, AmREIT owned a portfolio of 51 properties located in 18
states, subject to long term leases with retail tenants, either directly or
through its interests in joint ventures or partnerships. Forty six of the
properties are single tenant properties, and represented approximately 75% of
the annual rental income as of December 31, 2003. Five of the properties are
multi-tenant and represented approximately 25% of the annual rental income as of
December 31, 2003. In assessing the performance of the Company's properties,
management evaluates the occupancy of the Company's portfolio. Occupancy for the
total portfolio was 92.4% as of December 31, 2003. Additionally, the Company
anticipates that the majority of its rental income will consist of rental income
generated from multi-tenant shopping centers by the end of 2004. We have been
developing and acquiring multi-tenant shopping centers for over ten years in our
retail partnership business. During that time, we believe we have developed the
ability to recognize the high-end multi-tenant properties that can create
long-term value, and with the downward pressure on single tenant cap rates,
resulting in higher priced real estate, management anticipates strategically
increasing its holdings of multi-tenant shopping centers. Management intends to
increase total assets from $101 million as of December 31, 2003 to approximately
$200 million at the end of 2004. Through its class C common share offering, the
Company raised approximately $14 million in capital in 2003, which along with
debt financing, financed $27 million in property acquisitions and developments
in 2003.
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Management intends to fund future acquisitions and development projects through
a combination of equity offerings and debt financing. During 2004, the Company
anticipates raising approximately $60 million of equity from various sources
including Wall Street and the independent financial planning community. We have
already raised an additional $14 million through our class C common share
offering to date in 2004.
Management expects that single tenant, credit leased properties, will continue
to experience cap rate pressure during 2004 due to the low interest rate
environment and increased buyer demand. Therefore, as it has been, our continued
strategy will be to divest of properties which are no longer meet our core
criteria, and replace them with multi-tenant projects or the development of
single tenant properties located on irreplaceable corners. With respect to
additional growth opportunities, we currently have over $50 million of projects
in our pipeline at various stages of evaluation. Each potential acquisition is
subjected to a rigorous due diligence process that includes site inspections,
financial underwriting, credit analysis and market and demographic studies.
Therefore, there can be no assurance that any or all of these projects will
ultimately be purchased by AmREIT. Management anticipates, and has budgeted for,
an increase in interest rates during 2004. As of December 31, 2003,
approximately 47% of our outstanding debt had a long term fixed interest rate
with an average term of seven years. Our philosophy continues to be matching
long term leases with long term debt structures while keeping our debt to total
assets ratio less than 55%.
Summary of Critical Accounting Policies
The results of operations and financial condition of the Company, as reflected
in the accompanying financial 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. We evaluate our assumptions and estimates on an on-going
basis. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable based on the circumstances.
Rental Income Recognition - In accordance with accounting principles generally
accepted in the United States of America, the Company accounts for rental income
under the straight line method, whereby we record rental income based on the
average of the total rent obligation due under the primary term of the lease.
The Company prepares a straight line rent schedule for each lease entered into.
Certain leases contain a provision for percentage rent. Percentage rent is
recorded in the period when the Company can reasonably calculate the amount of
percentage rent owed, if any. Generally, the Company records percentage rent in
the period in which the percentage rent payment is made, and can thereby be
calculated and verified.
Real Estate Valuation - Real estate assets are stated at cost less accumulated
depreciation, which, in the opinion of management, is not in excess of the
individual property's estimated undiscounted future cash flows, including
estimated proceeds from disposition. Depreciation is computed using the
straight-line method, generally over estimated useful lives of 39 years for
buildings and over the primary term of the lease for tenant improvements. Major
replacements that extend the life of the property, or enhance the value of the
property are capitalized and the replaced asset and corresponding accumulated
depreciation are removed. All other maintenance items are charged to expense as
incurred.
Upon the acquisition of real estate projects, the Company assesses the fair
value of the acquired assets (including land, building, acquired, out-of-market
and in-place leases, as if vacant property value and tenant relationships) and
acquired liabilities, and allocates the purchase price based on these
assessments. The Company assesses fair value based on estimated cash flow
projections that utilize appropriate discount and capitalization rates and
available market information. Estimates of future cash flows are based on a
12
number of factors including the historical operating results, known trends, and
specific market and economic conditions that may affect the property. Factors
considered by management in our analysis of determining the as if vacant
property value include an estimate of carrying costs during the expected
lease-up periods considering current market conditions, and costs to execute
similar leases. In estimating carrying costs, management includes real estate
taxes, insurance and other operating expenses and estimates of lost rentals at
market rates during the expected lease-up periods, up to 12 months depending on
the property location, tenant demand and other economic conditions. Management
also estimates costs to execute similar leases including leasing commissions,
tenant improvements, legal and other related expenses.
Costs incurred in the development of new operating properties, including
preacquisition costs directly identifiable with the specific project,
development and construction costs, interest and real estate taxes are
capitalized into the basis of the project. The capitalization of such costs
ceases when the property, or any completed portion, becomes available for
occupancy.
AmREIT's properties are reviewed for impairment if events or changes in
circumstances indicate that the carrying amount of the property may not be
recoverable. In such an event, a comparison is made of the current and projected
operating cash flows of each such property on an undiscounted basis, plus the
residual value of the property upon disposition, to the carrying value of such
property. The carrying value would then be adjusted, if needed, to estimate the
fair value to reflect an impairment in the value of the asset. As of December
31, 2003, no impairment was identified for any of the Company's properties.
VALUATION OF RECEIVABLES - An allowance for the uncollectible portion of accrued
rents, property receivables and accounts receivable is determined based upon an
analysis of balances outstanding, historical payment history, tenant credit
worthiness, additional guarantees and other economic trends. Balances
outstanding include base rents, tenant reimbursements and receivables attributed
to the accrual of straight line rents. Additionally, estimates of the expected
recovery of pre-petition and post-petition claims with respect TO tenants in
bankruptcy is considered in assessing the collectibility of the related
receivables. At December 31, 2003, the Company wrote off a receivable of
approximately $150 thousand related to the Wherehouse bankruptcy. The Company
maintains a receivable related to Wherehouse of approximately $126 thousand
based on discussions with Wherehouse, Blockbuster Entertainment Corporation, the
guarantor of the lease, and legal proceedings involving Wherehouse and
Blockbuster Entertainment Corporation.
Liquidity and Capital Resources
Cash flow from operating activities and financing activities have been the
principal sources of capital to fund the Company's ongoing operations and
dividends. As AmREIT deploys the capital raised, and expected to be raised from
its equity offerings, into income producing real estate, we anticipate that cash
flow from operations will provide adequate resources for future ongoing
operations and dividends. AmREIT's cash on hand, internally-generated cash flow,
borrowings under our existing credit facilities, issuance of equity securities ,
as well as the placement of secured debt and other equity alternatives, will
provide the necessary capital to maintain and operate our properties as well as
execute and achieve our growth strategies. Cash flows from operating activities
as reported in the Consolidated Statements of Cash Flows decreased from $3.73
million in 2002 to $1.24 million in 2003. During 2003, AmREIT invested
approximately $7.81 million in retail real estate acquired for resale. This
consisted of four single tenant properties located in Texas, Missouri, Indiana,
and Wisconsin. As of December 31, 2003, AmREIT had sold two of these properties,
located in Indiana and Wisconsin, resulting in net proceeds from the sale of
$6.18 million and a gain on sale of real estate held for resale of $787
thousand.
Cash flows used in investing activities has been primarily related to the
acquisition or development of retail properties. During 2003, AmREIT acquired
13
or developed $34.5 million in retail projects, which were funded through a
combination of the $12.2 million of capital (net of $1.8 million in issuance
costs) raised through the class C common share offering, the net sales proceeds
of properties divested during the year, and debt financing . This investment
consisted of two single tenant projects, two multi-tenant projects, and three
land acquisitions, of which six are located in Texas, and one is located in
Maryland. The single tenant projects are 100% occupied and generating rental
income. The multi-tenant projects are 70% and 93% occupied respectively and
generating rental income. One of the land acquisitions is substantially complete
and rental income commenced in January 2004. The other two land acquisitions are
under development, and are anticipated to generate rental income during the
fourth quarter 2004. These acquisitions were funded with proceeds from the
Company's class C common share offering and through the existing revolving
credit facility. The Company also sold two non-core, underperforming properties,
an Office Max in Dover, Delaware and a Goodyear Tire Store in Houston, Texas.
Additionally, as part of its investment strategy, AmREIT constantly evaluates
its property portfolio, systematically selling off any non-core or
underperforming assets, and replacing them with "irreplaceable corners" and
other core assets. During 2003, AmREIT divested of an Office Max property
located in Dover, Delaware and a Goodyear Tire Store located in Houston, Texas.
The properties generated net sales proceeds of $3.5 million, resulting in a
profit on disposition of approximately $312 thousand. During 2004, the Company
anticipates continuing this strategy of divesting of its non-core properties,
which are estimated to generate between $10 and $15 million in sales proceeds.
Cash flows used in investing activities as reported in the Consolidated
Statements of Cash Flows increased from $15.27 million in 2002 to $22.03 million
in 2003.
In addition, capitalized expenditures for improvements and additions to our
existing properties were approximately $535 thousand, which were funded through
excess cash flow and through the Company's revolving credit facility.
Cash flows provided by financing activities increased from $13.82 million in
2002 to $20.32 million in 2003. Cash flows provided by financing activities were
primarily generated from our existing revolving credit facility, secured
property level mortgage financing or through our class C common share offering.
Through its class C common share offering, the Company is averaging new capital
raised of between $2 and $4 million per month. One advantage of raising capital
through the independent financial planning marketplace is that the capital is
received on a monthly basis, allowing for a scaleable matching of real estate
projects. Our first priority is to deploy the capital raised, and then to
moderately leverage the capital, while maintaining our philosophy of a
conservative balance sheet.
AmREIT has a $30 million unsecured revolving credit facility. The facility will
mature on September 4, 2004. The facility bears interest at a rate of LIBOR plus
a range of 1.40 to 2.35, depending on the Company's debt to asset ratio. 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. Furthermore, the Credit Facility contains
concentration covenants and limitations, limiting property level net operating
income for any one tenant to no more than 15% (35% for IHOP) of total property
net operating income. At December 31, 2003, IHOP net operating income
represented 34.7% of total property net operating income. Management estimates
that as of March 31, 2004, IHOP net operating income will represent
approximately 32% of total property net operating income. As of December 31,
2003, the spread over LIBOR was 2.00. At December 31, 2003, approximately $22.80
million was outstanding under the credit facility. In addition to the credit
facility, AmREIT utilizes various permanent mortgage financing and other debt
instruments. During the year ended December 31, 2003, approximately $39.02
million was borrowed under the credit facility and other mortgage debt
instruments for the acquisition of properties, tenant improvements and capital
expenditures as well as working capital. Additionally, approximately $24.12
million was paid down on the credit facility and other mortgage debt instruments
through out the year, primarily as a result of property sales and capital raised
through the class C common share offering.
14
As of December 31, 2003, the Company had the following contractual obligations:
2004 2005 2006 2007 2008 Thereafter Total
Unsecured debt:
Revolving credit facility $22,792 $ - $ - $ - $ - $ - $22,792
5.46% dissenter notes - - - - - 760 760
Secured Debt 3,557 490 530 573 620 19,163 24,933
_______ _______ _______ _______ _______ _______ _______
Total contractual obligation $26,349 $ 490 $ 530 $ 573 $ 620 $19,923 $48,485
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 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, acquisitions of the Company's affiliated entities or other
unrelated companies, or the disposition of assets, as well as undistributed
funds from operations.
In August 2003, the Company commenced the class C common share offering. This
offering is being exclusively made through the NASD independent financial
planning community. It is a $44 million offering, of which $4 million has been
reserved for the dividend reinvestment plan. As of December 31, 2003, 1.4
million shares had been issued, resulting in approximately $14 million in
grossproceeds. The proceeds are being and will be used to finance the
acquisition and development of retail real estate projects, pay down the
revolving credit facility and provide working capital for the on going operation
of the company and its properties.
During 2003, the Company paid dividends to its shareholders of $3.19 million,
compared with $1.73 million in 2002. The class A and C shareholders receive
monthly dividends and the class B shareholders receive quarterly dividends. All
dividends are declared on a quarterly basis. The dividends by class follows (in
thousands):
------------- ------------------------------- -------------------------- -------------------------- --------------------------
Class A Class B Class C
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
2003
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
Fourth Quarter $320 $437 $156
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
Third Quarter $308 $443 $15
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
Second Quarter $310 $439 N/A
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
First Quarter $307 $453 N/A
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
2002
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
Fourth Quarter $277 $456 N/A
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
Third Quarter $257 $409 N/A
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
Second Quarter $170 N/A N/A
------------- ------------------------------- -------------------------- -------------------------- --------------------------
------------- ------------------------------- -------------------------- -------------------------- --------------------------
First Quarter $162 N/A N/A
------------- ------------------------------- -------------------------- -------------------------- --------------------------
On July 23, 2002, the Company completed a merger with three of its 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, of which, approximately 2.36 million were outstanding as of
December 31, 2003. Approximately $760 thousand in 8 year, interest only,
15
subordinated notes were issued to limited partners of the Affiliated
Partnerships who dissented from 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. A deferred merger expense resulted from the shares payable to H. Kerr
Taylor, our President and Chief Executive Officer, as a result of the merger,
which shares represented a portion of consideration payable to Mr. Taylor as a
result of the sale of his advisory company to AmREIT in 1998. Mr. Taylor earned
approximately 143 thousand shares during 2003 as a result of our class C common
share offering, resulting in a non-cash charge to earnings of approximately $915
thousand. As of December 31, 2003, these shares were not issued to Mr. Taylor
and were accounted for as a liability in accounts payable. Mr. Taylor has the
ability to earn an additional 241 thousand shares under the deferred
consideration agreement.
Until properties are acquired by the Company, the Company's funds are held in
short-term, highly liquid investments which 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 December 31, 2003, the Company's cash and cash equivalents
totaled $2.03 million.
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, 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.
16
Results of Operations
Rental revenue and earned income from direct financing leases increased by 46%,
or $2.39 million, from $ 5.19 million in 2002 to $7.58 million in 2003. Of this
increase, $1.96 million is related to a full year of rental revenue and earned
income recorded during 2003 from the properties acquired either directly or
through the affiliated partnership merger in 2002, and $565 thousand is related
to acquisitions made during the year. This is somewhat offset by the loss of
rental income of $136 thousand due to property dispositions. Portfolio occupancy
at December 31, 2003 was 92.4%, which is a slight decrease compared to 2002
occupancy of 95.2%. This decrease is mainly due to a vacancy at one of our
Wherehouse Entertainment properties.
On January 21, 2003, Wherehouse Entertainment filed for a voluntary petition of
relief under Chapter 11 of the federal bankruptcy code. AmREIT owns two
Wherehouse Entertainment properties, one located in Independence, Missouri, and
the other located in Wichita, Kansas. Through court proceedings, Wherehouse has
affirmed the lease at the Missouri location, and have vacated the Kansas
location.
Securities commission income increased by $2.11 million, from $847 thousand in
2002 to $2.96 million in 2003. This increase in securities commission income is
due to increased capital being raised through our broker dealer company, AmREIT
Securities Company (ASC). As ASC raises capital for either AmREIT or its
affiliated retail partnerships, ASC earns a securities commission of between 8%
and 10.5% of the money raised. During 2003, AmREIT and its affiliated retail
partnerships raised approximately $28.4 million, as compared to approximately
$8.5 million during 2002. This increase in commission income is somewhat
mitigated by a corresponding increase in commission expense paid to other third
party broker dealer firms. Commission expense increased by $1.63 million, from
$653 thousand in 2002 to $2.29 million in 2003.
General and operating expense increased $1.14 million, from $2.80 million in
2002 to $3.94 million in 2003. The increase in general and operating expense is
primarily due to additional personnel and the associated salary and benefits
costs related to these individuals. During the year, the Company added members
to each of the operating teams, including one individual on the accounting and
finance team, four on the real estate team (property management, legal,
acquisitions and leasing) one in corporate communications, one on the securities
team and two clerical and administrative support positions. By building our
various teams, we have not only been able to grow revenue and Funds From
Operations, but believe that we will be able to sustain and further enhance our
growth. Compensation expense increased $941 thousand for the year. In addition,
property expense increased $44 thousand and insurance expense increased $47
thousand compared to 2002.
General and operating expense includes bad debt expense of $97 thousand and
property expenses of $49 thousand, which are related to the Wherehouse
Entertainment properties. Both of the Wherehouse Entertainment leases are
guaranteed by Blockbuster Entertainment Corporation. We are in the process of
trying to collect from Blockbuster and are involved in litigation regarding the
guarantee. As a result, we are uncertain as to the likelihood or the timing of
the collection from Blockbuster. Based on our negotiations with Wherehouse
Entertainment and Blockbuster Entertainment Corporation, we expensed $97
thousand of the rent that we are owed from the Wherehouse Entertainment
properties, which results in a net balance of $73 thousand that is accrued as
rent income as of December 31, 2003. In addition, we expensed $49 thousand of
property expenses that we are owed from the Wherehouse properties, which results
in a net balance of $53 thousand that is accrued as a receivable as of December
31, 2003. Based on discussions with Blockbuster Entertainment Corporation and
pending litigation with Blockbuster Entertainment Corporation, the net
receivable remaining of approximately $126 thousand is anticipated to be
collected during 2004.
Deferred merger costs decreased by $990 thousand, from $1.90 million in 2002 to
$915 thousand in 2003. The deferred merger cost is related to deferred
consideration payable to Mr. Taylor as a result of the acquisition of our
17
advisor, which was owned by Mr. Taylor in 1998. In connection with the
acquisition, Mr. Taylor agreed to payment for this advisory company in the form
of common shares, paid as the Company increases its outstanding equity. To date,
Mr. Taylor has received approximately 659 thousand class A common shares, and is
eligible to receive an additional 241 thousand shares as additional equity in
the Company is raised by the Company.
Gain on real estate acquired for re-sale increased $787 thousand, from $0 in
2002. Gain on real estate acquired for resale is a result of selling two
properties acquired during 2003 with the intent to resell after a short holding
period. Through a taxable REIT subsidiary, AmREIT actively seeks properties
where there is an opportunity to purchase undervalued assets, and after a short
holding period and value creation, dispose of the asset and capture the value
created.
Funds From Operations
AmREIT considers FFO to be an appropriate measure of the operating performance
of an equity REIT. The National Association of Real Estate Investment Trusts
(NAREIT) defines funds from operations (FFO) as net income (loss) computed in
accordance with generally accepted accounting principles (GAAP), excluding gains
or losses from sales of property, plus real estate related depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. In addition, NAREIT recommends that extraordinary items not be
considered in arriving at FFO. AmREIT calculates its FFO in accordance with this
definition. Most industry analysts and equity REITs, including AmREIT, consider
FFO to be an appropriate supplemental measure of operating performance because,
by excluding gains or losses on dispositions and excluding depreciation, FFO is
a helpful tool that can assist in the comparison of the operating performance of
a company's real estate between periods, or as compared to different companies.
There can be no assurance that FFO presented by AmREIT is comparable to
similarly titled measures of other REITs. FFO should not be considered as an
alternative to net income or other measurements under GAAP as an indicator of
our operating performance or to cash flows from operating, investing or
financing activities as a measure of liquidity.
Below is the calculation of FFO and the reconciliation to net income, which the
Company believes is the most comparable GAAP financial measure to FFO, in
thousands:
2003 2002
----------------- -------------------
----------------- -------------------
Income (loss) - before discontinued operations $ 1,295 $ (857)
Income - from discontinued operations 703 198
Plus depreciation of real estate assets - from operations 829 575
Plus depreciation of real estate assets - from discontinued operations 30 55
Less(gain)loss on sale of real estate assets acquired for investment (312) 48
Less class B & C distributions (1,943) (865)
----------------- -------------------
Total Funds From Operations available to class A shareholders * $ 602 $ (846)
Cash dividends paid to class A shareholders $ 1,245 $ 866
Dividends in excess of FFO * $ (643) $ (1,712)
* Based on the adherence to the NAREIT definition of FFO, we have not added back
the $915 thousand or $1.9 million charge to earnings during 2003 and 2002,
18
respectively, resulting from shares issued to Mr. Taylor. Adding this $915
thousand and $1.90 million charge to earnings back to earnings would result in
$1.52 million and $1.06 million adjusted funds from operations available to
class A shareholders, respectively, and class A dividends paid less than
adjusted FFO available to class A shareholders of $272 thousand and $192
thousand, respectively.
Cash flows from operating activities, investing activities, and financing
activities are presented below in thousands:
2003 2002
-------------------------- -----------------------
-------------------------- -----------------------
Operating activities $ 1,237 $ 3,729
Investing activities (22,031) (15,268)
Financing activities 20,319 13,819
ITEM 7. FINANCIAL STATEMENTS
(a) (1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheet, December 31, 2003
Consolidated Statements of Operations for the Years Ended
December 31, 2003 and 2002 Consolidated Statements of
Shareholders' Equity for the Years Ended December 31, 2003 and
2002 Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003 and 2002 Notes to Consolidated Financial
Statements for the Years Ended December 31, 2003 and 2002
(2) Financial Statement Schedules
Schedule III - Consolidated Real Estate Owned and Accumulated
Depreciation
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8a. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our Our Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO") management has evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange
Act of 1934) as of December 31, 2003. Based on that evaluation, the CEO and CFO
concluded that our disclosure controls and procedures were effective as of
December 31, 2003.
Changes in Internal Controls
There has been no change to our internal control over financial reporting during
the quarter ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
19
PART III
ITEM 9. DIRECTORS AND TRUST MANAGERS OF THE REGISTRANT
Information with respect to this Item is incorporated by reference from our
Proxy Statement, which we intend to file on or before April 30, 2004 in
connection with our Annual Meeting of Shareholders to be held on June 4, 2004.
ITEM 10. EXECUTIVE COMPENSATION
Information with respect to this Item is incorporated by reference from our
Proxy Statement, which we intend to file on or before April 30, 2004 in
connection with our Annual Meeting of Shareholders to be held on June 4, 2004.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
We are authorized to grant stock options up to an aggregate of 394,254 shares of
common stock outstanding at any time as incentive stock options (intended to
qualify under Section 422 of the Code) or as options that are not intended to
qualify as incentive stock options. All of our equity compensation plans were
approved by security holders. Information regarding our equity compensation
plans was as follows as December 31, 2003:
----------------------------------- ---------------------------- --------------------------- ---------------------------------
(a) (b) (c)
----------------------------------- ---------------------------- --------------------------- ---------------------------------
----------------------------------- ---------------------------- --------------------------- ---------------------------------
Number of securities remaining
remaining available for
future issuancesunder equity
Number of securities to Weighted average compensation plans(excluding
Plan be issued upon exercise exercise price of securities reflected in
Category of outstanding options outstanding options column (a))
----------------------------------- ---------------------------- --------------------------- ---------------------------------
----------------------------------- ---------------------------- --------------------------- ---------------------------------
----------------------------------- ---------------------------- --------------------------- ---------------------------------
----------------------------------- ---------------------------- --------------------------- ---------------------------------
Equity compensation plans
approved by security holders. - - 394,254
----------------------------------- ---------------------------- --------------------------- ---------------------------------
----------------------------------- ---------------------------- --------------------------- ---------------------------------
----------------------------------- ---------------------------- --------------------------- ---------------------------------
----------------------------------- ---------------------------- --------------------------- ---------------------------------
Equity compensation plans not
approved by security holders.
- - -
----------------------------------- ---------------------------- --------------------------- ---------------------------------
----------------------------------- ---------------------------- --------------------------- ---------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item is incorporated by reference from our
Proxy Statement, which we intend to file on or before April 30, 2004 in
connection with our Annual Meeting of Shareholders to be held on June 4, 2004.
20
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Amended and Restated Declaration of Trust (included as Exhibit
3.1 of the Exhibits to the Company's Annual Report on Form
10-KSB for the year ended December 31, 2002, and incorporated
herein by reference).
3.2 By-Laws, dated December 22, 2002 included as Exhibit 3.1 of the
Exhibits to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2002, and incorporated herein by
reference).
10.1 Revolving Credit Agreement, dated November 6, 1998, by and among
AmREIT, Inc., certain lenders and Wells Fargo Bank, as the
Agent, relating to a $30,000,000 loan (included as Exhibit 10.1
of the Exhibits to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1998 and incorporated herein
by reference).
10.2 Amended and Restated Revolving Credit Agreement,
effective August 1, 2000, by and among AmREIT, Inc., certain
lenders and Wells Fargo Bank, as the Agent, relating to a
$13,000,000 loan (included as Exhibit 10.1 of the Exhibits to
the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference).
10.3* Revolving Credit Agreement, effective September 4, 2003,
by and among AmREIT and Wells Fargo Bank, as the Agent, relating
to a $20,000,000 loan.
10.4* Amended and Restated Revolving Credit Agreement, effective
December 8, 2003, by and among AmREIT and Wells Fargo Bank, as
the Agent, relating to a $30,000,000 loan.
21 Subsidiaries of the Company.
31.1* Certification pursuant to Rule 13a-14(a) of Chief Executive
Officer dated March 30, 2004.
31.2* Certification pursuant to Rule 13a-14(a) of Chief Financial
Officer dated March 30, 2004.
32.1* Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Chief Financial Officer certification pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
______________________________________________________________________________
* Filed herewith
(b) Reports on Form 8-K
Current report on Form 8-K dated and filed with the Commission on
December 23, 2003 contained information under Item 5 (Other
Events), Item 7 (Financial Statements, Pro Forma Financial
Information and Exhibits), and Item 9 (Regulation FD Disclosure).
Current report on Form 8-K dated and filed with the Commission on
November 13, 2003 contained information under Item 7 (Financial
Statements, Pro Forma Financial Information and Exhibits) and
Item 9 (Regulation FD Disclosure).
21
Current report on Form 8-K dated and filed with the Commission on
October 10, 2003 contained information under Item 7 (Financial
Statements, Pro Forma Financial Information and Exhibits) and
Item 9 (Regulation FD Disclosure).
Items 5, 6 and 7 of Part II and Item 13 of Part IV of this Form 10-KSB contain
the financial statements, financial statement schedule and other financial
information. No Annual Report or proxy material has yet been provided to
security holders with respect to 2004.
ITEM 14. PRINCIPAL ACCOUNT FEES AND SERVICES
Information with respect to this Item is incorporated by reference from our
Proxy Statement, which we intend to file on or before April 30, 2004 in
connection with our Annual Meeting of Shareholders to be held on June 4, 2004.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Issuer has duly caused this report to be signed on its behalf
on the 30th of March 2004 by the undersigned, thereunto duly authorized.
AmREIT
/s/ H. Kerr Taylor
H. Kerr Taylor, President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Issuer and in
the capacities and on the dates indicated.
/s/ H. Kerr Taylor March 30, 2004
H. KERR TAYLOR
President, Chairman of the Board, Chief Executive
Officer and Director (Principal Executive Officer)
/s/ Robert S. Cartwright, Jr. March 30, 2004
ROBERT S. CARTWRIGHT, JR., Trust Manager
/s/ G. Steven Dawson March 30, 2004
G. STEVEN DAWSON, Trust Manager
/s/ Bryan L. Goolsby March 30, 2004
BRYAN L. GOOLSBY, Trust Manager
/s/ Philip W. Taggart March 30, 2004
PHILIP W. TAGGART, Trust Manager
/s/ Chad C. Braun March 30, 2004
CHAD C. BRAUN, Chief Financial Officer,
Executive Vice President and Secretary
(Principal Accounting Officer)
23
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AND FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 2003
AMREIT AND SUBSIDARIES
F-1
AMREIT AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
FINANCIAL STATEMENTS:
Independent Auditors' Report F-3
Consolidated Balance Sheet, December 31, 2003 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2003 and 2002 F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 2003 and 2002 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003 and 2002 F-7
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2003 and 2002 F-8 to F-23
FINANCIAL STATEMENT SCHEDULE:
Schedule III Consolidated Real Estate Owned and Accumulated
Depreciation for the Year Ended December 31, 2003 F-24 to F-25
All other financial statement schedules are omitted as the required information
is either inapplicable or is included in the financial statements or related
notes.
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Trust Managers
AmREIT:
We have audited the accompanying consolidated balance sheet of AmREIT and
subsidiaries (the "Company") as of December 31, 2003, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the two-year period ended December 31, 2003. In connection
with our audit of the consolidated financial statements, we have also audited
the related financial statement schedule. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AmREIT and
subsidiaries as of December 31, 2003, and the results of their operations and
their cash flows for each of the years in the two-year period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
KPMG LLP
Houston, Texas
March 24, 2004
F-3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMREIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2003
ASSETS
Property:
Land $ 36,242,482
Buildings 33,906,917
Tenant improvements 389,657
________________
70,539,056
Less accumulated depreciation (2,520,633)
________________
Net real estate held for investment 68,018,423
Real estate held for sale, net 4,384,342
Net investment in direct financing leases held for
investment 22,046,210
Cash and cash equivalents 2,031,440
Accounts receivable 575,841
Accounts receivable - related party 201,774
Notes receivable 999,777
Escrow deposits 331,239
Prepaid expenses, net 291,109
Other assets:
Preacquisition costs 13,182
Loan acquisition cost, net of $135,150 in accumulated
amortization 346,622
Leasing costs, net of $59,942 in accumulated
amortization 325,656
Furniture, fixtures and equipment, net of $149,014
in accumulated depreciation 103,271
Accrued rental income 499,658
Intangible lease cost, net of $63,802 in accumulated
amortization 613,171
Investment in non-consolidated affiliates 544,892
________________
Total other assets 2,446,452
________________
TOTAL ASSETS $ 101,326,607
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 48,484,625
Accounts payable 3,084,047
Accounts payable - related party 11,440
Security deposit 97,040
Prepaid rent 6,561
________________
TOTAL LIABILITIES 51,683,713
________________
Minority interest 846,895
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, 2,939,404 shares issued 29,394
Class B Common shares, $.01 par value, 3,000,000
shares authorized, 2,362,522 shares issued 23,625
Class C Common shares, $.01 par value, 4,400,000
shares authorized, 1,402,788 shares issued 14,028
Capital in excess of par value 59,350,988
Accumulated distributions in excess of earnings (9,616,551)
Deferred compensation (143,710)
Cost of treasury shares, 133,822 shares (861,775)
________________
TOTAL SHAREHOLDERS' EQUITY 48,795,999
________________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 101,326,607
================
See Notes to Condensed Consolidated Financial Statements.
F-4
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2003 2002
Revenues:
Rental income from operating leases $ 4,965,593 $ 3,386,030
Earned income from direct financing leases 2,618,573 1,807,117
Real estate fee income 1,031,201 1,222,944
Gain on sales of real estate acquired for
resale 787,244 -
Securities commission income 2,958,226 846,893
Asset management fee income 240,465 252,072
Interest and other income 7,938 4,206
___________ ___________
Total revenues 12,609,240 7,519,262
___________ ___________
Expenses:
General operating and administrative 3,936,546 2,801,946
Legal and professional 881,283 679,154
Securities commissions 2,288,027 653,034
Depreciation and amortization 835,987 611,083
Deferred merger costs 914,688 1,904,370
___________ ___________
Total expenses 8,856,531 6,649,587
___________ ___________
Operating income 3,752,709 869,675
Income from non-consolidated affiliates 312,147 416,904
Federal income tax expense for taxable REIT subsidiary (236,990) (60,656)
Interest expense (2,354,159) (1,774,973)
Minority interest in income of consolidated joint
ventures (178,311) (308,010)
___________ ___________
Income (loss) before discontinued operations 1,295,396 (857,060)
Income from discontinued operations 391,480 245,840
Gain (loss) on sales of real estate acquired for
investment 311,873 (47,553)
___________ ___________
Income from discontinued operations 703,353 198,287
Net income (loss) 1,998,749 (658,773)
Distributions paid to class B and class C shareholders (1,942,656) (865,293)
___________ ___________
Net income (loss) available to class A shareholders $ 56,093 $(1,524,066)
___________ ___________
Net income per common share - basic and diluted
Loss before discontinued operations $ (0.23) $ (0.70)
Income from discontinued operations 0.25 0.08
___________ ___________
Net income (loss) $ 0.02 $ (0.62)
=========== ===========
Weighted avergage common shares used to compute
net income per share, basic and diluted 2,792,190 2,469,725
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-5
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2003 and 2002
Accumulated
Capital in distributions
Common Shares excess of in excess of Deferred
Amount par value earnings Compensation
BALANCE AT DECEMBER 31, 2001 $ 23,856 $21,655,852 $ (6,037,757) $ -
Net loss - - (658,773) -
Issuance of common shares, Class A 3,023 1,901,347 - -
Issuance of common shares, Class A - for class B conversion 1,248 - - -
Issuance of common shares, Class B, net of 124,750
that converted to Class A 24,642 23,468,401 - -
Issuance of restricted shares, Class A 250 157,017 - (256,877)
Amortization of deferred compensation - - - 51,524
Repurchase of common shares, Class A (46,069 shares) - - - -
Distributions - - (1,730,316) -
________ ____________ ____________ __________
BALANCE AT DECEMBER 31, 2002 $ 53,019 $47,182,617 $ (8,426,846) $ (205,353)
________ ____________ ____________ __________
Net income - - 1,998,749 -
Issuance of common shares, Class A 1,017 - - -
Repurchase of common shares, Class B (1,017) - - -
Issuance of restricted shares, Class A - 15,184 - (152,819)
Amortization of deferred compensation - - - 214,462
Repurchase of common shares, Class A (92,700 shares) - - - -
Issuance of common shares, Class C 14,028 12,153,187 - -
Distributions - - 3,188,454 -
_________ ___________ ____________ __________
BALANCE AT DECEMBER 31, 2003 $ 67,047 $59,350,988 $ (9,616,551) $(143,710)
_________ ___________ ____________ __________
Cost of
treasury
shares Total
BALANCE AT DECEMBER 31, 2001 $ (288,170) $15,353,781
Net loss - (658,773)
Issuance of common shares, Class A - 1,904,370
Issuance of common shares, Class A - for Class B conversion - -
Issuance of common shares, Class B, net of 124,750
that converted to Class A - 23,494,291
Issuance of restricted shares, Class A 185,119 85,509
Amortization of deferred compensation - 51,524
Repurchase of common shares, Class A (46,069 shares) (294,138) (294,138)
Distributions - (1,730,316)
__________ ___________
BALANCE AT DECEMBER 31, 2002 $ (397,189) $38,206,248
__________ ___________
Net income - 1,998,749
Issuance of common shares, Class A - 1,017
Repurchase of common shares, Class B - (1,017)
Issuance of restricted shares, Class A 137,635 -
Amortization of deferred compensation - 214,462
Repurchase of common shares, Class A (87,700 shares) (602,221) (602,221)
Issuance of common shares, Class C - 12,167,215
Distributions - (3,188,454)
__________ ___________
BALANCE AT DECEMBER 31, 2003 $ (861,775) $48,795,999
__________ ___________
See Notes to Consolidated Financial Statements.
F-6
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2003 2002
Cash flows from operating activities:
Net income (loss) $ 1,998,749 $ (658,773)
Adjustments to reconcile net income to net cash
provided by operating activities:
Investment in real estate acquired for resale (7,807,597) -
Proceeds from sales of real estate acquired for resale 6,179,145 -
Gain on sales of real estate acquired for resale (787,244) -
(Gain) loss on sales of real estate acquired for investment (311,873) 47,553
Depreciation and amortization 942,326 723,607
Amortization of (increase in) deferred compensation 214,462 51,524
Minority interest in net income of consolidated joint ventures 178,311 308,010
Deferred merger costs 914,688 1,904,370
(Increase) decrease in accounts receivable (402,182) 1,056,265
(Increase) decrease in accounts receivable- related party (132,840) 378,494
Increase in prepaid expenses, net (121,411) (170,028)
Cash receipts from direct financing leases
more than income recognized 24,854 282,805
(Increase) decrease in accrued rental income (225,607) 32,095
Increase in other assets (318,539) (49,114)
Increase (decrease) in accounts payable 1,022,674 (365,018)
(Decrease) increase in accounts payable- related party (194,683) 181,123
Increase in prepaid rent 384 6,177
Increase in security deposits 63,110 -
______________ _____________
Net cash provided by operating activities 1,236,727 3,729,090
______________ _____________
Cash flows from investing activities:
Improvements to real estate (534,554) (623,124)
Acquisition of investment properties (23,922,118) (18,951,523)
Notes receivable advances (999,777) -
Additions to furniture, fixtures and equipment (64,859) (25,131)
Distributions from non-consolidating affiliates 4,444 431,604
Proceeds from sale of investment property 3,497,267 3,692,544
(Increase) decrease in preacquisition costs (11,417) 207,435
______________ _____________
Net cash used in investing activities (22,031,014) (15,268,195)
______________ _____________
Cash flows from financing activities:
Proceeds from notes payable 36,203,535 19,253,403
Payments of notes payable (24,118,829) (3,399,277)
Loan acquisition costs - (38,035)
Purchase of treasury shares (602,221) (109,019)
Issuance of common shares 14,012,572 (517,857)
Retirement of common shares (106,500)
Issuance costs (1,845,357) -
Common dividends paid (3,188,454) (1,730,316)
Contributions from minority interests - 809,971
Distributions to minority interests (142,387) (343,514)
______________ _____________
Net cash provided by financing activities 20,318,859 13,818,856
______________ _____________
Net (decrease) increase in cash and cash equivalents (475,428) 2,279,751
Cash and cash equivalents, beginning of period 2,506,868 227,117
______________ _____________
Cash and cash equivalents, end of period $ 2,031,440 $ 2,506,868
============== =============
In 2003 the Company issued 24,257 shares of restricted stock to
employees and trust managers as part of their compensation plan.
The restricted stock vests over a four and three year period
respectively. The Company recorded $152,819 in deferred
compensation related to the issuance of the restricted stock.
In 2003 the Company assumed $2.81 million of non-recourse debt in
conjunction with a property acquisition.
In 2002 the Company issued 35,732 shares of restricted stock to
employees and trust managers as part of their compensation plan.
The restricted stock vests over a four and three year period
respectively. The Company recorded $256,877 in deferred
compensation related to the issuance of the restricted stock.
On July 23, 2002, the Company merged 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. In conjunction with
the merger, the Company acquired $23,890,318 worth of property
and issued 2,589,179 shares of Class B common shares.
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 2,168,546 1,691,927
Income taxes 46,838 133,841
See Notes to Condensed Consolidated Financial Statements.
F-7
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT is a Texas real estate investment trust ("REIT") that has elected to be
taxed as a REIT for federal income tax purposes. AmREIT is a self-managed,
self-advised REIT with, along with its predecessor, a 19-year history and a
record of investing in quality income producing retail real estate. AmREIT's
class A common shares are traded on the American Stock Exchange under the
symbol "AMY". AmREIT's business structure consists of the publicly traded REIT
and three synergistic businesses that support the Company's platform of growth:
a real estate operation and development business, a securities business and a
retail partnership business. This unique combination provides AmREIT the
ability to access capital through both Wall Street and the independent
financial planning marketplace and strategically invest that capital in high
quality properties for flexibility and more dependable growth.
AmREIT's initial predecessor, American Asset Advisers Trust, Inc. was formed as
a Maryland Corporation in 1993. Following the merger of our external adviser
into the Company in June 1998, we changed our name to AmREIT, Inc., which was a
Maryland corporation. In December 2002, we reorganized as a Texas real estate
investment trust.
AmREIT owns a real estate portfolio that consists of 51 properties located in
18 states. Its properties include single tenant free standing credit tenant
leased projects and multi-tenant frontage shopping center projects. Our focus
is on irreplaceable corners: premier retail frontage properties in
high-traffic, highly populated areas - which create dependable income and
long-lasting value. The single tenant projects are located from 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. Our portfolio includes tenants such as Starbucks, Landry's CVS Pharmacy,
IHOP, Eckerd, Nextel, Washington Mutual, TGI Friday's and others.
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. A deferred merger expense resulted from the shares payable to H. Kerr
Taylor, our President and Chief Executive Officer, as a result of the merger,
which shares represented a portion of consideration payable to Mr. Taylor as a
result of the sale of his advisory company to AmREIT. Mr. Taylor earned
approximately 143 thousand shares during 2003 as a result of our class C common
share offering, resulting in a non-cash charge to earnings of approximately
$915 thousand. Mr. Taylor has the ability to earn an additional 241 thousand
shares under the deferred consideration agreement, in the event the Company
issues additional common shares prior to June 6, 2006, the expiration date of
the agreement.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
recorded when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of demand deposits at commercial banks and money market
funds.
PROPERTY
Property is leased to others, primarily on a net lease basis, whereby the
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 in accordance with generally accepted accounting principles. 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. 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
which includes 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. Prior
to that time, the Company expenses these costs as acquisition expense.
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 value of the individual
property. If impairment is indicated, a loss will be recorded for the amount by
which the carrying value of the asset exceeds its fair value.
DEPRECIATION
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years. Leasehold estate properties, where the Company owns
the building and improvements but not the related ground, therefore there is no
residual value beyond the lease, are amortized over the life of the lease.
F-9
INVESTMENT IN NON-CONSOLIDATED AFFILIATES
AmREIT Opportunity Corporation, a wholly owned subsidiary of AmREIT, invested
$250 thousand as a limited partner and $1 thousand as a general partner in
AmREIT Opportunity Fund, Ltd. ("AOF"), the operations of which are accounted
for using the equity method. The limited partners have the right to remove and
replace the general partner by a vote of the limited partners owning two-thirds
of the outstanding units. AmREIT currently owns a 10.5% limited partner
interest in AOF. AOF was formed to develop, own, manage, and hold for
investment and, or resell property and to make or invest in loans for the
development or construction of property. Liquidation of AOF commenced in July
of 2002.
AmREIT Income & Growth Corporation, a wholly owned subsidiary of AmREIT,
invested $200 thousand as a limited partner and $1 thousand as a general
partner in AmREIT Income & Growth Fund, Ltd. ("AIG"), the operations of which
are accounted for using the equity method. The limited partners have the right
to remove and replace the general partner by a vote of the limited partners
owning a majority of the outstanding units. AmREIT currently owns an
approximately 2.0% limited partner interest in AIG. AIG was formed to develop,
own, manage, and hold for investment and, or resell property and to make or
invest in loans for the development or construction of property.
AmREIT Monthly Income & & Growth Corporation, a wholly owned subsidiary of
AmREIT, invested $200 thousand as a limited partner and $1 thousand as a
general partner in AmREIT Monthly Income & Growth Fund, Ltd. ("MIG"), the
operations of which are accounted for using the equity method. The limited
partners have the right to remove and replace the general partner by a vote of
the limited partners owning a majority of the outstanding units. AmREIT
currently owns an approximately 1.4% limited partner interest in AIG. AIG was
formed to develop, own, manage, and hold for investment and, or resell property
and to make or invest in loans for the development or construction of property.
AmREIT invested $70 thousand as a limited partner in AmREIT CDP #27, LP ("CDP
27"), the operations of which are accounted for using the equity method. CDP 27
was formed to acquire commercial real property and to develop, operate, lease,
manage, and or sell real property. CDP 27 purchased two IHOP properties in 2001
located in Memphis, Tennessee and Tupelo, Mississippi. The Memphis, Tennessee
property was sold for a profit in the first quarter of 2002. The Tupelo,
Mississippi property was sold for a profit in the first quarter of 2003. CDP 27
does not own any real property as of December 31, 2003.
AmREIT Realty Investment Corporation ("ARIC") invested $122 thousand as a
limited partner in AmREIT CDP SPE #33, Ltd. ("CDP 33"), the operations of which
are accounted for using the equity method. CDP 33 was formed to acquire
commercial real property and to develop, operate, lease, manage, and or sell
real property. In December 2001, CDP 33 purchased three IHOP leasehold estate
properties located in Houston, Texas, Orem, Utah, and Hagerstown, Maryland. The
three properties were sold in the second quarter of 2003. CDP 33 does not own
any real property as of December 31, 2003.
LOAN ACQUISITION COSTS
Loan acquisitions costs are incurred in obtaining property financing and are
amortized to interest expense on the effective interest method over the term of
the debt agreements. Accumulated amortization related to loan acquisition costs
as of December 31, 2003 totaled $135 thousand.
F-10
DEFERRED COMPENSATION
Our deferred compensation and long term incentive plan is designed to attract
and retain the services of our trust managers and employees that we consider
essential to our long-term growth and success. As such, it is designed to
provide them with the opportunity to own shares, in the form of restricted
shares, in AmREIT, and provide key employees the opportunity to participate in
the success of our affiliated actively managed retail partnerships through the
economic participation in our general partner companies. All long term
compensation awards are designed to vest over a period of three to seven years,
and promote retention of our quality team.
Deferred compensation includes share grants to employees and as a form of long
term compensation. The share grants vest over a period of time of three to four
years. Additionally, the Company assigns a portion, up to 45 percent, of the
economic interest in certain of its retail limited partnerships to certain of
its key employees. This economic interest is received, as if and when the
Company receives economic benefit from its profit participation, after certain
preferred returns have been paid to the partnership's limited partners. This
assignment of economic interest generally vests over a period of five to seven
years. This allows the Company to align the interest of its employees with the
interest of our shareholders. The Company amortizes the market value,
established at the date of grant, of the restricted shares ratably over the
vesting period. Because the future profits and earnings from the retail limited
partnerships can not be reasonably predicted or estimated, and any employee
benefit is completely contingent upon the benefit received by the general
partner of the retail limited partnerships, AmREIT recognizes expense
associated with the assignment of economic interest in its retail limited
partnerships as the Company recognizes the corresponding income from the
associated retail limited partnerships.
AmREIT maintains a defined contribution 401K retirement plan for its employees.
This plan is available for all employees, immediately upon employment. The plan
allows for two open enrollment periods, June and December. The plan is
administered by Benefit Systems, Inc. and allows for contributions to be either
invested in an array of large, mid and small cap mutual funds managed by
Hartford, or directly into class A common shares. Employee contributions
invested in Company stock are limited to 50% of the employees contributions.
The Company matches 50% of the employees contribution, up to a maximum employee
contribution of 4%. None of the employer contribution is matched in Company
stock. As of December 31, 2003 and 2002, there were 21 and 12 participants
enrolled in the plan, with employer contributions of $35 thousand and $18
thousand, respectively.
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the sale of common
shares are treated as a reduction of shareholders' equity.
REVENUE RECOGNITION
Properties are primarily leased on a net lease basis. Revenue is recognized on
a straight-line basis over the terms of the individual leases. Service fees are
recognized when earned.
FEDERAL INCOME TAXES
AmREIT has elected to be taxed as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, and is, therefore, not subject to Federal
F-11
income taxes to the extent of dividends paid, provided it meets all conditions
specified by the Internal Revenue Code for retaining its REIT status, including
the requirement that at least 90% of its real estate investment trust taxable
income be distributed to shareholders.
ARIC, a wholly owned subsidiary of AmREIT, is treated as a taxable REIT
subsidiary for Federal income tax purposes. Federal income taxes are accounted
for under the asset and liability method. As such, ARIC and its consolidated
subsidiaries have recorded a Federal income tax expense of in 2003 and 2002 of
$237 thousand and $61 thousand, respectively, which represents the Federal
income tax obligations on the consolidated taxable REIT subsidiary's taxable
net income. Additionally, at December 31, 2003 a deferred tax liability of $28
thousand is established to record the taxes on certain real estate assets of
ARIC.
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income (loss)
available to class A common shareholders 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 common
shares outstanding plus the weighted average number of dilutive potential
common shares. Diluted earnings per share information is not applicable due to
the anti-dilutive nature of the common class B and class C shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
For the Years Ended December 31,
BASIC AND DILUTED EARNINGS PER SHARE 2003 2002
Weighted average class A common shares outstanding (in
thousands) 2,792 2,470
Basic and diluted earnings/(loss) per share * $0.02 $(0.62)
===== =======
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Earnings (loss) to Class A common shareholders (in
thousands) * $56 $(1,524)
=== ========
* The operating results for 2003 and 2002 include a charge taken to earnings of
$915 thousand and $1.9 million, respectively, which was the market value of the
class A common shares issued to H. Kerr Taylor, President & CEO, related to the
sale of his advisory company to AmREIT in 1998. The charge was for the deferred
merger cost due from this sale that was triggered by the issuance of additional
common stock as part of the merger with AmREIT's affiliated partnerships during
2002, and the issuance of common C stock in 2003.
USE OF ESTIMATES
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
F-12
The Company's consolidated financial instruments consist primarily of cash, cash
equivalents, accounts receivable and accounts and notes payable. The carrying
value of cash, cash equivalents, accounts receivable and accounts payable are
representative of their respective fair values due to the short-term maturity of
these instruments. As of December 31, 2003, the Company's total debt obligations
are $48.5 million, of which $25.9 million has variable rate terms and therefore,
the fair value is representative of its carry value. Approximately $22.6 million
has fixed rate terms, of which approximately $2.8 million was entered into
during 2003 and $17.2 million was entered into during 2002. Based on the dates
that the debt obligations were entered into, the pricing of the 10-year treasury
rate and the corresponding changes in the spreads over the 10-year treasury
rate, the Company believes that the fair value of its fixed rate debt
obligations is materially representative of its carry value.
NEW ACCOUNTING STANDARDS
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses accounting
and reporting for the impairment or disposal of a segment of a business. More
specifically, this statement broadens the presentation of discontinued
operations to include a component of an entity whose operations and cash flows
can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity.
In 2003, we sold two properties that were previously held for investment,
located in Delaware and Texas. Accordingly, the operating results and the gain
on sale of the disposed properties have been reclassified and reported as
discontinued operations on the Consolidated Statement of Operations.
In November 2002, the Financial Accounting Standards Board ("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, the Company does not have
stock based compensation that is applicable to SFAS No. 148 and therefore the
adoption of SFAS 148 did not have a material impact on our consolidated
financial position, results of operations, or cash flows.
In May 2003, the FASB issued Statement No. 150 ("SFAS 150") "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity". SFAS 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 was effective at the beginning of the first
interim period beginning after June 15, 2003. Statement 150 will be effected by
F-13
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 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, as amended, requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. As amended, the
interpretation requires disclosures about variable interest entities that a
company is not required to consolidate, but in which it has a significant
variable interest. The adoption of FIN 46 for small business filers is effective
no later than December 31, 2004.
REAL ESTATE HELD FOR SALE
Properties are classified as real estate held for sale if the properties were
purchased with intent to hold the properties for less than a year or if the
properties are listed for sale. At December 31, 2003, AmREIT owned three
properties that are classified as real estate held for sale. The three
properties have a combined carrying value of $4.4 million. Two of the properties
have separate notes payable, which have a one year term and a combined balance
of $3.11 million at December 31, 2003.
DISCONTINUED OPERATIONS
The operations of two properties that were sold during 2003 were reported as
discontinued operations. The following is a summary of our discontinued
operations (in thousands, except for per share data):
2003 2002
____ ____
Rental revenue $305 $301
Other income 129 -
Depreciation and amortization (30) (55)
Property expenses (13) -
_____ _____
Income from discontinued operations $391 $246
Basic income from discontinued operations
per common share $0.25 $0.08
RECLASSIFICATION
Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform to the presentation used in the 2003 consolidated
financial statements. Such reclassifications had no effect on net income (loss)
or shareholders' equity as previously reported.
F-14
3. OPERATING LEASES
A summary of minimum future rentals to be received, exclusive of any renewals,
under noncancellable operating leases in existence at December 31, 2003 is as
follows (in thousands):
2004 5,689
2005 5,382
2006 5,299
2007 5,044
2008 3,967
2009-thereafter 25,016
_________
$ 50,397
=========
4. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in its direct financing leases at December 31,
2003 included (in thousands):
Minimum lease payments receivable $55,094
Unguaranteed residual value 3,378
Less: Unearned income (36,426)
_________
$ 22,046
=========
A summary of minimum future rentals, exclusive of any renewals, under the
noncancellable direct financing leases follows (in thousands):
2004 2,321
2005 2,330
2006 2,338
2007 2,460
2008 2,540
2009 - thereafter 43,104
_______
Total $55,093
=======
5. INVESTMENT IN NON-CONSOLIDATED AFFILIATES
As of December 31, 2003, AmREIT, indirectly through wholly owned subsidiaries,
owned interests in three limited partnerships, which are accounted for under
the equity method since AmREIT exercises significant influence. Our interests
in these limited partnerships range from 1.4% to 10.5%. These partnerships were
formed to develop, own, manage, and hold for investment and resell property.
During 2003, the Company owned interests in two additional limited partnerships
that were liquidated after completion of their purpose. Combined condensed
financial information of these ventures (at 100%) is summarized as follows:
F-15
Combined Balance Sheet (in thousands) December 31, 2003
Assets
Property, net $10,682
Cash 4,667
Notes receivable 4,173
Other assets 5,739
_______
TOTAL ASSETS $25,261
=======
Liabilities and partners' capital
Notes payable $ 1,228
Other liabilities 979
Partners capital 23,054
_______
TOTAL LIABILITIES AND PARTNERS' CAPITAL $25,261
=======
Combined Statement of Operations (in thousands)
2003 2002
Total Revenue $ 3,501 $ 2,625
Expense
Interest 113 359
Depreciation and amortization 168 189
Other 405 189
_______ _______
TOTAL EXPENSE 686 737
_______ _______
NET INCOME $ 2,815 $ 1,888
======= =======
6. NOTES PAYABLE
In September 2003, the Company renewed an unsecured credit facility (the "Credit
Facility"), which is being used to provide funds for the acquisition of
properties and working capital. Under the Credit Facility, which has a term of
one year, 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, specified interest coverage and fixed charge coverage ratios and
allow the lender to approve all distributions. Furthermore, the Credit Facility
contains concentration covenants and limitations, limiting property level net
operating income for any one tenant to no more than 15% (35% for IHOP) of total
property net operating income. At December 31, 2003, IHOP net operating income
represented 34.7% of total property net operating income. At December 31, 2003,
the Company was in compliance with all financial covenants. The Credit
Facility's annual interest rate varies, depending upon the Company's debt to
asset ratio, from LIBOR plus a spread of 1.40% to LIBOR plus 2.35%. As of
December 31, 2003, the interest rate was 3.19%, which was calculated as LIBOR
plus 2.0%. As of December 31, 2003, $22.8 million was outstanding under the
Credit Facility. Thus, the Company has approximately $7.2 million available
under its line of credit, subject to lender approval of the use of the proceeds.
F-16
In March 1999, the Company entered into a ten-year mortgage note, amortized
over 30 years, for $1 million with $958 thousand being outstanding at December
31, 2003. The interest rate is fixed at 8.375% with payments of principal and
interest due monthly. The note matures April 1, 2009 and as of December 31,
2003 the Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on property with an aggregate carrying
value of $1.16 million, net of $129 thousand of accumulated depreciation.
In February 2001, the Company entered into a ten-year mortgage note, amortized
over 20 years, for $1.35 million with $1.27 million being outstanding at
December 31, 2003. The interest rate is fixed at 8.25% with payments of
principal and interest due monthly. The note matures February 28, 2011 and as
of December 31, 2003 the Company is in compliance with all terms of the
agreement. The note is collateralized by a first lien mortgage on property,
which is accounted for as a direct financing lease with a net investment in
direct financing lease of $1.01 million and land of $741 thousand.
In October 2001, the Company entered into a ten-year mortgage note amortized
over 30 years, for $2.40 million with $2.36 million being outstanding at
December 31, 2003. The interest rate is fixed at 7.60% with payments of
principal and interest due monthly. The note matures November 1, 2011 and as of
December 31, 2003 the Company is in compliance with all terms of the agreement.
The note is collateralized by a first lien mortgage on property with an
aggregate carrying value of $3.88 million, net of $416 thousand of accumulated
depreciation.
In April 2003, the Company entered into a note payable for $1.73 million with
$1.73 million being outstanding at December 31, 2003. At December 31, 2003, the
interest rate was 3.99%, which was calculated as LIBOR plus 2.8%. The note
matures April 1, 2004 and as of December 31, 2003 the Company is in compliance
with all terms of the agreement. The note is collateralized by a first lien
mortgage on the property, which is accounted for as a direct financing lease
with a net investment in direct financing lease of $1.37 million and land of
$573 thousand. Subsequent to December 31, 2003, the property was sold, the note
payable was paid in full, and an estimated profit of $500 thousand was
generated.
In May 2003, the Company entered into a note payable for $1.65 million with
$1.38 million being outstanding at December 31, 2003. At December 31, 2003, the
interest rate was 3.99%, which was calculated as LIBOR plus 2.8%. The note
matures April 1, 2004 and as of December 31, 2003 the Company is in compliance
with all terms of the agreement. The note is collateralized by a first lien
mortgage on the property, which is accounted for as a direct financing lease
with a net investment in direct financing lease of $1.31 million and land of
$547 thousand. Management is working with the lender and anticipates extending
the loan term for six months, or paying off the note payable prior to maturity.
In conjunction with a property acquisition completed during December 2003, we
assumed $2.81 million of non-recourse debt secured by the related property. The
interest rate is fixed at 7.58% with payments of principal and interest due
monthly. The note matures May 11, 2012 and as of December 31, 2003 the Company
is in compliance with all terms of the agreement. The note is collateralized by
a first lien mortgage on property with an aggregate carrying value of $4.75
million, net of $3 thousand of accumulated depreciation.
Beginning in April 2002, AAA CTL Notes, Ltd., a majority owned subsidiary of
AmREIT, began entering into non-recourse ten-year mortgages, amortized over 20
years, related to the purchase of seventeen IHOP properties. The balance of the
loans at December 31, 2003 totaled $14.43 million with fixed interest rates of
7.82% on 9 properties and 7.89% on eight properties. The maturity dates range
from May 1, 2012 to September 1, 2012. The notes are collateralized by a first
lien mortgage on the properties, which are accounted for as direct financing
leases with a net investment in direct financing lease at December 31, 2003 of
$17.20 million. As of December 31, 2003 the Company is in compliance with all
terms of the agreements. The non-recourse notes have cross-collateralization
and default provisions with each other.
F-17
In July of 2002, the Company issued 13, 8 year subordinated, 5.47%
interest-only notes with an aggregate principal amount of $760 thousand,
maturing July 2010. The notes, which are callable by the Company at par plus
accrued interest, were issued to partners who dissented against the Company's
merger with three affiliated public partnerships.
Aggregate annual maturity of the notes payable for each of the following five
years ending December 31 are as follows:
(in thousands)
2004 $ 26,349
2005 490
2006 530
2007 573
2008 620
Thereafter 19,923
________
$ 48,485
========
7. MAJOR TENANTS
The following schedule summarizes rental income by lessee for our top 15
tenants for 2003 and 2002 (in thousands):
2003 2002
_______ _______
International House of Pancakes $ 2,731 $ 1,784
Footstar, Inc. 740 735
Golden Corral(1) 430 167
Wherehouse Entertainment 386 381
Hollywood Entertainment Corp. 312 273
Texas Children's Pediatrics (2) 286 137
River Oaks Imaging 280 264
Comp USA (1) 268 123
OfficeMax, Inc. 256 509
TGI Friday's (1) 240 83
Baptist Memorial Hospital (1) 223 102
Dr. Pucilllo (1) 189 87
Mattress Giant, Inc. 179 168
Washington Mutual 159 158
Pier 1 135 62
_______ _______
Total $ 6,814 $ 5,033
======= =======
(1) Properties were purchased from three affiliated partnerships in July
2002.
(2) Texas Children's Pediatrics entered into a long-term lease with
AmREIT, beginning in May 2002, at Copperfield Medical Plaza. The lease
was entered into as a result of the negotiated lease buy out by AmREIT
and One Care Health Industries, Inc.
F-18
8. FEDERAL INCOME TAXES
The differences between net income for financial reporting purposes and taxable
income before distribution deductions relate primarily to temporary
differences, merger costs and potential acquisition costs which are expensed
for financial reporting purposes.
For income tax purposes, distributions paid to shareholders consist of ordinary
income, capital gains and return of capital as follows (in thousands):
2003 2002
_______ _______
Ordinary income $ 1,684 $ -
Return of capital 1,014 1,730
Capital gain 490 -
_______ _______
$ 3,188 $ 1,730
======= =======
9. RELATED PARTY TRANSACTIONS
See Note 4 regarding investments in non-consolidated affiliates.
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. AmREIT accounted for this merger as a purchase,
whereby the assets of the partnerships have been recorded at fair market value.
AmREIT increased its real estate assets by approximately $24.3 million and
issued approximately 2.6 million shares of Class B common stock to the limited
partners in the affiliated partnerships as a result of the merger.
Approximately $760 thousand in 8 year, 5.47% interest only, subordinated notes
were issued to limited partners of the affiliated partnerships who dissented to
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. A deferred merger expense
resulted from the shares payable to H. Kerr Taylor, our President and Chief
Executive Officer, as a result of the merger, which shares represented a
portion of the sale of consideration payable to Mr. Taylor as a result of the
sale of his advisory company to AmREIT. Mr. Taylor earned approximately 143
thousand shares during 2003 as a result of our class C common share offering,
resulting in a non-cash charge to earnings of approximately $915 thousand. Mr.
Taylor has the ability to earn an additional 241 thousand shares under the
deferred consideration agreement.
The Company earns real estate fee income by providing property acquisition,
leasing, property management and construction management services for eleven
affiliated real estate limited partnerships that are under common management
(the "Partnerships"). Mr. Taylor, the President and Chief Executive Officer of
the Company owns between 45% and 100% of the stock of the companies that serve
as the general partner for eight of the Partnerships. The Company owns 100% of
the stock of the companies that serve as the general partner for three of the
Partnerships. Real estate fee income of $455 thousand and $606 thousand were
paid by the Partnerships to the Company for 2003 and 2002, respectively.
The Company earns asset management fees from the Partnerships for providing
accounting related services, investor relations, facilitating the deployment of
capital, and other services provided in conjunction with operating the
Partnership. Asset management fees of $240 thousand and $252 thousand were paid
by the Partnerships to the Company for 2003 and 2002, respectively.
F-19
As a sponsor of real estate investment opportunities to the NASD financial
planning broker dealer community, the Company maintains an indirect 1% general
partner interest in the investment funds that it sponsors. The funds are
typically structured such that the limited partners receive 99% of the
available cash flow until 100% of their original invested capital has been
returned and a preferred return has been met. Once this has happened, then the
general partner begins sharing in the available cash flow at various promoted
levels. The Company also assigns a portion of this general partner interest in
these investment funds to its employees as long term, contingent compensation.
In so doing, the Company believes that it will align the interest of management
with that of the shareholders, while at the same time allowing for a
competitive compensation structure in order to attract and retain key
management positions without increasing the overhead burden.
On March 20, 2002, the Company formed AAA CTL Notes, Ltd. ("AAA"), a majority
owned subsidiary which is consolidated in the financial statements of AmREIT,
through which the Company purchased fifteen IHOP leasehold estate properties
and two IHOP fee simple properties.
Locke Liddell & Sapp, LLP acts as the Company's corporate attorneys. Bryan
Goolsby is the managing director of Locke Liddell & Sapp LLP and is a member of
the Company's board of trust managers.
10. PROPERTY ACQUISITIONS AND DISPOSITIONS
During 2003, AmREIT invested $34.5 million through the acquisition of 10 retail
properties, which consisted of single tenant properties, multi-tenant
properties and land to be developed.
AmREIT acquired five single tenant properties during the year. The Company
purchased four IHOP properties, which are located in Wisconsin, Texas, Missouri
and Indiana. Two of the IHOP properties, located in Wisconsin and Indiana, were
sold for a profit during 2003. The Company also acquired a single-tenant
property in Maryland that is ground leased to TGI Friday's.
The Company acquired two multi-tenant properties during 2003. Uptown Plaza is a
28,000 square foot retail complex located in Houston, Texas, including a
free-standing CVS drugstore and a retail shopping center anchored by Grotto, a
new concept of Landry's Restaurant, Inc. The Terrace Shops is a 16,395 square
foot center located near the West University area of Houston, Texas at the
prestigious corner of Buffalo Speedway and West Park. It is anchored by the
national coffee chain Starbucks.
During 2003, we acquired three parcels of land to be developed, which are
located in Houston, Texas. One of the sites, located in the Galleria area of
Houston, has been ground leased to Eckerd. Another site is an infill
development project in the prestigious Tanglewood area of Houston. AmREIT also
acquired a one-acre parcel at the intersection of Interstate 45 and West Road.
AmREIT sold four properties during 2003. The two IHOP properties were
classified as held for resale since we intended to hold the properties for less
than a year. The two properties were sold for a combined profit of $787
thousand, which is recorded as a gain on sale of real estate held for resale.
In addition, we sold two investment properties during 2003. We sold an Office
Max, located in Delaware, and a Goodyear Tire, located in Houston, Texas. These
two properties were sold for a combined profit of $312 thousand, which is
recorded as a gain on sale of real estate acquired for investment. Accordingly,
the operating results and the gain on sale of these two properties have been
reclassified and reported as discontinued operations on the Consolidated
Statement of Operations.
F-20
The following selected unaudited pro forma consolidated statement of operations
for AmREIT and subsidiaries gives effect to the acquisition of Uptown Plaza,
which assumes that the acquisition occurred on January 1, 2003 and January 1,
2002, respectively. The pro forma statement also assumes that the merger with
its three affiliated partnership occurred on January 1, 2002. Additionally, the
Company has presented a summary of assets acquired and liabilities assumed as
of the date of the Uptown Plaza acquisition, December 10, 2003.
Pro Forma Consolidated Statement of Operations
For the Twelve Months Ended December 31,
(Unaudited) (in thousands, except shares and
per share data)
2003 2002
Revenues
Rental income and earned income $ 8,715 $ 6,388
Other income 5,025 2,126
___________ __________
Total Revenues 13,740 8,514
Total Expenses 9,110 7,022
___________ ___________
Operating income 4,630 1,492
Income before discontinued operations 2,173 67
Income from discontinued operations 703 198
Pro forma net income $ 2,876 $ 265
Distributions paid to class B and class C shareholders (1,943) (1,822)
___________ ___________
Net income (loss) available to class A shareholders $ 933 $ (1,557)
=========== ===========
Net income per common share - basic and diluted
Loss before discontinued operations 0.08 (0.65)
Income from discontinued operations 0.25 0.07
___________ ___________
Net income (loss) 0.33 (0.58)
Weighted average common shares used to compute
net income per share, basic and diluted 2,792,190 2,691,580
========== ==========
F-21
Summary of Assets Acquired and Liabilities Assumed
as of December 10, 2003
(In Thousands)
Assets
Buildings $ 4,880
Land 7,784
Intangible lease costs 348
_______
TOTAL ASSETS $13,012
=======
Liabilities $ 147
Net assets acquired $12,865
_______
11. COMMITMENT
The Company's lease agreement for its office facilities expired December 31,
2003. The Company is currently on a month to month basis for its current office
facilities, and is in negotiations to sign a lease for a new office space.
Rental expense for the years ended December 31, 2003 and 2002 was $92 thousand
and $77 thousand, respectively.
12. SEGMENT REPORTING
In 2003, the Company began evaluating and managing the operations in a more
comprehensive manner, focusing on the specific aspects of the Company, and
measuring their performance.
The operating segments presented are the segments of AmREIT for which separate
financial information is available, and revenue and operating performance is
evaluated regularly by senior management in deciding how to allocate resources
and in assessing performance. The 2002 information has been reclassified into
these segments to provide comparable information.
AmREIT evaluates the performance of its operating segments primarily on revenue.
Because the real estate development and operating segment and securities and
retail partnership segment are both revenue and fee intensive, management
considers revenue the primary indicator in allocating resources and evaluating
performance.
The portfolio segment consists of our portfolio of singe and multi-tenant
shopping center projects. This segment consists of 51 properties located in 18
states. Expenses for this segment include depreciation, interest, minority
interest, legal cost directly related to the portfolio of properties and the
property level expenses. The consolidated assets of AmREIT are substantially all
in this segment.
Included in Corporate and Other are those costs and expenses related to general
overhead and personnel that are not solely responsible for one of the reporting
segments.
F-22
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Real Estate Securities &
Operating & Retail Corporate
Portfolio Development Partnerships and Other Total
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
2003
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Revenue $ 7,584 $ 1,818 $ 3,199 $ 8 $ 12,609
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Income from
non-consolidated
affiliates
- - 312 - 312
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Expenses (3,796) (447) (2,909) (3,557) (10,698)
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Deferred merger
cost - - - (915) (915)
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Net income
(loss) before
discontinued
operations 3,788 1,371 600 (4,464) 1,295
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
2002
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Revenue $ 5,193 $ 1,223 $ 1,099 $ 4 $ 7,519
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Income from
non-consolidated
affiliates - 417 - - 417
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Expenses (3,052) (307) (881) (2,649) (6,889)
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Deferred merger
cost - - - (1,904) (1,904)
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
Net income
(loss) before
discontinued
operations 2,141 1,333 218 (4,549) (857)
--------- ------------------ -------------- ----------------- ----------------- -------------- -------------
13. SUBSEQUENT EVENTS
On March 2, 2004, Footstar (the parent company of Just For Feet) filed for a
voluntary petition of relief under Chapter 11 of the federal bankruptcy code. On
March 3, 2004, the Footstar announced that they had negotiated and obtained
approval to use a $300 million debtor-in-possession financing facility in order
to satisfy their current operating obligations during the reorganization period.
AmREIT owns two Just For Feet properties, one located in Tucson, Arizona and
another in Baton Rouge, Louisiana. Footstar has indicated that both locations
are in the top 40 percent of the Just For Feet chain, and it has not been
identified whether the leases will be affirmed or rejected. Annual rental income
from both properties for the 2003 fiscal year is approximately $740 thousand, or
5.6% of total 2003 revenue. AmREIT is working with Footstar in an effort to
cooperate with their plan of reorganization, as well as working with local
retailers, brokers and leasing agents on alternative options for the property.
As of December 31, 2003 and as of the date of March 30, 2004 (unaudited) the
Company does not have a material receivable due from Footstar.
F-23
AmREIT and subsidiaries
SCHEDULE III - Consolidated Real Estate Owned and Accumulated Depreciation
For the year ended December 31, 2003
Cost at
Property Encum- Improve- Close of Year
Description brances Building Land ments Building Land
Properties Invested in
Under Operating Leases
Radio Shack Retail Store, Texas $ - $ 788,330 $ 337,856 $ - $ 788,330 $ 337,856
Blockbuster Music Store, Missouri $ - $ 1,247,461 534,483 $ - $ 1,247,461 $ 534,483
OneCare Health Industries, Inc., Texas $ - $ 1,455,030 $ 534,086 $ - $ 1,455,030 $ 534,086
Blockbuster Music Store, Kansas $ - $ 1,382,846 $ 592,648 $ - $ 1,382,846 $ 592,648
Just For Feet Store, Arizona $ - $ - $ 1,214,046 $ - $ - $ 1,214,046
Bank United, Woodlands, Texas $ - $ - $ 562,846 $ - $ - $ 562,846
Bank United, Houston, Texas $ - $ - $ 851,973 $ - $ - $ 851,973
Just For Feet Store, Louisiana $ - $ 2,254,537 $ 966,230 $ - $ 2,254,537 $ 966,230
Hollywood Video Store, Louisiana $ - $ 784,123 $ 443,544 $ - $ 784,123 $ 443,544
Hollywood Video Store, Mississippi $ - $ 835,854 $ 450,000 $ - $ 835,854 $ 450,000
Lake Woodlands Plaza $ - $ 2,987,700 $ 1,369,065 $ - $ 2,987,700 $ 1,369,065
Sugar Land Plaza $ - $ 2,902,157 $ 1,280,043 $ - $ 2,902,157 $ 1,280,043
Don Pablo's, Georgia $ - $ - $ 773,800 $ - $ - $ 773,800
IHOP, Topeka $ - $ - $ 450,984 $ - $ - $ 450,984
IHOP, Sugarland $ - $ - $ 740,882 $ - $ - $ 740,882
Jack in the Box $ - $ 504,230 $ 216,099 $ - $ 504,230 $ 216,099
Baptist Memorial Health $ - $ 1,456,017 $ 624,006 $ - $ 1,456,017 $ 624,006
Payless Shoe Source $ - $ 498,098 $ 212,907 $ - $ 498,098 $ 212,907
Golden Corral $ - $ 1,099,817 $ 722,949 $ - $ 1,099,817 $ 722,949
Golden Corral $ - $ 1,297,850 $ 556,221 $ - $ 1,297,850 $ 556,221
TGI Friday's, Houston $ - $ 1,453,769 $ 623,043 $ - $ 1,453,769 $ 623,043
Guitar Center $ - $ 1,782,470 $ 763,917 $ - $ 1,782,470 $ 763,917
Popeye's $ - $ 778,772 $ 333,758 $ - $ 778,772 $ 333,758
Dr. Pucillo $ - $ 1,276,836 $ 547,214 $ - $ 1,276,836 $ 547,214
Blockbuster Video $ - $ 688,090 $ 294,896 $ - $ 688,090 $ 294,896
Pier One Imports $ - $ 1,000,563 $ 422,722 $ - $ 1,000,563 $ 422,722
IHOP, Memphis $ - $ - $ 469,502 $ - $ - $ 469,502
IHOP, Centerville $ - $ - $ 457,492 $ - $ - $ 457,492
Uptown Plaza $ - $ 4,887,774 $ 7,796,383 $ - $ 4,887,774 $ 7,796,383
Terrace Shops $ - $ 2,544,593 $ 2,212,278 $ - $ 2,544,593 $ 2,212,278
San Felipe @ Winrock $ - $ - $ 4,723,140 $ - $ - $ 4,723,140
TGI Friday's, Hanover $ - $ - $ 1,474,473 $ - $ - $ 1,474,473
Westheimer & Yorktown $ - $ - $ 2,688,996 $ - $ - $ 2,688,996
I-45 @ West Rd. $ - $ - $ 584,877 $ - $ - $ 584,877
IHOP, Grand Prairie $ - $ - $ 572,711 $ - $ - $ 572,711
IHOP, Bridgeton $ - $ - $ 546,623 $ - $ - $ 546,623
____ ___________ ____________ ____ ___________ ___________
TOTAL $ - $33,906,917 $ 37,946,693 $ - $33,906,917 $37,946,693
==== =========== ============ ==== =========== ===========
Life on Which
Depreciation
in Latest Income
Accumulated Date of Date Statement
Depreciation Construction Acquired is Computed
Properties Invested in
Under Operating Leases
Radio Shack Retail Store, Texas $ 192,820 N/A 06-15-94 39 Years
Blockbuster Music Store, Missouri $ 170,630 N/A 11-14-94 39 Years
OneCare Health Industries, Inc., Texas $ 263,658 N/A 09-26-95 39 Years
Blockbuster Music Store, Kansas $ 164,427 N/A 09-12-95 39 Years
Just For Feet Store, Arizona N/A N/A 09-11-96 N/A
Bank United, Woodlands, Texas N/A N/A 09-23-96 N/A
Bank United, Houston, Texas N/A N/A 12-11-96 N/A
Just For Feet Store, Louisiana $ 223,168 N/A 06-09-97 39 Years
Hollywood Video Store, Louisiana $ 95,741 N/A 10-31-97 39 Years
Hollywood Video Store, Mississippi $ 128,593 N/A 12-30-97 39 Years
Lake Woodlands Plaza $ 342,258 N/A 6-3-98 39 Years
Sugar Land Plaza $ 416,081 N/A 7-1-98 39 Years
Don Pablo's, Georgia N/A N/A 12-18-98 N/A
IHOP, Topeka N/A N/A 9-30-99 N/A
IHOP, Sugarland N/A N/A 9-22-99 N/A
Jack in the Box $ 18,855 N/A 7-23-02 39 Years
Baptist Memorial Health $ 54,445 N/A 7-23-02 39 Years
Payless Shoe Source $ 18,625 N/A 7-23-02 39 Years
Golden Corral $ 41,126 N/A 7-23-02 39 Years
Golden Corral $ 48,531 N/A 7-23-02 39 Years
TGI Friday's, Houston $ 54,361 N/A 7-23-02 39 Years
Guitar Center $ 66,653 N/A 7-23-02 39 Years
Popeye's $ 29,121 N/A 7-23-02 39 Years
Dr. Pucillo $ 47,745 N/A 7-23-02 39 Years
Blockbuster Video $ 25,730 N/A 7-23-02 39 Years
Pier One Imports $ 37,414 N/A 7-23-02 39 Years
IHOP, Memphis N/A N/A 7-26-02 N/A
IHOP, Centerville N/A N/A 7-25-02 N/A
Uptown Plaza $ 6,860 N/A 12-10-03 39 Years
Terrace Shops $ 2,719 N/A 12-15-03 39 Years
San Felipe @ Winrock N/A N/A 11-17-03 N/A
TGI Friday's, Hanover N/A N/A 9-16-03 N/A
Westheimer & Yorktown N/A N/A 1-10-03 N/A
I-45 @ West Rd. N/A N/A 10-14-03 N/A
IHOP, Grand Prairie N/A N/A 4-29-03 N/A
IHOP, Bridgeton N/A N/A 5-8-03 N/A
____________
TOTAL $ 2,449,561
============
Cost at
Property Encum- Improve- Close of Year
Description brances Building Land ments Building Land
Properties Invested in Under
Direct Financing Lease
Just For Feet Store, Arizona $ - $ 2,828,744 $ - $ - $ 2,828,744 $ -
IHOP, Topeka $ - $ 1,004,323 $ - $ - $ 1,004,323 $ -
IHOP, Sugarland $ - $ 1,010,880 $ - $ - $ 1,010,880 $ -
IHOP, Albuquerque $ - $ 878,115 $ - $ - $ 878,115 $ -
IHOP, Baton Rouge $ - $ 1,436,863 $ - $ - $ 1,436,863 $ -
IHOP, Beaverton $ - $ 1,048,473 $ - $ - $ 1,048,473 $ -
IHOP, Charlottesville $ - $ 749,809 $ - $ - $ 749,809 $ -
IHOP, El Paso #1934 $ - $ 900,268 $ - $ - $ 900,268 $ -
IHOP, Roanoke $ - $ 846,641 $ - $ - $ 846,641 $ -
IHOP, Rochester $ - $ 1,140,349 $ - $ - $ 1,140,349 $ -
IHOP, Salem $ - $ 722,522 $ - $ - $ 722,522 $ -
IHOP, Shawnee $ - $ 890,283 $ - $ - $ 890,283 $ -
IHOP, Springfield $ - $ 1,194,802 $ - $ - $ 1,194,802 $ -
IHOP, Alexandria $ - $ 856,187 $ - $ - $ 856,187 $ -
IHOP, Centerville $ - $ 1,085,738 $ - $ - $ 1,085,738 $ -
IHOP, Memphis #4462 $ - $ 1,118,073 $ - $ - $ 1,118,073 $ -
IHOP, La Verne $ - $ 1,002,167 $ - $ - $ 1,002,167 $ -
IHOP, El Paso #1938 $ - $ 1,161,863 $ - $ - $ 1,161,863 $ -
IHOP, Memphis #4482 $ - $ 1,066,055 $ - $ - $ 1,066,055 $ -
IHOP, Parker $ - $ 1,104,056 $ - $ - $ 1,104,056 $ -
IHOP, Grand Prairie $ - $ 1,372,806 $ - $ - $ 1,372,806 $ -
IHOP, Bridgeton $ - $ 1,307,324 $ - $ - $ 1,307,324 $ -
____ ___________ __________ ____ ___________ ____________
TOTAL $ - $24,726,340 $ - $ - $24,726,340 $ -
==== =========== ========== ==== =========== ============
Life on Which
Depreciation
in Latest Income
Accumulated Date of Date Statement
Depreciation Construction Acquired is Computed
Properties Invested in Under
Direct Financing Lease
Just For Feet Store, Arizona (1) N/A 9-11-96 N/A
IHOP, Topeka (1) N/A 9-30-99 N/A
IHOP, Sugarland (1) N/A 9-22-99 N/A
IHOP, Albuquerque (1) N/A 4-23-02 N/A
IHOP, Baton Rouge (1) N/A 4-23-02 N/A
IHOP, Beaverton (1) N/A 4-16-02 N/A
IHOP, Charlottesville (1) N/A 4-23-02 N/A
IHOP, El Paso #1934 (1) N/A 4-16-02 N/A
IHOP, Roanoke (1) N/A 6-21-02 N/A
IHOP, Rochester (1) N/A 4-16-02 N/A
IHOP, Salem (1) N/A 5-17-02 N/A
IHOP, Shawnee (1) N/A 4-16-02 N/A
IHOP, Springfield (1) N/A 5-17-02 N/A
IHOP, Alexandria (1) N/A 7-18-02 N/A
IHOP, Centerville (1) N/A 7-25-02 N/A
IHOP, Memphis #4462 (1) N/A 7-26-02 N/A
IHOP, La Verne (1) N/A 8-23-02 N/A
IHOP, El Paso #1938 (1) N/A 8-23-02 N/A
IHOP, Memphis #4482 (1) N/A 8-23-02 N/A
IHOP, Parker (1) N/A 8-23-02 N/A
IHOP, Grand Prairie (1) N/A 4-29-03 N/A
IHOP, Bridgeton (1) N/A 5-8-03 N/A
TOTAL (1)
F-24
(1) The portion of the lease relating to the building of this property has
been recorded as a direct financing lease for financial reporting purposes.
Consequently, depreciation is not applicable.
(2) Transactions in real estate and accumulated depreciation during 2003, 2002
and 2001 for operating lease properties are summarized as follows:
Accumulated
Cost Depreciation
Balance at December 31, 2000 29,895,108 1,559,049
Acquisitions / additions 1,351,201 -
Disposals (797,237) -
Depreciation expense - 439,652
___________ ___________
Balance at December 31, 2001 $30,449,072 $ 1,998,701
Acquisitions / additions $20,024,562 $ -
Disposals $(2,875,168) $ (238,591)
Depreciation expense $ - $ 262,042
___________ ___________
Balance at December 31, 2002 $47,598,466 $ 2,022,152
Acquisitions / additions $29,239,727 $ -
Disposals $(4,984,583) $ (267,016)
Depreciation expense $ - $ 694,425
___________ ___________
Balance at December 31, 2003 $71,853,610 $ 2,449,561
(3) The aggregate cost of all properties for Federal Income
Tax purposes is $97,256,924 at December 31, 2003.
F-25