AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 2004
REGISTRATION NO. 333-114432
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMREIT
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENT)
8 GREENWAY PLAZA, SUITE 1000
HOUSTON, TEXAS 77046
(713) 850-1400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
H. KERR TAYLOR
CHIEF EXECUTIVE OFFICER
AMREIT
8 GREENWAY PLAZA, SUITE 1000
HOUSTON, TEXAS 77046
(713) 850-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BRYAN L. GOOLSBY
KENNETH L. BETTS
LOCKE LIDDELL & SAPP LLP
2200 ROSS AVENUE, SUITE 2200
DALLAS, TEXAS 75201-6776
(214) 740-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If this form is filed to register additional Securities for offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------
The Registrant is filing this Post-Effective Amendment No. Two, dated
October 4, 2004 ("Amendment Two"), because Post-Effective Amendment No. One,
Filed October 1, 2004 ("Amendment One"), inadvertently omitted the Prospectus,
dated June 25, 2004 (the "Prospectus"). Both Amendment One and Amendment Two
contain Supplement No. Two, dated September 29, 2004, to the Prospectus.
Amendment One and Amendment Two are substantially the same, with the exception
that Amendment Two contains the Prospectus.
This Post-Effective Amendment No. 2 consists of the following:
1. The Registrant's final form of Prospectus dated June 25, 2004,
previously filed on June 24, 2004 and refilled herewith.
2. Supplement No. 2 dated September 29, 2004 to the Registrant's
Prospectus dated June 25, 2004, included herewith, which will be delivered as an
unattached document along with the Prospectus dated June 25, 2004. Supplement
No. 2 supersedes and replaces all prior supplements to the Prospectus.
3. Part II included herewith.
4. Signatures, included herewith.
THE FOLLOWING IS TEXT TO A STICKER TO BE ATTACHED TO THE FRONT COVER PAGE OF THE
PROSPECTUS IN A MANNER THAT WILL NOT OBSCURE THE RISK FACTORS:
SUPPLEMENTAL INFORMATION - The prospectus of AmREIT consists of this
prospectus dated June 24, 2004 and Supplement No. 2 dated September 29, 2004.
Supplement No. 2 supersedes and replaces prior Supplement No. 1 (dated August
31, 2004).
AMREIT
UP TO 17,000,000 CLASS D COMMON SHARES OFFERED TO THE PUBLIC
AmREIT is a self-managed, self-advised real estate company that operates
as a real estate investment trust (REIT) under the federal income tax laws. Our
business model consists of a publicly traded REIT that is supported by three
synergistic businesses - a real estate operating and development business, a
securities business and a retail partnership business. AmREIT acquires, owns and
manages a diversified portfolio of high-end single and multi-tenant retail
centers. At March 31, 2004, AmREIT owned directly, or through joint ventures,
interests in 51 properties located in 18 states. The proceeds from the sale of
the class D common shares being offered by us pursuant to this prospectus will
be invested in these types of real estate properties. We are offering and
selling to the public up to 15,000,000 class D common shares of beneficial
interest for $10.00 per share and up to 2,000,000 shares to be issued pursuant
to our dividend reinvestment plan at a purchase price of $10.00 per share.
This prospectus gives you detailed information about the class D common
shares. You are encouraged to read this document carefully. IN PARTICULAR, YOU
SHOULD READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 11 FOR A DESCRIPTION OF
VARIOUS RISKS YOU SHOULD CONSIDER IN EVALUATING AN INVESTMENT IN THE SHARES,
INCLUDING THE FOLLOWING:
- the lack of a public trading market for the class D common shares,
- the fact that AmREIT depends on few major tenants,
- the potential dilution of your interest should we issue additional
shares,
- the speculative nature of an investment in the class D common
shares,
- the shareholders cannot evaluate property acquisitions ahead of
time,
- the ability of AmREIT to increase its current debt levels,
- the subordination of distributions on the class D common shares to
debt payments and to dividends on our class B and class C common
shares,
- the bankruptcy of a significant tenant could have a material adverse
affect on our operations, and
- the ability of AmREIT to maintain its REIT status.
The Offering:
- The shares will be offered on a best efforts basis to investors at
$10.00 per share.
- We will pay selling commissions to broker-dealers of 7.5%, due
diligence reimbursements to broker-dealers of 0.50% and a dealer
manager fee of 2.5% out of the offering proceeds raised.
- We will invest approximately 88.5% of the offering proceeds raised
in real estate properties or to pay down existing debt, and the
balance will be used to pay fees and expenses.
- This offering will terminate on or before June 25, 2005 unless we
decide to extend the offering until not later than June 25, 2006,
in any state that allows us to extend the offering.
PER SHARE TOTAL
--------- --------------
Public Offering Price $ 10.00 $ 150,000,000
Selling Commissions, Due Diligence Reimbursement and
Dealer Manager Fee $ 1.05 $ 15,750,000
Proceeds to AmREIT $ 8.95 $ 134,250,000
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE ATTORNEY GENERAL OF
THE STATE OF NEW YORK NOR ANY OTHER STATE SECURITIES REGULATOR HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. IT IS A CRIMINAL OFFENSE IF SOMEONE TELLS YOU OTHERWISE. THE USE OF
PROJECTIONS OR FORECASTS, OTHER THAN THOSE PRESENTED HEREIN, OR SPECIFICALLY
AUTHORIZED BY AMREIT, IS PROHIBITED. NO ONE IS PERMITTED TO MAKE ANY ORAL OR
WRITTEN PREDICTIONS ABOUT THE CASH BENEFITS OR TAX CONSEQUENCES YOU WILL RECEIVE
FROM YOUR INVESTMENT.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE INTO
THIS PROSPECTUS IN CONNECTION WITH THE OFFERING OF THE CLASS D COMMON SHARES
MADE HEREBY AND, IF GIVEN OR MADE, THAT INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER.
June 25, 2004
SUITABILITY STANDARDS
An investment in class D common shares involves significant risks.
Although the class D common shares are convertible into AmREIT class A common
shares, subject to certain restrictions discussed herein, it may be difficult to
resell the class D shares because no public market for the class D shares
currently exists nor is one ever expected to develop. Investors who are able to
sell their class D shares at all will likely be able to sell such shares only at
a discount.
If the investor in class D common shares is an individual, including an
individual beneficiary of a purchasing IRA, or if the investor is a fiduciary,
such as a trustee of a trust or corporate pension or profit sharing plan, or
other tax-exempt organization, or a custodian under a Uniform Gifts to Minors
Act, that individual or fiduciary, as the case may be, must represent that he
meets specific investment requirements. The requirements are set out in the
Subscription Agreement attached as Exhibit A to this prospectus, and include the
following:
- that the individual, or, in the case of a fiduciary, that the
fiduciary account or the donor who directly or indirectly supplies
the funds to purchase the shares, has a minimum annual gross income
of $45,000 and a net worth excluding home, furnishings and
automobiles of not less than $45,000; or
- that the individual, or, in the case of a fiduciary, that the
fiduciary account or the donor who directly or indirectly supplies
the funds to purchase the shares, has a net worth excluding home,
furnishings and automobiles of not less than $150,000.
Transferees will also be required to comply with applicable standards,
except for transfers to family members and transfers made by gift, inheritance
or divorce. In the case of purchases of shares by fiduciary accounts in
California, the suitability standards must be met by the beneficiary of the
account or, in those instances where the fiduciary directly or indirectly
supplies the funds for the purchase of shares, by such fiduciary.
The minimum purchase is 500 shares ($5,000) for non-qualified accounts and
300 shares ($3,000) for qualified accounts, except in certain states as
described below. You may not transfer less than the minimum required purchase
or, except in very limited circumstances, transfer, fractionalize or subdivide
the shares so as to retain less than such minimum number thereof. For purposes
of satisfying the minimum investment requirement for retirement plans, unless
otherwise prohibited by state law, a husband and wife may jointly contribute
funds from their separate IRAs, provided that they contribute in increments of
at least $3,000. You should note, however, that an investment in AmREIT will
not, in itself, create a retirement plan as defined in Section 401(a) of the
Internal Revenue Code or an IRA as defined in Section 408(a) of the Internal
Revenue Code for any investor and that, in order to create a retirement plan or
an IRA, an investor must comply with all applicable provisions of the Internal
Revenue Code.
California, Iowa, Maine, Massachusetts, Michigan, Missouri, New Hampshire,
North Carolina, Ohio, Pennsylvania and Tennessee have established suitability
standards different from those established by the Company, and Shares will be
sold only to investors in those states who meet the special suitability
standards set forth below.
CALIFORNIA, IOWA, MASSACHUSETTS, MICHIGAN, NORTH CAROLINA AND TENNESSEE -
The investor has either (i) a net worth (not including home, furnishings, and
personal automobiles) of at least $60,000 and an annual gross income of at least
$60,000, or (ii) a net worth (not including home, furnishings, and personal
automobiles) of at least $225,000.
MAINE -- The investor has either (i) a net worth (not including home,
furnishings, and personal automobiles) of at least $50,000 and an annual gross
income of at least $50,000, or (ii) a net worth (not including home,
furnishings, and personal automobiles) of at least $200,000.
MISSOURI - The investor (i) invests no more than 10% of the investor's net
worth (not including home, furnishings, and personal automobiles) in the Company
and (ii) has either (a) a net worth (not including home, furnishings, and
personal automobiles) of at least $60,000 and an annual gross income of at least
$60,000, or (b) a net worth (not including home, furnishings, and personal
automobiles) of at least $225,000.
NEW HAMPSHIRE - The investor has either (i) a net worth (not including
home, furnishings, and personal automobiles) of at least $125,000 and an annual
gross income of at least $50,000, or (ii) a net worth (not including home,
furnishings, and personal automobiles) of at least $250,000.
OHIO AND PENNSYLVANIA - The investor has (i) a net worth (not including
home, furnishings, and personal automobiles) of at least ten times the
investor's investment in the Company; and (ii) either (a) a net worth (not
including home, furnishings, and personal automobiles) of at least $45,000 and
an annual gross income of at least $45,000, or (b) a net worth (not including
home, furnishings, and personal automobiles) of at least $150,000.
The foregoing suitability standards must be met by the investor who
purchases the Shares. If the investment is being made for a fiduciary account
(such as an IRA, Keogh Plan, or corporate pension or profit-sharing plan), the
beneficiary, the fiduciary account, or any donor or grantor that is the
fiduciary of the account who directly or indirectly supplies the investment
funds must meet such suitability standards.
In addition, under the laws of certain states, investors may transfer
their class D common shares only to persons who meet similar standards, and
AmREIT may require certain assurances that such standards are met.
By executing the Subscription Agreement and Subscription Agreement
Signature Page, which is attached as Exhibit A to this prospectus, you represent
that you meet the foregoing applicable suitability standards for the state in
which you reside. We will not accept subscriptions from any person or entity
that does not represent that it meets such standards. We have the unconditional
right to accept or reject any subscription in whole or in part.
AmREIT and each person selling class D common shares on our behalf are
required to:
- make reasonable efforts to assure that each person purchasing class
D common shares is suitable in light of such person's age,
educational level, knowledge of investments, financial means and
other pertinent factors; and
- maintain records for at least six years of the information used to
determine that an investment in class D common shares is suitable
and appropriate for each investor.
The agreements with the selling broker-dealers require such broker-dealers
to (1) make inquiries diligently as required by law of all prospective investors
in order to ascertain whether a purchase of class D shares is suitable for the
investor, and (2) transmit promptly to AmREIT all fully completed and duly
executed Subscription Agreements.
TABLE OF CONTENTS
PAGE
SUITABILITY STANDARDS...................................................................................................... iii
QUESTIONS AND ANSWERS ABOUT THE OFFERING................................................................................... 1
SUMMARY OF THE OFFERING.................................................................................................... 7
RISK FACTORS............................................................................................................... 11
Risks Associated with an Investment in AmREIT..................................................................... 11
There is no public trading market for the class D common shares............................................. 11
AmREIT depends on a few major tenants....................................................................... 11
Your interest in amreit may be diluted if we issue additional shares........................................ 11
The acquisition of the class D common shares is a speculative investment.................................... 12
You cannot evaluate properties that we have not yet acquired or identified for acquisition.................. 12
AmREIT may increase its leverage without shareholder approval............................................... 12
Distribution payments are subordinate to payments on debt and other series of common shares................. 12
Bankruptcy of a significant tenant would adversely affect AmREIT's operations............................... 13
Bankruptcy of a significant tenant would adversely affect AmREIT's operations............................... 13
The class a common shares have limited average daily trading volume......................................... 13
The dealer manager has not made an independent review of AmREIT or the prospectus........................... 13
There may be delays in investing the proceeds of this offering.............................................. 13
There may be significant fluctuations in our quarterly results.............................................. 14
We established the offering price on an arbitrary basis..................................................... 14
AmREIT's plan to grow through the acquisition and development of new properties could
be adversely affected by trends in the real estate and financing businesses, may not generate
income or may generate insufficient income from operations............................................... 14
If AmREIT cannot meet its reit distribution requirements, it may have to borrow funds or liquidate
assets to maintain its REIT status....................................................................... 14
Limitations on share ownership required to maintain amreit's reit status may deter attractive
tender offers for amreit common shares................................................................... 15
AmREIT's charter contains anti-takeover provisions.......................................................... 15
Provisions of our charter, bylaws and texas law could restrict change in control............................ 15
Property acquisitions may fail to perform in accordance with expectations and estimates of the costs of
improvements to bring an acquired property up to standard may prove inaccurate........................... 16
We will be subject to conflicts of interest................................................................. 16
Our board of trust managers can take many actions without shareholder approval.............................. 16
Our officers and trust managers have limited liability...................................................... 17
Risks Associated with an Investment in Real Estate................................................................ 17
Real estate investments are relatively illiquid............................................................. 17
Properties are subject to general real estate operating risks............................................... 17
AmREIT may construct improvements, the cost of which may not be recoverable................................. 17
AMREIT leases to single tenants who can fail................................................................ 18
Net leases may not result in fair market lease rates over time.............................................. 18
AmREIT may invest in joint ventures......................................................................... 18
Our Properties May be Subject to Environmental Liabilities. 19
Anticipated borrowing creates risks......................................................................... 19
We May Not Have Adequate Insurance.......................................................................... 20
AmREIT's properties may not be profitable, may not result in distributions and/or may depreciate............ 20
AmREIT may provide financing to purchasers of properties.................................................... 20
AmREIT may engage in sale-leaseback transactions............................................................ 21
AmREIT must compete for acceptable investments.............................................................. 21
AmREIT may be unable to renew leases or relet spaces........................................................ 21
AmREIT's properties face competing properties............................................................... 21
i
The inability of a tenant to make lease and mortgage payments could have an adverse effect on AmREIT........ 22
AmREIT has properties specifically suited to few tenants.................................................... 22
We do not have control over market and business conditions.................................................. 22
We will have no economic interest in leasehold estate properties............................................ 23
Risks Associated with Federal Income Taxation of AmREIT........................................................... 23
AmREIT's failure to qualify as a REIT for tax purposes would result in AmREIT's taxation as a
corporation and the reduction of funds available for shareholder distribution............................ 23
AmREIT may be liable for prohibited transaction tax and/or penalties........................................ 23
Changes in the tax law may adversely affect AmREIT's REIT status............................................ 23
Investment in AmREIT may not be suitable under ERISA and IRA requirements................................... 23
BUSINESS AND PROPERTIES.................................................................................................... 24
MANAGEMENT................................................................................................................. 34
Executive Compensation............................................................................................ 37
Security Ownership of Certain Beneficial Owners and Management.................................................... 38
Certain Relationships and Related Transactions.................................................................... 38
Legal Proceedings................................................................................................. 40
ESTIMATED USE OF PROCEEDS.................................................................................................. 40
PRIOR PERFORMANCE.......................................................................................................... 41
CONFLICTS OF INTEREST...................................................................................................... 53
PRICE RANGE OF CLASS A COMMON SHARES....................................................................................... 56
REDEMPTION OF SHARES....................................................................................................... 57
SELECTED HISTORICAL FINANCIAL DATA......................................................................................... 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 61
INVESTMENT OBJECTIVES AND CRITERIA......................................................................................... 71
AMREIT'S DECLARATION OF TRUST AND BYLAWS................................................................................... 80
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE DECLARATION OF TRUST, BYLAWS AND TEXAS LAW......................................... 84
DESCRIPTION OF AMREIT'S CAPITAL SHARES..................................................................................... 87
General........................................................................................................... 87
Class A Common Shares............................................................................................. 87
Class B Common Shares............................................................................................. 88
Class C Common Shares............................................................................................. 92
Class D Common Shares............................................................................................. 97
Preferred Shares.................................................................................................. 101
Ownership Limits and Restrictions on Transfer..................................................................... 101
Dividend Reinvestment Plan........................................................................................ 104
FEDERAL INCOME TAX CONSEQUENCES............................................................................................ 105
General........................................................................................................... 105
REIT Qualification................................................................................................ 106
Taxation as a REIT................................................................................................ 111
Failure to Qualify as a REIT...................................................................................... 113
Taxation of Taxable U.S. Shareholders............................................................................ 113
Backup Withholding................................................................................................ 115
Taxation of Tax-Exempt Entities................................................................................... 115
Taxation of Foreign Investors..................................................................................... 116
Jobs and Growth Tax Act........................................................................................... 117
State and Local Taxes............................................................................................. 118
CERTAIN ERISA CONSIDERATIONS............................................................................................... 118
General Fiduciary Rules........................................................................................... 118
Plan Assets....................................................................................................... 119
ii
Plan Asset Regulations - Publicly Offered Securities Exemption.................................................... 119
Prohibited Transactions........................................................................................... 119
Governmental Plans................................................................................................ 120
Special Considerations for Insurance Companies.................................................................... 120
PLAN OF DISTRIBUTION....................................................................................................... 121
General........................................................................................................... 121
Underwriting Compensation and Terms............................................................................... 121
Subscription Procedures........................................................................................... 122
SUPPLEMENTAL SALES MATERIAL................................................................................................ 123
EXPERTS.................................................................................................................... 123
LEGAL OPINIONS............................................................................................................. 123
ADDITIONAL INFORMATION..................................................................................................... 123
GLOSSARY................................................................................................................... 125
EXHIBIT A - SUBSCRIPTION AGREEMENT......................................................................................... A-1
EXHIBIT B - DIVIDEND REINVESTMENT PLAN..................................................................................... B-1
EXHIBIT C - PRIOR PERFORMANCE TABLES....................................................................................... C-1
CONSOLIDATED FINANCIAL STATEMENTS.......................................................................................... F-1
iii
QUESTIONS AND ANSWERS ABOUT THE OFFERING
BELOW WE HAVE PROVIDED SOME OF THE MORE FREQUENTLY ASKED QUESTIONS AND
ANSWERS RELATING TO AN OFFERING OF THIS TYPE. PLEASE SEE "SUMMARY OF THE
OFFERING" AND THE REMAINDER OF THIS PROSPECTUS FOR MORE DETAILED INFORMATION
ABOUT THIS OFFERING. THESE QUESTIONS AND ANSWERS DO NOT, AND ARE NOT INTENDED
TO, ADDRESS ALL THE QUESTIONS THAT MAY BE IMPORTANT TO YOU. PROSPECTIVE
INVESTORS SHOULD CAREFULLY READ THE "SUMMARY OF THE OFFERING" SECTION AND THE
REMAINDER OF THIS PROSPECTUS FOR MORE INFORMATION REGARDING THE OFFERING.
Q. WHAT IS A REIT?
A. In general, a REIT is a company that:
- combines the capital of many investors to acquire or provide
financing for real estate properties;
- pays dividends to investors of at least 90% of its taxable income;
- avoids the "double taxation" treatment of income that may result
from investments in a corporation because a REIT is not generally
subject to federal corporate income taxes on its net income,
provided certain income and distribution requirements are satisfied;
and
- allows individual investors to invest in a large-scale diversified
real estate portfolio through the purchase of interests, typically
shares, in the REIT.
Q. WHAT IS AMREIT?
A. AmREIT is a self-managed, self-advised REIT with, along with its
predecessors, a 19-year history and a record of investing in quality
income producing retail real estate. Our business model consists of a
publicly-traded REIT, a portfolio of high-end single and multi-tenant
retail centers, a full service real estate operating and development
business, an NASD registered broker-dealer securities business, 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.
AmREIT, a Texas real estate investment trust, became the successor to
AmREIT, Inc., a Maryland corporation (the "Predecessor Corporation"), in
December 2002, through the merger of the Predecessor Corporation with
AmREIT. At May 31, 2004, AmREIT had outstanding approximately 3.3 million
class A common shares which are listed on the American Stock Exchange
(AMEX) under the trading symbol "AMY," 2.3 million class B common shares
that are not listed on an exchange, which may be converted into class A
common shares, on a one-for-one basis at any time, at the holder's option,
and 4.0 million class C common shares that are not listed on an exchange,
which may be converted into class A common shares based on 110% of
invested capital at any time following the seventh anniversary of the date
of issuance of the shares, at the holder's option.
Q. HOW MANY REAL ESTATE PROPERTIES DO YOU CURRENTLY OWN?
A. As of March 31, 2004, AmREIT owned, directly or through joint venture, 51
real estate properties. These properties are located in 18 different
states and include both single tenant free standing properties as well as
multi-tenant shopping centers. Some of our tenants include Washington
Mutual, Starbucks, Eckerd, Radio Shack, IHOP, TGI Friday's and CVS
Pharmacy. We focus on acquiring "irreplaceable corners" -- premier retail
frontage properties in high-traffic, highly populated areas -- which
create dependable income and long-
1
lasting value. These premium properties provide high leasing income and
high occupancy rates for a strong income stream.
Q. WHAT ARE THE TERMS OF THE CLASS D COMMON SHARES?
A. The AmREIT class D common shares will have the following terms:
- dividends will be payable in an amount per share equal to 6.5% of
the issue price ($10.00 per share) per annum, payable monthly, but
only if the dividends then payable to our class B common shares and
class C common shares have been paid;
- can be converted into AmREIT class A common shares (which are
currently publicly traded on the AMEX), at any time following the
seventh anniversary of the date of issuance of the shares, with the
class D common shares acquired in this offering being convertible at
a 7.7% premium on original capital (i.e., $1,000 of class D common
shares will convert to $1,077 of class A common shares);
- if acquired through our dividend reinvestment plan, the Class D
common shares can be converted into our class A common shares on a
one for one basis, at any time following the seventh anniversary of
the date of issuance of the common shares;
- can be called by AmREIT after one year following the date of
issuance of the shares for cash at a price of $10.00, plus the pro
rata portion of the conversion premium, based on the number of years
the shares are outstanding (for example, if the Class D shares are
called on the first anniversary of issuance the call price would be
$10.11 per share); and
- can be put to us at any time after the first anniversary of their
issuance to be acquired by AmREIT on a pro rata basis to the extent
we have designated funds to make such repurchase.
The 7.7% premium that shareholders may receive upon conversion will,
together with the dividends paid through the conversion date, provide a
total return of approximately 7.6% per annum as of the end of the
seven-year lock out period (assuming all dividends to such date are paid
in full). Although the class D common shares will not be listed on an
exchange, they will be freely transferable by the holders, and will be
convertible into the class A common shares after the seven-year lock out
period. See "Risk Factors -- Risks associated with an investment in
AmREIT."
Holders of class D common shares will be entitled to vote on all matters
submitted to shareholders of AmREIT for approval. In any matter on which
the class D common shares vote, you will be entitled to one vote for each
share you own and you will vote as a single class with the class A, class
B and class C common shares.
Q. IF I BUY SHARES, WILL I RECEIVE DIVIDENDS AND HOW OFTEN?
A. We have been making and intend to continue to make dividend distributions
to our shareholders; however, the declaration of dividends is at the sole
discretion of our board of trust managers and there can be no assurance
that AmREIT will in fact declare and pay dividends. As a holder of class D
common shares, you will be entitled to receive annual dividends in the
amount of $0.65 per share, paid to shareholders of record on a monthly
basis.
The amount of each dividend distribution to be paid to holders of class D
common shares is determined by our board of trust managers and typically
depends on the amount of distributable
2
funds, current and projected cash requirements, tax considerations and
other factors. Class D common share dividends will be payable concurrently
with the dividends payable to class A shareholders and only if all
dividends then payable concurrently with the dividends paid on the class B
shares and class C shares have been paid. However, in order to remain
qualified as a REIT, we must make distributions of at least 90% of our
REIT taxable income.
Q. HOW DO YOU CALCULATE THE PAYMENT OF DIVIDENDS TO CLASS D SHAREHOLDERS?
A. Dividends will be payable monthly on the same payment and with the same
record date as our class A common shares.
Q. HOW DID YOU DETERMINE THE PRICE OF THE CLASS D COMMON SHARES?
A. The purchase price of the class D common shares was established on an
arbitrary basis by our board of trust managers for administrative
convenience, and the price bears no relationship to the underlying value
of our assets or the trading price of our class A common shares. Because
the class D common shares are convertible based on the capital invested,
their value is not contingent on the trading price of our class A common
shares.
Q. WILL THE DIVIDENDS I RECEIVE BE TAXABLE AS ORDINARY INCOME?
A. Yes and No. Generally, dividends that you receive will be taxed as
ordinary income to the extent they are from current or accumulated
earnings and profits. We expect that some portion of your dividends will
not be subject to tax in the year in which they are received because
depreciation and other non-cash expenses reduce the amount of taxable
income but do not reduce cash available for distribution. The portion of
your distribution which is not subject to tax immediately is considered a
return of capital for tax purposes and will reduce the tax basis of your
investment. This, in effect, defers a portion of your tax until your
investment is sold or AmREIT is liquidated, at which time you will be
taxed at capital gains rates. However, because each investor's tax
considerations are different, we strongly recommend that you consult with
your tax advisor. You should also review the section of the prospectus
entitled "Federal Income Tax Consequences."
Q. WHAT WILL YOU DO WITH THE MONEY RAISED IN THIS OFFERING?
A. We will use the net proceeds of this offering to acquire properties
similar to those currently owned by AmREIT or to pay down existing debt,
which should provide increased liquidity to acquire additional properties
as opportunities are available. We may also use the proceeds for general
working capital purposes. We intend to invest a minimum of 88.5% of the
proceeds from this offering to acquire real estate properties, to pay down
debt or for general working capital purposes, and the remaining proceeds
will be used to pay fees and expenses of this offering and
acquisition-related expenses. The payment of these fees and expenses will
not reduce your invested capital. Your initial invested capital amount
will remain $10.00 per share, and your dividend yield will be based on
your $10.00 per share investment.
Until we invest the proceeds of this offering in real estate or pay down
existing debt, we may invest in short-term, highly liquid or other
authorized investments such as money market funds or commercial paper.
Such short-term investments will not earn as high of a return as we expect
to earn on our real estate investments, and we cannot guarantee how long
it will take to fully invest the proceeds in real estate.
3
Q. WILL THE CLASS D COMMON SHARES BE LISTED ON A STOCK EXCHANGE?
A. No. We have no plans to list the class D common shares on a stock
exchange. The AmREIT class A common shares into which the class D common
shares will be convertible, are currently listed on the AMEX. The class A
common shares currently have an average daily trading volume of
approximately 5,570 shares, based on a 90-day average.
Q. DOES AMREIT USE ANY SPECIFIC CRITERIA WHEN SELECTING A POTENTIAL PROPERTY
FOR ACQUISITION?
A. Yes. AmREIT and its predecessors have developed over their nearly 20-year
operating history a proprietary "AmREIT Decision Logic" system of analysis
for projects that it reviews. There are 25 specific factors that are
contained within this decision logic, including demographic studies,
traffic flow review, environmental review, site planning and financial
analysis. AmREIT will apply this model to each property it proposes to
acquire. AmREIT focuses on buying, developing, and joint venturing premier
retail frontage properties in high traffic, highly populated areas. Our
properties attract a wide array of established commercial tenants,
including high profile single tenants, high-end multi-tenant shopping
centers and large grocery-anchored centers, 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 $70,000 or more. On average, more than 30,000 cars per
day pass by these properties.
Q. WHAT KIND OF OFFERING IS THIS?
A. We are offering the public up to 15,000,000 class D common shares on a
"best efforts" basis. In addition, we are offering up to 2,000,000 class D
common shares to investors who want to participate in our reinvestment
plan.
Q. WHAT IS A "BEST EFFORTS" OFFERING?
A. When common shares are offered to the public on a "best efforts" basis,
the brokers participating in the offering are only required to use their
best efforts to sell the shares and have no firm commitment or obligation
to purchase any of the shares.
Q. HOW LONG WILL THIS OFFERING LAST?
A. The offering will not last beyond June 25, 2005, unless we decide to
extend the offering until not later than June 25, 2006, in any state that
allows us to extend the offering.
Q. WHO CAN BUY CLASS D COMMON SHARES?
A. If you receive a copy of this prospectus, you may buy class D common
shares provided that you have either (1) a net worth of at least $45,000
(excluding home, furnishings, and automobiles) and an annual gross income
of at least $45,000, or (2) a net worth of at least $150,000 (excluding
home, furnishings, and automobiles). These minimum levels may be higher in
certain states, so you should carefully read the more detailed information
set forth under the caption "Suitability Standards" in this prospectus.
Q. IS THERE ANY MINIMUM INVESTMENT REQUIRED?
A. Yes. You must invest at least $5,000 in a non-qualified account, or $3,000
in a qualified account. These minimum investment levels may be higher in
certain states, so you should
4
carefully read the more detailed description of the minimum investment
requirements appearing later in the "Suitability Standards" section of
this prospectus.
Q. HOW DO I SUBSCRIBE FOR SHARES?
A. If you choose to purchase shares in this offering, you will need to fill
out a Subscription Agreement, like the one contained in this prospectus as
Exhibit A, for a specific number of shares and pay for the shares at the
time you subscribe.
Q. IF I BUY SHARES IN THIS OFFERING, HOW MAY I LATER SELL THEM?
A. The class D common shares are convertible into class A common shares at
any time after the seventh anniversary of the acquisition of the shares.
Upon conversion, you will be able to sell the class A common shares on the
open market. The class A common shares are listed on the AMEX.
At the time you purchase the shares, they will not be listed for trading
on any national securities exchange or over-the-counter market. In fact,
we expect that there will not be any public market for the class D common
shares when you purchase them, and we cannot be sure if one will ever
develop. As a result, you may find it difficult to find a buyer for your
shares and realize a return on your investment. You may sell your shares
to any buyer unless such sale would cause the buyer to own more than 9.0%
of the outstanding shares. See "Description of AmREIT's Capital Shares --
Ownership Limits and Restriction on Transfer."
Q. WILL I BE NOTIFIED OF HOW MY INVESTMENT IS DOING?
A. Yes. You will receive periodic updates on the performance of your
investment with us, including:
- Twelve monthly dividend payments;
- Regular acquisition reports detailing our latest property
acquisitions through press releases available on our website,
www.amreit.com;
- A mid-year update report;
- An annual report;
- SEC filed 10-KSBs and 10-QSBs;
- An annual IRS Form 1099; and
- Supplements to this prospectus, as necessary.
Q. DOES AMREIT USE LEVERAGE?
A. Yes. AmREIT believes the conservative use of debt is very advantageous to
maximizing the monthly income to its shareholders. Our bylaws require
AmREIT to limit the level of recourse debt to less than 55% of its gross
asset value as determined by our board of trust managers. AmREIT's total
debt to asset ratio as of March 31, 2004 was 41%.
Q. WHAT ARE THE ECONOMIC TERMS OF YOUR TYPICAL LEASES?
A. We seek to secure leases with creditworthy tenants prior to or at the time
of the acquisition of a property. Our single tenant leases are primarily
economically "triple-net" leases, which means
5
that the tenant is responsible for the cost of repairs, maintenance,
property taxes, utilities, insurance and other operating costs. Our
multi-tenant leases are generally "net leases," but generally require
AmREIT to be responsible for certain capital improvements as well as the
operating and common area costs for the tenants, which are reimbursable by
the tenants on a monthly and annual basis.
Q. MAY I REINVEST MY DIVIDENDS IN ADDITIONAL CLASS D COMMON SHARES?
A. Yes. Holders of class D common shares will have the option of
participating in our dividend reinvestment plan by checking the
appropriate box on the subscription agreement or by filling out an
enrollment form we will provide to you at your request. The purchase price
for shares purchased under the dividend reinvestment plan is currently
$9.50 per share.
Q. WHAT HAPPENS TO THE VALUE OF MY INVESTMENT IF THE VALUE OF AMREIT CLASS A
COMMON SHARES DECLINES?
A. The value of the class D shares will not be affected by fluctuations in
the value of the class A common shares. The conversion of class D shares
into class A common shares, after the seven-year lockout period expires,
is based upon the amount of capital invested. Class D investors will
receive $1.077 of class A common shares for each $1.00 of invested capital
regardless of the market price of the class A common shares ($1.00 of
class A common shares for each $1.00 of invested capital in the case of
class D common shares acquired through our dividend reinvestment plan).
The calculation on the conversion date can be expressed as (capital
invested x 1.077) / (stock price of class A). For example, after the seven
year lock out period expires, if class A common shares are trading at
$7.00 then class D investors will receive, upon conversion, 153.85 class A
common shares for each $1,000 invested. If, after the seven year lock out
period expires, class A shares are trading at $10.77 per share then class
D investors will receive, upon conversion, 100.00 class A common shares
for each $1,000 invested.
Q. WHAT KIND OF TAX INFORMATION WILL I RECEIVE?
A. A Form 1099 will be placed in the mail by January 31st of each year.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A. If you have more questions about the offering or if you would like
additional copies of this prospectus, you should contact your registered
representative or contact:
Investor Services Department
AmREIT
8 Greenway Plaza, Suite 1000
Houston, Texas 77046
800-888-4400
FOR CHANGE OF ADDRESS AND LOST CHECKS: EXTENSION 135
FOR OTHER QUESTIONS REGARDING YOUR INVESTMENT: EXTENSION 151
6
SUMMARY OF THE OFFERING
This prospectus summary highlights selected information contained
elsewhere in this prospectus. It is not complete and does not contain all of the
information that is important to your decision whether to invest in AmREIT. To
understand this offering fully, you should read the entire prospectus carefully,
including the "Risk Factors" section and the financial statements.
AMREIT
AmREIT is a rapidly growing, self-managed and self-advised REIT with,
along with its predecessors, a 19-year history of delivering results to its
investors. Its business model consists of a publicly-traded REIT, a portfolio of
retail properties, including "irreplaceable corners" - premier retail frontage
properties in high traffic, highly populated areas, 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 March 31, 2004, our debt to total asset ratio was 41%.
At March 31, 2004, 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.
SUMMARY RISK FACTORS
Following are the most significant risks relating to an investment in the
class D shares:
- There is limited liquidity for the class D common shares. There is
no public trading market for the class D common shares. Tender
offers and certain other changes of control may be discouraged due
to the limitations on share ownership required to maintain our
status as a REIT and provisions of Texas law. If you are able to
sell your shares at all, you may have to sell them for substantially
less than the price you paid for them in the offering. After a
seven-year lock-out period, the class D common shares are
convertible into class A shares which are publicly traded on the
AMEX.
- AmREIT depends on few major tenants. International House of Pancakes
(IHOP) accounted for approximately 32% of AmREIT's total revenue for
2002 and 23% for 2003. At March 31, 2004, no other tenant accounted
for more than 15% of total revenue.
- There is no limitation on AmREIT's ability to issue additional
common shares and such issuance could potentially dilute your
interest in AmREIT.
7
- The acquisition of class D common shares is a speculative
investment, as AmREIT's ability to make distributions on its shares
depends on AmREIT's future business operations.
- The dividends on the class D common shares are non-cumulative and
are subordinate to debt payment and to dividends on our class B and
class C common shares.
- Although AmREIT has an existing portfolio of 51 operating
properties, shareholders will not be able to evaluate future
properties prior to making an investment in AmREIT.
- Although AmREIT has paid distributions since its organization in
1993, distribution payments are subordinate to payments on debt and
are subordinate to the dividends payable on our class B and class C
common shares, so any future distributions to shareholders will be
subject to this restriction. We may increase our leverage without
shareholder approval, but our bylaws limit the amount of recourse
indebtedness we may incur to not more than 55% of gross asset value
as determined by our board of trust managers.
- The bankruptcy of IHOP or of another significant tenant could have a
material adverse affect on AmREIT's operations.
- AmREIT has elected to be taxed as a REIT, assuming that it meets
certain financial and structural criteria. If AmREIT does not meet
this criteria, or cannot maintain its REIT status, it may not
qualify as a REIT under the Internal Revenue Code.
- We established the offering price of the class D common shares on an
arbitrary basis.
- Real estate investments are relatively illiquid and subject to
general operating risks relating to economic conditions, changes in
zoning or tax laws and the availability of financing.
- AmREIT's property leases may not be renewed and the cost of any
improvements constructed on certain properties by AmREIT may not be
recoverable.
- Single tenant leases account for 54% of AmREIT's total revenue and
the failure of such a tenant could impact the viability of the
property.
- Net leases accounted for 100% of AmREIT's total rental income for
the years ended December 31, 2002 and 2003. These leases frequently
provide the tenant greater flexibility in using the leased property
and provide for early termination under specified circumstances. In
the event of a termination, AmREIT may not be able to lease the
property for the same rent amount and may not be able to sell it
without incurring a loss. Consequently, these leases may not result
in fair market lease rates over time.
- Our involvement in joint ventures involve risks which may not
otherwise be present, such as the failure of a partner to perform,
the existence of conflicting business goals with a partner, or the
possibility that it may not be able to agree with a partner as to a
particular issue.
- Our properties may not be profitable, perform as expected or
appreciate in value.
8
- AmREIT may provide purchaser financing which would delay receipt of
the proceeds from a property sale. AmREIT may provide this financing
where lenders are not willing to make loans secured by commercial
real estate or may find it desirable where a purchaser is willing to
pay a higher price for the property than it would without this
financing. As a consequence, AmREIT will be subject to risks
inherent in the business of lending.
- We may on occasion enter into sale/leaseback transactions. A default
or any premature termination of the leaseback agreement could have
an adverse effect on AmREIT's financial position. In the event of a
default, AmREIT may not be able to find new tenants without
incurring a loss.
- Our operating results will depend upon the availability of suitable
investment opportunities, which in turn depends on the type of
investment involved, the condition of the money market, the nature
and geographical location of the property, competition and other
factors, none of which can be predicted with certainty.
INVESTMENT OBJECTIVES
Our investment objectives are:
- to create dependable, monthly dividends for our investors;
- to preserve and protect your capital contribution;
- to provide liquidity to our investors after a defined 7-year period;
and
- to realize growth in the value of our properties and our publicly
traded class A common shares, into which the class D common shares
convert in seven years.
PROPERTIES TO BE ACQUIRED
While we currently concentrate on "irreplaceable corners" - premier retail
frontage properties in high traffic, highly populated areas - which attract
three types of tenants: high profile single tenants, high-end multi-tenant
shopping centers and large grocery anchored centers, we are authorized to
purchase all types of commercial properties, including, without limitation,
office buildings, shopping centers, business and industrial parks, manufacturing
facilities, warehouses and distribution facilities and other similar real estate
properties. Although no properties have been specifically identified for
purchase with the proceeds of this offering, we are currently reviewing and
analyzing opportunities whereby we expect to purchase properties which are newly
constructed, under construction or have been constructed and have operating
histories. We expect the properties to be acquired with the proceeds of this
offering will have similar operating and revenue characteristics as those we
currently own. Properties may be acquired, developed and operated by us either
alone or jointly with another party. We anticipate that most of the properties
we acquire with the proceeds of this offering will be leased to creditworthy
tenants on a "net lease" basis, as are substantially all of the properties we
currently own. In other words, the tenant will pay as additional rent
substantially all costs associated with the repair and maintenance of the
building, real estate taxes, insurance and other similar costs associated with a
building. Whenever possible, we intend to execute leases for our properties at
or prior to the closing of the acquisition of such properties.
9
POSSIBLE LEVERAGE OF PROPERTIES
Our bylaws provide that we will not incur recourse indebtedness if, after
giving effect to the incurrence thereof, aggregate recourse indebtedness,
secured and unsecured, would exceed fifty-five percent (55%) of our gross asset
value on a consolidated basis. For this purpose, the term "Net Asset Value"
means the value of our total assets (less intangibles) based on market
capitalization rates and current year rental income, as determined by our board
of trust managers, before deducting depreciation or other non-cash reserves,
less total liabilities, as calculated at the end of each quarter on a basis
consistently applied. At March 31, 2004, our ratio of debt to total assets was
41%.
PRIOR OFFERING SUMMARY
AmREIT's affiliates have previously sponsored three publicly offered and
12 privately placed real estate limited partnerships, all of which were on an
unspecified property or "blind pool" basis. As of March 31, 2004, AmREIT and its
affiliates have raised approximately $62 million from approximately 2,000
investors. The disclosure under the caption "Prior Performance" in this
prospectus contains a discussion of the AmREIT programs sponsored to date.
COMPENSATION TO AMREIT AND AFFILIATES
AmREIT's affiliates will receive compensation and fees for services
relating to this offering and the investment and management of our assets. The
most significant items of compensation are included in the following table:
Estimated Dollar Amount
for Maximum Offering
Type of Compensation Form of Compensation ($150,000,000)
- -------------------- -------------------- --------------
Dealer Manager Fee 2.5% of gross offering proceeds $3,750,000
Offering Expenses 1.0% of gross offering proceeds $1,500,000
Nonetheless, AmREIT or its affiliates may not receive compensation in
excess of the maximum amount permitted under the Statement of Policy Regarding
Real Estate Programs of the North American Securities Administrators Association
(NASAA Guidelines).
ERISA CONSIDERATIONS
The section of this prospectus entitled "Certain ERISA Considerations"
describes the effect the purchase of shares will have on individual retirement
accounts (IRAs) and retirement plans subject to the Employee Retirement Income
Security Act of 1974, as amended (ERISA), and/or the Internal Revenue Code.
ERISA is a federal law that regulates the operation of certain tax-advantaged
retirement plans. Any retirement plan trustee or individual considering
purchasing shares for a retirement plan or an IRA should read this section of
the prospectus very carefully.
GLOSSARY
We have defined certain terms which have initial capital letters in the
"Glossary" of this prospectus.
10
RISK FACTORS
Before you decide to invest in AmREIT, you should be aware that your
purchase of class D common shares involves a number of risks. In addition to the
other information included in this prospectus, you should specifically consider
the following risks before purchasing shares. The following information
summarizes all material risks related to the acquisition of the class D common
shares.
RISKS ASSOCIATED WITH AN INVESTMENT IN AMREIT
THERE IS NO PUBLIC TRADING MARKET FOR THE CLASS D COMMON SHARES.
There is no current public market for the class D common shares, nor do we
expect a public market to develop for the class D common shares. It will,
therefore, be difficult for you to sell your shares promptly. In addition, the
price received for any shares sold is likely to be less than the proportionate
value of the real estate we own. Therefore, you should purchase the shares only
as a long-term investment. However, the shares are convertible, after a seven
year lock out period, into our class A common shares, which are listed on the
AMEX.
AMREIT DEPENDS ON A FEW MAJOR TENANTS.
There is no limit on the number of properties leased to a single tenant
which we may acquire. However, under investment guidelines established by our
board of trust managers, no single tenant may represent more than 15% of
AmREIT's total annual revenue unless approved by our board of trust managers.
The board of trust managers will review our properties and potential investments
in terms of geographic and tenant diversification. IHOP accounted for 22% of
AmREIT's total revenues for the year ended December 31, 2002, 24% of total
revenue for the year ended December 31, 2003, and 15% for quarter ended March
31, 2004. Because of this concentration, there is a risk that any adverse
developments affecting IHOP generally could materially adversely affect our
revenues (thereby affecting our ability to make distributions to shareholders).
If in the future we concentrate our acquisitions on another individual
tenant, or in certain geographic areas or on certain product types, it will
increase the risk that our financial condition will be adversely affected by the
poor judgment of a particular tenant's management group, by poor performance of
our tenants' brands, by a downturn in a particular market sub-segment or by
market disfavor with a certain product type.
Our profitability and our ability to diversify our investments, both
geographically and by type of properties purchased, will be limited by the
amount of further funds at our disposal. If our assets become geographically
concentrated, an economic downturn in one or more of the markets in which we
have invested could have an adverse effect on our financial condition and our
ability to make distributions. We do not know whether we will sell all of the
shares being offered by this Prospectus. If we do not, it is possible that we
will not have the money necessary to further diversify our investments or
achieve the highest possible return on our investments. See "Prior Performance."
YOUR INTEREST IN AMREIT MAY BE DILUTED IF WE ISSUE ADDITIONAL SHARES.
Existing shareholders and potential investors in this offering do not have
preemptive rights to any shares issued by AmREIT in the future. Therefore,
existing shareholders and investors purchasing shares in this offering may
experience dilution of their equity investment in the event that we:
11
- sell shares in this offering or sell additional common shares in the
future, whether publicly or privately;
- sell securities that are convertible into common shares; or
- issue common shares upon the exercise of the options.
THE ACQUISITION OF THE CLASS D COMMON SHARES IS A SPECULATIVE INVESTMENT.
The class D common shares are speculative investments because AmREIT's
ability to make distributions on its class D common shares depends on AmREIT's
ability to acquire properties with the proceeds from Class D shares. While
management believes AmREIT's future operating results should be sufficient to be
able to make these distributions and payments, AmREIT may not be able to do so.
The dividends payable on the class D common shares are not preferred or
cumulative, which means if we fail to pay you a dividend in any particular
monthly dividend period, we will have no obligation to make payment on such
dividend in the future and it is lost forever. AmREIT's future operating budgets
are based on assumptions about the general economy and AmREIT's business
operations. In general, budgets project inflation, interest rates and revenues,
all of which depend substantially on factors beyond AmREIT's control. Interest
rates and levels of economic activity have been particularly volatile in recent
years, and any significant increase in interest rates or downturn in the level
of economic activity, particularly in the real estate industry, would materially
impair AmREIT's ability to achieve budgeted levels of operating income.
YOU CANNOT EVALUATE PROPERTIES THAT WE HAVE NOT YET ACQUIRED OR IDENTIFIED FOR
ACQUISITION.
We have established certain criteria for evaluating potential properties
and tenants in which we may invest. We have not set fixed minimum standards
relating to creditworthiness of tenants and, therefore, our board of trust
managers and management have flexibility in assessing potential properties and
tenants. As of March 31, 2004, we owned 51 properties, located in 18 different
states.
AMREIT MAY INCREASE ITS LEVERAGE WITHOUT SHAREHOLDER APPROVAL.
Our bylaws provide that we will not incur recourse indebtedness if, after
giving effect to the incurrence thereof, aggregate recourse indebtedness,
secured and unsecured, would exceed fifty-five percent (55%) of our gross asset
value on a consolidated basis. This additional debt could adversely affect
AmREIT's ability to make shareholder distributions and would result in an
increased risk of default on its obligations. AmREIT intends to borrow future
funds through secured and/or unsecured credit facilities to finance property
investments. These borrowings may require lump sum payments of principal and
interest at maturity. Because of the significant cash requirements necessary to
make those large payments, AmREIT's ability to make these payments may depend
upon its ability to sell or refinance properties for amounts sufficient to repay
such loans. In addition, increased debt service may adversely affect cash flow
and share value.
At March 31, 2004, AmREIT had outstanding debt totaling $37.0 million of
which $12.8 million was unsecured. This debt represented approximately 41% of
AmREIT's total assets.
12
DISTRIBUTION PAYMENTS ARE SUBORDINATE TO PAYMENTS ON DEBT AND OTHER SERIES OF
COMMON SHARES.
AmREIT has paid distributions since its organization in 1993.
Distributions to shareholders of AmREIT are, however, subordinate to the payment
of AmREIT's current debts and obligations. If AmREIT has insufficient funds to
pay its debts and obligations, future distributions to shareholders will be
suspended pending the payment of such debts and obligations. Dividends may be
paid on the class D common shares only if all dividends then payable on the
class B common shares and class C common shares has been paid. As a result, the
class D common shares are subordinate to of the class B and class C common
shares as to dividends.
BANKRUPTCY OF A SIGNIFICANT TENANT WOULD ADVERSELY AFFECT AMREIT'S OPERATIONS.
Footstar filed for protection under Chapter 11 of the United States
Bankruptcy Code on March 2, 2004 and pursuant thereto rejected the two Just For
Feet leases it had with AmREIT. As of March 31, 2004, the Just For Feet leases
accounted for 3.9% of our total annualized revenue. Wherehouse Entertainment
declared bankruptcy on January 31, 2003. The obligations of Wherehouse
Entertainment are guaranteed by Blockbuster Entertainment Corp., its parent
corporation. Additional bankruptcies of our tenants or the bankruptcy of a
significant tenant could adversely affect AmREIT in the following ways:
- reduction or loss of lease payments related to the termination of
the tenant's leases;
- reduction of revenue resulting from the restructuring the original
tenant's leases;
- interruptions in the receipt of lease revenues from the tenant;
- increase in the costs associated with the maintenance and financing
of vacant properties;
- increase in costs associated with litigation and the protection of
the properties;
- increase in costs associated with improving and reletting the
properties;
- reduction in the value of AmREIT's shares; and
- decrease in distributions to shareholders.
THE CLASS A COMMON SHARES HAVE LIMITED AVERAGE DAILY TRADING VOLUME.
The class A common shares, into which the class D common shares being
offered by this prospectus are convertible on and after the seventh anniversary
of the date of issuance of the shares, are currently traded on the AMEX. The
class A common shares have only been traded since July 2002, and as of March 31,
2004, the average daily trading volume was approximately 5,570 shares based on a
90-day average. As a result, the class A common shares currently have limited
liquidity, and there can be no assurance that the market for the class A common
shares will have improved or that the shares will be more liquid at the time the
class D common shares are convertible.
THE DEALER MANAGER HAS NOT MADE AN INDEPENDENT REVIEW OF AMREIT OR THE
PROSPECTUS.
The dealer manager, AmREIT Securities Corp., is an affiliate of AmREIT and
will not make an independent review of AmREIT or this offering. Accordingly, you
do not have the benefit of an independent review of the terms of this offering.
13
There will be delays in investing the proceeds of this offering.
There will be a delay in investing the proceeds from this offering and,
therefore, a delay in the receipt of any returns from such investments, due to
our the timing of our ability to find suitable properties for investment. Until
we invest in properties, our investment returns on offering proceeds will be
limited to the rates of return available on short-term, highly liquid
investments that provide appropriate safety of principal. We expect these rates
of return, which affect the amount of cash available to make distributions to
shareholders, to be lower than we would receive for property investments.
THERE MAY BE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS.
Our quarterly operating results will fluctuate based on a number of
factors, including, among others:
- interest rate changes;
- the volume and timing of our property acquisitions;
- the amount and timing of income generated by our operating and
development and securities company subsidiaries, as well as our
retail partnerships;
- the recognitions of gains or losses on property sales;
- the level of competition in our market; and
- general economic conditions, especially those which effect the
retail industries.
As a result of these factors, results for any quarter should not be relied upon
as being indicative of performance in future quarters.
WE ESTABLISHED THE OFFERING PRICE ON AN ARBITRARY BASIS.
Our board of trust managers has arbitrarily determined the selling price
of the class D common shares and such price bears no relationship to any
established criteria for valuing issued or outstanding shares and does not
relate in any way to the current trading price of the class A common shares.
Furthermore, because the conversion of the class D shares into class A shares is
based on 107.7% of invested capital, the price per share of the class D shares
has no relation to the as converted value of the class A shares.
AMREIT'S PLAN TO GROW THROUGH THE ACQUISITION AND DEVELOPMENT OF NEW PROPERTIES
COULD BE ADVERSELY AFFECTED BY TRENDS IN THE REAL ESTATE AND FINANCING
BUSINESSES, MAY NOT GENERATE INCOME OR MAY GENERATE INSUFFICIENT INCOME FROM
OPERATIONS.
AmREIT's growth strategy is substantially based on the acquisition and
development of additional properties. We cannot assure you that AmREIT will be
able to do so successfully because AmREIT may have difficulty finding new
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional properties is subject to many
risks. If AmREIT does not generate enough income from future operations to pay
distributions to shareholders, AmREIT may make distributions to its shareholders
in amounts exceeding its net income.
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IF AMREIT CANNOT MEET ITS REIT DISTRIBUTION REQUIREMENTS, IT MAY HAVE TO BORROW
FUNDS OR LIQUIDATE ASSETS TO MAINTAIN ITS REIT STATUS.
REITs generally must distribute 90% of their taxable income annually. In
the event that AmREIT does not have sufficient available cash to make these
distributions, AmREIT's ability to acquire additional properties may be limited.
Also, for the purposes of determining taxable income, AmREIT may be required to
include interest payments, rent and other items it has not yet received and
exclude payments attributable to expenses that are deductible in a different
taxable year. As a result, AmREIT could have taxable income in excess of cash
available for distribution. If this occurred, AmREIT would have to borrow funds
or liquidate some of its assets in order to make sufficient distributions and
maintain its status as a REIT.
LIMITATIONS ON SHARE OWNERSHIP REQUIRED TO MAINTAIN AMREIT'S REIT STATUS MAY
DETER ATTRACTIVE TENDER OFFERS FOR AMREIT COMMON SHARES.
For the purposes of protecting its REIT status, AmREIT's declaration of
trust limits the ownership by any single holder of AmREIT's common shares to
9.0% of the issued and outstanding common shares, unless our board of trust
managers determines otherwise. These restrictions may discourage a change in
control of AmREIT, deter any attractive tender offers for AmREIT common shares
or limit the opportunity for you or other shareholders to receive a premium for
your AmREIT common shares.
AMREIT'S CHARTER CONTAINS ANTI-TAKEOVER PROVISIONS.
AmREIT's charter contains provisions which may make it more difficult to
remove current management or delay or discourage an unsolicited takeover, which
could have the effect of inhibiting a non-negotiated merger or other business
combination involving AmREIT. These provisions include:
- the prohibition on any person owning, directly or indirectly, more
than 9.0% of the outstanding common shares; and
- the provisions authorizing the issuance of preferred shares on terms
that board members determine make it more difficult for an aggressor
to obtain a controlling number of shares.
For AmREIT to continue to qualify as a REIT under the Internal Revenue
Code, not more than 50% of its outstanding shares may be owned by five or fewer
individuals during the last half of each year and outstanding shares must
generally be owned by 100 or more persons during at least 335 days of a taxable
year of 12 months. AmREIT's charter restricts the accumulation or transfer of
common shares if any accumulation or transfer could result in any person
beneficially owning in excess of 9.0% of the then outstanding common shares.
PROVISIONS OF OUR CHARTER, BYLAWS AND TEXAS LAW COULD RESTRICT CHANGE IN
CONTROL.
AmREIT's declaration of trust and bylaws contain provisions that may
inhibit or impede acquisition or attempted acquisition of control of AmREIT by
means of a tender offer, a proxy contest or otherwise. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate bids and to encourage persons seeking to acquire control of AmREIT to
negotiate first with the trust managers. AmREIT believes that these provisions
increase the likelihood that proposals initially will be on more attractive
terms than would be the case in their absence and increase the likelihood of
negotiations, which might outweigh the potential disadvantages of discouraging
such proposals because,
15
among other things, negotiation of such proposals might result in improvement of
terms. See "Certain Anti-Takeover Provisions of the Declaration of Trust and
Bylaws and Texas Law."
PROPERTY ACQUISITIONS MAY FAIL TO PERFORM IN ACCORDANCE WITH EXPECTATIONS AND
ESTIMATES OF THE COSTS OF IMPROVEMENTS TO BRING AN ACQUIRED PROPERTY UP TO
STANDARD MAY PROVE INACCURATE.
AmREIT anticipates that its new developments and acquisitions will be
financed under lines of credit or other interim forms of secured or unsecured
financing. Permanent financing for those newly developed or acquired projects
may not be available or may be available only on disadvantageous terms. In
addition, AmREIT's distribution requirements limit its ability to rely upon
income from operations or cash flow from operations to finance new developments
or acquisitions. As a result, if permanent financing is not available on
acceptable terms, further development activities or acquisitions might be
curtailed. In the case of an unsuccessful development or acquisition, AmREIT's
loss could exceed its project investment.
WE WILL BE SUBJECT TO CONFLICTS OF INTEREST.
We will be subject to conflicts of interest arising out of our
relationships with our affiliated Retail Partnerships, including certain
material conflicts discussed below.
We will experience competition for properties. In evaluating property
acquisitions, certain properties may be appropriate for AmREIT as well as its
affiliated Retail Partnerships. You will not have the opportunity to evaluate
the manner in which these conflicts of interest are resolved before making your
investment. Generally, we will evaluate each property, considering the
investment objectives, creditworthy nature of the tenant, expected holding
period of the property, available capital and geographic and tenant
concentration issues when determining the allocation of properties among AmREIT
and its affiliated Retail Partnerships.
There will be competing demands on our management and trust managers. Our
management team and trust managers are not only responsible for AmREIT, but also
for our affiliated Retail Partnerships, which include entities that may invest
in the same types of assets in which AmREIT may invest. For this reason, the
management team and trust managers will share their management time and services
among those companies and AmREIT, will not devote all of their attention to
AmREIT and could take actions that are more favorable to the other entities than
to AmREIT.
We may invest along side our affiliated Retail Partnerships. We may invest
in joint ventures, partnerships or limited liability companies for the purpose
of owning or developing retail real estate projects. Therefore, the interest,
investment objectives and timing of disposition may be different than that of
our shareholders, and there are no assurances that your investment objectives
will take priority.
We may, from time to time, purchase one or more properties from our
affiliated Retail Partnerships. In such circumstances, we will work with the
applicable Retail Partnership to ascertain, and we will pay, the Market Value of
the property. In so doing, there will not be any brokerage commissions paid;
however, there can be no assurance that the price paid for such property will be
equal to or greater than the price we would have been able to negotiate from an
independent third party. These property acquisitions from the affiliated Retail
Partnerships will be limited to properties that the affiliated Retail
Partnerships developed. See "Conflicts of Interest -- Purchase of Properties
from Retail Partnerships."
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OUR BOARD OF TRUST MANAGERS CAN TAKE MANY ACTIONS WITHOUT SHAREHOLDER APPROVAL.
Our board of trust managers has overall authority to conduct our
operations. This authority includes significant flexibility. For example, our
board of trust managers can (1) prevent the ownership, transfer and/or
accumulation of shares in order to protect our status as a REIT or for any other
reason deemed to be in the best interests of the shareholders; (2) issue
additional shares without obtaining shareholder approval, which could dilute
your ownership; (3) direct our investments toward investments that will not
appreciate over time, such as building only properties, with the land owned by a
third party, and mortgage loans; and (4) change minimum creditworthiness
standards with respect to tenants. Any of these actions could reduce the value
of our assets without giving you, as a shareholder, the right to vote.
OUR OFFICERS AND TRUST MANAGERS HAVE LIMITED LIABILITY.
Our declaration of trust and bylaws provide that an officer or trust
manager's liability for monetary damages to us, our shareholders or third
parties may be limited. Generally, we are obligated under our declaration of
trust and bylaws to indemnify our officers and trust managers against certain
liabilities incurred in connection with their services. These provisions could
limit our ability and the ability of our shareholders to effectively take action
against our trust managers and officers arising from their service to us.
RISKS ASSOCIATED WITH AN INVESTMENT IN REAL ESTATE
REAL ESTATE INVESTMENTS ARE RELATIVELY ILLIQUID.
Real estate investments are relatively illiquid. Illiquidity limits the
owner's ability to vary its portfolio promptly in response to changes in
economic or other conditions. In addition, federal income tax provisions
applicable to REITs may limit AmREIT's ability to sell properties at a time
which would be in the best interest of its shareholders.
PROPERTIES ARE SUBJECT TO GENERAL REAL ESTATE OPERATING RISKS.
If you become a shareholder of AmREIT your investment will be subject to
the risks of investing in real property. In general, a downturn in the national
or local economy, changes in zoning or tax laws or the availability of financing
could adversely affect occupancy or rental rates. In addition, increases in
operating costs due to inflation and other factors may not be offset by
increased rents. If operating expenses increase, the local rental market for
properties similar to AmREIT's may limit the extent to which rents may be
increased to meet increased expenses without decreasing occupancy rates. If any
of the above occurs, AmREIT's ability to make distributions to shareholders
could be adversely affected.
AMREIT MAY CONSTRUCT IMPROVEMENTS, THE COST OF WHICH MAY NOT BE RECOVERABLE.
AmREIT may on occasion acquire properties and construct improvements or
acquire properties under contract for development. Investment in properties to
be developed or constructed is more risky than investments in fully developed
and constructed properties with operating histories. In connection with the
acquisition of these properties, AmREIT may advance, on an unsecured basis, a
portion of the purchase price in the form of cash, a conditional letter of
credit and/or promissory note. AmREIT will be dependent upon the seller or
lessee of the property under construction to fulfill its obligations, including
the return of advances and the completion of construction. This party's ability
to carry out its obligations may be affected by financial and other conditions
which are beyond the control of AmREIT.
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If AmREIT acquires construction properties, the general contractors and
the subcontractors may not be able to control the construction costs or build in
conformity with plans, specifications and timetables. The failure of a
contractor to perform may necessitate legal action by AmREIT to rescind its
construction contract, to compel performance or to rescind its purchase
contract. These legal actions may result in increased costs to AmREIT.
Performance may also be affected or delayed by conditions beyond the
contractor's control, such as building restrictions, clearances and
environmental impact studies imposed or caused by governmental bodies, labor
strikes, adverse weather, unavailability of materials or skilled labor and by
financial insolvency of the general contractor or any subcontractors prior to
completion of construction. These factors can result in increased project costs
and corresponding depletion of AmREIT's working capital and reserves and in the
loss of permanent mortgage loan commitments relied upon as a primary source for
repayment of construction costs.
AmREIT may make periodic progress payments to the general contractors of
properties prior to construction completion. By making these payments, AmREIT
may incur substantial additional risks, including the possibility that the
developer or contractor receiving these payments may not fully perform the
construction obligations in accordance with the terms of his agreement with
AmREIT and that AmREIT may be unable to enforce the contract or to recover the
progress payments.
AMREIT LEASES TO SINGLE TENANTS WHO CAN FAIL.
Single tenant leases accounted for 87% of AmREIT's total revenue for the
year ended December 31, 2002 and 54% for the year ended December 31, 2003. In
single tenant leases, the continued viability of the lease will depend directly
on the continued financial viability of one tenant. If the tenant fails and the
lease is terminated, AmREIT would incur a reduction in cash flow from the
property and the value of the property would be decreased. Also, where two or
more properties have the same tenant, or related tenants, the continued
viability of each property would depend directly on the financial viability of a
single tenant.
NET LEASES MAY NOT RESULT IN FAIR MARKET LEASE RATES OVER TIME.
Net leases accounted for 100% of AmREIT's total rental income for the
years ended December 31, 2002 and 2003. Net leases frequently provide the tenant
greater discretion in using the leased property than ordinary property leases,
such as the right to freely sublease the property, to make alterations in the
leased premises and to early termination of the lease under specified
circumstances. Further, net leases are typically for longer lease terms and,
thus, there is an increased risk that any rental increase clauses in future
years will fail to result in fair market rental rates during those years. The
original leases on AmREIT's existing properties are for original terms ranging
from 10 to 20 years.
In the event a lease is terminated, AmREIT may not be able to lease the
property for the previous rent and may not be able to sell the property without
incurring a loss. AmREIT could also experience delays in enforcing its rights
against defaulting tenants. If a tenant does not pay rent, AmREIT may not only
lose the net cash flow from the property but may also need to use cash flow
generated by other properties to meet mortgage payments on the defaulted
property.
AMREIT MAY INVEST IN JOINT VENTURES.
Investments in joint ventures may involve risks which may not otherwise be
present where investments are made directly by AmREIT in real property such as:
- the potential inability of AmREIT's joint venture partner to
perform;
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- the joint venture partner may have economic or business interests or
goals which are inconsistent with or adverse to those of AmREIT;
- the joint venture partner may take actions contrary to the requests
or instructions of AmREIT or contrary to AmREIT's objectives or
policies; and
- the joint venturers may not be able to agree on matters relating to
the property they jointly own. Although each joint owner will have a
right of first refusal to purchase the other owner's interest, in
the event a sale is desired, the joint owner may not have sufficient
resources to exercise such right of first refusal.
AmREIT also may participate with other investors, including possibly
investment programs or other entities affiliated with management, in investments
as tenants-in-common or in some other joint venture arrangement. The risks of
such joint ownership may be similar to those mentioned above for joint ventures
and, in the case of a tenancy-in-common, each co-tenant normally has the right,
if an unresolvable dispute arises, to seek partition of the property, which
partition might decrease the value of each portion of the divided property.
OUR PROPERTIES MAY BE SUBJECT TO ENVIRONMENTAL LIABILITIES.
Under various federal and state environmental laws and regulations, as an
owner or operator of real estate, we may be required to investigate and clean up
certain hazardous or toxic substances, asbestos-containing materials, or
petroleum product releases at our properties. We may also be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by those parties in connection with the
contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. The presence of contamination or the failure
to remediate contaminations at any of our properties may adversely affect our
ability to sell or lease the properties or to borrow using the properties as
collateral. We could also be liable under common law to third parties for
damages and injuries resulting from environmental contamination coming from our
properties.
All of our properties will be acquired subject to satisfactory Phase I
environmental assessments, which generally involve the inspection of site
conditions without invasive testing such as sampling or analysis of soil,
groundwater or other media or conditions; or satisfactory Phase II environmental
assessments, which generally involve the testing of soil, groundwater or other
media and conditions. Our board of trust managers may determine that we will
acquire a property in which a Phase I or Phase II environmental assessment
indicates that a problem exists and has not been resolved at the time the
property is acquired, provided that (A) the seller has (1) agreed in writing to
indemnify us and/or (2) established in escrow case funds equal to a
predetermined amount greater than the estimated costs to remediate the problem;
or (B) we have negotiated other comparable arrangements, including, without
limitation, a reduction in the purchase price. We cannot be sure, however, that
any seller will be able to pay under an indemnity we obtain or that the amount
in escrow will be sufficient to pay all remediation costs. Further, we cannot be
sure that all environmental liabilities have been identified or that no prior
owner, operator or current occupant has created an environmental condition not
known to us. Moreover, we cannot be sure that (1) future laws, ordinances or
regulations will not impose any material environmental liability or (2) the
current environmental condition of our properties will not be affected by
tenants and occupants of the properties, by the condition of land or operations
in the vicinity of the properties (such as the presence of underground storage
tanks), or by third parties unrelated to us.
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Environmental liabilities that we may incur could have an adverse effect on our
financial condition or results of operations.
ANTICIPATED BORROWING CREATES RISKS.
We may borrow money to acquire assets, to preserve our status as a REIT or
for other corporate purposes. We may mortgage or put a lien on one or more of
our assets in connection with any borrowing. We currently have a revolving line
of credit in an aggregate amount of up to $30 million to provide financing for
the acquisition of assets, of which approximately $12.8 million was outstanding
as of March 31, 2004. We may repay the line of credit using equity offering
proceeds, including proceeds from this offering, working capital, permanent
financings or proceeds from the sale of assets. We may also obtain additional
long-term, permanent financing. Our bylaws limit our recourse debt obligations
to 55% of our gross asset value. Borrowing may be risky if the cash flow from
our real estate and other investments is insufficient to meet our debt
obligations. In addition, our lenders may seek to impose restrictions on future
borrowings, distributions and operating policies. If we mortgage or pledge
assets as collateral and we cannot meet our debt obligations, the lender could
take the collateral, and we would lose both the asset and the income we were
deriving from it.
WE MAY NOT HAVE ADEQUATE INSURANCE.
An uninsured loss or a loss in excess of insured limits could have a
material adverse impact on our operating results and cash flows and returns to
the shareholders could be reduced. Certain types of losses, such as from
terrorist attacks, however, may be either uninsurable, too difficult to obtain
or too expensive to justify insuring against. Furthermore, an insurance provider
could elect to deny or limit coverage under a claim. Should an uninsured loss or
a loss in excess of insured limits occur, we could lose all or a portion of the
capital we have invested in a property, as well as the anticipated future
revenue from the property. Therefore, if we, as landlord, incur any liability
which is not fully covered by insurance, we would be liable for the uninsured
amounts, cash available for distributions to shareholders may be reduced and the
value of our assets may decrease significantly. In addition, in such an event,
we might nevertheless remain obligated for any mortgage debt or other financial
obligations related to the property.
AMREIT'S PROPERTIES MAY NOT BE PROFITABLE, MAY NOT RESULT IN DISTRIBUTIONS
AND/OR MAY DEPRECIATE.
While AmREIT will attempt to buy leased, income-producing properties at a
price at or below the appraised value of such properties, properties acquired by
AmREIT:
- may not operate at a profit,
- may not perform to AmREIT's expectations,
- may not appreciate in value,
- may depreciate in value,
- may not ever be sold at a profit and
- may result in the loss of a portion of AmREIT's investment.
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The marketability and value of any properties will depend upon many factors
beyond AmREIT's control. A ready market for AmREIT's properties may not exist or
develop.
AMREIT MAY PROVIDE FINANCING TO PURCHASERS OF PROPERTIES.
AmREIT may provide purchaser financing which would delay receipt of the
proceeds from the property sale. AmREIT may provide this financing where lenders
are not willing to make loans secured by commercial real estate or where a
purchaser is willing to pay a higher price for the property than it would
without this financing.
In those circumstances, AmREIT will be subject to risks inherent in the
business of lending, such as the risk of default of the borrower or bankruptcy
of the borrower. Upon a default by a borrower, AmREIT may not be able to sell
the property securing a mortgage loan at a price that would enable it to recover
the balance of a defaulted mortgage loan. In addition, the mortgage loans could
be subject to regulation by federal, state and local authorities which could
interfere with AmREIT's administration of the mortgage loans and any collections
upon a borrower's default. AmREIT will also be subject to interest rate risk
that is associated with the business of making mortgage loans. Since AmREIT's
primary source of financing its mortgage loans is expected to be through
variable rate loans, any increase in interest rates will also increase AmREIT's
borrowing costs. In addition, any interest rate increases after a loan's
origination could also adversely affect the value of the loans when securitized.
AMREIT MAY ENGAGE IN SALE-LEASEBACK TRANSACTIONS.
AmREIT, on occasion, may lease an investment property back to the seller.
When the seller/lessee leases space to tenants, the seller/lessee may be unable
to meet its rental obligations to AmREIT if the tenants are unable to meet their
lease payments to the seller/lessee. A default by the seller/lessee or other
premature termination of the leaseback agreement could have an adverse effect on
AmREIT's financial position. In the event of a default or termination, AmREIT
may not be able to find new tenants without incurring a loss.
Additionally, a seller may attempt to include in the acquisition price all
or some portion of the lease payments. If the seller is successful, AmREIT may
pay a premium upon acquisition where a leaseback is involved.
AMREIT MUST COMPETE FOR ACCEPTABLE INVESTMENTS.
AmREIT's operating results will depend upon the availability of suitable
investment opportunities, which in turn depends on the type of investment
involved, the condition of the money markets, the nature and geographical
location of the property, competition and other factors, none of which can be
predicted with certainty. AmREIT will continue to compete for acceptable
investments with other financial institutions, including insurance companies,
pension funds and other institutions, real estate investment trusts and limited
partnerships which have investment objectives similar to those of AmREIT. Many
of these competitors may have greater resources than AmREIT.
AMREIT MAY BE UNABLE TO RENEW LEASES OR RELET SPACES.
AmREIT's property leases might not be renewed, the space might not be
relet or the terms of renewal or reletting may be less favorable than current
lease terms. AmREIT's cash flow and ability to make expected distributions to
its shareholders may be adversely affected if: (1) it is unable to promptly
relet or renew the leases, (2) the rental rate upon renewal or reletting is
significantly lower than expected or (3) its reserves proved inadequate.
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AMREIT'S PROPERTIES FACE COMPETING PROPERTIES.
All of AmREIT's properties are located in areas that include competing
properties. The number of competitive properties could have a material adverse
effect on both AmREIT's ability to lease space and the rents charged. AmREIT may
be competing with other property owners that have greater resources.
THE INABILITY OF A TENANT TO MAKE LEASE AND MORTGAGE PAYMENTS COULD HAVE AN
ADVERSE EFFECT ON AMREIT.
AmREIT's business depends on the tenants' ability to pay their obligations
to AmREIT with respect to AmREIT's real estate leases. The ability of the
tenants to pay their obligations to AmREIT in a timely manner will depend on a
number of factors, including the successful operation of their businesses.
Various factors, many of which are beyond the control of any business, may
adversely affect the economic viability of AmREIT's tenants, including but not
limited to:
- national, regional and local economic conditions (which may be
adversely affected by industry slowdowns, employer relocations,
prevailing employment conditions and other factors), which may
reduce consumer demand for the products offered by AmREIT's tenants;
- local real estate conditions;
- changes or weaknesses in specific industry segments;
- perceptions by prospective customers of the safety, convenience,
services and attractiveness of AmREIT's tenants;
- changes in demographics, consumer tastes and traffic patterns;
- the ability to obtain and retain capable management;
- changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties;
- increases in operating expenses; and
- increases in minimum wages, taxes (including income, service, real
estate and other taxes) or mandatory employee benefits.
AMREIT HAS PROPERTIES SPECIFICALLY SUITED TO FEW TENANTS.
AmREIT may acquire properties specifically suited to particular tenant
needs, including retail or commercial facilities. The value of these properties
would be adversely affected by the specific tenant's failure to renew or honor
its lease. These properties would typically require extensive renovations to
adapt them for new uses by new tenants. Also, AmREIT may experience difficulty
selling special purpose properties to persons other than the tenant.
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WE DO NOT HAVE CONTROL OVER MARKET AND BUSINESS CONDITIONS.
Changes in general or local economic or market conditions, such as
increased costs of operations, cost of development, increased costs of
insurance, increased costs or shortage in labor, competitive factors, quality of
management, turnover in management, changing consumer habits, changing
demographics, changing traffic patterns, environmental changes, regulatory
changes and other factors beyond our control may reduce the value of properties
that we currently own or those that we acquire in the future, the ability of
tenants to pay rent on a timely basis, and therefore, the amount of dividends
that we are able to pay to shareholders.
WE WILL HAVE NO ECONOMIC INTEREST IN LEASEHOLD ESTATE PROPERTIES.
We currently own properties, and may acquire additional properties, in
which we own only the leasehold interest, and do not own or control the
underlying land. With respect to these leasehold estate properties, AmREIT will
have no economic interest in the land at the expiration of the lease, and
therefore may lose the right to the use of the properties at the end of the
ground lease.
RISKS ASSOCIATED WITH FEDERAL INCOME TAXATION OF AMREIT
AMREIT'S FAILURE TO QUALIFY AS A REIT FOR TAX PURPOSES WOULD RESULT IN AMREIT'S
TAXATION AS A CORPORATION AND THE REDUCTION OF FUNDS AVAILABLE FOR SHAREHOLDER
DISTRIBUTION.
Although AmREIT's management believes that it is organized and is
operating so as to qualify as a REIT, AmREIT may not be able to continue to
remain so qualified. In addition REIT qualification tax laws may change. AmREIT
is not aware, however, of any currently pending tax legislation that would
adversely affect its ability to continue to qualify as a REIT.
For any taxable year that AmREIT fails to qualify as a REIT, it will be
subject to federal income tax on its taxable income at corporate rates. In
addition, unless entitled to relief under certain statutory provisions, AmREIT
also will be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce the net earnings available for investment or distribution to shareholders
because of the additional tax liability to AmREIT for the year or years
involved. In addition, distributions no longer would qualify for the dividends
paid deduction nor would there be any requirement that such distributions be
made. To the extent that distributions to shareholders would have been made in
anticipation of AmREIT qualifying as a REIT, AmREIT might be required to borrow
funds or to liquidate certain of its investments to pay the applicable tax.
AMREIT MAY BE LIABLE FOR PROHIBITED TRANSACTION TAX AND/OR PENALTIES.
A violation of the REIT provisions, even where it does not cause failure
to qualify as a REIT, may result in the imposition on AmREIT of substantial
taxes, such as the 100% tax that applies to net income from a prohibited
transaction if AmREIT is determined to be a dealer in real property. Because the
question of whether that type of violation occurs may depend on the facts and
circumstances underlying a given transaction, these violations could
inadvertently occur. To reduce the possibility of an inadvertent violation, the
trust managers intend to rely on the advice of legal counsel in situations where
they perceive REIT provisions to be inconclusive or ambiguous.
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CHANGES IN THE TAX LAW MAY ADVERSELY AFFECT AMREIT'S REIT STATUS.
The discussions of the federal income tax considerations are based on
current tax laws. Changes in the tax laws could result in tax treatment that
differs materially and adversely from that described in this proxy statement.
INVESTMENT IN AMREIT MAY NOT BE SUITABLE UNDER ERISA AND IRA REQUIREMENTS.
Fiduciaries of a pension, profit sharing or other employee benefit plan
subject to ERISA should consider whether the investment in AmREIT securities
satisfies the ERISA diversification requirements of ERISA, whether the
investment is prudent, whether the investment would be an improper delegation of
responsibility for plan assets and whether such fiduciaries have authority to
acquire such securities under the appropriate governing instrument and Title I
of ERISA. Also, fiduciaries of an individual retirement account should consider
that an IRA may only make investments that are authorized by the appropriate
governing instrument.
BUSINESS AND PROPERTIES
GENERAL
AmREIT is a rapidly growing, self-managed and self-advised REIT with,
along with its predecessors, a 19-year history of delivering results to its
investors. Its business model consists of a publicly traded REIT, A portfolio of
retail properties, including "irreplaceable corners" - premier retail frontage
properties in high traffic, highly populated areas, 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, a Texas real estate investment trust,
became the successor to Predecessor Corporation in December 2002, through the
merger of the Predecessor Corporation with AmREIT. The term "AmREIT" includes,
as the context requires, the Predecessor Corporation and the other subsidiaries
of "AmREIT." At May 31, 2004, AmREIT had outstanding approximately 3.3 million
class A common shares, listed on the American Stock Exchange (AMEX:AMY), 2.3
million class B common shares, that are not listed on an exchange, which may be
converted into class A common shares on a one-for-one basis at any time at the
holder's option, and 4.0 million class C common shares, that are not listed on
an exchange, which may be converted into class A common shares based on 110% of
invested capital at any time following the seventh anniversary of the date of
issuance of the shares at the holder's option.
On July 23, 2002, the Predecessor Corporation successfully 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 ("Funds IX, X and
XI") and listed its class A common stock on the American Stock Exchange. The
limited partners in Funds IX, X and XI received class B common stock of the
Predecessor Corporation, which was not listed, had a preferred 8% distribution
and was convertible one for one into the Class A common stock at the holder's
option. Each share of the Predecessor Corporation's class A
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common stock and class B common stock was converted into one class A common
share and class B common share, respectively, in the merger with AmREIT.
AmREIT, its predecessors and its wholly-owned affiliates have a proven
track record over the past 19 years of completing over 200 transactions,
including acquisitions, joint ventures, ground-up developments, sale/leaseback
transactions and numerous dispositions. AmREIT and its management team have been
active in the real estate markets and understand the dynamics of real estate
transactions in these markets.
The Predecessor Corporation was formed in 1993 to continue and expand the
business of its predecessor company, American Asset Advisers Trust, which was
founded in 1985. We actively acquire, develop and manage high-quality commercial
retail properties leased to creditworthy tenants under net-leases. Through a
wholly owned subsidiary, we also provide advisory services to 5 real estate
limited partnerships. As of March 31, 2004, AmREIT owned 51 properties located
in 18 states. AmREIT currently has approximately 3,000 shareholders and 900
partners in its retail limited partnerships.
OPERATING STRATEGY
Our business model 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. As of March 31, 2004, we had fully subscribed
the $40 million class C common share offering. Through our bylaws, our debt is
limited to 55% recourse debt as compared to its gross assets. As of March 31,
2004, our debt to asset ratio was approximately 41%.
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 March
31, 2004, the occupancy rate at our properties was 94.8 %. Our properties
attract a wide array of established commercial retail 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 $70,000 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 release terms.
Our revenues are substantially generated by corporate retail tenants such
as Starbucks, Landry's, CVS Pharmacy, IHOP, Eckerd, Nextel, Washington Mutual,
TGI Friday's, and others. AmREIT owns, 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.
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
25
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. 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 included in the category real estate held for sale, net, on our consolidated
balance sheet, and, at March 31, 2004, represented approximately $7.2 million.
SECURITIES COMPANY. The part of our business structure and operating
strategy that 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 by a
subsidiary of AmREIT. Additionally, during 2003 ASC raised approximately $14
million directly for us through our 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
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 directly
invests as both the general partner and as a limited partner (the "Retail
Partnerships"). We wanted to create a structure that aligns the interest of our
shareholders with that of our unit holders. Our subsidiary general partners of
the retail partnerships create value for AmREIT through managing money for the
sponsored funds, and in return, receive 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 March 31, 2004, AmREIT directly managed, through its four actively
managed and previously sponsored retail partnerships, a total of $30 million in
equity. These four partnerships have or will enter their liquidation phases in
2003, 2009, and 2010, and 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
26
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.
AmREIT's principal executive offices are located at 8 Greenway Plaza,
Suite 1000, Houston, Texas 77046, and its telephone number is (713) 850-1400.
PROPERTIES
GENERAL. At March 31, 2004, we owned 51 properties located in 18 different
states.
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.
On June 15, 2004, AmREIT acquired The Courtyard at Post Oak, consisting of
a 4,013 square foot free standing building occupied by Verizon Wireless and a
9,428 square foot multi-tenant shopping center occupied with Ninfa's Restaurant
and Dessert Gallery. The property was constructed in 1994 and is located at the
intersection of Post Oak and San Felipe in Houston Texas. This is a lighted
intersection in the heart of the Houston Galleria, the most significant retail
corridor in the Greater Houston area. The property was acquired for $6.35
million in cash. The Verizon Wireless building has a 10-year lease expiring in
December 2009 and currently provides for annual rental payments of $146,400 per
year. Ninfa's has a 15-year lease expiring in November 2009 and provides for
annual rental payments of $228,180 per year. Dessert Gallery has a 5-year lease
expiring in December 2009 and provides for annual rental payments of $54,660 per
year.
In addition to this property, the Company is working on other property
acquisitions at various stages of due diligence worth approximately $60 million.
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 us 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.
27
LOCATION OF PROPERTIES. AmREIT's focus is on property investments in
Texas. Of our 51 properties, 20 are located in Texas, with 14 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.
28
The rental income by state for 2003 was as follows:
State Rental Income Rental 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%
MULTI-TENANT PROPERTIES. As of March 31, 2004, AmREIT owned five
multi-tenant properties. 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 and a 12,000 square foot CVS Pharmacy (NYSE: CVS). 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.
29
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.
SINGLE TENANT PROPERTIES. As of March 31, 2004, AmREIT owned 46 single
tenant properties. During 2003, we acquired six single tenant properties with an
aggregate of approximately 23,000 square feet of gross leaseable area. 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 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 at these properties 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.
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 March 31, 2004, AmREIT held two sites to be developed.
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.
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.
30
AMREIT WHOLLY-OWNED PROPERTY INFORMATION
(MARCH 31, 2004)
BUILDING LEASE
DATE PURCHASE LEASEABLE ANNUAL EXPIRATION
PROPERTY (LOCATION) ACQUIRED PRICE AREA RENT DATE
------------------- -------- ----------- --------- ---------- ----------
Radio Shack
(Dallas, TX) .................... 06/15/94 $ 1,062,000 5,200 $ 108,900 11/30/06
Transworld
Entertainment
(Independence, MO) .............. 11/14/94 1,550,000 14,047 187,655 04/30/04
Copperfield Medical Plaza
(Houston, TX) ................... 07/01/95 1,680,000 14,000 201,072 04/30/07
Wherehouse Entertainment
(Wichita, KS) ................... 09/12/95 1,700,000 15,158 (3) 12/31/04
FootStar, Inc. (1)
(Tucson, AZ) .................... 09/11/96 3,351,000 19,550 419,026 09/30/16
Washington Mutual
(The Woodlands, TX) (4) ......... 09/23/96 500,000 - 59,461 09/30/11
Washington Mutual
(Houston, TX) (4) ............... 12/11/96 828,000 - 97,861 12/31/11
FootStar, Inc. (1)
(Baton Rouge, LA) ............... 06/09/97 2,806,000 20,575 300,539 05/15/12
Hollywood Video
(Lafayette, LA) ................. 10/31/97 1,124,000 7,488 134,709 09/24/12
Hollywood Video
(Ridgeland, MS) ................. 12/30/97 1,208,000 7,488 138,453 12/22/12
OfficeMax
(Dover, DE) ..................... 04/14/98 2,548,000 23,500 264,679 04/30/13
Woodlands Plaza
(The Woodlands, TX).............. 06/03/98 3,542,000 16,922 374,100 Various
Sugar Land Plaza
(Sugar Land, TX) ................ 07/01/98 3,635,000 16,922 330,875 07/01/13
Dardin Restaurants
(Peachtree City, GA) (4) ........ 12/18/98 738,000 - 75,000 12/17/08
IHOP, Corp.
(Sugarland, TX) ................. 9/30/99 1,608,000 4,020 165,180 9/30/24
IHOP, Corp.
(Topeka, KS) .................... 9/30/99 1,335,000 4,020 137,340 9/30/24
Foodmaker
(Dallas, TX)..................... 7/23/02 (2) 715,100 2,238 68,998 7/11/09
Baptist Memorial Health
(Memphis, TN).................... 7/23/02 (2) 2,079,200 15,000 204,375 8/31/07
Payless Shoes
(Austin, TX)..................... 7/23/02 (2) 698,300 4,000 82,000 1/30/08
Golden Corral
(Houston, TX).................... 7/23/02 (2) 1,811,800 12,000 182,994 11/30/07
Golden Corral
(Houston, TX).................... 7/23/02 (2) 1,843,400 12,000 181,688 3/14/08
31
BUILDING LEASE
DATE PURCHASE LEASEABLE ANNUAL EXPIRATION
PROPERTY (LOCATION) ACQUIRED PRICE AREA RENT DATE
------------------- -------- ----------- --------- ---------- ----------
Eckerd
(Houston, TX) (4)................ 1/10/03 2,646,900 - 327,167 10/31/23
TGI Friday's
(Houston, TX).................... 7/23/02 (2) 2,036,900 8,500 180,500 1/30/08
Guitar Center
(Minnesota, MN).................. 7/23/02 (2) 2,541,700 15,000 246,750 8/31/09
AFC, Inc. (Popeye's Chicken)
(Atlanta, GA).................... 7/23/02 (2) 1,113,900 2,583 105,563 7/19/14
Memorial Herman Hospital
(Houston, TX).................... 7/23/02 (2) 1,816,800 15,000 171,360 1/31/09
Blockbuster Video
(Oklahoma City, OK).............. 7/23/02 (2) 973,800 15,000 92,610 8/31/05
Pier One
(Longmont, CO)................... 7/23/02 (2) 1,423,600 8,014 135,560 2/29/08
IHOP, Corp.
(Grand Prairie, TX).............. 4/15/03 1,940,400 4,020 174,332 4/14/28
TGI Friday's
(Hanover, MD).................... 9/16/03 1,474,700 8,500 134,962 9/30/13
The Terrace Shops
(Houston, TX).................... 12/15/03 4,800,000 16,395 428,900 Various
Uptown Plaza
(Houston, TX).................... 12/15/03 13,000,000 28,000 1,268,400 Various
----------- ------- ---------- -------
TOTAL .............................. $73,080,100 326,640 $7,163,602
=========== ======= ==========
(1) Footstar, Inc. filed for Chapter 11 Bankruptcy protection on March 2,
2004. In publicly released announcement, Footstar has indicated their
intent to reject the lease on all Just For Feet locations, including the
leases on our two properties.
(2) These properties were acquired as part of the merger of the affiliated
partnerships (Funds IX, X and XI) on July 23, 2002. The purchase price
reflects the pro-rata portion of the negotiated price allocated to the
properties that AmREIT paid the partnerships in common shares.
(3) Wherehouse Entertainment filed for Chapter 11 Bankruptcy protection, and
as such, rejected the Wherehouse Entertainment lease in Wichita, Kansas.
At March 31, 2004, no rental income was being received on this property.
(4) Represents a land lease only, and as such, no building leasable area is
reflected.
In addition to the above wholly owned properties, AmREIT is the sole
shareholder of the corporate general partner and an 80% limited partner in AAA
CTL Notes, Ltd., a partnership created to purchase, hold, and manage a portfolio
of 17 IHOP leasehold estate and fee simple properties located throughout the
United States.
Through its sponsorship of retail partnerships to the independent
financial planning community, AmREIT is also the sole shareholder of the
corporate general partner and a 10.5%, 3.9% and 19% limited partner,
respectively, in AmREIT Opportunity Fund, AmREIT Income & Growth Fund and AmREIT
Monthly Income & Growth Fund, Ltd., at and AMREIT MOnthly Income & Growth Fund
II, Ltd.
32
RENOVATION AND IMPROVEMENTS. AmREIT manages each of its properties and is
constantly evaluating the need for renovation and capital improvements.
Currently, there are no material renovations or improvements scheduled.
LEASES. A majority of our properties are under lease to a regional or
national tenant. When entered into, each lease was long-term. Most leases are
net leases, requiring the tenant to pay all or substantially all expenses
related to operation of the property. The following table sets forth rental
information concerning AmREIT's 15 largest tenants for the year ended December
31,
2003 2002
---- ----
(in thousands)
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
Sugar Land Imaging Affiliates Ltd. 280 264
Comp USA (1) 268 123
OfficeMax, Inc 256 509
TGI Friday's (1) 240 83
Baptist Memorial Hospital (1) 223 102
Memorial Herman Healthcare (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.
The following table summarizes the minimum future rentals, exclusive of
any renewals, under AmREIT's operating and direct financing leases in existence
at December 31, 2003 (in thousands).
33
2004.................. 8,010
2005.................. 7,712
2006.................. 7,637
2007.................. 7,504
2008.................. 74,627
2009-Thereafter....... 68,120
--------
Total $173,610
========
SIGNIFICANT TENANTS. IHOP Corp. individually accounted for 22% of total
revenue for the year ended December 31, 2002 and 24% for the year ended December
31, 2003. At March 31, 2004, IHOP accounted for approximately 15% of AmREIT's
total revenue.
According to its fourth quarter 2003 earning release announced on February
26, 2004, IHOP was founded in July 1958 and operates over 1,110 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. According to its fourth quarter 2003 earnings release dated February
26, 2004, for the twelve months ended December 31, 2003, comparable store sales
in 2003 increased by 4.8% compared to 2002, and net income in 2003 decreased 10%
compared to 2002. The decrease in net income was due to a $9.1 million
reorganization charge to earnings. Excluding this charge to earnings, IHOP's net
income in 2003 increased 3.9% compared to 2002. For more information on IHOP,
please see the SEC web site at www.sec.gov.
Footstar, Inc. declared bankruptcy on March 2, 2004 and pursuant thereto
rejected the two Just For Feet leases it had with AmREIT. At March 31, 2004, the
Footstar accounted for approximately 3.9% of AmREIT's total annualized revenue.
See "Risk Factors -- Bankruptcy of a significant tenant would adversely affect
AmREIT's operations." We do not believe the Footstar bankruptcy will have a
material affect on our results of operations or affect our ability to pay
dividends on the class D common shares due to additional revenues generated by
our real estate operating and development subsidiary and the acquisition of
additional core retail properties.
COMPETITION
AmREIT's properties are located in 18 different states, with approximately
40% of its properties located in the Texas metropolitan areas. All of AmREIT's
properties are located in areas that include competing properties. The number of
competitive properties in a particular area could have a material adverse effect
on both AmREIT's ability to lease space at any of its properties or at any newly
developed or acquired properties and the rents charged. AmREIT may be competing
with owners, including, but not limited to, other REITs, insurance companies and
pension funds that have greater resources than AmREIT. There is no dominant
competitor in any of AmREIT's markets.
EMPLOYEES
AmREIT currently has 28 full-time employees and retains the services of
three real estate brokers and three managerial consultants on an as-needed
basis.
34
MANAGEMENT
The trust managers of AmREIT are as follows:
NAME AGE POSITION HELD TRUST MANAGER SINCE
---- --- ------------- -------------------
H. Kerr Taylor............... 53 Chairman of the Board, 1993
Chief Executive Officer and President
Robert S. Cartwright, Jr.... 54 Trust Manager, Chair at Corporate Governance and 1993
Nominating Committee, Audit Committee
G. Steven Dawson............ 46 Trust Manager, Chair of Audit Committee, Chair of 2000
Compensation Committee and Corporate Governance
and Nominating Committee
Bryan L. Goolsby............. 53 Trust Manager, Compensation Committee 2000
Philip Taggart............... 73 Trust Manager, Compensation Committee, Audit 2000
Committee and Corporate Governance and Nominating
Committee
H. KERR TAYLOR - Mr. Taylor is the chairman of the board of trust
managers, chief executive officer and president of AmREIT and was, prior to the
Merger, the chairman of the board of trust managers, chief executive officer and
president of the Predecessor Corporation from August 1993. Mr. Taylor was
president, director and sole shareholder of American Asset Advisers Realty Corp.
from 1989 to June 1998. Mr. Taylor has a bachelor's degree from Trinity
University, a Masters of Business Degree from Southern Methodist University and
a Doctor of Jurisprudence from South Texas College of Law. Mr. Taylor has over
twenty five years experience and has participated in over 300 real estate
transactions. Mr. Taylor has served on a board and governing bodies of a bank,
numerous private and public corporations and charitable institutions, and is
currently on the board of Millennium Relief and Development. Mr. Taylor is a
member of the National Board of Realtors, the Texas Association of Realtors, the
Texas Bar Association, the International Counsel of Shopping Centers and the
National Association of Real Estate Investment Trusts.
ROBERT S. CARTWRIGHT, JR. - Mr. Cartwright has been a trust manager or
director of AmREIT or the Predecessor Corporation since 1993. Mr. Cartwright is
a Professor of Computer Science at Rice University. Mr. Cartwright earned a
bachelor's degree magna cum laude in Applied Mathematics from Harvard College in
1971 and a doctoral degree in Computer Science from Stanford University in 1977.
Mr. Cartwright has been a member of the Rice faculty since 1980 and twice served
as department Chair. Mr. Cartwright has compiled an extensive record and Chair
of the ACM Pro-College Education Committee of professional service. He is a
Fellow of the Association for Computing Machinery (ACM). He is also a member of
the Board of Directors of the Computing Research Association, an umbrella
organization representing academic and industrial computing researchers. Mr.
Cartwright has served as a charter member of the editorial boards of two
professional journals and has also chaired several major ACM conferences. From
1991-1996, he was a member of the ACM Turing Award Committee, which selects the
annual recipient of the most prestigious international prize for computer
science research.
G. STEVEN DAWSON - Mr. Dawson has been a trust manager or director of
AmREIT or the Predecessor Corporation since 2000. From 1990 to 2003 when Mr.
Dawson retired, he has served as senior vice president and chief financial
officer of Camden Property Trust (NYSE:CPT), a public real estate company which
specializes in the acquisition, development, and management of over 159
apartment communities throughout the United States, with major concentrations in
Dallas, Houston, Las Vegas, Denver, Southern California and the Tampa/Orlando
areas. Prior to 1990, Mr. Dawson served in various related capacities with
companies involved in commercial real estate including land and office building
development as well as the construction and management of industrial facilities
located on
35
airports throughout the country. Mr. Dawson currently serves on the boards of
U.S. Restaurant Properties, Inc. (NYSE:USV) and His Grace Foundation.
BRYAN L. GOOLSBY - Mr. Goolsby has been a trust manager or director of
AmREIT or the Predecessor Corporation since 2000. Mr. Goolsby is the Managing
Partner of Locke Liddell & Sapp LLP, and has practiced in the area of corporate
and securities since 1977. Mr. Goolsby is an associate member of the Board of
Governors of the National Association of Real Estate Investment Trusts and is a
member of the National Multi-Family Housing Association and the Pension Real
Estate Association. Mr. Goolsby is currently a member of the Associate Board of
Directors of the Edwin L. Cox School of Business at Southern Methodist
University and is a member of the board of the Junior Achievement of Dallas. Mr.
Goolsby has a bachelor's degree from Texas Tech University and a Doctor of
Jurisprudence from the University of Texas.
PHILIP TAGGART - Mr. Taggart has been a trust manager or director of
AmREIT or the Predecessor Corporation since 2000. Mr. Taggart has specialized in
investor relations activities since 1964 and is the president and chief
executive officer of Taggart Financial Group, Inc. He is the co-author of the
book Taking Your Company Public, and has provided communications services for 58
initial public offerings, more than 200 other new issues, 210 mergers and
acquisitions, 3,500 analyst meetings and annual and quarterly reports for over
25 years. Mr. Taggart serves on the boards of International Expert Systems, Inc.
and Salon Group International and served on the board of the Foundation of Texas
State Technical College for 10 years. A distinguished alumnus of the University
of Tulsa, he also has been a university instructor in investor relations at the
University of Houston.
The following table sets forth certain information regarding the officers
of AmREIT.
NAME POSITION DATE OF EMPLOYMENT
H. Kerr Taylor* President and CEO Founder - 1985
Chad C. Braun* Executive Vice President and April 1999
Chief Financial Officer
Jim O'Neill Controller January 2000
Todd McDonald Managing VP-Real Estate November 2000
Jason Lax VP-Construction Management August 2002
Preston Cunningham VP-Development August 2002
David Thailing Managing VP-Securities September 2002
Tenel Tayar VP-Acquisitions January 2003
Debbie Lucas VP-Corporate Communications September 2003
Max Shilstone VP-Property Management May 2003
- ----------------
* Executive Officers
For information regarding Mr. Taylor, see above.
CHAD C. BRAUN CPA, Series 63, 7, 24 and 27. Mr. Braun serves as our
Executive Vice President and Chief Financial Officer, Treasurer and Secretary.
Mr. Braun oversees the financial accounting and reporting and is responsible for
AmREIT's capital formation, debt placement and joint venture initiatives. Mr.
Braun received a B.B.A degree in accounting and finance from Hardin Simmons
University and subsequently earned the CPA designation and his Series 63, 7, 24,
and 27 securities licenses. He has significant accounting, financial and real
estate experience with both Kenneth Leventhal & Co. and Ernst & Young, LLP. At
Ernst & Young, LLP, Mr. Braun served as a manager in the real estate advisory
services group and has provided extensive consulting and audit services to a
number of Real Estate Investment Trusts and private real estate companies. These
services included financial statement audits,
36
portfolio acquisition and disposition, real estate portfolio management, merger
integration and process improvement, financial analysis and due diligence. Mr.
Braun is a member of the National Association of Real Estate Investment Trusts,
Financial Planning Association, and the Texas Society of Certified Public
Accountants.
JIM O'NEIL CPA. Mr. O'Neill serves as Controller and oversees the daily
accounting activities of AmREIT and its affiliated partnerships, debt placement,
and project financials. Mr. O'Neill's responsibilities also include coordinating
financial activities with auditors, banks, lenders, transfer agents, and
attorneys to assure timely and accurately financial reporting. Mr. O'Neill is a
graduate of Texas A & M University, where he received his BBA in Accounting and
subsequently earned the distinction of CPA certification. Prior to joining
AmREIT, Inc., Mr. O'Neill served in a controller capacity at Continental Emsco
in Houston, Texas, Wedge Energy Group in Houston, Texas, and Markborough
Development Company located in Denver, Colorado.
TODD MCDONALD. Mr. McDonald serves as Managing Vice President - Real
Estate and oversees the analysis, marketing, and sales process related to
properties currently being marketing by the Company. Mr. McDonald received his
B.S. in Business Economics from Wofford College. Mr. McDonald has real estate
experience in which he reviewed property level financial statements, produced
project proformas, and provided analysis on acquisition and disposition
prospects.
JASON LAX. Mr. Lax serves as Vice President - Construction Management and
oversees all development and construction projects. Mr. Lax has nationwide
experience in the commercial construction industry obtained from previous
employment with ExxonMobil Corporation and Trammell Crow Company. During his
career, he has managed over a hundred projects valued over $150 million from
grassroots development projects to minor remodeling projects and has been
involved in all phases of development from conceptual site plan preparation to
project turnover after completion of construction. Mr. Lax received a B.S. in
Mechanical Engineering from Texas Tech University and has received his Engineer
In Training certification from the Texas Board of Professional Engineers. He is
also a Texas licensed Real Estate Salesperson.
PRESTON CUNNINGHAM JD. Mr. Cunningham serves as our Vice President -
Development Manager for existing retail properties and land suitable for infill
development. Mr. Cunningham received a B.B.A. degree in Financial Planning and
Services from Baylor University and Doctor of Jurisprudence from South Texas
College of Law. Mr. Cunningham has significant real estate experience with The
Howard Smith Company, Albritton Properties and Community Bank and Trust. Mr.
Cunningham is a member of the American Bar Association.
DAVID M. THAILING MBA, Series 63, 65, 7. Mr. Thailing serves as our
Managing Vice President - Securities and is responsible for raising capital for
AmREIT sponsored investment programs through the NASD marketplace. Mr. Thailing
received his B.B.A. degree in management from Southern Methodist University and
earned a Masters of Business from the Jones Graduate School at Rice University.
Prior to joining AmREIT, Mr. Thailing gained financial consulting experience as
an associate with Andersen's Corporate Finance and Restructuring practice. He
also has five years of experience as a financial advisor and public speaker with
PaineWebber.
TENEL TAYAR MBA. Mr. Tayar joined AmREIT in January 2003 and serves as
Vice President - Acquisitions. Mr. Tayar has 10 years of experience in
commercial real estate development and investment with companies such as
Crescent Real Estate Equities and The Woodlands Operating Company. Mr. Tayar has
directed all aspects of real estate capitalization and investment for over $225
million of transactions and participated in over $500 Million. Mr. Tayar
received a BBA in Finance from
37
the University of Texas at Austin and an MBA from Southern Methodist University.
He is also a Texas licensed Real Estate Salesperson.
DEBBIE LUCAS MBA, Series 63 and 7. Debbie J. Lucas serves as vice
president of corporate communications and is responsible for creating,
communicating, and distributing the AmREIT corporate message and brand to a wide
range of individuals including investment professionals, rating agencies and
analysts, individual investors, and employees. Prior to joining AmREIT, Ms.
Lucas gained financial consulting and business development experience at Smith
Barney and served as an environmental consultant for Tetra Tech, EMI. In
addition, Ms. Lucas provided consulting services to a corporate communications
firm located in Houston, Texas. Ms. Lucas received a Bachelor of Science degree
from Texas A&M University and earned a Masters of Business Administration from
the Jones School of Management at Rice University, simultaneously completing the
CFP certification course. She is a member of the National Association of Real
Estate Investment Trusts and the American Marketing Association.
Max Shilstone MBA. Mr. Shilstone serves as our vice president of property
management and is responsible for the property management and leasing of
existing assets owned by AmREIT and its retail partnership funds. Mr. Shilstone
received a Bachelor of Business Administration in management from the University
of Texas and earned a Masters of Business Administration from the University of
St. Thomas. Mr. Shilstone has both real estate and property management
experience with C.P. Oles Company in Austin, Texas where his responsibilities
included managing multi-tenant shopping centers and overseeing tenant
improvements, center upgrades, and tenant leasing.
EXECUTIVE COMPENSATION
The below table represents the compensation paid to Mr. Taylor, chairman
of the board, chief executive officer and president and Chad C. Braun Executive
Vice President, Chief Financial Officer and Secretary. The table sets forth all
compensation, cash and restricted stock, received during the fiscal years 2003,
2002 and 2001.
Long-Term Compensation
Annual Compensation Awards
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Cash Bonus Compensation Options Compensation
- ----------------------- ---- ------ ---------- ------------ ------- ------------
H. Kerr Taylor 2003 $ 195,000 $ 136,500 $ 58,500(1) -- (5)
Chief Executive 2002 $ 175,000 $ 122,500 $ 52,914(1) -- (4)
Officer and President 2001 $ 175,000 $ 61,250 $ 28,878(1) -- --
Chad C. Braun 2003 $ 122,000 $ 100,000 $ 121,927(2) -- (5)
Executive Vice 2002 $ 115,000 $ 49,750 $ 21,488(2) -- $ 99,996(3)(4)
President and CFO 2001 $ 85,000 $ 17,500 $ 8,251(2) -- --
- --------------
(1) Mr. Taylor was granted 9,000, 8,333 and 3,122 common shares as part of his
bonus for 2003, 2002 and 2001, respectively. The restrictions on these
shares lapse equally over a four year period beginning on February 15,
2004, equally over a four year period beginning on February 15, 2003 and
equally over a three year period beginning February 15, 2002,
respectively.
(2) Mr. Braun was granted 7,219, 3,384 and 892 common shares as part of his
bonus for 2003, 2002 and 2001, respectively. The restrictions on these
shares lapse equally over a four year period
38
beginning in February 15, 2004, a four year period beginning on February
15, 2003 and equally over a three year period beginning on February 15,
2002, respectively. Additionally Mr. Braun was granted 11,538 shares as a
long term 2003 retention bonus. The restrictions on the shares lapse on
the fifth anniversary on the issuance, February 15, 2009.
(3) Mr. Braun was granted 14,388 common shares as a bonus related to the
completion of the merger of three affiliated investment funds with AmREIT,
completed in 2002. The restrictions on these shares lapse equally over a
four year period beginning on February 15, 2003.
(4) Mr. Taylor and Mr. Braun were assigned 45% and 5%, respectively, in the
income and cash flow of the general partner of AAA CTL Notes, Ltd., which
is comprised of a portfolio of seventeen IHOP properties, the remainder of
which is owned by AmREIT. Mr. Taylor's interest is 100% vested
immediately. Mr. Braun's interest vests 100% on February 15, 2008. The
value of the assigned interest can not be determined or estimated at this
time.
(5) Mr. Taylor and Mr. Braun were assigned 37% and 4%, respectively, in the
income and cash flow of the general partner of AmREIT Income & Growth
Fund, Ltd. ("AIG"), AmREIT Income & Growth Corporation. AIG is an
affiliated retail partnership with a seven year operating lifecycle. In
June 2008, AIG will enter into liquidation and commence a final sale of
all of its real estate assets. In accordance with the limited partnership
agreement, net sales proceeds will be allocated to the limited partners,
and to the general partner as, if, and when certain annual returns have
been achieved by the limited partners. Mr. Taylor and Mr. Braun's interest
vests equally over a four year period beginning on February 15, 2004. The
value of the assigned interest can not be determined or estimated at this
time.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 30, 2004, the beneficial
ownership interest of the executive officers and trust managers of AmREIT:
AMOUNT AND NATURE OF PERCENT OF VOTING
NAME BENEFICIAL OWNERSHIP COMMON SHARES
- ---------------------------------------------------------- -------------------- -----------------
H. Kerr Taylor - Chairman, President & CEO 754,388 11.48%
Robert S. Cartwright - Trust Manager 16,481 *
G. Steven Dawson - Trust Manager 14,000 *
Bryan L. Goolsby - Trust Manager 12,000 *
Philip Taggart - Trust Manager 12,800 *
Chad C. Braun - Secretary, CFO and Executive VP 37,421 *
-------
All trust managers and executive officers as a group 847,090 12.86%
All other employees combined 93,318 1.42
-------
All trust managers, executive officers, and employees as a
group 940,408 14.28%
- -----------------
* Less than 1%.
As of April 30, 2004, no other person was known by AmREIT to be the
beneficial owner of more than 5% of the shares of AmREIT.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 23, 2002, AmREIT completed a merger with three of its affiliated
partnerships, Funds IX, X and XI. 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
stemmed from stock issued to H. Kerr Taylor, President and Chief Executive
Officer, based on a deferred consideration that was approved by the shareholders
in 1998, as discussed below.
On June 5, 1998, our shareholders voted to approve an agreement and plan
of merger ("Merger Agreement") with American Asset Advisers Realty Corporation
(the "Former Adviser"), whereby Mr. Taylor, the sole shareholder of the Former
Adviser, agreed to exchange 100% of the outstanding common stock of the Former
Adviser for up to 900,000 of our common shares. As a result of the merger, we
became a fully integrated, self-administered real estate investment trust.
Effective June 5, 1998, we issued Mr. Taylor 213,260 shares of common stock and
the right to receive the remaining 686,740 common shares until certain goals
were achieved following the merger. As a result of the merger of Funds IX, X and
XI into AmREIT, completed on July 23, 2002, AmREIT issued to Mr. Taylor an
additional 302,281 class A common shares on September 19, 2002. Since July 23,
2002, Mr. Taylor has not earned any of the remaining 384,459 class A common
shares payable to him pursuant to the terms of the Merger Agreement. The Merger
Agreement, as amended, currently requires those goals to be met by June 2006.
On May 20, 1999, a wholly-owned subsidiary of AmREIT entered into a
partnership agreement with various individual investors to form AmREIT
Opportunity Fund, Ltd. The partnership was formed to develop, own, manage, hold
for investment and or resell property and to make and or invest in loans for the
development or construction of property. AmREIT invested $250,000 as a limited
partner and $1,000 through the general partner. Subject to certain restrictions
in the limited partnership agreement which require limited partner approval
(such as liquidating the partnership, withdrawing as general partner or
assigning its general partner interest), the general partner manages and
operates the daily activities of the partnership. The general partner can
however be removed, with or without cause, by a majority vote of the outstanding
limited partner units.
On January 26, 2001, a wholly-owned subsidiary of AmREIT entered into a
partnership agreement with various individual investors to form AmREIT Income &
Growth Fund, Ltd. The partnership was formed to develop, own, manage, hold for
investment and or resell property and to make and or invest in loans for the
development or construction of property. AmREIT invested $200,000 as a limited
partner and $1,000 through the general partner. Subject to certain restrictions
in the limited partnership agreement which require limited partner approval
(such as liquidating the partnership, withdrawing as general partner or
assigning its general partner interest), the general partner manages and
operates the daily activities of the partnership. The general partner can,
however, be removed, with or without cause, by a majority vote of the
outstanding limited partner units.
On November 7, 2002, a wholly-owned subsidiary of AmREIT entered into a
partnership agreement with various individual investors to form AmREIT Monthly
Income & Growth Fund, Ltd. The partnership was formed to develop, own, manage,
hold for investment and or resell property and to make and or invest in loans
for the development or construction of property. AmREIT invested $200,000 as a
40
limited partner and $1,000 through the general partner. Subject to certain
restrictions in the limited partnership agreement which require limited partner
approval (such as liquidating the partnership, withdrawing as general partner or
assigning its general partner interest), the general partner manages and
operates the daily activities of the partnership. The general partner can,
however, be removed, with or without cause, by a majority vote of the
outstanding limited partner units.
On December 31, 2003, a wholly-owned subsidiary of AmREIT entered into a
partnership agreement with various individual investors to form AmREIT Monthly
Income & Growth Fund II, Ltd. The partnership was formed to develop, own,
manage, hold for investment and or resell property and to make and or invest in
loans for the development or construction of property. AmREIT invested $400,000
as a limited partner and $1,000 through the general partner. Subject to certain
restrictions in the limited partnership agreement which require limited partner
approval (such as liquidating the partnership, withdrawing as general partner or
assigning its general partner interest), the general partner manages and
operates the daily activities of the partnership. The general partner can,
however, be removed, with or without cause, by a majority vote of the
outstanding limited partner units.
As a sponsor of real estate investment opportunities to the NASD financial
planning broker dealer community, the Company maintains a 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.
Locke Liddell & Sapp LLP acts as AmREIT's corporate counsel. Bryan Goolsby
is the managing partner of Locke Liddell & Sapp LLP and is a member of AmREIT's
board of trust managers.
LEGAL PROCEEDINGS
Neither AmREIT nor any of its properties is subject to any material claim
or legal proceeding, nor to management's best knowledge, is any such claim or
legal proceeding threatened which could have a material adverse effect on AmREIT
or its properties.
ESTIMATED USE OF PROCEEDS
The following table sets forth information about how we intend to use the
proceeds raised in this offering assuming that we sell 5,000,000 shares and
15,000,000 shares, respectively, pursuant to this offering. The use of the
5,000,000 share number was an arbitrary selection by AmREIT because there is no
minimum offering. Many of the figures set forth below represent management's
best estimate since they cannot be precisely calculated at this time. Although
there can be no assurances, we expect that at least 88.5% of the money you
invest will be used to buy real estate or pay down existing debt, while the
remaining up to 11.5% will be used for working capital and to pay expenses and
fees, including the payment of fees to AmREIT Securities, a wholly-owned
subsidiary of AmREIT and our Dealer Manager.
41
5,000,000 Shares 15,000,000 Shares
------------------------- ------------------------
Amount(1) Percent Amount(2) Percent
--------- ------- --------- -------
Gross Offering Proceeds $50,000,000 100.0% $150,000,000 100.0%
Less Public Offering Expenses:
Selling Commissions and Dealer Manager Fee(s) (3) 5,250,000 10.5% 15,750,000 10.5%
Organization and Offering Expenses(4) 500,000 1.0% 1,500,000 1.0%
----------- ----- ------------ -----
$ 5,750,000 11.5% $ 17,250,000 11.5%
Amount Available for Investment(5)(6) $44,250,000 88.5% $132,750,000 88.5%
=========== ===== ============ =====
- -----------------
1. Assumes that an aggregate of $50,000,000 will be raised in this offering
for purposes of illustrating the percentage of estimated organization and
offering expenses at two different sales levels. See Note 4 below.
2. Assumes the maximum offering is sold which includes 15,000,000 shares
offered to the public at $10.00 per share.
3. Includes selling commissions equal to 7.5% of aggregate gross offering
proceeds, which commissions may be reduced under certain circumstances, a
0.5% due diligence reimbursement and a dealer manager fee equal to 2.5% of
aggregate gross offering proceeds, both of which are payable to the Dealer
Manager, an affiliate of AmREIT. The Dealer Manager, in its sole
discretion, may reallow a portion of its dealer manager fee to
Participating Dealers in the aggregate amount of up to 0.50% of gross
offering proceeds to be paid to such Participating Dealers as marketing
fees, or to reimburse representatives of such Participating Dealers the
costs and expenses of attending our educational conferences and seminars.
4. Organization and offering expenses consist of reimbursement of actual
legal, accounting, printing and other accountable offering expenses, other
than selling commissions and the dealer manager fee, including amounts to
reimburse us for all marketing related costs and expenses, including, but
not limited to, salaries and direct expenses of our employees while
engaged in registering and marketing the shares and other marketing and
organization costs, technology costs and expenses attributable to the
offering, costs and expenses of conducting our educational conferences and
seminars, payment or reimbursement of bona fide due diligence expenses,
and costs and expenses we incur for attending retail seminars conducted by
broker-dealers. AmREIT will be responsible for the payment of organization
and offering expenses, other than selling commissions and the dealer
manager fee. We do not expect organization and offering expenses,
including selling commissions, the dealer manager fee and all other
underwriting compensation, to exceed 11.5% of gross offering proceeds.
5. Until required in connection with the acquisition and development of
properties, substantially all of the net proceeds of this offering and,
thereafter, the working capital reserves, may be invested in short-term,
highly-liquid investments including government obligations, bank
certificates of deposit, short-term debt obligations and investor-bearing
accounts or other authorized investments as determined by our board of
trust managers.
42
6. Includes amounts anticipated to be invested in properties net of fees and
expenses. We estimate that at least 88.5% of the proceeds received from
the sale of shares will be used to acquire properties or pay down existing
debt.
43
PRIOR PERFORMANCE
The following information summarizes the historical experience of real
estate programs previously sponsored by AmREIT's affiliates. INVESTORS IN THE
OFFERING SHOULD NOT ASSUME THAT THEY WILL EXPERIENCE RETURNS, IF ANY, COMPARABLE
TO THOSE EXPERIENCED BY INVESTORS IN THESE PRIOR INVESTMENTS.
Affiliates of AmREIT have sponsored a total of 12 non-public programs and
three public programs since 1985. As of March 31, 2004, approximately $62
million had been raised from over 2,046 investors through all programs. The
properties acquired in the prior programs are primarily single and multi-tenant
retail centers located throughout the United States, that are "actively managed"
by the partnership's general partner. As of March 31, 2004, subsidiaries of
AmREIT served as general partners of four on-going non-public programs. Our
executive officers and chairman of the board, serve as executive officers and
directors of these general partners.
In November 1999, Just For Feet, Inc., a significant tenant in AmREIT's
portfolio, declared bankruptcy. This resulted in four stores leased by AmREIT to
Just For Feet closing. Footstar, Inc., assumed two of the leases for stores that
AmREIT owned, one which is located in Baton Rouge, Louisiana and the other is
located in Tucson, Arizona. These stores will continue to be operated under the
terms and conditions for the original Just For Feet Lease. The third store,
located in Sugarland, Texas has been 100% re-leased as AmREIT's leasing team
secured long term, guaranteed leases with Mattress Giant and River Oaks Imaging
and Diagnostics. AmREIT's construction management team re-designed the building
to accommodate these two tenants. The fourth property, located in The Woodlands,
Texas has been re-designed into a multi-tenant store front and has been
re-leased. On March 2, 2004, Footstar declared bankruptcy and pursuant thereto
rejected the two Just For Feet leases it had with AmREIT. We are in the process
of selling the Just For Feet property located in Tucson, Arizona and are
evaluating our strategy for the Just For Feet property located in Baton Rouge,
Louisiana location.
The following table sets forth a summary information on all programs
previously sponsored by AmREIT's affiliates. A more detail description of these
programs is contained in the prior performance tables included as Exhibit C to
in this prospectus.
TYPE OF TYPE OF METHOD OF
NAME OF FUND REAL ESTATE ACTIVITY PROGRAM FINANCING
------------ -------------------- ------- ---------
Taylor Income Investors III, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
Taylor Income Investors IV, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
Taylor Income Investors V, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
Taylor Income Investors VI, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
AAA Net Realty Fund VII, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
AAA Net Realty Fund VIII, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
AAA Net Realty Fund Goodyear, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
AAA Net Realty Fund IX, Ltd. Investment in Commercial Real Estate Public All-Cash
AAA Net Realty Fund X, Ltd. Investment in Commercial Real Estate Public All-Cash
44
TYPE OF TYPE OF METHOD OF
NAME OF FUND REAL ESTATE ACTIVITY PROGRAM FINANCING
------------ -------------------- ------- ---------
AAA Net Realty Fund XI, Ltd. Investment in Commercial Real Estate Public All-Cash
AmREIT: Investment in Commercial Real Estate Public Up to 50%
Class A common shares financing
Class B common shares
Class C common shares
AAA Net Developers, Ltd. Acquisition, development and construction of Non-Public Up to 80%
commercial real estate financing
AmREIT Opportunity Fund, Ltd. Acquisition, development and construction of Non-Public Up to 80%
commercial real estate financing
AmREIT Income & Growth Fund, Ltd. Acquisition, development and construction of Non Public Up to 75%
commercial real estate financing
AmREIT Monthly Income & Growth Fund, Ltd. Acquisition, development and construction of Non Public Targeted at
commercial real estate. 50% financing
AmREIT Monthly Income & Growth Fund II, Acquisition development and construction of Non Public Targeted at
Ltd. commercial real estate 50% financing
PUBLICLY OFFERED UNSPECIFIED REAL ESTATE PROGRAMS
AAA NET REALTY FUND IX, LTD. terminated its offering in May 1992 and
received aggregate gross proceeds of $ 5,390,500, representing subscriptions
from 326 limited partners. Fund IX wholly owned four properties and owned one
property in joint venture with an affiliate of the general partner:
- Foodmaker (Jack-in-the-Box) in Dallas, Texas;
- Baptist Memorial Health System in Memphis, Tennessee;
- Payless Shoe/Walden Books in Austin, Texas;
- Golden Corral in Houston, Texas; and
- 4.08% interest in Golden Corral in Houston, Texas
The prospectus of Fund IX provided that the properties would be held for a
period of eight to twelve years, but that the general partner, in their sole
discretion, could increase or decrease this timeframe. On July 23, 2002, the
limited partners in Fund IX and the shareholders of AmREIT approved a plan of
merger whereby the limited partners of Fund IX would become class B common
shareholders in AmREIT. The class B common shares were valued by an independent
third party firm at $9.25 per share, receives an 8% cumulative and preferred
dividend quarterly and is convertible into AmREIT class A common shares at any
time, at the holders option, one for one. Per $1,000 of original invested
capital, the limited partners received a total of approximately $1,868 through
quarterly distributions and class B common shares.
45
AAA NET REALTY FUND X, LTD. terminated its offering in August 1994 and
received aggregate gross proceeds of $11,453,600, representing subscriptions
from 727 limited partners. Fund X wholly owned five properties and owned three
properties in joint venture with certain affiliates of the general partner:
- 95.92% interest in Golden Corral in Houston, Texas;
- TGI Friday's in Houston, Texas;
- Goodyear Tire in Houston, Texas;
- Comp USA in Minneapolis, Minnesota;
- AFC, Inc. (Popeye's Favorite Chicken) in Atlanta, Georgia;
- 45.16% interest in Wherehouse Entertainment in Independence,
Missouri;
- Memorial Herman Hospital System (suburban doctors clinic) in
Sugarland, Texas; and
- 18.25% interest in Footstar, Inc. in Tucson, Arizona
The prospectus of Fund X provided that the properties would be held for a
period of eight to twelve years, but that the general partner, in their sole
discretion, could increase or decrease this timeframe. On July 23, 2002, the
limited partners in Fund X and the shareholders of AmREIT approved a plan of
merger whereby the limited partners of Fund X would become class B common
shareholders in AmREIT. The class B common shares were valued by an independent
third party firm at $9.25 per share, receives an 8% cumulative and preferred
dividend quarterly and is convertible into AmREIT class A common shares at any
time, at the holders option, one for one. Per $1,000 of original invested
capital, the limited partners received a total of approximately $1,638 through
quarterly distributions and class B common shares.
AAA NET REALTY FUND XI, LTD. terminated its offering in January 1996 and
received aggregate gross proceeds of $7,061,200, representing subscriptions from
269 limited partners. Fund XI wholly owned two properties and owned five
properties in joint venture with certain affiliates of the general partner:
- 49% interest in Wherehouse Entertainment in Wichita, Kansas;
- Blockbuster Video in Oklahoma City, Oklahoma;
- 29.85% interest in Footstar, Inc. in Tucson, Arizona;
- 49% interest in Washington Mutual in The Woodlands, Texas;
- Pier One in Longmont, Colorado; and
- 25.42% interest in Hollywood Video in Lafayette, Louisiana
The prospectus of Fund XI provided that the properties would be held for a
period of eight to twelve years, but that the general partner, in their sole
discretion, could increase or decrease this timeframe. On July 23, 2002, the
limited partners in Fund XI and the shareholders of AmREIT approved
46
a plan of merger whereby the limited partners of Fund XI would become class B
common shareholders in AmREIT. The class B common shares were valued by an
independent third party firm at $9.25 per share, receives an 8% cumulative and
preferred dividend quarterly and is convertible into AmREIT class A common
shares at any time, at the holders option, one for one. Per $1,000 of original
invested capital, the limited partners received a total of approximately $1,473
through quarterly distributions and class B common shares.
PRIVATELY OFFERED UNSPECIFIED REAL ESTATE PROGRAMS
TAYLOR INCOME INVESTORS III, LTD. terminated its offering in December 1985
and received aggregate gross proceeds of $945,000, representing subscriptions
from 43 limited partners. Fund III owns a 44% interest in a Bennigan's
restaurant located in Houston, Texas. The property was purchased all cash in
December 1986. Additionally, in 2000, the partnership sold a Guaranty Federal
(acquired as a Bank of America) branch location in Houston, Texas that was
purchased in February 1986. The private placement memorandum provided that the
properties purchased by Fund III would typically be held for a period of 12 to
15 years, but that the general partner, in their sole discretion, could increase
or decrease this timeframe. The general partners have evaluated the local real
estate market and the Bennigan's lease and determined that the best course of
liquidation is to sell this property as part of a larger portfolio of all
properties currently owned by the AAA Funds described in this section. At
December 31, 2003, the General Partner had entered into a binding contract with
an independent third party to purchase all of the assets in Funds III through
Goodyear. In March 2004, all of the assets were sold in a single transaction to
a single unrelated purchaser. The transaction resulted in net sales proceeds to
Fund III of approximately $348,700. Including previous distributions received by
the limited partners, total distributions were approximately $2,789 per $1,000
original investment.
TAYLOR INCOME INVESTORS IV, LTD. terminated its offering in June 1986 and
received aggregate gross proceeds of $615,000, representing subscriptions from
31 limited partners. Fund IV owns a 56% interest in a Bennigan's restaurant
located in Houston, Texas. Additionally, Fund IV owns a promissory note secured
by an Atlas Transmission located in Houston, Texas and matures in October 2006.
Fund IV purchased the Atlas Transmission in October 1986 and subsequently sold
the property in November 1997; however, Fund IV had to provide owner financing.
The private placement memorandum provided that the properties purchased by Fund
IV would typically be held for a period of 12 to 15 years, but that the general
partners, in their sole discretion, could increase or decrease this timeframe.
The general partners have evaluated the local real estate market and the
Bennigan's lease and determined that the best course of liquidation is to sell
this property as part of a larger portfolio of all properties currently owned by
the AAA Funds described in this section. At December 31, 2003, the General
Partner had entered into a binding contract with an independent third party to
purchase all of the assets in Funds III through Goodyear. In March 2004, all of
the assets were sold in a single transaction to a single unrelated purchaser.
The transaction resulted in net sales proceeds to Fund IV of approximately
$516,800. Including previous distributions received by the limited partners,
total distributions were approximately $1,916 per $1,000 original investment.
TAYLOR INCOME INVESTORS V, LTD. terminated its offering in December 1986
and received aggregate gross proceeds of $480,000, representing subscriptions
from 21 limited partners. Fund V owns a 6.02% interest in a La Petite Academy in
Houston, Texas. Additionally, Fund V owns a promissory
47
note secured by an Atlas Transmission located in Houston, Texas and matures in
October 2006. Fund V purchased the Atlas Transmission in October 1986 and
subsequently sold the property in November 1997; however, Fund IV had to provide
owner financing. During 2001, the partnership sold a Pizza Inn and a Whataburger
both located in Clute, Texas that were purchased in March 1988. All of the net
sales proceeds from the sale of Pizza Inn and Whataburger allocable to Fund V
were distributed to the limited partners as a capital distribution. The private
placement memorandum provided that the properties purchased by Fund V would
typically be held for a period of 12 to 15 years, but that the general partners,
in their sole discretion, could increase or decrease this timeframe. The general
partners have evaluated the local real estate market and determined that the
best course of liquidation is to sell this property as part of a larger
portfolio of all properties currently owned by the AAA Funds described in this
section. At December 31, 2003, the General Partner had entered into a binding
contract with an independent third party to purchase all of the assets in Funds
III through Goodyear. In March 2004, all of the assets were sold in a single
transaction to a single unrelated purchaser. The transaction resulted in net
sales proceeds to Fund V of approximately $80,287. Including previous
distributions received by the limited partners, total distributions were
approximately $1,993 per $1,000 original investment.
TAYLOR INCOME INVESTORS VI, LTD. terminated its offering in June 1987 and
received aggregate gross proceeds of $300,000, representing subscriptions from
13 limited partners. Fund VI owns a 2.73% interest in a La Petite Academy in
Houston, Texas. Additionally, during 2001 the partnership sold a Pizza Inn and a
Whataburger both located in Clute, Texas that were purchased in March 1988. 100%
of the net sales proceeds from the sale of Pizza Inn and Whataburger allocable
to Fund VI were distributed to the limited partners as a capital distribution.
The private placement memorandum provided that the properties purchased by Fund
VI would typically be held for a period of 12 to 15 years, but that the general
partners, in their sole discretion, could increase or decrease this timeframe.
The general partners have evaluated the local real estate market and determined
that the best course of liquidation is to sell this property as part of a larger
portfolio of all properties currently owned by the AAA Funds described in this
section. At December 31, 2003, the General Partner had entered into a binding
contract with an independent third party to purchase all of the assets in Funds
III through Goodyear. In March 2004, all of the assets were sold in a single
transaction to a single unrelated purchaser. The transaction resulted in net
sales proceeds to Fund VI of approximately $14,879. Including previous
distributions received by the limited partners, total distributions were
approximately $1,886 per $1,000 original investment.
AAA NET REALTY INVESTORS FUND VII, LTD. terminated its offering in March
1988 and received aggregate gross proceeds of $1,125,100, representing
subscriptions from 40 limited partners. Fund VII owns the following five
properties in joint venture with affiliates of AmREIT:
- 91.25% interest in La Petite Academy in Houston, Texas;
- 54.88% interest in Whataburger in Dallas, Texas;
- 27.27% interest in Superior Sound Systems in Houston, Texas;
- 27.27% interest in AFC, Inc. (Church's Fried Chicken) in Houston,
Texas; and
- 27.27% interest in Eller Media (Billboard) in Houston, Texas
48
The private placement memorandum provided that the properties purchased by Fund
VII would typically be held for a period of 12 to 15 years, but that the general
partners, in their sole discretion, could increase or decrease this timeframe.
The general partners have evaluated the local real estate market and determined
the best course of liquidation is to sell these properties as part of a larger
portfolio of all properties currently owned by the AAA Funds described in this
section. At December 31, 2003, the General Partner had entered into a binding
contract with an independent third party to purchase all of the assets in Funds
III through Goodyear. In March 2004, all of the assets were sold in a single
transaction to a single unrelated purchaser. The transaction resulted in net
sales proceeds to Fund VII of approximately $1,126,301. Including previous
distributions received by the limited partners, total distributions were
approximately $2,178 per $1,000 original investment.
AAA NET REALTY INVESTORS FUND VIII, LTD. terminated its offering in March
1989 and received aggregate gross proceeds of $1,860,000, representing
subscriptions from 55 limited partners. Fund VIII owns a 100% interest in two
properties and five properties in joint venture with affiliates of AmREIT:
- Discount Tire Center in Ft. Worth, Texas;
- La Petite Academy in Houston, Texas;
- 45.12% interest in Whataburger in Dallas, Texas;
- 72.72% interest in Superior Sound Systems in Houston, Texas;
- 72.72% interest in AFC, Inc. (Church's Fried Chicken) in Houston,
Texas;
- 72.72% interest in Eller Media (Billboard) in Houston, Texas; and
- 25.27% interest in Goodyear Tire in Dallas, Texas
The private placement memorandum provided that the properties purchased by Fund
VIII would typically be held for a period of 12 to 15 years, but that the
general partner, in their sole discretion, could increase or decrease this
timeframe. The general partners have evaluated the local real estate market and
determined the best course of liquidation is to sell these properties as part of
a larger portfolio of all properties currently owned by the AAA Funds described
in this section. At December 31, 2003, the General Partner had entered into a
binding contract with an independent third party to purchase all of the assets
in Funds III through Goodyear. In March 2004, all of the assets were sold in a
single transaction to a single unrelated purchaser. The transaction resulted in
net sales proceeds to Fund VIII of approximately $1,899,647. Including previous
distributions received by the limited partners, total distributions were
approximately $2,167 per $1,000 original investment.
AAA NET REALTY FUND GOODYEAR, LTD. terminated its offering in July 1991
and received aggregate gross proceeds of $1,335,000, representing subscriptions
from 37 limited partners. Fund Goodyear owns a Goodyear Tire in Dallas, Texas
and a 74.72% interest in another Goodyear Tire in Dallas, Texas through a joint
venture with an affiliated fund of the general partner. The private placement
memorandum provided that the properties purchased by Fund Goodyear would
typically be held for a
49
period of 12 to 15 years, but that the general partners, in their sole
discretion, could increase or decrease this timeframe. The general partners have
evaluated the local real estate market and determined the best course of
liquidation is to sell these properties as part of a larger portfolio of all
properties currently owned by the AAA Funds described in this section. At
December 31, 2003, the General Partner had entered into a binding contract with
an independent third party to purchase all of the assets in Funds III through
Goodyear. In March 2004, all of the assets were sold in a single transaction to
a single unrelated purchaser. The transaction resulted in net sales proceeds to
Fund Goodyear of approximately $1,078,819. Including previous distributions
received by the limited partners, total distributions were approximately $1,780
per $1,000 original investment.
AAA NET DEVELOPERS, LTD. terminated its offering in January 1997 and
received aggregate gross proceeds of $1,862,100, representing subscriptions from
30 limited partners. Net Developers owns an interest in the following two
properties:
- 15% interest in Vista Ridge Shopping Center, a multi-tenant retail
center located in Lewisville, Texas; and
- 50% interest in Hollywood Video located in Montgomery, Alabama
Vista Ridge Shopping Center is a 36,271 square foot multi tenant center
located in Lewisville, Texas. Tenants include Caldwell Watson, Planet Tan,
American Laser Vision, Frazier Ancillary Services and The Trakz Group, Inc. At
December 31, 2003, the property was encumbered with a $4.24 million mortgage
note secured by the property that matures in March 2010. Net Developers has no
remaining equity in this project and maintains an 8.3% carried interest in the
cash flows and profit upon disposition. The project is currently being marketed
for sale.
Hollywood Video is a single tenant property located in Montgomery,
Alabama. At March 31, 2004, the property was encumbered with a $936,700 mortgage
note secured by the property that matures in April 2009. Net Developers has no
remaining equity in this project and maintains a 50% carried interest in the
cash flows and profit upon disposition. The project is currently being marketed
for sale.
Other projects that Net Developers made an investment in and have already
been liquidated include:
- Copper Plaza, a multi-tenant shopping center located in Houston,
Texas;
- Just For Feet located in Lewisville, Texas;
- Hollywood Video located in Covington, Louisiana;
- Hollywood Video located in Saraland, Alabama;
- IHOP located in Gainesville, Georgia;
- IHOP located in Falls Church, Virginia;
- IHOP located in Keyport, New Jersey; and
50
- Parkwood Square Shopping Center, Huntsville, Texas.
Net Developers was the first in a series of actively managed funds. Per the
private placement memorandum, it was a three-year fund that entered into
liquidation in August 1999. The remaining properties are currently listed for
sale, and upon disposition, net sales proceeds will be allocated to the general
partner and the limited partners in accordance with the limited partnership
agreement.
AMREIT OPPORTUNITY FUND, LTD. terminated its offering in January 2001 and
received aggregate gross proceeds of $2,353,750, representing subscriptions from
71 limited partners. AOF owns an interest in the following two properties:
- 50% interest in ARC Round Rock, a multi-tenant shopping center
located in Round Rock, Texas; and
- 45% interest in Temple TX 363, Ltd, a multi-pad project located in
Temple, Texas.
ARC Round Rock is a 9,600 square foot multi-tenant center located in Round
Rock, Texas. Tenants include The Sleep Shop, Noodles Etc., and ABC Liquer. The
property is newly constructed and as of October 31, 2003 is encumbered with a
construction loan in the amount of $1.61. AOF is currently negotiating a
permanent loan, which will be used to pay off the construction loan, and is in
the process of marketing the property for sale.
Temple TX 363, Ltd. is a multi-pad project located in Temple, Texas. This
project included four individual, freestanding pad sites. Three of the pad sites
have been developed and sold, which included a McDonalds restaurant, an IHOP
restaurant and a Chili's restaurant. The fourth pad site is currently being
marketed and will either be developed and sold or sold directly to a
user/operator.
Other projects that AOF made an investment in and have already been
liquidated include:
- IHOP located in Norfolk, Virginia;
- IHOP located in Houston, Texas;
- Cooper Plaza, a multi-tenant shopping center located in Houston,
Texas;
- CDP #31, two IHOP properties located in Memphis, Tennessee and
Cookeville, Tennessee;
- IHOP and pad site located in Kenosha, Wisconsin;
- Temple TX 363, a multi-pad project consisting of McDonalds, IHOP and
Chili's located in Temple, Texas;
- IHOP located in Hagerstown, Maryland;
- IHOP located in Orem, Utah;
- McLendon Plaza, a 16,000 square foot shopping center located in
Houston, Texas;
- River Park, a 30 acre grocery anchored joint venture developed
center in Sugarland, Texas; and
51
- CDP #33, three IHOP properties located in Hagerstown, Maryland,
Orem, Utah and Houston, Texas.
AOF is the second in a series of actively managed funds. Per the private
placement memorandum, AOF entered into liquidation in August 2002. The remaining
properties are still in the development stage or are currently listed for sale,
and upon disposition, net sales proceeds will be allocated to the general
partners and the limited partners in accordance with the limited partnership
agreement.
AMREIT INCOME & GROWTH FUND terminated its offering in November 2002 and
received aggregate gross proceeds of $10,000,000, representing subscriptions
from 185 limited partners. AIG owns an interest in the following six properties:
- IHOP located in Irondequoit, New York;
- 20% interest in a portfolio of 17 IHOP properties, AAA CTL, located
in twelve different states;
- TGI Friday's located in Crystal Lake, Illinois;
- 45% interest in Temple TX 363, Ltd, a multi-pad project located in
Temple, Texas;
- IHOP located in Albuquerque, New Mexico;
- TGI Friday's located in Danvers, Massachusetts;
- 25% interest in Peakway market Square, a 55,000 square foot shopping
center development located in Apex, North Carolina; and
- Blanco Pointe, a 19,612 square foot shopping center development
located in San Antonio, Texas.
IHOP - Irondequoit is an IHOP property located in Irondequoit, New York.
The property was purchased for cash in November 2002. AIG will hold this
property for investment purposes and collect rental income. During the operating
stage of the partnership, the general partner will evaluate the credit of the
tenant and the local real estate market, and when appropriate, market the
property for sale.
AAA CTL is a portfolio of 17 IHOP properties located in 12 different
states. AIG will hold its interest in the AAA for investment purposes, and
collect rental income. During the operating stage of the partnership, the
general partner will evaluate the credit of the tenant and the local real estate
market, and when appropriate, market the property for sale.
TGI Friday's is a full service restaurant located in Crystal Lake,
Illinois. The property was purchased for cash in November 2002. AIG will hold
this property for investment purposes and collect rental income. During the
operating stage of the partnership, the general partner will evaluate the credit
of the tenant and the local real estate market, and when appropriate, market the
property for sale.
Temple TX 363, Ltd. is a multi-pad project located in Temple, Texas. This
project included four individual, freestanding pad sites. Three of the pad sites
have been developed and sold, which included a McDonalds restaurant, an IHOP
restaurant and a Chili's restaurant. The fourth pad site is currently being
marketed and will either be developed and sold or sold directly to a
user/operator.
52
IHOP - Albuquerque is an IHOP property located in Albuquerque, New Mexico.
The property was purchased for cash in March 2003. AIG will hold this property
for investment purposes and collect rental income. During the operating state of
the partnership, the general partner will evaluate the credit of the tenant and
the local real estate market, and when appropriate, market the property for
sale.
TGI Friday's - Danvers is a full service restaurant located in Danvers,
Massachusetts. The property was purchased for cash in May 2003. AIG will hold
this property for investment purposes and collect rental income. During the
operating state of the partnership, the general partner will evaluate the credit
of the tenant and the local real estate market, and when appropriate, market the
property for sale.
Peakway - Peakway Market Square ("Peakway") is a 55,000 square foot
shopping center development located at the intersection of NEC Highway 55 and
Peakway in Apex, North Carolina. The project is being developed as a joint
venture between Centdev Properties, LLC ("Centdev"), AmREIT Income & Growth
Fund, Ltd. ("AIG"), and AmREIT Monthly Income & Growth Fund, Ltd. ("MIG"). MIG
and AIG are co-general partners and Centdev is the limited partner (together,
"Peakway @ Apex, L.P."). Peakway, with estimated total costs of $7.8 million,
was funded with $1.5 million in equity contributions and a $6.3 million
construction loan. The equity was contributed 50% by MIG and 50% by AIG. As of
March 31, 2004, the project construction was substantially complete, and leasing
is estimated to be completed during 2004.
Blanco Pointe - Blanco Pointe is anticipated to be a 19,612 square foot
shopping center development located at the intersection of Blanco Road and
Huebner Road in San Antonio, Texas. AIG has purchased the 3.68 acres of land for
$1 million in cash. The total project costs are estimated to be $4.14 million.
The remaining $3.14 million are anticipated to be funded through a construction
loan, secured by the project. The project is currently approximately 50%
pre-leased, and construction is estimated to begin during the second quarter of
2004.
Other projects that AIG made an investment in and have already been
liquidated include:
- CDP #27, IHOP located in Memphis, Tennessee and Tupelo, Mississippi;
- CDP #31, two IHOP properties located in Scottsdale, Arizona and
Cookeville, Tennessee;
- IHOP and pad site located in Kenosha, Wisconsin;
- Temple TX 363, a multi-pad project consisting of McDonalds, IHOP and
Chili's located in Temple, Texas;
- IHOP located in Hagerstown, Maryland; and
- IHOP located in Orem, Utah
- McLendon Plaza, a 16,000 square foot shopping center located in
Houston, Texas;
- River Park, a 30 acre grocery anchored joint venture developed
center in Sugarland, Texas; and
53
- CDP #33, three IHOP properties located in Hagerstown, Maryland,
Orem, Utah and Houston, Texas.
AIG is the third in a series of actively managed funds. Per the private
placement memorandum, AIG is a seven year, actively managed fund that we will
enter into a final liquidation during 2008. During the operating state of the
partnership, the general partner will negotiate the acquisition, development and
disposition of properties, focusing on generating dependable, increasing,
monthly income with appreciation on original capital during a seven year
actively managed time period.
AmREIT Monthly Income & Growth Fund terminated its offering in December
2003 and received aggregate gross proceeds of $15 million, representing
subscriptions from 290 limited partners. MIG owns an interest in the following
properties:
- IHOP located in St. Peters, Missouri;
- 25% interest in Peakway Market Square, a 55,000 square foot shopping
center development located in Apex, North Carolina;
- 50% interest in the development of an Advance Auto located in
Kankakee, Illinois;
- Approximately 1 acre pad site located in The Woodlands, Texas,
ground leased to Sonic;
- Memorial Heights, an 18,900 square foot shopping center, 91 %
occupied located in Houston, Texas;
- The Garden's @ West Green, an 82,000 square foot shopping center
development in Houston, Texas that is currently under development
and approximately 50% re-leased;
- 65% interest in West Road Plaza, a multi-pad, multi-tenant
redevelopment project located in Houston, Texas. the project was
built in 1993 and consists of a 107,400 square foot Fry's
Electronics Store, a 37,540 square foot ground lease to Payless
Shoesource, Inc., a 33,759 square foot ground lease to Whataburger,
Inc., a 101,843 square foot ground lease to Pep Boys-Manny Moe &
Jack and a 50,926 square foot ground lease to Taco Bell Corp. In
addition to these leases, there are two vacant buildings (previously
leased to Compaq Works and K-Mart), representing approximately 250
thousand square feet, that can be re-leased to "large box" tenants
or that can be further demised for smaller retail tenants.
MIG is the fourth in a series of actively managed funds. Per the private
placement memorandum, MIG is a seven year, actively managed fund that will enter
into a final liquidation during 2010. During the operating stage of the
partnership, the general partner will negotiate the acquisition, development and
disposition of properties, focusing on generating dependable, monthly income
with appreciation on original capital during a seven year actively managed
period.
AmREIT Monthly Income & Growth II Fund is currently in its offering period
and has received aggregate gross proceeds through March 31, 2004 of
approximately $2.3 million, representing subscriptions from 23 limited partners.
MIG II owns an interest in the following property:
54
- 10% interest in West Road Plaza, a multi-pad, multi-tenant
redevelopment project located in Houston, Texas. The project was
built in 1993 and consists of a 107,400 square foot Fry's
Electronics Store, a 37,540 square foot ground lease to Payless
Shoesource, Inc., a 33,759 square foot ground lease to Whataburger,
Inc., a 101,843 square foot ground lease to Pep Boys-Manny Moe &
Jack and a 50,926 square foot ground lease to Taco Bell Corp. In
addition to these leases, there are two vacant buildings (previously
leased to Compaq Works and K-Mart), representing approximately 250
thousand square feet, that can be re-leased to "large box" tenants
or that can be further demised for smaller retail tenants.
MIG II is the fourth in a series of actively managed funds. per the
private placement memorandum, MIG II is a seven year, actively managed fund that
will enter into a final liquidation during 2011. During the operating stage of
the partnership, the general partner will negotiate the acquisition, development
and disposition of properties, focusing on generating dependable, monthly income
with appreciation on original capital during a seven year actively managed
period.
55
CUMULATIVE DISTRIBUTIONS TO PARTNERS
CAPITAL DISTRIBUTIONS ANNUAL PROPERTIES
RAISED PER $1,000 RETURN BOUGHT SOLD
------ ------------- ------ ---------- ----
Taylor Income Investors III (1) $ 945,000 $ 2,405 9.98% 3 2
Taylor Income Investors IV (1) 615,000 1,031 6.09% 2 1
Taylor Income Investors V (1) 480,000 1,776 7.83% 4 3
Taylor Income Investors VI (1) 300,000 1,817 6.98% 3 2
Taylor Income Investors VII (1) 1,125,000 1,124 7.79% 5 0
AAA Net Realty Fund VIII (1) 1,860,000 1,097 8.20% 7 0
AAA Net Realty Fund Gdyr (1) 1,335,000 924 8.06% 2 0
AAA Net Realty Fund IX 5,390,000 1,850 7.73% 5 5
AAA Net Realty Fund X 11,453,000 1,649 7.21% 8 8
AAA Net Realty Fund XI 7,061,000 1,471 6.73% 7 7
AAA Net Developers 1,800,000 1,227 (2) 10 7
AmREIT Opportunity Fund 2,800,000 659 (2) 20 12
AmREIT Income & Growth Fund 10,000,000 180 9.00% 17 8
AmREIT Monthly Income & Growth Fund 15,000,000 80 8.00% 8 -
AmREIT Monthly Income &
Growth Fund II, Ltd. (3) 2,300,000 80 8.00% 1 -
------------ ------- ----- --- --
- -----------------
(1) As of March 16, 2004, this partnership sold its remaining properties and
is in the process of liquidation.
(2) Paid no current return. Funds are currently in liquidation, and are
anticipated to generate a 10%-14% return.
(3) AmREIT Monthly Income & Growth Fund II was organized in December 2003.
CONFLICTS OF INTEREST
As an internally advised REIT, we have eliminated the single largest
conflict of interest of many REITs: the conflict between the external adviser
and the shareholders. As an internally advised REIT, the interests of our board,
management team and employees are more fully aligned with those of our
shareholders. We will, however, be subject to various conflicts of interest
arising out of the normal course of business, relationships with our affiliated
investment funds, and the acquisition and allocation of properties, as described
below.
PRIOR AND FUTURE PROGRAMS
AmREIT and its affiliates have organized 15 retail partnerships, currently
have other real estate holdings, and in the future expect to form, offer
interests in, and manage other real estate programs in addition to AmREIT, and
make additional real estate investments. Future real estate programs may involve
our affiliates owning, financing, operating, leasing, and managing properties
that may be suitable for acquisition by us. AmREIT, or a wholly-owned subsidiary
of AmREIT, is the general partner of these other investment funds. As a result,
our board of trust managers may be faced with conflicting fiduciary obligations
to the shareholders of AmREIT and the limited partners of the funds.
Some of these affiliated real estate programs may in the future invest in
properties owned by us, may purchase properties concurrently with us and may
lease properties to operators who also lease or
56
operate certain of our properties. These properties, if located in the vicinity
of, or adjacent to, properties acquired by us, may affect our properties' gross
revenues. Conflicts between us and affiliated programs may affect the value of
our investments as well as our net income. We believe that our advisor has
established guidelines to minimize such conflicts. See "Conflicts of Interest --
Certain Conflict Resolution Procedures" below.
COMPETITION TO ACQUIRE PROPERTIES
Affiliates of AmREIT may compete with us to acquire properties of a type
suitable for acquisition by us and may be better positioned to make such
acquisitions as a result of relationships that may develop with various owners
of real estate. See "Business -- General." A purchaser who wishes to acquire one
or more of these properties may have to do so within a relatively short period
of time, occasionally at a time when we (due to insufficient funds, for example)
may be unable to make the acquisition.
In an effort to address these situations and preserve the acquisition
opportunities, AmREIT or its affiliates may maintain lines of credit which
enable them to acquire properties on an interim basis.
AmREIT and its affiliates also may be subject to potential conflicts of
interest at the time we wish to acquire a property that also would be a suitable
investment for an affiliate of ours. Our trust managers, in this capacity, have
a fiduciary obligation to act in the best interest of our shareholders and, as
general partners or directors of our affiliates, to act in the best interests of
the investors in other programs with investments that may be similar to ours and
will use their best efforts to assure that AmREIT will be treated as favorably
as any of our affiliated investment funds. See "Management -- Fiduciary
Responsibility of the Board of Trust Managers." We have also developed the
following procedures to resolve potential conflicts of interest in the
allocation of properties between AmREIT and certain of our affiliates.
Our board of trust managers, investment committee and management team have
agreed that AmREIT will have the first opportunity to purchase any asset, other
than multi-tenant shopping centers under 20,000 square feet, that are expected
to provide long-term value, such as our "irreplaceable corners." Long-term value
is measured by the location of the property, the type of tenants and the area
demographics. See "Business and Properties -- Operating Strategy." Once an
opportunity is presented, the investment committee and management will determine
if the potential acquisition is an appropriate opportunity for AmREIT by
evaluating the following criteria:
- whether the asset is suitable for holding long-term or more likely
to be disposed of following a brief holding period;
- amount of funds available for investment;
- tenant concentration exposure (limited to 15%, unless expressly
approved by the trust managers);
- geographic concentration exposure;
- anticipated cash flows that will support financial underwriting for
projected dividends, FFO, and cost of capital; and
- compliance with loan agreements and debt covenants.
57
Management believes that its real estate pipeline of single tenant CTL
properties, multi-tenant acquisition and development projects and joint-venture
development opportunities are sufficient to supply AmREIT and its affiliated
investment funds with the appropriate amount and diversification of suitable
properties.
We will supplement this prospectus during the offering period to disclose
the acquisition of a property at the time we believe that a reasonable
probability exists that we will acquire the property. Based upon the experience
of our management team, a reasonable probability will exist for the acquisition
of a property when: (1) a commitment letter is executed by a proposed tenant,
(2) a satisfactory credit underwriting for the proposed tenant has been
completed, (3) a satisfactory site inspection has been completed, and (4) a
refundable earnest money deposit has been paid on the property.
JOINT INVESTMENT WITH AN AFFILIATED PROGRAM
We may invest in Joint Ventures with another program sponsored by AmREIT
or its affiliates if such investment and joint venture is fair and reasonable to
AmREIT and on substantially the same terms and conditions as those to be
received by the co-venturer or co-venturers, and is approved by our investment
committee. Potential situations may arise in which the interests of the
co-venturer or co-venturers may conflict with ours. In addition, we and the
co-venturer or co-venturers may reach an impasse with regard to business
decisions, such as the purchase or sale of property, in which our approval and
each co-venturer is required. In this event, none of the parties may have the
funds necessary to purchase the interests of the other co-venturers. We may
experience difficulty in locating a third party purchaser for our Joint Venture
interest and in obtaining a favorable sales price for our Joint Venture
interest. See "Risk Factors -- Real Estate Risks -- We may not control the joint
ventures in which we enter."
PURCHASE OF PROPERTIES FROM RETAIL PARTNERSHIPS
If at any time the general partner of AmREIT Monthly Income & Growth Fund
II, Ltd. ("MIG II") determines it is in the best interests of that partnership
to sell a property that MIG II developed (not a fully-developed property
acquired by MIG II, whether pursuant to a sale-lease back transaction or
otherwise), the general partner will notify AmREIT of the partnership's interest
in selling such property. After delivering such notice, the General Partner will
have 30 days to market the Property. If at the conclusion of that 30-day period
the General Partner has entered into a letter of intent (the "Letter of Intent")
to sell the Property, it will offer AmREIT the right to acquire that Property on
the same terms and conditions as in the Letter of Intent. AmREIT would then have
10 days to exercise such right and acquire the Property on the terms set forth
in the Letter of Intent, but in no event will the purchase price be less than
Market Value. If AmREIT declines to acquire the Property, the General Partner
will have the right to sell the Property to the third-party purchaser on the
terms set forth in the Letter of Intent. If, after AmREIT declines to exercise
its purchase right, the terms of the Letter of Intent are modified, the General
Partner will notify AmREIT of the modification and offer AmREIT the right,
exercisable within 3 days of the delivery of such notice, to acquire the
Property on the revised terms, but in no event will the purchase price be less
than Market Value. If AmREIT agrees to purchase the property, the Partnership
will sell the property to amreit, and none of the General Partner or its
Affiliates will receive a brokerage commission with respect to such sale. If
AmREIT
58
declines to acquire the Property, the General Partner may complete the sale to
the third party on the revised terms or determine not to sell the Property. If a
Property which had been held for sale is retained by the Partnership, any future
Proposed sale of that Property will be undertaken as provided in this paragraph.
The General Partner anticipates an average holding period for the Properties of
eighteen to thirty-six months; however, certain projects may involve a shorter
or longer holding period. In all circumstances, the General Partner will
initiate the final liquidation of the Properties by March 1, 2011.
If the Partnership does not enter into a letter of intent with respect to
the sale of the Property within the 30-day period described above, then AmREIT
will have the ability to purchase the property for Market Value. In any event,
if AmREIT elects to purchase a property from the Partnership, the purchase and
terms of the purchase must be approved by a majority of AmREIT's independent
Trust Managers.
COMPETITION FOR MANAGEMENT TIME
The trust managers, officers, and management of AmREIT are engaged, and in
the future will engage, in the management of our affiliated investment funds,
their properties and business. They will devote as much of their time to AmREIT
as is required, however, a portion of their time will also be allocated to the
management of our affiliated investment funds. The officers and directors of
AmREIT may experience conflicts of interest in allocating management time,
services, and functions among AmREIT and its various investment funds.
RELATIONSHIP WITH THE DEALER MANAGER
The Dealer Manager is AmREIT Securities Company, a wholly-owned affiliate
of AmREIT. Certain of the officers and trust managers of AmREIT are also
officers, directors, and registered principals of the Dealer Manager. This
relationship may create conflicts in connection with the fulfillment by the
Dealer Manager of its due diligence obligations under the federal securities
laws. Although the Dealer Manager will examine the information in the prospectus
for accuracy and completeness, the Dealer Manager is an affiliate of ours and
will not make an independent review of AmREIT or this offering. Accordingly, the
investors do not have the benefit of such independent review. Certain of the
Soliciting Dealers have made, or are expected to make, their own independent due
diligence investigations. The Dealer Manager is not prohibited from acting in
any capacity in connection with the offer and sale of securities offered by
entities that may have some or all investment objectives similar to those of
AmREIT and is expected to participate in other offerings sponsored by AmREIT.
LEGAL REPRESENTATION
Locke Liddell & Sapp LLP, which serves as securities and tax counsel to us
in this offering, also serves as securities and tax counsel for certain of our
affiliates, including other real estate programs, in connection with other
matters. Neither AmREIT nor our shareholders will have separate counsel. In the
event any controversy arises following the termination of this offering in which
our interests appear to be in conflict with those of AmREIT or its affiliates,
other counsel may be retained for one or both parties. Bryan L. Goolsby, one of
our trust managers, is the managing partner of Locke Liddell & Sapp.
59
PRICE RANGE OF CLASS A COMMON SHARES
As of March 6, 2004, there were approximately 800 record holders of
approximately 2.9 million of the class A common shares outstanding net, of 134
thousand shares held in treasury. AmREIT's class A common shares are listed on
the AMEX and trade under the symbol "AMY." The following table sets forth for
the calendar periods indicated the 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
--------------- ---- --- ---------
2002
Third Quarter (from July 23, 2002) (1)....................... $7.50 $6.20 $.095
Fourth Quarter............................................... $6.55 $6.15 $.100
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
2004
First Quarter $7.20 $6.60 $.116
Second Quarter (through May 3, 2004)......................... $7.35 $6.69 $.118
(1) The Company listed its class A common shares on the AMEX on July 23, 2002.
Prior to July 23, 2002, the Company's shares were not listed on a public
exchange, and therefore, there is no public trading or pricing information
available.
The payment of any future dividends by AmREIT is dependent upon applicable
legal and contractual restrictions, including the provisions of the class D
common shares, as well as its earnings and financial needs.
60
REDEMPTION OF SHARES
AmREIT will file a "no action" letter request with the SEC to permit
AmREIT to put into place the repurchase program described below. In the event
the no-action letter is not received, the repurchase program will not be
implemented until completion of the sale of the 15,000,000 primary class D
common shares offered by this prospectus.
Prior to the time at which the class D common shares become eligible to be
converted into class A common shares, any shareholder who has held class D
common shares for not less than one year may present all or any portion equal to
at least 25% of those shares to AmREIT for redemption at any time, in accordance
with the procedures outlined herein. At that time, AmREIT may, at its sole
option, redeem those shares presented for redemption for cash to the extent it
has sufficient funds available. There is no assurance that there will be
sufficient funds available for redemption and, accordingly, a shareholder's
shares may not be redeemed. If AmREIT elects to redeem shares, the following
conditions and limitations would apply. The full amount of the proceeds from the
sale of shares under our dividend reinvestment plan (Reinvestment Proceeds)
attributable to any calendar quarter will be used to redeem shares presented for
redemption during that quarter. In addition, AmREIT may, at its discretion, use
up to $100,000 per calendar quarter of the proceeds of any public offering of
its common shares for redemptions. Any amount of offering proceeds which is
available for redemptions, but which is unused, may be carried over to the next
succeeding calendar quarter for use in addition to the amount of offering
proceeds and Reinvestment Proceeds that would otherwise be available for
redemptions. At no time during a 12-month period, however, may the number of
shares redeemed by AmREIT exceed 5% of the number of class D shares outstanding
at the beginning of that 12-month period.
In the event there are insufficient funds to redeem all of the shares for
which redemption requests have been submitted, AmREIT plans to redeem the shares
in the order in which such redemption requests have been received. A shareholder
whose shares are not redeemed due to insufficient funds can ask that the request
to redeem the shares be honored at such time, if any, as there are sufficient
funds available for redemption. In that case, the. redemption request will be
retained and those shares will be redeemed before any subsequently received
redemption requests are honored. Alternatively, a shareholder whose shares are
not redeemed may withdraw his or her redemption request. Shareholders will not
relinquish their shares until such time as AmREIT commits to redeeming such
shares.
A shareholder who wishes to have his or her shares redeemed must mail or
deliver a written request on a form provided by AmREIT and executed by the
shareholder, its trustee or authorized agent, to the redemption agent
(Redemption Agent), which currently is Wells Fargo Bank Minnesota, N.A. The
Redemption Agent at all times will be registered as a broker-dealer with the SEC
and each applicable state securities commission. Within 30 days following the
Redemption Agent's receipt of the shareholder's request, the Redemption Agent
will forward to that shareholder the documents necessary to effect the
redemption, including any signature guarantee AmREIT or the Redemption Agent may
require. The Redemption Agent will effect the redemption for the calendar
quarter provided that it receives the properly completed redemption documents
relating to the shares to be redeemed from the shareholder at least one calendar
month prior to the last day of the current calendar quarter and has sufficient
funds available to redeem the shares. The effective date of any redemption will
be the last date during a quarter during which the Redemption Agent receives the
properly completed redemption documents. As a result, AmREIT anticipates that,
assuming sufficient funds are available for redemption, the effective date of
redemptions will be no later than thirty days after the quarterly determination
of the availability of funds for redemption.
Upon the Redemption Agent's receipt of notice for redemption of shares,
the redemption price for this limited optional redemption right will initially
be $9.50 per share. Our board of trust managers
61
may change the redemption price at any time and will announce publicly any price
adjustment as part of its regular communications with our stockholders, such
adjustment being effective on the 10th day after first public announcement of
same. Any shares acquired pursuant to a redemption will be retired and no longer
available for issuance by AmREIT.
A shareholder may present fewer than all of his or her shares to AmREIT
for redemption; provided, however, that (1) the minimum number of shares which
must be presented for redemption shall be at least 25% of his or her shares, and
(2) if the shareholder retains any shares, he or she must retain at least $2,500
worth of shares based on the current offering price ($1,000 worth of shares
based on the current offering price for an IRA, Keogh Plan or pension plan).
Our board of trust managers, in its sole discretion, may amend or suspend
the redemption plan at any time it determines that any amendment or suspension
is in the best interest of AmREIT. Our board of trust managers may suspend the
redemption of shares if (1) it determines, in its sole discretion, that the
redemption impairs the capital or the operations of AmREIT; (2) it determines,
in its sole discretion, that an emergency makes such redemption not reasonably
practical; (3) any governmental or regulatory agency with jurisdiction over
AmREIT so demands for the protection of the shareholders; (4) it determines, in
its sole discretion, that the redemption would be unlawful; (5) it determines,
in its sole discretion, that the redemption, when considered with all other
redemptions, sales, assignments, transfers and exchanges of our common shares,
could cause direct or indirect ownership of shares of our common stock to become
concentrated to an extent which would prevent AmREIT from qualifying as a REIT
under the Internal Revenue Code; or (6) it determines, in its sole discretion,
the suspension to be in the best interest of AmREIT. The redemption plan will
terminate, and AmREIT no longer shall accept shares for redemption at such time
as the class D common shares become eligible to convert into class A common
shares.
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth the selected historical financial data for
AmREIT. The selected historical operating, balance sheet and cash flow data of
AmREIT for (i) each of the five years are derived from the audited financial
statements of AmREIT as reported in its Annual Reports on Form 10-KSB and (ii)
each of the three months ended March 31, 2004 and March 31, 2003 are derived
from the unaudited financial statements of AmREIT as reported in its Quarterly
Reports on Form 10-QSB. These historical data are not necessarily indicative of
the results to be expected in the future and should be read in conjunction with
the financial statements and notes thereto contained in this prospectus.
On July 23, 2002, AmREIT completed a merger with three of its affiliated
partnerships, AAA Net Realty Funds IX, X and XI. The December 31, 2002 and 2003
And March 31, 2004 and 2003 balance sheets and income statements do reflect the
effect of this merger for the period subsequent to the consummation of the
merger. Through this merger, AmREIT acquired approximately $24.3 million in net
lease real estate assets in exchange for issuing approximately 2.6 million class
B common shares Additionally, in 2003 and 2002 AmREIT expensed approximately
$915 thousand and $1.9 million, respectively, as well as expensing approximately
$1.3 million for the 3 months ended march 31, 2004 based on the payment of 143
thousand, 302 thousand, and 168 thousand class A common shares, respectively, as
deferred merger costs paid to Mr. Kerr Taylor in conjunction with the sale of
his advisory company to AmREIT in 1998.
62
AMREIT
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL AND OTHER DATA
December 31, December 31, December 31,
2003 2002 2001
------------- ------------- -------------
BALANCE SHEET DATA (AT END OF PERIOD)
Total Property .................................... $ 70,539,056 $ 47,979,848 $ 30,726,025
Accumulated depreciation .......................... (2,520,633) (2,136,376) (2,066,067)
Total Property Held For Sale ...................... 4,384,342 - -
Cash and cash equivalents ......................... 2,031,440 2,506,868 227,117
Total assets ...................................... 101,326,607 73,975,753 38,828,393
Notes payable ..................................... 48,484,625 33,586,085 16,971,549
Total liabilities ................................. 51,683,713 34,958,534 18,399,279
Minority interest ................................. 846,895 810,971 5,075,333
Shareholders' equity .............................. 48,795,999 38,206,248 15,353,781
Fully diluted class A common shares issued ........ 6,704,714 5,236,547 2,384,117
Treasury shares ................................... 133,822 65,379 39,323
OTHER DATA
Cash flows provided by (used in):
Operating ............................ 1,236,727 3,729,090 1,625,417
Investing ............................ (22,031,014) (15,268,195) (2,332,891)
Financing ............................ 20,318,859 13,818,856 (1,276)
Net increase (decrease) in cash and cash
equivalents ..................................... (475,428) 2,279,751 (708,750)
Funds from operations, available to class A (1) ... 602,000 (846,000) 978,565
Adjusted funds from operations, available to
class A (2) .................................... 1,520,000 1,060,000 978,565
Book value per share .............................. 7.28 7.30 6.44
Unaudited
------------------------------
December 31, December 31, March 31, March 31,
2000 1999 2004 2003
------------- ------------- ------------- -------------
BALANCE SHEET DATA (AT END OF PERIOD)
Total Property .................................... $ 31,622,098 $ 31,136,268 $ 69,547,336 $ 50,847,808
Accumulated depreciation .......................... (1,601,758) (1,148,503) (2,734,344) (2,327,147)
Total Property Held For Sale ...................... - - 7,241,439 -
Cash and cash equivalents ......................... 935,867 1,118,746 2,179,002 825,560
Total assets ...................................... 36,522,276 37,018,186 107,986,683 75,082,173
Notes payable ..................................... 15,472,183 15,480,378 36,985,642 35,852,721
Total liabilities ................................. 16,063,221 16,048,366 44,674,134 36,651,061
Minority interest ................................. 5,130,337 5,180,546 866,129 782,440
Shareholders' equity .............................. 15,328,718 15,789,274 62,446,420 37,648,672
Fully diluted class A common shares issued ........ 2,384,117 2,384,117 8,469,747 5,301,916
Treasury shares ................................... 11,373 11,373 25,127 90,322
OTHER DATA
Cash flows provided by (used in):
Operating ............................ 676,430 469,700 305,313 252,160
Investing ............................ (25,720) (2,439,262) (1,728,023) (3,056,444)
Financing ............................ (833,589) 3,039,788 1,570,272 1,122,976
Net increase (decrease) in cash and cash
equivalents ..................................... (182,879) 1,070,226 147,562 (1,681,308)
Funds from operations, available to class A (1) ... 222,767 1,605,091 (934,000) 672,000
Adjusted funds from operations, available to
class A (2) .................................... 222,767 1,605,091 386,000 672,000
Book value per share .............................. 6.43 6.62 7.37 7.10
(1) AmREIT has adopted the National Association of Real Estate Investment
Trusts (NAREIT) definition of FFO. FFO is calculated as net income
(computed in accordance with generally accepted accounting principles)
excluding gains or losses from sales of depreciable operating property,
depreciation and amortization of real estate assets, and excluding results
defined as "extraordinary items" under generally accepted accounting
principles. FFO should not be considered an alternative to cash flows from
operating, investing and financing activities in accordance with general
accepted accounting principles and is not necessarily indicative of cash
available to meet cash needs. AmREIT's computation of FFO may differ from
the methodology for calculating FFO utilized by other equity REITs and,
therefore, may not be comparable to such other REITS. FFO is not defined
by generally accepted accounting principles and should not be considered
an alternative to net income as an indication of AmREIT's performance, or
of cash flows as a measure of liquidity. Please see the reconciliation of
Net Income to FFO on Page __.
(2) Based on the adherence to the NAREIT definition of FFO, we have not added
back the $915 thousand $1.90 million, and $1.32 million charge to earnings
during 2003, 2002 and the quarter ended March 31, 2004 respectively,
resulting from shares issued to Mr. Taylor as deferred merger cost
stemming from the sale of his advisory company to AmREIT in June 1998.
Adding this $915 thousand, $1.90 million, and $1.32 million charge. back
to earnings would result in Adjusted FFO of $1.52 million, $1.06 million,
and $386 thousand, respectively.
63
AMREIT
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL AND OTHER DATA (3)
December 31, December 31, December 31, December 31,
2003 2002 2001 2000
------------ ------------ ------------ ------------
(3) (3) (3)
OPERATING DATA
Revenues:
Rental income and earned income from DFL ............... $ 7,584,166 $ 5,193,147 $ 3,009,330 $ 2,848,850
Real estate fee income ................................. 1,031,201 1,222,944 - -
Gain on sale 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 income ........................................ 7,938 4,206 10,555 31,630
Service fee, other income, and gain and loss on sale ...
of property ............................................ - - 2,650,113 793,268
------------ ------------ ------------ ------------
Total revenues ............................ 12,609,240 7,519,262 5,669,998 3,673,748
Expenses:
General operating, administrative, and
professional ........................................... 3,936,546 2,801,946 2,956,061 1,688,799
Securities commissions ................................. 2,288,027 653,034 - -
Legal and professional ................................. 881,283 679,154 - -
Reimbursements and fees to related party ............... - - - -
Depreciation and amortization .......................... 835,987 611,084 413,583 403,181
Merger related acquisition costs ....................... - - - -
Bad debts .............................................. - - - -
Merger costs ........................................... - - - -
Deferred merger costs .................................. 914,688 1,904,370 - -
Potential acquisition costs ............................ - - - 153,236
------------ ------------ ------------ ------------
Total expense ............................. 8,856,531 6,649,588 3,369,644 2,245,216
Operating income 3,752,709 869,674 2,300,354 1,428,532
Income from non-consolidated affiliates ......................... 312,147 416,904 - -
Federal income tax expense ...................................... (236,990) (60,656) 144,420 -
Interest ........................................................ (2,354,159) (1,774,973) (1,063,574) (1,339,622)
Minority interest in net income of consolidated joint
ventures ........................................................ (178,311) (308,010) (527,571) (527,121)
------------ ------------ ------------ ------------
Income from continuing operations ............................... 1,295,396 (857,061) 853,629 (438,211)
Income from discontinued operations (3) ......................... 391,480 245,840 225,719 225,719
Gain (loss) on sale of real estate acquired for investment ...... 311,873 (47,553) - -
------------ ------------ ------------ ------------
Net income (loss) ............................................... $ 1,998,749 $ (658,774) $ 1,079,348 $ (212,492)
Less distributions to class B & C shareholders .................. (1,942,656) (865,293) - -
------------ ------------ ------------
Net income (loss) available to class A shareholders ............. $ 56,093 $ (1,524,067) $ 1,079,348 $ (212,492)
============ ============ ============ ============
Basic and diluted (loss) income before discontinued
operations per share ......................................... $ (0.23) $ (0.70) $ 0.36 $ (0.18)
Basic and diluted (loss) income from discontinued
operations per share ......................................... 0.25 0.08 0.10 0.10
------------ ------------ ------------ ------------
Net income (loss) ............................................... $ 0.02 $ (0.62) $ 0.46 $ (0.09)
============ ============ ============ ============
Distributions per share - class A ............................... $ 0.34 $ 0.34 $ 0.26 $ 0.10
Weighted average number of Series A common shares
outstanding .................................................. 2,792,190 2,469,725 2,354,572 2,373,060
Weighted average number of common shares plus dilutive
potential common shares ...................................... 2,792,190 2,469,725 2,354,572 2,373,060
Unaudited
----------------------------
December 31, March 31, March 31,
1999 2004 2003
------------ ------------ ------------
(3) (3)
OPERATING DATA
Revenues:
Rental income and earned income from DFL ............... $ 3,373,374 $ 2,193,669 $ 1,593,180
Real estate fee income ................................. - 367,359 130,752
Gain on sale of real estate acquired for resale ........ - -
Securities commission income ........................... - 1,904,541 85,608
Asset management fee income ............................ - 75,280 50,994
Interest income ........................................ 199,448 11,452 3,113
Service fee, other income, and gain and loss on sale ... - -
of property ............................................ 754,059 - -
------------ ------------ ------------
Total revenues ............................ 4,326,881 4,552,301 1,863,647
Expenses:
General operating, administrative, and
professional ........................................... 1,290,433 1,435,764 770,405
Securities commissions ................................. - 1,423,632 65,035
Legal and professional ................................. - 327,740 103,862
Reimbursements and fees to related party ............... - - -
Depreciation and amortization .......................... 444,072 246,481 207,288
Merger related acquisition costs ....................... 262,495 - -
Bad debts .............................................. 189,490 - -
Merger costs ........................................... - - -
Deferred merger costs .................................. - 1,319,833 -
Potential acquisition costs ............................ 743,001 - -
------------ ------------ ------------
Total expense ............................. 2,929,491 4,753,450 1,146,590
Operating income 1,397,390 (201,149) 717,057
Income from non-consolidated affiliates ......................... - 14,598 40,305
Federal income tax expense ...................................... - (170,905) 73,000
Interest ........................................................ (1,134,919) (619,031) (523,549)
Minority interest in net income of consolidated joint
ventures ........................................................ (526,052) (44,265) (39,788)
------------ ------------ ------------
Income from continuing operations ............................... (263,581) (1,020,752) 267,025
Income from discontinued operations (3) ......................... 225,719 655,735 190,812
Gain (loss) on sale of real estate acquired for investment ...... - - -
------------ ------------ ------------
Net income (loss) ............................................... $ (37,862) $ (365,017) $ 457,837
Less distributions to class B & C shareholders .................. - (813,056) (452,543)
------------ ------------ ------------
Net income (loss) available to class A shareholders ............. $ (37,862) $ (1,178,073) $ 5,294
============ ============ ============
Basic and diluted (loss) income before discontinued
operations per share ......................................... $ (0.11) $ (0.62) $ (0.07)
Basic and diluted (loss) income from discontinued
operations per share ......................................... 0.10 0.22 0.07
------------ ------------ ------------
Net income (loss) ............................................... $ (0.02) $ (0.40) $ 0.00
============ ============ ============
Distributions per share - class A ............................... $ 0.55 $ 0.12 $ 0.11
Weighted average number of Series A common shares
outstanding .................................................. 2,372,744 2,952,984 2,768,253
Weighted average number of common shares plus dilutive
potential common shares ...................................... 2,372,744 2,952,984 2,768,253
(3) In accordance with Financial Accounting Standard Statement No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" issued by
the Financial Accounting Standards Board, the consolidated statement of
operations have been restated from those originally reported for the years
ended December 31, 2003, 2002, 2001, 2000, 1999, and the quarter ended
March 31, 2003 to reflect separately the results of discontined
operations. The restatement had no impact on the consolidated balance
sheet, statements of stockholders' equity or statement of cash flows. The
restatement had no impact on net earnings or net earnings per share for
the years ended December 31, 2003, 2002, 2001, 2000, 1999, and the quarter
ended March 31, 2003.
64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain information presented in this prospectus 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
AmREIT believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, AmREIT'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 AmREIT's debt or equity
capital, the ability of AmREIT to locate suitable tenants for its properties and
the ability of tenants to make payments under their respective leases, as well
as the factors set forth under the caption "Risk Factors" appearing elsewhere in
this prospectus.
GENERAL
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus. Historical results and trends which might appear should not be taken
as indicative of future operations. The results of operations and financial
condition of AmREIT, as reflected in the accompanying statements, 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 AmREIT's tenants. Management believes the most
critical accounting policies in this regard are the accounting for lease
revenues (including the straight-line rent), the regular evaluation of whether
the value of a real estate asset has been impaired and the allowance for
doubtful accounts. Each of these issues requires management to make judgments
that are subjective in nature. Management relies on its experience, collects
historical data and current market data, and analyzes these assumptions in order
to arrive at what it believes to be reasonable estimates.
EXECUTIVE OVERVIEW
AmREIT is a rapidly growing, self-managed and self-advised REIT with,
along with its predecessors, a 19-year history of delivering results to its
investors. Its business model consists of a publicly traded REIT, a portfolio of
retail properties, including "irreplaceable corners" - premier retail frontage
properties in high traffic, highly populated areas, 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 March 31, 2004, our debt to total asset ratio was 41%.
At March 31, 2004, 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
65
ventures or partnerships. Forty six of the properties are single tenant
properties, and represent approximately 75% of the rental income as of March 31,
2004. Five of the properties are multi-tenant and represent approximately 25% of
the rental income as of March 31, 2004. In assessing the performance of AmREIT's
properties, management evaluates the occupancy of AmREIT's portfolio. Occupancy
for the total portfolio was 94.8% based on leaseable square footage as of March
31, 2004. Additionally, AmREIT 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, AmREIT raised approximately $30.1
million in capital through March 31, 2004.
Management intends to fund future acquisitions and development projects
through a combination of equity offerings and debt financings. During 2004,
AmREIT 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 $16 million through our class C common
share offering for the three months ended March 31, 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, and 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 $60 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 March 31, 2004, approximately
60% 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 AmREIT, 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 AmREIT'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.
66
Rental Income Recognition - In accordance with accounting principles
generally accepted in the United States of America, AmREIT 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. AmREIT 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 AmREIT can reasonably calculate the amount of
percentage rent owed, if any. Generally, AmREIT records percentage rent in the
period in which the percentage rent payment is made, and can thereby be
calculated and verified. For the three months ended March 31, 2004, AmREIT
collected and recorded percentage rent from tenants of $65 thousand.
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, AmREIT 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. AmREIT 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 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 March 31,
2004, no impairment was identified for any of AmREIT'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
67
claims with respect to tenants in bankruptcy is considered in assessing the
collectibility of the related receivables. At December 31, 2003, AmREIT wrote
off a receivable of approximately $150 thousand related to the Wherehouse
bankruptcy. During the three months ended March 31, 2004, AmREIT wrote off
receivables totaling approximately $67 thousand. The receivables were
attributable to the GAAP required accrual of straight line rents associated with
Just for Feet. The write off of the receivable from Just for Feet is included in
income from discontinued operations. AmREIT maintains a receivable related to
Wherehouse of approximately $126 thousand. Based on discussions with Wherehouse,
Blockbuster Entertainment Corporation, the guarantor of the lease, and an
evaluation of the legal proceedings involving Wherehouse and Blockbuster
Entertainment Corporation, AmREIT believes that these receivables are
collectible and should be collected in 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities and financing activities have been the
principal sources of capital to fund AmREIT'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 decreased
from $3.73 million for the year ended December 31, in 2002 to $1.24 million for
the year ended December 31, 2003 and increased $53 thousand for the quarter
ended March 31, 2004 compared to the quarter ended March 31, 2003. Proceeds from
sales of real estate acquired for sale increased by $2.4 million in the first
quarter of 2004 compared to the first quarter of 2003. This increase in cash was
offset somewhat by an increase in accounts receivable related-party of $1.5
million.
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.
During the first quarter 2004, AmREIT contracted to purchase approximately
$8.5 million of retail real estate, representing a multi-tenant shopping center
located in Houston, Texas. The shopping center is anticipated to close during
the second quarter and will be funded with approximately $3.9 million in cash
and the assumption of a $4.6 million mortgage payable. Additionally, AmREIT sold
an IHOP located in Bridgeton, Missouri during the first quarter 2004, which was
previously classified as real estate held for sale. AmREIT realized a gain on
the sale of approximately $608 thousand. 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. For the remainder of 2004, AmREIT anticipates
continuing the strategy of divesting its non-core properties, which is estimated
will generate between $10 and $15 million in sales proceeds. On January 11,
2003, Wherehouse Entertainment filed for voluntary petition of relief under
Chapter 11 of the federal bankruptcy code. AmREIT owns two Wherehouse
Entertainment locations. The lease on the Independence, Missouri location has
been amended and assigned to Record Town. Subsequent to March 31, the Wichita,
Kansas property was placed under contract, which the Company attempted to cancel
as it was determined that a potentially higher value could be obtained by
redeveloping the property. In
68
June 2004, it was determined that the contract was not able to be canceled, and
the Company would continue with the sale, which would result in an impairment in
value of approximately $1 million. 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 and subsequent to March 31, 2004, rejected the
leases on both properties. The Company is negotiating a contract to sell the
Tucson, Arizona Just For Feet property, which is anticipated to result in a gain
on sale and is evaluating the alternatives for the Baton Rouge Just For Feet
property.
Cash flows used in investing activities has been primarily related to the
acquisition or development of retail properties. During 2003, AmREIT acquired 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 AmREIT's
class C common share offering and through the existing revolving credit
facility. AmREIT also sold two non-core, underperforming properties, an Office
Max in Dover, Delaware and a Goodyear Tire Store in Houston, Texas. During the
first quarter of 2004, AmREIT, through one of its taxable REIT subsidiaries,
acquired a 25% equity interest in a 45 acre retail redevelopment in Houston,
Texas. The other partners are affiliated partnerships. The investment was funded
through a combination of the $14.3 million of capital (net of $1.8 million in
issuance costs) raised through the class C common share offering and debt
financing.
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, AmREIT
anticipates continuing this strategy of divesting 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 for the year ended
December 31, 2003 and $300 thousand for the quarter ended March 31, 2004, which
were funded through excess cash flow and through AmREIT's revolving credit
facility. Cash flows used in investing activities decreased from $3.1 million in
the first three months of 2003 to $1.7 million in the first three months of
2004.
Cash flows provided by financing activities increased from $13.82 million
in 2002 to $20.32 million for the year ended December 31, 2003. Cash flows
provided by financing activities increased from $1.1 million for the quarter
ended March 31, 2003 to $1.6 million for the quarter ended March 31, 2004. 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, AmREIT raised new capital of between $4 million and $6 million per
month during the first quarter of 2004. One advantage of raising capital through
the independent financial planning
69
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 AmREIT's debt to asset ratio. The
Credit Facility contains covenants which, among other restrictions, require
AmREIT 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 and March 31, 2004, IHOP net
operating income represented 34.7% and approximately 32% of total property net
operating income, respectively. As of March 31, 2004, the spread over LIBOR was
2.00. At March 31, 2004, approximately $12.8 million was outstanding under the
credit facility. In addition to the credit facility, AmREIT utilizes various
permanent mortgage financing and other debt instruments.
As of March 31, 2004, AmREIT had the following contractual obligations:
2004 2005 2006 2007 2008 Thereafter Total
-------- -------- -------- -------- -------- ---------- --------
Unsecured debt:
Revolving credit facility $ 12,777 $ - $ - $ - $ - $ - $ 12,777
5.46% dissenter notes - - - - - 760 760
Secured debt 2,073 490 530 573 620 19,163 23,449
-------- -------- -------- -------- -------- -------- --------
Total contractual obligations $ 14,850 $ 490 $ 530 $ 573 $ 620 $ 19,923 $ 36,986
In order to continue to expand and develop its portfolio of properties and
other investments, AmREIT 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
AmREIT's debt or equity securities, secured or unsecured borrowings from banks
or other lenders, acquisitions of AmREIT's affiliated entities or other
unrelated companies, or the disposition of assets, as well as undistributed
funds from operations.
In August 2003, AmREIT 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 March 31, 2004, 3.0 million
shares had been issued, resulting in approximately $30.1 million in gross
proceeds. 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 AmREIT and
its properties.
70
During 2003, AmREIT paid dividends to its shareholders of $3.19 million,
compared with $1.73 million in 2002. For the quarters ended March 31, 2004 and
2003, AmREIT paid dividends to its shareholders of $1.158 million and $760
thousand, respectively. 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):
71
Class A Class B Class C
------- ------- -------
2004
First Quarter $345 $434 $379
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 $165 N/A N/A
On July 23, 2002, AmREIT completed a merger with three of its affiliated
partnerships, which increased AmREIT's real estate assets by approximately $24.3
million. Pursuant to the merger, AmREIT 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, 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.
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 AmREIT, AmREIT's funds are held in short
term, highly liquid investments which AmREIT believes to have appropriate safety
of principal. This investment strategy has allowed, and continues to allow, high
liquidity to facilitate AmREIT's use of these funds to acquire properties at
such time as properties suitable for acquisition are located. At March 31, 2004,
AmREIT's cash and cash equivalents totaled $2.2 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
AmREIT properties. These factors, however, also may have an adverse impact on
the operating margins of the tenants of the properties.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2004 to March 31, 2003:
Rental revenue and earned income from direct financing leases increased by
38%, or $600 thousand, from $1.6 million in 2003 to $2.2 million in 2004. Of
this increase, $640 thousand is related to acquisitions made after the first
quarter of 2003. This is somewhat offset by the loss of rental income of $100
thousand due to property dispositions.
72
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, the lease
at the Missouri location has been modified and assigned to Record Town.
Wherehouse Entertainment has vacated the Kansas location. 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. Footstar has announced
it intends to close all their Just for Feet stores after an orderly liquidation
of the remaining inventory. AmREIT owns two Just for Feet locations, one in
Tucson, Arizona and the other is located in Baton Rouge, Louisiana.
Securities commission income increased by $1.8 million, from $86 thousand
in 2003 to $1.9 million in 2004. 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 the first quarter of 2004, AmREIT and its
affiliated retail partnerships raised approximately $18.0 million, as compared
to approximately $834 thousand during the first quarter of 2003. 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 $1.4 million, from $65 thousand in 2003 to $1.4 million in
2004.
General and operating expense increased $665 thousand, from $770 thousand
in 2003 to $1.4 million in 2004. The increase in general and operating expense
is primarily due to additional personnel and the associated salary and benefits
costs related to these individuals. Since the first quarter of 2003, AmREIT
added members to each of the operating teams, five on the real estate team
(property management, legal, acquisitions and leasing), 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 $462 thousand in 2004 as compared to
2003. In addition, property expense increased $131 thousand.
Deferred merger costs increased from $0 in the first quarter of 2003 to
$1.3 million in the first quarter of 2004 . The deferred merger cost is related
to deferred consideration payable to Mr. Taylor as a result of the acquisition
of our 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 AmREIT increases its outstanding equity. To date, Mr.
Taylor has received approximately 847 thousand class A common shares, and is
eligible to receive an additional 53 thousand shares as additional equity is
raised by AmREIT.
COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO DECEMBER 31, 2002
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.
73
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, AmREIT 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 Entertainment 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
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 AmREIT 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 is
raised by AmREIT.
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
74
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 AmREIT believes is the most comparable GAAP financial measure to FFO, in
thousands, for the years ended December 31:
2003 2002
-------- --------
Income (loss) - before discontinued operations ....................... $ 1,295 $ (857)
Income - from discounted 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,
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.
75
Cash flows from operating activities, investing activities, and financing
activities are presented below in thousands:
March 31, December 31,
-------------------- --------------------
2004 2003 2003 2002
-------- -------- -------- --------
Operating activities $ 305 $ 252 $ 1,237 $ 3,729
Investing activities (1,728) (3,056) (22,031) (15,268)
Financing activities 1,570 1,123 20,319 13,819
Below is the calculation of FFO and the reconciliation to net income, in
thousands, for the three months ended March 31:
2004 2003
-------- --------
(Loss) income before discontinued operations $ (1,021) $ 267
Income from discontinued operations 656 191
Plus depreciation of real estate assets - from operations 244 181
Plus depreciation of real estate assets - from discontinued operations - 38
Less class B and class C distributions (813) (453)
Total Funds From Operations available to class A shareholders* $ (934) $ 224
Cash dividends paid to class A shareholders $ 345 $ 307
Dividends in excess of FFO* $ (1,279) $ (83)
* Based on the adherence to the NAREIT definition of FFO, we have not added back
the $1.3 million charge to earnings during 2004 resulting from shares issued to
Mr. Taylor. Adding this charge back to earnings would result in $386 thousand
adjusted funds from operations available to class A shareholders, and class A
dividends paid less than adjusted FFO available to class A shareholders of $41
thousand.
INVESTMENT OBJECTIVES AND CRITERIA
AMREIT'S INVESTMENT POLICIES
AmREIT's investment policies have been adopted by its board of trust
managers and set forth the policies and restrictions pursuant to which AmREIT
conducts its affairs. The board of trust managers may change any investment
policy without the approval of shareholders. Set forth below is a summary of
AmREIT's investment policies.
INVESTMENTS IN PROPERTIES. AmREIT will:
- invest only in interests in (including mortgage loan interests
secured by) income-producing, undeveloped, development stage and
improved real estate properties using borrowed capital only where
prudent as determined by the board;
- not invest more than 10% of its total assets in unimproved real
property or mortgage loans on unimproved real property;
- not acquire properties leased, or to be leased, to one tenant
generating annual rental income in excess of 15% of AmREIT's total
annual rental income, without the prior approval of our board of
trust managers;
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- not engage in the purchase and sale of investments, other than real
property interests which satisfy AmREIT's investment objectives or
for the purpose of investing on a short-term basis reserves and
funds available for the purchase of properties; and
- pay consideration for a property which is based on its fair market
value as determined by a majority of the trust managers. In cases
where the majority of the independent trust managers determine, and
in all acquisitions from interested persons, such fair market value
shall be determined by an independent expert selected by the
independent trust managers.
POLICY RESTRICTIONS. AmREIT will not:
- invest more than ten percent (10%) of its total assets in second
mortgages, excluding wrap-around type second mortgage loans;
- make or invest in mortgage loans, including construction loans, on
any one property if the aggregate amount of all mortgage loans
outstanding on the property, including AmREIT's loan(s), would
exceed an amount equal to eighty-five percent (85%) of the appraised
value of the property as determined by appraisal unless substantial
justification exists because of the presence of other underwriting
criteria. For purposes of this subsection, the "aggregate amount of
all mortgage loans outstanding on the property" shall include all
interest (excluding contingent participation in income and/or
appreciation in value of the mortgaged property), the current
payment of which may be deferred pursuant to the terms of such
loans, to the extent that deferred interest on each loan exceeds
five percent (5%) per annum of the principal balance of the loan;
- make or invest in any mortgage loans that are subordinate to any
mortgage or equity interest of any affiliate of AmREIT;
- invest in any mortgage loans that are subordinate to any liens or
other indebtedness on a property if the effect of such mortgage
loans would be to cause the aggregate value of all such subordinated
indebtedness to exceed twenty-five percent (25%) of AmREIT's
tangible assets;
- invest in equity securities of other issuers unless a majority of
the trust managers, including a majority of the independent trust
managers, not otherwise interested in the transaction approve the
transaction as being fair, competitive and commercially reasonable;
- invest in the equity securities of any non-governmental issue,
including other real estate investment trusts or limited
partnerships for a period in excess of eighteen (18) months, unless
approved by a majority of the trust managers, including a majority
of the independent trust managers;
- engage in underwriting or the agency distribution of securities
issued by others;
- invest in commodities or commodity futures contracts, other than
solely for hedging purposes;
- engage in short sales of securities or trading, as distinguished
from investment activities;
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- invest in real estate contracts of sale, otherwise known as land
sale contracts, unless such contracts are in recordable form and
appropriately recorded in the chain of title;
- issue equity securities which are redeemable at the election of the
holder of such securities;
- issue debt securities unless the historical debt service coverage
(in the most recently completed fiscal year) as adjusted for known
changes is sufficient to properly service that higher level of debt;
- issue warrants, options or similar evidences of a right to buy its
securities, unless issued to all of its security holders ratably, or
issued as part of a financing arrangement; and
- issue shares on a deferred payment basis or other similar
arrangement.
RESTRICTIONS ON LEVERAGE. AmREIT may not borrow funds in order to
distribute the proceeds to the shareholders and thereby offset under-performance
by the properties, unless it is required to do so for REIT qualification
purposes.
The trust managers must review AmREIT's borrowings at least quarterly for
reasonableness in relation to its net assets. AmREIT may not incur indebtedness
if, after giving effect to the incurrence thereof, aggregate indebtedness,
secured and unsecured, would exceed fifty-five percent (55%) of its net assets
on a consolidated basis. For this purpose, the term "net assets" means the value
of our total assets (less intangibles) based on market capitalization rates and
current year rental income, as determined by our board, before deducting
depreciation or other non-cash reserves, less total liabilities, as calculated
at the end of each quarter on a basis consistently applied.
TRANSACTIONS WITH AFFILIATES. AmREIT is self-managed and does not have an
external advisor. AmREIT's dealings with and its officers, trust managers,
sponsors and any advisor are subject to the following restrictions:
Sales To Interested Persons. An advisor, officer or trust manager may not
acquire assets from AmREIT except as approved by a majority of trust managers
(including a majority of independent trust managers), not otherwise interested
in such transaction, as being fair and reasonable to AmREIT.
Acquisitions From Interested Persons. Any transaction with a trust
manager, officer or affiliate that involves the acquisition of a property from
an interested person must be approved by a majority of the independent trust
managers as being fair and reasonable to AmREIT and at a price not greater than
the cost of the property to such seller, or if at a greater price only if
substantial justification exists and such excess is reasonable and not in excess
of the properties' current appraised value.
Purchases from Affiliated Retail Partnerships. Any acquisition of a
property from MIG II will only be made at the Market Value of the property, and
no real estate commission will be paid to AmREIT or any affiliate of AmREIT in
connection with such purchases.
Leases To Interested Persons. AmREIT may lease assets to an advisor, or a
trust manager only if such transaction is approved by a majority of trust
managers (including a majority of independent trust managers), not otherwise
interested in such transaction, as being fair and reasonable to AmREIT.
Loans From Interested Persons. AmREIT may not borrow money from an advisor
or a trust manager unless a majority of the trust managers, including a majority
of the independent trust managers,
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not otherwise interested in such transaction approve the transaction as being
fair, competitive, and commercially reasonable and no less favorable to AmREIT
than loans between unaffiliated parties under the same circumstances.
Loans To Interested Persons. AmREIT may not make or invest in loans to a
sponsor, advisor or trust manager, which includes any affiliate thereof, except
for mortgage loans for the construction of improvements on properties to be
acquired by AmREIT that are under lease or binding contract to be leased to
qualifying tenants and those loans insured or guaranteed by a government or
government agency or unless an appraisal is obtained on the underlying property.
An appraisal of the underlying property shall be obtained in connection with any
loan to an advisor, director or their affiliate.
Other Transactions With Interested Persons. All other transactions between
AmREIT and the sponsor, advisor or a trust manager shall require approval by a
majority of the trust managers (including a majority of the independent trust
managers) not otherwise interested in such transactions as being fair and
reasonable to AmREIT and on terms and conditions not less favorable to AmREIT
than those available from unaffiliated third parties.
JOINT VENTURE INVESTMENTS. AmREIT may enter into joint ventures with
unaffiliated third parties. AmREIT may also invest jointly with another
publicly-registered entity sponsored by a sponsor, advisor or trust manager that
has investment objectives and management compensation provisions substantially
identical to those of AmREIT, provided that the following conditions must be
satisfied:
- the joint venture must have approval of a majority of the trust
managers, including a majority of the independent trust managers;
- the joint venture must have investment objectives comparable to
AmREIT;
- the investment by each party to the joint venture must be on
substantially the same terms and conditions; provided, however,
AmREIT shall own more than fifty percent (50%) of any joint venture
between it and its sponsor or affiliate;
- in making any such joint venture investment, AmREIT may not pay more
than once, directly or indirectly, for the same services and may not
act indirectly through any such joint venture if AmREIT would be
prohibited from doing so directly because of restrictions contained
in the bylaws; and
- in the event of a proposed sale of the property initiated by the
other joint venture partner, AmREIT must have a right of first
refusal to purchase the other party's interest.
REAL ESTATE COMMISSIONS ON RESALE OF PROPERTY. If an advisor, officer or
trust manager provides a substantial amount of the services in the effort to
sell an AmREIT property, that such person may receive up to one-half of the
brokerage commission paid but in no event to exceed an amount equal to 3% of the
contract price for the property. In addition, the amount paid when added to the
sums paid to unaffiliated parties in such a capacity shall not exceed the lesser
of the Competitive Real Estate Commission or an amount equal to 6% of the
contract price for the property. The Competitive Real Estate Commission is the
real estate or brokerage commission paid for the purchase or sale of a property
which is reasonable, customary and competitive in light of the size, type and
location of such property. The "contract price" is the amount actually paid or
allocated to the purchase, development, or construction or improvement of a
property exclusive of the acquisition fees and acquisition expenses.
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ACQUISITION FEES AND ACQUISITION EXPENSES. AmREIT may not pay acquisition
fees and acquisition expenses which are unreasonable. The total amount of such
fees may not exceed 6% of the contract price of the property, or in the case of
a mortgage loan, 6% of the funds advanced. Notwithstanding the foregoing, a
majority of the trust managers, including a majority of the independent trust
managers, not otherwise interested in the transaction may approve fees in excess
of these limits if they determine the transaction to be commercially
competitive, fair and reasonable to AmREIT.
AMREIT'S OPERATING STRATEGY
AmREIT's policies with respect to the following activities have been
determined by our board of trust managers within the restrictions of AmREIT's
stated investment policies and, in general, may be amended or revised, from time
to time, subject to the stated objectives and policies, by the board without a
vote of the shareholders.
REAL ESTATE STRATEGY. Over the years, AmREIT has emphasized the
development, acquisition and ownership of a portfolio of high-end single and
multi-tenant retail centers that are located on prime tracts of land in high
traffic, highly populated areas, which will maximize the total return to its
shareholders, consisting of both dividends paid and appreciation in value of the
shares. 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
$70,000 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. See "Business and Properties --
Operating Strategy." These properties are usually smaller in size (2,500 to
50,000 sq. ft.) and have a large, stable and deep pool of investors as buyers
for this type of real estate. In particular, tax concerned investors ("1031
investors"), wealthy family estates and professional investors find these types
of properties valuable. Therefore, the marketability of this type of property is
usually appealing. For these reasons, management believes that AmREIT's niche of
frontage commercial credit is among the most liquid type of real estate. AmREIT
intends to continue to focus on acquiring commercial frontage properties,
believing that this sector is capable of providing appealing returns at more
attractive risk levels than other sectors of the retail/commercial real estate
market. In pursuing its growth strategy, AmREIT intends to utilize
research-driven investment analysis, disciplined buy/sell decisions and
up-to-date operating systems. AmREIT's business has, however, expanded beyond
being solely dependent on the income produced by its real estate portfolio to
include the real estate operating and capital raising operations of its
wholly-owned taxable REIT subsidiaries. See "Business and Properties." Today,
AmREIT's lines of business are expanding, its core portfolio is improved and
more diversified, and AmREIT has the best team of people in its history.
AmREIT's real estate strategy will focus on major markets, with the goal of
achieving a significant presence in major retail corridor markets of targeted
cities. These new operations provide AmREIT with additional funds to pay
distributions to its shareholders and increased asset value through its
ownership of the equity securities of these subsidiaries.
Management believes that AmREIT's focus on upgrading its property
portfolio and its continued emphasis on commercial frontage properties which are
often adjacent to major regional malls or other high traffic generators, coupled
with increasing the size of the portfolio through the acquisition of the
properties through the merger with certain of its affiliated partnerships and of
the financing opportunities provided by these new properties, should allow
AmREIT to increase revenue distributable to shareholders in the short-term. The
revenue growth strategy is enhanced by the possibility of increased long-term
value arising from the operating success of AmREIT's subsidiaries. Management
believes that AmREIT's structure allows it to be an entrepreneurial real estate
company, with income producing assets to provide attractive returns to
shareholders plus revenue producing subsidiaries which can both support AmREIT's
distributions and produce cash flow for continued growth.
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INVESTMENT STRATEGY. AmREIT will continue to invest in existing,
newly-developed, development stage or undeveloped retail properties subject to
leases under which the tenant is responsible for all operating costs (i.e., the
tenant pays non-capital costs associated with operating the leased premises),
frequently referred to as a net lease. AmREIT will continue to seek to lease to
single tenant and multiple tenant properties. AmREIT intends to continue to
concentrate its investments in the Southwest, but may invest in properties
anywhere in the continental United States.
In determining whether a property is a suitable for investment, management
considers the following factors, among others:
- the safety of the investment;
- the location, condition, use and design of the property and its
suitability for a long-term net lease or a lease that otherwise
limits the amount of expenses to be incurred by AmREIT;
- the cash flow expected to be generated by the property;
- the terms of the proposed lease (including, specifically, provisions
relating to rent increases or percentage rent and provisions
relating to passing on operating expenses to tenants);
- the creditworthiness of the lessee (based on the lessee's most
recent audited financial statement or other similar evidence
establishing net worth) and the cash flow expected to be generated
by the property;
- the prospects for long-term appreciation of the property;
- the prospects for long-range liquidity of the investment; and
- the stability and potential growth of the community.
AmREIT invests in properties which are either under current lease or are
to be leased upon completion of development to a national or regional
corporation. However, in circumstances deemed appropriate, leases may be with a
sole proprietor or franchisee operating the businesses on the property. AmREIT
has no minimum financial requirements for its tenants, which will vary depending
on individual circumstances of the property and the lease. With respect to the
credit of a prospective tenant, AmREIT will evaluate the party's
creditworthiness in terms of its most recent audited financial statements, its
general credit history, any trends exhibited by its credit rating, appropriate
references, if available, the type of business in which it engages, the size and
scope of its business, the length of its operating history, the background and
experience of its management and similar types of factors.
Management also considers a property's prospects for long-term
appreciation and the prospects for long-range liquidity of the investment. Other
considerations of AmREIT affecting appreciation of the properties and liquidity
of the investment include: inclusion of lease clauses providing for increased
rents based on a tenant's increased revenues, lease clauses providing for
periodic inflation adjustments to the base rent, minimizing deferred maintenance
by prompt attention to repair and replacement needs at the properties and by
including common area maintenance clauses in the leases.
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AmREIT's procedures with respect to environmental due diligence are to
require, prior to the purchase of a property, that all conditions imposed by a
lender loaning funds towards the acquisition of the property, if applicable,
have been satisfied and that all conditions imposed by the title insurer which
exclude coverage due to environmental conditions are either removed, waived or
found acceptable by a majority of AmREIT's trust managers. Where neither lender
nor title insurer conditions raise issues regarding environmental due diligence,
AmREIT may nevertheless require certain protective representations from the
seller of a property, including a satisfactory phase one environmental study of
the property site.
AmREIT competes for both investment opportunities and the operation of its
properties with other real estate investors (both domestic and foreign),
including other real estate investment trusts and limited partnerships which
have investment objectives similar to those of AmREIT and which are likely to
have resources greater than those of AmREIT. Management continually monitors the
real estate market in order to identify potential desirable property
acquisitions and advantageous disposition opportunities for its properties.
AmREIT plans to explore possible acquisitions of properties in whole or
partial exchange for its equity securities. AmREIT has authority to issue
additional shares or other securities in exchange for property and other valid
consideration, and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. AmREIT has
authorized preferred shares, but has not issued such senior securities.
LINE OF BUSINESS STRATEGY. AmREIT has three primary lines of business
beyond its portfolio: a full service real estate operating and development
subsidiary (ARIC), an NASD registered broker dealer subsidiary (securities
business) and its retail partnerships. ARIC is contributing strongly to AmREIT's
profitability through generating brokerage, leasing, construction management,
development and property management fee income. This line of business carries
little overhead burden and has proven profitable from the beginning. ARIC
provides comprehensive development and construction services from site selection
and design through building completion for creditworthy tenants across the
nation. Not only does this area of expertise allow AmREIT to generate third
party fee income, but it also allows AmREIT to respond to its own portfolio
needs when required.
AmREIT's second line of business, its securities business, continues to
grow and gain traction. This business is conducted by AmREIT Securities Company
(ASC), a wholly owned subsidiary of ARIC. Through ASC, we are able to raise
capital through the 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
retail partnerships and approximately $14 million directly for us through a
class C common share offering.
AmREIT's third line of business, its sponsorship of retail partnerships,
involves sponsoring retail partnerships through NASD financial broker dealers.
Through its retail partnerships, AmREIT is able to: (1) better match its capital
with its real estate pipeline, (2) generate fee income from the real estate
activities and asset management fees that benefit the AmREIT shareholders, and
(3) participate, as the general partner of these investment funds, in the "back
end" or "carried interest" in these funds. As a sponsor of real estate
investment opportunities to the NASD financial planning broker dealer community,
we maintain an indirect 1% general partner interest in the retail partnerships
that we sponsor. The retail partnerships 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. We also assign a portion of this general
partner interest in these retail partnerships to management
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as long term, contingent compensation. In so doing, we believe that we 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.
MANAGEMENT OF PROPERTIES. AmREIT internally manages each of its
properties. Such management includes providing leasing services in connection
with identifying and qualifying prospective tenants, assisting in the
negotiation of the leases, providing statements as to the income and expense
applicable to each property, receiving and depositing monthly lease payments,
periodic verification of tenant payment of real estate taxes and insurance
coverage, and periodic inspection of properties and tenants' sales records where
applicable. AmREIT pays no property management fees or advisory fees. The
tenants will be responsible, at their expense, for day-to-day oversight and
maintenance of the properties.
AmREIT acquires marketable title to each of its properties, subject only
to such liens and encumbrances as are acceptable to management. Evidence of
title includes a policy of title insurance, an opinion of counsel or such other
evidence as is customary in the locality in which the property is situated.
DEVELOPMENT OF PROPERTIES. AmREIT intends to continue to increase its own
development of properties. Under AmREIT's investment policies, not more than 10%
of AmREIT's total assets may be invested in unimproved real property and AmREIT
does not intend to exceed such percentage. Depending upon the circumstances,
improvements will be developed and/or constructed either through joint ventures
with third party development companies from whom AmREIT purchases the
properties, by the tenants to whom such properties are leased, or by development
companies other than the sellers of the properties. AmREIT finances the
construction or completion of improvements on particular properties through
borrowing under its current credit facilities, which it intends to increase
should the merger be consummated.
To the extent AmREIT acquires property on which improvements are to be
constructed or completed, AmREIT is subject to risk in connection with the
builder's ability to control construction costs or to build in conformity with
plans, specifications and timetables and to make the property available to the
lessee within the time projected. Performance may be affected or delayed by
conditions beyond the builder's control such as building restrictions,
clearances and environmental impact studies imposed or caused by governmental
bodies, labor strikes, adverse weather, unavailability of materials or of
skilled labor, and by the financial insolvency of the builder or any
subcontractors prior to completion of construction. Such factors can result in
increased costs of a project, corresponding depletion of AmREIT's offering
proceeds, working capital reserves and/or cash from operations and could
possibly result in the loss of permanent mortgage loan commitments relied upon
as a primary source for repayment of construction loans.
AmREIT may use one or more of the following techniques to reduce the risk
of any non-performance by the builder and to assure compliance with approved
plans and specifications:
- a labor and material bond, a completion bond or a performance bond,
or more than one of the foregoing, may be required;
- if, in management's opinion, the financial position of the builder
so requires, a personal guaranty or pledge of other assets may be
accepted in lieu of, or required in addition to, a bond;
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- in some cases, the builder of the property will be required to
leaseback the property from AmREIT until construction is completed
with lease payments designed to return to AmREIT a portion of its
funds paid to the builder during construction and to require the
builder to bear the risk of construction;
- where possible, AmREIT will purchase property subject to the
construction loan and management will endeavor not to have AmREIT be
liable on such loan; and
- depending on the financial condition of the builder, the contract
may provide that portions of the purchase price payments to the
former owners will be withheld until a notice of completion of
construction is obtained.
PROPERTY SALE AND DISPOSITION STRATEGY. 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, we anticipate continuing this strategy of divesting its non-core
properties, which sales are estimated to generate between $10 and $15 million in
sales proceeds.
The determination of whether a particular property should be sold or
otherwise disposed of will be made after consideration of performance of the
property and market conditions and will depend, in part, on the economic
benefits of continued ownership. In deciding whether to sell properties,
management will consider factors such as potential capital appreciation, cash
flow and federal income tax consequences. Affiliates of AmREIT or of one or more
of its trust managers may be selected to perform various substantial real estate
brokerage functions in connection with the sale of properties by AmREIT. AmREIT
will not sell or lease any property to its trust managers or their affiliates.
Management will periodically review the assets comprising AmREIT's
portfolio. AmREIT has no current intention to dispose of any of its properties
or other properties acquired in the merger with its affiliated partnerships,
unless the sale of properties is necessary or appropriate because of liquidity
problems. AmREIT reserves the right to dispose of any of the properties or any
property that may be acquired in the future if the trust managers, based in part
upon management's periodic reviews, determines that the disposition of such
property is in the best interests of AmREIT.
Any net proceeds from the sale of any property may, at the election of our
board of trust managers, based upon their then current evaluation of the real
estate market conditions, either be distributed to the shareholders or be
reinvested in other properties. A reinvestment in other properties would be
feasible only if it could be accomplished so that the status of AmREIT as a REIT
would not be adversely affected. Any properties in which net proceeds from a
sale are reinvested will be subject to the same acquisition guidelines as
properties initially acquired by AmREIT. See "Business and Properties."
In connection with the sale of a property owned by AmREIT, purchase money
obligations secured by mortgages may be taken as partial payment. The terms of
payment to AmREIT will be affected by custom in the area in which the property
being sold is located and the then prevailing economic conditions. To the extent
AmREIT receives notes and property other than cash on sales, such proceeds will
not be included in net proceeds of sale until and to the extent the notes or
other property are actually collected, sold, refinanced or otherwise liquidated.
Therefore, dividends to shareholders of the proceeds of a sale may be delayed
until the notes or other property are collected at maturity, sold, refinanced or
otherwise converted to cash. AmREIT may receive payments (cash and other
property) in the year of sale in an amount less than the full sales price and
subsequent payments may be spread over
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several years. The entire balance of the principal may be a balloon payment due
at maturity. For federal income tax purposes, unless AmREIT elects otherwise it
will report the gain on such sale ratably as principal payments are received
under the installment method of accounting.
BORROWING POLICIES. AmREIT may elect to borrow funds in order to take
advantage of particular acquisition opportunities, cover the cost of improving a
property, cover costs not met by insurance or cover operating costs. The amount
of borrowings will be determined from time to time based on a number of factors,
including the use of the proceeds, the lender's restrictions, the likelihood
that the loan can be readily serviced from rents at the property where the
proceeds are applied and similar considerations. AmREIT will not borrow funds in
order to use the proceeds from the borrowing to pay dividends to AmREIT's
shareholders, unless such borrowings are necessary for REIT qualification
purposes.
AmREIT may not borrow from a trust manager, officer or any affiliate
thereof, unless a majority of trust managers, including a majority of
independent trust managers, not otherwise interested in such transaction approve
the transaction as being fair, competitive, and commercially reasonable and no
less favorable to AmREIT than loans between unaffiliated parties under the same
circumstances.
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CONFLICT OF INTEREST AND AFFILIATE TRANSACTION POLICY. Mr. Taylor, our
Chairman of the Board and Chief Executive Officer, is prohibited from engaging
in competitive real estate activities, including any real estate acquisitions,
development or management activities in connection therewith, during his
employment with AmREIT, except as may be approved by the independent trust
managers.
AmREIT will not enter into any transactions, including, without
limitation, loans, acquisitions or sales of property, joint ventures and
partnerships, in which AmREIT or a subsidiary is a party and in which any
officer, trust manager, principal security holder or affiliate has any direct or
indirect pecuniary interest, unless such transaction is approved by a majority
of the independent trust managers after full disclosure of such interests. In
determining whether to approve the transaction, the independent trust managers
will condition such approval on the transaction being fair and reasonable to
AmREIT and, to the extent deemed relevant by such independent trust managers, on
terms no less favorable to AmREIT than prevailing market terms and conditions
for comparable transactions. Independent trust managers will be considered to be
disinterested for this purpose provided they have no direct or indirect
pecuniary interest in the transaction.
SUMMARY OF AMREIT'S GROWTH STRATEGY. AmREIT has focused on strengthening
its management, its board of trust managers and, thereby, its intellectual
capital base over the past two years. Simultaneously, a stronger emphasis on
long term growth and value creation has been embraced. Along with this long-term
growth and value creation focus, AmREIT's management also recognizes the need to
provide short-term results for its shareholders. This balances the desire to
create long-term value and the short-term need to provide an acceptable and
steady current returns to its investors. This approach also recognizes the
reality of the variable nature of AmREIT's net income as profits from its lines
of business fluctuate as compared to a larger REIT that looks to its portfolio
income for its distributable cash flow. Although it is a reality that AmREIT's
net income is not as predictable as a larger portfolio REIT, AmREIT is able to
potentially generate very attractive long term yields because its smaller equity
base creates more upside for shareholders as its lines of business create
profits.
Today, AmREIT is a nimble, efficient and effective entrepreneurial real
estate company which has the ability to generate attractive non-portfolio yields
through its lines of business including investment sponsorship, merchant
development, brokerage, construction and property management.
AMREIT'S DECLARATION OF TRUST AND BYLAWS
The following summarizes the material terms of AmREIT's current
declaration of trust and bylaws, but does not set forth all the provisions of
AmREIT's declaration of trust or bylaws. For additional information about
AmREIT's declaration of trust and bylaws, you should read these documents, which
are included as exhibits to this registration statement, in their entirety.
AUTHORIZED STOCK
The charter provides that AmREIT is authorized to issue 103,000,000 equity
shares consisting of 50,000,000 class A common shares, $0.01 par value per
share, 3,000,000 class B common shares, $0.01 par value per share, 40,000,000
undesignated common shares, $0.01 par value per share, and 10,000,000 preferred
shares, par value $0.01 per share. The undesignated common shares and the
preferred shares may be issued from time to time, in one or more series, each of
which series shall have such voting powers, designations, preferences and
rights, and the qualifications, limitations or restrictions relating thereto, as
shall be authorized by the board of trust managers. See "Description of AmREIT's
Capital Shares."
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TRUST MANAGERS
The bylaws provide that the number of trust managers shall consist of not
less than three nor more than nine members, the exact number of which shall be
fixed by the board from time to time. The bylaws provide that, except as
otherwise provided by law or the charter, a quorum of the board for the
transaction of business shall consist of a majority of the entire board. The act
of a majority of the trust managers present at any meeting at which there is a
quorum shall be the act of the board. The charter and the bylaws do not provide
for a classified board or for cumulative voting in the election of trust
managers to the board. The bylaws provide that vacancies and any newly-created
trust manager portions resulting from an increase in the authorized number of
trust managers may be filled by a majority of the trust managers then in office,
though less than a quorum.
SHAREHOLDER MEETINGS AND SPECIAL VOTING REQUIREMENTS
The annual meetings of shareholders are held on such date as shall be
fixed by the board. The bylaws specify such date to be not fewer than 30 days
nor more than 61 days after distribution of AmREIT's annual report to
shareholders. Special meetings of shareholders may be called only upon the
request of a majority of the trust managers, a majority of the independent trust
managers, the president, or upon the written request of shareholders entitled to
cast at least 10 % of all of the votes entitled to be cast at such meeting. In
general, the presence in person or by proxy of shareholders entitled to cast a
majority of votes shall constitute a quorum at any shareholders' meeting. The
charter and the bylaws may in general be amended by a majority vote of the
shareholders. However, an amendment of any provision of the charter or bylaws
which requires a greater than majority vote must itself be approved by a vote of
the shareholders holding shares representing at least 66 2/3% of the votes
entitled to be cast thereon.
Other matters on which the shareholders are entitled to vote include:
- the election and removal of trust managers;
- a voluntary change in AmREIT's status as a REIT; and/or
- the dissolution of AmREIT.
AMENDMENT OF THE CHARTER AND BYLAWS
A majority of the trust managers may in their discretion, from time to
time, amend, without a shareholder vote, the bylaws. The shareholders may amend
the bylaws by a majority vote.
TRANSACTIONS WITH INTERESTED OFFICERS OR TRUST MANAGERS
The bylaws provide that contracts or transactions between AmREIT and a
trust manager or officer of AmREIT or a corporation or entity in which such
officer or trust manager is also an officer or trust manager or has a financial
interest, are not void or voidable solely for such reason or solely because the
officer or trust manager is present at or participates in any meeting of the
board which authorizes the transaction or contract, or solely because such
officer's or trust manager's vote is counted for such purpose, if the bylaw
restrictions regarding such transactions are satisfied (see discussion under
stated investment policies above) and:
- the material facts as to his relationship or interest are disclosed
or are known to the board or a committee and the board or a
committee in good faith authorizes such contract or transaction;
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- the material facts as to his relationship or interest are disclosed
or are known to the shareholders entitled to vote thereon and the
shareholders in good faith specifically approve such contract or
transaction; or
- the contract or transaction is fair to AmREIT at the time it is
authorized, approved or ratified by the board, a committee or the
shareholders.
In addition, the bylaws provide that any transactions with interested
trust managers or officers or their affiliates shall be made on commercially
reasonable terms substantially equivalent to terms available from third parties
in an arm's-length transaction in the competitive marketplace.
LIMITATIONS ON HOLDINGS AND TRANSFER
For AmREIT to continue to qualify as a REIT under the Code, not more than
fifty percent (50%) of its outstanding shares may be owned by five or fewer
individuals during the last half of each year and outstanding shares must be
owned by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year except with
respect to the first taxable year for which an election to be treated as a REIT
is made. The charter restricts the accumulation or transfer of common shares if
any accumulation or transfer could result in any person beneficially owning, in
accordance with the Code, in excess of 9.0% of the then outstanding common
shares, or could result in AmREIT being disqualified as a REIT under the Code.
Such restrictions authorize the board to refuse to give effect to such transfer
on AmREIT's books as to common shares accumulated in excess of the 9.0%
ownership limit. Although the intent of these restrictions is to preclude
transfers which would violate the ownership limit or protect the AmREIT's status
as a REIT under the Code, there can be no assurance that such restrictions will
achieve their intent. See "Description of AmREIT's Capital Shares -- Ownership
Limits and Restrictions on Transfer."
A transferee who acquires shares in a restricted transfer is required to
indemnify, defend, and hold AmREIT and its other shareholders harmless from and
against all damages, losses, costs, and expenses, including, without limitation,
reasonable attorneys' fees, incurred or suffered by AmREIT or such shareholders
by virtue of AmREIT's loss of its qualification as a REIT if such loss is a
result of the transferee's acquisition. See "Federal Income Tax Consequences."
LIABILITY FOR MONETARY DAMAGES
The declaration of trust provides that no trust manager will be personally
liable to AmREIT or its shareholders for monetary damages for breach of
fiduciary duty as a trust manager, other than liability for breach of the duty
of loyalty to AmREIT or its shareholders, acts or omissions not in good faith,
intentional misconduct, a knowing violation of law, certain unlawful dividends,
share repurchases or redemptions or any transaction from which the trust manager
derived an improper personal benefit. Any repeal or modification of such
provision by the shareholders of AmREIT will not adversely affect any right or
protection of a trust manager existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such repeal or
modification.
INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The declaration of trust provides for the indemnification of present and
former trust managers and officers of AmREIT and persons serving as trust
managers, officers, employees or agents of another corporation or entity at the
request of AmREIT to the fullest extent permitted by Texas law. Indemnified
parties are specifically indemnified in the charter and the bylaws for expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by an indemnified party
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(1) in connection with a threatened, pending or completed action, suit or
proceeding (whether civil, criminal, administrative or investigative) by reason
of the fact that he is or was a trust manager or officer of AmREIT or is or was
serving as a trust manager, director, officer, employee or agent of another
corporation or entity at the request of AmREIT, or (2) in connection with the
defense or settlement of a threatened, pending or completed action or suit by or
in the right of AmREIT, provided that such indemnification is permitted only
with judicial approval if the indemnified party is adjudged to be liable to
AmREIT. Such indemnified party must have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the subject
entity and, with respect to any criminal action or proceeding, must have had no
reasonable cause to believe his conduct was unlawful. Any indemnification under
the indemnification provisions must be authorized based on a determination that
the indemnification is proper if the applicable standard of conduct has been met
by the indemnified party, provided that no such authorization is required, and
indemnification is mandatory, where a trust manager or officer of AmREIT is
successful in the defense of such action, suit or proceeding or any claim or
matter therein. Otherwise, such determination will be made by a majority vote of
a quorum of the board consisting of trust managers not a party to the suit,
action or proceeding, by a written opinion of independent legal counsel or by
the shareholders. In the event that a determination is made that a trust manager
or officer is not entitled to indemnification under the indemnification
provisions, the indemnification provisions provide that the indemnified party
may seek a judicial determination of his right to indemnification. The
indemnification provisions further provide that the indemnified party is
entitled to indemnification for all expenses (including attorneys' fees)
incurred in any proceeding seeking to collect from AmREIT an indemnity claim
under the indemnification provisions if such indemnified party is successful.
Other than proceedings to enforce rights to indemnification, AmREIT is not
obligated to indemnify any person in connection with a proceeding initiated by
such person, unless authorized by the board.
AmREIT will pay expenses incurred by a trust manager or officer of AmREIT,
or a former trust manager or officer, in advance of the final disposition of an
action, suit or proceeding, if he undertakes to repay amounts advanced if it is
ultimately determined that he is not entitled to be indemnified by AmREIT.
The indemnification provisions and provisions for advancing expenses in
the charter will be expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the bylaws. The
indemnification provisions and provisions for advancing expenses in the bylaws
and the charter will be expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to any agreement, vote of
the shareholders or disinterested trust managers or pursuant to judicial
direction. AmREIT will be authorized to purchase insurance on behalf of an
indemnified party for liabilities incurred, whether or not AmREIT would have the
power or obligation to indemnify him pursuant to the charter, the bylaws or
Texas law.
In addition, AmREIT will enter into indemnification agreements with its
trust managers and certain of its executive officers pursuant to which such
persons are indemnified for costs and expenses actually and reasonably incurred
by such persons in connection with a threatened, pending or completed claim
arising out of service as a trust manager, officer, employee, trustee and/or
agent of AmREIT or another entity at the request of AmREIT.
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CERTAIN ANTI-TAKEOVER PROVISIONS OF THE
DECLARATION OF TRUST, BYLAWS AND TEXAS LAW
AmREIT's declaration of trust and bylaws contain certain provisions that
may inhibit or impede acquisition or attempted acquisition of control of AmREIT
by means of a tender offer, a proxy contest or otherwise. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
AmREIT to negotiate first with the trust managers. AmREIT believes that these
provisions increase the likelihood that proposals initially will be on more
attractive terms than would be the case in their absence and increase the
likelihood of negotiations, which might outweigh the potential disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals might result in improvement of terms. The description set forth below
is only a summary of the terms of the declaration of trust and bylaws. See
"Description of AmREIT's Capital Shares -- Ownership Limits and Restrictions on
Transfer."
NUMBER OF TRUST MANAGERS; REMOVAL; FILLING VACANCIES
Subject to any rights of holders of preferred shares to elect additional
trust managers under specified circumstances ("Preferred Holders' Rights"), the
declaration of trust provides that the number of trust managers will be fixed
by, or in the manner provided in, the bylaws, but must not be more than nine nor
less than three. See "Preferred Shares" below. In addition, the bylaws provide
that, subject to any Preferred Holders' Rights, the number of trust managers
will be fixed by the trust managers, but must not be more than nine nor less
than three. In addition, the bylaws provide that, subject to any Preferred
Holders' Rights, and unless the trust managers otherwise determine, any
vacancies (other than vacancies created by an increase in the total number of
trust managers) will be filled by the affirmative vote of a majority of the
remaining trust managers, although less than a quorum, and any vacancies created
by an increase in the total number of trust managers may be filled by a majority
of the entire trust managers. Accordingly, the trust managers could temporarily
prevent any shareholder from enlarging the trust managers and then filling the
new trust manager position with such shareholder's own nominees.
The declaration of trust and the bylaws provide that, subject to any
Preferred Holders' Rights, trust managers may be removed only for cause upon the
affirmative vote of holders of at least 80% of the entire voting power of all
the then-outstanding shares entitled to vote generally in the election of trust
managers, voting together as a single class.
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RELEVANT FACTORS TO BE CONSIDERED BY THE BOARD OF TRUST MANAGERS
The declaration of trust provides that, in determining what is in the best
interest of AmREIT in evaluating a "business combination," "change in control"
or other transaction, a trust manager of AmREIT shall consider all of the
relevant factors. These factors may include (1) the immediate and long-term
effects of the transaction on AmREIT shareholders, including shareholders, if
any, who do not participate in the transaction; (2) the social and economic
effects of the transaction on AmREIT's employees, suppliers, creditors and
customers and others dealing with AmREIT and on the communities in which AmREIT
operates and is located; (3) whether the transaction is acceptable, based on the
historical and current operating results and financial condition of AmREIT; (4)
whether a more favorable price would be obtained for AmREIT's stock or other
securities in the future; (5) the reputation and business practices of the other
party or parties to the proposed transaction, including its or their management
and affiliates, as they would affect employees of AmREIT; (6) the future value
of AmREIT's securities; (7) any legal or regulatory issues raised by the
transaction; and (8) the business and financial condition and earnings prospects
of the other party or parties to the proposed transaction including, without
limitation, debt service and other existing financial obligations, financial
obligations to be incurred in connection with the transaction, and other
foreseeable financial obligations of such other party or parties. Pursuant to
this provision, the trust managers may consider subjective factors affecting a
proposal, including certain nonfinancial matters, and, on the basis of these
considerations, may oppose a business combination or other transaction which,
evaluated only in terms of its financial merits, might be attractive to some, or
a majority, of AmREIT's shareholders.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The bylaws provide for an advance notice procedure for shareholders to
make nominations of candidates for trust manager or bring other business before
an annual meeting of shareholders of AmREIT (the "Shareholder Notice
Procedure").
Pursuant to the Shareholder Notice Procedure (i) only persons who are
nominated by, or at the direction of, the trust managers, or by a shareholder
who has given timely written notice containing specified information to the
Secretary of AmREIT prior to the meeting at which trust managers are to be
elected, will be eligible for election as trust managers of AmREIT and (ii) at
an annual meeting, only such business may be conducted as has been brought
before the meeting by, or at the direction of, the Chairman or the trust
managers or by a shareholder who has given timely written notice to the
Secretary of AmREIT of such shareholder's intention to bring such business
before such meeting. In general, for notice of shareholder nominations or
proposed business to be conducted at an annual meeting to be timely, such notice
must be received by AmREIT not less than 70 days nor more than 90 days prior to
the first anniversary of the previous year's annual meeting.
The purpose of requiring shareholders to give AmREIT advance notice of
nominations and other business is to afford the trust managers a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business and, to the extent deemed necessary
or desirable by the trust managers, to inform shareholders and make
recommendations about such nominees or business, as well as to ensure an orderly
procedure for conducting meetings of shareholders.
Although the bylaws do not give the trust managers power to block
shareholder nominations for the election of trust managers or proposal for
action, the Shareholder Notice Procedure may have the effect of discouraging a
shareholder from proposing nominees or business, precluding a contest for the
election of trust managers or the consideration of shareholder proposals if
procedural requirements are not met, and deterring third parties from soliciting
proxies for a non-management proposal or slate of trust managers, without regard
to the merits of such proposal or slate.
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PREFERRED SHARES
The declaration of trust authorizes the trust managers to establish one or
more series of preferred shares and to determine, with respect to any series of
preferred shares, the preferences, rights and other terms of such series,
subject to the prior approval rights of the class B common shareholders. AmREIT
believes that the ability of the trust managers to issue one or more series of
preferred shares will provide AmREIT with increased flexibility in structuring
possible future financings and acquisitions, and in meeting other needs. The
authorized preferred shares are available for issuance without further action by
AmREIT's shareholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which AmREIT's
securities may be listed or traded at the time of issuance or proposed issuance.
Although the trust managers have no present intention to do so, they could, in
the future, issue a series of preferred shares which, due to its terms, could
impede a merger, tender offer or other transaction that some, or a majority, of
AmREIT's shareholders might believe to be in their best interests or in which
shareholders might receive a premium over then-prevailing market prices for
their common shares.
AMENDMENT OF DECLARATION OF TRUST
The declaration of trust provides that it may be amended only by the
affirmative vote of the holders of not less than two-thirds of the votes
entitled to be cast, except that the provisions of the declaration of trust
relating to "business combinations" or "control shares" (as described below
under "-- Business Combinations" and "-- Control Share Acquisitions") may be
amended only with the affirmative vote of 80% of the votes entitled to be cast,
voting together as a single class.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The declaration of trust authorizes the trust managers, subject to any
rights of holders of any series of preferred shares, to create and issue rights
entitling the holders thereof to purchase from AmREIT common shares or other
securities or property. The times at which and terms upon which such rights are
to be issued are within the discretion of the trust managers. This provision is
intended to confirm the authority of the trust managers to issue share purchase
rights which could have terms that would impede a merger, tender offer or other
takeover attempt, or other rights to purchase securities of AmREIT or any other
entity.
BUSINESS COMBINATIONS
The declaration of trust establishes special requirements with respect to
"business combinations" (including a merger, consolidation, share exchange, or,
in certain circumstances, an asset transfer or issuance of reclassification of
equity securities) between AmREIT and any person who beneficially owns, directly
or indirectly, 10% or more of the voting power of AmREIT's shares (an
"Interested Shareholder"), subject to certain exemptions. In general, the
declaration of trust provides that an Interested Shareholder or any affiliate
thereof may not engage in a "business combination" with AmREIT for a period of
five years following the date he becomes an Interested Shareholder. Thereafter,
pursuant to the declaration of trust, such transactions must be (1) approved by
the trust managers of AmREIT and (2) approved by the affirmative vote of at
least 80% of the votes entitled to be cast by holders of voting shares other
than voting shares held by the Interested Shareholder with whom the business
combination is to be effected, unless, among other things, the holders of equity
shares receive a minimum price (as defined in our declaration of trust) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for his shares. These provisions
of the declaration of trust do not apply, however, to business combinations that
are approved or exempted by the trust
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managers of AmREIT prior to the time that the Interested Shareholder becomes an
Interested Shareholder.
CONTROL SHARE ACQUISITIONS
The declaration of trust provides that "control shares" of AmREIT acquired
in a control share acquisition have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast by the holders
of equity shares, excluding shares as to which the acquiror, officers of AmREIT
and employees of AmREIT who are also trust managers have the right to vote or
direct the vote. "Control shares" are Equity Shares which, if aggregated with
all other equity shares previously acquired which the person is entitled to
vote, would entitle the acquiror to vote (1) 20% or more but less than
one-third; (2) one-third or more but less than a majority; or (3) a majority of
the outstanding voting shares of AmREIT. Control shares do not include equity
shares that the acquiring person is entitled to vote on the basis of prior
shareholder approval. A "control share acquisition" is defined as the
acquisition of control shares, subject to certain exemptions enumerated in the
declaration of trust.
The declaration of trust provides that a person who has made or proposed
to make a control share acquisition and who has obtained a definitive financing
agreement with a responsible financial institution providing for any amount of
financing not to be provided by the acquiring person may compel the trust
managers of AmREIT to call a special meeting of shareholders to be held within
50 days of demand to consider the voting rights of the Equity Shares. If no
request for a meeting is made, the declaration of trust permits AmREIT itself to
present the question at any shareholders' meeting.
Pursuant to the declaration of trust, if voting rights are not approved at
a shareholders' meeting or if the acquiring person does not deliver an acquiring
person statement as required by the declaration of trust, then, subject to
certain conditions and limitations set forth in the declaration of trust, AmREIT
will have the right to redeem any or all of the control shares, except those for
which voting rights have previously been approved, for fair value determined,
without regard to the absence of voting rights of the control shares, as of the
date of the last control share acquisition or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. Under
the declaration of trust, if voting rights for control shares are approved at a
shareholders' meeting and, as a result, the acquiror would be entitled to vote a
majority of the Equity Shares entitled to vote, all other shareholders will have
the rights of dissenting shareholders under the Texas Real Estate Investment
Trust Act (the "TRA"). The declaration of trust provides that the fair value of
the Equity Shares for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition,
and that certain limitations and restrictions of the TRA otherwise applicable to
the exercise of dissenters' rights do not apply.
These provisions of the declaration of trust do not apply to Equity Shares
acquired in a merger, consolidation or share exchange if AmREIT is a party to
the transaction, or if the acquisition is approved or excepted by the
declaration of trust or bylaws of AmREIT prior to a control share acquisition.
OWNERSHIP LIMIT
The limitation on ownership of shares of common shares set forth in
AmREIT's declaration of trust, as well as the provisions of the TRA, could have
the effect of discouraging offers to acquire AmREIT and of increasing the
difficulty of consummating any such offer. See "Description of AmREIT's Capital
Shares -- Ownership Limits and Restrictions on Transfer."
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DESCRIPTION OF AMREIT'S CAPITAL SHARES
GENERAL
AmREIT's authorized equity structure consists of 93,000,000 common shares,
$0.01 par value per share, and 10,000,000 preferred shares, par value $0.01 per
share. As of May 31, 2004, AmREIT had outstanding approximately 3.3 million
class A common shares, approximately 2.3 million class B common shares, and
approximately 4.0 million class C common shares and no preferred shares. AmREIT
is authorized to issue 93,000,000 common shares consisting of 50,000,000 class A
common shares, 3,000,000 class B common shares and 40,000,000 undesignated
common shares.
CLASS A COMMON SHARES
Subject to such preferential rights as may be granted by the board of
trust managers in connection with the future issuance of preferred shares and
the preferential rights of the holders of the class B and class C common shares,
holders of class A common shares are exclusively entitled to one vote for each
class A common shares on all matters to be voted on by shareholders and are
entitled to receive ratably such dividends as may be declared on the class A
common shares by the board of trust managers in its discretion from legally
available funds. In the event of the liquidation, dissolution or winding up of
AmREIT, holders of class A common shares are entitled to share ratably with
holders of class B common shares, class C common shares and class D common
shares that portion of aggregate assets available for distribution as the number
of outstanding class A common shares held by such holder bears to the total
number of (1) class A common shares then outstanding, (2) the class B common
shares then outstanding, (3) the class C common shares then outstanding, (4) the
class D common shares then outstanding and (5) any other series of common shares
then outstanding that rank on a parity with the class A common shares as to the
distribution of assets upon liquidation. Holders of class A common shares have
no subscription, redemption, conversion or preemptive rights. Matters submitted
for shareholder approval generally require a majority vote of the shares present
and voting thereon.
The transfer agent and registrar for the class A common shares is Wells
Fargo Shareowner Services, 161 North Concord Exchange, South St. Paul, MN 55075.
CLASS B COMMON SHARES
DIVIDENDS. Subject to the preferential rights of any series of our
preferred shares (of which there is currently none issued), holders of class B
common shares will be entitled to receive, when and as declared by the AmREIT
board of trust managers, out of funds legally available for the payment of
dividends, cumulative cash dividends in an amount per class B common share equal
to $0.74 per annum. Dividends with respect to the class B common shares will be
cumulative from the date of original issuance and will be payable quarterly in
arrears on March 31, June 30, September 30 and December 31 (each, a Dividend
Payment Date), beginning with a partial dividend on September 30, 2002, with
respect to the period from the date of original issuance to the initial Dividend
Payment Date. Any dividend payable on the class B common shares for any partial
dividend period after the initial dividend period will be computed on the basis
of a 360-day year consisting of twelve 30-day months. Dividends payable on the
class B common shares for each full dividend period will be computed by dividing
the annual dividend rate by four. Dividends will be payable to holders of record
as they appear in the share records of AmREIT at the close of business on the
applicable record date, which will be the first day of the calendar month in
which the applicable Dividend Payment Date falls or such other date designated
by the AmREIT board for the payment of dividends that is no more than thirty
(30) nor less than ten (10) days prior to the Dividend Payment Date (each, a
Dividend Record Date).
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No dividends on class B common shares will be declared by the AmREIT board
or paid or set apart for payment at such time as, and to the extent that, the
terms and provisions of any AmREIT agreement, including any agreement relating
to its indebtedness, or any provisions of its charter relating to any series of
preferred stock, prohibit such declaration, payment or setting apart for payment
or provide that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such declaration or
payment will be restricted or prohibited by law. Notwithstanding the foregoing,
dividends on the class B common shares will accrue whether or not AmREIT has
earnings, whether or not there are funds legally available for the payment of
such dividends and whether or not such dividends are declared. Holders of the
class B common shares will not be entitled to any dividends in excess of full
cumulative dividends as described above.
If any class B common shares are outstanding, no full dividends will be
declared or paid or set apart for payment on the class A common shares for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the class B common shares for all past dividend
periods and the then current dividend period. No interest, or sum of money in
lieu of interest, will be payable in respect of any dividend payment or payments
on class B common shares which may be in arrears. Any dividend payment made on
class B common shares will first be credited against the earliest accrued but
unpaid dividend due with respect to class B common shares which remains payable.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of AmREIT, subject to the prior rights of any series of preferred
stock, the holders of class B common shares will share pro rata with the holders
of the class A common shares, class C common shares, class D common shares and
any other series of common shares then outstanding that rank on a parity with
the class B common shares as to the distribution of assets on liquidation, the
assets of AmREIT remaining following the payment of all liquidating
distributions payable to holders of capital shares of AmREIT with liquidation
rights senior to those of the common shares.
REDEMPTION. The class B common shares will not be redeemable prior to July
16, 2005, except under certain limited circumstances to preserve the AmREIT's
status as a REIT. On and after July 16, 2005, AmREIT, at its option (to the
extent AmREIT has funds legally available therefore) upon not less than 30 nor
more than 60 days' written notice, may redeem class B common shares, in whole or
in part, at any time or from time to time, for, at the option of the holder
thereof, either in cash at the redemption price per share of $10.18, plus all
accrued and unpaid dividends, if any, thereon (whether or not earned or
declared) to the date fixed for redemption, or for one class A common share.
Notwithstanding the foregoing, unless full cumulative dividends on all
class B common shares have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period, no class B
common shares will be redeemed unless all outstanding class B common shares are
simultaneously redeemed. The foregoing, however, will not prevent the purchase
or acquisition of the class B common shares pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding class B common
shares. Unless full cumulative dividends on all outstanding class B common
shares have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, AmREIT will not purchase
or otherwise acquire directly or indirectly through a subsidiary or otherwise,
any class B common shares.
If fewer than all of the outstanding class B common shares are to be
redeemed, the number of shares to be redeemed will be determined by AmREIT and
those shares may be redeemed pro rata from the holders of record of those shares
in proportion to the number of those shares held by the holders (as
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nearly as may be practicable without creating fractional class B common shares)
or any other equitable method determined by AmREIT.
Notice of redemption will be given by publication in a newspaper of
general circulation in the City of New York, such publication to be made once a
week for two successive weeks commencing not less than 30 nor more than 60 days'
prior to the redemption date. A similar notice will be mailed by AmREIT, postage
prepaid, not less than 30 nor more than 60 days' prior to the redemption date,
addressed to the respective holders of record of class B common shares to be
redeemed at their respective addresses as they appear on the stock transfer
records of AmREIT. No failure to give notice or any defect therein or in the
mailing thereof will affect the validity of the proceeding for the redemption of
any class B common shares except as to the holder to whom notice was defective
or not given. Each notice will state: (1) the redemption date; (2) the
redemption price; (3) the number of class B common shares to be redeemed; (4)
the place or places where the class B common shares are to be surrendered for
payment of the redemption price; (5) that dividends on the shares to be redeemed
will cease to accrue on the redemption date; and (6) that any conversion rights
will terminate at the close of business on the third business day immediately
preceding the redemption date. If fewer than all the class B common shares held
by any holder are to be redeemed, the notice mailed to that holder will also
specify the number of class B common shares to be redeemed from that holder. If
notice of redemption of any class B common shares has been properly given and if
funds necessary for redemption have been irrevocably set aside by AmREIT in
trust for the benefit of the holders of any of the class B common shares so
called for redemption, then from and after the redemption date dividends will
cease to accrue on those class B common shares, those shares will no longer be
deemed to be outstanding and all rights of the holders of those shares will
terminate except for the right to receive the applicable redemption price and
other amounts payable in respect of such shares.
The holders of class B common shares at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to class B common shares on the corresponding Dividend Payment Date
notwithstanding the redemption thereof between that Dividend Record Date and the
corresponding Dividend Payment Date or AmREIT's default in the payment of the
dividend due. Except as provided above, AmREIT will make no payment or allowance
for unpaid dividends, whether or not in arrears, on class B common shares called
for redemption.
VOTING RIGHTS. Holders of the class B common shares have the right to vote
on all matters presented to shareholders as a single class with all other
holders of common shares. In any matter in which the class B common shares may
vote, including any action by written consent, each class B common share will be
entitled to one vote.
AmREIT shall not issue any preferred shares or other class of common
shares with dividend preferences senior to the dividends payable on the class B
common shares without the approval of 66 2/3% of the class B common shares then
outstanding.
Whenever dividends on any class B common shares have been in arrears for
six or more consecutive quarterly periods, the holders of those class B common
shares will be entitled to vote for the election of two additional trust
managers of AmREIT at a special meeting called by the holders of record of at
least 10% of the class B common shares (unless the request is received less than
90 days before the date fixed for the next annual or special meeting of the
stockholders), or at the next annual meeting of shareholders, and at each
subsequent annual meeting until all dividends accumulated on the class B common
shares for the past dividend periods and the then current dividend period have
been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment. In this event, the entire AmREIT board of trust managers will
be increased by two trust managers. Each of these two trust
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managers will be elected to serve until the earlier of (1) the election and
qualification of that trust manager's successor or (2) payment of the dividend
arrearage for the class B common shares.
In addition, AmREIT may not sell all or substantially all of its assets,
dissolve, or amend its declaration of trust in any manner that materially and
adversely affects the voting powers, rights or preferences of the holders of
class B common shares without the approval of 66 2/3% of the class B common
shares then outstanding; provided, however, the issuance of any security with
dividend or liquidation preferences that rank equally with or are junior to the
dividend or liquidation preferences of the class B common shareholders shall not
be considered to materially or adversely affect the voting powers, rights or
preferences of the class B common shareholders.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which a vote would otherwise be required is
effected, all outstanding class B common shares have been redeemed or called for
redemption upon proper notice and sufficient funds have been deposited in trust
to effect such redemption.
CONVERSION. Subject to the exceptions described under the caption
"Restrictions on Transfer" below, holders of the class B common shares will have
the right, at any time and from time to time, to convert all or any of the class
B common shares into class A common shares on a one for one basis, subject to
adjustment upon the occurrence of the events described below (the Conversion
Price).
Class B common shares will be deemed to have been converted immediately
prior to the close of business on the date the shares are surrendered for
conversion and notice of election to convert the same is received by AmREIT.
Upon conversion, no adjustment or prepayment will be made for dividends, but if
any holder surrenders class B common shares for conversion after the close of
business on a Dividend Record Date and prior to the opening of business on the
related Dividend Payment Date, then, notwithstanding the conversion, the
dividend payable on that Dividend Payment Date will be paid on that Dividend
Payment Date to the registered holder of those shares on that Dividend Record
Date. Class B common shares surrendered for conversion during the period from
the close of business on a Dividend Record Date to the Dividend Payment Date
must also pay the amount of the dividend which is payable. No fractional class A
common shares will be issued upon conversion and, if the conversion results in a
fractional interest, an amount will be paid in cash equal to the value of the
fractional interest based on the market price of the common shares on the last
trading day prior to the date of conversion.
The number of class A common shares or other assets issuable upon
conversion and the Conversion Price are subject to adjustment upon the
occurrence of the following events:
(1) the issuance of class A common shares as a dividend or distribution
on class A common shares;
(2) the subdivision, combination or reclassification of the outstanding
class A common shares;
(3) the issuance to all holders of class A common shares of rights or
warrants to subscribe for or purchase class A common shares (or
securities convertible into class A common shares) at a price per
share less than the then current market price per share;
(4) the distribution to all holders of class A common shares of
evidences of indebtedness or assets (including securities, but
excluding Ordinary Cash Distributions, as defined below, and those
dividends, distributions, rights or warrants referred to above); and
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(5) the distribution to all holders of class A common shares of rights
or warrants to subscribe for securities (other than those referred
to in clause (3) above).
In the event of a distribution of evidence of indebtedness or other assets
(as described in clause (4)) or a dividend to all holders of class A common
shares of rights to subscribe for additional AmREIT's capital stock (other than
those referred to in clause (3) above), AmREIT may, instead of making an
adjustment of the Conversion Price, make proper provision so that each holder
who converts shares will be entitled to receive upon conversion, in addition to
class A common shares, an appropriate number of those rights, warrants,
evidences of indebtedness or other assets. No adjustment will be made for
"Ordinary Cash Distributions," which are distributions to holders of class A
common shares in an amount not exceeding AmREIT's accumulated funds from
operations since its formation, after deducting dividends or other distributions
(1) paid in respect of all classes of capital shares of AmREIT or (2) accrued in
respect of the class B common shares, and any preferred shares. In addition, no
adjustment of the Conversion Price will be made until cumulative adjustments
amount to one percent or more of the Conversion Price as last adjusted. Any
adjustments not so required to be made will be carried forward and taken into
account in subsequent adjustments.
Whenever the number of class A common shares or other assets issuable upon
conversion and the Conversion Price are adjusted as herein provided, AmREIT (1)
will promptly make available at the office of the transfer agent a statement
describing in reasonable detail such adjustment, and (2) will cause to be mailed
by first class mail, postage prepaid, as soon as practicable, to each holder of
record of class B common shares, a notice stating that adjustments have been
made and stating the adjusted conversion price.
In the event of any capital reorganization or reclassification of the
capital shares of AmREIT, or consolidation or merger of AmREIT with another
corporation, or the sale, transfer or lease of all or substantially all of its
assets to another corporation, is effected in a way that holders of class A
common shares will be entitled to receive stock, securities or other assets with
respect to or in exchange for class A common shares, then, as a condition of
that reorganization, reclassification, consolidation, merger, sale, transfer or
lease, the holder of each class B common share will have the right immediately
to convert that share into the kind and amount of stock, securities or other
assets which the holders of those shares would have owned or been entitled to
receive immediately after the transaction if those holders had converted such
shares immediately before the effective date of the transaction, subject to
further adjustment upon the occurrence of the events described above.
RESTRICTIONS ON TRANSFER. The class B common shares are generally
transferable, subject to restrictions to enable AmREIT to maintain its REIT
status. See "--Ownership Limits and Restrictions on Transfer."
CLASS C COMMON SHARES
DIVIDENDS. Subject to the preferential rights of any series of our
preferred shares (of which there is currently none issued), holders of class C
common shares will be entitled to receive, when, as and if declared by the
AmREIT board of trust managers, out of funds legally available for the payment
of dividends, non-cumulative cash dividends in an amount per class C common
share equal to $0.70 per annum. Dividends payable on the class C common shares
for each full monthly dividend period will be computed by dividing the annual
dividend rate by twelve. Dividends with respect to the class C common shares
will be non-cumulative from the date of original issuance and will be payable
monthly when, as and if the AmREIT board declares a monthly dividend on the
class C common shares for that month in its sole discretion (each, a Dividend
Payment Date). Any dividend payable on the class C common shares for any partial
dividend period after the initial dividend period will be computed on the basis
of a 360-day
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year consisting of twelve 30-day months. Dividends will be payable to holders of
record as they appear in the share records of AmREIT at the close of business on
the applicable record date, which will be the first day of the calendar month in
which the applicable Dividend Payment Date falls or such other date designated
by the AmREIT board for the payment of dividends that is no more than thirty
(30) nor less than ten (10) days prior to the Dividend Payment Date (each, a
Dividend Record Date).
No dividends on class C common shares will be declared by the AmREIT board
or paid or set apart for payment at such time as, and to the extent that, the
terms and provisions of any AmREIT agreement, including any agreement relating
to its indebtedness, or any provisions of its charter relating to any series of
preferred stock, prohibit such declaration, payment or setting apart for payment
or provide that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such declaration or
payment will be restricted or prohibited by law.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of AmREIT, subject to the prior rights of any series of preferred
stock, the holders of class C common shares will share pro rata with the holders
of the class A common shares, class B common shares, class D common shares and
any other series of common shares then outstanding that rank on a parity with
the class C common shares as to the distribution of assets on liquidation, the
assets of AmREIT remaining following the payment of all liquidating
distributions payable to holders of capital shares of AmREIT with liquidation
rights senior to those of the common shares.
CALL PROVISION. The class C common shares will not be redeemable prior to
the third anniversary of the date of issuance of such shares, except under
certain limited circumstances to preserve the AmREIT's status as a REIT. On and
after such third anniversary date, AmREIT, at its option (to the extent AmREIT
has funds legally available therefore) upon not less than 30 nor more than 60
days' written notice, may redeem class C common shares, in whole or in part, at
any time or from time to time, for, at the option of the holder thereof, either
(i) cash at the redemption price per share of $11.00 or (ii) one class A common
share per each Class C common share redeemed by such holder.
Notwithstanding the foregoing, unless the full then current dividends on
all class C common shares have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for payment
for the then current dividend period (without regard to whether dividends were
paid or not paid in any prior monthly dividend period), no class C common shares
will be redeemed unless all outstanding class C common shares are simultaneously
redeemed. The foregoing, however, will not prevent the purchase or acquisition
of the class C common shares pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding class C common shares. Unless full
current monthly dividends on all outstanding class C common shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for the then current dividend period
(without regard to whether dividends were paid or not paid in any prior monthly
dividend period), AmREIT will not purchase or otherwise acquire directly or
indirectly through a subsidiary or otherwise, any class C common shares.
If fewer than all of the outstanding class C common shares are to be
redeemed, the number of shares to be redeemed will be determined by AmREIT and
those shares may be redeemed pro rata from the holders of record of those shares
in proportion to the number of those shares held by the holders (as nearly as
may be practicable without creating fractional class C common shares) or any
other equitable method determined by AmREIT.
Notice of redemption will be given by publication in a newspaper of
general circulation in the City of New York, such publication to be made once a
week for two successive weeks commencing not less than 30 nor more than 60 days'
prior to the redemption date. A similar notice will be mailed by
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AmREIT, postage prepaid, not less than 30 nor more than 60 days' prior to the
redemption date, addressed to the respective holders of record of class C common
shares to be redeemed at their respective addresses as they appear on the stock
transfer records of AmREIT. No failure to give notice or any defect therein or
in the mailing thereof will affect the validity of the proceeding for the
redemption of any class C common shares except as to the holder to whom notice
was defective or not given. Each notice will state: (1) the redemption date; (2)
the redemption price; (3) the number of class C common shares to be redeemed;
(4) the place or places where the class C common shares are to be surrendered
for payment of the redemption price; (5) that dividends on the shares to be
redeemed will cease to accrue on the redemption date; and (6) that any
conversion rights will terminate at the close of business on the third business
day immediately preceding the redemption date. If fewer than all the class C
common shares held by any holder are to be redeemed, the notice mailed to that
holder will also specify the number of class C common shares to be redeemed from
that holder. If notice of redemption of any class C common shares has been
properly given and if funds necessary for redemption have been irrevocably set
aside by AmREIT in trust for the benefit of the holders of any of the class C
common shares so called for redemption, then from and after the redemption date
dividends will cease to accrue on those class C common shares, those shares will
no longer be deemed to be outstanding and all rights of the holders of those
shares will terminate except for the right to receive the applicable redemption
price and other amounts payable in respect of such shares.
The holders of class C common shares at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to class C common shares on the corresponding Dividend Payment Date
notwithstanding the redemption thereof between that Dividend Record Date and the
corresponding Dividend Payment Date or AmREIT's default in the payment of the
dividend due. Except as provided above, AmREIT will make no payment or allowance
for unpaid dividends on class C common shares called for redemption.
LIMITED OPTIONAL REDEMPTION. Prior to the time at which the class C common
shares become eligible to be converted into class A common shares, any
shareholder who has held class C common shares for not less than one year may
present all or any portion equal to at least 25% of those shares to AmREIT for
redemption at any time, in accordance with the procedures outlined herein. At
that time, AmREIT may, at its sole option, redeem those shares presented for
redemption for cash to the extent it has sufficient funds available. There is no
assurance that there will be sufficient funds available for redemption and,
accordingly, a shareholder's shares may not be redeemed. If AmREIT elects to
redeem shares, the following conditions and limitations would apply. The full
amount of the proceeds from the sale of shares under our dividend reinvestment
plan (Reinvestment Proceeds) attributable to any calendar quarter will be used
to redeem shares presented for redemption during that quarter. In addition,
AmREIT may, at its discretion, use up to $100,000 per calendar quarter of the
proceeds of any public offering of its common shares for redemptions. Any amount
of offering proceeds which is available for redemptions, but which is unused,
may be carried over to the next succeeding calendar quarter for use in addition
to the amount of offering proceeds and Reinvestment Proceeds that would
otherwise be available for redemptions. At no time during a 12-month period,
however, may the number of shares redeemed by AmREIT exceed 5% of the number of
class C shares outstanding at the beginning of that 12-month period.
In the event there are insufficient funds to redeem all of the shares for
which redemption requests have been submitted, AmREIT plans to redeem the shares
in the order in which such redemption requests have been received. A shareholder
whose shares are not redeemed due to insufficient funds can ask that the request
to redeem the shares be honored at such time, if any, as there are sufficient
funds available for redemption. In that case, the. redemption request will be
retained and those shares will be redeemed before any subsequently received
redemption requests are honored. Alternatively, a shareholder whose
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shares are not redeemed may withdraw his or her redemption request. Shareholders
will not relinquish their shares until such time as AmREIT commits to redeeming
such shares.
A shareholder who wishes to have his or her shares redeemed must mail or
deliver a written request on a form provided by AmREIT and executed by the
shareholder, its trustee or authorized agent, to the redemption agent
(Redemption Agent), which currently is Wells Fargo Band Minnesota, N.A. The
Redemption Agent at all times will be registered as a broker-dealer with the SEC
and each applicable state securities commission. Within 30 days following the
Redemption Agent's receipt of the shareholder's request, the Redemption Agent
will forward to that shareholder the documents necessary to effect the
redemption, including any signature guarantee AmREIT or the Redemption Agent may
require. The Redemption Agent will effect the redemption for the calendar
quarter provided that it receives the properly completed redemption documents
relating to the shares to be redeemed from the shareholder at least one calendar
month prior to the last day of the current calendar quarter and has sufficient
funds available to redeem the shares. The effective date of any redemption will
be the last date during a quarter during which the Redemption Agent receives the
properly completed redemption documents. As a result, AmREIT anticipates that,
assuming sufficient funds are available for redemption, the effective date of
redemptions will be no later than thirty days after the quarterly determination
of the availability of funds for redemption.
Upon the Redemption Agent's receipt of notice for redemption of shares,
the redemption price for this limited optional redemption right will initially
be $10.00 per share. Our board of trust managers may change the redemption price
at any time and will announce publicly any price adjustment as part of its
regular communications with our stockholders, such adjustment being effective on
the 10th day after first public announcement of same. Any shares acquired
pursuant to a redemption will be retired and no longer available for issuance by
AmREIT.
A shareholder may present fewer than all of his or her shares to AmREIT
for redemption; provided, however, that (1) the minimum number of shares which
must be presented for redemption shall be at least 25% of his or her shares, and
(2) if the shareholder retains any shares, he or she must retain at least $2,500
worth of shares based on the current offering price ($1,000 worth of shares
based on the current offering price for an IRA, Keogh Plan or pension plan).
Our board of trust managers, in its sole discretion, may amend or suspend
the redemption plan at any time it determines that any amendment or suspension
is in the best interest of AmREIT. Our board of trust managers may suspend the
redemption of shares if (1) it determines, in its sole discretion, that the
redemption impairs the capital or the operations of AmREIT; (2) it determines,
in its sole discretion, that an emergency makes such redemption not reasonably
practical; (3) any governmental or regulatory agency with jurisdiction over
AmREIT so demands for the protection of the shareholders; (4) it determines, in
its sole discretion, that the redemption would be unlawful; (5) it determines,
in its sole discretion, that the redemption, when considered with all other
redemptions, sales, assignments, transfers and exchanges of our common shares,
could cause direct or indirect ownership of shares of our common stock to become
concentrated to an extent which would prevent AmREIT from qualifying as a REIT
under the Internal Revenue Code; or (6) it determines, in its sole discretion,
the suspension to be in the best interest of AmREIT. The redemption plan will
terminate, and AmREIT no longer shall accept shares for redemption at such time
as the class C common shares become eligible to convert into class A common
shares.
VOTING RIGHTS. Holders of the class C common shares will have the right to
vote on all matters presented to shareholders as a single class with all other
holders of common shares. In any matter in which the class C common shares may
vote, including any action by written consent, each class C common share will be
entitled to one vote.
101
AmREIT shall not issue any preferred shares or other class of common
shares with dividend preferences senior to the dividends payable on the class C
common shares without the approval of 66 2/3% of the class C common shares then
outstanding.
In addition, AmREIT may not sell all or substantially all of its assets,
dissolve, or amend its declaration of trust in any manner that materially and
adversely affects the voting powers, rights or preferences of the holders of
class C common shares without the approval of 66 2/3% of the class C common
shares then outstanding; provided, however, the issuance of any security with
dividend or liquidation preferences that rank equally with or are junior to the
dividend or liquidation preferences of the class C common shareholders shall not
be considered to materially or adversely affect the voting powers, rights or
preferences of the class C common shareholders.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which a vote would otherwise be required is
effected, all outstanding class C common shares have been redeemed or called for
redemption upon proper notice and sufficient funds have been deposited in trust
to effect such redemption.
CONVERSION. Subject to the exceptions described under the caption
"Restrictions on Transfer" below, holders of the class C common shares will have
the right, from time to time after seventh anniversary of the issuance of such
shares, to convert all or any of the class C common shares into class A common
shares at a conversion price equal to the purchase price of the class C common
shares, plus a 10% premium. As a result, each $1,000 of class C common shares
owned by an investor will be able to be converted into $1,100 of class A common
shares, with the exact number of class A common shares to be acquired upon
conversion being determined by dividing the $1,100 by the market price of the
class A common shares on the date notice of conversion is delivered. Upon
conversion, no gain or loss will be then recognized by the class C shareholder.
Class C common shares will be deemed to have been converted immediately
prior to the close of business on the date the shares are surrendered for
conversion and notice of election to convert the same is received by AmREIT.
Upon conversion, no adjustment or prepayment will be made for dividends, but if
any holder surrenders class C common shares for conversion after the close of
business on a Dividend Record Date and prior to the opening of business on the
related Dividend Payment Date, then, notwithstanding the conversion, the
dividend payable on that Dividend Payment Date will be paid on that Dividend
Payment Date to the registered holder of those shares on that Dividend Record
Date. Class C common shares surrendered for conversion during the period from
the close of business on a Dividend Record Date to the Dividend Payment Date
must also pay the amount of the dividend which is payable. No fractional class A
common shares will be issued upon conversion and, if the conversion results in a
fractional interest, an amount will be paid in cash equal to the value of the
fractional interest based on the market price of the common shares on the last
trading day prior to the date of conversion.
In the event of any capital reorganization or reclassification of the
capital shares of AmREIT, or consolidation or merger of AmREIT with another
corporation, or the sale, transfer or lease of all or substantially all of its
assets to another corporation, is effected in a way that holders of class A
common shares will be entitled to receive stock, securities or other assets with
respect to or in exchange for class A common shares, then, as a condition of
that reorganization, reclassification, consolidation, merger, sale, transfer or
lease, the holder of each class C common share will have the right immediately
to convert that share into the kind and amount of stock, securities or other
assets which the holders of those shares would have owned or been entitled to
receive immediately after the transaction if those holders had converted such
shares immediately before the effective date of the transaction, subject to
further adjustment upon the occurrence of the events described above.
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RESTRICTIONS ON TRANSFER. The class C common shares are generally
transferable, subject to restrictions necessary to enable AmREIT to maintain its
REIT status. See "--Ownership Limits and Restrictions on Transfer."
103
CLASS D COMMON SHARES
DIVIDENDS. Subject to the preferential rights of any series of our
preferred shares (of which there is currently none issued), holders of class D
common shares will be entitled to receive, when, as and if declared by the
AmREIT board of trust managers, out of funds legally available for the payment
of dividends, non-cumulative cash dividends in an amount per class D common
share equal to $0.65 per annum. Dividends payable on the class D common shares
for each full monthly dividend period will be computed by dividing the annual
dividend rate by twelve. Dividends with respect to the class D common shares
will be non-cumulative from the date of original issuance and will be payable
monthly when, as and if the AmREIT board declares a monthly dividend on the
class D common shares for that month in its sole discretion (each, a Dividend
Payment Date). Dividends may not be paid on the class D common shares unless all
dividends then payable on the class B common shares and class C common shares
have been paid in full. Any dividend payable on the class D common shares for
any partial dividend period after the initial dividend period will be computed
on the basis of a 360-day year consisting of twelve 30-day months. Dividends
will be payable to holders of record as they appear in the share records of
AmREIT at the close of business on the applicable record date, which will be the
19th day of the calendar month in which the applicable Dividend Payment Date
falls or such other date designated by the AmREIT board for the payment of
dividends that is no more than thirty (30) nor less than ten (10) days prior to
the Dividend Payment Date (each, a Dividend Record Date).
No dividends on class D common shares will be declared by the AmREIT board
or paid or set apart for payment at such time as, and to the extent that, the
terms and provisions of any AmREIT agreement, including any agreement relating
to its indebtedness, or any provisions of its charter relating to any series of
preferred stock, prohibit such declaration, payment or setting apart for payment
or provide that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such declaration or
payment will be restricted or prohibited by law.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of AmREIT, subject to the prior rights of any series of preferred
stock, the holders of class D common shares will share pro rata with the holders
of the class A common shares, class B common shares, class C common shares and
any other series of common shares then outstanding that rank on a parity with
the class D common shares as to the distribution of assets on liquidation, the
assets of AmREIT remaining following the payment of all liquidating
distributions payable to holders of capital shares of AmREIT with liquidation
rights senior to those of the common shares.
CALL PROVISION. The class D common shares will not be redeemable prior to
the first anniversary of the date of issuance of such shares, except under
certain limited circumstances to preserve the AmREIT's status as a REIT. On and
after the first anniversary date, AmREIT, at its option (to the extent AmREIT
has funds legally available therefore) upon not less than 30 nor more than 60
days' written notice, may redeem the class D common shares, in whole or in part,
at any time or from time to time, for cash at the redemption price per share of
$10.00, plus the pro rata portion of the 7.7% conversion premium (discussed
below), based on the number of years the shares are outstanding (for example, if
the class D common shares are called on the first anniversary of issuance the
call price would be $1.011 per share).
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Notwithstanding the foregoing, unless the full then current dividends on
all class D common shares have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for payment
for the then current dividend period (without regard to whether dividends were
paid or not paid in any prior monthly dividend period), no class D common shares
will be redeemed unless all outstanding class D common shares are simultaneously
redeemed. The foregoing, however, will not prevent the purchase or acquisition
of the class D common shares pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding class D common shares. Unless full
current monthly dividends on all outstanding class D common shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for the then current dividend period
(without regard to whether dividends were paid or not paid in any prior monthly
dividend period), AmREIT will not purchase or otherwise acquire directly or
indirectly through a subsidiary or otherwise, any class D common shares.
If fewer than all of the outstanding class D common shares are to be
redeemed, the number of shares to be redeemed will be determined by AmREIT and
those shares may be redeemed pro rata from the holders of record of those shares
in proportion to the number of those shares held by the holders (as nearly as
may be practicable without creating fractional class D common shares) or any
other equitable method determined by AmREIT.
Notice of redemption will be given by publication in a newspaper of
general circulation in the City of New York, such publication to be made once a
week for two successive weeks commencing not less than 30 nor more than 60 days'
prior to the redemption date. A similar notice will be mailed by AmREIT, postage
prepaid, not less than 30 nor more than 60 days' prior to the redemption date,
addressed to the respective holders of record of class D common shares to be
redeemed at their respective addresses as they appear on the stock transfer
records of AmREIT. No failure to give notice or any defect therein or in the
mailing thereof will affect the validity of the proceeding for the redemption of
any class D common shares except as to the holder to whom notice was defective
or not given. Each notice will state: (1) the redemption date; (2) the
redemption price; (3) the number of class D common shares to be redeemed; (4)
the place or places where the class D common shares are to be surrendered for
payment of the redemption price; (5) that dividends on the shares to be redeemed
will cease to accrue on the redemption date; and (6) that any conversion rights
will terminate at the close of business on the third business day immediately
preceding the redemption date. If fewer than all the class D common shares held
by any holder are to be redeemed, the notice mailed to that holder will also
specify the number of class D common shares to be redeemed from that holder. If
notice of redemption of any class D common shares has been properly given and if
funds necessary for redemption have been irrevocably set aside by AmREIT in
trust for the benefit of the holders of any of the class D common shares so
called for redemption, then from and after the redemption date dividends will
cease to accrue on those class D common shares, those shares will no longer be
deemed to be outstanding and all rights of the holders of those shares will
terminate except for the right to receive the applicable redemption price and
other amounts payable in respect of such shares.
The holders of class D common shares at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to class D common shares on the corresponding Dividend Payment Date
notwithstanding the redemption thereof between that Dividend Record Date and the
corresponding Dividend Payment Date or AmREIT's default in the payment of the
dividend due. Except as provided above, AmREIT will make no payment or allowance
for unpaid dividends on class D common shares called for redemption.
LIMITED OPTIONAL REDEMPTION. Prior to the time at which the class D common
shares become eligible to be converted into class A common shares, any
shareholder who has held class D common shares for not less than one year may
present all or any portion equal to at least 25% of those shares to
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AmREIT for redemption at any time, in accordance with the procedures outlined
herein. At that time, AmREIT may, at its sole option, redeem those shares
presented for redemption for cash to the extent it has sufficient funds
available. There is no assurance that there will be sufficient funds available
for redemption and, accordingly, a shareholder's shares may not be redeemed. If
AmREIT elects to redeem shares, the following conditions and limitations would
apply. The full amount of the proceeds from the sale of shares under our
dividend reinvestment plan (Reinvestment Proceeds) attributable to any calendar
quarter will be used to redeem shares presented for redemption during that
quarter. In addition, AmREIT may, at its discretion, use up to $100,000 per
calendar quarter of the proceeds of any public offering of its common shares for
redemptions. Any amount of offering proceeds which is available for redemptions,
but which is unused, may be carried over to the next succeeding calendar quarter
for use in addition to the amount of offering proceeds and Reinvestment Proceeds
that would otherwise be available for redemptions. At no time during a 12-month
period, however, may the number of shares redeemed by AmREIT exceed 5% of the
number of class D shares outstanding at the beginning of that 12-month period.
In the event there are insufficient funds to redeem all of the shares for
which redemption requests have been submitted, AmREIT plans to redeem the shares
in the order in which such redemption requests have been received. A shareholder
whose shares are not redeemed due to insufficient funds can ask that the request
to redeem the shares be honored at such time, if any, as there are sufficient
funds available for redemption. In that case, the. redemption request will be
retained and those shares will be redeemed before any subsequently received
redemption requests are honored. Alternatively, a shareholder whose shares are
not redeemed may withdraw his or her redemption request. Shareholders will not
relinquish their shares until such time as AmREIT commits to redeeming such
shares.
A shareholder who wishes to have his or her shares redeemed must mail or
deliver a written request on a form provided by AmREIT and executed by the
shareholder, its trustee or authorized agent, to the redemption agent
(Redemption Agent), which currently is Wells Fargo Band Minnesota, N.A. The
Redemption Agent at all times will be registered as a broker-dealer with the SEC
and each applicable state securities commission. Within 30 days following the
Redemption Agent's receipt of the shareholder's request, the Redemption Agent
will forward to that shareholder the documents necessary to effect the
redemption, including any signature guarantee AmREIT or the Redemption Agent may
require. The Redemption Agent will effect the redemption for the calendar
quarter provided that it receives the properly completed redemption documents
relating to the shares to be redeemed from the shareholder at least one calendar
month prior to the last day of the current calendar quarter and has sufficient
funds available to redeem the shares. The effective date of any redemption will
be the last date during a quarter during which the Redemption Agent receives the
properly completed redemption documents. As a result, AmREIT anticipates that,
assuming sufficient funds are available for redemption, the effective date of
redemptions will be no later than thirty days after the quarterly determination
of the availability of funds for redemption.
Upon the Redemption Agent's receipt of notice for redemption of shares,
the redemption price for this limited optional redemption right will initially
be $10.00 per share. Our board of trust managers may change the redemption price
at any time and will announce publicly any price adjustment as part of its
regular communications with our stockholders, such adjustment being effective on
the 10th day after first public announcement of same. Any shares acquired
pursuant to a redemption will be retired and no longer available for issuance by
AmREIT.
A shareholder may present fewer than all of his or her shares to AmREIT
for redemption; provided, however, that (1) the minimum number of shares which
must be presented for redemption shall be at least 25% of his or her shares, and
(2) if the shareholder retains any shares, he or she must retain at
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least $2,500 worth of shares based on the current offering price ($1,000 worth
of shares based on the current offering price for an IRA, Keogh Plan or pension
plan).
Our board of trust managers, in its sole discretion, may amend or suspend
the redemption plan at any time it determines that any amendment or suspension
is in the best interest of AmREIT. Our board of trust managers may suspend the
redemption of shares if (1) it determines, in its sole discretion, that the
redemption impairs the capital or the operations of AmREIT; (2) it determines,
in its sole discretion, that an emergency makes such redemption not reasonably
practical; (3) any governmental or regulatory agency with jurisdiction over
AmREIT so demands for the protection of the shareholders; (4) it determines, in
its sole discretion, that the redemption would be unlawful; (5) it determines,
in its sole discretion, that the redemption, when considered with all other
redemptions, sales, assignments, transfers and exchanges of our common shares,
could cause direct or indirect ownership of shares of our common stock to become
concentrated to an extent which would prevent AmREIT from qualifying as a REIT
under the Internal Revenue Code; or (6) it determines, in its sole discretion,
the suspension to be in the best interest of AmREIT. The redemption plan will
terminate, and AmREIT no longer shall accept shares for redemption at such time
as the class D common shares become eligible to convert into class A common
shares.
VOTING RIGHTS. Holders of the class D common shares will have the right to
vote on all matters presented to shareholders as a single class with all other
holders of common shares. In any matter in which the class D common shares may
vote, including any action by written consent, each class D common share will be
entitled to one vote.
In addition, AmREIT may not sell all or substantially all of its assets,
dissolve, or amend its declaration of trust in any manner that materially and
adversely affects the voting powers, rights or preferences of the holders of
class D common shares without the approval of 66 2/3% of the class D common
shares then outstanding; provided, however, the issuance of any security with
dividend or liquidation preferences that rank equally with or are junior to the
dividend or liquidation preferences of the class D common shareholders shall not
be considered to materially or adversely affect the voting powers, rights or
preferences of the class D common shareholders.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which a vote would otherwise be required is
effected, all outstanding class D common shares have been redeemed or called for
redemption upon proper notice and sufficient funds have been deposited in trust
to effect such redemption.
CONVERSION. Subject to the exceptions described under the caption
"Restrictions on Transfer" below, holders of the class D common shares acquired
in this offering, and not through our dividend reinvestment plan, will have the
right, from time to time after seventh anniversary of the issuance of such
shares, to convert all or any of the class D common shares into class A common
shares at a conversion price equal to the purchase price of the class D common
shares, plus a 7.7% premium. As a result, each $1,000 of class D common shares
owned by an investor will be able to be converted into $1,077 of class A common
shares, with the exact number of class A common shares to be acquired upon
conversion being determined by dividing the $1,077 by the market price of the
class A common shares on the date notice of conversion is delivered. All class D
common shares acquired through our dividend reinvestment plan will be
convertible on a dollar-for-dollar basis, based on the dividends invested in
such reinvestment plan shares, into our class A common shares, with no premium
associated with the conversion. The reinvestment plan shares will be convertible
on or after the seventh anniversary of the issuance of the original class D
common shares, the dividends of which were used to acquire the reinvestment plan
shares. Upon conversion, no gain or loss will be then recognized by the class D
shareholder.
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Class D common shares will be deemed to have been converted immediately
prior to the close of business on the date the shares are surrendered for
conversion and notice of election to convert the same is received by AmREIT.
Upon conversion, no adjustment or prepayment will be made for dividends, but if
any holder surrenders class D common shares for conversion after the close of
business on a Dividend Record Date and prior to the opening of business on the
related Dividend Payment Date, then, notwithstanding the conversion, the
dividend payable on that Dividend Payment Date will be paid on that Dividend
Payment Date to the registered holder of those shares on that Dividend Record
Date. Class D common shares surrendered for conversion during the period from
the close of business on a Dividend Record Date to the Dividend Payment Date
must also pay the amount of the dividend which is payable. No fractional class A
common shares will be issued upon conversion and, if the conversion results in a
fractional interest, an amount will be paid in cash equal to the value of the
fractional interest based on the market price of the common shares on the last
trading day prior to the date of conversion.
In the event of any capital reorganization or reclassification of the
capital shares of AmREIT, or consolidation or merger of AmREIT with another
corporation, or the sale, transfer or lease of all or substantially all of its
assets to another corporation, is effected in a way that holders of class A
common shares will be entitled to receive stock, securities or other assets with
respect to or in exchange for class A common shares, then, as a condition of
that reorganization, reclassification, consolidation, merger, sale, transfer or
lease, the holder of each class D common share will have the right immediately
to convert that share into the kind and amount of stock, securities or other
assets which the holders of those shares would have owned or been entitled to
receive immediately after the transaction if those holders had converted such
shares immediately before the effective date of the transaction, subject to
further adjustment upon the occurrence of the events described above.
RESTRICTIONS ON TRANSFER. The class D common shares are generally
transferable, subject to restrictions necessary to enable AmREIT to maintain its
REIT status. See "--Ownership Limits and Restrictions on Transfer."
PREFERRED SHARES
The declaration of trust of AmREIT authorizes the trust managers of AmREIT
to issue up to 10,000,000 preferred shares of beneficial interest, par value
$.01 per share, to establish one or more series of such preferred shares and to
determine, with respect to any series of preferred shares, the terms, rights,
restrictions and qualifications of such series. Although the trust managers have
no present intention to do so, they could, in the future, issue a series of
preferred shares which, due to its terms, could impede a merger, tender offer or
other transaction that some, or a majority, of AmREIT's shareholders might
believe to be in their best interests or in which shareholders might receive a
premium over then prevailing market prices for their common shares.
OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFER
For AmREIT to qualify as a REIT under the Internal Revenue Code, (1) not
more than 50% in value of outstanding equity securities of all classes may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities) during the last half of a
taxable year; (2) the outstanding equity securities of all classes must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year; and
(3) certain percentages of AmREIT's gross income must come from certain
activities.
To ensure that five or fewer individuals do not own more than 50% in value
of the outstanding equity securities of all classes, AmREIT's declaration of
trust provides generally that no holder may own,
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or be deemed to own by virtue of certain attribution provisions of the Internal
Revenue Code, more than 9.0% of the issued and outstanding common shares or more
than 9.9% of the issued and outstanding shares of any series of preferred
shares, except that H. Kerr Taylor, the chairman of the board of trust managers
and chief executive officer of AmREIT, and certain related persons together may
own, or be deemed to own, by virtue of certain attribution provisions of the
Internal Revenue Code, up to 9.8% of the issued and outstanding common shares.
The board of trust managers, upon receipt of a ruling from the IRS, an opinion
of counsel, or other evidence satisfactory to the board of trust managers, in
its sole discretion, is permitted to waive or change, in whole or in part, the
application of the ownership limit with respect to any person that is not an
individual (as that term is used in Section 542(a)(2) of the Internal Revenue
Code). In connection with any waiver or change, the board of trust managers has
the authority to require such representations and undertakings from such person
or affiliates and to impose such other conditions as the board of trust managers
deems necessary, advisable or prudent, in its sole discretion, to determine the
effect, if any, of a proposed transaction or ownership of outstanding equity
securities of all classes on AmREIT's status as a REIT. The board of trust
managers also has the authority to reduce the ownership limit on H. Kerr Taylor,
with the written consent of Mr. Taylor or his successor-in-interest or designee,
after any transfer permitted by the declaration of trust.
In addition, the board of trust managers will have the right, from time to
time, to increase the ownership limit on common shares, except that it will not
be permissible for the board of trust managers (i) to increase the ownership
limit or create additional limitations if, after giving effect thereto, AmREIT
would be "closely held" within the meaning of Section 856(h) of the Internal
Revenue Code, (ii) to increase either the ownership limit on common shares or
the ownership limit on preferred shares to a percentage that is greater than
9.9%, or (iii) to increase the ownership limit on H. Kerr Taylor. Prior to any
modification of the ownership limit with respect to any person, the board of
trust managers will have the right to require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary, advisable or
prudent, in its sole discretion, in order to determine or ensure AmREIT's status
as a REIT.
Under our declaration of trust, the ownership limit will not be
automatically removed even if the REIT provisions of the Internal Revenue Code
are changed so as to no longer contain any ownership concentration limitation or
if the ownership concentration limit is increased. In addition to preserving
AmREIT's status as a REIT for federal income tax purposes, the ownership limit
may prevent any person or small group of persons from acquiring control of
AmREIT.
Our declaration of trust also provides that if any issuance, transfer or
acquisition of equity securities (1) would result in a holder exceeding the
ownership limit, (2) would cause AmREIT to be beneficially owned by less than
100 persons, (3) would result in AmREIT being "closely held" within the meaning
of Section 856(h) of the Internal Revenue Code, or (4) would otherwise result in
the failure of AmREIT to qualify as a REIT for federal income tax purposes, then
that issuance, transfer or acquisition will be null and void to the intended
transferee or holder, and the intended transferee or holder will acquire no
rights to the shares. Pursuant to the declaration of trust, equity securities
owned, transferred or proposed to be transferred in excess of the ownership
limit or which would otherwise jeopardize AmREIT's status as a REIT under the
Internal Revenue Code automatically will be deemed to have been transferred to a
trustee appointed by AmREIT, unaffiliated with AmREIT and the intended
transferee or holder, to serve as trustee of a charitable trust for the
exclusive benefit of one or more nonprofit organizations designated by AmREIT so
that the shares proposed to be transferred in excess of the ownership limit held
in the charitable trust would not violate ownership restrictions set forth in
the declaration of trust. The transfer to the trustee will be deemed to be
effective as of the close of business on the business day prior to the purported
transfer or other event that results in the transfer to the charitable trust.
Shares proposed to be transferred in excess of the ownership limit held by the
trustee shall be issued and outstanding equity securities of AmREIT. The
intended transferee or holder will have
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no rights in the shares proposed to be transferred in excess of the ownership
limit, will not benefit economically from these shares, will have no rights to
dividends or other distributions associated with the shares and shall not
possess any rights to vote or other rights attributable to the shares. The
trustee will have all voting rights and rights to dividends or other
distributions to which such shares proposed to be transferred in excess of the
ownership limit are entitled with respect to such shares held in the charitable
trust, which rights shall be exercised for the exclusive benefit of the
charitable beneficiary. Any dividend or other distribution paid prior to the
discovery by AmREIT that the shares have been deemed transferred to the trustee
shall be paid with respect to the shares to the trustee upon demand and any
dividend or other distribution authorized but unpaid shall be paid when due to
the trustee. Any dividends or distributions so paid over to the trustee shall be
held in trust for the benefit of the charitable beneficiary for distribution at
such times as may be determined by the trustee. The prohibited owner of these
shares will have no voting rights with respect to the shares held in the
charitable trust and, subject to Texas law, effective as of the date that the
shares have been deemed transferred to the trustee, the trustee shall have the
authority (1) to rescind as void any vote cast, to the extent the shares are
entitled to vote, by a prohibited owner prior to the discovery by AmREIT that
the shares have been deemed transferred to the trustee and (2) to recast such
vote, to the extent the shares are entitled to vote, in accordance with the
desires of the trustee acting for the benefit of the charitable beneficiary.
Within twenty (20) days of receiving notice from AmREIT that shares proposed to
be transferred in excess of the ownership limit have been deemed transferred to
the charitable trust, the trustee of the charitable trust shall sell the shares
held in the charitable trust to a person, designated by the trustee, whose
ownership of the shares will not violate the ownership limit or otherwise
jeopardize AmREIT's status as a REIT under the Internal Revenue Code. Upon the
sale, the interest of the charitable beneficiary in the shares sold shall
terminate and the trustee shall distribute the net proceeds of the sale to the
prohibited owner and to the charitable beneficiary as follows: (1) the
prohibited owner shall receive the lesser of (a) the price paid by the
prohibited owner for the shares or, if the prohibited owner did not give value
for the shares in connection with the event that resulted in the transfer of
such shares to the charitable trust (e.g., in the case of a gift, devise or
other such transaction), the market price at the time of such gift, devise or
other transaction which resulted in the transfer of the shares and (b) the price
per share (net of costs of sales) received by the trustee from the sale or other
disposition of the shares held in the charitable trust; and (2) any net sales
proceeds in excess of the amount payable to the prohibited owner shall be
immediately paid to the charitable beneficiary. If, prior to the discovery by
AmREIT that the shares have been deemed transferred to the trustee, the shares
are sold by a prohibited owner, then (1) the shares shall be deemed to have been
sold on behalf of the charitable trust and (2) to the extent that the prohibited
owner received an amount for such shares that exceeds the amount that such
prohibited owner would have been entitled to receive if such shares had been
sold by the trustee such excess shall be paid to the trustee upon demand. The
shares will be subject to repurchase by AmREIT at its election and shall be
deemed to have been offered for sale to AmREIT or its designee, at a price per
share equal to the lesser of (1) the price per share in the transaction that
resulted in such deemed transfer to the charitable trust (or, in the case of a
devise or gift or event other than a transfer or acquisition which results in
the deemed transfer of the shares, the market price at the time of such devise
or gift or event other than a transfer or acquisition which results in the
deemed transfer of the shares) and (2) the market price of the shares on the
date AmREIT, or its designee, accepts such offer. AmREIT and its assignees will
have the right to accept the offer until the trustee has otherwise sold the
shares held in the charitable trust. Upon such a sale to AmREIT or its
designees, the interest of the charitable beneficiary in the shares sold shall
terminate and the trustee shall distribute all net sales proceeds of the sale to
the prohibited owner.
If the trust managers or any duly authorized committee thereof shall at
any time determine in good faith that a transfer or other event has taken or is
otherwise proposed to take place that results or will result in a violation of
the ownership limit or otherwise jeopardizes AmREIT's status as a REIT under the
Internal Revenue Code, the trust managers or a committee thereof shall take such
action as it deems advisable to refuse to give effect to or to prevent such
transfer or other event, including, without
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limitation, causing AmREIT to redeem equity securities, refusing to give effect
to such transfer on the books of AmREIT or instituting proceedings to enjoin
such transfer or other event; provided, however that any transfer or attempted
transfer or other event in violation of the declaration of trust shall
automatically result in the transfer to the charitable trust described above,
and, where applicable, such transfer (or other event) shall be void ab initio as
provided above irrespective of any action (or non-action) by the board of trust
managers or a committee thereof.
Under the declaration of trust, AmREIT will have the authority, at any
time, to waive the requirement that the shares be deemed outstanding in
accordance with the provisions of the declaration of trust if the fact that the
shares are deemed to be outstanding would, in the opinion of nationally
recognized tax counsel, jeopardize the status of AmREIT as a REIT for federal
income tax purposes.
All certificates issued by AmREIT representing equity securities will bear
a legend referring to the restrictions described above.
The declaration of trust of AmREIT also will provide that all persons who
own, directly or by virtue of the attribution provisions of the Internal Revenue
Code, more than 5.0% of the outstanding equity securities (or such lower
percentage as may be set by the board of trust managers), must give written
notice to AmREIT containing information specified in the declaration of trust no
later than January 30 of each year. In addition, each shareholder will be
required, upon demand, to disclose to AmREIT in writing such information with
respect to the direct, indirect and constructive ownership of shares as the
trust managers deem necessary to comply with the provisions of the Internal
Revenue Code, as applicable to a REIT, or to comply with the requirements of a
governmental authority or agency.
The ownership limitations described above may have the effect of
inhibiting or impeding acquisitions of control of AmREIT by a third party. See
"Certain Anti-Takeover Provisions of the Declaration of Trust, Bylaws and Texas
Law."
DIVIDEND REINVESTMENT PLAN
AmREIT's board of trust managers has authorized a dividend reinvestment
plan that allows you to have the dividends otherwise distributable to you as a
class D common shareholder invested in additional class D common shares.
You may purchase class D common shares under our dividend reinvestment
plan for $9.50 per share until all of the shares registered as part of this
offering have been sold. After that time, we may fund the dividend reinvestment
plan through purchasing shares on the open market, if a market then exists, or
issuing additional shares. In any case, the price per share will be equal to the
then-prevailing market price, which shall equal the price on the securities
exchange or over-the-counter market on which such shares are listed at the date
of purchase if such shares are then listed. A copy of our dividend reinvestment
plan as currently in effect is included as Exhibit B to this prospectus. You may
elect to participate in the dividend reinvestment plan by completing the
Subscription Agreement, the enrollment form or by other written notice to the
plan administrator. Participation in the plan will begin with the next
distribution made after receipt of your written notice. We may terminate the
dividend reinvestment plan for any reason at any time upon 10 days' prior
written notice to participants. Your participation in the plan will also be
terminated to the extent that a reinvestment of your dividends in class D common
shares would cause the percentage ownership limitation contained in our
declaration of trust to be exceeded. In addition, you may terminate your
participation in the dividend reinvestment plan at any time by providing us with
written notice.
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If you elect to participate in the dividend reinvestment plan and are
subject to federal income taxation, you will incur a tax liability for dividends
allocated to you even though you have elected not to receive the dividends in
cash but rather to have the dividends withheld and reinvested pursuant to the
dividend reinvestment plan. Specifically, you will be treated as if you have
received the dividend from us in cash and then applied such dividend to the
purchase of additional shares. Additionally, the shares you acquire will be held
in book-entry form on the books of the plan agent and may only be resold at such
time as you request the plan agent to transfer the shares held into the plan to
the books of the transfer agent. These shares will be subject to the same
liquidity limitations as originally purchased shares. See "Risk Factors -- There
is no public trading market for the class D common shares." You will be taxed on
the amount of such dividend as ordinary income to the extent such dividend is
from current or accumulated earnings and profits, unless we have designated all
or a portion of the dividend as a capital gain dividend.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of material federal income tax consequences that may
be relevant to a holder of our securities is based on current law, is for
general information only and is not intended as tax advice. The following
discussion, which is not exhaustive of all possible tax consequences, does not
include a detailed discussion of any state, local or foreign tax consequences.
Nor does it discuss all of the aspects of federal income taxation that may be
relevant to a prospective holder of our securities in light of his or her
particular circumstances or to certain types of holders (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States and persons holding securities as part of a conversion transaction, a
hedging transaction or as a position in a straddle for tax purposes) who are
subject to special treatment under the federal income tax laws. Unless otherwise
indicated the terms "we," "us," and "our" when used herein refer to AmREIT.
The statements in this discussion are based on current provisions of the
Internal Revenue Code existing, temporary and currently proposed Treasury
Regulations under the Internal Revenue Code, the legislative history of the
Internal Revenue Code, existing administrative rulings and practices of the IRS
and judicial decisions. No assurance can be given that legislative, judicial or
administrative changes will not affect the accuracy of any statements in this
discussion with respect to transactions entered into or contemplated prior to
the effective date of such changes. Any such change could apply retroactively to
transactions preceding the date of the change. We do not plan to request any
rulings from the IRS concerning our tax treatment and the statements in this
discussion are not binding on the IRS or any court. Thus, we can provide no
assurance that these statements will not be challenged by the IRS or that such
challenge will not be sustained by a court.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
EACH PROSPECTIVE PURCHASER OF SECURITIES IS ADVISED TO CONSULT WITH HIS OR HER
OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES IN AN ENTITY ELECTING TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
We have elected to be treated as a REIT under Sections 856 through 860 of
the Internal Revenue Code for federal income tax purposes commencing with our
taxable year ended December 31, 1994. We
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believe that we have been organized and have operated in a manner that qualifies
for taxation as a REIT under the Internal Revenue Code. We also believe that we
will continue to operate in a manner that will preserve our status as a REIT. We
cannot however, assure you that such requirements will be met in the future.
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Locke Liddell & Sapp LLP, our legal counsel, is of the opinion that we
qualified as a REIT under the Internal Revenue Code for our taxable year ended
December 31, 2003, we have been organized and our manner of operation has been
in conformity with the requirements for qualification and taxation as a REIT as
of the date of this prospectus and that our proposed manner of operation and
diversity of equity ownership will enable us to continue to satisfy the
requirements for qualification as a REIT in the future if we operate in
accordance with the methods of operations described herein including our
representations concerning our intended method of operation. However, no opinion
can be given that we will actually satisfy all REIT requirements in the future
since this depends on future events. You should be aware that opinions of
counsel are not binding on the IRS or on the courts, and, if the IRS were to
challenge these conclusions, no assurance can be given that these conclusions
would be sustained in court. The opinion of Locke Liddell & Sapp LLP is based on
various assumptions as well as on certain representations made by us as to
factual matters, including a factual representation letter provided by us. The
rules governing REITs are highly technical and require ongoing compliance with a
variety of tests that depend, among other things, on future operating results,
asset diversification, distribution levels and diversity of stock ownership.
Locke Liddell & Sapp LLP will not monitor our compliance with these
requirements. While we expect to satisfy these tests, and will use our best
efforts to do so, no assurance can be given that we will qualify as a REIT for
any particular year, or that the applicable law will not change and adversely
affect us and our shareholders. See "-- Failure to Qualify as a REIT." The
following is a summary of the material federal income tax considerations
affecting us as a REIT and our shareholders. This summary is qualified in its
entirety by the applicable Internal Revenue Code provisions, relevant rules and
regulations promulgated under the Internal Revenue Code, and administrative and
judicial interpretations of the Internal Revenue Code and these rules and
regulations.
REIT QUALIFICATION
We must be organized as an entity that would, if we do not maintain our
REIT status, be taxable as a regular corporation. We cannot be a financial
institution or an insurance company. We must be managed by one or more trust
managers. Our taxable year must be the calendar year. Our beneficial ownership
must be evidenced by transferable shares. Our capital shares must be held by at
least 100 persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a taxable year of less than 12 months. Not more
than 50% of the value of the shares of our capital shares may be held, directly
or indirectly, applying the applicable constructive ownership rules of the
Internal Revenue Code, by five or fewer individuals at any time during the last
half of each of our taxable years. We must also meet certain other tests,
described below, regarding the nature of our income and assets and the amount of
our distributions.
Our outstanding shares of common stock are owned by a sufficient number of
investors and in appropriate proportions to permit us to satisfy these share
ownership requirements. To protect against violations of these share ownership
requirements, our declaration of trust provides that no person (other than the
existing holder) is permitted to own, applying constructive ownership tests set
forth in the Internal Revenue Code, more than 9.0% of our outstanding common
shares, unless the trust managers are provided evidence satisfactory to them in
their sole discretion that our qualification as a REIT will not be jeopardized.
In addition, our declaration of trust contains restrictions on transfers of
capital shares, as well as provisions that automatically transfer capital shares
to a charitable trust for the benefit of a charitable beneficiary to the extent
that another investor's ownership of such capital shares otherwise might
jeopardize our REIT status. These restrictions, however, may not ensure that we
will, in all cases, be able to satisfy the share ownership requirements. If we
fail to satisfy these share ownership requirements, except as provided in the
next sentence, our status as a REIT will terminate. However, if we comply with
the rules contained in applicable Treasury Regulations that require us to
ascertain the actual ownership of our shares and we do not know, or would not
have known through the exercise of
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reasonable diligence, that we failed to meet the 50% requirement described
above, we will be treated as having met this requirement. See the section below
entitled "-- Failure to Qualify as a REIT."
To monitor our compliance with the share ownership requirements, we are
required to and we do maintain records disclosing the actual ownership of our
common shares. To do so, we will demand written statements each year from the
record holders of certain percentages of shares in which the record holders are
to disclose the actual owners of the shares (i.e., the persons required to
include in gross income the REIT dividends). A list of those persons failing or
refusing to comply with this demand will be maintained as part of our records.
Shareholders who fail or refuse to comply with the demand must submit a
statement with their tax returns disclosing the actual ownership of the shares
and certain other information.
We currently satisfy, and expect to continue to satisfy, each of these
requirements discussed above. We also currently satisfy, and expect to continue
to satisfy, the requirements that are separately described below concerning the
nature and amounts of our income and assets and the levels of required annual
distributions.
SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular
year, we also must meet two tests governing the sources of our income - a 75%
gross income test and a 95% gross income test. These tests are designed to
ensure that a REIT derives its income principally from passive real estate
investments. The Internal Revenue Code allows a REIT to own and operate a number
of its properties through wholly-owned subsidiaries which are "qualified REIT
subsidiaries." The Internal Revenue Code provides that a qualified REIT
subsidiary is not treated as a separate corporation, and all of its assets,
liabilities and items of income, deduction and credit are treated as assets,
liabilities and items of income, deduction and credit of the REIT.
In the case of a REIT which is a partner in a partnership or any other
entity such as a limited liability company that is treated as a partnership for
federal income tax purposes, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership. Also,
the REIT will be deemed to be entitled to its proportionate share of the income
of the partnership. The character of the assets and gross income of the
partnership retains the same character in the hands of the REIT for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests. Thus, our proportionate share of the assets and items of income of
any partnership in which we own an interest are treated as our assets and items
of income for purposes of applying the requirements described in this
discussion, including the income and asset tests described below.
75% GROSS INCOME TEST. At least 75% of a REITs gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to us
are:
- rents from real property;
- interest on loans secured by real property;
- gains from the sale of real property or loans secured by real
property (excluding gain from the sale of property held primarily
for sale to customers in the ordinary course of our business,
referred to below as "dealer property");
- income from the operation and gain from the sale of property
acquired in connection with the foreclosure of a mortgage securing
that property ("foreclosure property");
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- distributions on, or gain from the sale of, shares of other
qualifying REITs;
- abatements and refunds of real property taxes;
- amounts received as consideration for entering into agreements to
make loans secured by real property or to purchase or lease real
property; and
- "qualified temporary investment income" (described below).
In evaluating our compliance with the 75% gross income test, as well as
the 95% gross income test described below, gross income does not include gross
income from "prohibited transactions." In general, a prohibited transaction is
one involving a sale of dealer property, not including foreclosure property and
not including certain dealer property we have held for at least four years.
We expect that substantially all of our operating gross income will be
considered rent from real property and interest income. Rent from real property
is qualifying income for purposes of the gross income tests only if certain
conditions are satisfied. Rent from real property includes charges for services
customarily rendered to tenants, and rent attributable to personal property
leased together with the real property so long as the personal property rent is
not more than 15% of the total rent received or accrued under the lease for the
taxable year. We do not expect to earn material amounts in these categories.
Rent from real property generally does not include rent based on the
income or profits derived from the property. However, rent based on a percentage
of gross receipts or sales is permitted as rent from real property and we will
have leases where rent is based on a percentage of gross receipts or sales. We
generally do not intend to lease property and receive rentals based on the
tenant's income or profit. Also excluded from "rents from real property" is rent
received from a person or corporation in which we (or any of our 10% or greater
owners) directly or indirectly through the constructive ownership rules
contained in Section 318 and Section 856(d)(5) of the Internal Revenue Code, own
a 10% or greater interest in either vote or value.
A third exclusion from qualifying rent income covers amounts received with
respect to real property if we furnish services to the tenants or manage or
operate the property, other than through an "independent contractor" from whom
we do not derive any income or through a "taxable REIT subsidiary." A taxable
REIT subsidiary is a corporation in which a REIT owns stock, directly or
indirectly, and with respect to which the corporation and the REIT have made a
joint election to treat the corporation as a taxable REIT subsidiary. The
obligation to operate through an independent contractor or a taxable REIT
subsidiary generally does not apply, however, if the services we provide are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not considered rendered primarily for the convenience of
the tenant (applying standards that govern in evaluating whether rent from real
property would be unrelated business taxable income when received by a
tax-exempt owner of the property). Further, if the value of the non-customary
service income with respect to a property, valued at no less than 150% of our
direct cost of performing such services, is 1% or less of the total income
derived from the property, then the provision of such non-customary services
shall not prohibit the rental income (except the non-customary service income)
from qualifying as "rents from real property."
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We believe that the only material services generally to be provided to
tenants will be those usually or customarily rendered in connection with the
rental of space for occupancy only. We do not intend to provide services that
might be considered rendered primarily for the convenience of the tenants, such
as hotel, health care or extensive recreational or social services.
Consequently, we believe that substantially all of our rental income will be
qualifying income under the gross income tests, and that our provision of
services will not cause the rental income to fail to be included under that
test.
Upon the ultimate sale of our properties, any gains realized also are
expected to constitute qualifying income, as gain from the sale of real property
(not involving a prohibited transaction).
95% GROSS INCOME TEST. In addition to earning 75% of our gross income from
the sources listed above, 95% of our gross income for each taxable year must
come either from those sources, or from dividends, interest or gains from the
sale or other disposition of stock or other securities that do not constitute
dealer property. This test permits a REIT to earn a significant portion of its
income from traditional "passive" investment sources that are not necessarily
real estate related. The term "interest" (under both the 75% and 95% tests) does
not include amounts that are based on the income or profits of any person,
unless the computation is based only on a fixed percentage of receipts or sales.
FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE. As a result of the 75% and
95% tests, REITs generally are not permitted to earn more than 5% of their gross
income from active sources, including brokerage commissions or other fees for
services rendered. We may receive certain types of that income. This type of
income will not qualify for the 75% test or 95% test but is not expected to be
significant and that income, together with other nonqualifying income, is
expected to be at all times less than 5% of our annual gross income. While we do
not anticipate that we will earn substantial amounts of nonqualifying income, if
nonqualifying income exceeds 5% of our gross income, we could lose our status as
a REIT. We may establish taxable REIT subsidiaries to hold assets generating
non-qualifying income. The gross income generated by these subsidiaries would
not be included in our gross income. However, dividends we receive from these
subsidiaries would be included in our gross income and qualify for the 95%
income test.
If we fail to meet either the 75% or 95% income tests during a taxable
year, we may still qualify as a REIT for that year if (1) we report the amount
and nature of each item of our gross income in a schedule attached to our
federal income tax return for that year, (2) the inclusion of any incorrect
information in such schedule is not due to fraud with intent to evade tax, and
(3) the failure to meet the tests is due to reasonable cause and not to willful
neglect. It is not possible, however, to state whether in all circumstances we
would be entitled to the benefit of this relief provision. For example, if we
fail to satisfy the gross income tests because nonqualifying income that we
intentionally accrue or receive causes us to exceed the limits on nonqualifying
income, the IRS could conclude that our failure to satisfy the tests was not due
to reasonable cause. If these relief provisions do not apply to a particular set
of circumstances, we will not qualify as a REIT. As discussed below, even if
these relief provisions apply, and we retain our status as a REIT, a tax would
be imposed with respect to our non-qualifying income. We would be subject to a
100% tax based on the greater of the amount by which we fail either the 75% or
95% income tests (substituting 90% for 95% for purposes of calculating the
amount by which the 95% income test is failed) for that year multiplied by a
fraction intended to reflect our profitability. See "-- Taxation as a REIT"
below.
PROHIBITED TRANSACTION INCOME. Any gain that we realize on the sale of any
property held as inventory or other property held primarily for sale to
customers in the ordinary course of business (including our share of any such
gain realized by any subsidiary partnerships but excluding foreclosure
property), will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. This prohibited transaction income may also
adversely affect our ability to satisfy the income tests for
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qualification as a REIT. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of a trade
or business depends on all the facts and circumstances surrounding the
particular transaction. We intend to hold our and our subsidiary partnerships
intend to hold their properties for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing and owning
properties, and to make occasional sales of the properties as are consistent
with their investment objectives. The IRS may contend, however, that one or more
of these sales is subject to the 100% penalty tax.
CHARACTER OF ASSETS OWNED. At the close of each calendar quarter of our
taxable year, we also must meet three tests concerning the nature of our
investments. First, at least 75% of the value of our total assets generally must
consist of real estate assets, cash, cash items (including receivables) and
government securities. For this purpose, "real estate assets" include interests
in real property, interests in loans secured by mortgages on real property or by
certain interests in real property, shares in other REITs and certain options,
but excluding mineral, oil or gas royalty interests. The temporary investment of
new capital in stock or debt instruments also qualifies under this 75% asset
test, but only for the one-year period beginning on the date we receive the new
capital. Second, although the balance of our assets generally may be invested
without restriction, other than certain debt securities, we will not be
permitted to own (1) securities of any one non-governmental issuer that
represent more than 5% of the value of our total assets, (2) securities
possessing more than 10% of the voting power of the outstanding securities of
any single issuer or (3) securities having a value of more than 10% of the total
value of the outstanding securities of any one issuer. A REIT, however, may own
100% of the stock of a qualified REIT subsidiary, in which case the assets,
liabilities and items of income, deduction and credit of the subsidiary are
treated as those of the REIT. A REIT may also own more than 10% of the voting
power or value of a taxable REIT subsidiary. Third, not more than 20% of the
value of a REIT's total assets may be represented by securities of one or more
taxable REIT subsidiaries. In evaluating a REIT's assets, if the REIT invests in
a partnership, it is deemed to own its proportionate share of the assets of the
partnership.
After initially meeting the asset tests at the close of any quarter, we
will not lose our status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If we fail
to satisfy the asset tests because we acquire securities or other property
during a quarter, we can cure this failure by disposing of sufficient
nonqualifying assets within 30 days after the close of that quarter. We intend
to take such action within the 30 days after the close of any quarter as may be
required to cure any noncompliance. If we fail to cure noncompliance with the
asset tests within this time period, we would cease to qualify as a REIT.
ANNUAL DISTRIBUTIONS TO SHAREHOLDERS. To maintain our REIT status, we
generally must distribute as a dividend to our shareholders in each taxable year
at least 90% of our net ordinary income. Capital gain is not required to be
distributed. More precisely, we must distribute an amount equal to (1) 90% of
the sum of (a) our "REIT Taxable Income" before deduction of dividends paid and
excluding any net capital gain and (b) 90% of the excess of net income from
foreclosure property over the tax on such income, minus (2) certain limited
categories of "excess noncash income," including, income attributable to certain
payments for the use of property or services described under Section 467 of the
Internal Revenue Code, cancellation of indebtedness and original issue discount
income. REIT Taxable Income is defined to be the taxable income of the REIT,
computed as if it were an ordinary corporation, with certain modifications. For
example, the deduction for dividends paid is allowed, but neither net income
from foreclosure property, nor net income from prohibited transactions, is
included. In addition, the REIT may carry over, but not carry back, a net
operating loss for 20 years following the year in which it was incurred.
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A REIT may satisfy the 90% distribution test with dividends paid during
the taxable year and with certain dividends paid after the end of the taxable
year. Dividends paid in January that were declared during the last calendar
quarter of the prior year and were payable to shareholders of record on a date
during the last calendar quarter of that prior year are treated as paid on
December 31 of the prior year. Other dividends declared before the due date of
our tax return for the taxable year, including extensions, also will be treated
as paid in the prior year if they are paid (1) within 12 months of the end of
that taxable year and (2) no later than our next regular distribution payment.
Dividends that are paid after the close of a taxable year that do not qualify
under the rule governing payments made in January (described above) will be
taxable to the shareholders in the year paid, even though we may take them into
account for a prior year. A nondeductible excise tax equal to 4% will be imposed
for each calendar year to the extent that dividends declared and distributed or
deemed distributed on or before December 31 are less than the sum of (a) 85% of
our "ordinary income" plus (b) 95% of our capital gain net income plus (c) any
undistributed income from prior periods.
To be entitled to a dividends paid deduction, the amount distributed by a
REIT must not be preferential. For example, every shareholder of the class of
shares to which a distribution is made must be treated the same as every other
shareholder of that class, and no class of shares may be treated otherwise than
in accordance with its dividend rights as a class.
We will be taxed at regular corporate rates to the extent that we retain
any portion of our taxable income. For example, if we distribute only the
required 90% of our taxable income, we would be taxed on the retained 10%. Under
certain circumstances we may not have sufficient cash or other liquid assets to
meet the distribution requirement. This could arise because of competing demands
for our funds, or due to timing differences between tax reporting and cash
receipts and disbursements (i.e., income may have to be reported before cash is
received, or expenses may have to be paid before a deduction is allowed).
Although we do not anticipate any difficulty in meeting this requirement, no
assurance can be given that necessary funds will be available. In the event
these circumstances do occur, then in order to meet the 90% distribution
requirement, we may arrange for short-term, or possibly long-term, borrowings to
permit the payment of required dividends.
If we fail to meet the 90% distribution requirement because of an
adjustment to our taxable income by the IRS, we may be able to cure the failure
retroactively by paying a "deficiency dividend," as well as applicable interest
and penalties, within a specified period.
TAXATION AS A REIT
As a REIT, we generally will not be subject to corporate income tax to the
extent we currently distribute our REIT taxable income to our shareholders. This
treatment effectively eliminates the "double taxation" imposed on investments in
most corporations. Double taxation refers to taxation that occurs once at the
corporate level when income is earned and once again at the shareholder level
when such income is distributed. We generally will be taxed only on the portion
of our taxable income that we retain, which will include any undistributed net
capital gain, because we will be entitled to a deduction for dividends paid to
shareholders during the taxable year. A dividends paid deduction is not
available for dividends that are considered preferential within any given class
of shares or as between classes except to the extent that class is entitled to a
preference. We do not anticipate that we will pay any of those preferential
dividends.
Even as a REIT, we will be subject to tax in certain circumstances as
follows:
- We would be subject to tax on any income or gain from foreclosure
property at the highest corporate rate (currently 35%). Foreclosure
property is generally defined as
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property acquired through foreclosure or after a default on a loan
secured by the property or a lease of the property.
- A confiscatory tax of 100% applies to any net income from prohibited
transactions which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property.
- If we fail to meet either the 75% or 95% source of income tests
described above, but still qualify for REIT status under the
reasonable cause exception to those tests, a 100% tax would be
imposed equal to the amount obtained by multiplying (a) the greater
of the amount, if any, by which it failed either the 75% income test
or the 95% (substituting for purposes of calculating the amount by
which the 95% gross income test is failed, 90% for 95%) income test,
times (b) a fraction intended to reflect our profitability.
- We will be subject to the alternative minimum tax on items of tax
preference, excluding items specifically allocable to our
shareholders.
- If we should fail to distribute with respect to each calendar year
at least the sum of (a) 85% of our REIT ordinary income for that
year, (b) 95% of our REIT capital gain net income for that year, and
(c) any undistributed taxable income from prior years, we would be
subject to a 4% excise tax on the excess of the required
distribution over the amounts actually distributed.
- Under temporary regulations, we also may be taxed at the highest
regular corporate tax rate on any built-in gain attributable to
assets that we acquire in certain tax-free corporate transactions,
to the extent the gain is recognized during the first ten years
after we acquire those assets. Built-in gain is the excess of (a)
the fair market value of the asset over (b) our adjusted basis in
the asset, in each case determined as of the beginning of the
ten-year recognition period. The results described in this paragraph
with respect to the recognition of built-in gain assume that we will
make an election pursuant to the temporary regulations.
- We will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains.
As a result of recent legislation, a tax is imposed on a REIT equal to
100% of redetermined rents, redetermined deductions and excess interest.
Redetermined rents are generally rents from real property which would otherwise
be reduced on distribution, apportionment or allocation to clearly reflect
income as a result of services furnished or rendered by a taxable REIT
subsidiary to tenants of the REIT. There are a number of exceptions with regard
to redetermined rents, which are summarized below.
- Redetermined rents do not include amounts received directly or
indirectly by a REIT for services customarily furnished or rendered
in connection with the rental of real property or services furnished
through an independent contractor from whom the REIT does not derive
or receive any income or through a taxable REIT subsidiary.
- Redetermined rents do not include de minimis payments received by
the REIT with respect to non-customary services rendered to the
tenants of a property owned by the REIT that do not exceed 1% of all
amounts received by the REIT with respect to the property.
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- The redetermined rent provisions do not apply with respect to any
services rendered by a taxable REIT subsidiary to the tenants of the
REIT, as long as the taxable REIT subsidiary renders a significant
amount of similar services to persons other than the REIT and to
tenants who are unrelated to the REIT or the taxable REIT subsidiary
or the REIT tenants, and the charge for these services is
substantially comparable to the charge for similar services rendered
to such unrelated persons.
- The redetermined rent provisions do not apply to any services
rendered by a taxable REIT subsidiary to a tenant of a REIT if the
rents paid by tenants leasing at least 25% of the net leaseable
space in the REIT's property who are not receiving such services are
substantially comparable to the rents paid by tenants leasing
comparable space who are receiving the services and the charge for
the services is separately stated.
- The redetermined rent provisions do not apply to any services
rendered by a taxable REIT subsidiary to tenants of a REIT if the
gross income of the taxable REIT subsidiary from these services is
at least 150% of the taxable REIT subsidiary's direct cost of
rendering the service.
- The Secretary of the Treasury has the power to waive the tax that
would otherwise be imposed on redetermined rents if the REIT
establishes to the satisfaction of the Secretary that rents charged
to tenants were established on an arm's length basis even though a
taxable REIT subsidiary provided services to the tenants.
Redetermined deductions are deductions, other than redetermined rents, of
a taxable REIT subsidiary if the amount of these deductions would be decreased
on distribution, apportionment or allocation to clearly reflect income between
the taxable REIT subsidiary and the REIT. Excess interest means any deductions
for interest payments made by a taxable REIT subsidiary to the REIT to the
extent that the interest payments exceed a commercially reasonable rate of
interest.
FAILURE TO QUALIFY AS A REIT
For any taxable year in which we fail to qualify as a REIT and certain
relief provisions do not apply, we would be taxed at regular corporate rates,
including alternative minimum tax rates on all of our taxable income.
Distributions to our shareholders would not be deductible in computing that
taxable income, and distributions would no longer be required to be made. Any
corporate level taxes generally would reduce the amount of cash available for
distribution to our shareholders and, because the shareholders would continue to
be taxed on the distributions they receive, the net after tax yield to the
shareholders from their investment likely would be reduced substantially. As a
result, failure to qualify as a REIT during any taxable year could have a
material adverse effect on an investment in our shares of common stock. If we
lose our REIT status, unless certain relief provisions apply, we would not be
eligible to elect REIT status again until the fifth taxable year which begins
after the taxable year during which our election was terminated. It is not
possible to state whether in all circumstances we would be entitled to this
statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
Except as discussed below, distributions generally will be taxable to
taxable U.S. shareholders as ordinary income to the extent of our current or
accumulated earnings and profits. We may generate cash in excess of our net
earnings. If we distribute cash to shareholders in excess of our current and
accumulated earnings and profits (other than as a capital gain dividend), the
excess cash will be deemed to be a return of capital to each shareholder to the
extent of the adjusted tax basis of the shareholder's
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shares. Distributions in excess of the adjusted tax basis will be treated as
gain from the sale or exchange of the shares. A shareholder who has received a
distribution in excess of our current and accumulated earnings and profits may,
upon the sale of the shares, realize a higher taxable gain or a smaller loss
because the basis of the shares as reduced will be used for purposes of
computing the amount of the gain or loss. Distributions we make, whether
characterized as ordinary income or as capital gains, are not eligible for the
dividends received deduction for corporations.
Dividends we declare in October, November, or December of any year and
payable to a shareholder of record on a specified date in any of these months
shall be treated as both paid by us and received by the shareholder on December
31 of that year, provided we actually pay the dividend on or before January 31
of the following calendar year. Shareholders may not include in their own income
tax returns any of our net operating losses or capital losses.
Distributions that we properly designate as capital gain dividends will be
taxable to taxable U.S. shareholders as gains from the sale or disposition of a
capital asset to the extent that they do not exceed our actual net capital gain
for the taxable year. Depending on the period of time the tax characteristics of
the assets which produced these gains, and on certain designations, if any,
which we may make, these gains may be taxable to non-corporate U.S. shareholders
at a 15% or 25% rate. U.S. shareholders that are corporations may, however, be
required to treat up to 20% of certain capital gain dividends as ordinary
income.
We may elect to retain, rather than distribute as a capital gain dividend,
our net long-term capital gains. If we make this election, we would pay tax on
our retained net long-term capital gains. In addition, to the extent we
designate, a U.S. shareholder generally would:
- include its proportionate share of our undistributed long-term
capital gains in computing its long-term capital gains in its return
for its taxable year in which the last day of our taxable year
falls;
- be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the U.S. shareholder's long-term
capital gains;
- receive a credit or refund for the amount of tax deemed paid by it;
and
- increase the adjusted basis of its shares of common stock by the
difference between the amount of includable gains and the tax deemed
to have been paid by it; and, in the case of a U.S. shareholder that
is a corporation, appropriately adjust its earnings and profits for
the retained capital gains in accordance with Treasury Regulations
to be prescribed by the IRS.
Distributions we make and gain arising from the sale or exchange by a U.S.
shareholder of our shares will not be treated as income from a passive activity,
within the meaning of Section 469 of the Internal Revenue Code, since income
from a passive activity generally does not include dividends and gain
attributable to the disposition of property that produces dividends. As a
result, U.S. shareholders subject to the passive activity rules will generally
be unable to apply any "passive losses" against this income or gain.
Distributions we make, to the extent they do not constitute a return of capital,
generally will be treated as investment income for purposes of computing the
investment interest limitation. Gain arising from the sale or other disposition
of our shares, however, will be treated as investment income if a shareholder so
elects, in which case the capital gain is taxed at ordinary income rates.
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Generally, gain or loss realized by a shareholder upon the sale of shares
will be reportable as capital gain or loss. In general, capital gains recognized
by individuals and other non-corporate shareholders upon the sale or disposition
of shares of common stock will be subject to a maximum federal income tax rate
of 15% if the shares of common stock are held for more than 12 months, and will
be taxed at ordinary income rates of up to 35% if the shares of common stock are
held for 12 months or less. Gains recognized by shareholders that are
corporations are subject to federal income tax at a maximum rate of 35%, whether
or not classified as long-term capital gains. Capital losses recognized by a
shareholder upon the disposition of shares of common stock held for more than
one year at the time of disposition will be considered long-term capital losses,
and are generally available only to offset capital gain income of the
shareholder but not ordinary income (except in the case of individuals, who may
offset up to $3,000 of ordinary income each year). In addition, if a shareholder
receives a long-term capital gain dividend from us and has held the shares for
six months or less, any loss incurred on the sale or exchange of the shares is
treated as a long-term capital loss to the extent of the corresponding long-term
capital gain dividend received.
In any year in which we fail to qualify as a REIT, the shareholders
generally will continue to be treated in the same fashion described above,
except that none of our dividends will be eligible for treatment as capital
gains dividends, corporate shareholders will qualify for the dividends received
deduction and the shareholders will not be required to report any share of our
tax preference items.
BACKUP WITHHOLDING
We will report to our shareholders and the IRS the amount of dividends
paid during each calendar year and the amount of tax withheld, if any. If a
shareholder is subject to backup withholding, we will be required to deduct and
withhold from any dividends payable to that shareholder a tax equal to the rate
as provided under Section 3406(a)(1) of the Internal Revenue Code. These rules
may apply (1) when a shareholder fails to supply a correct taxpayer
identification number, (2) when the IRS notifies us that the shareholder is
subject to the rules or has furnished an incorrect taxpayer identification
number, or (3) in the case of corporations or others within certain exempt
categories, when they fail to demonstrate that fact when required. A shareholder
that does not provide a correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount withheld as backup
withholding may be credited against the shareholder's federal income tax
liability. We also may be required to withhold a portion of capital gain
distributions made to shareholders who fail to certify their non-foreign status.
The United States Treasury issued its final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and clarify
reliance standards. The final regulations were generally made effective for
payments made on or after January 1, 2001, subject to certain transition rules.
Prospective investors should consult their own tax advisors concerning these
final regulations and the potential effect on their ownership of common shares.
TAXATION OF TAX-EXEMPT ENTITIES
In general, a tax-exempt entity that is a shareholder will not be subject
to tax on distributions or gain realized on the sale of shares. A tax-exempt
entity may be subject to unrelated business taxable income, however, to the
extent that it has financed the acquisition of its shares with "acquisition
indebtedness" within the meaning of the Internal Revenue Code. In determining
the number of shareholders a REIT has for purposes of the "50% test" described
above under "-- REIT Qualification," generally, any shares held by tax-exempt
employees' pension and profit sharing trusts which qualify under Section 401(a)
of the Internal Revenue Code and are exempt from tax under Section 501(a) of the
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Internal Revenue Code ("qualified trusts") will be treated as held directly by
its beneficiaries in proportion to their interests in the trust and will not be
treated as held by the trust.
A qualified trust owning more than 10% of a REIT may be required to treat
a percentage of dividends from the REIT as unrelated business taxable income
("UBTI"). The percentage is determined by dividing the REIT's gross income (less
direct expenses related thereto) derived from an unrelated trade or business for
the year (determined as if the REIT were a qualified trust) by the gross income
(less direct expenses related thereto) of the REIT for the year in which the
dividends are paid. However, if this percentage is less than 5%, dividends are
not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a REIT
because of the "look-thru" rule with respect to the 50% test discussed above and
if the trust is "predominantly held" by qualified trusts. A REIT is
predominantly held by qualified trusts if at least one pension trust owns more
than 25% of the value of the REIT or a group of pension trusts each owning more
than 10% of the value of the REIT collectively own more than 50% of the value of
the REIT. We do not currently meet either of these requirements.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Internal Revenue Code, respectively, income from an investment in our
capital stock will constitute UBTI unless the organization is able to deduct an
amount properly set aside or placed in reserve for certain purposes so as to
offset the UBTI generated by the investment in our capital stock. These
prospective investors should consult their own tax advisors concerning the "set
aside" and reserve requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders are complex and no attempt will be made herein to provide more than
a summary of such rules. Prospective non-U.S. shareholders should consult with
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in shares of common stock,
including any reporting requirements, as well as the tax treatment of such an
investment under the laws of their home country.
Dividends that are not attributable to gain from any sales or exchanges we
make of United States real property interests and which we do not designate as
capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of our current or accumulated earnings and
profits. Those dividends ordinarily will be subject to a withholding tax equal
to 30% of the gross amount of the dividend unless an applicable tax treaty
reduces or eliminates that tax. However, if income from the investment in the
shares of common stock is treated as effectively connected with the non-U.S.
shareholder's conduct of a United States trade or business, the non-U.S.
shareholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. shareholders are taxed with respect to those dividends, and may
also be subject to the 30% branch profits tax in the case of a shareholder that
is a foreign corporation. For withholding tax purposes, we are currently
required to treat all distributions as if made out of our current and
accumulated earnings and profits and thus we intend to withhold at the rate of
30%, or a reduced treaty rate if applicable, on the amount of any distribution
(other than distributions designated as capital gain dividends) made to a
non-U.S. shareholder unless (1) the non-U.S. shareholder files an IRS Form
W-8BEN claiming that a lower treaty rate applies or (2) the non-U.S. shareholder
files an IRS Form W-8ECI claiming that the dividend is effectively connected
income.
Under the final regulations, which were generally effective for
distributions on or after January 1, 2001, we are not required to withhold at
the 30% rate on distributions we reasonably estimate to be in excess of our
current and accumulated earnings and profits. Dividends in excess of our current
and
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accumulated earnings and profits are not taxable to a shareholder to the extent
that they do not exceed the adjusted basis of the shareholder's shares, but
rather will reduce the adjusted basis of those shares. To the extent that those
dividends exceed the adjusted basis of a non-U.S. shareholder's shares, they
will give rise to tax liability if the non-U.S. shareholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares, as
described below. If it cannot be determined at the time a dividend is paid
whether or not a dividend will be in excess of current and accumulated earnings
and profits, the dividend will be subject to such withholding. We do not make
quarterly estimates of that portion of dividends that are in excess of earnings
and profits, and, as a result, all dividends will be subject to such
withholding. However, the non-U.S. shareholder may seek a refund of those
amounts from the IRS.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from our sales or exchanges of United States real property
interests will be taxed to a non-U.S. shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980, commonly known as "FIRPTA."
Under FIRPTA, those dividends are taxed to a non-U.S. shareholder as if the gain
were effectively connected with a United States business. Non-U.S. shareholders
would thus be taxed at the normal capital gain rates applicable to U.S.
shareholders subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals. Also,
dividends subject to FIRPTA may be subject to a 30% branch profits tax in the
hands of a corporate non-U.S. shareholder not entitled to treaty exemption. We
are required by the Internal Revenue Code and applicable Treasury Regulations to
withhold 35% of any dividend that could be designated as a capital gain dividend
in connection with the sale of a United States real property interest. This
amount is creditable against the non-U.S. shareholder's FIRPTA tax liability.
Gain recognized by a non-U.S. shareholder upon a sale of shares generally
will not be taxed under FIRPTA if we are a "domestically controlled REIT,"
defined generally as a REIT in which at all times during a specified testing
period less than 50% in value of the shares was held directly or indirectly by
foreign persons. It is currently anticipated that we will be a "domestically
controlled REIT," and therefore the sale of shares will not be subject to
taxation under FIRPTA. Because the shares of common stock will be publicly
traded, however, no assurance can be given that we will remain a "domestically
controlled REIT." However, gain not subject to FIRPTA will be taxable to a
non-U.S. shareholder if (1) investment in the shares of common stock is
effectively connected with the non-U.S. shareholder's United States trade or
business, in which case the non-U.S. shareholder will be subject to the same
treatment as U.S. shareholders with respect to that gain, and may also be
subject to the 30% branch profits tax in the case of a corporate non-U.S.
shareholder, or (2) the non-U.S. shareholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year in which case the nonresident alien individual will be subject to a 30%
withholding tax on the individual's capital gains. If we were not a domestically
controlled REIT, whether or not a non-U.S. shareholder's sale of shares would be
subject to tax under FIRPTA would depend on whether or not the shares of common
stock were regularly traded on an established securities market (such as the
American Stock Exchange) and on the size of selling non-U.S. shareholder's
interest in our capital shares. If the gain on the sale of shares were to be
subject to taxation under FIRPTA, the non-U.S. shareholder will be subject to
the same treatment as U.S. shareholders with respect to that gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals and the possible application of the 30%
branch profits tax in the case of foreign corporations) and the purchaser of our
shares of common stock may be required to withhold 10% of the gross purchase
price.
JOBS AND GROWTH TAX ACT
On May 28, 2003, the President of the United States signed into law the
Jobs and Growth Tax Relief Reconciliation Act of 2003, referred to herein as the
Jobs and Growth Tax Act. The Jobs and Growth Tax Act reduces the maximum
individual tax rate for long-term capital gains generally from 20%
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to 15% (for sales occurring after May 6, 2003 through December 31, 2008). The
Jobs and Growth Tax Act also taxes "qualified dividend income" of individuals as
net capital gain, thus reducing the maximum individual tax rate for such
dividends to 15% (for tax years from 2003 through 2008). "Qualified dividend
income" generally includes dividends received from regular corporations and from
certain "qualified foreign corporations," provided certain required stock
holding periods are met.
Under the Jobs and Growth Tax Act, REIT dividends (other than capital gain
dividends) generally are not qualifying dividend income and continue to be taxed
at ordinary rates. Dividends received from a REIT will be treated as qualified
dividend income, however, to the extent the REIT itself has qualifying dividend
income for the taxable year in which the dividend was paid, such as dividends
from taxable REIT subsidiaries, and designates such dividends as qualifying for
such capital gains rate tax treatment. Qualifying dividend income of a REIT for
this purpose also includes the sum of (i) the excess of the REIT's "real estate
investment trust taxable income" for the preceding year, which would typically
include any income that the REIT did not distribute to stockholders, over the
tax payable by the REIT on such income, and (ii) the excess of the income of the
REIT for the preceding year subject to the built-in gain tax on certain assets
acquired from C corporations, including as a result of the conversion of a C
corporation to a REIT, over the tax payable by the REIT on any such income in
the preceding year.
Assuming that we distribute all of our taxable income to our stockholders,
our distributions generally will not be eligible for the new 15% tax rate on
dividends for individual taxpayers except to the extent attributable to income
on which we have paid tax as discussed above or to dividends received by us from
non-REIT corporations such as taxable REIT subsidiaries. As a result, our
ordinary REIT distributions generally will be taxed at the higher tax rates
applicable to ordinary income.
Without future congressional action, the maximum individual tax rate on
long-term capital gains will return to 20% in 2009, and the maximum individual
tax rate on dividends will move to 35% in 2009 and 39.6% in 2011.
STATE AND LOCAL TAXES
We, and our shareholders, may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in our capital shares.
CERTAIN ERISA CONSIDERATIONS
Each prospective investor that is (i) an ERISA Plan, (ii) a plan within
the meaning of Section 4975(e)(1) of the Internal Revenue Code (including an IRA
and a Keogh Plan) or (iii) a person investing assets of any ERISA Plan or plan
whose assets are deemed to include plan assets should consider the matters
described below in determining whether to invest in our capital shares. Such
ERISA Plans, plans and persons are referred to herein as "Plans."
GENERAL FIDUCIARY RULES
Investments by ERISA Plans and persons whose assets are deemed to include
plan assets are subject to ERISA's general fiduciary requirements, including the
requirements of investment prudence and diversification, requirements respecting
the delegation of investment authority and the requirement that an ERISA Plan's
investment be made in accordance with the documents governing the Plan. Plan
fiduciaries must give appropriate consideration to, among other things, the role
that an investment in our capital shares has in the Plan's investment portfolio,
taking into account the Plan's purposes, the risk of
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loss and the potential return in respect of such investment, the composition of
the Plan's portfolio, the liquidity and current return of the total portfolio
relative to the anticipated cash flow needs of the Plan, and the projected
return of the portfolio relative to the Plan's funding objectives. Keogh Plan
and IRA investors should also consider whether an investment in our capital
shares is appropriate for their Keogh Plans or IRAs.
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PLAN ASSETS
Regulations issued by the U.S. Department of Labor (the "Plan Asset
Regulations") describe what constitutes the assets of a Plan for purposes of
various provisions of ERISA and Section 4975 of the Internal Revenue Code when a
Plan makes an equity investment in an entity such as an investment in our
capital shares. The U.S. Department of Labor has generally stated that an
investment by a plan in securities (within the meaning of section 3(20) of
ERISA) of a corporation or partnership will not, solely by reason of such
investment, be considered to be an investment in the underlying assets of such
corporation or partnership so as to make such assets of the entity "plan assets"
and thereby make a subsequent transaction between the party in interest and the
corporation or partnership a prohibited transaction under Section 406 of ERISA.
The Plan Asset Regulations provide that the assets of entities in which
retirement plans make equity investments will be treated as "plan assets" unless
such investments are (1) in publicly offered securities, (2) in securities
offered by an investment company registered under the Investment Company Act of
1940, or (3) within one of the other specific exemptions set forth in the Plan
Asset Regulations. Since we are not a registered investment company, the
exemption contained in the Plan Asset Regulations which may apply to an
investment in our capital shares is that that it may be an investment in
"publicly offered securities," defined generally as interests which are freely
transferable, widely-held and registered with the Securities and Exchange
Commission or an investment in which equity participation by "benefit plan
investors" is not significant. The Plan Asset Regulations provide that equity
participation in an entity by benefit plan investors is "significant" if at any
time 25% or more of the value of any class of equity interest is held by benefit
plan investors. The term "benefit plan investors" is broadly defined for this
purpose to include any employee pension or welfare benefit plan, whether or not
subject to ERISA, any plan described in Section 4975(e)(1) of the Internal
Revenue Code and any entity whose underlying assets include plan assets by
reason of plan investment in the entity. We may have equity participation in
this offering by "benefit plan investors" that is significant, as defined above.
Therefore, we may not qualify for the exemption for investments in which equity
participation by benefit plan investors is not significant.
PLAN ASSET REGULATIONS - PUBLICLY OFFERED SECURITIES EXEMPTION
As noted above, if a retirement plan acquires "publicly offered
securities," the assets of the issuer of the securities are not deemed to be
plan assets under the Plan Asset Regulations. The definition of publicly offered
securities requires that such securities must be "widely-held," "freely
transferable" and must satisfy certain registration requirements under federal
securities laws. Although we should satisfy the registration requirements under
this definition, the determinations of whether a security is "widely-held" and
"freely transferable" are inherently factual matters. Under the Plan Asset
Regulations, a class of securities will be "widely-held" if it is held by 100 or
more persons. We anticipate that this requirement will be met; however, even if
the shares are deemed to be widely-held, the "freely transferable" requirement
must also be satisfied in order to qualify for this exemption. We intend to
satisfy the freely transferable requirement set forth in the Plan Asset
Regulations with respect to our shares. Because of the factual nature of such a
determination, however, and the lack of further guidance as to the meaning of
the term "freely transferable," there can be no assurance that we will, in fact,
qualify for this exemption.
PROHIBITED TRANSACTIONS
ERISA generally prohibits a fiduciary from causing an ERISA Plan to engage
in a broad range of transactions involving the assets of the ERISA Plan and
persons having a specified relationship to the Plan ("parties in interest")
unless a statutory or administrative exemption applies. Similar prohibitions are
contained in Section 4975 of the Internal Revenue Code and generally apply with
respect to ERISA Plans, Keogh Plans, IRAs, and other Plans. An excise tax may be
imposed pursuant to Section 4975 of the Internal Revenue Code on persons having
a specified relationship with a Plan ("disqualified persons") in
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respect of prohibited transactions involving the assets of the Plan. Generally
speaking, parties in interest for purposes of ERISA would be disqualified
persons under Section 4975 of the Internal Revenue Code.
If our assets are treated for purposes of ERISA and Section 4975 of the
Internal Revenue Code as the assets of the Plans that invest in our capital
shares due to the fact that we fail to satisfy the publicly offered securities
exception, certain transactions that we might enter into in the ordinary course
of our business might constitute "prohibited transactions" under ERISA and the
Internal Revenue Code, thereby potentially subjecting fiduciaries of the Plans
to personal liability and civil penalties and potentially resulting in the
imposition of an excise tax under Section 4975 of the Internal Revenue Code on
the disqualified person that is party to the transaction with us unless a
statutory or administrative exemption exist and the plan satisfies all
conditions for such exemptive relief.
There are five class exemptions issued by the Department of Labor that
could apply in the event of a prohibited transaction. These Department of Labor
Prohibited Transaction Class Exemptions apply to:
- plan asset transactions determined by independent qualified
professional asset managers (PTE 84-14),
- certain transactions involving bank collective investment funds (PTE
91-38),
- certain transactions involving insurance company pooled separate
accounts (PTE 90-1),
- certain transactions involving insurance company general accounts
(PTE 95-60), and
- plan asset transactions determined by in-house asset manager (PTE
96-23).
However, there is no assurance that these exemptions or any other
exemption will apply, even if all of the conditions specified are satisfied.
GOVERNMENTAL PLANS
Although federal, state and local governmental pension plans are not
subject to ERISA, applicable provisions of federal and state law may restrict
the type of investments such a plan may make or otherwise have an impact on such
a plan's ability to invest in our capital shares. Accordingly, state and local
governmental pension plans considering an investment in our capital shares
should consult with their counsel regarding their proposed investment in our
capital shares.
SPECIAL CONSIDERATIONS FOR INSURANCE COMPANIES
An insurance company considering an investment should consider whether
it's general account may be deemed to include assets of the plans investing in
the general account, for example, through the purchase of an annuity contract.
In John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 510
U.S. 86 (1993), the United States Supreme Court held that assets held in an
insurance company's general account may be deemed to be plan assets under
certain circumstances. In that event, the insurance company might be treated as
a party in interest under such plans. However, PTE 95-60 (described above) may
exempt some or all of the transactions that could occur as the result of the
acquisition of our capital shares by an insurance company general account.
Therefore, insurance company investors should analyze whether John Hancock and
PTE 95-60 or any other exemption may have an impact on their decision to
purchase our capital shares.
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In addition, the Small Business Job Protection Act of 1996 added a new
Section 401(c) of ERISA relating to the status of the assets of insurance
company general accounts under ERISA and Section 4975 of the Internal Revenue
Code. Pursuant to Section 401(c), the Department of Labor issued final
regulations effective January 5, 2000 (the "General Account Regulations") with
respect to insurance policies issued on or before December 31, 1998 that are
supported by an insurer's general account. As a result of these regulations,
assets of an insurance company general account will not be treated as "plan
assets" for purposes of the fiduciary responsibility provisions of ERISA and
Section 4975 of the Internal Revenue Code to the extent such assets relate to
contracts issued to employee benefit plans on or before December 31, 1998 and
the insurer satisfies various conditions. The plan asset status of insurance
company separate accounts is unaffected by new Section 401(c) of ERISA, and
separate account assets continue to be treated as the plan assets of any such
plan invested in a separate account.
THE FOREGOING DISCUSSION OF ERISA AND INTERNAL REVENUE CODE ISSUES SHOULD
NOT BE CONSTRUED AS LEGAL ADVICE. FIDUCIARIES OF PLANS SHOULD CONSULT THEIR OWN
COUNSEL WITH RESPECT TO ISSUES ARISING UNDER ERISA AND THE INTERNAL REVENUE CODE
AND MAKE THEIR OWN INDEPENDENT DECISION REGARDING AN INVESTMENT IN OUR COMMON
SHARES.
PLAN OF DISTRIBUTION
GENERAL
We are offering a maximum of 15,000,000 shares to the public through
Participating Dealers, as defined below. The shares are being offered at a price
of $10.00 per share on a "best efforts" basis, which means generally that the
Participating Dealers will be required to use only their best efforts to sell
the shares and they have no firm commitment or obligation to purchase any of the
shares. We are also offering 2,000,000 shares for sale pursuant to our dividend
reinvestment plan at a price of $10.00 per share. Prior to the conclusion of
this offering, if any of the 2,000,000 shares remain after meeting anticipated
obligations under our reinvestment plan, AmrEIT may decide to sell a portion of
those shares in this offering. Therefore, a total of 17,000,000 shares are being
registered in this offering.
The offering of shares will terminate on or before June 25, 2005.
However, we reserve the right to extend the offering until not later than June
25, 2006 in any state that allows us to extend the offering.
UNDERWRITING COMPENSATION AND TERMS
Except as provided below, the Participating Dealers will receive selling
commissions of 7.5% of the gross offering proceeds. The Dealer Manager will
receive 2.5% of the gross offering proceeds in the form of a dealer manager fee
as compensation for acting as the Dealer Manager and for expenses incurred in
connection with marketing our shares. We will not pay referral or similar fees
to any accountants, attorneys or other persons in connection with the
distribution of the shares. Shareholders who elect to participate in the
dividend reinvestment plan will be charged selling commissions and dealer
manager fees on shares purchased pursuant to the dividend reinvestment plan on
the same basis as shareholders purchasing shares other than pursuant to the
dividend reinvestment plan.
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The Dealer Manager will select other broker-dealers who are members of the
NASD (Participating Dealers) to sell our shares. In the event of the sale of
shares by such Participating Dealers, the Dealer Manager may reallow its
commissions in the amount of up to 7.5% of the gross offering proceeds to such
Participating Dealers. In addition, the Dealer Manager may reallow a portion of
its dealer manager fee to Participating Dealers in the aggregate amount of up to
0.5% of gross offering proceeds to be paid to such Participating Dealers as
marketing fees, or to reimburse representatives of such Participating Dealers
the costs and expenses of attending our educational conferences and seminars.
In addition, unless otherwise agreed with the Dealer Manager,
Participating Dealers will be reimbursed by AmREIT for bona fide due diligence
expenses, not to exceed 0.5% of gross offering proceeds in the aggregate.
Investors may agree with their broker-dealer to reduce the amount of
selling commissions payable with respect to the sale of their shares down to
zero (1) in the event that the investor has engaged the services of a registered
investment advisor or other financial advisor with whom the investor has agreed
to pay compensation for investment advisory services or other financial or
investment advice, or (2) in the event that the investor is investing in a bank
trust account with respect to which the investor has delegated the
decision-making authority for investments made in the account to a bank trust
department. The net proceeds to AmREIT will not be affected by reducing the
commissions payable in connection with such transactions.
Neither the Dealer Manager nor its affiliates will compensate any person
engaged as an investment advisor by a potential investor as an inducement for
such investment advisor to advise favorably for an investment in AmREIT.
SUBSCRIPTION PROCEDURES
You should pay for your shares by check payable to "AmREIT." Subscriptions
will be effective only upon our acceptance, and we reserve the right to reject
any subscription in whole or in part. We may not accept a subscription for
shares until at least five business days after the date you receive this
prospectus. You will receive a confirmation of your purchase. We will initially
deposit the subscription proceeds in an interest-bearing account with Wells
Fargo Bank. Subscribers may not withdraw funds from the account. We will
withdraw funds from the account periodically for the acquisition of real estate
properties, the payment of fees and expenses or other investments approved by
our board of trust managers. We generally admit shareholders to AmREIT on a
daily basis.
Except for purchases pursuant to our dividend reinvestment plan or
reinvestment plans of other public real estate programs, all accepted
subscriptions will be for whole shares and for not less than 500 shares ($5,000)
for non-qualified accounts, or 300 shares ($3,000) for qualified accounts. See
"Suitability Standards." Except in Maine, Minnesota, Nebraska and Washington,
investors who have satisfied the minimum purchase requirement and have purchased
units or shares in AmREIT programs or units or shares in other public real
estate programs may purchase less than the minimum number of shares discussed
above, provided that such investors purchase a minimum of 10 shares ($100).
After investors have satisfied the minimum purchase requirement, minimum
additional purchases must be in increments of at least 10 shares ($100), except
for purchases made pursuant to our dividend reinvestment plan or reinvestment
plans of other public real estate programs.
The proceeds of this offering will be used only for the purposes set forth
in the "Estimated Use of Proceeds" section of this prospectus. Subscriptions
will be accepted or rejected within 30 days of receipt by AmREIT and, if
rejected, all funds shall be returned to the rejected subscribers within 10
business days. The Dealer Manager and each Participating Dealer who sells shares
on behalf of AmREIT have the
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responsibility to make every reasonable effort to determine that the purchase of
shares is appropriate for the investor and that the requisite suitability
standards are met. See "Suitability Standards." In making this determination,
the Participating Dealer will rely on relevant information provided by the
investor, including information as to the investor's age, investment objectives,
investment experience, income, net worth, financial situation, other
investments, and other pertinent information. Each investor should be aware that
the Participating Dealer will be responsible for determining suitability.
The Dealer Manager or each Participating Dealer shall maintain records of
the information used to determine that an investment in shares is suitable and
appropriate for an investor. These records are required to be maintained for a
period of at least six years.
SUPPLEMENTAL SALES MATERIAL
In addition to this prospectus, we may utilize certain sales material in
connection with the offering of the shares, although only when accompanied by or
preceded by the delivery of this prospectus. In certain jurisdictions, some or
all of such sales material may not be available. This material may include
information relating to this offering, our past performance, property brochures
and articles and publications concerning real estate. In addition, the sales
material may contain certain quotes from various publications without obtaining
the consent of the author or the publication for use of the quoted material in
the sales material.
The offering of shares is made only by means of this prospectus. Although
the information contained in such sales material will not conflict with any of
the information contained in this prospectus, such material does not purport to
be complete, and should not be considered a part of this prospectus or the
registration statement of which this prospectus is a part, or as incorporated by
reference in this prospectus or said registration statement or as forming the
basis of the offering of the shares.
EXPERTS
The consolidated financial statements and schedule of AmREIT and
subsidiaries as of December 31, 2003 and for each of the years in the two years
ended December 31, 2003, have been included herein in reliance upon the report
of KPMG LLP, independent registered public accounting firm, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
LEGAL OPINIONS
The legality of the shares being offered hereby has been passed upon by
Locke Liddell & Sapp LLP, Dallas, Texas. The statements under the caption
"Federal Income Tax Consequences" as they relate to federal income tax matters
have been reviewed by Locke Liddell & Sapp LLP, and Locke Liddell & Sapp LLP has
opined as to certain income tax matters relating to an investment in the
company. Locke Liddell & Sapp LLP has represented affiliates of AmREIT in other
matters and may continue to do so in the future.
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ADDITIONAL INFORMATION
We have filed with the SEC in Washington, D.C., a registration statement
on Form S-11 under the Securities Act of 1933, as amended, with respect to the
shares offered pursuant to this prospectus. This prospectus does not contain all
the information set forth in the registration statement and the exhibits related
thereto filed with the SEC, reference to which is hereby made. Copies of the
registration statement and exhibits related thereto, as well as periodic reports
and information filed by AmREIT may be obtained upon payment of the fees
prescribed by the SEC, or may be examined at the offices of the SEC without
charge, at the public reference facility in Washington, D.C. at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the SEC
maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
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GLOSSARY
The following are definitions of certain terms used in this prospectus:
"AFFO" means adjusted funds from operations. The Company has adopted
NAREIT'S definition of FFO, and then adds back non-cash, non-operational amounts
to calculate AFFO.
"Affiliate" means (1) any person or entity directly or indirectly through
one or more intermediaries controlling, controlled by, or under common control
with another person or entity; (2) any person or entity directly or indirectly
owning, controlling, or holding with power to vote 10% or more of the
outstanding voting securities of another person or entity; (3) any officer,
director, partner, or trustee of such person or entity; (4) any person 10% or
more of whose outstanding voting securities are directly or indirectly owned,
controlled or held, with power to vote, by such other person; and (5) if such
other person or entity is an officer, director, partner, or trustee of a person
or entity, the person or entity for which such person or entity acts in any such
capacity.
"AmREIT" means AmREIT, a Texas real estate investment trust, and unless
otherwise indicated to the contrary, the Predecessor Corporation and all
subsidiaries of AmREIT.
"AmREIT Decision Logic" means a system of analysis for properties being
reviewed by AmREIT, consisting of 25 specific factors, including demographic
studies, traffic flow review, environmental review, site planning and financial
analysis.
"ARIC" means AmREIT Realty Investment Corporation, a wholly-owned
subsidiary of AmREIT.
"Board of Trust Managers" means the Trust Managers of AmREIT.
"Bylaws" means the bylaws of AmREIT.
"Class A Common Shares" means the Class A Common Shares, par value $0.01
per share, of AmREIT.
"Class B Common Shares" means the Class B Common Shares, par value $0.01
per share, of AmREIT.
"Class C Common Shares" means the Class C Common Shares, par value $0.01
per share, of AmREIT.
"Class D Common Shares" means the Class D Common Shares, par value $0.01
per share, of AmREIT.
"Common Shares" means any class or series of common shares of beneficial
interest, par value $0.01, of AmREIT.
"Credit Facility" means AmREIT's $30 million unsecured credit facility
with Wells Fargo Bank, N.A., as lender.
"CTL" means single tenant, free standing, credit tenant leased properties.
"Dealer Manager" means AmREIT Securities Corp., a wholly-owned subsidiary
of AmREIT.
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"Dividend Reinvestment Plan" means the Dividend Reinvestment Plan, in the
form attached hereto as Exhibit B.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement, or other
employee benefit plan subject to ERISA.
"FCP" means multi-tenant frontage commercial properties.
"FFO" means Funds from Operations.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended
"Former Advisor" means American Asset Advisors Realty Corporation, which
was wholly-owned by H. Kerr Taylor, AmREIT's Chairman of the Board and Chief
Executive Officer.
"Funds IX, X and XI" means, collectively, AAA Net Realty Fund IX, Ltd.,
AAA Net Realty Fund X, Ltd. and AAA Net Realty Fund XI, Ltd.
"Internal Revenue Code" or "Code" means the Internal Revenue Code of 1986,
as amended.
"Interested Shareholder" means any person who beneficially owns, directly
or indirectly, 10% or more of the voting power of AmREIT's shares.
"IRAs" means individual retirement accounts.
"Irreplaceable Corners" means premier retail frontage properties in
high-traffic, highly populated areas, which provide long-term value. These
corners attract three types of tenants: high profile single tenants, high-end
multi-tenant shopping centers and large grocery anchored centers.
"IRS" means the Internal Revenue Service.
"Joint Ventures" means the joint venture or general partnership
arrangements in which AmREIT is a co-venturer or general partner which are
established to acquire properties.
"Market Value" means an amount determined as follows. Each party, at its
sole cost and by giving notice to the other party, shall appoint a real estate
appraiser with at least five (5) years full-time commercial appraisal experience
and who is a member of the Appraisal Institute (MAI designation) to determine
the Market Value. If either party fails to appoint an appraiser within five (5)
days after the other party has given notice of the name of its appraiser, the
single appraiser appointed shall be the sole appraiser and shall determine the
Market Value. If two appraisers are appointed by the parties, they shall each
conduct an independent appraisal of the property to be completed no later than
thirty (30) days after the two appraisers are appointed. If the two appraised
values are within five percent (5%) of each other, the Market Value of the
property shall be the median of the two appraisals. If the two appraisals are
more than five percent (5%) apart, a third appraiser meeting the qualifications
stated above shall be appointed by the two existing appraisers within five (5)
days after the last day the two appraisers are given to complete their
appraisals. If they are unable to agree on the third appraiser, either of the
parties, by giving ten (10) days notice to the other party, can apply to the
then president of the Houston Chapter of the Appraisal Institute for the
selection of a third appraiser who meets the qualifications stated above. Each
of the parties shall bear one-half (1/2) of the cost of appointing the third
135
appraiser and of paying the third appraiser's fee. The third appraiser, however
selected, shall be a person who has not previously acted in any capacity for
either party within the previous twelve months. Within thirty (30) days after
its selection, the third appraiser shall complete its appraisal of the property.
Upon completion of the third appraisal, if the low appraisal and/or the high
appraisal are/is more than five percent (5%) lower and/or higher than the middle
appraisal, the low appraisal and/or the high appraisal shall be disregarded. If
only one appraisal is disregarded, the remaining two (2) appraisals shall be
added together and their total divided by two (2), with the resulting quotient
being the Market Value. If both the low appraisal and the high appraisal are
disregarded as stated above, the middle appraisal shall be the Market Value.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NASAA Guidelines" means the Statement of Policy Regarding Real Estate
Programs of the North American Securities Administrators Association, Inc.
adopted on October 9 and 12, 1988, effective January 1, 1989, as amended.
"NASD" means the National Association of Securities Dealers, Inc.
"Net Asset Value" means the value of AmREIT's total assets (less
intangibles) based on market capitalization rates and current year rental
income, as determined by the Board of Trust Managers, before deducting
depreciation or other non-cash reserves, less total liabilities, calculated at
the end of each quarter on a basis consistently applied.
"Net Lease" generally means a property lease pursuant to which the tenant
is responsible for property costs associated with ongoing operations, including
repairs, maintenance, property taxes, utilities and insurance.
"Offering Expenses" means any and all costs and expenses, other than
Selling Commissions, the marketing support fee, due diligence expense
reimbursements, and the fee payable to the Dealer Manager incurred by AmREIT, or
any Affiliate, in connection with the qualification and registration of AmREIT
and the marketing and distribution of shares, including, without limitation, the
following: legal, accounting, and escrow fees; printing, amending,
supplementing, mailing, and distributing costs; filing, registration, and
qualification fees and taxes; fax and telephone costs; and all advertising and
marketing expenses, including the costs related to investor and broker-dealer
sales meetings. The Offering Expenses paid by AmREIT in connection with the
offering, together with the 7.5% Selling Commissions, the marketing support fee,
due diligence expense reimbursements, and 2.5% fee payable to the Dealer
Manager, incurred by AmREIT will not exceed 11.5% of the proceeds raised in
connection with this offering.
"Ownership Limit" means, with respect to Common Shares and Preferred
Shares, the percent limitation placed on the ownership of Common Shares and
Preferred Shares by any one person. As of the initial date of this prospectus,
the Ownership Limit is 9.0% of the outstanding Common Shares and 9.9% of the
outstanding Preferred Shares.
"Participants" means those shareholders who elect to participate in the
Dividend Reinvestment Plan.
"Participating Dealers" means those broker-dealers that are members of the
NASD, or that are exempt from broker-dealer registration, and that, in either
case, enter into participating broker or other agreements with the Dealer
Manager to sell shares.
136
"Partnerships" means the ten real estate limited partnerships under common
management that are Affiliates of AmREIT.
"Plan" means ERISA Plans, IRAs, Keogh plans, stock bonus plans, and
certain other plans.
"Plan Asset Regulations" means regulations issued by the U.S. Department
of Labor describing what constitutes the assets of a Plan for purposes of
various provisions of ERISA.
"Predecessor Corporation" means AmREIT, Inc., a Maryland corporation.
"Preferred Shares" means any class or series of preferred shares of
beneficial interest, par value $0.01 per share of AmREIT that may be issued in
accordance with the terms of our articles of incorporation and applicable law.
"Prospectus" means the final prospectus included in the Company's
registration statement filed with the SEC, pursuant to which the Company will
offer Class D Common Shares to the public, as the same may be amended or
supplemented from time to time after the effective date of the registration
statement.
"Qualified Plans" means qualified pension, profit-sharing, and share bonus
plans, including Keogh plans and IRAs.
"Reinvestment Agent" means the independent agent, which currently is Wells
Fargo Bank Minnesota, N.A., for Participants in the Dividend Reinvestment Plan.
"Reinvestment Proceeds" means net proceeds available from the sale of
shares under the Dividend Reinvestment Plan to redeem shares.
"REIT" means real estate investment trust, as defined pursuant to Sections
856 through 860 of the Internal Revenue Code.
"Retail Partnerships" means AmREIT's retail partnership subsidiaries that
sell limited partnership interests to retail investors, in which AmREIT directly
invests as both the general partner and as a limited partner.
"SEC" means the Securities and Exchange Commission.
"Selling Commissions" means any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of shares as described in this prospectus, including, without limitation,
commissions payable to the Participating Dealers.
"Subscription Agreement' means the Subscription Agreement and the
Subscription Agreement Signature Page, in the forms attached hereto as Exhibit
A.
"TRA" means the Texas Real Estate Investment Trust Act, as amended.
"Trust Manager" means a member of the board of trust managers of AmREIT.
"UBTI" means unrelated business taxable income, as that term is defined in
Sections 511 through 514 of the Internal Revenue Code.
137
EXHIBIT A
SUBSCRIPTION AGREEMENT
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[AMREIT LOGO] SPECIAL INSTRUCTIONS:
CLASS D COMMON SHARES
SUBSCRIPTION AGREEMENT SIGNATURE PAGE
See pages of the Prospectus for instructions
1. INVESTMENT
MAKE INVESTMENT CHECKS PAYABLE TO AMREIT
- ------------------- --------------- [ ] Initial Investment - Qualified Plans (min. $3,000)
Total $ Invested # of Shares [ ] Initial Investment - Non Qualified Plans (min. $5,000)
[ ] Additional Investment (increments of $100.00)
2. LIQUIDITY
Ihave received and reviewed the prospectus and understand that this
investment is considered illiquid, not convertible into the AmREIT class A
shares for a period of seven years. I further understand that AmREIT's -------------- --------------
class A shares are publicly traded on the American Stock Exchange. Initials Initials
3. TYPE OF OWNERSHIP
NON QUALIFIED QUALIFIED **
[ ] Individual [ ] Trust * / Trust Type: [ ] IRA
[ ] Joint Tenants with Rights of (Please specify, i.e. family, living, [ ] Qualified Pension Plan
Survivorship (JTWROS) revocable, etc.) [ ] Qualified Profit Sharing Plan
[ ] Joint Tenants in Common (JTIC) [ ] Other: [ ] KEOGH _____________
[ ] Uniform Gift to Minors Act (UGMA) [ ] Other:
[ ] Partnership * Must attach a copy of title ** All IRA accounts must be
and signature page of trust forwarded to custodian for
document processing and signatures.
Custodian will then submit to
AmREIT.
4. INVESTOR NAME AND ADDRESS
SKIP THIS SECTION IF IT IS THE SAME AS THE REGISTRATION INFORMATION IN
SECTION 5. THIS IS TYPICAL IN THE CASE OF INDIVIDUAL AND JOINT ACCOUNTS.
[ ] Mr [ ] Mrs [ ] Ms [ ] Dr [ ] Other Taxpayer Identification Number
Name (s) ----- [ ] [ ] - [ ] [ ] [ ] [ ] [ ] [ ] [ ]
- ------------------------------------------ Social Security Number
- ------------------------------------------ [ ] [ ] [ ] - [ ] [ ] - [ ] [ ] [ ] [ ]
Street Address
or P.O. Box -----------------------------------------------------------------
-----------------------------------------------------------------
City State Zip Code
------------------ ------------ ---------------
Home Phone
Number ------------------
------------------
5. REGISTRATION INFORMATION AND ADDRESS
PLEASE PRINT NAME (S) IN WHICH UNITS ARE TO BE REGISTERED. INCLUDE TRUST
OR CUSTODIAL NAME IF APPLICABLE. AMREIT DOES NOT PROVIDE CUSTODIAL
SERVICES; THEREFORE, IF THIS IS A CUSTODIAL ACCOUNT, A CUSTODIAN MUST BE
SELECTED AND INDICATED BELOW. ALSO, CUSTODIAN MUST SIGN AND PROCESS PAPER
WORK PRIOR TO SUBMISSION TO AMREIT.
[ ] Mr [ ] Mrs [ ] Ms [ ] Dr [ ] Other
--------
Taxpayer Identification Number
Name (s) [ ] [ ] - [ ] [ ] [ ] [ ] [ ] [ ] [ ]
- ------------------------------------------ Social Security Number
- ------------------------------------------ [ ] [ ] [ ] - [ ] [ ] - [ ] [ ] [ ] [ ]
Street Address
or P.O. Box -----------------------------------------------------------------
-----------------------------------------------------------------
City State Zip Code
------------------ ------------ ---------------
Home Phone
Number ------------------ Email Address
------------------ ------------------------------
Birth Date ------------------ (E-mail addresses will not be sold or
distributed and will only be used for
corporate communication.)
(BOTH PAGES MUST BE COMPLETED)
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NAME: SS/TAX ID
------------------------------- -----------------------------
6. INVESTOR KNOWLEDGEMENT
Please separately initial each of the representations below. In order to induce
AmREIT to accept this subscription, I hereby represent and warrant to you as
follows:
(a) I have received the Prospectus.
------------- -------------
(b) I (i) either have a net worth (exclusive of home, home furnishings, and Initials Initials
automobiles) of at least $150,000, or have a net worth (as described
above) of at least $45,000 and had during the last tax year, or estimate
that I will have during the current tax year, a minimum annual gross ------------- -------------
income of $45,000; and (ii) if the state of my primary residence imposes a Initials Initials
higher suitability standard, I meet the higher suitability requirements
imposed by my state of primary residence as set forth in the Prospectus
under "Suitability Standards". ------------- -------------
Initials Initials
(c) This investment does not represent more than 20% of my net worth.
(d) I acknowledge that the shares are not liquid. ------------- -------------
Initials Initials
7. DIVIDENDS (YOU MUST CHECK ONE OF THE FOLLOWING
NOTE: AMREIT DOES NOT PROVIDE CUSTODIAL SERVICES. IF THIS IS A CUSTODIAL
ACCOUNT, PLEASE ENSURE THAT YOU HAVE COMPLETED SECTION 4 APPROPRIATELY AND
INDICATED THE NAME OF THE CUSTODIAN.
[ ] I prefer to participate in the Dividend Reinvestment Plan with the transfer
agent selected in the prospectus.
[ ] I prefer dividends be paid to me at my address listed under Section 5
[ ] I prefer to direct dividends to a party other than the registered owner per
my instructions below
[ ] I prefer dividends to be deposited directly into the following account:
Checking______ Savings______
(If you wish to have your dividends deposited via electronic deposits,
please complete the attached electronic deposit form and include the
appropriate voided check or deposit slip)
Institution Account Number
Name ----------------------------------
------------------------------
Name on
Account ABA Routing Number
------------------------------- -------------------------------
Street Address
or P.O. Box
-------------------------------------------------------------------------------------
City State Zip Code
-------------------------- ------------ ------------------------
I declare that the information supplied above is true and correct and may be
relied upon by AmREIT in connection with my investment in AmREIT. Under
penalties of perjury, by signing this Signature Page, I hereby certify that (a)
I have provided herein my correct Taxpayer Identification Number, and (b) I am
not subject to back-up withholding as a result of a failure to report all
interest or dividends, or the Internal Revenue Service has notified me that I am
no longer subject to back-up withholding.
(MUST BE SIGNED BY INVESTOR (S) OR TRUSTREE (S) AND, IF QUALIFIED PLAN, BY
CUSTODIAN
- --------------------------------- --------------------------------------- ----------------
- --------------------------------- --------------------------------------- ----------------
Signature of Investor or Trustee Signature of Joint Owner, if applicable Date
8. BROKER DEALER (TO BE COMPLETED BY REGISTERED REPRESENTATIVE)
THE BROKER-DEALER OR AUTHORIZED REPRESENTATIVE MUST SIGN BELOW to complete
order. Broker-Dealer or authorized representative warrants that it is a duly
licensed Broker-Dealer or authorized representative and may lawfully offer
Shares in the state designated as the investor's address or the state in which
the sale was made, if different. The Broker-Dealer or authorized representative
warrants that he has reasonable grounds to believe this investment is suitable
for the subscriber and that he has informed subscriber of all aspects of
liquidity and marketability of this investment.
Broker Dealer
Name
----------------------------------
BD Address
------------------------------------------------------------------------------------
City State Zip Code
-------------------------- -------------- ------------------------
Reg. Rep. Rep. Phone Number
-------------------------- -------------------------------
Rep Address
------------------------------------------------------------------------------------
City State Zip Code
-------------------------- -------------- ------------------------
Email Address
-------------------------- (E-mail addresses will not be sold or distributed and
will only be used for corporate communication.)
- ----------------------------------- ---------------------------------------
Registered Representative Signature Broker-Dealer Signature, if required
Please Mail completed Subscription Agreement (with all signatures) and personal
check(s) made payable to
AMREIT
8 Greenway Plaza, Suite 1000, Houston, TX 77046 Common D Sub. Agreement
1-800-888-4400 - Investor Relations (ext. 135 & 151) 6-23-2004
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EXHIBIT B
DIVIDEND REINVESTMENT PLAN
AmREIT, a Texas real estate investment trust (the "Company"), pursuant to
its Amended and Restated Declaration of Trust has adopted this Dividend
Reinvestment Plan (the "Reinvestment Plan") on the terms and conditions set
forth below.
1. Reinvestment of Distributions. Wells Fargo Bank, N.A, the agent (the
"Reinvestment Agent") for participants (the "Participants") in the Reinvestment
Plan, will receive all cash distributions made by the Company with respect to
class D common shares of the Company (the "Shares") owned by each Participant
(collectively, the "Distributions"). The Reinvestment Agent will apply such
Distributions as follows:
(a) At any period during which the Company is making a public
offering of Shares, the Reinvestment Agent will invest Distributions in Shares
acquired from the Company at the public offering price per Share.
(b) The price of which the Shares will be issued under the
Reinvestment Plan will be $9.50 per Share.
(c) For each Participant, the Reinvestment Agent will maintain a
record which shall reflect for each month the Distributions received by the
Reinvestment Agent on behalf of such Participant. The Reinvestment Agent will
use the aggregate amount of Distributions to all Participants for each month to
purchase Shares for the Participants. Distributions shall be invested by the
Reinvestment Agent in Shares promptly following the payment date with respect to
such Distributions to the extent Shares are available. If the aggregate amount
of Distributions to Participants exceeds the amount required to purchase all
Shares then available for purchase, the Reinvestment Agent will distribute all
cash funds to participants via a check in lieu of purchasing additional shares.
The ownership of the Shares purchased pursuant to the Reinvestment Plan shall be
reflected on the books of the Company.
(d) The allocation of Shares among Participants may result in the
ownership of fractional Shares, computed to three decimal places.
(e) Distributions attributable to Shares purchased on behalf of
the Participants pursuant to the Reinvestment Plan will be reinvested in
additional Shares in accordance with the terms hereof.
(f) No certificates will be issued to a Participant for Shares
purchased on behalf of the Participant pursuant to the Reinvestment Plan.
Participants in the Reinvestment Plan will receive statements of account in
accordance with Paragraph 7 below.
2. Election to Participate. Any shareholder who participates in a
public offering of Shares and who has received a copy of the related final
prospectus filed with the Securities and Exchange Commission ("SEC") may elect
to participate in and purchase Shares through the Reinvestment Plan at any time
by written notice to the Company and would not need to receive a separate
prospectus relating solely to the Reinvestment Plan. A person who becomes a
shareholder otherwise than by participating in a public offering of Shares may
purchase Shares, with distribution dollars only, through the Reinvestment Plan
only after receipt of a separate prospectus relating solely to the Reinvestment
Plan. The purchase of additional shares through the Reinvestment Plan with
voluntary cash contributions is prohibited.
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Participation in the Reinvestment Plan will commence with the next Distribution
made after receipt of the Participant's notice, provided it is received by the
record date to which such Distribution relates. A Participant who has terminated
his participation in the Reinvestment Plan pursuant to Paragraph 11 will be
allowed to participate in the Reinvestment Plan again upon receipt of a current
version of a final prospectus relating to participation in the Reinvestment Plan
which contains, at a minimum, the following: (i) the minimum investment amount;
(ii) the type or source of proceeds which may be invested; and (iii) the tax
consequences of the reinvestment to the Participant, by notifying the Company
and completing any required forms.
3. Distribution of Funds. In making purchases for Participants'
accounts, the Reinvestment Agent may commingle Distributions attributable to
Shares owned by Participants in the Reinvestment Plan.
4. Proxy Solicitation. The Reinvestment Agent will distribute to
Participants proxy solicitation material received by it from the Company which
is attributable to Shares held in the Reinvestment Plan. The Reinvestment Agent
will vote any Shares that it holds for the account of a Participant in
accordance with the Participant's written instructions. If a Participant gives a
proxy to person(s) representing the Company covering Shares registered in the
Participant's name, such proxy will be deemed to be an instruction to the
Reinvestment Agent to vote the full Shares in the Participant's account in like
manner. If a Participant does not direct the Reinvestment Agent as to how the
Shares should be voted and does not give a proxy to person(s) representing the
Company covering these Shares, the Reinvestment Agent will not vote said Shares.
5. Absence of Liability. Neither the Company nor the Reinvestment Agent
shall have any responsibility or liability as to the value of the Shares, any
change in the value of the Shares acquired for the Participant's account, or the
rate of return earned on, or the value of, the interest-bearing account in which
Distributions are invested. Neither the Company nor the Reinvestment Agent shall
be liable for any act done in good faith, or for any good faith omission to act,
including, without limitation, any claims of liability (a) arising out of the
failure to terminate a Participant's participation in the Reinvestment Plan upon
such Participant's death prior to receipt of notice in writing of such death and
the expiration of 15 days from the date of receipt of such notice and (b) with
respect to the time and the prices at which Shares are purchased for a
Participant. Notwithstanding the foregoing, liability under the federal
securities laws cannot be waived. Similarly, the Company and the Reinvestment
Agent have been advised that in the opinion of the Securities and Exchange
Commission and certain state securities commissioners indemnification is also
considered contrary to public policy and therefore unenforceable.
6. Suitability.
(a) Each Participant shall notify the Dealer Manager in the event
that, at any time during his participation in the Reinvestment Plan, there is
any material change in the Participant's financial condition or inaccuracy of
any representation under the Subscription Agreement.
(b) For purposes of this Paragraph 6, a material change shall
include any anticipated or actual decrease in net worth or annual gross income
or any other change in circumstances that would cause the Participant to fail to
meet the suitability standards set forth in the Company's prospectus.
7. Reports to Participants. Within 10 days after the end of each fiscal
month, the Reinvestment Agent will mail to each Participant a statement of
account describing, as to such Participant, the Distributions received during
the month, the number of Shares purchased during the month, the per Share
purchase price for such Shares, and the total Shares purchased on behalf of the
Participant pursuant to the Reinvestment Plan. Each statement shall also advise
the Participant that, in
B-2
accordance with Paragraph 6(d) hereof, he or she is required to notify the
Dealer Manager in the event that there is any material change in his or her
financial condition or if any representation under the Subscription Agreement
becomes inaccurate. Tax information for income earned on Shares under the
Reinvestment Plan will be sent to each participant by the Company or the
Reinvestment Agent at least annually.
8. Administrative Charges, Commissions, and Plan Expenses. The Company
shall be responsible for all administrative charges and expenses charged by the
Reinvestment Agent.
9. No Drawing. No Participant shall have any right to draw checks or
drafts against his account or give instructions to the Company or the
Reinvestment Agent except as expressly provided herein.
10. Taxes. Taxable Participants may incur a tax liability for
Distributions made with respect to such Participant's Shares, even though they
have elected not to receive their Distributions in cash but rather to have their
Distributions held in their account under the Reinvestment Plan.
11. Termination.
(a) A Participant may terminate his or her participation in the
Reinvestment Plan at any time by written notice to the Company. To be effective
for any Distribution, such notice must be received by the Company prior to the
record date to which such Distribution relates.
(b) The Company or the Reinvestment Agent may terminate a
Participant's individual participation in the Reinvestment Plan, and the Company
may terminate the Reinvestment Plan itself at any time by ten days' prior
written notice mailed to a Participant, or to all Participants, as the case may
be, at the address or addresses shown on their account or such more recent
address as a Participant may furnish to the Company in writing.
(c) After termination of the Reinvestment Plan or termination of a
Participant's participation in the Reinvestment Plan, the Reinvestment Agent
will send to each Participant (i) a statement of account in accordance with
Paragraph 7 hereof, and (ii) a check for (A) the amount of any Distributions in
the Participant's account that have not been reinvested in Shares, and (B) the
value of any fractional Shares standing to the credit of a Participant's account
based on $10.00 per share. The record books of the Company will be revised to
reflect the ownership of record of the Participant's full Shares and any future
Distributions made after the effective date of the termination will be sent
directly to the former Participant.
12. Notice. Any notice or other communication required or permitted to
be given by any provision of this Reinvestment Plan shall be in writing and
addressed to Investor Relations Department, AmREIT Securities Corp., 8 Greenway
Plaza, Suite 1000, Houston, Texas 77046 if to the Company, or to Wells Fargo
Shareowner Services, 161 North Concord Exchange South St. Paul, Minnesota
55075-1139, if to the Reinvestment Agent, or such other addresses as may be
specified by written notice to all Participants. Notices to a Participant may be
given by letter addressed to the Participant at the Participant's last address
of record with the Company. Each Participant shall notify the Company promptly
in writing of any change of address.
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13. Amendment. The terms and conditions of this Reinvestment Plan may be
amended or supplemented by an agreement between the Reinvestment Agent and the
Company at any time, including, but not limited to, an amendment to the
Reinvestment Plan to add a voluntary cash contribution feature or to substitute
a new Reinvestment Agent to act as agent for the Participants or to increase the
administrative charge payable to the Reinvestment Agent, by mailing an
appropriate notice at least 30 days prior to the effective date thereof to each
Participant at his or her last address of record, provided, that any such
amendment must be approved by a majority of the independent trust managers of
the Company. Such amendment or supplement shall be deemed conclusively accepted
by each Participant except those Participants from whom the Company receives
written notice of termination prior to the effective date thereof.
14. Governing Law. THIS REINVESTMENT PLAN AND A PARTICIPANTS ELECTION TO
PARTICIPATE IN THE REINVESTMENT PLAN SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF TEXAS; PROVIDED, HOWEVER, THAT CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR
STATE SECURITIES LAWS SHALL NOT BE GOVERNED BY THIS SECTION 14.
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EXHIBIT C
PRIOR PERFORMANCE TABLES
The information in this Exhibit C contains certain summary information
concerning certain prior real estate investment partnerships (the "Prior
Programs") sponsored by affiliates of AmREIT. The investment objectives of the
Prior Programs are not substantially the same as those of AmREIT. Whereas AmREIT
is a self managed, self advised REIT focusing on the long term investment of
high quality irreplaceable corners, the Prior Programs were primarily focused on
the active management of development and high quality retail real estate,
anticipated to generate monthly income and capital appreciation through the
active management of the portfolio over a defined holding period.
INVESTORS SHOULD NOT CONSTRUE INCLUSION OF THE FOLLOWING TABLES AS IMPLYING, IN
ANY MANNER, THAT THE PARTNERSHIP WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED
IN SUCH TABLES. DISTRIBUTABLE CASH FLOW, FEDERAL INCOME TAX DEDUCTIONS OR OTHER
FACTORS COULD BE SUBSTANTIALLY DIFFERENT. INVESTORS SHOULD NOTE THAT, BY
ACQUIRING UNITS IN THE PARTNERSHIP, THEY WILL NOT BE ACQUIRING ANY INTEREST IN
ANY PRIOR PROGRAM.
DESCRIPTION OF THE TABLES
The following tables are included herein:
Table I - Experience in Raising and Investing Funds;
Table II - Compensation to the Sponsor
Table III - Operating Results of Prior Programs
Table IV - Results of Completed Programs
Table V - Sale or Disposition of Properties
Table VI - Acquisitions of Properties by Programs
All information contained in Tables I, II, III, IV, V and VI is as of December
31, 2003. The following is a brief description of the tables.
C-1
TABLE I - EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents information on a percentage basis showing the experience of the
Sponsor and Affiliates in raising and investing funds for the Prior Programs,
the offerings of which closed in the three-year period ended December 31, 2003.
Also included is information on one program which has not closed. The table sets
forth information on the offering expenses incurred and amounts available for
investment expressed as a percentage of dollars raised. The table also shows the
date the offering commenced and the time required raising funds for investment.
TABLE II - COMPENSATION TO THE SPONSOR
Table II provides information on a total dollar basis regarding amounts and
types of compensation paid to the Sponsor or Affiliates of the Prior Programs.
The table indicates the total offering proceeds and the portion of such offering
proceeds paid to the Sponsor and Affiliates in connection with the Prior
Programs, the offerings of which closed in the three-year period ended December
31, 2003 and one program which has not closed. The table also shows the amounts
paid to the Sponsor and Affiliates from cash generated from operations on a
cumulative basis commencing with inception and ending December 31, 2003.
TABLE III - OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of operating results of the Prior Programs, the
offerings of which closed in the five-year period ended December 31, 2003 and
one program which has not closed.
TABLE IV - RESULTS OF COMPLETED PROGRAMS
Table IV includes information related to three completed programs which closed
in 2002. The investment objectives of these programs were dissimilar to those of
the other programs for which information is contained in Tables I, II, III, V
and VI. Consequently, the only information related to these three programs is
that reported in Table IV.
TABLE V - SALE OR DISPOSITION OF PROPERTIES
Table V provides information on all property sales or disposals by the Prior
Programs from January 1, 2001 through December 31, 2003.
C-2
TABLE VI - ACQUISITIONS OF PROPERTIES BY PROGRAMS
Table VI provides certain information pertaining to properties acquired by the
Prior Programs from January 1, 2001 through December 31, 2003.
PRIOR PROGRAMS
Information in this section (except for Table IV) pertains to the following
programs:
AmREIT Monthly Income & Growth Fund, Ltd. "MIG"
AmREIT Income & Growth Fund, Ltd. "AIG"
AmREIT Opportunity Fund, Ltd. "AOF"
AAA Net Developers, Ltd. "Developers"
Information contained in Table IV pertain to the following programs:
AAA Net Realty Fund IX, Ltd. "Fund IX"
AAA Net Realty Fund X, Ltd. "Fund X"
AAA Net Realty Fund XI, Ltd. "Fund XI"
C-3
NOTES TO TABLE I
(1) Organizational expenses include legal, accounting, printing, escrow,
filing, recording and other related expenses associated with the formation
and original organization of the Program and also includes fees paid to
the sponsor and to affiliates.
(2) Acquisition fees include fees paid to the sponsor and to affiliates.
(3) The investment objective of Developers and AOF is primarily capital
appreciation. The investment objective of AIG and MIG is both income and
capital appreciation. Because properties are acquired in each of these
programs with the use of some leverage, the costs for property acquisition
exceed the percentage available for investment. Accordingly, the
information reported in this table as property acquisition costs is
limited to the percentage available for investment from the funds raised
by each program.
(4) AOF, AIG and MIG operate as actively managed portfolios that use
traditional leverage to purchase and/or develop net lease commercial real
estate. As such, each project is underwritten and analyzed to determine
the appropriate amount of leverage that will be supported by the project.
Maximum leverage by memorandum is 75% loan to value on the AIG and MIG
portfolios and 80% on the AOF portfolio.
(5) Acquisition fees and development fees are paid to the general partner or
affiliates based upon the terms of the memorandum. These fees range
between 4% and 6% of total project costs including the portion which is
funded by cash and also by permanent or construction debt.
(6) Developers has never directly acquired a property with the use of
leveraged funds. However, Developers has invested in several real estate
partnerships which have made property acquisitions with both cash and
debt. These real estate partnerships have been managed by outside
partners. Consequently, no information on leverage is included.
(7) The offering period for the MIG program has not terminated. Information
included in Table I pertaining to MIG is as of December 31, 2003.
C-4
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(UNAUDITED)
AAA Net AmREIT AmREIT AmREIT Monthly
Developers Opportunity Fund Income & Growth Fund Income & Growth Fund (7)
------------ ----------------- -------------------- ------------------------
Dollar Amount Offered $ 2,000,000 $ 5,000,000 $ 15,000,000 $ 15,000,000
Dollar Amount Raised 1,862,099 2,352,750 10,029,158 14,687,729
Less Offering Expenses:
Selling Commissions & Due Dilgence 8.1% 8.5% 7.0% 8.0%
Organizational expenses (1) 2.7% 1.1% 1.5% 1.4%
Marketing & Reimbursement 2.4% 0.5% 2.5% 2.5%
Less Reserve for Operations 1.0% 0.0% 0.0% 0.0%
Percent Available for Investment 85.8% 89.9% 89.0% 88.1%
Acquisition Cost:
Cash Down Payment 85.8%(3) 89.9%(3) 89.0%(3) 24.5%(3)
Acquisition/Development Fees (2) (5) (5) (5) 0.1%
Other 0.0% 0.0% 0.0% 0.0%
Total Acquisition Costs 85.8% 89.9% 89.0% 24.6%
Percent Leveraged (6) (4) (4) (4)
Date Offering Began 11/20/95 03/15/99 06/25/01 11/15/02
Length of Offering (Months) 15 23 18 15
Months to Invest 90% of Amount 32 N/A N/A N/A
Available for Investment (Measured
From Beginning of Offering)
See Notes to Table I
C-5
NOTES TO TABLE II
(1) A primary investment objective of each of these programs is capital
appreciation. Commercial real estate is evaluated upon completion of
development and leasing and is either sold or held based investment
criteria, market conditions and general economic conditions. Profits from
development projects sold within one year are included in cash generated
from operations rather than from property sales.
(2) Properties are acquired with a combination of funds from offering proceeds
and leverage. The acquisition and development fees and the leasing
commissions reported in this table include the total amount of fees paid
to the sponsor or its affiliates regardless of the funding source for
these costs.
(3) AOF and AIG have invested in several real estate partnerships. Some of the
acquisition and development fees and real estate commissions that are
included in this table represent AOF and AIG's share of the partnership
that made the payment directly to the sponsor or to affiliates.
(4) The offering period for MIG commenced in November 2002. The information
contained in this Table for MIG represents activity through December 31,
2003 at which time funds were continuing to be raised.
(5) The cash utilized by operations at December 31, 2003 for MIG is primarily
attributable to accounts receivable of $2.8 million and notes receivable
of $2.5 million from affiliated partnerships.
C-6
TABLE II
COMPENSATION TO SPONSOR
(UNAUDITED)
AAA Net AmREIT AmREIT AmREIT Monthly
Developers Opportunity Fund Income & Growth Fund Income & Growth Fund (4)
---------- ---------------- -------------------- --------------------
Date of Offering 11/20/95 03/15/99 06/25/01 11/15/02
Dollar Amount Raised $1,862,099 $ 2,352,750 $ 10,029,158 $ 14,687,729
Amount Paid to Sponsor from
Proceeds of Offering
Underwriting Fees - - - -
Acquisition/Development Fees 58,178(2) 272,605(2)(3) 97,082(2)(3) 20,833(2)
Real Estate Commissions - 21,414(2)(3) 20,627(2)(3) -
Advisory Fees - - - -
Reimbursement for Org. Cost 40,922 25,000 144,812 202,759
Other 44,802 11,764 250,729 367,193
Dollar Amount of Cash Generated
from Operations before Deducting
payments to Sponsor 1,032,365(1) 933,333 482,757(1) (4,738,649)(5)
Amount Paid to Sponsor from
Operations:
Property Management Fee 45,068 116,326 - -
Reimbursements 111,718 87,160 138,637 54,832
Leasing/Brokerage Commissions - 44,811 19,222 -
Other General Partner
Distributions 343,114 63,726 - -
Dollar Amount of Property Sales
and Refinancing Before Deducting
Payments to Sponsor:
Cash 1,220,334 4,465,130 1,310,097 -
Notes N/A N/A N/A N/A
Amount Paid to Sponsor From
Property Sales and Refinancing:
Real Estate Commissions 71,117 168,375(3) 86,883(3) -
Incentive Fees N/A N/A N/A N/A
Other N/A N/A N/A N/A
See Notes to Table II
C-7
NOTES TO TABLE III
(1) Amortization of organizational costs is computed over a period of 60
months. Depreciation of commercial real property is determined on the
straight-line method over an estimated useful life of 39 years. Leasehold
interests are amortized over the life of the lease.
(2) Cash distributions to investors represents the amount actually disbursed
in each year to the limited partners and general partner. The
distributions are reported in this Table as a return of capital until the
partners have received back their initial capital contribution and then as
a distribution from operating profit.
(3) Operating expenses include management fees paid to affiliates for such
services as accounting, property supervision, etc.
(4) Cash generated from operations generally includes net income plus
depreciation and amortization plus any decreases in accounts receivable
and accrued rental income or increases in accounts payable minus any
increases in accounts receivable and accrued rental income or decreases in
accounts payable. In addition, cash generated from operations is reduced
for any property costs related to development projects and is increased by
proceeds when the project is sold (usually in less than twelve months).
(5) Table III does not include certain tax distribution data per $1,000
invested because a primary objective of these programs is capital
appreciation rather than income. Management decides after projects are
completed and sold whether to reinvest the proceeds in a new project or to
distribute a portion of the proceeds back to investors. When distributions
are made, they are first applied as a return of capital until an
investor's money has been returned. Any remaining distributions are then
made from operating cash flow.
(6) The partnership's maintain their books on a tax basis rather than a GAAP
basis. There are no significant differences in tax and GAAP basis records
as pertains to the accounting for projects that are developed and sold. If
a property is acquired and held for long-term investment, there are two
potential differences in tax and GAAP basis. Rental income is recorded on
a tax basis as it is received where it is accrued on a straight-line basis
over the life of the lease for GAAP. Additionally, all properties are
recorded at cost and depreciated over their estimated useful life on a tax
basis even if they qualify as a direct financing lease for GAAP purposes.
(7) Property acquisitions represent investments made by the partnership for
commercial real estate or for through a real estate partnership where the
properties will be held on a long-term basis.
(8) AOF and AIG sold a property in December 2003 on an installment basis. The
gain on the sale will be recognized as payments are received on the note.
In addition, the note receivable reported for 2003 has been reduced by the
amount of the deferred gain.
C-8
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS (5)
AAA NET DEVELOPERS, LTD.
(UNAUDITED)
1996 1997 1998 1999 2000 2001 2002 2003
---------- --------- --------- ---------- ---------- --------- ------- -------
Gross Revenues $ 77,632 $ 34,522 $ 96,384 $ 395,643 $ 185,207 $ 40,614 31,870 15,147
Profit on Sale of Properties - - - 102,555 - 171,651 - 321,715
Less: Operating Expenses (3) 11,155 28,874 71,648 26,857 83,103 13,609 11,611 12,990
Interest Expense - - - - - - - -
Depreciation/Amortization (1) 6,944 10,000 10,000 10,000 10,000 3,056 - -
---------- --------- --------- ---------- ---------- --------- ------- -------
Net Income (6) 59,533 (4,352) 14,736 461,342 92,104 195,600 20,259 323,872
Taxable Income
From Operations 59,533 (4,352) 14,736 461,452 92,104 195,600 20,259 2,157
From Gain on Sale - - - - - - 321,715
Cash Generated From Operations (4) 74,694 26,696 (489,360) 914,794 (84,658) 391,206 32,266 9,941
Cash Generated From Sales - - - - - - - 482,568
Cash Generated From Refinancing - - - 343,309 323,340 - - -
---------- --------- --------- ---------- ---------- --------- ------- -------
Total Cash Generated 74,694 26,696 (489,360) 1,258,103 238,682 391,206 32,266 492,509
Less Cash Distributions to Investors: (2)
From Operating Cash Flow - - - - - 197,286 27,000 292,202
From Sales and Refinancing - - - - - - - -
From Return of Capital - - 93,259 500,000 959,575 302,925 - -
---------- --------- --------- ---------- ---------- --------- ------- -------
Cash Generated (Deficiency) After Cash
Distributions to Investors 74,694 26,696 (582,619) 758,103 (720,893) (109,005) 5,266 200,307
Less: Cash Distributions to General
Partner (2) - - - - - 130,314 18,000 194,800
---------- --------- --------- ---------- ---------- --------- ------- -------
Cash Generated (Deficiency) After Cash
Distributions 74,694 26,696 (582,619) 758,103 (720,893) (239,319) (12,734) 5,507
Special Items:
Limited Partners' Capital
Contributions 1,599,599 262,500 - - - - - -
General Partners' Capital
Contributions 1,000 - - - - - - -
Organization Costs (50,000) - - - - - - -
Syndication Costs (167,958) (27,562) - - - - - -
Property Acquisitions (7) (500,000) (338,523) (59,127) - - - - -
---------- --------- --------- ---------- ---------- --------- ------- -------
Cash Generated (Deficiency) After Cash
Distributions and Special Items 957,335 (76,889) (641,746) 758,103 (720,893) (239,319) (12,734) 5,507
See Notes to Table III
C-9
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS (5)
AMREIT OPPORTUNITY FUND
(UNAUDITED)
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- -----------
Gross Revenues $ - $ 176,682 $ 163,539 $ 787,176 $ 96,427
Profit on Sale of Properties - - 171,650 526,861 932,413
Less: Operating Expenses (3) 641 192,348 70,836 231,087 239,062
Interest Expense - - 24,507 81,821 21,780
Depreciation/Amortization (1) 1,250 5,000 27,544 49,544 18,929
----------- ----------- ----------- ----------- -----------
Net Income (6) (1,891) (20,666) 212,302 951,585 749,069
Taxable Income
From Operations (1,891) (20,666) 212,356 647,371 (183,344)
From Gain on Sale (8) - - - 304,214 932,413
Cash Generated From Operations (4) (641) (113,046) (833,428) 1,777,283 (145,132)
Cash Generated from Sales - - - 2,019,656 2,277,099
Cash Generated From Refinancing - - - - -
----------- ----------- ----------- ----------- -----------
Total Cash Generated (641) (113,046) (833,428) 3,796,939 2,131,967
Less Cash Distributions to Investors: (2)
From Operating Cash Flow - - - - 781,555
From Sales and Refinancing - - - - -
From Return of Capital - - - 1,648,031 704,719
----------- ----------- ----------- ----------- -----------
Cash Generated (Deficiency) After Cash
Distributions to Investors (641) (113,046) (833,428) 2,148,908 645,693
Less: Cash Distributions to General Partner (2) - - - - 63,726
Cash Generated (Deficiency) After Cash
Distributions (641) (113,046) (833,428) 2,148,908 581,967
Special Items:
Limited Partners' Capital Contributions 918,750 1,334,000 100,000 - -
General Partners' Capital Contributions 1,000 - - - -
Note Receivable (8) - - - - (327,467)
Notes Payable - 624,389 920,889 (1,401,553) (143,725)
Organization Costs (25,000) - - - -
Syndication Costs (68,242) (132,917) (10,500) - -
Property Acquisitions (7) - (1,716,609) (747,863) (881,534) -
----------- ----------- ----------- ----------- -----------
Cash Generated (Deficiency) After Cash
Distributions and Special Items 825,867 (4,183) (570,902) (134,179) 110,775
See Notes to Table III
C-10
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS (5)
AMREIT INCOME & GROWTH FUND, LTD.
(UNAUDITED)
2001 2002 2003
----------- ----------- -----------
Gross Revenues $ 4,857 $ 404,065 $ 650,330
Profit on Sale of Properties - 24,747 217,679
Less: Operating Expenses (3) 5,381 75,743 200,310
Interest Expense 47 - 38,773
Depreciation/Amortization (1) 3,590 10,938 126,114
----------- ----------- -----------
Net Income (6) (4,161) 342,131 502,812
Taxable Income
From Operations (4,161) 342,131 285,133
From Gain on Sale (8) - - 217,679
Cash Generated From Operations (4) (571,188) 158,505 737,581
Cash Generated from Sales - - 1,223,214
Cash Generated From Refinancing - - -
----------- ----------- -----------
Total Cash Generated (571,188) 158,505 1,960,795
Less Cash Distributions to Investors: (2)
From Operating Cash Flow - - -
From Sales and Refinancing - - -
From Return of Capital 14,638 352,829 901,082
----------- ----------- -----------
Cash Generated (Deficiency) After Cash
Distributions to Investors (585,826) (194,324) 1,059,713
Less: Cash Distributions to General Partner (2) - - -
Cash Generated (Deficiency) After Cash
Distributions (585,826) (194,324) 1,059,713
Special Items:
Limited Partners' Capital Contributions 1,472,258 8,556,900 -
General Partners' Capital Contributions 1,000 - -
Note Receivable (8) - - (327,966)
Notes Payable 20,872 122,853 1,084,677
Organization Costs (19,584) (125,728) -
Syndication Costs (131,264) (901,100) -
Property Acquisitions (7) (140,569) (4,110,737) (5,638,637)
----------- ----------- -----------
Cash Generated (Deficiency) After Cash
Distributions and Special Items 616,887 3,347,864 (3,822,213)
See Notes to Table III
C-11
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS (5)
AMREIT MONTHLY INCOME & GROWTH FUND, LTD.
(UNAUDITED)
2003
------------
Gross Revenues $ 250,332
Profit on Sale of Properties
Less: Operating Expenses (3) 69,895
Interest Expense -
Depreciation/Amortization (1) 26,556
------------
Net Income (6) 153,881
Taxable Income
From Operations 153,881
From Gain on Sale -
Cash Generated From Operations (4) (4,683,817)
Cash Generated from Sales -
Cash Generated From Refinancing -
------------
Total Cash Generated (4,683,817)
Less Cash Distributions to Investors: (2)
From Operating Cash Flow -
From Prior Period -
From Sales and Refinancing -
From Return of Capital 370,056
------------
Cash Generated (Deficiency) After Cash
Distributions to Investors (5,053,873)
Less: Cash Distributions to General Partner (2) -
------------
Cash Generated (Deficiency) After Cash
Distribution (5,053,873)
Special Items:
Limited Partners' Capital Contributions 14,687,729
General Partners' Capital Contributions 1,000
Organization Costs (10,000)
Syndication Costs (1,734,971)
Property Acquisitions (7) (3,592,960)
------------
Cash Generated (Deficiency) After Cash
Distributions and Special Items 4,296,925
See Notes to Table III
C-12
TABLE IV
RESULTS OF COMPLETED PROGRAMS
(UNAUDITED)
FUND IX FUND X FUND XI
--------- ---------- ---------
Dollar Amount Raised 5,390,500 11,453,610 7,061,209
Number of Properties 5 8 7
Date of Closing of Offering 6/15/1992 6/30/1994 11/1/1996
Date of First Sale of Property 7/23/2002 7/23/2002 7/23/2002
Date of Final Sale of Property 7/23/2002 7/23/2002 7/23/2002
TAX AND DISTRIBUTION DATA PER $1,000
FEDERAL INCOME TAX RESULTS
- --From Operations 688.57 526.49 376.75
- --From Recapture 180.21 130.66 79.94
- --Capital Gain (Loss) 176.72 130.88 163.43
- --Deferred Gain - Capital - - -
- --Deferred Gain - Ordinary - - -
CASH DISTRIBUTIONS TO INVESTORS
Source (on GAAP Basis)
- --Investment Income 1,045.50 788.04 620.12
- --Return of Capital 891.17 877.22 869.57
Source (on Cash Basis)
- --Sales 1,026.90 1,000.37 1,018.09
- --Refinancing - - -
- --Operations 909.76 664.90 471.59
- --Other - - -
C-13
TABLE V
SALE OR DISPOSITION OF PROPERTIES
(Unaudited)
DATE OF DATE OF
PROPERTY OWNERSHIP LOCATION INVESTMENT DISPOSITION
-------- --------- -------- ---------- -----------
1 Copper Plaza Developers Houston, Texas March 2000 January 2001
2 Parkwood Square Developers Houston, Texas May 1999 November 2003
1 Copper Plaza AOF Houston, Texas March 2000 January 2001
2 Oxford Park (Hollywood Video, Radio Shack) AOF Houston, Texas May 2000 November 2002
3 IHOP Kenosha AOF Kenosha, Wisconsin July 2001 January 2002
4 Arby's Kenosha AOF Kenosha, Wisconsin July 2001 September 2002
5 IHOP CDP 31 AOF Scottsdale, Arizona September 2001 January 2002
6 IHOP CDP 31 AOF Cookeville, Tennessee October 2001 January 2002
7 Temple - Chili's AOF Temple, Texas October 2001 October 2002
8 Temple - IHOP AOF Temple, Texas October 2001 June 2002
9 Temple - McDonald's AOF Temple, Texas October 2001 April 2002
10 IHOP CDP 27 AOF Memphis, Tennessee November 2001 January 2002
11 IHOP CDP 27 AOF Tupelo, Mississippi November 2001 January 2003
12 IHOP CDP 33 AOF Orem, Utah December 2001 April 2003
13 IHOP CDP 33 AOF Hagerstown, Maryland December 2001 May 2003
14 IHOP CDP 33 AOF Houston, Texas December 2001 June 2003
15 Riverpark AOF Houston, Texas April 2000 October 2003
16 McLendon Plaza AOF Houston, Texas December 2002 December 2003
1 IHOP Kenosha AIG Kenosha, Wisconsin July 2001 January 2002
2 Arby's - Kenosha AIG Kenosha, Wisconsin July 2001 September 2002
3 IHOP CDP 31 AIG Scottsdale, Arizona September 2001 January 2002
4 IHOP CDP 31 AIG Cookeville, Tennessee October 2001 January 2002
4 Temple - Chili's AIG Temple, Texas October 2001 October 2002
5 Temple - IHOP AIG Temple, Texas October 2001 June 2002
6 Temple - McDonald's AIG Temple, Texas October 2001 April 2002
8 IHOP CDP 27 AIG Memphis, Tennessee November 2001 January 2002
9 IHOP CDP 27 AIG Tupelo, Mississippi November 2001 January 2003
10 IHOP CDP 33 AIG Orem, Utah December 2001 April 2003
11 IHOP CDP 33 AIG Hagerstown, Maryland December 2001 May 2003
12 IHOP CDP 33 AIG Houston, Texas December 2001 June 2003
13 McLendon Plaza AIG Houston, Texas December 2002 December 2003
SELLING CLOSING PROJECT NET
PROPERTY PRICE COSTS COSTS PROFIT
-------- ----- ----- ----- ------
1 Copper Plaza $ 728,646 $ 51,965 $ 505,031 $ 171,650
2 Parkwood Square $ 1,000,000 $ 51,701 $ 807,927 $ 140,372
1 Copper Plaza $ 728,646 $ 51,965 $ 505,031 $ 171,650
2 Oxford Park (Hollywood Video, Radio Shack) $ 2,107,000 $ 87,343 $ 1,781,745 $ 237,912
3 IHOP Kenosha $ 763,565 $ 76,734 $ 568,353 $ 118,478
4 Arby's Kenosha $ 382,458 $ 33,949 $ 244,337 $ 104,172
5 IHOP CDP 31 $ 480,462 $ 7,272 $ 407,902 $ 65,288
6 IHOP CDP 31 $ 374,427 $ 5,668 $ 316,577 $ 52,182
7 Temple - Chili's $ 244,746 $ 19,291 $ 162,060 $ 63,395
8 Temple - IHOP $ 138,545 $ 22,763 $ 77,946 $ 37,836
9 Temple - McDonald's $ 180,711 $ 12,311 $ 101,735 $ 66,665
10 IHOP CDP 27 $ 867,522 $ 65,277 $ 711,236 $ 91,009
11 IHOP CDP 27 $ 813,552 $ 41,125 $ 654,678 $ 117,749
12 IHOP CDP 33 $ 290,469 $ 2,668 $ 279,693 $ 8,108
13 IHOP CDP 33 $ 297,218 $ 3,237 $ 288,024 $ 5,957
14 IHOP CDP 33 $ 343,995 $ 7,054 $ 327,888 $ 9,053
15 Riverpark $ 1,126,200 $ - $ 325,748 $ 800,452
16 McLendon Plaza $ 1,559,000 $ 66,256 $ 1,025,049 $ 467,695
1 IHOP Kenosha $ 84,935 $ 11,360 $ 60,396 $ 13,179
2 Arby's - Kenosha $ 42,542 $ 9,551 $ 21,423 $ 11,568
3 IHOP CDP 31 $ 480,462 $ 7,272 $ 407,902 $ 65,288
4 IHOP CDP 31 $ 374,427 $ 5,668 $ 316,577 $ 52,182
4 Temple - Chili's $ 152,417 $ 12,014 $ 100,924 $ 39,479
5 Temple - IHOP $ 86,280 $ 14,176 $ 48,541 $ 23,563
6 Temple - McDonald's $ 112,539 $ 7,667 $ 63,356 $ 41,516
8 IHOP CDP 27 $ 808,373 $ 60,826 $ 662,762 $ 84,785
9 IHOP CDP 27 $ 758,082 $ 38,321 $ 610,041 $ 109,720
10 IHOP CDP 33 $ 290,469 $ 2,668 $ 279,693 $ 8,108
11 IHOP CDP 33 $ 297,218 $ 3,237 $ 288,024 $ 5,957
12 IHOP CDP 33 $ 343,995 $ 7,054 $ 327,888 $ 9,053
13 McLendon Plaza $ 1,559,000 $ 66,256 $ 1,025,049 $ 467,695
NOTES
(1) This property was acquired through a joint venture investment which is
managed and operated by an outside party. The information presented herein
is based on preliminary information provided by the manager.
C-14
TABLE VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(UNAUDITED)
TYPE OF GROSS LEASABLE DATE OF
PROPERTY OWNERSHIP LOCATION PROPERTY SPACE (APPROX.) PURCHASE
-------- --------- -------- -------- --------------- --------
1 K-2 Plaza AOF Round Rock, Texas Retail Center 9,600 April-01
2 IHOP Kenosha AOF Kenosha, Wisconsin Restaurant 4,020 July-01
3 Arby's Kenosha AOF Kenosha, Wisconsin Restaurant Land July-01
4 IHOP CDP 31 AOF Scottsdale, Arizona Restaurant 4,020 September-01
5 IHOP CDP 31 AOF Cookeville, Tennessee Restaurant 4,020 October-01
6 Temple - Chili's AOF Temple, Texas Restaurant Land October-01
7 Temple - IHOP AOF Temple, Texas Restaurant 4,020 October-01
8 Temple - McDonald's AOF Temple, Texas Restaurant Land October-01
9 Temple - Land AOF Temple, Texas October-01
10 IHOP CDP 27 AOF Memphis, Tennessee Restaurant 4,020 November-01
11 IHOP CDP 27 AOF Tupelo, Mississippi Restaurant 4,020 November-01
12 IHOP CDP 33 AOF Orem, Utah Restaurant 4,020 December-01
13 IHOP CDP 33 AOF Hagerstown, Maryland Restaurant 4,020 December-01
14 IHOP CDP 33 AOF Houston, Texas Restaurant 4,020 December-01
15 McLendon Plaza AOF Houston, Texas Retail Center 16,000 December-02
1 IHOP Kenosha AIG Kenosha, Wisconsin Restaurant 4,020 July-01
2 Arby's - Kenosha AIG Kenosha, Wisconsin Restaurant Land July-01
3 IHOP CDP 31 AIG Scottsdale, Arizona Restaurant 4,020 September-01
4 IHOP CDP 31 AIG Cookeville, Tennessee Restaurant 4,020 October-01
5 Temple - Chili's AIG Temple, Texas Restaurant Land October-01
6 Temple - IHOP AIG Temple, Texas Restaurant 4,020 October-01
7 Temple - McDonald's AIG Temple, Texas Restaurant Land October-01
8 Temple - Land AIG Temple, Texas October-01
8 IHOP CDP 27 AIG Memphis, Tennessee Restaurant 4,020 November-01
9 IHOP CDP 27 AIG Tupelo, Mississippi Restaurant 4,020 November-01
10 IHOP CDP 33 AIG Orem, Utah Restaurant 4,020 December-01
11 IHOP CDP 33 AIG Hagerstown, Maryland Restaurant 4,020 December-01
12 IHOP CDP 33 AIG Houston, Texas Restaurant 4,020 December-01
13 17 IHOP Leaseholds AIG Various Restaurant 4,020 Each 2002
14 McLendon Plaza AIG Houston, Texas Retail Center 16,000 December-02
15 IHOP AIG Rochester, New York Restaurant 4,020 October-02
16 TGI Friday's AIG Crystal Lake, Illinois Restaurant Land November-02
17 IHOP AIG Albuquerque, NM Restaurant 4,020 March-03
18 TGI Friday's AIG Danvers, Maine Restaurant Land April-03
19 Peakway AIG Apex, North Carolina Retail Center 56,296 July-03
1 IHOP MIG St. Peters, Missouri Restaurant 4,020 April-03
2 Peakway MIG Apex, North Carolina Retail Center 56,296 July-03
3 College Park MIG Houston, Texas Restaurant Land October-03
MORTGAGE CONTRACT
FINANCING CASH PRICE & OTHER TOTAL
PROPERTY AT PURCHASE DOWNPAYMENT ACQ. FEE COSTS PRICE
-------- ----------- ----------- -------- ----- -----
1 K-2 Plaza $ 803,147 $ 943,192 $ 953,192 $ - $ 953,192
2 IHOP Kenosha $ 187,669 $ 505,272 $ 568,353 $ - $ 568,353
3 Arby's Kenosha $ - $ 217,302 $ 244,337 $ - $ 244,337
4 IHOP CDP 31 $ 281,005 $ 400,189 $ 401,779 $ 6,123 $ 407,902
5 IHOP CDP 31 $ 273,091 $ 310,748 $ 311,983 $ 4,594 $ 316,577
6 Temple - Chili's $ 349,580 (5) $ 155,502 $ 162,060 $ - $ 162,060
7 Temple - IHOP (5) $ 74,792 $ 77,946 $ - $ 77,946
8 Temple - McDonald's (5) $ 97,618 $ 101,735 $ - $ 101,735
9 Temple - Land (5) $ 44,707 $ 46,592 $ - $ 46,592
10 IHOP CDP 27 $ 615,120 $ 699,222 $ 705,229 $ 6,007 $ 711,236
11 IHOP CDP 27 $ 566,280 $ 543,618 $ 649,148 $ 5,530 $ 654,678
12 IHOP CDP 33 $ 239,580 $ 272,723 $ 274,923 $ 4,770 $ 279,693
13 IHOP CDP 33 $ 245,190 $ 280,617 $ 282,881 $ 5,143 $ 288,024
14 IHOP CDP 33 $ 286,638 $ 320,769 $ 323,357 $ 4,531 $ 327,888
15 McLendon Plaza $ 675,570 $ 909,112 $ 965,562 $59,487 $1,025,049
1 IHOP Kenosha $ 20,872 $ 53,005 $ 60,396 $ - $ 60,396
2 Arby's - Kenosha $ - $ 18,801 $ 21,423 $ - $ 21,423
3 IHOP CDP 31 $ 281,005 $ 400,189 $ 401,779 $ 6,123 $ 407,902
4 IHOP CDP 31 $ 273,091 $ 310,748 $ 311,983 $ 4,594 $ 316,577
5 Temple - Chili's $ 217,714 (5) $ 96,840 $ 100,924 $ - $ 100,924
6 Temple - IHOP (5) $ 46,577 $ 48,541 $ - $ 48,541
7 Temple - McDonald's (5) $ 60,792 $ 63,356 $ - $ 63,356
8 Temple - Land (5) $ 27,841 $ 29,015 $ - $ 29,015
8 IHOP CDP 27 $ 573,180 $ 651,549 $ 657,146 $ 5,597 $ 662,743
9 IHOP CDP 27 $ 527,670 $ 599,735 $ 604,888 $ 5,153 $ 610,041
10 IHOP CDP 33 $ 239,580 $ 272,723 $ 274,923 $ 4,770 $ 279,693
11 IHOP CDP 33 $ 245,190 $ 280,617 $ 282,881 $ 5,143 $ 288,024
12 IHOP CDP 33 $ 286,638 $ 320,769 $ 323,357 $ 4,531 $ 327,888
13 17 IHOP Leaseholds $ 2,982,000 $ 3,607,411 $3,607,411 $43,565 $3,650,976
14 McLendon Plaza $ 675,570 $ 909,112 $ 965,562 $59,487 $1,025,049
15 IHOP $ - $ 1,303,722 $1,303,722 $29,140 $1,332,862
16 TGI Friday's $ - $ 1,731,479 $1,731,479 $34,244 $1,765,723
17 IHOP $ - $ 1,643,426 $1,643,426 $32,658 $1,676,084
18 TGI Friday's $ - $ 2,248,252 $2,248,252 $41,997 $2,290,249
19 Peakway $ 625,670 $ 1,139,785 $1,160,618 $14,091 $1,174,709
1 IHOP $ - $ 1,916,121 $1,916,121 $ - $1,916,121
2 Peakway $ 625,670 $ 1,139,785 $1,160,618 $14,091 $1,174,709
3 College Park $ - $ 673,546 $ 673,546 $ - $ 673,546
NOTES:
1) Table VI includes property acquistions completed from the period January
1, 2001 through December 31, 2003.
2) Acquisition fees include payments made to the sponsor or to affiliates.
3) Other Costs includes loan acquistion costs or prepaid leasing commissions.
4) Table VI reflects a partnership's pro-rata share of property costs for
acquisitions made through a separate partnership investment. Square
footage is 100% of the leasable space regardless of the percentage
ownership in the property.
5) There was one loan related to this entire property that was repaid from
sales proceeds as the property was developed and sold. At December 31,
2003 the loan has been repaid although one tract of land is still owned by
the Temple partnership.
C-15
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 SUBSIDIARIES
AMREIT AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
FINANCIAL STATEMENTS FOR THE QUARTER
ENDED MARCH 31, 2004 AND 2003 (CONDENSED) (UNAUDITED):
Consolidated Balance Sheet, March 31, 2004............................................. F-1
Consolidated Statements Of Operations For The Quarters Ended
March 31, 2004 And 2003.......................................................... F-2
Consolidated Statements Of Cash Flows For The Quarters Ended
March 31, 2004 And 2003.......................................................... F-3
Notes To Condensed Consolidated Financial Statements for The Quarters Ended
March 31, 2004 And 2003......................................................... F-4
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2003 AND 2002:
Report Of Independent Registered Public Accounting Firm................................ F-22
Consolidated Balance Sheet, December 31, 2003.......................................... F-23
Consolidated Statements of Operations for the Years Ended
December 31, 2003 and 2002....................................................... F-24
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 2003 and 2002................................... F-25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003 and 2002....................................................... F-26
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2003 and 2002....................................................... F-27
FINANCIAL STATEMENT SCHEDULE:
Schedule III Consolidated Real Estate Owned and Accumulated
Depreciation for the Year Ended December 31, 2003................................ II-3
All other financial statement schedules are omitted as the required information
is either inapplicable or is included in the financial statements or related
notes.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMREIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
ASSETS
Property:
Land $ 35,028,437
Buildings 33,906,917
Tenant improvements 611,982
-------------
69,547,336
Less accumulated depreciation and amortization (2,734,344)
-------------
Net real estate held for investment 66,812,992
Real estate held for sale, net 7,241,439
Net investment in direct financing leases held for investment 19,219,878
Cash and cash equivalents 2,179,002
Restricted cash 4,608,187
Accounts receivable 784,766
Accounts receivable - related party 1,696,214
Notes receivable 956,222
Escrow deposits 347,088
Prepaid expenses, net 230,221
Other assets:
Preacquisition costs 47,322
Loan acquisition cost, net of $147,867 in accumulated amortization 319,754
Leasing costs, net of $68,948 in accumulated amortization 392,123
Furniture, fixtures and equipment, net of $160,351 in accumulated depreciation 210,852
Accrued rental income 485,889
Intangible lease cost, net of $85,234 in accumulated amortization 591,740
Investment in non-consolidated affiliates 1,862,994
-------------
Total other assets 3,910,674
-------------
TOTAL ASSETS $ 107,986,683
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 36,985,642
Accounts payable 2,744,535
Accounts payable - related party 4,840,356
Security deposit 97,040
Prepaid rent 6,561
-------------
TOTAL LIABILITIES 44,674,134
-------------
Minority interest 866,129
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, 3,122,767 shares issued 31,228
Class B Common shares, $.01 par value, 3,000,000 shares authorized,
2,339,451 shares issued 23,395
Class C Common shares, $.01 par value, 4,400,000 shares authorized,
3,007,529 shares issued 30,075
Capital in excess of par value 74,616,819
Accumulated distributions in excess of earnings (11,139,273)
Deferred compensation (954,945)
Cost of treasury shares, 25,127 shares (160,879)
-------------
TOTAL SHAREHOLDERS' EQUITY 62,446,420
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 107,986,683
=============
See Notes to Condensed Consolidated Financial Statements.
F-1
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
QUARTER ENDED MARCH 31,
2004 2003
----------- -----------
Revenues:
Rental income from operating leases $ 1,686,467 $ 1,098,900
Earned income from direct financing leases 507,202 494,280
Real estate fee income 367,359 130,752
Securities commission income 1,904,541 85,608
Asset management fee income 75,280 50,994
Interest and other income 11,452 3,113
----------- -----------
Total revenues 4,552,301 1,863,647
----------- -----------
Expenses:
General operating and administrative 1,435,764 770,405
Legal and professional 327,740 103,862
Securities commissions 1,423,632 65,035
Depreciation and amortization 246,481 207,288
Deferred merger costs 1,319,833 -
----------- -----------
Total expenses 4,753,450 1,146,590
----------- -----------
Operating (loss) income (201,149) 717,057
Income from non-consolidated affiliates 14,598 40,305
Federal income tax (expense) benefit for taxable REIT subsidiary (170,905) 73,000
Interest expense (619,031) (523,549)
Minority interest in income of consolidated joint ventures (44,265) (39,788)
----------- -----------
(Loss) income before discontinued operations (1,020,752) 267,025
Income from discontinued operations 655,735 190,812
----------- -----------
Net (loss) income $ (365,017) $ 457,837
Distributions paid to class B and class C shareholders (813,056) (452,543)
----------- -----------
Net (loss) income available to class A shareholders $(1,178,073) $ 5,294
=========== ===========
Net income per common share - basic and diluted
Loss before discontinued operations $ (0.62) $ (0.07)
Income from discontinued operations 0.22 $ 0.07
----------- -----------
Net (loss) income $ (0.40) $ 0.00
=========== ===========
Weighted avergage class A common shares used to
compute net income per share, basic and diluted 2,952,984 2,768,253
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-2
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED MARCH 31,
2004 2003
------------ -----------
Cash flows from operating activities:
Net (loss) income $ (365,017) $ 457,837
Adjustments to reconcile net income to net cash
provided by operating activities:
Investment in real estate acquired for resale (666,838) -
Proceeds from sales of real estate acquired for sale 2,463,722 -
Gain on sales of real estate acquired for resale (607,887) -
Depreciation and amortization 255,485 229,697
Amortization of deferred compensation 64,283 59,928
Minority interest in net income of consolidated joint ventures 44,265 39,788
Deferred merger costs 1,319,833 -
(Increase) decrease in accounts receivable (208,925) 38,020
Increase in accounts receivable-related party (1,494,440) (55,909)
Decrease in prepaid expenses, net 60,888 14,077
Cash receipts from direct financing leases
(less) more than income recognized (3,097) 17,060
Decrease (increase) in accrued rental income 13,769 (49,519)
Decrease in other assets 11,019 83,091
Decrease in accounts payable (802,476) (547,924)
Increase (decrease) in accounts payable-related party 220,729 (33,986)
------------ -----------
Net cash provided by operating activities 305,313 252,160
------------ -----------
Cash flows from investing activities:
Improvements to real estate (300,417) (155,763)
Acquisition of investment properties - (2,688,157)
Notes receivable collections 43,555 -
Additions to furniture, fixtures and equipment (118,919) (24,040)
Investment in non-consolidating affiliates (1,318,102) (161,771)
Increase in preacquisition costs (34,140) (26,713)
------------ -----------
Net cash used in investing activities (1,728,023) (3,056,444)
------------ -----------
Cash flows from financing activities:
Proceeds from notes payable 2,964,517 2,367,799
Payments of notes payable (14,463,500) (101,163)
Purchase of treasury shares - (315,719)
Issuance of common shares 16,047,530 -
Issuance costs (1,795,539) -
Common dividends paid (1,157,705) (759,622)
Distributions to minority interests (25,031) (68,319)
------------ -----------
Net cash provided by financing activities 1,570,272 1,122,976
------------ -----------
Net increase (decrease) in cash and cash equivalents 147,562 (1,681,308)
Cash and cash equivalents, beginning of period 2,031,440 2,506,868
------------ -----------
Cash and cash equivalents, end of period $ 2,179,002 $ 825,560
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In 2004 the Company issued 134,695 shares of restricted stock to
employees and trust managers as as part of their compensation plan.
The restricted stock vests over a four and three period
respectively. The Company recorded $875,518 in deferred compensation
related to the issuance of the restricted stock.
In 2003 the Company issued 24,257 shares of restricted stock to
employees and trust managers as as part of their compensation plan.
The restricted stock vests over a four and three period
respectively. The Company recorded $152,819 in deferred compensation
related to the issuance of the restricted stock.
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 620,688 524,189
Income taxes 48,600 31,103
See Notes to Condensed Consolidated Financial Statements.
F-3
AMREIT AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
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.
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 March 31, 2004, the Company had
raised approximately $30.1 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 March 31, 2004, the Company's debt to asset ratio was
approximately 41%.
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 March 31,
2004, the occupancy rate at our properties was 94.8%. 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.
F-4
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 March 31, 2004. 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 March 31, 2004, no single property accounted for more than 10% of the
Company's total assets. As of March 31, 2004, IHOP accounted for 14.5% of the
Company's total revenue and no other tenant accounted for more than 10% of the
Company's total revenue.
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 twelve to eighteen months. These assets are listed as real
estate held for sale on our consolidated balance sheet, and, at March 31, 2004,
these assets represented approximately $3.0 million of the $7.2 million reported
as real estate held for sale.
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 by a subsidiary of
AmREIT. Additionally, as of March 31, 2004, ASC has
F-5
raised approximately $30.1 million directly for 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
retail partnerships have received their targeted return, again, linking AmREIT's
success to that of its unit holders.
As of March 31, 2004, AmREIT directly managed, through its four actively managed
and previously sponsored retail partnerships, over $30 million in equity. These
four partnerships have entered or will enter their liquidation phases in 2003,
2009, 2010, and 2011 respectively. As these partnerships enter into liquidation,
we expect to 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.
In August 2003 the Company began selling class C common shares. The offering is
a $44 million offering, issued on a best efforts basis through the independent
financial broker dealer community. The Company will primarily use the proceeds
for the acquisition of new properties and to pay down existing debt. As of March
31, 2004, the Company had issued approximately 3.0 million shares, representing
approximately $30.1 million in proceeds from selling class C shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and include all of
the disclosures required by accounting principles generally accepted in the
United States of America. The condensed consolidated financial statements
reflect all normal and recurring adjustments, which are, in the opinion of
management, necessary to present a fair statement of results for the three month
periods ended March 31, 2004 and 2003.
The condensed consolidated financial statements of AmREIT contained herein
should be read in conjunction with the consolidated financial statements
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2003.
REAL ESTATE HELD FOR SALE
Properties are classified as real estate held for sale if the properties were
purchased with intent to sell the properties within twelve to eighteen months or
if the properties are listed for sale. Additionally, if management has made the
determination to dispose of an operating property, the associated property is
reclassified to real estate held for sale and depreciation is ceased. An
evaluation for impairment is also performed. At March 31, 2004, AmREIT owned
F-6
four properties that are classified as real estate held for sale. The four
properties have a combined carrying value of $7.2 million. One of the properties
has a separate note payable, which has a one-year term and a balance of $1.7
million at March 31, 2004.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT and its
wholly or majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46"), which
was amended in December 2003. 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 return 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.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150
("Statement 150") "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". Statement 150 requires certain
financial instruments that have characteristics of both liabilities and equity
to be classified as a liability on the balance sheet. Statement 150 is effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. Statement 150 will be effected by reporting the cumulative
effect of a change in accounting principle for contracts created before the
issuance date and still existing at the beginning of that interim period. The
adoption of Statement 150 did not have an impact on our consolidated financial
position, results of operations, or cash flows.
RECLASSIFICATION
Certain amounts in the interim unaudited 2003 condensed consolidated financial
statements have been reclassified to conform to the presentation used in the
interim unaudited 2004 condensed consolidated financial statements. Such
reclassifications had no effect on previously reported net income or loss or
shareholders' equity.
3. NOTES PAYABLE
In September 2003, the Company renewed its 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 March 31, 2004, IHOP net operating income
represented approximately 32% of total property net operating income. At March
31, 2004, 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 March
31, 2004, the interest rate was LIBOR plus 2.0%. As of March 31, 2004, $12.8
million was outstanding under the Credit Facility. Thus the Company has
approximately $17.2 million available under its line of credit, subject to
Lender approval on the use of the proceeds.
F-7
4. MAJOR TENANTS
As of March 31, 2004, there have been no significant changes in the tenant
make-up from year end December 31, 2003.
5. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income (loss)
available to class A shareholders by the weighted average number of class A
common shares outstanding. Diluted earnings per share has been computed by
dividing net income (as adjusted) by the weighted average number of common
shares outstanding plus the weighted average number of potentially dilutive
common shares. Diluted earnings per share information is not applicable due to
the anti-dilutive nature of the common class B and class C shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
Three months ended March 31,
2004 2003
-------- -------
BASIC EARNINGS PER SHARE
Weighted average class A common shares outstanding
(in thousands) 2,953 2,768
Basic and diluted (loss) earnings per share * ($ 0.40) $ 0.002
======= =======
EARNINGS (LOSS) FOR BASIC AND DILUTIVE COMPUTATION
(Loss) earnings to class A common
shareholders (in thousands) ($ 1,178) $ 5
======= =======
* The operating results for the three months ended March 31, 2004 include a
charge to earnings of $1.3 million, which was the market value of the class A
common shares issued to H. Kerr Taylor, President and 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
class C common shares.
6. DISCONTINUED OPERATIONS
The operations of six properties were reported as discontinued operations. Two
of the properties were listed as held for sale at March 31, 2004, one of the
properties was sold in the second quarter of 2003, two of the properties were
sold in the fourth quarter of 2003 and one of the properties was sold in the
first quarter of 2004. The following is a summary of our discontinued operations
(in thousands, except for per share data):
Three months ended March 31,
2004 2003
--------- -------
Rental revenue $ 172 $ 238
Gain on sale of real estate held for sale 608 -
Depreciation and amortization - ( 15)
Bad debt expense ( 67) -
Interest expense ( 39) ( 28)
Property expense ( 18) ( 4)
--------- -------
Income from discontinued operations $ 656 $ 191
Basic and diluted income from discontinued
operations per common share $ 0.22 $ 0.07
========= =======
F-8
Gain on real estate held for sale is a result of selling one property 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.
7. COMMITMENTS
The Company has signed a 63 month lease for office space. The lease commences on
the occupancy date which is expected to be May 14, 2004. The annual rent will be
$210 thousand. Rental expense for the three months ended March 31, 2004 and 2003
was $18 thousand and $22 thousand respectively.
As of March 31, 2004, the Company has contracted to purchase approximately $8.5
million of multi-tenant real estate projects that are anticipated to close
during the second quarter of 2004.
8. SEGMENT REPORTING
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.
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 single 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.
Real estate Securities &
operating & retail Corporate
Portfolio development partnerships and other Total
March 31, 2004:
Revenue $ 2,194 $ 367 $1,980 $ 11 $4,552
Income from non- consolidated affiliates - - 15 - 15
Expenses (910) (110) (1,485) (1,763) (4,268)
Deferred merger cost - - - (1,320) (1,320)
------- ----- ------ ------ ------
Net income (loss) before discontinued operations 1,284 257 510 (3,072) (1,021)
March 31, 2003:
Revenue $ 1,593 $ 131 $ 137 $ 3 $1,864
Income from non-consolidated affiliates - - 40 - 40
Expenses (771) 57 (49) (874) (1,637)
------- ----- ------ ------ ------
Net income (loss) before discontinued operations 822 188 128 (871) 267
F-9
9. PROPERTY ACQUISITIONS AND DISPOSITIONS
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. Uptown Plaza,
acquired in December 2003, 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.
2003
-------
Revenues
Rental income and earned income $ 1,794
Other income 271
-------
Total Revenues 2,065
Total Expenses 1,203
-------
Operating income 862
Income before discontinued operations 412
Income from discontinued operations 191
Pro forma net income 603
Distributions paid to class B and class C shareholders (453)
-------
Net income available to class A shareholders $ 150
=======
Net income per common share - basic and diluted
Loss before discontinued operations (0.015)
Income from discontinued operations 0.069
-------
Net income 0.054
=======
Weighted average common shares used to compute
net income per share, basic and diluted (in thousands) 2,768
=======
10. SUBSEQUENT EVENTS
On April 13, 2004, the Company filed a Form S-11 registration statement with the
SEC. The registration statement registered approximately 17 million shares of
the Company's class D common shares with the SEC. The class D common shares are
expected to be sold at $10 per share, will have dividends on par with those of
the class A common shares at a fixed rate of 6.5% per annum paid monthly, will
have the ability to convert into the class A common shares on the seventh
anniversary of the issuance of the class D common shares at a ratio of 1.077% of
initial capital invested, and are callable after one year. On April 22, 2004,
the Company received a comment letter from the SEC, identifying one comment. The
Company has responded to the SEC's comment, and anticipates the
F-10
registration statement being declared effective by the SEC on or before May 14,
2004. The primary use of proceeds will be property acquisitions, the pay down of
debt and credit facilities and general working capital.
The Company has contracted for a property located in Houston, Texas, which
includes a free standing Walgreens pharmacy and a 20,000 square foot shopping
center. The property is anticipated to close on or before June 30, 2004 for a
total purchase price of approximately $8.5 million. The acquisition is
anticipated to be funded with $3.9 million in cash and the assumption of
mortgage financing of $4.6 million.
The Company expects a charge to the second quarter operating results of
approximately $355 to $375 thousand, depending on the market value of the class
A common shares. The charge is for class A shares to be issued to H. Kerr
Taylor, President and CEO, related to the sale of his advisory company to AmREIT
in 1998. The charge for the deferred merger cost due from this sale was
triggered by the issuance of additional class C common shares.
F-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
Certain information presented in this Form 10-QSB constitutes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in these 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 condensed consolidated financial statements of AmREIT, and the following
discussion contained herein should be read in conjunction with the consolidated
financial statements and discussion included in the Company's annual report on
Form 10-KSB for the year ended December 31, 2003. Historical results and trends
which might appear should not be taken as indicative of future operations.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and the comparative summary of selective
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, 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 March 31, 2004, our debt to total asset ratio was 41%.
At March 31, 2004, 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 represent approximately 75% of the
rental income as of March 31, 2004. Five of the properties are multi-tenant and
represent approximately 25% of the rental income as of March 31, 2004. In
assessing the performance of the Company's properties, management evaluates the
occupancy of the Company's portfolio. Occupancy for the total portfolio was
94.8% based on leaseable square footage as of March 31, 2004. 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
F-12
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 $30.1 million in capital
through March 31, 2004.
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 $16 million through our class C common share
offering for the three months ended March 31, 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 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 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 March 31, 2004, approximately 60% 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. For the three months ended March 31, 2004, the Company
collected and recorded percentage rent from tenants of $65 thousand.
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.
F-13
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
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 March 31,
2004, 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. During the three months ended March 31, 2004, the Company wrote off
receivables totaling approximately $67 thousand. The receivable is attributable
to the GAAP required accrual of straight line rents associated with Just for
Feet. The write off of the receivable from Just for Feet is included in income
from discontinued operations. The Company maintains a receivable related to
Wherehouse Entertainment of approximately $126 thousand. Based on discussions
with Wherehouse Entertainment, Blockbuster Entertainment Corporation, the
guarantor of the lease, and legal proceedings involving Wherehouse Entertainment
and Blockbuster Entertainment Corporation, the Company believes that these
receivables are collectable, and should be collected during 2004.
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, is
expected to provide the necessary capital to maintain and operate our properties
as well as execute and achieve our growth strategies. Cash provided by operating
activities as reported in the Consolidated Statements of Cash Flows increased
$53 thousand in 2004 when compared to 2003.
F-14
Proceeds from sales of real estate acquired for sale increased by $2.4 million.
This increase in cash was offset somewhat by an increase in accounts receivable
related party of $1.5 million.
During the first quarter 2004, AmREIT contracted to purchase approximately $8.5
million of retail real estate, representing a multi-tenant shopping center
located in Houston, Texas. The shopping center is anticipated to close during
the second quarter and will be funded with approximately $3.9 million in cash
and the assumption of a $4.6 million mortgage payable. Additionally, AmREIT sold
an IHOP located in Bridgeton, Missouri during the first quarter 2004, which was
previously classified as real estate held for sale. The Company realized a gain
on the sale of approximately $608 thousand. 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. For the remainder of 2004, the Company
anticipates continuing the strategy of divesting its non-core properties, which
is estimated will generate between $10 and $15 million in sales proceeds. On
January 11, 2003, Wherehouse Entertainment filed for voluntary petition of
relief under Chapter 11 of the federal bankruptcy code. The Company owns two
Wherehouse Entertainment locations. The lease on one location has been amended
and assigned to Record Town. The Company is evaluating the alternatives on the
second location. 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 and has announced it intends to close all their Just for Feet
stores after an orderly liquidation of the remaining inventory. The Company
anticipates the closure of both of their Just for Feet locations this summer and
is evaluating the alternatives.
Cash flows used in investing activities has been primarily related to the
acquisition or development of retail properties. During the first quarter of
2004, AmREIT through one its taxable REIT subsidiaries, acquired a 25% equity
interest in a 45 acre retail redevelopment in Houston, Texas. The other partners
are affiliated partnerships. The investment was funded through a combination of
the $14.3 million of capital (net of $1.8 million in issuance costs) raised
through the class C common share offering and debt financing.
In addition, capitalized expenditures for improvements and additions to our
existing properties were approximately $300 thousand, which were funded through
excess cash flow and through the Company's revolving credit facility. Cash flows
used in investing activities as reported in the Consolidated Statements of Cash
Flows decreased from $3.1 million in the first three months of 2003 to $1.7
million in the first three months of 2004.
Cash flows provided by financing activities increased from $1.1 million through
March 31, 2003 to $1.6 million through March 31, 2004. Cash flows provided by
financing activities were primarily generated from our class C common share
offering. Through its class C common share offering, the Company is averaging
new capital raised of between $4 and $6 million per month. One advantage of
raising capital through the independent financial planning marketplace is 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. The Company was able to reduce debt by almost $11.5
million with the proceeds from it class C common share offering.
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 fro any one tenant to no more than 15% (35% for IHOP) of total property
net operating income. At March 31, 2004, IHOP net operating income represented
approximately 32% of total property net operating income. As of March 31, 2004,
the spread over LIBOR was 2.00. At March 31, 2004, approximately $12.8 million
was outstanding under the credit facility. In addition to the credit facility,
AmREIT utilizes various permanent mortgage financing and other debt instruments.
As of March 31, 2004, the
F-15
Company had the following contractual obligations:
2004 2005 2006 2007 2008 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Unsecured debt:
Revolving credit facility $ 12,777 $ - $ - $ - $ - $ - $ 12,777
5.46% dissenter notes - - - - - 760 760
Secured debt 2,073 490 530 573 620 19,163 23,449
Total contractual obligations $ 14,850 $ 490 $ 530 $ 573 $ 620 $ 19,923 $ 36,986
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 March 31, 2004, 3.0 million
shares had been issued, resulting in approximately $30.1 million in gross
proceeds. 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.
For the quarters ended March 31, 2004 and 2003, the Company paid dividends to
its shareholders of $1.158 million, and $760 thousand respectively. The class A
and class 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 follow (in thousands):
Class A Class B Class C
------- ------- -------
2004
First quarter $345 $434 $379
2003
Fourth quarter $320 $437 $156
Third quarter $308 $443 $ 15
Second quarter $310 $439 N/A
First quarter $307 $453 N/A
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 March 31, 2004, the Company's cash and cash equivalents totaled
$2.2 million.
F-16
Cash flows from operating activities, investing activities, and financing
activities for the three months ended March 31, are presented below in
thousands:
2004 2003
-------- --------
Operating activities $ 305 $ 252
Investing activities (1,728) (3,056)
Financing activities 1,570 1,123
INFLATION
Inflation has had very little effect on income from operations. Management
expects that increases in store sales volumes due to inflation as well as
increases in the Consumer Price Index (C.P.I.), may contribute to capital
appreciation of the Company properties. These factors, however, also may have an
adverse impact on the operating margins of the tenants of the properties.
FUNDS FROM OPERATIONS
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 or loss computed in
accordance with generally accepted accounting principles (GAAP), excluding gains
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 for the three months ended March 31:
2004 2003
-------- -------
(Loss) income before discontinued operations $ (1,021) $ 267
Income from discontinued operations 656 191
Plus depreciation of real estate assets - from operations 244 181
Plus depreciation of real estate assets - from discontinued operations - 38
Less class B and class C distributions (813) (453)
-------- -------
Total Funds From Operations available to class A shareholders * $ (934) $ 224
Cash dividends paid to class A shareholders $ 345 $ 307
Dividends in excess of FFO * $ (1,279) $ (83)
* Based on the adherence to the NAREIT definition of FFO, we have not added back
the $1.3 million charge to earnings during 2004 resulting from shares issued to
Mr. Taylor. Adding these charges back to earnings would result in $386 thousand
adjusted funds from operations available to class A shareholders, and class A
dividends paid less than adjusted FFO available to class A shareholders of $41
thousand.
F-17
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 TO MARCH 31, 2003:
Rental revenue and earned income from direct financing leases increased by 38%,
or $600 thousand, from $1.6 million in 2003 to $2.2 million in 2004. Of this
increase, $640 thousand is related to acquisitions made after the first quarter
of 2003. This is somewhat offset by the loss of rental income of $100 thousand
due to property dispositions.
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, the lease at
the Missouri location has been modified and assigned to Record Town. Wherehouse
Entertainment has vacated the Kansas location. 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. Footstar has announced it intends to
close all their Just for Feet stores after an orderly liquidation of the
remaining inventory. AmREIT owns two Just for Feet locations, one in Tucson,
Arizona and the other is located in Baton Rouge, Louisiana.
Securities commission income increased by $1.8 million, from $86 thousand in
2003 to $1.9 million in 2004. 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 the first quarter of 2004, AmREIT and its
affiliated retail partnerships raised approximately $18.0 million, as compared
to approximately $834 thousand during the first quarter of 2003. 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 $1.4 million, from $65 thousand in 2003 to $1.4 million in
2004.
General and operating expense increased $665 thousand, from $770 thousand in
2003 to $1.4 million in 2004. The increase in general and operating expense is
primarily due to additional personnel and the associated salary and benefits
costs related to these individuals. Since the first quarter of 2003, the Company
added members to each of the operating teams, five on the real estate team
(property management, legal, acquisitions and leasing), 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 $462 thousand in 2004 as compared to
2003. In addition, property expense increased $131 thousand.
Deferred merger costs increased from $0 in the first quarter of 2003 to $1.3
million in the first quarter of 2004 . The deferred merger cost is related to
deferred consideration payable to Mr. Taylor as a result of the acquisition of
our 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 847 thousand class A common shares, and is
eligible to receive an additional 53 thousand shares as additional equity is
raised by the Company.
F-18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Chief Executive Officer Section 302 Certification
31.2 Chief Financial Officer Section 302 Certification
32.1 Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current report on Form 8-K dated and filed with the Commission
on March 18, 2004 contained information under Item 7
(Financial Statements, Pro Forma Financial Information and
Exhibits) and Item 9 (Regulation FD Disclosure).
F-19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AmREIT
-------------------------------------
(Issuer)
May 14, 2004 /s/ H. Kerr Taylor
- ------------ ------------------
Date H. Kerr Taylor, President
May 14, 2004 /s/ Chad C. Braun
- ------------ -----------------
Date Chad C. Braun (Principal Accounting Officer)
F-20
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-21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 the standards of the Public Company
Accounting Oversight Board (United States). 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-22
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 and amortization (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-23
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 class A 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-24
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Accumulated
Capital in distributions Cost of
Common Shares excess of in excess of Deferred treasury
Amount par value earnings compensation shares Total
------------- ------------ ------------- ------------ ---------- -------------
BALANCE AT DECEMBER 31, 2001 $ 23,856 $ 21,655,852 $(6,037,757 $ - $ (288,170) $ 15,353,781
Net loss - - (658,773) - - (658,773)
Issuance of common shares, Class A 3,023 1,901,347 - - - 1,904,370
Issuance of common shares, Class A -
for class B conversion 1,248 - 1,248
Issuance of common shares, Class B, net
of 124,750 shares that converted to Class A 24,642 23,468,401 - - - 23,493,043
Issuance of restricted shares, Class A 250 157,017 - (256,877) 185,119 85,509
Amortization of deferred compensation - - - 51,524 - 51,524
Repurchase of common shares, Class A
(46,069 shares) - - - - (294,138) (294,138)
Distributions - - (1,730,316) - - (1,730,316)
------------ ------------ ----------- ------------ ---------- -------------
BALANCE AT DECEMBER 31, 2002 $ 53,019 $ 47,182,617 $(8,426,846) $ (205,353) $ (397,189) $ 38,206,248
------------ ------------ ----------- ------------ ---------- -------------
Net income - - 1,998,749 - - 1,998,749
Issuance of common shares, Class A 1,017 - - - - 1,017
Repurchase of common shares, Class B (1,017) - - - - (1,017)
Issuance of restricted shares, Class A - 15,184 - (152,819) 137,635 -
Amortization of deferred compensation - - - 214,462 - 214,462
Repurchase of common shares, Class A
(92,700 shares) - - - - (602,221) (602,221)
Issuance of common shares, Class C 14,028 12,153,187 - - - 12,167,215
Distributions - - (3,188,454) - - (3,188,454)
------------ ------------ ----------- ------------ ---------- -------------
BALANCE AT DECEMBER 31, 2003 $ 67,047 $ 59,350,988 $(9,616,551) $ (143,710) $ (861,775) $ 48,795,999
------------ ------------ ----------- ------------ ---------- -------------
See Notes to Consolidated Financial Statements.
F-25
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 sale 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 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 security deposits 63,110 -
Increase in prepaid rent 384 6,177
------------ ------------
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
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In 2003 the Company issued 24,257 shares of restricted stock to employees and
trust managers as as part of their compensation plan. The restricted stock vests
over a four and three 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 as part of their compensation plan. The restricted stock vests
over a four and three 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-26
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-27
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-28
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-29
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 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 employee's 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.
F-30
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
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,
2003 2002
BASIC AND DILUTED EARNINGS PER SHARE
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.
F-31
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
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
treasurey 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
F-32
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
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-33
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-34
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-35
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-36
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-37
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 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-38
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-39
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-40
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 single 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.
F-41
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.
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) (2,907) (3,557) (10,707)
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)
F-42
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
5.56% 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-43
AMREIT
SUPPLEMENT NO. TWO, DATED SEPTEMBER 29, 2004
TO PROSPECTUS, DATED JUNE 25, 2004
FOR UP TO 17,000,000 CLASS D COMMON SHARES OFFERED TO THE PUBLIC
This Supplement supplements, and should be read in conjunction with,
the Prospectus dated June 25, 2004. This Supplement No. Two supercedes and
replaces all prior supplements to the prospectus. Capitalized terms used in this
Supplement have the same meanings as in the Prospectus unless otherwise stated
herein.
Information as to the number and types of properties acquired by AmREIT
is presented as of August 31, 2004 and all references to property acquisitions
should be read in that context. Proposed properties for which AmREIT enters into
initial commitments to acquire, as well as property acquisitions, that occur
after August 31, 2004, will be reported in a subsequent Supplement.
The purpose of this Supplement is to describe the following:
(1) the status of the offering of class D common shares in AmREIT;
(2) revisions to the "Risk Factors" section of the prospectus;
(3) revisions to the "Experts" section of the prospectus to update the
information included in the prospectus relating to the acquisition of certain
properties described in this Supplement;
(4) financial information relating to the acquisition of certain
properties described in this Supplement; and
(5) all other material items that have been previously disclosed by
supplement to the Prospectus.
STATUS OF THE OFFERING
As of August 31, 2004, AmREIT had received subscriptions from this
offering for approximately 275,300 class D common shares, totaling $2.75 million
in gross proceeds. Of this amount, AmREIT has paid $289 thousand to AmREIT
Securities Company, the dealer manager of this offering and an affiliate of
AmREIT, pursuant to the terms of the dealer manager agreement between AmREIT and
AmREIT Securities. Additionally, AmREIT Securities has paid out approximately
$220 thousand in commissions to other non-affiliated NASD broker dealer firms.
RECENT DEVELOPMENTS
AmREIT has acquired four new properties: The Courtyard at Post Oak,
Bakery Square Shopping Center, Plaza in the Park and Cinco Ranch Shopping
Center. The first three are located in Houston, Texas and the last property is
located in Katy, Texas, a suburb of Houston.
The Courtyard at Post Oak:
On June 15, 2004, AmREIT acquired The Courtyard at Post Oak, consisting
of a 4,013 square foot, free standing building occupied by Verizon Wireless
(NYSE: VZ) and a 9,584 square foot,
multi-tenant shopping center occupied by Ninfa's Restaurant and Dessert Gallery.
The property was acquired for $6.35 million in cash.
Plaza in the Park:
On July 1, 2004, AmREIT acquired Plaza in the Park, a 129,955 square
foot Kroger (NYSE: KR) anchored shopping center located on approximately 14.3
acres of land. The property was acquired with approximately $15.3 million in
cash and the assumption of $18.2 million in long term fixed rate debt.
Cinco Ranch Shopping Center:
On July 1, 2004, AmREIT acquired Cinco Ranch Shopping Center, a 97,297
square foot Kroger (NYSE: KR) anchored shopping center located on approximately
12.8 acres of land. The property was acquired with approximately $6.4 million in
cash and the assumption of $8.6 million in long term fixed rate debt.
Bakery Square Shopping Center:
On July 21, 2004, AmREIT acquired Bakery Square Shopping Center, which
is comprised of a free standing Walgreen's and a 19,494 square foot shopping
center anchored by Bank of America (NYSE: BOA). The shopping center was acquired
with approximately $3.97 million in cash and the assumption of $4.52 million in
long term fixed rate debt.
Extension of Credit Facility:
On September 3, 2004, AmREIT extended its $35 million credit facility
to October 4, 2004. AmREIT is in the process of documenting an extension of the
credit facility to October 4, 2005, substantially under the same terms and
conditions as the previous credit facility.
COVER PAGE
The last sentence of the first paragraph of the Cover Page is hereby
amended to change the second reference of "$10.00" to "$9.50".
RISK FACTORS
The section of the prospectus entitled "Risk Factors" beginning on page
11 of the prospectus is supplemented with the following risk factors:
USE OF DESCRIPTIVE TERMS.
Throughout this prospectus, management of AmREIT has employed various
favorable descriptive terms, including "synergistic," "rapidly growing,"
"premier," "unique combination," "dependable growth," "high-quality," "high-end"
and "proven track record" to describe its properties, its historic growth and
its business structure. These terms have not been defined in the prospectus and
could, therefore, be interpreted too positively by prospective investors.
Although these terms reflect management's beliefs concerning these matters,
since they were not characterized as such, prospective investors are cautioned
that the use of these descriptive terms is not intended to offer projections of
the future operating performance of the properties or AmREIT as a whole.
Further, no assurance can be given that the favorable characteristics ascribed
by management to certain of its properties and/or AmREIT will prove to be
accurate, or that AmREIT will perform as well as such terms may suggest.
2
OUR FINANCIAL PERFORMANCE WILL DEPEND ON THE HEALTH OF THE TEXAS ECONOMY.
At August 31, 2004, 17 and 22 of our properties, representing 69.7% and
73.4% of our annualized rental income, were located in the greater metropolitan
Houston area and the State of Texas, respectively. Our performance is,
therefore, highly dependent upon the economic conditions in Houston and Texas
generally. A general downturn in the economy or the real estate market in
Houston or Texas could have a material adverse effect on our results of
operations and financial condition.
WE MAY CONTINUE TO RECOGNIZE IMPAIRMENT CHARGES FOR THE FORESEEABLE FUTURE.
We recognized an impairment charge during the second quarter of 2004.
We anticipate that as we sell our older triple net properties, we may recognize
additional impairment charges related to those properties in the future.
Impairments result from our regular analysis of our real property assets to
determine whether circumstances indicate that the book value of an asset may not
be fully recoverable. Additionally, any time we market a property for sale at a
price less than book value, we recognize an immediate charge. Impairments are
non-cash expenses and impact both our net income and funds from operations for
each fiscal quarter.
The risk factor entitled "AmREIT may increase its leverage without
shareholder approval" on page 12 of the prospectus is hereby amended by deleting
the second paragraph and replacing it in its entirety with the following:
At August 31, 2004, AmREIT had outstanding debt totaling $85.03 million
of which $32.21 million was unsecured. This debt represented approximately 50%
of AmREIT's total assets.
BUSINESS AND PROPERTIES
PROPERTIES
Location of Properties.
The following paragraphs update and replace the paragraph under this
caption on page 27 of the Prospectus.
AmREIT's focus is on property investments in Texas. Of our 54 properties, 23 are
located in Texas, with 17 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 our eye on them. For that reason, we believe AmREIT
delivers an extra degree of hands on management to our real estate investments.
Houston is Texas' largest city and the fourth largest city in the United States.
According to a US Census, 2003 population estimates for Houston are
approximately 4,497,000, a 2.1% increase as compared to 2002, and a 27% increase
compared to 1990. In 2003, the unemployment rates for both Texas and Houston
were below the national average and inflation was less pronounced in Houston and
Texas, compared to the national average. While still highly dependent on the
petro-chemical industry, Houston has sought to diversify its business base so
the local economy does not follow the drastic rise and fall of oil prices. The
Port of Houston, one of the largest in the world, is the second busiest port in
the United States in terms of annual tonnage.
3
The national economy showed marked improvement in 2003 and many indicators show
that the Houston and Texas economies outperformed the national averages. The
Houston economy is highly diversified, with over 50% of the workforce employed
in sectors that are marginally, if at all, affected by changing energy prices.
Houston's top ten employers include:
* Houston Independent School District * Harris County
* City of Houston * MD Anderson Cancer Center
* Administaff * Halliburton
* Continental Airlines * Kroger
* Memorial Herman Healthcare Center * ARAMARK Corporation
According to RECON, Houston area retail sales per capita were reported to be
$13,525 for 2003, compared to the sate average of $12,859 per capita. The
overall occupancy rate for retail during 2003 was 86% while the average
occupancy rate for strip and shopping centers was approximately 89%.
Management believes that any downturn in the Houston economy could adversely
affect us; however, general retail and grocery anchored shopping centers, which
we primarily own, provide basic necessity-type items, and tend to be less
affected by economic changes.
DESCRIPTION.
The following sentence updates and replaces the table heading under
this caption on page 30 of the Prospectus.
Information concerning the properties owned solely by AmREIT as of
August 31, 2004, is presented in the following table:
AMREIT WHOLLY-OWNED PROPERTY INFORMATION
(AUGUST 31, 2004)
<Table>
<Caption>
BUILDING LEASE
DATE PURCHASE LEASEABLE ANNUAL EXPIRATION
PROPERTY (LOCATION) ACQUIRED PRICE AREA RENT DATE
------------------- -------- ----- ---- ---- ----
Radio Shack
(Dallas, TX) .............................. 06/15/94 $ 1,062,000 5,200 $108,900 11/30/06
Transworld Entertainment
(Independence, MO) ........................ 11/14/94 1,550,000 14,047 135,000 01/31/05
Copperfield Medical Plaza
(Houston, TX) ............................. 07/01/95 1,680,000 14,000 201,072 04/30/07
Wherehouse Entertainment
(Wichita, KS) ............................. 09/12/95 1,700,000 15,158 (3) 12/31/04
FootStar, Inc. (1)
(Tucson, AZ) .............................. 09/11/96 3,351,000 19,550 (1) 09/30/16
Washington Mutual
(The Woodlands, TX) (4) ................... 09/23/96 500,000 -- 59,461 09/30/11
Washington Mutual
(Houston, TX) (4) ......................... 12/11/96 828,000 -- 97,861 12/31/11
4
<Table>
<Caption>
BUILDING LEASE
DATE PURCHASE LEASEABLE ANNUAL EXPIRATION
PROPERTY (LOCATION) ACQUIRED PRICE AREA RENT DATE
------------------- -------- ----- ---- ---- ----
FootStar, Inc. (1)
(Baton Rouge, LA) ......................... 06/09/97 $ 2,806,000 20,575 (1) 05/15/12
Hollywood Video
(Lafayette, LA) ........................... 10/31/97 1,124,000 7,488 134,709 09/24/12
Hollywood Video
(Ridgeland, MS) ........................... 12/30/97 1,208,000 7,488 138,453 12/22/12
OfficeMax
(Dover, DE) ............................... 04/14/98 2,548,000 23,500 264,679 04/30/13
Woodlands Plaza
(The Woodlands, TX) ....................... 06/03/98 3,542,000 16,922 374,100 Various
Sugar Land Plaza
(Sugar Land, TX) .......................... 07/01/98 3,635,000 16,922 330,875 07/01/13
Dardin Restaurants
(Peachtree City, GA) (4) .................. 12/18/98 738,000 -- 75,000 12/17/08
IHOP, Corp.
(Sugarland, TX) ........................... 9/30/99 1,608,000 4,020 165,180 9/30/24
IHOP, Corp.
(Topeka, KS) .............................. 9/30/99 1,335,000 4,020 137,340 9/30/24
Foodmaker
(Dallas, TX) .............................. 7/23/02(2) 715,100 2,238 68,998 7/11/09
Baptist Memorial Health
(Memphis, TN) ............................. 7/23/02(2) 2,079,200 15,000 204,375 8/31/07
Payless Shoes
(Austin, TX) .............................. 7/23/02(2) 698,300 4,000 82,000 1/30/08
Golden Corral
(Houston, TX) ............................. 7/23/02(2) 1,811,800 12,000 182,994 11/30/07
Golden Corral
(Houston, TX) ............................. 7/23/02(2) 1,843,400 12,000 181,688 3/14/08
Eckerd
(Houston, TX) (4) ......................... 1/10/03 2,646,900 -- 327,167 10/31/23
TGI Friday's
(Houston, TX) ............................. 7/23/02(2) 2,036,900 8,500 180,500 1/30/08
Guitar Center
(Minnesota, MN) ........................... 7/23/02(2) 2,541,700 15,000 246,750 8/31/09
AFC, Inc. (Popeye's Chicken)
(Atlanta, GA) ............................. 7/23/02(2) 1,113,900 2,583 105,563 7/19/14
Memorial Herman Hospital
(Houston, TX) ............................. 7/23/02(2) 1,816,800 15,000 171,360 1/31/09
Blockbuster Video
(Oklahoma City, OK) ....................... 7/23/02(2) 973,800 15,000 92,610 8/31/05
Pier One
(Longmont, CO) ............................ 7/23/02(2) 1,423,600 8,014 135,560 2/29/08
IHOP, Corp.
(Grand Prairie, TX) ....................... 4/15/03 1,940,400 4,020 174,332 4/14/28
TGI Friday's
(Hanover, MD) ............................. 9/16/03 1,474,700 8,500 134,962 9/30/13
The Terrace Shops
(Houston, TX) ............................. 12/15/03 4,800,000 16,395 428,900 Various
5
<Table>
<Caption>
BUILDING LEASE
DATE PURCHASE LEASEABLE ANNUAL EXPIRATION
PROPERTY (LOCATION) ACQUIRED PRICE AREA RENT DATE
------------------- -------- ----- ---- ---- ----
Uptown Plaza
(Houston, TX) ............................. 12/15/03 $ 13,000,000 28,000 $ 1,268,400 Various
The Courtyard at Post Oak
(Houston, TX) .............................. 6/15/04 6,350,000 13,597 481,609 Various
Plaza in the Park
(Houston, TX) .............................. 7/1/04 33,490,000 129,955 2,607,862 Various
Cinco Ranch Shopping Center
(Katy, TX) ................................. 7/1/04 14,990,000 97,297 1,218,466 Various
Bakery Square
(Houston, TX) .............................. 7/21/04 8,490,000 34,704 531,108 Various
------------ ------- -----------
TOTAL ........................................ $133,451,500 610,693 $11,047,834
</Table>
(1) Footstar, Inc. filed for Chapter 11 Bankruptcy protection on March 2,
2004. In publicly released announcement, Footstar has indicated their
intent to reject the lease on all Just For Feet locations, including
the leases on our two properties.
(2) These properties were acquired as part of the merger of the affiliated
partnerships (Funds IX, X and XI) on July 23, 2002. The purchase price
reflects the pro-rata portion of the negotiated price allocated to the
properties that AmREIT paid the partnerships in common shares.
(3) Wherehouse Entertainment filed for Chapter 11 Bankruptcy protection,
and as such, rejected the Wherehouse Entertainment lease in Wichita,
Kansas. At August 31, 2004, no rental income was being received on this
property.
(4) Represents a land lease only, and as such, no building leasable area is
reflected.
The following paragraphs are inserted following the first full
paragraph on page 33 of the Prospectus.
RECENT ACQUISITIONS AND DISPOSITIONS.
On June 15, 2004, AmREIT acquired The Courtyard at Post Oak, consisting
of a 4,013 square foot, free standing building occupied by Verizon Wireless
(NYSE: VZ) and a 9,584 square foot, multi-tenant shopping center occupied by
Ninfa's Restaurant and Dessert Gallery. The property was constructed in 1994 and
is located at the northwest intersection of Post Oak and San Felipe in Houston,
Texas. This is a lighted intersection in the heart of the Galleria area, the
most significant retail corridor in the Greater Houston area. The property was
acquired for $6.35 million in cash. The weighted average remaining lease term
for the project is 5.2 years.
<Table>
<Caption>
TENANT SQUARE FOOTAGE LEASE TERM EXPIRATION RENTAL INCREASES
------ -------------- ---------- ---------- ----------------
Verizon Wireless 4,013 10 Years November 2009 Yes
Ninfa's 7,606 15 Years November 2009 Yes
Dessert Gallery 1,978 5 Years August 2008 No
</Table>
On July 21, 2004, AmREIT acquired Bakery Square Shopping Center, which
is comprised of a free standing Walgreen's and a 19,494 square foot shopping
center anchored by Bank of America (NYSE: BOA). The property was constructed in
1996 and is located at the southwest corner of Dunlavy and West Gray in Houston,
Texas. This is a strong infill location just south of the central business
district in Houston. The property was acquired with approximately $3.97 million
in cash and the assumption of $4.52 million in long term fixed rate debt. The
debt is evidenced by a note issued to New York Life
6
Insurance Company and has a current balance of $4.52 million, bears interest at
a rate of 8% per year and matures on February 10, 2017. The initial principal
balance of the note was $5.40 million. The loan has a term and amortization of
15-years, with principal and interest payments of $47,617 due monthly. The
weighted average remaining lease term for the shopping center is 4.9 years. The
Walgreen's lease is for 60 years and will expire September, 2056. The shopping
center is 100% occupied.
<Table>
<Caption>
TENANT SQUARE FOOTAGE LEASE TERM EXPIRATION RENTAL INCREASES
------ -------------- ---------- ---------- ----------------
Blockbuster Video 6,484 10 years October 2006 No
T-Mobile 1,416 10 years September 2007 No
Fantastic Sam's 1,050 4 years April 2008 Yes
River Oaks Nails 1,050 5 years May 2009 Yes
Bell Cleaners 1,750 14 years March 2010 Yes
Boston Market 2,816 10 years May 2010 Yes
Bank of America 3,878 15 years January 2012 Yes
Philly Connection 1,050 10 years May 2014 Yes
Walgreens 15,210 60 years September 2056 No
</Table>
On July 1, 2004, AmREIT acquired Plaza in the Park, a 129,955 square
foot Kroger (NYSE: KR) anchored shopping center located on approximately 14.3
acres of land. The property was constructed in 1999 and is located at the
southwest corner of Buffalo Speedway and Westpark in Houston, Texas. Plaza in
the Park's Kroger is undergoing a 13,120 square foot expansion and, when
completed, is expected to be the number one Kroger grocery store in both sales
volume and size in the State of Texas. Additionally, Kroger is the number one
grocer in the Houston marketplace, and enjoys over 26% of total market share.
The property was acquired with approximately $15.33 million in cash and the
assumption of $18.16 million in long term fixed rate debt. The debt is evidenced
by a note issued to Teachers Insurance and Annuity Association of America and
has a current balance of $18.16 million, bears interest at a rate of 5.16% per
year and matures in July 2013. The initial principal balance of the note was
approximately $18.43 million. The loan has a ten year term with a 30-year
amortization. Principal and interest payments of $105,802 are due monthly. The
weighted average remaining lease term for the project is 9.2 years. The Kroger
lease is for 20 years, containing approximately 69 thousand square feet,
expiring in August 2017. The shopping center is 96.67% occupied.
<Table>
<Caption>
TENANT SQUARE FOOTAGE LEASE TERM EXPIRATION RENTAL INCREASES
------ -------------- ---------- ---------- ----------------
Postal Annex 900 5 years April 2006 No
Dervish Enterprises 2,427 5 years June 2006 No
Quizno's 1,600 7 years October 2006 Yes
Sprintcom, Inc. 2,500 5-Year October 2006 No
The Root of You 2,850 5 years December 2006 No
Hallmark Gold Crown 5,650 5-Year February 2007 No
Siena Interiors 2,164 5 years October 2007 No
Image America 2,276 5-Year March 2008 Yes
Avenue Chocolates 1,200 5 years March 2008 No
Tapioca Express 1,112 5 years December 2008 No
Planet Beach 1,960 7 years March 2009 Yes
Huntington Learning Center 2,518 5 years March 2009 No
West University Wellness 2,400 5 years April 2009 No
Dr. Daniel O. Howes 1,500 10 years May 2009 No
Pilgrim Cleaners 1,200 10 years June 2009 Yes
7
<Table>
<Caption>
TENANT SQUARE FOOTAGE LEASE TERM EXPIRATION RENTAL INCREASES
------ -------------- ---------- ---------- ----------------
General Nutrition 900 10 years June 2009 Yes
Bo Hwa Oh 1,295 5 years July 2009 No
Brelian, Inc. 2,300 10 years August 2009 Yes
Envision Nails 1,200 10 years September 2009 No
Vietopia Restaurant 5,640 10 years September 2009 Yes
Vision Optique 1,800 10 years October 2009 Yes
Copperfield Liquor 3,400 10 years December 2009 Yes
Buca di Beppo 7,573 10 years August 2010 Yes
Household Finance Corp III 2,000 10 years April 2011 Yes
Kroger Texas, LP 68,658 20 years August 2017 No
Vacant 2,932
</Table>
On July 1, 2004, AmREIT acquired Cinco Ranch Shopping Center, a 97,297
square foot Kroger (NYSE: KR) anchored shopping center located on approximately
12.8 acres of land. The property was constructed in 2001 and is located at the
northeast corner of Mason Road and Westheimer Parkway in Katy, Texas. The
shopping center is positioned in the heart of the affluent Cinco Ranch master
planned community, and is ranked by Kroger as one of the top 10 Kroger grocery
stores in Texas. The property was acquired with approximately $6.4 million in
cash and the assumption of $8.59 million in long term fixed rate debt. The debt
is evidenced by a note issued to Teachers Insurance and Annuity Association of
America and has a current balance of $8.59 million, bears interest at a rate of
5.16% per year and matures in July 2003. The initial principal amount of the
note was approximately $8.72 million. The loan has a ten year term with a
30-year amortization. Principal and interest payments of $50,060 are due
monthly. The weighted average remaining lease term for the project is 14 years.
The Kroger lease is for 20 years, containing approximately 63 thousand square
feet, expiring in June 2023. The shopping center is 100% occupied.
<Table>
<Caption>
TENANT SQUARE FOOTAGE LEASE TERM EXPIRATION RENTAL INCREASES
------ -------------- ---------- ---------- ----------------
Hallmark Gold Crown 4,500 5 years February 2006 No
General Nutrition 1,400 5 years March 2006 No
L'Aglio 1,720 5 years April 2006 No
Sally Beauty Company 1,400 5 years July 2006 No
State Farm Mutual 1,400 5 years September 2006 No
I-cafe 1,000 5 years February 2008 No
Uncle Lee's Cafe 1,600 5 years June 2008 No
Itty Bitty City 2,600 5 years December 2008 No
Pizza Hut of America 1,600 10 years January 2011 Yes
Fashion Park Cleaners 1,400 10 years February 2011 Yes
Nails Today 1,400 10 years February 2011 Yes
Parkway Liquor 1,927 10 years February 2011 Yes
eDentistry 1,750 10 years February 2011 Yes
TGF Haircutters 1,400 10 years March 2011 Yes
Wishnow-Sugar Vision Center 1,820 10 years March 2011 Yes
Blockbuster Inc. 4,417 10 years March 2011 Yes
Starbucks Corp. 1,400 10 years June 2011 Yes
Mail Boxes Etc. 1,190 10 years November 2011 Yes
Kroger Texas LP 63,373 20 years June 2023 No
</Table>
8
SELECTED HISTORICAL FINANCIAL DATA
The section of the prospectus entitled "Selected Historical Financial
Data", beginning on page 58 of the prospectus is supplemented with the following
tables:
9
AMREIT
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL AND OTHER DATA
<Table>
<Caption>
December 31, December 31, December 31, December 31,
2003 2002 2001 2000
---- ---- ---- ----
BALANCE SHEET DATA (AT END OF PERIOD)
Total Property ................................ $ 70,539,056 $ 47,979,848 $ 30,726,025 $ 31,622,098
Accumulated depreciation ...................... (2,520,633) (2,136,376) (2,066,067) (1,601,758)
Total Property Held For Sale .................. 4,384,342 -- -- --
Cash and cash equivalents ..................... 2,031,440 2,506,868 227,117 935,867
Total assets .................................. 101,326,607 73,975,753 38,828,393 36,522,276
Notes payable ................................. 48,484,625 33,586,085 16,971,549 15,472,183
Total liabilities ............................. 51,683,713 34,958,534 18,399,279 16,063,221
Minority interest ............................. 846,895 810,971 5,075,333 5,130,337
Shareholders' equity .......................... 48,795,999 38,206,248 15,353,781 15,328,718
Fully diluted class A common shares issued .... 6,704,714 5,236,547 2,384,117 2,384,117
Treasury shares ............................... 133,822 65,379 39,323 11,373
OTHER DATA
Cash flows provided by (used in):
Operating .................................. 1,236,727 3,729,090 1,625,417 676,430
Investing .................................. (22,031,014) (15,268,195) (2,332,891) (25,720)
Financing .................................. 20,318,859 13,818,856 (1,276) (833,589)
Net increase (decrease) in cash and cash
equivalents ................................ (475,428) 2,279,751 (708,750) (182,879)
Funds from operations, available to class A (1) 602,000 (846,000) 978,565 222,767
Adjusted funds from operations, available to
class A (2) ................................ 1,520,000 1,060,000 978,565 222,767
Book value per share .......................... 7.28 7.30 6.44 6.43
<Table>
<Caption>
Unaudited
------------------------------
December 31, June 30, June 30,
1999 2004 2003
---- ---- ----
BALANCE SHEET DATA (AT END OF PERIOD)
Total Property ................................ $ 31,136,268 $ 70,825,947 $ 52,559,547
Accumulated depreciation ...................... (1,148,503) (2,707,431) (2,525,907)
Total Property Held For Sale .................. -- 11,031,821 --
Cash and cash equivalents ..................... 1,118,746 846,001 736,434
Total assets .................................. 37,018,186 108,712,381 80,440,990
Notes payable ................................. 15,480,378 32,534,450 40,996,381
Total liabilities ............................. 16,048,366 35,999,085 42,152,009
Minority interest ............................. 5,180,546 1,009,880 800,570
Shareholders' equity .......................... 15,789,274 71,703,416 37,488,411
Fully diluted class A common shares issued .... 2,384,117 9,698,060 5,301,926
Treasury shares ............................... 11,373 25,127 101,822
OTHER DATA
Cash flows provided by (used in):
Operating .................................. 469,700 1,940,455 (4,091,016)(3)
Investing .................................. (2,439,262) (7,909,933) (3,096,161)(3)
Financing .................................. 3,039,788 4,784,039 5,416,743 (3)
Net increase (decrease) in cash and cash
equivalents ................................ 1,070,226 (1,185,439) (1,770,434)
Funds from operations, available to class A (1) 1,605,091 (1,660,000) 643,000
Adjusted funds from operations, available to
class A (2) ................................ 1,605,091 1,140,000 643,000
Book value per share .......................... 6.62 7.39 7.07
(1) AmREIT has adopted the National Association of Real Estate Investment
Trusts (NAREIT) definition of FFO. FFO is calculated as net income
(computed in accordance with generally accepted accounting principles)
excluding gains or losses from sales of depreciable operating property,
depreciation and amortization of real estate assets, and excluding results
defined as "extraordinary items" under generally accepted accounting
principles. FFO should not be considered an alternative to cash flows from
operating, investing and financing activities in accordance with general
accepted accounting principles and is not necessarily indicative of cash
available to meet cash needs. AmREIT's computation of FFO may differ from
the methodology for calculating FFO utilized by other equity REITs and,
therefore, may not be comparable to such other REITS. FFO is not defined
by generally accepted accounting principles and should not be considered
an alternative to net income as an indication of AmREIT's performance, or
of cash flows as a measure of liquidity. Please see the reconciliation of
Net Income to FFO on Page 70.
(2) Based on the adherence to the NAREIT definition of FFO, we have not added
back the $915 thousand $1.90 million, and $1.70 million charge to earnings
during 2003, 2002 and the six months ended June 30, 2004 respectively,
resulting from shares issued to Mr. Taylor as deferred merger cost
stemming from the sale of his advisory company to AmREIT in June 1998.
Additionally, the Company added back a $1.1 million impairment charge to
earnings related to the sale of a vacant property. Adding these charges
back to earnings would result in Adjusted FFO of $1.52 million, $1.06
million and $1.14 million, respectively
10
AMREIT
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL AND OTHER DATA (3)
Unaudited
December 31, December 31, December 31, December 31,
2003 2002 2001 2000
---- ---- ---- ----
(3) (3) (3)
OPERATING DATA
Revenues:
Rental income and earned income from DFL .............. $ 7,584,166 $ 5,193,147 $ 3,009,330 $ 2,848,850
Real estate fee income ................................ 1,031,201 1,222,944 -- --
Gain on sale 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 income ....................................... 7,938 4,206 10,555 31,630
Service fee, other income, and gain and loss on sale
of property ......................................... -- -- 2,650,113 793,268
------------ ------------ ------------ ------------
Total revenues ................................... 12,609,240 7,519,262 5,669,998 3,673,748
Expenses:
General operating, administrative, and
professional ........................................ 3,936,546 2,801,946 2,956,061 1,688,799
Securities commissions ................................ 2,288,027 653,034 -- --
Legal and professional ................................ 881,283 679,154 -- --
Reimbursements and fees to related party .............. -- -- -- --
Depreciation and amortization ......................... 835,987 611,084 413,583 403,181
Merger related acquisition costs ...................... -- -- -- --
Bad debts ............................................. -- -- -- --
Merger costs .......................................... -- -- -- --
Deferred merger costs ................................. 914,688 1,904,370 -- --
Potential acquisition costs ........................... -- -- -- --
------------ ------------ ------------ ------------
Total expense .................................... 8,856,531 6,649,588 3,369,644 2,245,216
Operating income ......................................... 3,752,709 869,674 2,300,354 1,428,532
Income from non-consolidated affiliates .................. 312,147 416,904 -- --
Federal income tax expense ............................... (236,990) (60,656) 144,420 --
Interest ................................................. (2,354,159) (1,774,973) (1,063,574) (1,339,622)
Minority interest in net income of consolidated joint
ventures ............................................... (178,311) (308,010) (527,571) (527,121)
------------ ------------ ------------ ------------
Income from continuing operations ........................ 1,295,396 (857,061) 853,629 (438,211)
Income from discontinued operations (3) .................. 391,480 245,840 225,719 225,719
Gain (loss) on sale of real estate acquired for investment 311,873 (47,553) -- --
------------ ------------ ------------ ------------
Net income (loss) ........................................ $ 1,998,749 $ (658,774) $ 1,079,348 $ (212,492)
Less distributions to class B & C shareholders ........... (1,942,656) (865,293) -- --
------------ ------------ ------------ ------------
Net income (loss) available to class A shareholders ...... $ 56,093 $ (1,524,067) $ 1,079,348 $ (212,492)
============ ============ ============ ============
Basic and diluted (loss) income before discontinued
operations per share .................................. $ (0.23) $ (0.70) $ 0.36 $ (0.18)
Basic and diluted (loss) income from discontinued
operations per share .................................. 0.25 0.08 0.10 0.10
------------ ------------ ------------ ------------
Net income (loss) ........................................ $ 0.02 $ (0.62) $ 0.46 $ (0.09)
============ ============ ============ ============
Distributions per share - class A ........................ $ 0.34 $ 0.34 $ 0.26 $ 0.10
Weighted average number of Series A common shares
outstanding ........................................... 2,792,190 2,469,725 2,354,572 2,373,060
Weighted average number of common shares plus dilutive
potential common shares ............................... 2,792,190 2,469,725 2,354,572 2,373,060
Unaudited
-----------------------------
December 31, June 30, June 30,
1999 2004 2003
---- ---- ----
(3) (3)
OPERATING DATA
Revenues:
Rental income and earned income from DFL .............. $ 3,373,374 $ 4,210,961 $ 2,941,055
Real estate fee income ................................ -- 948,566 266,753
Gain on sale of real estate acquired for resale .......
Securities commission income .......................... -- 3,552,867 526,660
Asset management fee income ........................... -- 148,902 97,610
Interest income ....................................... 199,448 324,957 3,394
Service fee, other income, and gain and loss on sale
of property ......................................... 754,059 -- --
------------ ------------ ------------
Total revenues ................................... 4,326,881 9,186,253 3,835,472
Expenses:
General operating, administrative, and
professional ........................................ 1,290,433 3,008,026 1,536,074
Securities commissions ................................ -- 2,761,225 396,321
Legal and professional ................................ -- 649,558 335,737
Reimbursements and fees to related party .............. -- -- --
Depreciation and amortization ......................... 444,072 503,594 355,895
Merger related acquisition costs ...................... 262,495 -- --
Bad debts ............................................. 189,490 -- --
Merger costs .......................................... -- -- --
Deferred merger costs ................................. -- 1,681,870 --
Potential acquisition costs ........................... -- -- --
------------ ------------ ------------
Total expense .................................... 2,929,491 8,604,273 2,624,027
Operating income ......................................... 1,397,390 581,980 1,211,445
Income from non-consolidated affiliates .................. -- 186,805 85,338
Federal income tax expense ............................... -- (275,252) 15,300
Interest ................................................. (1,134,919) (1,163,005) (1,056,051)
Minority interest in net income of consolidated joint
ventures ............................................... (526,052) (93,451) (82,949)
------------ ------------ ------------
Income from continuing operations ........................ (263,581) (762,923) 173,083
Income from discontinued operations (3) .................. 225,719 (354,701) 654,814
Gain (loss) on sale of real estate acquired for investment -- 849,866 279,084
------------ ------------ ------------
Net income (loss) ........................................ $ (37,862) $ (267,758) $ 1,106,981
Less distributions to class B & C shareholders ........... -- (1,918,870) (891,667)
------------ ------------ ------------
Net income (loss) available to class A shareholders ...... $ (37,862) $ (2,186,628) $ 215,314
============ ============ ============
Basic and diluted (loss) income before discontinued
operations per share .................................. $ (0.11) $ (0.87) (0.26)
Basic and diluted (loss) income from discontinued
operations per share .................................. 0.10 0.16 0.34
------------ ------------ ------------
Net income (loss) ........................................ $ (0.02) $ (0.71) $ 0.08
============ ============ ============
Distributions per share - class A ........................ $ 0.55 $ 0.12 $ 0.11
Weighted average number of Series A common shares
outstanding ........................................... 2,372,744 3,094,216 2,779,434
Weighted average number of common shares plus dilutive
potential common shares ............................... 2,372,744 3,094,216 2,779,434
(3) In accordance with Financial Accounting Standard Statement No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" issued by
the Financial Accounting Standards Board, the consolidated statement of
operations have been restated from those originally reported for the years
ended December 31, 2003, 2002, 2001, 2000, 1999, and the six months ended
June 30, 2003 to reflect separately the results of discontined operations.
The restatement had no impact on the consolidated balance sheet,
statements of stockholders' equity or statement of cash flows. The
restatement had no impact on net earnings or net earnings per share for
the years ended December 31, 2003, 2002, 2001, 2000, 1999, and the six
months ended June 30, 2003.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The section of the prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 61
of the prospectus is supplemented with the following information. The following
discussion should be read in conjunction with our accompanying financial
statements and the notes thereto.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The results of operations and financial condition of AmREIT, 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 AmREIT's tenants. Management
believes the most critical accounting policies in this regard are the accounting
for lease revenues (including 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, AmREIT 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. AmREIT 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 AmREIT can reasonably calculate the amount of
percentage rent owed, if any. Generally, AmREIT records percentage rent in the
period in which the percentage rent payment is made, and can thereby be
calculated and verified. For the six months ended June 30, 2004, AmREIT
collected and recorded percentage rent from tenants of $65 thousand.
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, AmREIT assesses the fair
value of the acquired assets (including land, building as if vacant, acquired
above and below market leases and in-place leases, and tenant relationships) and
acquired liabilities, and allocates the purchase price based on these
assessments. AmREIT 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 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
12
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. Following the
bankruptcy of its sole tenant, and after a thorough remarketing during the
quarter, AmREIT determined that it could not replace the previously existing
value in its Wherehouse Entertainment project located in Wichita, Kansas, and
recorded an impairment charge to earnings of approximately $1.10 million in the
second quarter. Subsequent to the write-down in value, management sold the
property during the current quarter.
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 are considered in assessing the collectibility of the
related receivables. During the six months ended June 30, 2004, AmREIT wrote off
receivables totaling approximately $67 thousand. The receivable is attributable
to the accrual of straight line rents associated with Just for Feet. The write
off of the receivable from Just for Feet is included in income from discontinued
operations. AmREIT maintains a receivable related to Wherehouse Entertainment of
approximately $126 thousand. Based on discussions with Wherehouse Entertainment
and Blockbuster Entertainment Corporation, the guarantor of the lease, and legal
proceedings involving Wherehouse Entertainment and Blockbuster Entertainment
Corporation, AmREIT believes this receivable is collectable, and should be
collected during 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities and financing activities have been the
principal sources of capital to fund AmREIT'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, is expected to
provide the necessary capital to maintain and operate our properties as well as
execute and achieve our growth strategies.
SOURCES AND USES OF FUNDS
Cash provided by operating activities as reported in the Consolidated
Statements of Cash Flows increased $6.0 million for the six months ended June
30, 2004 when compared to the six months ended June 30, 2003. Investment in real
estate acquired for resale decreased by $5.0 million. In addition,
13
proceeds from sales of real estate acquired for sale increased by $714 thousand.
AmREIT sold two properties for a profit that were acquired for sale, one in the
first quarter and one in the second quarter of 2004.
The increase in net cash provided by operating activities was primarily
due to a decrease in investment in real estate acquired for resale. During 2003,
AmREIT invested in five IHOP properties that were purchased as acquired for
resale. For the six months ended June 30, 2004, AmREIT has invested
approximately $2.2 million in real estate acquired for resale. This decrease in
investment in real estate acquired for resale was somewhat offset by a $1.1
million non-cash impairment charge related to the Wherehouse Entertainment
property located in Wichita Kansas and a $1.7 million non-cash increase in
deferred merger costs. The deferred merger expense is a result of shares issued
or 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 has now earned 100% of the shares eligible under the
deferred consideration agreement. Therefore, AmREIT's internal advisor has been
fully paid for, 100% with Company shares as opposed to debt, and no further
payments of shares or expense related to the issuance of shares will be made.
Cash flows used in investing activities has been primarily related to
the acquisition or development of retail properties. During the second quarter
of 2004, AmREIT purchased The Courtyard at Post Oak, consisting of a free
standing building occupied by Verizon Wireless and a multi-tenant center
occupied by Ninfa's Restaurant and Dessert Gallery. During the first quarter of
2004, AmREIT through one its taxable REIT subsidiaries, acquired a 25% equity
interest in a 45 acre retail redevelopment in Houston, Texas. The other partners
are affiliated partnerships. The investment was funded through a combination of
the $14.3 million of capital (net of $1.8 million in issuance costs) raised
through the class C common share offering and debt financing.
In addition, AmREIT received $694 thousand in proceeds during the
second quarter of 2004 from the sale of its Wherehouse Entertainment project
located in Wichita, Kansas. Prior to the sale, AmREIT recorded an impairment
charge to earnings of approximately $1.1 million to reflect the impaired value
of the property. Cash flows used in investing activities as reported in the
Consolidated Statements of Cash Flows increased from $3.1 million in the first
six months of 2003 to $7.9 million in the first six months of 2004.
Cash flows provided by financing activities decreased from $5.4 million
through June 30, 2003 to $4.8 million through June 30, 2004. Cash flows provided
by financing activities were primarily generated from our class C common share
offering. AmREIT fully subscribed its class C commons share offering during the
second quarter. 100% of the net proceeds have been used to purchase
irreplaceable corners. AmREIT has begun to market its class D common share
offering, a $170 million common share offering, offered through the independent
financial planning community. The class D common shares have a stated 6.5%
annual dividend, paid monthly, are convertible into AmREIT's class A common
shares at any time after a seven-year lock out period for a 7.7% premium on
invested capital and are callable by AmREIT after one year. One advantage of
raising capital through the independent financial planning marketplace is 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 was able to reduce debt by almost $25.1
million with the proceeds from it class C common share offering.
AmREIT has a $35 million unsecured revolving credit facility, as
amended in June 2004. The facility will mature on September 4, 2004, and AmREIT
and Lender are in the process of renewing the Credit Facility for a one year
period. Management believes that the Credit Facility will be renewed on
14
terms and conditions substantially the same as the current Credit Facility. The
Credit Facility contains covenants which, among other restrictions, require
AmREIT 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 June 30, 2004, IHOP net operating income represented
approximately 33% of total property net operating income. At June 30, 2004,
AmREIT was in compliance with all financial covenants. The Credit Facility's
annual interest rate varies depending upon AmREIT's debt to asset ratio, from
LIBOR plus a spread of 1.40% to LIBOR plus a spread of 2.35%. As of June 30,
2004, the interest rate was LIBOR plus 2.0%. As of June 30, 2004, $10.2 million
was outstanding under the Credit Facility. Thus AmREIT has approximately $24.8
million available under its line of credit, subject to Lender approval on the
use of the proceeds. In addition to the credit facility, AmREIT utilizes various
permanent mortgage financing and other debt instruments. As of June 30, 2004,
AmREIT had the following contractual debt obligations:
<Table>
<Caption>
2004 2005 2006 2007 2008 Thereafter Total
-------- -------- -------- -------- -------- ---------- --------
Unsecured debt:
Revolving credit facility $ 10,168 $ - $ - $ - $ - $ - $ 10,168
5.46% dissenter notes - - - - - 760 760
Secured debt 230 490 530 573 620 19,163 21,606
Non-cancelable operating lease
payments 79 210 210 210 210 123 1,042
Total contractual obligations $ 10,477 $ 700 $ 740 $ 783 $ 830 $ 20,046 $ 33,576
======== ======== ======== ======== ======== ======== ========
</Table>
In order to continue to expand and develop its portfolio of properties
and other investments, AmREIT 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
AmREIT's debt or equity securities, secured or unsecured borrowings from banks
or other lenders, acquisitions of AmREIT's affiliated entities or other
unrelated companies, or the disposition of assets, as well as undistributed
funds from operations.
In August 2003, AmREIT commenced the class C common share offering.
This offering is being exclusively made through the NASD independent financial
planning community. It was a $44 million offering, of which $4 million has been
reserved for the dividend reinvestment plan. As of June 30, 2004, 4.04 million
shares had been issued, including shares issued through the dividend
reinvestment program, resulting in approximately $40.4 million in gross
proceeds. 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 AmREIT and
its properties.
For the quarters ended June 30, 2004 and 2003, AmREIT paid dividends to
its shareholders of $1.489 million, and $749 thousand respectively. The class A
and class 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 follow (in thousands):
<Table>
<Caption>
Class A Class B Class C
2004
Second quarter $383 $429 $677
First quarter $345 $434 $379
2003
Fourth quarter $320 $437 $156
Third quarter $308 $443 $15
Second quarter $310 $439 N/A
</Table>
15
Until properties are acquired by AmREIT, AmREIT's funds are held in
short term, highly liquid investments which AmREIT believes to have appropriate
safety of principal. This investment strategy has allowed, and continues to
allow, high liquidity to facilitate AmREIT's use of these funds to acquire
properties at such time as properties suitable for acquisition are located. At
June 30, 2004, AmREIT's cash and cash equivalents totaled $846 thousand.
Cash flows from operating activities, investing activities, and
financing activities for the three and six months ended June 30, are presented
below in thousands:
<Table>
<Caption>
QUARTER YEAR TO DATE
2004 2003 2004 2003
--------- --------- -------- ---------
Operating activities $ 1,635 $ (4,343) $ 1,940 $ (4,091)
Investing activities (6,182) (40) (7,910) (3,096)
Financing activities 3,214 4,294 4,784 5,417
</Table>
INFLATION
Inflation has had very little effect on income from operations.
Management expects that increases in store sales volumes due to inflation as
well as increases in the Consumer Price Index (C.P.I.), may contribute to
capital appreciation of AmREIT properties. These factors, however, also may have
an adverse impact on the operating margins of the tenants of the properties.
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 FFO as net income or loss computed in
accordance with generally accepted accounting principles (GAAP), excluding gains
from sales of property held for investment, 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.
16
Below is the calculation of FFO and the reconciliation to income (loss)
before discontinued operationsnet income, which AmREIT believes is the most
comparable GAAP financial measure to FFO, in thousands for the periods ended
June 30:
<Table>
<Caption>
QUARTER YEAR TO DATE
2004 2003 2004 2003
------- ------ ------- ------
Income (loss) before discontinued operations $ 308 $ 13 $ (763) $ 173
Income (loss) from discontinued operations (211) 636 495 934
Plus depreciation of real estate assets - from operations 257 170 488 352
Plus depreciation of real estate assets - from discontinued operations 26 38 39 76
Less class B and class C distributions (1,106) (439) (1,919) (892)
------- ------ ------- ------
Total Funds From Operations available to class A shareholders * $ (726) $ 418 $(1,660) $ 643
Cash dividends paid to class A shareholders $ 383 $ 310 $ 728 $ 617
Dividends (in excess of) less than FFO * $(1,109) $ 108 $(2,388) $ 26
</Table>
* Based on the adherence to the NAREIT definition of FFO, we have not added back
the $362 thousand or $1.7 million charge to earnings for the three and six
months ended June 30, 2004, respectively, resulting from shares issued to Mr.
Taylor. Additionally, we have not added back the $1.1 million charge to earnings
for the three and six months ended June 30, 2004, resulting from an asset
impairment and corresponding write-down of value. Adding these charges back to
earnings would result in adjusted funds from operations available to class A
shareholders of $739 thousand for the three months ended June 30, 2004 and $1.1
million for the six months ended June 30, 2004. Adding the charge to earnings
would also result in dividends paid being less than adjusted FFO of $356
thousand for the three months ended June 30, 2004 and $397 thousand for the six
months ended June 30, 2004.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2004 TO JUNE 30, 2003:
Rental revenue and earned income from direct financing leases increased
by 42%, or $619 thousand, for the three months ended June 30, 2004 when compared
to the three months ended June 30, 2003. Of this increase, $597 thousand is
related to acquisitions made after the second quarter of 2003.
Securities commission income increased by $1.2 million for the three
months ended June 30, 2004 when compared to 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 the second
quarter of 2004, AmREIT and its affiliated retail partnerships raised
approximately $15.3 million, as compared to approximately $4.3 million during
the second quarter of 2003. 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 $1.0 million for the
three months ended June 30, 2004 compared to the three months ended June 30,
2003. Interest and other income increased approximately $313 thousand primarily
due to the negotiated claim on the lease of the Footstar location in Baton
Rouge.
General and operating expense for the three months ended June 30, 2004
increased $804 thousand when compared to 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. Since the second quarter
of 2003, AmREIT added members to each of the operating teams, two on the real
estate
17
team (property management, legal, acquisitions and leasing), four on the
securities team and three 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 $424 thousand in the three months
ended June 30, 2004 as compared to the three months ended June 30, 2003. In
addition, property expense increased $126 thousand.
Deferred merger costs increased from $0 in 2003 to $362 thousand in
2004. The deferred merger cost is related to deferred consideration payable to
Mr. Taylor as a result of the acquisition of our 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 AmREIT increases
its outstanding equity. To date, Mr. Taylor has received 900 thousand class A
common shares, which fulfills the shares that he is owed under the deferred
consideration agreement.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 TO JUNE 30, 2003:
Rental revenue and earned income from direct financing leases increased
by 43%, or $1.3 million for the six months ended June 30, 2004 when compared to
the six months ended June 30, 2003. Of this increase, $1.2 million is related to
acquisitions made after the second quarter of 2003.
Securities commission income increased by $3.0 million, from $527
thousand in 2003 to $3.6 million in 2004. 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 the six months ended June
30, 2004, AmREIT and its affiliated retail partnerships raised approximately
$33.3 million, as compared to approximately $5.2 million during the six months
ended June 30, 2003. 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 $2.4 million, from $396 thousand
in 2003 to $2.8 million in 2004.
General and operating expense increased $1.5 million, from $1.5 million
in 2003 to $3.0 million in 2004. The increase in general and operating expense
is primarily due to additional personnel and the associated salary and benefits
costs related to these individuals. Since the second quarter of 2003, AmREIT
added members to each of the operating teams, two on the real estate team
(property management, legal, acquisitions and leasing), four on the securities
team and three 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 $882 thousand in the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003. In addition,
property expense increased $261 thousand.
Deferred merger costs increased from $0 in 2003 to $1.7 million in the
six months ended June 30, 2004. The deferred merger cost is related to deferred
consideration payable to Mr. Taylor as a result of the acquisition of our
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 AmREIT increases its outstanding equity. To date, Mr.
Taylor has received 900 thousand class A common shares, which fulfills the
shares that he is owed under the deferred consideration agreement.
18
REDEMPTION OF SHARES
The second paragraph under this caption on page 57 of the prospectus is
hereby amended by addressing the following sentence at the end of such
paragraph:
At any time prior to the repurchase of his or her shares, a shareholder
may withdraw his or her shares from the Repurchase Plan by providing
written notice of such intent to withdraw to AmREIT not later than five
business days prior to the end of the applicable calendar quarter.
The first sentence of the third paragraph under this caption on page 57
of the prospectus is hereby deleted and replaced in its entirety with the
following:
In the event there are insufficient funds to redeem all of the
shares for which redemption requests have been submitted, AmREIT plans
to redeem the shares on a pro rata basis.
The third sentence of the third paragraph under this caption on page 57
of the prospectus is hereby deleted and replaced in its entirety with the
following:
In that case, the redemption request will be retained and those shares
will be repurchased on a pro rata basis with all other shares submitted
for repurchase at the end of the next quarter.
The fourth sentence of the third paragraph under this caption on page
57 of the prospectus is hereby deleted and replaced in its entirety with the
following:
Alternatively, if a repurchase request is not satisfied and the
shareholder does not make a subsequent request to repurchase its shares
at such time, if any, as sufficient funds exist, the initial repurchase
request will be treated by AmREIT as cancelled.
The following sentence updates and replaces the first sentence in the
fifth paragraph under this caption on page 57 of the Prospectus.
Upon the Redemption Agent's receipt of notice for redemption of shares,
the redemption price for this limited optional redemption right will initially
be $10.00 per share.
The second sentence of the fifth paragraph under this caption on page
57 of the prospectus is hereby deleted and replaced in its entirety with the
following:
During periods when AmREIT is not engaged in an offering, the per share
price of the class D common shares, for purposes of repurchase, will be
based on periodic updates of the value of the class D common shares as
our board reasonably determines based upon market conditions; provided,
however, that during an offering of class D common shares the
repurchase price will be equal to or below the price of the class D
common shares issued in the offering. Accordingly, the repurchase
prices paid to holders of class D common shares repurchased by AmREIT
may vary over time. Our board of trust
19
managers will announce any price adjustment and the period of its
effectiveness as part of its regular communications with shareholders.
The last sentence of the seventh paragraph under this caption on page
58 of the prospectus is hereby amended by adding the following at the end of
such sentence:
or the class D common shares are listed on a securities exchange, the
subject of bona fide quotes on any inter-dealer quotation system or
electronic communications network or are the subject of bona fide
quotes in the pink sheets.
DESCRIPTION OF AMREIT'S CAPITAL SHARES
DIVIDEND REINVESTMENT PLAN
The second paragraph under this caption on page 104 of the prospectus
is hereby amended by deleting the second and third sentences of such paragraph
in their entirety.
EXPERTS
The following paragraph updates and replaces the first paragraph under
this caption on page 123 of the Prospectus.
The consolidated financial statements and schedule of AmREIT and
subsidiaries as of and for the year ended December 31, 2003, and the historical
summary of gross income and direct operating expenses of Cinco Ranch Shopping
Center and Plaza in the Park Shopping Center for the period from June 4, 2003
through May 31, 2004 have been included herein in reliance upon the reports of
KPMG LLP, independent registered public accounting firm, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
20
EXHIBIT B
DIVIDEND REINVESTMENT PLAN
Section 1(a) of the Dividend Reinvestment Plan is hereby deleted and
replaced in its entirety with the following:
(a) The price at which the Shares will be issued under the
Reinvestment Plan will be equal to the greater of $9.50 per Share or
95% of the estimated value of one Share as estimated by the Company's
Board of Trust Managers or other firm chosen by the Company's board for
that purpose.
Section 1(b) of the Dividend Reinvestment Plan is hereby deleted and
replaced it in its entirety with the following:
(b) The number of Shares authorized for issuance under the
Reinvestment Plan is 2,000,000.
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMREIT FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 2004 (unaudited)
Consolidated Statements of Operations for the quarters ended June 30, 2004 and
June 30, 2003 and for the periods from January 1, 2004 through June 30, 2004 and
January 1, 2003 through June 30, 2003 (unaudited)
Consolidated Statements of Cash Flows for the quarters ended June 30, 2004 and
June 30, 2003 and for the periods from January 1, 2004 through June 30, 2004 and
January 1, 2003 through June 30, 2003 (unaudited)
Notes to Consolidated Financial Statements for the six months ended June 30,
2004 and 2003 (unaudited)
PROPERTIES ACQUIRED
Audited Financial Statements of Cinco Ranch Shopping Center
Report of Independent Registered Public Accounting Firm
Historical Summary of Gross Income and Direct Operating Expenses for
the Period from June 4, 2003 through May 31, 2004
Notes to Historical Summary of Gross Income and Direct Operating
Expenses for the Period from June 4, 2003 through May 31, 2004
Audited Financial Statements of Plaza In The Park Shopping Center
Report of Independent Registered Public Accounting Firm
Historical Summary of Gross Income and Direct Operating Expenses for
the Period from June 4, 2003 through May 31, 2004
Notes to Historical Summary of Gross Income and Direct Operating
Expenses for the Period from June 4, 2003 through May 31, 2004
Pro Forma Financial Information
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2004
(Unaudited)
Notes to Pro Forma Condensed Consolidated Balance Sheet as of June 30,
2004 (Unaudited)
Pro Forma Condensed Consolidated Statement of Operations for the Six
Month Period Ended June 30, 2004 (Unaudited)
Notes to Pro Forma Condensed Consolidated Statement of Operations for
the Six Month Period Ended June 30, 2004 (Unaudited)
Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 2003 (Unaudited)
Notes to Pro Forma Condensed Consolidated Statement of Operations for
the Year Ended December 31, 2003 (Unaudited)
22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMREIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
ASSETS
Property:
Land $ 37,920,045
Buildings 32,285,679
Tenant improvements 620,223
------------
70,825,947
Less accumulated depreciation and amortization (2,707,431)
------------
Net real estate held for investment 68,118,516
Real estate held for sale, net 11,031,821
Net investment in direct financing leases held for investment 19,222,398
Cash and cash equivalents 846,001
Accounts receivable 1,694,495
Accounts receivable - related party 1,359,437
Notes receivable 890,445
Escrow deposits 689,112
Prepaid expenses, net 329,669
Other assets:
Preacquisition costs 146,343
Loan acquisition cost, net of $166,365 in accumulated amortization 311,257
Leasing costs, net of $78,189 in accumulated amortization 440,237
Furniture, fixtures and equipment, net of $183,316 in accumulated depreciation 410,534
Accrued rental income 550,394
Intangible lease cost, net of $105,808 in accumulated amortization 671,680
Investment in non-consolidated affiliates 2,000,042
------------
Total other assets 4,530,487
------------
TOTAL ASSETS $108,712,381
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 32,534,450
Accounts payable 2,520,462
Accounts payable - related party 236,947
Construction payable 392,068
Deferred gain 132,569
Security deposit 153,673
Prepaid rent 28,916
------------
TOTAL LIABILITIES 35,999,085
------------
Minority interest 1,009,880
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,
3,347,030 shares issued 33,470
Class B Common shares, $.01 par value, 3,000,000 shares authorized,
2,315,890 shares issued 23,159
Class C Common shares, $.01 par value, 4,400,000 shares authorized,
4,035,140 shares issued 40,351
Capital in excess of par value 85,186,612
Accumulated distributions in excess of earnings (12,530,674)
Deferred compensation (888,623)
Cost of treasury shares, 25,127 shares (160,879)
------------
TOTAL SHAREHOLDERS' EQUITY 71,703,416
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $108,712,381
============
See Notes to Condensed Consolidated Financial Statements.
F-1
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Quarter ended June 30, Year to date June 30,
2004 2003 2004 2003
----------- ---------- ----------- -----------
Revenues:
Rental income from operating leases $ 1,588,798 $ 970,501 $ 3,196,452 $ 1,939,976
Earned income from direct financing leases 507,307 506,799 1,014,509 1,001,079
Real estate fee income 581,207 136,001 948,566 266,753
Securities commission income 1,648,326 441,052 3,552,867 526,660
Asset management fee income 73,622 46,616 148,902 97,610
Interest and other income 313,505 281 324,957 3,394
----------- ---------- ----------- -----------
Total revenues 4,712,765 2,101,250 9,186,253 3,835,472
----------- ---------- ----------- -----------
Expenses:
General operating and administrative 1,587,601 783,210 3,008,026 1,536,074
Legal and professional 321,747 214,318 649,558 335,737
Securities commissions 1,337,593 331,286 2,761,225 396,321
Depreciation and amortization 270,330 171,155 503,594 355,895
Deferred merger costs 362,037 - 1,681,870 -
----------- ---------- ----------- -----------
Total expenses 3,879,308 1,499,969 8,604,273 2,624,027
----------- ---------- ----------- -----------
Operating income 833,457 601,281 581,980 1,211,445
Income from non-consolidated affiliates 172,207 45,033 186,805 85,338
Federal income tax (expense) benefit for taxable REIT subsidiary (104,347) (57,700) (275,252) 15,300
Interest expense (543,974) (532,503) (1,163,005) (1,056,051)
Minority interest in income of consolidated joint ventures (49,186) (43,161) (93,451) (82,949)
----------- ---------- ----------- -----------
Income (loss) before discontinued operations 308,157 12,950 (762,923) 173,083
(Loss) income from discontinued operations (452,877) 357,110 (354,701) 654,814
Gain on sales of real estate acquired for resale 241,979 279,084 849,866 279,084
----------- ---------- ----------- -----------
(Loss) income from discontinued operations (210,898) 636,194 495,165 933,898
----------- ---------- ----------- -----------
Net income (loss) $ 97,259 $ 649,144 $ (267,758) $ 1,106,981
Distributions paid to class B and class C shareholders (1,105,814) (439,124) (1,918,870) (891,667)
----------- ---------- ----------- -----------
Net (loss) income available to class A shareholders $(1,008,555) $ 210,020 $(2,186,628) $ 215,314
=========== ========== =========== ===========
Net (loss) income per common share - basic and diluted
Loss before discontinued operations $ (0.25) $ (0.15) $ (0.87) $ (0.26)
(Loss) income from discontinued operations $ (0.06) $ 0.23 $ 0.16 $ 0.34
----------- ---------- ----------- -----------
Net (loss) income $ (0.31) $ 0.08 $ (0.71) $ 0.08
=========== ========== =========== ===========
Weighted avergage class A common shares used to compute
net income per share, basic and diluted 3,235,449 2,790,492 3,094,216 2,779,434
=========== ========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-2
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Quarter ended June 30, Year to date June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 97,259 $ 649,144 $ (267,758) $ 1,106,981
Adjustments to reconcile net income to net cash
provided by operating activities:
Investment in real estate acquired for resale (1,533,452) (7,233,907) (2,200,290) (7,233,907)
Proceeds from sales of real estate acquired for sale 149,020 1,898,356 2,612,742 1,898,356
Gain on sales of real estate acquired for resale (241,979) - (849,866) -
Impairment charges 1,103,144 - 1,103,144 -
Depreciation and amortization 305,039 237,319 560,524 467,016
Amortization of deferred compensation 67,677 15,457 131,960 75,385
Minority interest in income of consolidated joint ventures 169,807 43,161 214,072 82,949
Deferred merger costs 362,037 - 1,681,870 -
Decrease (increase) in accounts receivable 436,392 (151,253) 227,467 (113,233)
Decrease (increase) in accounts receivable- related party 336,777 (22,966) (1,157,663) (78,875)
(Increase) decrease in prepaid expenses, net (28,436) (30,536) 32,452 (16,459)
Cash receipts from direct financing leases
(less) more than income recognized (4,554) (4,265) (7,651) 12,795
Increase in accrued rental income (76,571) (30,328) (62,802) (79,847)
(Increase) decrease in other assets (334,707) (76,447) (323,688) 6,644
Increase (decrease) in accounts payable 743,923 270,726 (58,553) (277,198)
Increase (decrease) in accounts payable- related party 4,778 7,561 225,507 (26,425)
Increase in security deposits 56,633 - 56,633 -
Increase in prepaid rent 22,355 84,802 22,355 84,802
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities 1,635,142 (4,343,176) 1,940,455 (4,091,016)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Improvements to real estate (93,771) (121,806) (394,188) (277,569)
Acquisition of investment properties (6,388,715) - (6,388,715) (2,688,157)
Notes receivable collections 65,777 - 109,332 -
Additions to furniture, fixtures and equipment (222,647) (17,553) (341,566) (41,593)
Investment in non-consolidating affiliates (137,048) 80,939 (1,455,150) (80,832)
Proceeds from sale of investment property 693,515 - 693,515 -
Increase in preacquisition costs (99,021) 18,703 (133,161) (8,010)
----------- ----------- ----------- -----------
Net cash used in investing activities (6,181,910) (39,717) (7,909,933) (3,096,161)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 6,142,154 6,892,959 9,106,671 9,260,758
Payments of notes payable (10,593,346) (1,749,299) (25,056,846) (1,850,462)
Purchase of treasury shares - (75,425) - (391,144)
Issuance of common shares 10,276,145 - 26,323,675 -
Issuance costs (1,096,470) - (2,892,009) -
Common dividends paid (1,488,660) (749,437) (2,646,365) (1,509,059)
Distributions to minority interests (26,056) (25,031) (51,087) (93,350)
----------- ----------- ----------- -----------
Net cash provided by financing activities 3,213,767 4,293,767 4,784,039 5,416,743
----------- ----------- ----------- -----------
Net decrease in cash and cash equivalents (1,333,001) (89,126) (1,185,439) (1,770,434)
Cash and cash equivalents, beginning of period 2,179,002 825,560 2,031,440 2,506,868
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 846,001 $ 736,434 $ 846,001 $ 736,434
=========== =========== =========== ===========
Supplemental schedule of noncash investing and financing activities
In 2004 the Company issued 134,695 shares of restricted stock to employees and trust managers as
as part of their compensation plan. The restricted stock vests over a four and three period respectively.
The Company recorded $875,518 in deferred compensation related to the issuance of the restricted stock.
In 2003 the Company issued 24,257 shares of restricted stock to employees and trust managers as
as part of their compensation plan. The restricted stock vests over a four and three period respectively.
The Company recorded $152,819 in deferred compensation related to the issuance of the restricted stock.
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest 528,604 603,232 1,149,292 1,127,421
Income taxes - - 48,600 31,103
See Notes to Condensed Consolidated Financial Statements.
F-3
AMREIT AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
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 operating and development business, a securities business 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 and strategically invest that capital in high
quality properties for flexibility and more 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 a series of publicly registered, non traded common share
offerings, being offered exclusively through the independent financial planning
community. As of June 30, 2004, the Company had raised approximately $40.4
million through sales of its class C common shares since the offering commenced
in August 2003, including shares issued through the dividend reinvestment
program. On June 25, 2004, the Company launched its class D common share
offering: a $170 million publicly registered, non-traded common share offering
with a stated yield of 6.5%. The class D common shares are convertible into the
Company's class A common shares after a seven-year lock out period. Through its
by-laws, the Company's debt is limited to 55% recourse debt as compared to its
gross assets. As of June 30, 2004, the Company's debt to asset ratio was
approximately 33%.
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 the Company expects
will create dependable income and long-lasting value. These premium properties
are expected to provide high leasing income and high occupancy rates for a
strong income stream. As of June 30, 2004, the occupancy rate of our properties
was 88.5%. Our properties attract a wide array of established commercial
tenants, and offer attractive opportunities for dependable monthly income and
potential capital appreciation. Management believes that the location and design
of its properties provide flexibility in use and tenant selection and an
increased likelihood of advantageous lease renewal terms.
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.
F-4
AmREIT owns a real estate portfolio consisting of 53 properties located in 19
states at June 30, 2004. 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 June 30, 2004, no single property accounted for more than 10% of the
Company's total assets. For the year to date period ended June 30, 2004, IHOP
accounted for 13.8% of the Company's total revenue and no other tenant accounted
for more than 5% of the Company's total revenue.
Real Estate Operating and Development Company
AmREIT's real estate operating and development subsidiary, AmREIT Realty
Investment Corporation ("ARIC"), comprised of a fully integrated real estate
team, provides 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 generating fee income from providing services
to third parties and affiliated funds, 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 Bank of America,
Starbucks, TGI Friday's CVS/pharmacy, Nextel, Landry's, Eckerd, IHOP, Washington
Mutual, 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 twelve to eighteen months. These assets are listed as real
estate held for sale on our consolidated balance sheet, and at June 30, 2004,
these assets represented approximately $4.0 million of the $11.0 million
reported as real estate held for sale.
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 by a subsidiary of
AmREIT. Additionally, since August of 2003, ASC has raised approximately $40.4
million, including shares issued through the dividend reinvestment program,
directly for us through a class C common share offering. ASC is also the dealer
manager on our newest offering, a $170 million class D common share offering:
publicly registered, non-traded common shares receiving a stated 6.5%
F-5
annual dividend paid monthly. The class D common shares are non-cumulative and
can convert into the class A common shares at a 7.7% premium on invested capital
after a seven-year lock out period. We anticipate raising approximately $25-30
million during 2004 through this class D common share offering. 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
retail partnerships have received their targeted return, again, linking AmREIT's
success to that of its unit holders.
As of June 30, 2004, AmREIT directly managed, through its four actively managed
and previously sponsored retail partnerships, over $35 million in equity. These
four partnerships have entered or will enter their liquidation phases in 2003,
2009, 2010, and 2011 respectively. As these partnerships enter into liquidation,
we expect to receive economic benefit from our profit participation, after
certain preferred returns have been paid to the partnership's limited partners.
Unrealized gains associated with this potential profit participation, if any,
have not been reflected on our balance sheet or statement of operations.
In August 2003 the Company began selling class C common shares. The offering is
a $44 million offering ($40 million offered to the public and $4 million
reserved for the dividend reinvestment program), issued on a best efforts basis
through the independent financial broker dealer community. The Company will
primarily use the proceeds for the acquisition of new properties and to pay down
existing debt. Since August 2003, the Company had issued approximately 4.04
million shares (including shares issued through the dividend reinvestment
program), representing approximately $40.4 million in proceeds from selling
class C shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and include all of
the disclosures required by accounting principles generally accepted in the
United States of America. The condensed consolidated financial statements
reflect all normal and recurring adjustments, which are, in the opinion of
management, necessary to present a fair statement of results for the six month
periods ended June 30, 2004 and 2003. Operating results for the three and six
months ended June 30, 2004 are not necessarily indicative of the results to be
expected for the year ended December 31, 2004.
The condensed consolidated financial statements of AmREIT contained herein
should be read in conjunction with the consolidated financial statements
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2003.
REAL ESTATE HELD FOR SALE
AmREIT constantly evaluates its real estate portfolio, identifying those assets
that are non-core and no longer meet its investment objectives. Management has
identified three portfolio properties that are considered non-core and
F-6
are listed for sale. Further, management anticipates identifying an additional
five to seven properties that it will list for sale during 2004.
Properties are classified as real estate held for sale if the properties were
purchased with intent to sell the properties within twelve to eighteen months or
if the properties are listed for sale. Additionally, if management has made the
determination to dispose of an operating property, the associated property is
reclassified to real estate held for sale and depreciation is ceased. An
evaluation for impairment is also performed. At June 30, 2004, AmREIT owned
eight properties that are classified as real estate held for sale. The eight
properties have a combined carrying value of $11.0 million.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT and its
wholly or majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46"), which
was amended in December 2003. 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 return 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. Management anticipates the
adoption of FIN 46 will not have an impact on our consolidated financial
position, results of operations, or cash flows.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150
("Statement 150") "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". Statement 150 requires certain
financial instruments that have characteristics of both liabilities and equity
to be classified as a liability on the balance sheet. Statement 150 is effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. Statement 150 will be effected by reporting the cumulative
effect of a change in accounting principle for contracts created before the
issuance date and still existing at the beginning of that interim period. The
adoption of Statement 150 did not have an impact on our consolidated financial
position, results of operations, or cash flows.
RECLASSIFICATION
Certain amounts in the interim unaudited 2003 condensed consolidated financial
statements have been reclassified to conform to the presentation used in the
interim unaudited 2004 condensed consolidated financial statements. Such
reclassifications had no effect on previously reported net income or loss or
shareholders' equity.
3. NOTES PAYABLE
In September 2003, the Company renewed its unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the acquisition of
properties and working capital. In June 2004, the Credit Facility was amended in
order to increase the maximum availability and modify certain terms and
conditions of the Credit Facility. Under the amended Credit Facility, which
matures September 2004, the Company may borrow up to $35 million subject to the
value of unencumbered assets. The Company and the lender are in the process of
renewing the Credit Facility for a one year period. Management believes that the
Credit Facility will be renewed on terms and conditions substantially the same
as the current Credit Facility. The Credit Facility contains covenants which,
among other restrictions, require the Company to maintain a minimum net worth, a
maximum leverage ratio,
F-7
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. For the six months ended June 30, 2004, IHOP net operating
income represented approximately 33% of total property net operating income. On
June 30, 2004, 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 a spread of
2.35%. As of June 30, 2004, the interest rate was LIBOR plus 2.0%. As of June
30, 2004, $10.2 million was outstanding under the Credit Facility. Thus the
Company has approximately $24.8 million available under its line of credit,
subject to Lender approval on the use of the proceeds.
4. MAJOR TENANTS
As of June 30, 2004, there have been no significant changes in the tenant
make-up from year end December 31, 2003, other than those delineated in Note 10.
5. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income (loss)
available to class A 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 potentially dilutive
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:
<Table>
<Caption>
Quarter Year to Date
------------------ ------------------
2004 2003 2004 2003
-------- ------ -------- ------
BASIC EARNINGS PER SHARE
Weighted average class A common shares
outstanding (in thousands) 3,235 2,790 3,094 2,779
Basic and diluted (loss) earnings
per share* $ (0.31) $ 0.08 $ (0.71) $ 0.08
EARNINGS (LOSS) FOR BASIC AND
DILUTIVE COMPUTATION
(Loss) earnings to class A common
shareholders (in thousands) $(1,009) $ 210 $(2,187) $ 215
</Table>
* The operating results for the three and six months ended June 30, 2004 include
a charge to earnings of $362 thousand and $1.7 million, respectively, which
represents the market value of the class A common shares issued to H. Kerr
Taylor, President and 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 class C common shares. Additionally,
these operating results include an impairment charge of $1.1 million, which
represents a write-down in value of the vacant Wherehouse Entertainment property
located in Wichita, Kansas, which was sold during the quarter. For additional
information see Footnote 6 - DISCONTINUED OPERATIONS.
F-8
6. DISCONTINUED OPERATIONS
The operations of fifteen properties were reported as discontinued operations
for the six months period ended June 30, 2004. Eight of the properties were
listed as held for sale at June 30, 2004, three of the properties were sold in
the current year, and five of the properties were sold in 2003. The following is
a summary of our discontinued operations (in thousands, except for per share
data):
<Table>
<Caption>
Quarter Year to Date
----------------- -----------------
2004 2003 2004 2003
------- ----- ------- -----
Rental revenue $ 176 $ 294 $ 317 $ 558
Earned income from direct financing
leases 34 164 143 269
Interest and other income 639 -- 639 --
Gain on sale of real estate held for sale 242 279 850 279
General operating and administrative (51) (2) (150) (6)
Legal and professional -- -- -- (1)
Depreciation and amortization (25) (38) (39) (76)
Interest expense (2) (61) (41) (89)
Minority interest (121) -- (121) --
Impairment charge (1,103) -- (1,103) --
------- ----- ------- -----
(Loss) income from discontinued
operations (211) 636 495 934
======= ===== ======= =====
Basic and diluted (loss) income from
discontinued operations per common share $ (0.07) $0.23 $ 0.16 $0.34
======= ===== ======= =====
</Table>
On June 21, 2004, the Company sold its Wherehouse Entertainment project located
in Wichita, Kansas. The Company recorded an impairment charge to earnings of
approximately $1.10 million in the second quarter to reflect the loss incurred
upon sale of the property, following the bankruptcy of its sole tenant. After a
thorough remarketing during the quarter, the Company could not replace the
previously existing value and determined to sell the asset and redeploy the
proceeds into more productive investments.
Gain on real estate held for sale is a result of selling two properties, one
acquired in 2003 and one acquired in 2004, 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.
7. COMMITMENTS
The Company has signed a 63 month lease for office space. The lease commenced on
May 14, 2004. The annual rent will be $210 thousand. Rental expense for the six
months ended June 30, 2004 and 2003 was $60 thousand and $45 thousand,
respectively.
As of June 30, 2004, the Company has contracted to purchase approximately $57.0
million of multi-tenant real estate projects that are anticipated to close
during the third quarter of 2004. The acquisitions will be funded by cash and
the assumption of debt.
8. SEGMENT REPORTING
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.
F-9
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 single and multi-tenant
shopping center projects. This segment consists of 53 properties located in 19
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.
<Table>
<Caption>
Real estate Securities &
operating & retail Corporate
Portfolio development partnerships and other Total
--------- ----------- ------------ --------- -------
Six months ended June 30, 2004:
Revenue $ 4,211 $ 949 $ 3,702 $ 325 $ 9,187
Income from non-consolidated
affiliates -- -- 187 -- 187
Expenses (1,760) (95) (2,942) (3,658) (8,455)
Deferred merger cost -- -- -- (1,682) (1,682)
------- ----- ------- ------- -------
Net income (loss) before
discontinued operations 2,451 854 947 (5,015) (763)
Six months ended June 30, 2003:
Revenue $ 2,941 $ 267 $ 624 $ 3 $ 3,835
Income from non-consolidated
affiliates -- -- 86 -- 86
Expenses (1,495) 11 (392) (1,872) (3,748)
------- ----- ------- ------- -------
Net income (loss) before
discontinued operations 1,446 278 318 (1,869) 173
</Table>
<Table>
<Caption>
Real estate Securities &
operating & retail Corporate
Portfolio development partnerships and other Total
--------- ----------- ------------ --------- -------
Three months ended June 30, 2004:
Revenue $ 2,096 $ 581 $ 1,722 $ 313 $ 4,712
Income from non-consolidated -- -- 172 -- 172
affiliates
Expenses (863) (20) (1,422) (1,909) (4,214)
Deferred merger cost -- -- -- (362) (362)
------- ----- ------- ------- -------
Net income (loss) before
discontinued operations 1,233 561 472 (1,958) 308
Three months ended June 30, 2003:
Revenue $ 1,477 $ 136 $ 488 $ -- $ 2,101
Income from non-consolidated -- 45 -- 45
affiliates --
Expenses (747) (41) (348) (997) (2,133)
------- ----- ------- ------- -------
Net income (loss) before
discontinued operations 730 95 185 (997) 13
</Table>
F-10
9. PROPERTY ACQUISITIONS AND DISPOSITIONS
On June 15, 2004, AmREIT acquired The Courtyard at Post Oak, consisting of a
4,013 square-foot, free standing building occupied by Verizon Wireless (NYSE:
VZ) and a 9,584 square-foot, multi-tenant shopping center occupied by Ninfa's
Restaurant and Dessert Gallery. The property is located at the northwest
intersection of Post Oak and San Felipe in Houston, Texas which is the heart of
the Uptown Houston area, the most significant retail corridor in the Greater
Houston area. The property was acquired for cash. The weighted average remaining
lease term for the project is 5.2 years. The anticipated combined net operating
income contribution is approximately $450 thousand annually. Following is a
summary of assets acquired and liabilities assumed as of the date of the
Courtyard at Post Oak acquisition.
Summary of Assets Acquired and Liabilities Assumed
as of June 15, 2004
(In Thousands)
<Table>
Assets
Buildings $1,874
Land 4,376
Intangible lease costs 101
------
TOTAL ASSETS $6,351
======
Liabilities $ 91
Net assets acquired $6,260
------
</Table>
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. Uptown Plaza,
acquired in December 2003, is a 28,000 square foot retail complex located in
Houston, Texas, including a free-standing CVS/pharmacy drugstore and a retail
shopping center anchored by Grotto, a new concept of Landry's Restaurant, Inc.
<Table>
<Caption>
Three months ended Six months ended
June 30, 2003 June 30, 2003
------------------ ----------------
Revenues
Rental income and earned income $ 1,778 $ 3,502
Other income 624 894
------- -------
Total Revenues 2,402 4,396
------- -------
Total Expenses 1,573 2,752
------- -------
Operating income 829 1,644
F-11
<Table>
<Caption>
Three months ended Six months ended
June 30, 2003 June 30, 2003
------------------ ----------------
Income before discontinued operations 241 606
Income from discontinued operations 636 934
Pro forma net income 877 1,540
Distributions paid to class B and class C
shareholders (439) (892)
------- -------
Net income available to class A shareholders $ 438 $ 648
======= =======
Net income per common share - basic and diluted
Loss before discontinued operations (0.07) (0.10)
Income from discontinued operations 0.23 0.34
------- -------
Net income 0.16 0.24
Weaverage common shares used to compute
net income per share, basic and diluted 2,790 2,779
======= =======
</Table>
10. SUBSEQUENT EVENTS
On July 1, 2004, AmREIT acquired Plaza in the Park, a 129,955 square-foot Kroger
(NYSE: KR) anchored shopping center located on approximately 14.3 acres. The
property is located at the southwest corner of Buffalo Speedway and Westpark in
Houston, Texas. Plaza in the Park's Kroger is undergoing a 13,120 square-foot
expansion. The property was acquired for cash and the assumption of long-term
fixed rate debt. The weighted average remaining lease term for the project is
9.2 years. The Kroger lease is for 20 years, containing approximately 71,000
square feet, expiring in August 2017. The shopping center is 96.67 percent
occupied.
On July 1, 2004, AmREIT acquired Cinco Ranch - Kroger, a 97,297 square-foot
Kroger (NYSE: KR) anchored shopping center located on approximately 12.8 acres
of land. The property is located at the northeast corner of Mason Road and
Westheimer Parkway in Katy, Texas. The property was acquired for cash and the
assumption of long-term fixed rate debt. The weighted average remaining lease
term for the project is 14 years. The Kroger lease is for 20 years, containing
approximately 63,000 square-feet, expiring in June 2023. The shopping center is
100 percent occupied.
On July 21, 2004, AmREIT acquired Bakery Square Shopping Center, a 34,704
square-foot retail project including a free standing Walgreen's and a shopping
center anchored by Bank of America (NYSE:BOA). This is an infill property
located just west of downtown Houston and includes other national tenants such
as T-Mobile, Blockbuster Video and Boston Market. The property as acquired for
cash and the assumption of long-term fixed rate debt. The weighted average
remaining lease term for the shopping center is 4.9 years. The Walgreen's lease
is for 60 years and will expire in October 2056. The shopping center is 100
percent occupied.
On July 21, 2004, AmREIT sold the IHOP property located in Grand Prairie, Texas.
The project was sold to an unaffiliated, buyer for cash. The project generated
approximately $202 thousand in annual rental income from operating leases and
earned income from direct financing leases, and was sold for a profit of
approximately $800 thousand.
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
Certain information presented in this Form 10-QSB constitutes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in these 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 condensed consolidated financial statements of AmREIT, and the following
discussion contained herein should be read in conjunction with the consolidated
financial statements and discussion included in the Company's annual report on
Form 10-KSB for the year ended December 31, 2003. Historical results and trends
which might appear should not be taken as indicative of future operations.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and the comparative summary of selective
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 publicly traded REIT that is supported by three synergistic
businesses - a real estate operating and development business, NASD-registered
broker dealer securities business and a retail partnership business. This unique
structure gives AmREIT access to the intellectual and financial capital required
to support a rapid growth platform.
Operated as a wholly owned subsidiary, AmREIT's real estate operating and
development business focuses on the development, acquisition, management,
brokerage and ownership of high quality commercial retail real estate to
generate monthly income and growth for our investors. The Company's in-house
NASD-registered securites group gives the company direct access to the
independent financial planning market, broadening AmREIT's avenues to raise
capital. The retail partnership business combines the skills of our real estate
team and our securities group to actively acquire and develop high quality
properties, creating potential for increasing income and capital appreciation by
opportunistically selling the properties within a defined time horizon.
The self-managed REIT focuses on the acquisition and development of
"irreplaceable corners" - premier retail frontage properties in high-traffic,
highly populated areas - to hold for long-term value. These properties are
leased to tenants located in high-end multi-tenant shopping centers, grocery
anchored centers and regional and national single tenants. AmREIT's retail
partnership business incorporates an "active management" strategy to acqire
develop and sell high quality free-standing and shopping center properties to
create shorter-term added value.
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 ("FFO") by issuing long term capital through both the NASD
independent financial planning marketplace as well as through Wall Street, and
investing the capital in
F-13
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 June 30, 2004, our debt to total asset ratio was 33%.
At June 30, 2004, AmREIT owned a portfolio of 53 properties located in 19
states, subject to long term leases with retail tenants, either directly or
through its interests in joint ventures or partnerships. Forty seven of the
properties are single tenant properties, and represent approximately 74% of the
rental income for the six months ended June 30, 2004. Six of the properties are
multi-tenant and represent approximately 26% of the rental income for the six
months ended June 30, 2004. In assessing the performance of the Company's
properties, management evaluates the occupancy of the Company's portfolio.
Occupancy for the total portfolio was 88.5% based on leaseable square footage as
of June 30, 2004. 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 June 30, 2004,
the Company fully subscribed its $40 million class C common share offering and
began marketing its $170 million class D common share offering. With the
proceeds of the class C common share offering and the assumption of debt, the
Company has purchased approximately $70 million in real estate assets since
December 31, 2003 including acquisitions subsequent to June 30, 2004 (see
Footnote 10.).
Management intends to fund future acquisitions and development projects through
a combination of equity offerings and debt financing. During 2004, the Company
anticipates raising an additional $25 to $30 million of equity from various
sources including Wall Street and the independent financial planning community.
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 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 have purchased approximately $57.0 million in grocery anchored
and multi-tenant shopping center projects subsequent to June 30, 2004 and 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 June 30,
2004, approximately 69% 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.
F-14
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. For the six months ended June 30, 2004, the Company
collected and recorded percentage rent from tenants of $65 thousand.
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, above and
below market leases 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
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. Following the
bankruptcy of its sole tenant, and after a thorough remarketing during the
quarter, the Company determined that it could not replace the previously
existing value in its Wherehouse Entertainment project located in Wichita,
Kansas, and recorded an impairment charge to earnings of approximately $1.10
million in the second quarter. Subsequent to the write-down in value, management
sold the property during the current quarter.
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
F-15
expected recovery of pre-petition and post-petition claims with respect to
tenants in bankruptcy are considered in assessing the collectibility of the
related receivables. During the six months ended June 30, 2004, the Company
wrote off receivables totaling approximately $67 thousand. The receivable is
attributable to the accrual of straight line rents associated with Just for
Feet. The write off of the receivable from Just for Feet is included in income
from discontinued operations. The Company maintains a receivable related to
Wherehouse Entertainment of approximately $126 thousand. Based on discussions
with Wherehouse Entertainment and Blockbuster Entertainment Corporation, the
guarantor of the lease, and legal proceedings involving Wherehouse Entertainment
and Blockbuster Entertainment Corporation, the Company believes this receivable
is collectable, and should be collected during 2004.
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, is
expected to provide the necessary capital to maintain and operate our properties
as well as execute and achieve our growth strategies.
SOURCES AND USES OF FUNDS
Cash provided by operating activities as reported in the Consolidated Statements
of Cash Flows increased $6.0 million for the six months ended June 30, 2004 when
compared to the six months ended June 30, 2003. Investment in real estate
acquired for resale decreased by $5.0 million. In addition, proceeds from sales
of real estate acquired for sale increased by $714 thousand. AmREIT sold two
properties for a profit that were acquired for sale, one in the first quarter
and one in the second quarter of 2004.
The increase in net cash provided by operating activities was primarily due to a
decrease in investment in real estate acquired for resale. During 2003, the
Company invested in five IHOP properties that were purchased as acquired for
resale. For the six months ended June 30, 2004, the Company has invested
approximately $2.2 million in real estate acquired for resale. This decrease in
investment in real estate acquired for resale was somewhat offset by a $1.1
million non-cash impairment charge related to the Wherehouse Entertainment
property located in Wichita Kansas and a $1.7 million non-cash increase in
deferred merger costs. The deferred merger expense is a result of shares issued
or 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 has now earned 100% of the shares eligible under the
deferred consideration agreement. Therefore, AmREIT's internal advisor has been
fully paid for, 100% with Company shares as opposed to debt, and no further
payments of shares or expense related to the issuance of shares will be made.
Cash flows used in investing activities has been primarily related to the
acquisition or development of retail properties. During the second quarter of
2004, AmREIT purchased The Courtyard at Post Oak, consisting of a free standing
building occupied by Verizon Wireless and a multi-tenant center occupied by
Ninfa's Restaurant and Dessert Gallery. During the first quarter of 2004, AmREIT
through one its taxable REIT subsidiaries, acquired a 25% equity interest in a
45 acre retail redevelopment in Houston, Texas. The other partners are
affiliated partnerships. The investment was funded through a combination of the
$14.3 million of capital (net of $1.8 million in issuance costs) raised through
the class C common share offering and debt financing.
F-16
In addition, the Company received $694 thousand in proceeds during the second
quarter of 2004 from the sale of its Wherehouse Entertainment project located in
Wichita, Kansas. Prior to the sale, the Company recorded an impairment charge to
earnings of approximately $1.1 million to reflect the impaired value of the
property. Cash flows used in investing activities as reported in the
Consolidated Statements of Cash Flows increased from $3.1 million in the first
six months of 2003 to $7.9 million in the first six months of 2004.
Cash flows provided by financing activities decreased from $5.4 million through
June 30, 2003 to $4.8 million through June 30, 2004. Cash flows provided by
financing activities were primarily generated from our class C common share
offering. AmREIT fully subscribed its class C commons share offering during the
second quarter. 100% of the net proceeds have been used to purchase
irreplaceable corners. AmREIT has begun to market its class D common share
offering, a $170 million common share offering, offered through the independent
financial planning community. The class D common shares have a stated 6.5%
annual dividend, paid monthly, are convertible into the Company's class A common
shares at any time after a seven-year lock out period for a 7.7% premium on
invested capital and are callable by the Company after one year. One advantage
of raising capital through the independent financial planning marketplace is 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. The Company was able to reduce debt by almost $25.1
million with the proceeds from it class C common share offering.
AmREIT has a $35 million unsecured revolving credit facility, as amended in June
2004. The facility will mature on September 4, 2004, and the Company and Lender
are in the process of renewing the Credit Facility for a one year period.
Management believes that the Credit Facility will be renewed on terms and
conditions substantially the same as the current Credit Facility. The Credit
Facility contains covenants which, among other restrictions, require the Company
to maintain a minimum net worth, a maximum leverage ratio, specified interest
coverage and fixed charge coverage ratios and allow the lender to approve all
distributions. 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
June 30, 2004, IHOP net operating income represented approximately 33% of total
property net operating income. At June 30, 2004, 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 a spread of 2.35%. As of June 30, 2004, the interest rate
was LIBOR plus 2.0%. As of June 30, 2004, $10.2 million was outstanding under
the Credit Facility. Thus the Company has approximately $24.8 million available
under its line of credit, subject to Lender approval on the use of the proceeds.
In addition to the credit facility, AmREIT utilizes various permanent mortgage
financing and other debt instruments. As of June 30, 2004, the Company had the
following contractual debt obligations:
<Table>
<Caption>
2004 2005 2006 2007 2008 Thereafter Total
------- ---- ---- ---- ---- ---------- -------
Unsecured debt:
Revolving credit $10,168 $ -- $ -- $ -- $ -- $ -- $10,168
facility
5.46% dissenter notes -- -- -- -- -- 760 760
Secured debt 230 490 530 573 620 19,163 21,606
Non-cancelable operating
lease payments 79 210 210 210 210 123 1,042
Total contractual
obligations $10,477 $700 $740 $783 $830 $20,046 $33,576
======= ==== ==== ==== ==== ======= =======
</Table>
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.
F-17
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 was a $44 million offering, of which $4 million has been
reserved for the dividend reinvestment plan. As of June 30, 2004, 4.04 million
shares had been issued, including shares issued through the dividend
reinvestment program, resulting in approximately $40.4 million in gross
proceeds. 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.
For the quarters ended June 30, 2004 and 2003, the Company paid dividends to its
shareholders of $1.489 million, and $749 thousand respectively. The class A and
class 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 follow (in thousands):
<Table>
<Caption>
Class A Class B Class C
------- ------- -------
2004
Second quarter $383 $429 $677
First quarter $345 $434 $379
2003
Fourth quarter $320 $437 $156
Third quarter $308 $443 $15
Second quarter $310 $439 N/A
</Table>
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 June 30, 2004, the Company's cash and cash equivalents totaled
$846 thousand.
Cash flows from operating activities, investing activities, and financing
activities for the three and six months ended June 30, are presented below in
thousands:
<Table>
<Caption>
QUARTER YEAR TO DATE
----------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
Operating activities $ 1,635 $(4,343) $ 1,940 $(4,091)
Investing activities (6,182) (40) (7,910) (3,096)
Financing activities 3,214 4,294 4,784 5,417
</Table>
INFLATION
Inflation has had very little effect on income from operations. Management
expects that increases in store sales volumes due to inflation as well as
increases in the Consumer Price Index (C.P.I.), may contribute to capital
appreciation of the Company properties. These factors, however, also may have an
adverse impact on the operating margins of the tenants of the properties.
F-18
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 FFO as net income or loss computed in accordance with generally
accepted accounting principles (GAAP), excluding gains 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 for the three months ended June 30:
<Table>
<Caption>
QUARTER YEAR TO DATE
--------------------- ---------------------
2004 2003 2004 2003
------- ----- ------- -----
Income (loss) before discontinued operations $ 308 $ 13 $ (763) $ 173
Income from discontinued operations (211) 636 495 934
Plus depreciation of real estate assets - from
operations 257 170 488 352
Plus depreciation of real estate assets - from
discontinued operations 26 38 39 76
Less class B and class C distributions (1,106) (439) (1,919) (892)
------- ----- ------- -----
Total Funds From Operations available to
class A shareholders* $ (726) 418 (1,660) $ 643
Cash dividends paid to class A shareholders $ 383 $ 310 $ 728 $ 617
Dividends (in excess of) less than FFO* $(1,109) $ 108 $(2,388) $ 26
</Table>
* Based on the adherence to the NAREIT definition of FFO, we have not added back
the $362 thousand or $1.7 million charge to earnings for the three and six
months ended June 30, 2004, respectively, resulting from shares issued to Mr.
Taylor. Additionally, we have not added back the $1.1 million charge to earnings
for the three and six months ended June 30, 2004, resulting from an asset
impairment and corresponding write-down of value. Adding these charges back to
earnings would result in adjusted funds from operations available to class A
shareholders of $739 thousand for the three months ended June 30, 2004 and $1.1
million for the six months ended June 30, 2004. Adding the charge to earnings
would also result in dividends paid being less than adjusted FFO of $356
thousand for the three months ended June 30, 2004 and $397 thousand for the six
months ended June 30, 2004.
F-19
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2004 TO JUNE 30, 2003:
Rental revenue and earned income from direct financing leases increased by 42%,
or $619 thousand, for the three months ended June 30, 2004 when compared to the
three months ended June 30, 2003. Of this increase, $597 thousand is related to
acquisitions made after the second quarter of 2003.
Securities commission income increased by $1.2 million for the three months
ended June 30, 2004 when compared to 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 the second
quarter of 2004, AmREIT and its affiliated retail partnerships raised
approximately $15.3 million, as compared to approximately $4.3 million during
the second quarter of 2003. 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 $1.0 million for the
three months ended June 30, 2004 compared to the three months ended June 30,
2003. Interest and other income increased approximately $313 thousand primarily
due to the negotiated claim on the lease of the Footstar location in Baton
Rouge.
General and operating expense for the three months ended June 30, 2004 increased
$804 thousand when compared to 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. Since the second quarter of 2003,
the Company added members to each of the operating teams, two on the real estate
team (property management, legal, acquisitions and leasing), four on the
securities team and three 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 $424 thousand in the three months
ended June 30, 2004 as compared to the three months ended June 30, 2003. In
addition, property expense increased $126 thousand.
Deferred merger costs increased from $0 in 2003 to $362 thousand in 2004. The
deferred merger cost is related to deferred consideration payable to Mr. Taylor
as a result of the acquisition of our 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 900 thousand class A common
shares, which fulfills the shares that he is owed under the deferred
consideration agreement.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 TO JUNE 30, 2003:
Rental revenue and earned income from direct financing leases increased by 43%,
or $1.3 million for the six months ended June 30, 2004 when compared to the six
months ended June 30, 2003. Of this increase, $1.2 million is related to
acquisitions made after the second quarter of 2003.
Securities commission income increased by $3.0 million, from $527 thousand in
2003 to $3.6 million in 2004. 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 the six months ended June 30, 2004, AmREIT
and its affiliated retail partnerships raised approximately $33.3 million, as
compared to approximately $5.2 million during the six months ended June 30,
2003. 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 $2.4 million, from $396 thousand
in 2003 to $2.8 million in 2004.
General and operating expense increased $1.5 million, from $1.5 million in 2003
to $3.0 million in 2004. The increase in general and operating expense is
primarily due to additional personnel and the associated salary and
F-20
benefits costs related to these individuals. Since the second quarter of 2003,
the Company added members to each of the operating teams, two on the real estate
team (property management, legal, acquisitions and leasing), four on the
securities team and three 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 $882 thousand in the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003. In addition,
property expense increased $261 thousand.
Deferred merger costs increased from $0 in 2003 to $1.7 million in the six
months ended June 30, 2004. The deferred merger cost is related to deferred
consideration payable to Mr. Taylor as a result of the acquisition of our
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 900 thousand class A common shares, which fulfills the
shares that he is owed under the deferred consideration agreement.
F-21
THE BOARD OF TRUST MANAGERS
AMREIT:
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses (Historical Summary) of Cinco Ranch Shopping Center (the
Property) for the period June 4, 2003 through May 31, 2004. This Historical
Summary is the responsibility of the management of AmREIT. Our responsibility is
to express an opinion on the Historical Summary based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
Historical Summary is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Historical Summary. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the Historical Summary. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission and for
inclusion in the Current Report on Form 8-K. The presentation is not intended to
be a complete presentation of the Property's revenues and expenses.
In our opinion, the Historical Summary referred to above presents fairly, in all
material respects, the gross income and direct operating expenses, as described
in note 2, of Cinco Ranch Shopping Center for the period June 4, 2003 through
May 31, 2004, in conformity with U.S. general accepted accounting principles.
KPMG LLP
Houston, TX
September 14, 2004
F-22
CINCO RANCH SHOPPING CENTER HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT
OPERATING EXPENSES FOR THE PERIOD FROM JUNE 4, 2003 THROUGH MAY 31, 2004
<Table>
Gross Income $1,374,246
----------
Direct Operating Expenses:
Operating expenses 132,270
Real estate taxes 101,231
Insurance 10,697
Interest 485,676
----------
Total direct operating expenses 729,874
----------
Excess of gross income over direct operating expenses $ 644,372
==========
</Table>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-23
CINCO RANCH SHOPPING CENTER NOTES TO HISTORICAL SUMMARY OF GROSS INCOME AND
DIRECT OPERATING EXPENSES FOR THE PERIOD FROM JUNE 4, 2003 THROUGH MAY 31, 2004
(1) BUSINESS
The Cinco Ranch Shopping Center (the Property) is located in Katy, Texas. The
property consists of approximately 97,297 square feet of gross leasable area and
was 100% occupied at May 31, 2004. On July 1, 2004, AmREIT acquired the property
for $15.5 million.
(2) BASIS OF PRESENTATION AND COMBINATION
The Historical Summary of Gross Income and Direct Operating Expenses (Historical
Summary) has been prepared for the purpose of complying with Rule 3-14 of the
Securities and Exchange Commission Regulation S-X and for inclusion in AmREIT's
filing on Form 8-K, and is not intended to be a complete presentation of the
Property's revenues and expenses. The seller purchased the Property on June 4,
2003. The Historical Summary has been prepared on the accrual basis of
accounting. Management of the Property is required to make estimates and
assumptions that affect the reported amounts of the revenues and expenses during
the reporting period. Actual results may differ from those estimates.
(3) GROSS INCOME
The Property leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. The leases include
provisions under which the Property is reimbursed for common area maintenance,
real estate taxes, and insurance costs. Revenue related to these reimbursed
costs is recognized in the period the applicable costs are incurred and billed
to tenants pursuant to the lease agreements. Certain leases contain renewal
options at various periods at various rental rates. Certain of the leases
contain provisions for contingent rentals. No contingent rent was earned during
the period from June 4, 2003 through May 31, 2004.
Although certain leases may provide for tenant occupancy during periods for
which no rent is due and/or increases exist in minimum lease payments over the
term of the lease, rental income is recognized for the full period of occupancy
on a straight-line basis.
The weighted average remaining lease term for the project is 14 years. Minimum
rents to be received from tenants under operating leases, exclusive of common
area maintenance reimbursements, which were $187 thousand for the period from
June 4, 2003 through May 31, 2004, are as follows:
<Table>
2005 $ 1,218,461
2006 1,207,697
2007 1,081,057
2008 1,064,256
2009 1,013,050
Thereafter 8,546,056
-----------
Total $14,130,577
===========
</Table>
F-24
Adjustments to record rental income on a straight line basis increased gross
income by $24 thousand during the period from June 4, 2003 through May 31, 2004.
Additionally, adjustments to rental income increased gross income by $6 thousand
for such period due to adjustments to reflect rental income at market rates
related to leases acquired through acquisition.
As of May 31, 2004, 63,373 square feet was leased to one tenant, Kroger, under a
noncancelable lease that expires June 3, 2023. This tenant accounted for
approximately 42% of rental revenue during the period from June 4, 2003 through
May 31, 2004.
(4) DIRECT OPERATING EXPENSES
Direct operating expenses include only those costs expected to be comparable to
the proposed future operations of the Property. Repairs and maintenance expenses
are charged to operations as incurred. Costs such as depreciation and
amortization are excluded from the Historical Summary.
(5) RELATED-PARTY TRANSACTIONS
During the period from June 4, 2003 through May 31, 2004, management fees and
leasing commissions of $37,340 and $16,380, respectively, were paid or incurred.
Such amounts were paid or owed to various entities related to the owner of the
Property either by common ownership or control. Payments and amounts due to
related parties represent amounts due under contracts for different services
provided by the related party.
(6) PROJECT FINANCING
In June 2003, a $8,720,000 non-recourse note payable was entered into with a
lender, secured by the Property. The note requires monthly installment payments
of principal and interest through its maturity on July 10, 2013, at the fixed
interest rate of 5.6%, based on a 30-year amortization. The Property is pledged
as security under the terms of the note payable. The loan may not be prepaid
before July 10, 2008 and requires prepayment fees of 5%, 4%, 3%, 2%, and 1% if
it is prepaid during the sixth, seventh, eighth, ninth, or tenth year,
respectively. In connection with the July 2004 acquisition of the Property by
AmREIT, this note was assumed.
F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF TRUST MANAGERS
AMREIT:
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses (Historical Summary) of Plaza in the Park Shopping Center
(the Property) for the period June 4, 2003 through May 31, 2004. This Historical
Summary is the responsibility of the management of AmREIT. Our responsibility is
to express an opinion on the Historical Summary based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
Historical Summary is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Historical Summary. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the Historical Summary. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission and for
inclusion in the Current Report on Form 8-K. The presentation is not intended to
be a complete presentation of the Property's revenues and expenses.
In our opinion, the Historical Summary referred to above presents fairly, in all
material respects, the gross income and direct operating expenses, as described
in note 2, of Plaza in the Park Shopping Center for the period June 4, 2003
through May 31, 2004, in conformity with U.S. general accepted accounting
principles.
KPMG LLP
Houston, TX
September 14, 2004
F-26
PLAZA IN THE PARK SHOPPING CENTER HISTORICAL SUMMARY OF GROSS INCOME AND DIRECT
OPERATING EXPENSES FOR THE PERIOD FROM JUNE 4, 2003 THROUGH MAY 31, 2004
<Table>
Gross Income $2,775,684
----------
Direct Operating Expenses:
Operating expenses 350,316
Real estate taxes 252,118
Insurance 34,142
Interest 1,026,493
----------
Total direct operating expenses 1,663,069
----------
Excess of gross income over direct operating expenses $1,112,615
==========
</Table>
See accompanying notes to historical summary of gross income and direct
operating expenses.
F-27
PLAZA IN THE PARK SHOPPING CENTER NOTES TO HISTORICAL SUMMARY OF
GROSS INCOME AND DIRECT OPERATING EXPENSES FOR THE PERIOD FROM
JUNE 4, 2003 THROUGH MAY 31, 2004
(1) BUSINESS
Plaza in the Park Shopping Center (the Property) is located in Houston, Texas.
The Property consists of approximately 129,955 square feet of gross leasable
area and was approximately 96.7% occupied at May 31, 2004. On July 1, 2004,
AmREIT acquired the Property for $33.0 million.
(2) BASIS OF PRESENTATION AND COMBINATION
The Historical Summary of Gross Income and Direct Operating Expenses (Historical
Summary) has been prepared for the purpose of complying with Rule 3-14 of the
Securities and Exchange Commission Regulation S-X and for inclusion in AmREIT's
filing on Form 8-K, and is not intended to be a complete presentation of the
Property's revenues and expenses. The seller purchased the Property on June 4,
2003. The Historical Summary has been prepared on the accrual basis of
accounting. Management of the Property is required to make estimates and
assumptions that affect the reported amounts of the revenues and expenses during
the reporting period. Actual results may differ from those estimates.
(3) GROSS INCOME
The Property leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. The leases include
provisions under which the Property is reimbursed for common area maintenance,
real estate taxes, and insurance costs. Revenue related to these reimbursed
costs is recognized in the period the applicable costs are incurred and billed
to tenants pursuant to the lease agreements. Certain leases contain renewal
options at various periods at various rental rates. Certain of the leases
contain provisions for contingent rentals. No contingent rent was earned during
the period from June 4, 2003 through May 31, 2004.
Although certain leases may provide for tenant occupancy during periods for
which no rent is due and/or increases exist in minimum lease payments over the
term of the lease, rental income is recognized for the full period of occupancy
on a straight-line basis.
The weighted average remaining lease term for the project is 9.2 years. Minimum
rents to be received from tenants under operating leases, exclusive of common
area maintenance reimbursements, which were $480 thousand for the period from
June 4, 2003 through May 31, 2004, are as follows:
<Table>
2005 $2,443,901
2006 2,455,763
2007 2,291,814
2008 2,057,938
2009 1,918,793
Thereafter 13,409,044
-----------
Total $24,577,253
===========
</Table>
Adjustments to record rental income on a straight line basis increased gross
income by $44 thousand during the period from June 4, 2003 through May 31, 2004.
Additionally, adjustments to rental income decreased gross income by $66
thousand for such period due to adjustments to reflect rental income at market
rates related to leases acquired through acquisition at other than market rates.
As of May 31, 2004, 68,658 square feet was leased to one tenant, Kroger, under a
noncancelable lease that expires August 31, 2021. This tenant accounted for
approximately 41% of rental revenue during the period from June 4, 2003 through
May 31, 2004.
F-28
(4) DIRECT OPERATING EXPENSES
Direct operating expenses include only those costs expected to be comparable to
the proposed future operations of the Property. Repairs and maintenance expenses
are charged to operations as incurred. Costs such as depreciation and
amortization are excluded from the Historical Summary.
(5) RELATED-PARTY TRANSACTIONS
During the period from June 4, 2003 through May 31, 2004, management fees and
leasing commissions of $75,462 and $14,712, respectively, were paid or incurred.
Such amounts were paid or owed to various entities related to the owner of the
Property either by common ownership or control. Payments and amounts due to
related parties represent amounts due under contracts for different services
provided by the related party.
(6) PROJECT FINANCING
In June 2003, a $18,430,000 non-recourse note payable was entered into with a
lender, secured by the Property. The note requires monthly installment payments
of principal and interest through its maturity on July 10, 2013, at the fixed
interest rate of 5.6%, based on a 30-year amortization. The Property is pledged
as security under the terms of the note payable. The loan may not be prepaid
before July 10, 2008 and requires prepayment fees of 5%, 4%, 3%, 2%, and 1% if
it is prepaid during the sixth, seventh, eighth, ninth, or tenth year,
respectively. In connection with the July 2004 acquisition of the Property by
AmREIT, this note was assumed.
F-29
AMREIT AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following pro forma financial statements have been prepared to provide pro
forma information with regards to the properties described below (the
"Properties") which AmREIT (the "Company") acquired from an unrelated third
party.
On July 1, 2004, the Company acquired Plaza in the Park Shopping Center, a
129,955 square-foot Kroger anchored shopping center located on approximately
14.3 acres. The property is located in Houston, Texas and is 96.7% occupied.
Also on July 1, 2004, the Company acquired Cinco Ranch Shopping Center, a 97,297
square-foot Kroger anchored shopping center located on approximately 12.8 acres
of land. The property is located in Katy, Texas and is 100% occupied.
The unaudited Pro Forma Condensed Consolidated Balance Sheet presents the
historical financial information of the Company as of June 30, 2004 as adjusted
for the acquisition of the Properties which are assumed to have occurred on June
30, 2004.
The unaudited Pro Forma Condensed Consolidated Statements of Operations for the
year ended December 31, 2003 and the six months ended June 30, 2004 combine the
historical operations of the Company with the gross income and direct operating
expenses of the Properties and are presented as if the acquisitions of the
Properties occurred on January 1, 2003.
The unaudited pro forma condensed consolidated financial statements have been
prepared by the Company's management based upon the historical financial
statements of the Company and of the Properties. These pro forma statements may
not be indicative of the results that actually would have occurred if the
combination had been in effect on the dates indicated or which may be obtained
in the future. In management's opinion, all adjustments necessary to reflect the
effects of the property acquisitions have been made. These unaudited pro forma
condensed consolidated financial statements should be read in conjunction with
the historical financial statements included in the Company's previous filings
with the Securities and Exchange Commission.
F-30
AMREIT AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2004
(unaudited)
(in thousands)
<Table>
<Caption>
Acquisitions (2)
------------------------
AmREIT Cinco Plaza in the
Historical (1) Ranch Park Pro Forma
-------------- --------- ------------ ---------
ASSETS
Property:
Land $ 37,920 $ 2,660 $ 13,232 $ 53,812
Buildings 32,286 9,619 14,091 55,996
Tenant improvements 620 1,459 1,905 3,984
--------- --------- --------- ---------
70,826 13,738 29,228 113,792
Less accumulated depreciation and amortization (2,707) -- -- (2,707)
--------- --------- --------- ---------
Net real estate held for investment 68,119 13,738 29,228 111,085
Real estate held for sale, net 11,032 -- -- 11,032
Net investment in direct financing leases held for investment 19,222 -- -- 19,222
Intangible lease cost, net 672 1,892 3,742 6,306
Other assets 9,667 44 203 9,914
--------- --------- --------- ---------
TOTAL ASSETS $ 108,712 $ 15,674 $ 33,173 $ 157,559
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 32,534 $ 15,504(3) $ 33,007(3) $ 81,045
Other liabilities 3,465 170 166 3,801
--------- --------- --------- ---------
TOTAL LIABILITIES 35,999 15,674 33,173 84,846
--------- --------- --------- ---------
Minority interest 1,010 -- -- 1,010
Shareholders' equity 71,703 -- -- 71,703
--------- --------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 108,712 $ 15,674 $ 33,173 $ 157,559
========= ========= ========= =========
</Table>
The accompanying notes are an integral part of this pro forma condensed
consolidated financial statement.
F-31
AMREIT AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2004
(UNAUDITED)
(1) Reflects the historical condensed consolidated balance sheet of the Company
as of June 30, 2004. Please refer to the AmREIT's historical consolidated
financial statements and notes thereto included in the Company's Quarterly
Report on Form 10-QSB for the six months ended June 30, 2004.
(2) Reflects the acquisition of the Properties. The aggregate purchase price was
$48.5 million and was allocated among land, buildings, tenant improvements,
above- and below-market leases and intangible lease costs pursuant to Statement
of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141).
The buildings are depreciated over a period of 39 years.
(3) In conjunction with the acquisition of the Properties, the Company assumed
$26.8 million of secured debt with a fixed rate of 5.6%. Additionally, $21.7
million of the acquisition consideration was funded through the Company's credit
facility (rate of 3.375% on the acquisition date). The terms of the debt assumed
approximated market on the date of the acquisition; accordingly, no adjustments
were made to the carrying value of the debt in allocating the purchase price of
the Properties.
F-32
AMREIT AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(Unaudited)
(in thousands, except per share amounts)
<Table>
<Caption>
Acquisitions (2)
------------------------
AmREIT Cinco Plaza in the Pro Forma
Historical(1) Ranch Park Adjustments Pro Forma
------------- -------- ------------ ----------- ---------
Revenues
Rental income and earned income $ 4,211 $ 687 $ 1,388 $ -- $ 6,286
Other income 4,975 -- -- -- 4,975
-------- -------- -------- -------- --------
Total Revenues 9,186 687 1,388 -- 11,261
-------- -------- -------- -------- --------
Expenses
General operating and administrative 3,008 122 318 -- 3,448
Depreciation and amortization 504 -- -- 740(3) 1,244
Other expenses 5,093 -- -- -- 5,093
-------- -------- -------- -------- --------
Total Expenses 8,605 122 318 740 9,785
-------- -------- -------- -------- --------
Operating income 581 565 1,070 (740) 1,476
Interest expense (1,163) (243) (513) (356)(4) (2,275)
Other income/expense (182) -- -- -- (182)
Income (loss) from continuing operations (764) 322 557 (1,096) (981)
Distributions paid to class B and class C shareholders (1,919) -- -- -- (1,919)
-------- -------- -------- -------- --------
Loss from continuing operations available to class A
shareholders ($ 2,682) $ 322 $ 557 ($ 1,096) ($ 2,900)
======== ======== ======== ======== ========
Loss from continuing operations - basic and diluted (0.87) (0.94)
-------- --------
Weighted average common shares used to compute
net income per share, basic and diluted 3,094 3,094
======== ========
</Table>
The accompanying notes are an integral part of this pro forma condensed
consolidated financial statement.
F-33
AMREIT AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
(1) Reflects the historical condensed consolidated statement of operations of
the Company for the six months ended June 30, 2004. Please refer to AmREIT's
historical consolidated financial statements and notes thereto included in the
Company's Quarterly Report on Form 10-QSB for the six months ended June 30,
2004.
(2) The historical statements of operations for the Properties represent a
historical summary of gross income and direct operating expenses for the period
from January 1, 2004 through June 30, 2004. Costs such as depreciation and
amortization were excluded from the historical summary. See Note 3 below.
(3) Represents the depreciation of the building (over 39 years) and tenant
improvements (over the terms of the respective lease agreements) as well as the
amortization of the intangible assets based on the preliminary purchase price
allocation in accordance with SFAS No. 141.
(4) Represents the incremental interest expense related to the portion of the
acquisition consideration that was financed via the Company's credit facility,
assuming an interest rate of 3.375%.
F-34
AMREIT AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(Unaudited)
(in thousands, except per share amounts)
<Table>
<Caption>
Acquisitions(2)
--------------------
AmREIT Cinco Plaza in Pro Forma
Historical(1) Ranch the Park Adjustments Pro Forma
------------- ------- -------- ----------- ---------
Revenues
Rental income and earned income $ 7,584 $ 1,143 $ 2,798 $ - $ 11,525
Other income 5,025 - - - 5,025
------- ------- ------- -------- --------
Total Revenues 12,609 1,143 2,798 - 16,550
------- ------- ------- -------- --------
Expenses
General operating and administrative 3,937 245 642 4,824
Depreciation and amortization 836 - - 1,479 (3) 2,315
Other expenses 4,084 - - - 4,084
------- ------- ------- -------- --------
Total Expenses 8,857 245 642 1,479 11,223
------- ------- ------- -------- --------
Operating income 3,752 898 2,156 (1,479) 5,327
Interest expense (2,354) (491) (1,037) (712)(4) (4,594)
Other expense (102) - - - (102)
------- ------- ------- -------- --------
Income (loss) before discontinued operations 1,296 407 1,119 (2,191) 630
Distributions paid to class B and class C
shareholders (1,943) - - - (1,943)
------- ------- ------- -------- --------
Income (loss) from continuing operations
available to class A shareholders $ (647) $ 407 $ 1,119 $ (2,191) $ (1,312)
======= ======= ======= ======== ========
Loss from continuing operations-
basic and diluted (0.23) (0.47)
------- --------
Weighted average common shares used to compute
net income per share, basic and diluted 2,792 2,792
======= ========
</Table>
The accompanying notes are an integral part of this pro forma condensed
consolidated financial statement.
F-35
AMREIT AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
(1) Reflects the historical condensed consolidated statement of operations of
the Company for the year ended December 31, 2003. Please refer to AmREIT's
historical consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2003.
(2) The historical statements of operations for the Properties represent a
historical summary of gross income and direct operating expenses for the year
ended December 31, 2003. Costs such as depreciation and amortization were
excluded from the historical summary. See Note 3 below.
(3) Represents the depreciation of the building (over 39 years) and tenant
improvements (over the terms of the respective lease agreements) as well as the
amortization of the intangible assets based on the preliminary purchase price
allocation in accordance with SFAS No. 141.
(4) Represents the incremental interest expense related to the portion of the
acquisition consideration that was financed via the Company's credit facility,
assuming an interest rate of 3.375%.
F-36
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31 through 35 and Item 37 of Part II are incorporated by reference from
Amendment No. 1 to the Registrant's Registration Statement on Form S-11, as
filed on June 24, 2004.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS.
(1) The following financial statements are included in the
Prospectus, which constitutes a portion of this
Registration Statement.
FINANCIAL STATEMENTS FOR THE QUARTER
ENDED MARCH 31, 2004 AND 2003 (CONDENSED) (UNAUDITED):
Consolidated Balance Sheet, March 31, 2004
Consolidated Statements Of Operations For The
Quarters Ended March 31, 2004 And 2003
Consolidated Statements Of Cash Flows For The
Quarters Ended March 31, 2004 And 2003
Notes To Condensed Consolidated Financial
Statements for The Quarters Ended
March 31, 2004 And 2003
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2003 AND 2002:
Report Of Independent Registered Public
Accounting Firm
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
FINANCIAL STATEMENT SCHEDULE:
Schedule III Consolidated Real Estate Owned and
Accumulated Depreciation for the Year Ended
December 31, 2003
(2) The following financial statements are included in
Supplement No. 2, which constitutes a portion of this
Registration Statement.
AMREIT FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 2004 (unaudited)
Consolidated Statements of Operations for the quarters
ended June 30, 2004 and June 30, 2003 and for the periods
from January 1, 2004 through June 30, 2004 and January 1,
2003 through June 30, 2003 (unaudited)
Consolidated Statements of Cash Flows for the quarters
ended June 30, 2004 and June 30, 2003 and for the periods
from January 1, 2004 through June 30, 2004 and January 1,
2003 through June 30, 2003 (unaudited)
Notes to Consolidated Financial Statements for the six
months ended June 30, 2004 and 2003 (unaudited)
PROPERTIES ACQUIRED
Audited Financial Statements of Cinco Ranch Shopping
Center
Report of Independent Registered Public
Accounting Firm
Historical Summary of Gross Income and Direct
Operating Expenses for the Period from June 4, 2003
through May 31, 2004
Notes to Historical Summary of Gross Income and
Direct Operating Expenses for the Period from June
4, 2003 through May 31, 2004
Audited Financial Statements of Plaza In The Park
Shopping Center
Report of Independent Registered Public
Accounting Firm
Historical Summary of Gross Income and Direct
Operating Expenses for the Period from June 4, 2003
through May 31, 2004
Notes to Historical Summary of Gross Income and
Direct Operating Expenses for the Period from June
4, 2003 through May 31, 2004
Pro Forma Financial Information
Pro Forma Condensed Consolidated Balance Sheet as
of June 30, 2004 (Unaudited)
Notes to Pro Forma Condensed Consolidated Balance
Sheet as of June 30, 2004 (Unaudited)
Pro Forma Condensed Consolidated Statement of
Operations for the Six Month Period Ended June 30,
2004 (Unaudited)
Notes to Pro Forma Condensed Consolidated Statement
of Operations for the Six Month Period Ended June
30, 2004 (Unaudited)
Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 2003
(Unaudited)
Notes to Pro Forma Condensed Consolidated Statement
of Operations for the Year Ended December 31, 2003
(Unaudited)
(b) EXHIBITS (SEE EXHIBIT INDEX).
EXHIBIT
NO. EXHIBIT
------- -------
1.1 Form of Dealer Manager Agreement*
3.1 Amended and Restated Declaration of Trust (incorporated by
reference to Exhibit 3.1 to the Registrant's Form 10-KSB
for the fiscal year ended December 31, 2002)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the
Registrant's Form 10-KSB for the fiscal year ended
December 31, 2002)
3.3 Form of Statement of Designation for class D common
shares*
4.1 Form of Subscription Agreement and Subscription Agreement
Signature Page (included as Exhibit A to the Prospectus)
5.1 Opinion of Locke Liddell & Sapp LLP regarding legality of
the securities*
8.1 Opinion of Locke Liddell & Sapp LLP regarding tax matters*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Locke Liddell & Sapp LLP (included in Exhibits
5.1 and 8.1)*
23.2 Consent of KPMG LLP
24.1 Power of Attorney*
----------------
* Previously filed
II-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Post-Effective Amendment No. 2 to the Registration Statement on Form S-11 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on the 4th day of October, 2004.
AMREIT
(Registrant)
By: /s/ H. Kerr Taylor
-----------------------------------------
Name: H. Kerr Taylor
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/s/ H. Kerr Taylor President, Chief Executive Officer October 4, 2004
- ---------------------------------------------- and Chairman of the Board
H. Kerr Taylor (Principal Executive Officer)
/s/ Chad C. Braun Executive Vice President and Chief October 4, 2004
- ---------------------------------------------- Financial Officer
Chad C. Braun (Principal Financial Officer)
* Trust Manager October 4, 2004
- ----------------------------------------------
Robert S. Cartwright
* Trust Manager October 4, 2004
- ----------------------------------------------
G. Steven Dawson
* Trust Manager October 4, 2004
- ----------------------------------------------
Bryan L. Goolsby
* Trust Manager October 4, 2004
- ----------------------------------------------
Philip W. Taggart
*By: /s/ Chad C. Braun
------------------------------------------
Chad C. Braun
Attorney-in-Fact
</Table>
II-2
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT
- ------- -------
1.1 Form of Dealer Manager Agreement*
3.1 Amended and Restated Declaration of Trust (incorporated by
reference to Exhibit 3.1 to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 2002)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the
Registrant's Form 10-KSB for the fiscal year ended December 31,
2002)
3.3 Form of Statement of Designation for class D common shares*
4.1 Form of Subscription Agreement and Subscription Agreement Signature
Page (included as Exhibit A to the Prospectus)
5.1 Opinion of Locke Liddell & Sapp LLP regarding legality of the
securities*
8.1 Opinion of Locke Liddell & Sapp LLP regarding tax matters*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Locke Liddell & Sapp LLP (included in Exhibits 5.1
and 8.1)*
23.2 Consent of KPMG LLP
24.1 Power of Attorney*
- ----------------
* Previously filed