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Table of Contents



 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

 


 

 

FORM 10-Q

 

 


 

(mark one)

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from _________ to _________

 

Commission file number 000-53841

 

 

 

 


 

 

(AMREIT LOGO)

 

AmREIT, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland

20-8857707

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

8 Greenway Plaza, Suite 1000

 

Houston, Texas

77046

(Address of Principal Executive Offices)

(Zip Code)

 

 

(713) 850-1400

(Registrant’s Telephone Number, Including Area Code)

 

n/a

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

 

 

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x YES   o NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x YES   o NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

        Large accelerated filer o

Accelerated filer o

        Non-accelerated filer o

Smaller reporting company x

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o YES   x NO

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

 

Class

 

Outstanding as of April 27, 2012

AmREIT, Inc. Common Stock, $0.01 par value

 

23,306,279 shares

 




TABLE OF CONTENTS

 

 

 

Item No.

 

Form 10-Q
Report Page

 

Definitions

ii

 

PART I - Financial Information

 

1

Financial Statements.

1

2

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

19

3

Quantitative and Qualitative Disclosures About Market Risk.

28

4

Controls and Procedures.

28

 

 

 

 

PART II - Other Information

 

1

Legal Proceedings.

28

2

Unregistered Sales of Equity Securities and Use of Proceeds.

28

3

Defaults Upon Senior Securities.

28

4

Mine Safety Disclosures.

28

5

Other Information.

28

6

Exhibits.

28

 

Signatures.

29

 

Exhibit Index.

30

i


Table of Contents

DEFINITIONS

          As used in this Quarterly Report, the following abbreviations and terms have the meanings as listed below. Additionally, the terms “AmREIT” “we,” “us” and “our” refer to AmREIT, Inc., its predecessors and consolidated subsidiaries, unless the context clearly indicates otherwise.

 

 

 

 

ABBREVIATION

 

DEFINITION

 

 

Advised Funds

Collectively, our varying minority ownership interests in five high net worth investment funds, one institutional joint venture with J.P. Morgan Investment Management, one institutional joint venture with AEW Capital and one joint venture with two of our high net worth investment funds, MIG III and MIG IV.

 

AIGC

AmREIT Income and Growth Corporation, general partner of AIGF.

 

AIGF

AmREIT Income and Growth Fund, Ltd.

 

AmREIT

AmREIT, Inc.

 

ARIC

AmREIT Realty Investment Corporation, a taxable REIT subsidiary, and its consolidated subsidiaries.

 

EPS

Earnings per share.

 

Facility

Our $25.0 million secured credit facility as specified in our Credit Agreement with Amegy Mortgage Capital, dated December 23, 2009.

 

FFO

Funds from operations, as defined by NAREIT, which includes net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and impairments on properties held for investment, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

 

GAAP

U.S. generally accepted accounting principles.

 

GLA

Gross leasable area.

 

LIBOR

London Interbank Offered Rate.

 

MIG

AmREIT Monthly Income and Growth Fund, Ltd.

 

MIG II

AmREIT Monthly Income and Growth Fund II, Ltd.

 

MIG III

AmREIT Monthly Income and Growth Fund III, Ltd.

 

MIG IV

AmREIT Monthly Income and Growth Fund IV, L.P.

 

MIGC

AmREIT Monthly Income and Growth Corporation, general partner of MIG.

 

MIGC II

AmREIT Monthly Income and Growth II Corporation, general partner of MIG II.

 

MIGC III

AmREIT Monthly Income and Growth III Corporation, general partner of MIG III.

 

MIGC IV

AmREIT Monthly Income and Growth IV Corporation, general partner of MIG IV.

 

NAREIT

National Association of Real Estate Investment Trusts.

 

NOI

Net operating income, defined as operating revenues (rental income, tenant recovery income, percentage rent, excluding straight-line rental income and amortization of acquired above- and below-market rents) less property operating expenses (real estate tax expense and property operating expense, excluding straight-line rent bad debt expense).

 

OCI

Other comprehensive income.

 

Quarterly Report

Quarterly Report on Form 10-Q filed with the SEC for the three months ended March 31, 2012.

 

REIT

Real estate investment trust.

 

SEC

Securities and Exchange Commission.

ii


Table of Contents

PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.

AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)

 

 

 

 

 

 

 

 

 

 

March 31,
2012

 

December 31,
2011

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Real estate investments at cost:

 

 

 

 

 

 

 

Land

 

$

138,404

 

$

138,404

 

Buildings

 

 

172,478

 

 

172,146

 

Tenant improvements

 

 

14,911

 

 

14,483

 

 

 

 

325,793

 

 

325,033

 

Less accumulated depreciation and amortization

 

 

(35,194

)

 

(33,865

)

 

 

 

290,599

 

 

291,168

 

 

 

 

 

 

 

 

 

Acquired lease intangibles, net

 

 

9,534

 

 

10,139

 

Investments in Advised Funds

 

 

8,302

 

 

8,322

 

Net real estate investments

 

 

308,435

 

 

309,629

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

946

 

 

1,050

 

Tenant and accounts receivable, net

 

 

4,025

 

 

4,340

 

Accounts receivable - related party, net

 

 

837

 

 

645

 

Notes receivable, net

 

 

3,386

 

 

3,412

 

Notes receivable - related party, net

 

 

7,292

 

 

6,513

 

Deferred costs, net

 

 

3,036

 

 

2,887

 

Other assets

 

 

1,921

 

 

2,134

 

TOTAL ASSETS

 

$

329,878

 

$

330,610

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Notes payable

 

$

204,105

 

$

201,658

 

Accounts payable and other liabilities

 

 

5,875

 

 

8,007

 

Acquired below-market lease intangibles, net

 

 

1,943

 

 

2,021

 

TOTAL LIABILITIES

 

 

211,923

 

 

211,686

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued

 

 

 

 

 

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 23,308,007 and 23,197,917 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

 

 

233

 

 

232

 

Capital in excess of par value

 

 

191,996

 

 

191,889

 

Accumulated distributions in excess of earnings

 

 

(74,274

)

 

(73,197

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

117,955

 

 

118,924

 

   TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

329,878

 

$

330,610

 

See Notes to Consolidated Financial Statements.

1


Table of Contents

AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

Rental income from operating leases

 

$

8,929

 

$

7,450

 

Advisory services income - related party

 

 

1,131

 

 

1,001

 

Total revenues

 

 

10,060

 

 

8,451

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

General and administrative

 

 

1,484

 

 

1,284

 

Property expense

 

 

2,213

 

 

1,727

 

Legal and professional

 

 

221

 

 

256

 

Real estate commissions

 

 

86

 

 

29

 

Acquisition costs

 

 

 

 

40

 

Depreciation and amortization

 

 

2,227

 

 

1,640

 

Total expenses

 

 

6,231

 

 

4,976

 

 

 

 

 

 

 

 

 

Operating income

 

 

3,829

 

 

3,475

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest and other income

 

 

102

 

 

128

 

Interest and other income - related party

 

 

72

 

 

30

 

Loss from Advised Funds

 

 

(36

)

 

(104

)

Income tax expense for taxable REIT subsidiary

 

 

(76

)

 

(51

)

Interest expense

 

 

(2,634

)

 

(2,203

)

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

1,257

 

 

1,275

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of taxes

 

 

 

 

61

 

 

 

 

 

 

 

 

 

Net income

 

$

1,257

 

$

1,336

 

 

 

 

 

 

 

 

 

Net income per share of common stock - basic and diluted

 

 

 

 

 

 

 

Income before discontinued operations

 

$

0.05

 

$

0.06

 

Income from discontinued operations

 

$

 

$

 

Net income

 

$

0.05

 

$

0.06

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock used to compute net income per share, basic and diluted

 

 

22,747

 

 

22,729

 

 

 

 

 

 

 

 

 

Dividends per share of common stock

 

$

0.10

 

$

0.10

 

See Notes to Consolidated Financial Statements.

2


Table of Contents

AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three months ended March 31, 2012
(in thousands)
(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Capital in excess
of par value

 

Accumulated
distributions in
excess of
earnings

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

232

 

$

191,889

 

$

(73,197

)

$

118,924

 

Net income

 

 

 

 

 

 

1,257

 

 

1,257

 

Deferred compensation issuance of restricted shares

 

 

 

 

(790

)

 

 

 

(790

)

Issuance of shares of common stock

 

 

1

 

 

789

 

 

 

 

790

 

Amortization of deferred compensation

 

 

 

 

144

 

 

 

 

144

 

Retirement of AmREIT common shares

 

 

 

 

(36

)

 

 

 

(36

)

Distributions

 

 

 

 

 

 

(2,334

)

 

(2,334

)

Balance at March 31, 2012

 

$

233

 

$

191,996

 

$

(74,274

)

$

117,955

 

See Notes to Consolidated Financial Statements.

3


Table of Contents

AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

1,257

 

$

1,336

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Bad debt expense (recoveries)

 

 

47

 

 

(10

)

Loss from Advised Funds

 

 

36

 

 

104

 

Cash receipts (deferrals) for related party fees

 

 

8

 

 

(12

)

Depreciation and amortization

 

 

2,233

 

 

1,697

 

Amortization of deferred compensation

 

 

144

 

 

132

 

Decrease in tenant and accounts receivable

 

 

294

 

 

1,520

 

Increase in accounts receivable - related party

 

 

(537

)

 

(87

)

Decrease in other assets

 

 

157

 

 

260

 

Decrease in accounts payable and other liabilities

 

 

(2,132

)

 

(2,281

)

Net cash provided by operating activities

 

 

1,507

 

 

2,659

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Improvements to real estate, including leasing costs

 

 

(1,129

)

 

(425

)

Net cash paid for acquisition of investment properties

 

 

 

 

(4,689

)

Additions to furniture, fixtures and equipment

 

 

(8

)

 

(11

)

Investments in and advances to Advised Funds

 

 

(458

)

 

(229

)

Distributions and payments from Advised Funds

 

 

 

 

16

 

Cash received from qualified intermediary

 

 

 

 

9,370

 

Net cash provided by (used in) investing activities

 

 

(1,595

)

 

4,032

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from notes payable

 

 

8,000

 

 

1,750

 

Payments of notes payable

 

 

(5,521

)

 

(6,065

)

Payments for financing costs

 

 

(125

)

 

(3

)

Retirement of shares of common stock

 

 

(36

)

 

 

Common dividends paid

 

 

(2,334

)

 

(2,319

)

Net cash used in financing activities

 

 

(16

)

 

(6,637

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(104

)

 

54

 

Cash and cash equivalents, beginning of period

 

 

1,050

 

 

655

 

Cash and cash equivalents, end of period

 

$

946

 

$

709

 

 

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

2,567

 

$

1,972

 

Taxes

 

$

2

 

$

142

 

 

 

 

 

 

 

 

 

Deferred compensation recorded upon issuance of restricted shares of common stock

 

$

790

 

$

674

 

 

 

 

 

 

 

 

 

Reclassification of accounts receivable - related party to notes receivable - related party

 

$

345

 

$

 

 

 

 

 

 

 

 

 

Assumption of debt associated with the acquisition of The Market at Lake Houston

 

$

 

$

15,675

 

See Notes to Consolidated Financial Statements.

4


Table of Contents

AmREIT, Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(unaudited)

1. OUR BUSINESS AND OUR RECENT HISTORY

Our Business

          We are a full service, vertically integrated and self-administered REIT that owns, operates, acquires and selectively develops and redevelops primarily neighborhood and community shopping centers located in high-traffic, densely populated, affluent areas with high barriers to entry. We seek to own properties in major cities in the United States that contain submarkets with characteristics comparable to our existing markets. Our shopping centers are often anchored by strong national and local retailers, including supermarket chains, drug stores and other necessity-based retailers. Our remaining tenants consist primarily of specialty retailers and local restaurants. Over our 28-year history, we have acquired, owned and operated retail properties across 19 states. We have elected to be taxed as a REIT for federal income tax purposes.

          Our investment focus is predominantly concentrated in the affluent, high-growth submarkets of Houston, Dallas, San Antonio, Austin and Atlanta, which represent five of the top population and job growth markets in the United States. We believe these metropolitan areas are compelling real estate markets given their favorable demographics, robust job growth and large and diverse economies. The primary economic drivers in these markets are transport and utilities (including energy), government (including defense), education and healthcare, professional and business services, and leisure and hospitality. As part of our ongoing investment strategy, we expanded our presence in Atlanta, Georgia with the acquisition of two multi-tenant properties in 2011. We intend to continue to acquire additional properties within the above markets, or other U.S. cities, that exhibit comparable population, affluence and growth characteristics. Our targeted properties will include premier retail frontage locations in high-traffic, highly populated, affluent areas with high barriers to entry.

          As of March 31, 2012, our portfolio consisted of 29 wholly-owned properties with 1.2 million square feet of GLA. In addition to our portfolio, we have an advisory services business that provides a full suite of real estate services to the properties within our wholly-owned portfolio as well as to eight real estate funds in which we have varying ownership interests and that we manage on behalf of institutional and individual high-net-worth investors, which we collectively refer to as our Advised Funds. The investment strategy of the Advised Funds is focused upon the development and re-development of retail and mixed-use properties situated on premium-quality locations. As of March 31, 2012, our Advised Funds held 18 properties.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

          The accompanying consolidated financial statements included in this Quarterly Report as of and for the three months ended March 31, 2012 and 2011, are unaudited. In our opinion, the accompanying consolidated financial statements contain all normal and recurring items and adjustments necessary for their fair presentation.

          Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. The consolidated financial statements include our accounts as well as the accounts of any subsidiaries in which we have a controlling financial interest. Investments in joint ventures and partnerships, where we have the ability to exercise significant influence but do not exercise financial and operating control, are accounted for using the equity method. The significant accounting policies of our non-consolidated entities are consistent with those of our subsidiaries in which we have a controlling financial interest. As of March 31, 2012, we did not have any interests in variable interest entities. All significant inter-company accounts and transactions have been eliminated through consolidation.

Use of Estimates

          The preparation of consolidated financial statements in conformity with GAAP 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.

5


Table of Contents

Cash and Cash Equivalents

          We consider 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.

Financial Instruments

          Our consolidated financial instruments consist of cash and cash equivalents, tenant and accounts receivable, accounts receivable – related party, notes receivable, notes receivable – related party, notes payable and accounts payable and other liabilities. Except for the notes payable, the carrying values are representative of the fair values due to the short term nature of the instruments and/or recent impairments. Our notes payable consist of both variable-rate and fixed-rate notes. The fair value of the variable-rate notes and revolving line of credit approximate their carrying values. See Note 6 for further discussion of our fair value of our notes payable.

Revenue Recognition

          Rental income from operating leases – We lease space to tenants under agreements with varying terms. Our leases are accounted for as operating leases, and, although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, possession or control occurs on the lease commencement date. In all cases, we have determined that we are the owner of any tenant improvements that we fund pursuant to the lease terms. In cases where significant tenant improvements are made prior to lease commencement, the leased asset is considered to be the finished space, and revenue recognition therefore begins when the improvements are substantially complete. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Additionally, certain of our lease agreements contain provisions that grant additional rents based upon tenants’ sales volumes (contingent or percentage rent). Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements. During the three months ended March 31, 2012 and 2011, we recognized percentage rents of $32,000 and $10,000, respectively. Accrued rents are included in tenant and accounts receivable, net.

          Lease termination income – We recognize lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured. Upon early lease termination, we provide for losses related to unrecovered intangibles and other assets. We did not recognize any lease termination fees during the three months ended March 31, 2012 or 2011.

          Advisory services income – related party – We provide various real estate services, including development, construction management, property management, leasing and brokerage. The fees for these services are recognized as services are provided and are generally calculated as a percentage of revenues earned or to be earned or of property cost, as appropriate. We also earn asset management fees from certain of the Advised Funds for facilitating the deployment of capital and for monitoring the real estate investments. Asset management fees are calculated as a percentage of equity under management. See Note 10 for a detail of our advisory services income – related party.

Real Estate Investments

          Development Properties – Expenditures related to the development of real estate are capitalized as part of construction in progress, which includes carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction. The capitalization of such costs ceases at the earlier of one year from the date of completion of major construction or when the property, or any completed portion, becomes available for occupancy. We capitalize costs associated with pending acquisitions of raw land once the acquisition of the property is determined to be probable. We did not capitalize any interest or taxes during the three months ended March 31, 2012 or 2011.

6


Table of Contents

          Acquired Properties and Acquired Intangibles – We account for operating real estate acquisitions as an acquisition of a business as we believe most operating real estate meets the definition of a “business” under GAAP. Accordingly, we allocate the purchase price of acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired above and below market leases, the value of in-place leases and customer relationship value, if any. We determine 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 (i) an estimate of carrying costs during the expected lease-up periods, considering market conditions, and (ii) costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to in-place lease value and above and below-market leases are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Below market leases include fixed-rate renewal periods where we believe the renewal is reasonably assured. Premiums or discounts on debt are amortized to interest expense over the remaining term of such debt. Costs related to acquiring operating properties are expensed as incurred.

          Depreciation – Depreciation is computed using the straight-line method over an estimated useful life, generally, 39 - 50 years for buildings, up to 20 years for site improvements and over the term of the lease for tenant improvements. Leasehold estate properties, which are properties where we own the building and improvements but not the related ground, are amortized over the life of the lease.

          Impairment – We review our 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. We determine whether an impairment of value has 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. We did not recognize any impairment charges during the three months ended March 31, 2012 or 2011.

Tenant and Accounts Receivable

          Included in tenant and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of tenant and accounts receivables is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels and current economic trends. Bad debt expenses and any recoveries related to tenant receivables are included in property expense, and bad debt expenses and any related recoveries on other accounts receivable are included in general and administrative expense. The table below summarizes the activity within our allowance for uncollectible accounts for tenant receivables (in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Beginning balance

 

$

1,780

 

$

2,068

 

Additional reserves

 

 

134

 

 

149

 

Collections/reversals

 

 

(104

)

 

(144

)

Write-offs

 

 

(434

)

 

(15

)

Ending balance

 

$

1,376

 

$

2,058

 

Notes Receivable

          Included in notes receivable is a $3.5 million note due from the sale of a tract of land adjacent to our Uptown Plaza – Dallas property located outside of downtown Dallas, Texas. The note matured unpaid on December 31, 2010, and we recorded a $1.3 million impairment to reduce the value of the note to the fair value of the underlying collateral. During 2011, we recorded an impairment recovery of $1.1 million to reflect payments received on this note. Also during 2011, we entered into a new agreement with the borrower that requires a $1.0 million principal payment during the second quarter of 2012 and monthly interest payments until the maturity date, which was extended to June 30, 2014.

          Also included in notes receivable is $144,000 in notes receivable from various tenants. An allowance for the uncollectible portion of notes receivable from tenants is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. As of March 31, 2012 and December 31, 2011, we had an allowance for uncollectible notes receivable from tenants of $46,000 and $29,000, respectively. During the three months ended March 31, 2012, we recorded bad debt expense related to tenant notes receivable of $17,000. During the three months ended March 31, 2011, we recorded bad debt recoveries related to tenant notes receivable of $11,000.

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Notes Receivable – Related Party

          Included in notes receivable – related party are loans made to certain of our affiliated Advised Funds related to the acquisition or development of properties and the deferral of asset management fees. These loans bear interest at LIBOR plus a spread and are due upon demand. The notes are secured by the funds’ ownership interests in various unencumbered properties. We recorded a $500,000 impairment on the note from AIGF during 2010 as we believe that the fund will be unable to repay the full balance after settlement of its other obligations. As a result, we have ceased recording interest income on the note due from AIGF. Instead, interest accruals are recorded directly to the reserve balance, and interest income is recorded to the extent that cash is received from the borrower.

          The following is a summary of the notes receivable due from related parties (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

Related Party

 

 

Face
Amount

 

Reserve (1)

 

Carrying
Amount

 

Face
Amount

 

Reserve (1)

 

Carrying
Amount

 

AIGF

 

$

2,530

 

$

(651

)

$

1,879

 

$

2,488

 

$

(619

)

$

1,869

 

MIG III

 

 

3,674

 

 

(349

)

 

3,325

 

 

3,218

 

 

(356

)

 

2,862

 

MIG IV

 

 

2,339

 

 

(251

)

 

2,088

 

 

2,026

 

 

(244

)

 

1,782

 

Total

 

$

8,543

 

$

(1,251

)

$

7,292

 

$

7,732

 

$

(1,219

)

$

6,513

 


 

 

 

 

 

 

(1)

A portion of these reserve balances represents the amount by which losses recognized on our equity investment in the entity exceeds our basis in the equity investment. GAAP provides that, to the extent that such an ‘excess loss’ exists and we have made an additional investment in the entity via a loan, that excess loss should be recorded as a reduction in the basis of the loan. Included in the reserve balances for the AIGF, MIG III and MIG IV loans are $55, $349 and $251 for such losses as of March 31, 2012, and $55, $356 and $244 for such losses as of December 31, 2011, respectively. We do not believe that these reserves are indicative of the ultimate collectability of these receivables.

Derivative Financial Instruments

          Our use of derivative financial instruments to date has been limited to the use of interest rate swaps to mitigate our interest rate risk on variable-rate debt and is immaterial to our consolidated financial statements. We do not use derivative financial instruments for trading or speculative purposes. GAAP requires that all derivative instruments, whether designated in hedging relationships or not, be recorded on the balance sheet at their fair value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Changes in fair value of derivatives that qualify as cash flow hedges are recognized in other comprehensive income, OCI, while the ineffective portion of the derivative’s change in fair value is recognized in the income statement. As the hedge transactions settle, gains and losses associated with the transaction are reclassified out of OCI and into earnings. We assess, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items.

          During the three months ended March 31, 2011, we had an interest rate swap with a notional amount of $17 million and a fixed rate of 5.11% hedging our variable-rate loan on our MacArthur Park property. The swap matured on December 1, 2011, and we do not have any derivative financial instruments as of March 31, 2012. We designated this interest rate swap as a cash flow hedge for financial reporting purposes and therefore recorded any changes in its fair value to OCI. The swap settled monthly with an amount paid to or received from our counterparty, which was recorded as an adjustment to interest expense. During the three months ended March 31, 2012 and 2011, we paid $0 and $89,000, respectively, related to this swap, which is included in interest expense.

Subsequent Events

          Except as otherwise disclosed in this Quarterly Report, we did not have any material subsequent events as of the date of this filing that impacted our consolidated financial statements.

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3. REAL ESTATE ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS

          The Market at Lake Houston – On February 25, 2011, we completed the acquisition of The Market at Lake Houston, a 101,791 square foot grocery-anchored neighborhood shopping center situated on 13.86 acres in Atascocita, Texas, a northern suburb of Houston. The property was completed in 2002 and was 100% leased on the acquisition date. The anchor tenant is H-E-B, a regional supermarket, and other major tenants include Five Guys Burgers, Payless ShoeSource and Subway. We acquired the property for $20.1 million, of which $4.4 million was paid using cash on deposit with a qualified intermediary. The balance was paid through our assumption of $15.7 million of mortgage debt. The property was owned by two of our Advised Funds, and we completed the acquisition pursuant to an independent appraisal process.

          Brookwood Village – On May 10, 2011, we completed the acquisition of Brookwood Village, a 28,774 square foot pharmacy-anchored, neighborhood shopping center located in the Buckhead District of Atlanta, Georgia. The property was renovated in 2000 and was 96% leased on the acquisition date. The anchor tenant is CVS/pharmacy and other tenants include Sprint, FedEx/Kinko’s and Subway. We acquired the property for $10.6 million in cash using proceeds from our Facility.

          Alpharetta Commons – On July 29, 2011, we completed the acquisition of Alpharetta Commons, a 94,544 square foot grocery-anchored neighborhood shopping center located in the Alpharetta submarket of Atlanta, Georgia. The property was built in 1997 and was 100% leased on the acquisition date. The anchor tenant is Publix, a regional supermarket, with the remaining tenants comprised primarily of local and regional convenience retailers. We acquired the property for $18.8 million using cash on hand, $5.4 million from borrowings on our Facility and a mortgage loan of $12.5 million.

Pro Forma Results

          Included in our consolidated statements of operations for the three months ended March 31, 2012 are revenues of $1.2 million and net loss of $96,000 related to the operations of The Market at Lake Houston, Brookwood Village and Alpharetta Commons beginning on the respective dates of acquisition. The table below presents our pro forma results of operations for the three months ended March 31, 2011, assuming that we acquired the above properties on January 1, 2011 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma adjustments to historical results

 

 

 

 

 

 

Historical
results

 

Market at Lake
Houston

 

Brookwood
Village

 

Alpharetta
Commons

 

Pro forma
results

 

Total revenues

 

$

8,451

 

$

315

 

$

233

 

$

377

 

$

9,376

 

Net income available to stockholders

 

$

1,336

 

$

(26

)

$

53

 

$

8

 

$

1,371

 

Dispositions and Discontinued Operations

          Our properties generally have operations and cash flows that can be clearly distinguished from the rest of the Company. The operations and gains on sales reported in discontinued operations include those properties that have been sold and for which operations and cash flows have been clearly distinguished. The operations of these properties have been eliminated from ongoing operations, and we will not have continuing involvement after disposition. Prior period operating activity related to such properties and business has been reclassified as discontinued operations in the accompanying statements of operations.

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Table of Contents

          We did not dispose of any of our properties during the three months ended March 31, 2012. During 2011, we sold two non-core, single-tenant properties to a third party. The following table is a summary of our discontinued operations for the three months ended March 31, 2012, and 2011 (in thousands, except for per share data):

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

Rental income from operating leases

 

$

 

$

83

 

Total revenues

 

 

 

 

83

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Property expense

 

 

 

 

1

 

Legal and professional

 

 

 

 

18

 

Depreciation and amortization

 

 

 

 

7

 

Total expenses

 

 

 

 

26

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

57

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

4

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

$

 

$

61

 

Basic and diluted income from discontinued operations per share

 

$

 

$

 

4. INVESTMENTS IN ADVISED FUNDS

          As of March 31, 2012, our Advised Funds included five high net worth investment funds, one institutional joint venture with J.P. Morgan Investment Management, one institutional joint venture with AEW Capital and one joint venture with two of our high net worth investment funds, MIG III and MIG IV. Our Advised Funds are accounted for under the equity method as we exercise significant influence over, but do not control, the investee. We record our pro rata share of income or loss from the underlying entities based on our ownership interest.

High Net Worth Investment Funds

          Our five high net worth investment funds are limited partnerships, wherein each of the partnerships, the unrelated limited partners have the right, with or without cause, to remove and replace the general partner by a vote of the unrelated limited partners owning a majority of the outstanding units. These high net worth investment funds were formed to develop, own, manage and add value to properties with an average holding period of two to four years. Our interests in these limited partnerships range from 2.1% to 3.0%. As a sponsor of our Advised Funds, we maintain a 1% general partner interest in each of the Advised Funds. 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 the preferred return has been met, the general partner begins sharing in the available cash flow at various promoted levels.

          AIGF – AIGC, our wholly-owned subsidiary, invested $200,000 as a limited partner and $1,000 as a general partner in AIGF. We own a 2.0% limited partner interest in AIGF, which is currently in liquidation. Pursuant to the AIGF limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and AIGC as, if and when the annual return thresholds have been achieved by the limited partners. As of March 31, 2012, we believe that the fair value of the remaining AIGF assets approximates its obligations. Therefore, we do not expect any further distributions to be made to the AIGF limited partners.

          MIG – MIGC, our wholly-owned subsidiary, invested $200,000 as a limited partner and $1,000 as a general partner in MIG. We currently own a 1.4% limited partner interest in MIG. MIG was originally scheduled to begin liquidation in November 2009; however, the liquidation has been extended to March 2013, pursuant to the approval of a majority of the limited partners. Pursuant to the MIG limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and MIGC as, if and when the annual return thresholds have been achieved by the limited partners.

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Table of Contents

          MIG II – MIGC II, our wholly-owned subsidiary, invested $400,000 as a limited partner and $1,000 as a general partner in MIG II. We currently own a 1.6% limited partner interest in MIG II. MIG II was originally scheduled to begin 10 liquidation in March 2011; however, the liquidation has been extended to March 2013, pursuant to the approval of a majority of the limited partners. Pursuant to the MIG II limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and MIGC II as, if and when the annual return thresholds have been achieved by the limited partners.

          MIG III – MIGC III, our wholly-owned subsidiary, invested $800,000 as a limited partner and $1,000 as a general partner in MIG III. We currently own a 1.1% limited partner interest in MIG III. Pursuant to the MIG III limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and to MIGC III as, if and when the annual return thresholds have been achieved by the limited partners.

          MIG IV – MIGC IV, our wholly-owned subsidiary, invested $800,000 as a limited partner and $1,000 as a general partner in MIG IV. We currently own a 1.6% limited partner interest in MIG IV. Pursuant to the MIG IV limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and to MIGC IV as, if and when the annual return thresholds have been achieved by the limited partners.

          The following table sets forth certain financial information for the AIGF, MIG, MIG II, MIG III and MIG IV Advised Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sharing Ratios(1)

 

 

Advised Fund

 

LP interest

 

GP interest

 

LP

 

GP

 

LP Preference

AIGF

 

2.0%

 

1.0%

 

99%

 

1%

 

8%

 

 

 

 

 

 

90%

 

10%

 

10%

 

 

 

 

 

 

80%

 

20%

 

12%

 

 

 

 

 

 

70%

 

30%

 

15%

 

 

 

 

 

 

0%

 

100%

 

40% Catch Up

 

 

 

 

 

 

60%

 

40%

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

MIG

 

1.4%

 

1.0%

 

99%

 

1%

 

8%

 

 

 

 

 

 

90%

 

10%

 

10%

 

 

 

 

 

 

80%

 

20%

 

12%

 

 

 

 

 

 

0%

 

100%

 

40% Catch Up

 

 

 

 

 

 

60%

 

40%

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

MIG II

 

1.6%

 

1.0%

 

99%

 

1%

 

8%

 

 

 

 

 

 

85%

 

15%

 

12%

 

 

 

 

 

 

0%

 

100%

 

40% Catch Up

 

 

 

 

 

 

60%

 

40%

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

MIG III

 

1.1%

 

1.0%

 

99%

 

1%

 

10%

 

 

 

 

 

 

0%

 

100%

 

40% Catch Up

 

 

 

 

 

 

60%

 

40%

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

MIG IV

 

1.6%

 

1.0%

 

99%

 

1%

 

8.5%

 

 

 

 

 

 

0%

 

100%

 

40% Catch Up

 

 

 

 

 

 

60%

 

40%

 

Thereafter


 

 

 

 

 

 

(1)

Using AIGF as an example of how the sharing ratios and LP preference provisions are applied, the LPs share in 99% of the cash distributions until they receive an 8% preferred return. The LPs share in 90% of the cash distributions until they receive a 10% preferred return and so on.

Joint Ventures

          AmREIT Woodlake, L.P. – In 2007, we invested $3.4 million in AmREIT Woodlake L.P., for a 30% limited partnership interest. AmREIT Woodlake, L.P. was formed in 2007 to acquire, lease and manage Woodlake Square, a grocery-anchored shopping center located in Houston, Texas. In June 2008, we sold two-thirds (a 20% limited partnership interest) of our interest in Woodlake Square to MIG IV. Pursuant to the purchase agreement, the interest in the property was sold at its carrying value, resulting in no gain or loss to us. In July 2010, we and our affiliated partners entered into a joint venture with a third-party institutional partner wherein the partner acquired a 90% interest in the joint venture. As a result of this transaction, we now hold a 1% interest in Woodlake Square, which carries a promoted interest in profits and cash flows once an 11.65% return is met on the project.

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Table of Contents

          AmREIT Westheimer Gessner, L.P. – In 2007, we invested $3.8 million in AmREIT Westheimer Gessner, LP, for a 30% limited partner interest in the partnership. AmREIT Westheimer Gessner, L.P. was formed in 2007 to acquire, lease and manage the Woodlake Pointe Shopping Center, a shopping center located on the west side of Houston, Texas. In June 2008, we sold two-thirds of our interest (a 20% limited partner interest) in the Woodlake Pointe Shopping Center to MIG IV. Pursuant to the purchase agreement, our interest in the property was sold at its carrying value, resulting in no gain or loss to us. We now hold a 10% interest in the Woodlake Pointe Shopping Center.

          AmREIT SPF Shadow Creek, L.P. – In 2009, we acquired a 10% investment in AmREIT SPF Shadow Creek, L.P., which was formed to acquire, lease and manage Shadow Creek Ranch, a shopping center located in Pearland, Texas. The investment was recorded at $5.8 million on the date of the acquisition, net of acquisition costs of $441,000, which were recorded as an other-than-temporary impairment.

5. ACQUIRED LEASE INTANGIBLES

          We identify and record the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangibles are amortized over the leases’ remaining terms, which generally range from one month to 25 years. Below market lease amortization includes fixed-rate renewal periods where we believe the tenant is reasonably compelled to renew the lease.

Balance Sheet Presentation

          Total in-place and above and below-market lease amounts and their respective accumulated amortization as of March 31, 2012, and December 31, 2011 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

Acquired lease intangible assets:

 

 

 

 

 

 

 

In-place leases

 

$

22,307

 

$

22,720

 

In-place leases – accumulated amortization

 

 

(13,146

)

 

(12,978

)

Above-market leases

 

 

2,187

 

 

2,247

 

Above-market leases – accumulated amortization

 

 

(1,814

)

 

(1,850

)

Acquired leases intangibles, net

 

$

9,534

 

$

10,139

 

 

 

 

 

 

 

 

 

Acquired lease intangible liabilities:

 

 

 

 

 

 

 

Below-market leases

 

$

4,597

 

$

4,623

 

Below-market leases – accumulated amortization

 

 

(2,654

)

 

(2,602

)

Acquired below-market lease intangibles, net

 

$

1,943

 

$

2,021

 

Income Statement Presentation

          The following table details our amortization related to in-place leases and above and below-market leases as well as the presentation of such amounts in our consolidated statements of operations for the three months ended March 31, 2012, and 2011 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Presentation

 

2012

 

2011

 

In-place leases

 

 

amortization expense

 

$

581

 

$

314

 

Above-market leases

 

 

reduction of rental income

 

$

24

 

$

11

 

Below-market leases

 

 

increase in rental income

 

$

78

 

$

61

 

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Table of Contents

6. FAIR VALUE MEASUREMENTS

          GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. GAAP requires the use of observable market data, when available, in making fair value measurements. Observable inputs are inputs that the market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of ours. When market data inputs are unobservable, we utilize inputs that we believe reflect our best estimate of the assumptions market participants would use in pricing the asset or liability. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:

 

 

 

• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

 

 

 

• Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

 

 

 

• Level 3 – Unobservable inputs for the asset or liability, which are typically based on the Company’s own assumptions, as there is little, if any, related market activity.

          The following table presents our assets and liabilities and related valuation inputs within the fair value hierarchy utilized to measure fair value as of March 31, 2012, and December 31, 2011 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

Level 1

 

Level 2

 

Level 3

 

Notes receivable

 

$

 

$

3,288

 

$

 

Fixed-rate notes payable

 

$

 

$

157,811

 

$

 

 

December 31, 2011

 

Level 1

 

Level 2

 

Level 3

 

Notes receivable

 

$

 

$

3,288

 

$

 

Fixed-rate notes payable

 

$

 

$

150,839

 

$

 

Notes Receivable

          During 2010, we recorded an impairment of $1.3 million on a note receivable related to the sale of a tract of land adjacent to our Uptown Plaza – Dallas property. During 2011, we recorded an impairment recovery of $1.1 million to reflect payments received on this note. As of March 31, 2012, and December 31, 2011, the fair value of the note was $3.3 million and was determined by calculating an average, per-acre price of vacant tracts of land recently sold near Downtown Dallas, Texas. We have concluded that our valuation of the seller-financing note is classified in Level 2 of the fair value hierarchy.

Notes Payable

          Our notes payable consist of both variable-rate and fixed-rate notes. The fair values of the variable-rate notes, including the Facility, approximate their carrying values. In determining the fair value of our fixed-rate notes, we determine the appropriate Treasury Bill Rate based on the remaining time to maturity for each of the debt instruments. We then add the appropriate yield spread to the Treasury Bill Rate. The yield spread is a risk premium estimated by investors to account for credit risk involved in debt financing. The spread is typically estimated based on the property type and loan-to-value ratio of the debt instrument. The result is an estimate of the market interest rate a typical investor would expect to receive given the underlying subject asset (property type) and remaining time to maturity. We believe the fair value of our notes payable is classified in Level 2 of the fair value hierarchy. Fixed-rate loans assumed in connection with real estate acquisitions are recorded in the accompanying consolidated financial statements at fair value at the time of acquisition.

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Table of Contents

7. NOTES PAYABLE

          Our outstanding debt as of March 31, 2012, and December 31, 2011, consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

Fixed-rate mortgage loans

 

$

148,495

 

$

141,373

 

Variable-rate secured line of credit

 

 

18,695

 

 

19,345

 

Variable-rate secured loans

 

 

36,915

 

 

40,940

 

Total

 

$

204,105

 

$

201,658

 

          Our $25.0 million Facility, which is available to us for the acquisition of properties and for working capital, is our primary source of additional credit. As of March 31, 2012, we had $18.7 million outstanding under the Facility with $6.0 million of future availability. The Facility’s borrowing base is determined based on the properties that are pledged as security, and it contains covenants applicable to those pledged properties which, among other restrictions, require us to maintain a minimum net worth and, in certain cases of the occurrence of default, limit distributions to our shareholders. The Facility bears interest at LIBOR plus a spread of 3.50%, with a floor of 4.75% and matures on June 30, 2013. As of March 31, 2012, the interest rate was 4.75%, and we were in compliance with all covenants.

          In February 2012, we refinanced the mortgage on our Brookwood Village property with a 10-year note that bears interest at 5.4%. In March 2012, we procured $3.5 million of long-term financing on one of our single-tenant properties located in Houston, Texas.

          As of March 31, 2012, the weighted average interest rate on our fixed-rate debt was 5.07%, and the weighted average remaining life of such debt was 4.3 years.

8. EARNINGS PER SHARE

          We report both basic and diluted EPS using the two-class method as required under GAAP. The two-class method is an earnings allocation method for computing EPS when an entity’s capital structure includes either two or more classes of common stock or includes common stock and participating securities. The two-class method determines EPS based on distributed earnings (i.e. dividends declared on common stock and any participating securities) and undistributed earnings. Our unvested restricted shares contain rights to receive non-forfeitable dividends and thus are participating securities. Undistributed losses are not allocated to participating securities under the two-class method unless the participating security has a contractual obligation to share in losses on a basis that is objectively determinable. Pursuant to the two-class method, our unvested shares of restricted stock have not been allocated any undistributed losses.

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          The following table provides a reconciliation of net income from continuing operations and the number of common shares used in the computations of basic and diluted EPS under the two-class method (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

 

2012

 

2011

 

Continuing Operations

 

 

 

 

 

 

 

Income from continuing operations attributable to common stockholders

 

$

1,257

 

$

1,275

 

Less: Dividends attributable to unvested restricted stockholders

 

 

(47

)

 

(41

)

Basic and Diluted — Income from continuing operations

 

 

1,210

 

 

1,234

 

Discontinued Operations

 

 

 

 

 

 

 

Basic and Diluted — Income from discontinued operations

 

 

 

 

61

 

Net income attributable to common stockholders after allocation to participating securities

 

$

1,210

 

$

1,295

 

Number of Shares:

 

 

 

 

 

 

 

Basic and Diluted — Weighted average shares outstanding(1)

 

 

22,747

 

 

22,729

 

Basic and Diluted Earnings Per Share

 

 

 

 

 

 

 

Income from continuing operations attributable to common stockholders

 

$

0.05

 

$

0.06

 

Income from discontinued operations attributable to common stockholders

 

$

 

$

 

Net income attributable to common stockholders

 

$

0.05

 

$

0.06

 


 

 

 

 

 

(1)

Weighted average shares outstanding do not include unvested restricted shares totaling 467 and 413 for the three months ended March 31, 2012 and 2011, respectively.

9. STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTEREST

Common Stock

          Our charter authorizes us to issue 1,050,000,000 shares of capital stock, of which 1,000,000,000 shares of capital stock are designated as common stock with a par value of $0.01 per share and 50,000,000 shares of capital stock are designated as preferred stock with a par value of $0.01 per share. As of March 31, 2012 and December 31, 2011, there were 23,308,007 and 23,197,917 shares of our common stock issued and outstanding, respectively. Our payment of any future dividends to our common stockholders is dependent upon applicable legal and contractual restrictions, as well as our earnings and financial needs.

Deferred Compensation Incentive Plan

          Our 1999 Flexible Incentive Plan is designed to attract and retain the services of our directors 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 of our restricted common stock. All long-term compensation awards are designed to vest over a period of three to seven years and promote retention of our team.

Restricted Share Issuances

          Deferred compensation includes grants of restricted shares to our directors and employees as a form of long-term compensation. The share grants vest over a period of three to seven years. We determine the fair value of the restricted shares as the number of shares awarded multiplied by the fair value per share of our common shares on the grant date. We amortize such fair value ratably over the vesting periods of the respective awards.

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Table of Contents

          The following table presents restricted share activity during the three months ended March 31, 2012 and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

 

Non-vested
Shares

 

Weighted
average grant
date fair value

 

Non-vested
Shares

 

Weighted
average grant
date fair value

 

Beginning of period

 

 

414,399

 

$

8.93

 

 

431,175

 

$

8.78

 

Granted

 

 

117,100

 

 

6.75

 

 

70,900

 

 

9.50

 

Vested

 

 

(64,625

)

 

8.26

 

 

(86,525

)

 

8.28

 

Forfeited

 

 

 

 

 

 

(2,928

)

 

8.52

 

End of period

 

 

466,874

 

$

8.47

 

 

412,622

 

$

9.01

 

          The total grant date fair value of shares vested during the three months ended March 31, 2012 and 2011 was $534,000 and $716,000 respectively. Total compensation cost recognized related to restricted shares during the three months ended March 31, 2012 and 2011, was $144,000 and $132,000, respectively. As of March 31, 2012, total unrecognized compensation cost related to restricted shares was $3.3 million, and the weighted average period over which we expect this cost to be recognized is 4.3 years.

10. RELATED PARTY TRANSACTIONS

          See Note 4 regarding investments in our Advised Funds and Note 2 regarding notes receivable from affiliates.

          The table below details our income and administrative cost reimbursements from the Advised Funds for the three months ended March 31, 2012 and 2011 (in thousands):

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Real estate fee income(1)

 

$

918

 

$

559

 

Asset management fee income(2)

 

 

155

 

 

370

 

Construction management fee income(3)

 

 

58

 

 

72

 

Advisory services income - related party

 

$

1,131

 

$

1,001

 

Reimbursements of administrative costs

 

$

211

 

$

196

 


 

 

 

 

 

(1)

We earn real estate fee income by providing property acquisition, leasing and property management services to our Advised Funds. We own 100% of the stock of the companies that serve as the general partner for the funds.

(2)

We earn asset management fees from our Advised Funds for providing accounting related and investor relation services, facilitating the deployment of capital and other services provided in conjunction with operating the funds.

(3)

We earn construction management fees by managing construction and tenant build-out projects on behalf of our Advised Funds.

          See Note 3 for a discussion of our acquisition of The Market at Lake Houston.

11. CONCENTRATIONS

          As of March 31, 2012, two properties individually accounted for more than 10% of our consolidated total assets – Uptown Park in Houston, Texas, and MacArthur Park in Dallas, Texas, which accounted for 19% and 15% of total assets, respectively. Consistent with our strategy of investing in geographic areas that we know well, 19 of our properties are located in the Houston metropolitan area. These Houston properties represent 62.2% and 66.3% of our rental income for the three months ended March 31, 2012 and 2011, respectively. Houston is Texas’ largest city and the fourth largest city in the United States.

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          Following are the base revenues generated by our top tenants for the three months ended March 31, 2012 and 2011 (in thousands):

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Kroger

 

$

529

 

$

529

 

Landry’s Seafood House(1)

 

 

318

 

 

257

 

CVS/pharmacy(2)

 

 

306

 

 

230

 

H-E-B(3)

 

 

277

 

 

106

 

Publix(4)

 

 

195

 

 

 

Hard Rock Café

 

 

124

 

 

124

 

TGI Friday’s

 

 

113

 

 

113

 

The Container Store(5)

 

 

112

 

 

 

Champps Americana

 

 

106

 

 

106

 

Golden Corral

 

 

105

 

 

105

 

 

 

$

2,185

 

$

1,570

 


 

 

 

 

 

(1)

In 2012, Landry’s Seafood House purchased two companies with whom we had existing leases.

(2)

We obtained an additional CVS/Pharmacy anchor tenant with the Brookwood Village acquisition in May 2011.

(3)

H-E-B, a regional grocer, is the anchor tenant at The Market at Lake Houston, which was acquired in February 2011.

(4)

Publix, a regional supermarket, is the anchor tenant at Alpharetta Commons, which was acquired in July 2011.

(5)

Rent commenced on a new lease with The Container Store in Houston, Texas in November 2011.

12. COMMITMENTS AND CONTINGENCIES

          As the owner or operator of real property, we may incur liability based on various property conditions and may be subject to liability for personal injury or property damage sustained as a result. In addition, we are subject to ongoing compliance requirements imposed on us by environmental laws. We are not aware of any environmental matters or liabilities with respect to our properties that would have a material adverse effect on our consolidated financial statements.

          We are involved in various matters of litigation arising in the normal course of business; however, we believe that we maintain sufficient comprehensive, general liability and extended insurance coverage as deemed necessary with respect to our properties. We believe that no estimate of loss or range of loss, if any, can be made at this time for such matters; however, our management, based in part upon consultation with legal counsel, is of the opinion that, when such litigation is resolved, any liability in excess of amounts covered by insurance or already accrued in our consolidated financial statements, if any, will not have a material effect on our consolidated financial statements.

13. SEGMENT REPORTING

          We assess our business based upon the nature of operations. Our reportable segments presented are our portfolio segment and our advisory services segment, which includes our real estate operating and development business and our Advised Funds, which are segments where separate financial information is both available, and revenue and operating performance is evaluated regularly by senior management in deciding how to allocate resources and in assessing performance. However, this operating performance data might not be indicative of what a third party would assess or evaluate for purposes of determining fair value of our segments.

Portfolio Segment

          Our portfolio segment consists of our portfolio of single and multi-tenant shopping center projects. Expenses for this segment include depreciation, interest, minority interest, legal cost directly related to the portfolio of properties and property level expenses. Substantially all of our consolidated assets are in this segment.

Advisory Services Segments

          Our advisory services segments consist of our real estate operating and development business as well as our Advised Funds. The real estate operating and development business is a fully integrated and wholly-owned business consisting of brokers and real estate professionals that provide development, acquisition, brokerage, leasing, and asset and property management services to our portfolio and Advised Funds. Our Advised Funds consist of five high net worth investment funds that have sold limited partnership interests to retail investors to develop, own, manage and add value to properties with an average holding period of two to four years and three joint ventures with institutional investors.

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Table of Contents

          Segment results for the three months ended March 31, 2012 and 2011, are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory Services

 

 

 

For the three months ended March 31, 2012

 

Portfolio

 

Real Estate
Operating and
Development

 

Advised
Funds

 

Total

 

Rental income from operating leases

 

$

8,885

 

$

44

 

$

 

$

8,929

 

Advisory services income - related party

 

 

 

 

976

 

 

155

 

 

1,131

 

Total revenue

 

 

8,885

 

 

1,020

 

 

155

 

 

10,060

 

 

General and administrative

 

 

407

 

 

1,049

 

 

28

 

 

1,484

 

Property expense

 

 

2,213

 

 

 

 

 

 

2,213

 

Legal and professional

 

 

197

 

 

23

 

 

1

 

 

221

 

Real estate commissions

 

 

1

 

 

85

 

 

 

 

86

 

Depreciation and amortization

 

 

2,221

 

 

6

 

 

 

 

2,227

 

Total expenses

 

 

5,039

 

 

1,163

 

 

29

 

 

6,231

 

 

Interest expense

 

 

(2,634

)

 

 

 

 

 

(2,634

)

Other income/(expense)

 

 

97

 

 

1

 

 

(36

)

 

62

 

Income (loss) from continuing operations

 

$

1,309

 

$

(142

)

$

90

 

$

1,257

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory Services

 

 

 

 

For the three months ended March 31, 2011

 

Portfolio

 

Real Estate
Operating and
Development

 

Advised
Funds

 

Total

 

Rental income from operating leases

 

$

7,406

 

$

44

 

$

 

$

7,450

 

Advisory services income - related party

 

 

 

 

631

 

 

370

 

 

1,001

 

Total revenue

 

 

7,406

 

 

675

 

 

370

 

 

8,451

 

 

General and administrative

 

 

392

 

 

858

 

 

34

 

 

1,284

 

Property expense

 

 

1,719

 

 

8

 

 

 

 

1,727

 

Legal and professional

 

 

241

 

 

14

 

 

1

 

 

256

 

Real estate commissions

 

 

2

 

 

27

 

 

 

 

29

 

Acquisition costs

 

 

40

 

 

 

 

 

 

40

 

Depreciation and amortization

 

 

1,634

 

 

6

 

 

 

 

1,640

 

Total expenses

 

 

4,028

 

 

913

 

 

35

 

 

4,976

 

 

Interest expense

 

 

(2,203

)

 

 

 

 

 

(2,203

)

Other income/(expense)

 

 

141

 

 

21

 

 

(159

)

 

3

 

Income (loss) from continuing operations

 

$

1,316

 

$

(217

)

$

176

 

$

1,275

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

          References to “we,” “us,” “our” and “the Company” refer to AmREIT, Inc. and our consolidated subsidiaries, except where the context otherwise requires.

FORWARD-LOOKING STATEMENTS

          Certain information presented in this Quarterly Report on Form 10-Q constitutes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our business, financial condition, liquidity, results of operations, funds from operations and prospects could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a material difference include the following: changes in general economic conditions, changes in real estate market conditions in general and within our specific submarkets, continued availability of proceeds from our debt or equity capital, our ability to locate suitable tenants for our properties, the ability of tenants to make payments under their respective leases, the timing of acquisitions, development starts and sales of properties, the ability to meet development schedules and other risks, uncertainties and assumptions. Any forward-looking statement speaks only as of the date of this report, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operation results over time.

          The following discussion should be read in conjunction with our accompanying consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as our 2011 consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011. Historical results and trends that appear should not be taken as indicative of future operations.

EXECUTIVE OVERVIEW

Our Company

          We are a full service, vertically integrated and self-administered REIT that owns, operates, acquires and selectively develops and redevelops primarily neighborhood and community shopping centers located in high-traffic, densely populated, affluent areas with high barriers to entry. We seek to own properties in major cities in the United States that contain submarkets with characteristics comparable to our existing markets. Our shopping centers are often anchored by strong national and local retailers, including supermarket chains, drug stores and other necessity-based retailers. Our remaining tenants consist primarily of specialty retailers and local restaurants. Over our 28-year history, we have acquired, owned and operated retail properties across 19 states. We have elected to be taxed as a REIT for federal income tax purposes.

          Our investment focus is predominantly concentrated in the affluent, high-growth submarkets of Houston, Dallas, San Antonio, Austin and Atlanta, which represent five of the top population and job growth markets in the United States. We believe these metropolitan areas are compelling real estate markets given their favorable demographics, robust job growth and large and diverse economies. The primary economic drivers in these markets are transport and utilities (including energy), government (including defense), education and healthcare, professional and business services, and leisure and hospitality. As part of our ongoing investment strategy, we expanded our presence in Atlanta, Georgia with the acquisition of two multi-tenant properties in 2011. We intend to continue to acquire additional properties within the above markets, or other U.S. cities, that exhibit comparable population, affluence and growth characteristics. We generally seek to invest in properties that possess the following attributes, which we refer to collectively as our “5Ds”:

 

 

 

 

Demographic purchasing power – average household incomes within a one-mile radius of $100,000 or more resulting in an affluent population with substantial disposable income;

 

 

 

 

Density of population – 45,000 or more households within a three-mile radius and additional retail drivers such as favorable daytime employment population, tourism and regional draws;

 

 

 

 

Demand for retail space – limited nearby retail properties or land available for the development of new retail properties, providing for favorable retail per capita figures as compared to the national and metropolitan statistical area averages;

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Desirability of physical layout – physical attributes that provide the best opportunity for our tenants to attract and serve their target customers; and

 

 

 

 

Demarcation advantage – site-specific factors that will influence traffic to our properties and require analysis beyond the raw demographic data.

Our Portfolio

          As of March 31, 2012, our portfolio consisted of 29 wholly-owned properties with approximately 1.2 million square feet of GLA, which were approximately 96% leased with a weighted average remaining lease term of 5.2 years. Our neighborhood and community shopping centers accounted for approximately 89% of our GLA and 91% of our annualized base rent as of March 31, 2012. Our single-tenant retail properties only comprised 11% of our GLA and 9% of our annualized base rent.

Our Advisory Services

          Advised Funds– As of March 31, 2012, our Advised Funds included five high net worth investment funds, one institutional joint venture with J.P. Morgan Investment Management, one institutional joint venture with AEW Capital and one joint venture with two of our high net worth investment funds, MIG III and MIG IV. We have formed, invested in and managed 20 advised funds over the past 28 years that have led to the acquisition, development and redevelopment of 29 million square feet of GLA of retail properties throughout the United States.

          As the sole owner of the general partner of each of the five high net worth investment funds, and as the exclusive operator of each of the properties owned in whole or in part by the Advised Funds, we believe that our Advised Funds provide us with a pipeline of acquisition opportunities in our core markets. If these properties meet our investment criteria, we may acquire these assets (i) from our high net worth Advised Funds based on fair market value as determined by an independent appraisal process and (ii) from our institutional joint venture partners pursuant to contractual buy-sell rights or rights of first offer, as applicable. As of the date of this Quarterly Report, our Advised Funds held all or a portion of the ownership interests in 18 properties with approximately 2.2 million square feet of GLA and an undepreciated book value of over $451 million.

          Real Estate Operating and Development Business– Our real estate operating and development business focuses on acquiring, managing, leasing and providing development and redevelopment services for our wholly-owned properties as well as the properties held by our Advised Funds. By employing our own real estate team, we are able to provide all services to our properties in-house and maintain secure relationships with our tenants. Our real estate operating and development business is held under our taxable REIT subsidiary, ARIC. ARIC generates brokerage, leasing, construction management, development and property management fee income.

RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2012, to the three months ended March 31, 2011

          Below are the results of operations for the three months ended March 31, 2012 and 2011 (in thousands, except for per share amounts, percentages and number of properties). In the comparative tables presented below, increases in revenues/income or decreases in expenses (favorable variances) are shown without brackets while decreases in revenues/income or increases in expenses (unfavorable variances) are shown with brackets. For purposes of comparing our results of operations for the periods presented below, all of our properties in the “same store” reporting group were owned since January 1, 2011. As of March 31, 2012, our portfolio was comprised of 29 wholly-owned properties with an aggregate of approximately 1.2 million square feet of GLA, compared to a portfolio that was comprised of 29 wholly-owned properties with an aggregate of approximately 1.1 million square feet of GLA as of March 31, 2011. During the year ended December 31, 2011, we sold certain non-core, single-tenant properties, the results for which are presented in income from discontinued operations, and we acquired three neighborhood shopping centers.

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Table of Contents


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Change $

 

Change %

 

Same store properties (26 properties)

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income (1)

 

$

5,773

 

$

5,571

 

$

202

 

 

4

%

Recovery income (1)

 

 

1,871

 

 

1,597

 

 

274

 

 

17

%

Percentage rent (1)

 

 

32

 

 

10

 

 

22

 

 

220

%

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property expenses

 

 

2,073

 

 

1,701

 

 

(372

)

 

(22

)%

Same store net operating income

 

 

5,603

 

 

5,477

 

 

126

 

 

2

%

Non-same store properties (3 properties)

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income (1)

 

 

900

 

 

151

 

 

749

 

 

496

%

Recovery income (1)

 

 

242

 

 

39

 

 

203

 

 

521

%

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property expenses

 

 

215

 

 

32

 

 

(183

)

 

(572

)%

Non-same store net operating income

 

 

927

 

 

158

 

 

769

 

 

487

%

Total net operating income(2)

 

 

6,530

 

 

5,635

 

 

895

 

 

16

%

Other revenues (see further detail below):

 

 

1,416

 

 

1,241

 

 

175

 

 

14

%

Less other expenses (see further detail below):

 

 

6,689

 

 

5,601

 

 

(1,088

)

 

(19

)%

 

Income (loss) from continuing operations

 

 

1,257

 

 

1,275

 

 

(18

)

 

(1

)%

Income from discontinued operations

 

 

 

 

61

 

 

(61

)

 

(100

)%

Net income attributable to AmREIT stockholders

 

$

1,257

 

$

1,336

 

$

(79

)

 

(6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds from operations(3)

 

$

3,627

 

$

3,110

 

$

517

 

 

17

%

Number of properties at end of period

 

 

29

 

 

29

 

 

 

 

 

Percent leased at end of period(4)

 

 

96

%

 

93

%

 

n/a

 

 

3

%

Distributions per share

 

$

0.10

 

$

0.10

 

$

 

 

 


 

 

 

 

 

 

 

(1)

Rental income from operating leases is comprised of rental income, recovery income and percentage rent from same store properties, rental income and recovery income from non-same store properties and amortization of straight-line rents and above/below market rents. For the three months ended March 31, 2012 and 2011, rental income from operating leases was $8,929 and $7,450, respectively.

 

(2)

For a definition and reconciliation of NOI and a statement disclosing the reasons why our management believes that presentation of NOI provides useful information to investors and, to the extent material, any additional purposes for which our management uses NOI, see “Net Operating Income” below.

 

(3)

For a reconciliation of FFO to net income, and a statement disclosing the reasons why our management believes that presentation of FFO provides useful information to investors and, to the extent material, any additional purposes for which our management uses FFO, see “Funds From Operations” below.

 

(4)

Percent leased is calculated as (i) GLA under commenced leases as of March 31, 2012, divided by (ii) total GLA, expressed as a percentage.

Same Store Properties – Property Revenues and Property Expenses

 

 

 

 

Rental income. Rental income increased by $202,000, or 4%, on a same store basis to $5.8 million for the three months ended March 31, 2012, as compared to $5.6 million for the same period in 2011. Of this increase, $99,000 was driven by an increase in average occupancy percentage, and $103,000 was driven by an increase in average rental rates.

 

 

 

 

Recovery income. Recovery income increased by $274,000, or 17%, on a same store basis to $1.9 million for the three months ended March 31, 2012, as compared to $1.6 million for the same period in 2011. This increase is due to a new lease with a national tenant at one of our single tenant properties as well as lower property tax recoveries in 2011 resulting from a favorable property tax refund received during 2011 and passed along to our tenants at our MacArthur Park property.

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Property expenses. Property expenses increased by $372,000, or 22%, on a same store basis to $2.1 million for the three months ended March 31, 2012, as compared to $1.7 million for the same period in 2011. This same store increase is attributable to an increase in bad debt expense recorded during 2012 as we continue to monitor collectability of our tenant receivables and to lower property taxes in 2011 resulting from a favorable property tax refund received at our MacArthur Park property.

Non-same Store Properties – Property revenues and Property expenses.

          Our rental income, tenant recovery income and property expenses increased for our non-same store investment properties due to the acquisitions of The Market at Lake Houston (February 25, 2011), Brookwood Village (May 10, 2011) and Alpharetta Commons (July 29, 2011) whose results of operations have been recorded in the consolidated statements of operations from the date of acquisition.

Other Revenues:

          Overall, other revenues increased by $175,000, or 14%, to $1.4 million for the three months ended March 31, 2012, as compared to $1.2 million for the same period in 2011, primarily due to the following (in thousands, except for percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Change $

 

Change %

 

Amortization of straight-line rents and above/below
market rents(1)

 

$

111

 

$

82

 

$

29

 

 

35

%

Advisory services income - related party:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate fee income - related party

 

 

918

 

 

559

 

 

359

 

 

64

%

Asset management fee income - related party

 

 

155

 

 

370

 

 

(215

)

 

(58

)%

Construction management fee income - related party

 

 

58

 

 

72

 

 

(14

)

 

(19

)%

Total advisory services income - related party

 

 

1,131

 

 

1,001

 

 

130

 

 

13

%

Interest and other income

 

 

102

 

 

128

 

 

(26

)

 

(20

)%

Interest and other income - related party

 

 

72

 

 

30

 

 

42

 

 

140

%

Total other revenues

 

$

1,416

 

$

1,241

 

$

175

 

 

14

%


 

 

 

 

 

 

 

(1)

Included in rental income from operating leases as presented on our consolidated statements of operations.


 

 

 

 

Real estate fee income – related party. Real estate fee income – related party increased by $359,000, or 64%, to $918,000 for the three months ended March 31, 2012, as compared to $559,000 for the same period in 2011. This increase is primarily attributable to disposition fees earned upon the sale of a land parcel and increased development fees during 2012 at properties that we manage for our Advised Funds.

 

 

 

 

Asset management fee income– related party. Asset management fee income – related party decreased by $215,000, or 58%, to $155,000 for the three months ended March 31, 2012, as compared to $370,000 for the same period in 2011. Our asset management fees are calculated based upon the net equity raised in the Advised Funds that we manage. Through a combination of property sales in our Advised Funds, and we as the general partner voluntarily reducing the asset management fees in response to the past economic recession, our asset management fee income – related party has decreased since the first quarter of 2011.

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Table of Contents

Other Expenses:

          Overall, other expenses increased by $1.1 million, or 19%, to $6.7 million for the three months ended March 31, 2012, as compared to $5.6 million for the same period in 2011, primarily due to the following (in thousands, except for percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Change $

 

Change %

 

Straight-line bad debt recoveries(1)

 

$

(75

)

$

(6

)

$

69

 

 

*

 

General and administrative

 

 

1,484

 

 

1,284

 

 

(200

)

 

(16

)%

Legal and professional

 

 

221

 

 

256

 

 

35

 

 

14

%

Real estate commissions

 

 

86

 

 

29

 

 

(57

)

 

(197

)%

Acquisition costs

 

 

 

 

40

 

 

40

 

 

100

%

Depreciation and amortization

 

 

2,227

 

 

1,640

 

 

(587

)

 

(36

)%

Loss from Advised Funds

 

 

36

 

 

104

 

 

68

 

 

65

%

Income tax expense for taxable REIT subsidiary

 

 

76

 

 

51

 

 

(25

)

 

(49

)%

Interest expense

 

 

2,634

 

 

2,203

 

 

(431

)

 

(20

)%

Total other expenses

 

$

6,689

 

$

5,601

 

$

(1,088

)

 

(19

)%


 

 

 

 

 

 

 

(1)

Included in property expense on our consolidated statements of operations.

 

*

Percentage change not shown as prior year amount is immaterial, or the percentage change is not meaningful.


 

 

 

 

Straight-line bad debt recoveries. Straight-line bad debt recoveries increased by $69,000 to $75,000 for the three months ended March 31, 2012, as compared to $6,000 for the same period in 2011. Certain of our leases provide for increases in minimum lease payments over the term of the lease, and we recognize revenues on a straight-line basis over the term of such leases. The straight-line method results in accrued rent on our balance sheet, representing the portion of the rent that we expect to recover from the tenant in the future as they fulfill their obligation to us under the terms of the lease. We previously recorded a reserve against the accrued rent balances due from certain of our tenants that we believed may not fulfill their obligation to us. A portion of the reserve was reversed in 2011 due to the collection of such rents as well as a stabilizing economy. An additional portion of the reserve was reversed in 2012 as certain tenants with accrued rent balances showed signs of improvement in their business, and we determined that the reserve was no longer needed.

 

 

 

 

General and administrative. General and administrative expense increased by $200,000, or 16%, to $1.5 million for the three months ended March 31, 2012, as compared to $1.3 million for the same period in 2011. This increase was due to changes in estimates to our annual performance compensation as well as due to increased marketing costs associated with our continued efforts to brand our company through an improved website and other media. We expect our salary and performance compensation costs for the year ended December 31, 2012 to be comparable to those for the year ended December 31, 2011.

 

 

 

 

Depreciation and amortization. Depreciation and amortization expense increased by approximately $587,000, or 36%, to $2.2 million for the three months ended March 31, 2012, as compared to $1.6 million for the same period in 2011. This increase is primarily attributable to the acquisitions of The Market at Lake Houston, Brookwood Village and Alpharetta Commons during 2011.

 

 

 

 

Interest Expense. Interest expense increased by $431,000, or 20%, to $2.6 million for the three months ended March 31, 2012, as compared to $2.2 million for the same period in 2011. This increase was due to increased borrowings associated with the acquisitions of The Market at Lake Houston, Brookwood Village and Alpharetta Commons during 2011.


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Table of Contents

FUNDS FROM OPERATIONS

          We consider FFO to be an appropriate measure of the operating performance of an equity REIT. NAREIT defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and impairment charges on properties held for investment, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. NAREIT recommends that extraordinary items not be considered in arriving at FFO. We calculate FFO in accordance with this definition.

          Most industry analysts and equity REITs, including us, consider FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or losses on dispositions, impairment charges and 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. Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income by itself as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that uses historical cost accounting is insufficient by itself. There can be no assurance that FFO presented by us 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.

          The table below details our FFO reconciliation to net income for the periods presented (in thousands).

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011(1)

 

Net income

 

$

1,257

 

$

1,336

 

Add:

 

 

 

 

 

 

 

Depreciation of real estate assets - from operations

 

 

2,213

 

 

1,615

 

Depreciation of real estate assets - from discontinued operations

 

 

 

 

7

 

Depreciation of real estate assets for nonconsolidated affiliates

 

 

157

 

 

152

 

Total FFO available to stockholders

 

$

3,627

 

$

3,110

 


 

 

 

 

 

 

 

(1)

Net income for the three months ended March 31, 2011, includes acquisition costs of $40 incurred in connection with the acquisition of The Market at Lake Houston.


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Table of Contents

NET OPERATING INCOME

          We believe that NOI is a useful measure of our operating performance. We define NOI as operating revenues (rental income, tenant recovery income, percentage rent, excluding straight-line rental income and amortization of acquired above-and below-market rents) less property operating expenses (real estate tax expense and property operating expense, excluding straight-line rent bad debt expense). Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REITs.

          We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. We use NOI to evaluate our performance on a property-by-property basis because NOI allows us to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on our operating results. However, NOI should only be used as a supplemental measure of our financial performance. The following table sets forth a reconciliation of NOI to net income as computed in accordance with GAAP, for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

 

Net income

 

$

1,257

 

$

1,336

 

Adjustments to Add/(Deduct):

 

 

 

 

 

 

 

Amortization of straight-line rents and above/below-market rents(1)

 

 

(111

)

 

(82

)

Advisory services income - related party

 

 

(1,131

)

 

(1,001

)

Interest and other income

 

 

(102

)

 

(128

)

Interest and other income - related party

 

 

(72

)

 

(30

)

Straight-line rent bad debt recoveries(2)

 

 

(75

)

 

(6

)

General and administrative

 

 

1,484

 

 

1,284

 

Legal and professional

 

 

221

 

 

256

 

Real estate commissions

 

 

86

 

 

29

 

Acquisition costs

 

 

 

 

40

 

Depreciation and amortization

 

 

2,227

 

 

1,640

 

Loss from Advised Funds

 

 

36

 

 

104

 

Income tax expense for taxable REIT subsidiary

 

 

76

 

 

51

 

Interest expense

 

 

2,634

 

 

2,203

 

Income from discontinued operations

 

 

 

 

(61

)

Net operating income

 

$

6,530

 

$

5,635

 


 

 

 

 

 

 

 

(1)

Included in rental income from operating leases as presented on our consolidated statements of operations.

 

(2)

Included in property expense on our consolidated statements of operations.

LIQUIDITY AND CAPITAL RESOURCES

          Our short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our properties, regular debt service requirements, dividend payments to our stockholders, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements primarily from cash on hand, cash flows generated from the operation of our properties, proceeds from the Facility and, potentially, proceeds from new mortgages, as needed for acquisitions. The cash generated from operations is primarily paid to our common stockholders in the form of dividends. As a REIT, we must generally make annual distributions to our stockholders of at least 90% of our REIT taxable income.

          We anticipate that our primary future uses of capital will include, but will not be limited to, operating expenses, making scheduled debt service payments, funding renovations, expansions, and other significant capital expenditures for our existing portfolio of properties and, subject to the availability of attractive properties and our ability to consummate acquisitions on satisfactory terms, acquiring new assets compatible with our investment strategy. These expenditures include building improvement projects, as well as amounts for tenant improvements and leasing commissions related to re-leasing, which are subject to change as market and tenant conditions dictate.

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Table of Contents

          We may utilize several other forms of capital for funding our long-term liquidity requirements, including proceeds from secured mortgages and unsecured indebtedness, proceeds from equity issuances, cash generated from the sale of property and the formation of joint ventures.

          As of March 31, 2012, we had $946,000 of available cash on hand, and we had $6.0 million available under our Facility for the acquisition of properties and for working capital needs. We anticipate that cash on hand, cash flows from operating activities and cash available under the Facility will be sufficient to meet our short-term liquidity needs.

          We intend to maintain a financially disciplined and conservative capital structure. As of March 31, 2012, approximately 73% of our debt was fixed, long-term mortgage financing, and our ratio of debt to gross book assets was 54%. As of March 31, 2012, we had $18.7 million outstanding on our Facility. The Facility’s maturity date is June 30, 2013, and its borrowing base is determined based on the properties that are pledged as security. The Facility contains covenants applicable to those pledged properties which, among other restrictions, require us to maintain a minimum net worth and, in certain cases of the occurrence of default, limit distributions to our stockholders. As of March 31, 2012, we were in compliance with all covenants.

          We continue to seek additional opportunities to selectively invest capital in high-quality, multi-tenant shopping centers with higher overall return prospects while maintaining our conservative capital structure. We may consider all or a combination of future joint ventures, sales of selected properties that no longer meet our investment criteria, refinancing of current debt and unencumbered properties or possible public offerings of our common stock in order to provide us with significant financial flexibility and to fund future growth.

          Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about our company. Potential disruptions in the financial markets and deteriorating economic conditions could adversely affect our ability to utilize any one or more of these sources of funds.

          Our operations are sensitive to changes in overall economic conditions that impact our tenants, including, among other things, increased bad debts due to such recessionary pressures. A general reduction in the level of tenant leasing or shifts in tenant leasing practices could adversely affect our business, financial condition, liquidity, results of operations, funds from operations and prospects. The United States has undergone a prolonged recession that has been marked by pervasive and fundamental disruptions in the financial markets. Continued concerns regarding the uncertainty of whether the U.S. economy will be adversely affected by inflation, deflation or stagflation and the systemic impact of increased unemployment, volatile energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a severely distressed real estate market have contributed to increased market volatility and weakened business and consumer confidence. Additionally, the uncertainty surrounding the United States’ rapidly increasing national debt and continuing global economic upheaval have kept markets volatile. These unstable conditions could continue for a prolonged period of time. It is difficult to determine the breadth and duration of the financial market problems and the many ways in which they may affect our tenants and our business in general. While we believe that we have sufficient access to cash in order to meet our contractual obligations, a significant additional deterioration in the U.S. economy or the bankruptcy or insolvency of one or more of our significant tenants could cause our 2012 cash resources to be insufficient to meet our obligations. If necessary, we have the ability to defer capital improvements and to defer payment of certain operating costs, including property taxes, until sufficient cash resources are available.

          We believe our current cash flows from operations, coupled with our Facility are sufficient to allow us to continue operations, satisfy our contractual obligations and pay dividends to our stockholders. We have an option to extend the maturity of our $16.6 million mortgage on our MacArthur Park property due in December 2012 for an additional twelve months. This represents the only debt maturing within the next 12 months.

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Table of Contents

Comparison of Cash Flows for the Three Months Ended March 31, 2012 and 2011

          Cash flows provided by (used in) operating activities, investing activities and financing activities for the three months ended March 31, 2012 and 2011, are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Operating activities

 

$

1,507

 

$

2,659

 

Investing activities

 

$

(1,595

)

$

4,032

 

Financing activities

 

$

(16

)

$

(6,637

)

          Operating Activities. The primary driver of the decrease in operating cash flows was a decrease in cash inflows from receivables of $1.2 million resulting from the receipt of escrow deposits in the first quarter of 2011 associated with debt refinancing closed in 2010. We refinanced two of our neighborhood and community shopping centers in December 2010 and received full reimbursement of our escrow accounts in January 2011.

          Investing Activities. The primary driver of the decrease from cash inflows from investing activities in the first quarter of 2011 to cash outflows in the first quarter of 2012 was a decrease of $9.4 million in cash received from deposits held by a qualified intermediary. This decrease was partially offset by a $4.7 million reduction of cash outflows used for the acquisition of The Market at Lake Houston.

          Financing Activities. The primary driver of the decrease in cash outflows from financing activities was an increase in proceeds from notes payable resulting from the financing of one of our single-tenant properties in March 2012 and an increase in draws from the Facility.

Off-Balance Sheet Arrangements

          As of March 31, 2012, none of our off-balance sheet arrangements had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. We own interests in several unconsolidated Advised Funds that are accounted for under the equity method as we exercise significant influence over, but do not control, the investee. See Note 4 of the Notes to Consolidated Financial Statements. We have made loans to some of these affiliates as discussed in Note 2 of the Notes to Consolidated Financial Statements.

Contractual Obligations

          As of March 31, 2012, we had the following contractual debt obligations, in thousands (see also Note 7 of the Notes to Consolidated Financial Statements for further discussion regarding the specific terms of our debt):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Facility

 

$

 

$

18,695

 

$

 

$

 

$

 

$

 

$

18,695

 

Secured debt (1)

 

 

17,211

 

 

11,304

 

 

1,565

 

 

52,037

 

 

68,435

 

 

34,450

 

 

185,002

 

Interest (2)

 

 

6,919

 

 

8,633

 

 

7,718

 

 

6,245

 

 

2,408

 

 

8,920

 

 

40,843

 

Non-cancelable operating lease payments

 

 

118

 

 

 

 

 

 

 

 

 

 

 

 

118

 

Total contractual obligations

 

$

24,248

 

$

38,632

 

$

9,283

 

$

58,282

 

$

70,843

 

$

43,370

 

$

244,658

 


 

 

 

 

 

 

 

(1)

Secured debt as shown above is $408 less than total secured debt as reported in the accompanying balance sheet due to the premium recorded on above-market debt assumed in conjunction with certain of our property acquisitions.

 

(2)

Interest expense includes our interest obligations on the Facility as well as all secured debt. The Facility is a variable-rate debt instrument, and the outstanding balance fluctuates throughout the year based on our liquidity needs. This table assumes that the outstanding balance of $18,695 and the interest rate as of March 31, 2012, of 4.75% remain constant through maturity. We also have variable-rate mortgage loans. This table assumes the total balance of $39,915 and the interest rates as of March 31, 2012, between 3.25% and 5.50%, remain constant through maturity.

27


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

          Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

          Under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of March 31, 2012. Based on that evaluation, our CEO and CFO concluded that, as of March 31, 2012, our disclosure controls and procedures were effective in causing material information relating to us (including our consolidated subsidiaries) to be recorded, processed, summarized and reported by management on a timely basis and to ensure the quality and timeliness of our public disclosures with disclosure obligations of the Securities and Exchange Commission.

Changes in Internal Controls

          There has been no change to our internal control over financial reporting during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

          We are involved in various matters of litigation arising in the normal course of business. While we are unable to predict with certainty the amounts involved, our management and counsel are of the opinion that, when such litigation is resolved, any additional liability, if any, will not have a material effect on our consolidated financial statements.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

          Our shares are no longer actively traded on an exchange. We do not currently have a public stock buy back program in place. However, in January 2012, our Board of Directors authorized a redemption of 7,010 shares at $5.10 per share for a total of $35,751.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

          None.

ITEM 4. MINE SAFETY DISCLOSURES.

          Not applicable.

ITEM 5. OTHER INFORMATION.

          None.

ITEM 6. EXHIBITS.

          The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Report.

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Table of Contents

SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

AmREIT, Inc.

 

 

 

 

(registrant)

 

 

 

 

 

 

 

Date: April 27, 2012

By:

/s/ H. Kerr Taylor

 

 

H. Kerr Taylor, Chairman of the Board of Directors, President and Chief Executive Officer

 

 

 

 

 

Date: April 27, 2012

By:

/s/ Chad C. Braun

 

 

Chad C. Braun, Executive Vice President, Chief Operating Officer, Chief Financial
Officer, Treasurer and Secretary

29


Table of Contents

Exhibit Index

Exhibit No.

 

 

 

3.1

Articles of Amendment and Restatement (included as Exhibit 3.1 to the Company’s Amendment No. 3 to the Registration Statement on Form S-4, filed on September 9, 2009, and incorporated herein by reference).

 

 

3.2

Amended and Restated Bylaws (included as Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on November 3, 2010, and incorporated herein by reference).

 

 

31.1

Certification pursuant to Rule 13a-14(a) of Chief Executive Officer (filed herewith).

 

 

31.2

Certification pursuant to Rule 13a-14(a) of Chief Financial Officer (filed herewith).

 

 

32.1

Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

 

 

32.2

Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

 

 

101.INS

 

XBRL Instance Document*

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document*

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document*

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document *

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document*

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document*

 

 

 

 

 

 

*

 

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of March 31, 2012, and December 31, 2011, (ii) the Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011, (iii) the Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2012, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 and (v) the Notes to the Consolidated Financial Statements.

 

 

 

 

 

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

30