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AMRE > SEC Filings for AMRE > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for AMREIT, INC.


9-May-2013

Quarterly Report


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 constitutes "forward-looking statements" within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act of 1934. 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, FFO 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 Quarterly 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 operating 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, as well as our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012. Historical results and trends that appear are not necessarily indicative of future results of 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 (collectively, our Core Markets), 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. We intend to continue to acquire additional properties within our Core Markets. 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;


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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;

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 influence traffic to our properties and require analysis beyond the raw demographic data.

Our Portfolio and Recent MacArthur Park Joint Venture

As of March 31, 2013, our portfolio consisted of 31 wholly owned properties with approximately 1.2 million square feet of GLA, which were 96.5% occupied with a weighted average remaining lease term of 5.1 years. Our neighborhood and community shopping centers accounted for 88.6% of our GLA and 90.8% of our annualized base rent as of March 31, 2013. Our single-tenant retail properties comprised 11.4% of our GLA and 9.2% of our annualized base rent.

MacArthur Park Joint Venture - On March 26, 2013, we completed the entry into the MacArthur Park Joint Venture with Goldman Sachs whereby we contributed our MacArthur Park property to the MacArthur Park Joint Venture for a 30% interest, and Goldman Sachs contributed cash for a 70% interest. The MacArthur Park Joint Venture concurrently purchased the contiguous property to the north, excluding a Target store, for approximately $25.5 million and placed mortgage financing on the entire combined property of $43.9 million. The MacArthur Park Joint Venture fully repaid the mortgage loan securing the MacArthur Park debt of approximately $8.7 million (including a $2.1 million defeasance penalty). Upon closing the transaction, we received net cash proceeds of approximately $35.6 million which were used to repay borrowings under our $75 Million Facility. We recorded a gain of approximately $7.7 million representing the cash proceeds received in excess of 70% of the carrying value of the MacArthur Park net assets contributed by us. We will continue to manage and lease the property on behalf of the MacArthur Park Joint Venture and we retain a right of first offer to acquire the project in the future, after a lock-out period.

Our 30% ownership interest does not qualify for consolidation under GAAP. Accordingly, we deconsolidated this property on March 26, 2013. See also Note 3 to the Notes to Consolidated Financial Statements. Included on our consolidated balance sheet as of March 31, 2013 is our investment in the MacArthur Park Joint Venture of $8.8 million, which represents our historical basis in the MacArthur Park net assets plus post-closing cash contributions (distributions). We have recorded our 30% retained interest in the MacArthur Park Joint Venture at its historical carrying value.

Our 30% ownership grants us the ability to exercise significant influence over the operation and management of the joint venture and we account for our ownership under the equity method since the date of the formation of the joint venture. Additionally, our significant continuing involvement in MacArthur Park precludes us from treating our contribution of the property to the joint venture as discontinued operations. Accordingly, MacArthur Park's historical operating results prior to the formation of the joint venture will continue to be reported as a component of our income from continuing operations.

Our Advisory Services

Advised Funds - As of March 31, 2013, our Advised Funds included four high net worth investment funds, one institutional joint venture with Goldman Sachs, 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.


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As the sole owner of the general partner of each of the four 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 investment 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 March 31, 2013, our Advised Funds held all or a portion of the ownership interests in 18 properties with approximately 2.6 million square feet of GLA and an undepreciated book value of $528 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 better maintain relationships with our tenants. Our real estate operating and development business is held by our taxable REIT subsidiary, ARIC. ARIC generates brokerage, leasing, construction management, development and property management fee income.

We acquired 1.26 acres of unimproved land located at the intersection of Loop 610 & Ella Boulevard in Houston, Texas on April 4, 2013 for $2.2 million. We entered into a long-term, build-to-suit lease with CVS/pharmacy on the site. This acquisition was made through ARIC as it was acquired with the intent to resell it in the near-term.

LEASING UPDATE

     The following table summarizes our leasing activity for comparable leases
for the three months ended March 31, 2013 and 2012.


                                                              For the three months ended March 31,
Comparable Leasing Activity Table                                 2013                    2012

Expirations
Number of leases expired during applicable period                           13                       6
Aggregate net rentable square footage of expiring leases                25,331                  27,198
New Leases (1)
Number of leases                                                             4                       1
Square feet                                                              8,467                   2,412
Expiring ABR PSF                                           $             23.64     $             23.00
New ABR PSF                                                $             33.41     $             24.00
% Change (Cash)                                                           41.4 %                   4.3 %
Renewals (2)
Number of leases                                                             9                       5
Square feet                                                             19,007                  24,444
Expiring ABR PSF                                           $             27.46     $             20.92
New ABR PSF                                                $             29.31     $             21.38
% Change (Cash)                                                            6.7 %                   2.2 %
Combined
Number of leases                                                            13                       6
Square feet                                                             27,474                  26,856
Expiring ABR PSF                                           $             26.28     $             21.10
New ABR PSF                                                $             30.58     $             21.61
% Change (Cash)                                                           16.3 %                   2.4 %

(1) Represents new leases for a space that was not vacant for more than 12 consecutive months prior to lease signing.

(2) Represents existing tenants that, upon expiration of their leases, enter into new leases for the same space.


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RESULTS OF OPERATIONS

Same store properties

Throughout this section, we have provided certain information on a "same store" property basis. Properties that we have designated as "same store" represent those properties that we wholly owned and operated for the entirety of both periods being compared, except for properties for which significant redevelopment or expansion occurred during either of the periods. While there is some judgment surrounding changes in designation as a given property is redeveloped or expanded, we typically remove properties from the same store designation once significant redevelopment has commenced. We typically move redevelopment properties and expansion properties into the same store designation once they have stabilized, which is typically when the growth expected from the redevelopment or expansion has been included in the comparable periods.

Recent Acquisition and Disposition Activity

Recent acquisition and disposition activity that may affect our future results of operations is discussed further below.

Preston Royal Village Shopping Center acquisition - On December 12, 2012, we completed the acquisition of Preston Royal Village Shopping Center, a retail shopping center containing approximately 230,000 square feet of GLA. The results of operations of our acquired properties are included in our financial statements from the date of acquisition. Our financial results for the three months ended March 31, 2013 include the results of the Preston Royal Shopping Center; however, our financial results for the three months ended March 31, 2012 do not contain any results from the Preston Royal Village Shopping Center as this period is prior to its acquisition. See Note 3 to the Notes to Consolidated Financial Statements for the pro forma results of our acquisitions. We have designated our results from the Preston Royal Village Shopping Center as non-same store below.

MacArthur Park Joint Venture - On March 26, 2013, we completed the entry into the MacArthur Park Joint Venture with Goldman Sachs whereby we contributed our MacArthur Park property to the MacArthur Park Joint Venture for a 30% interest, and Goldman Sachs contributed cash for a 70% interest. See also Note 3 of the Notes to Consolidated Financial Statements. We recorded a gain of approximately $7.7 million representing the cash proceeds received in excess of 70% of the carrying value of the MacArthur Park net assets contributed by us. We will continue to manage and lease the property on behalf of the MacArthur Park Joint Venture, and we retain a right of first offer to acquire the project in the future, after a lock-out period. Our 30% ownership interest does not qualify for consolidation under GAAP. Accordingly, we deconsolidated this property on March 26, 2013. Our 30% ownership interest grants us the ability to exercise significant influence over the operation and management of the joint venture and we therefore report this ownership interest under the equity method of accounting. Additionally, our significant continuing involvement in MacArthur Park precludes us from treating the property as a discontinued operation. Accordingly, MacArthur Park's historical operating results prior to the formation of the joint venture will continue to be reported as a component of our income from continuing operations. We have designated our results from our MacArthur Park property as non-same store below.


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Comparison of the three months ended March 31, 2013 to the three months ended March 31, 2012

Below are the results of operations for the three months ended March 31, 2013 and 2012 (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 parentheses while decreases in revenues/income or increases in expenses (unfavorable variances) are shown with parentheses. For purposes of comparing our results of operations for the periods presented below, all of our properties in the "same store" reporting group were wholly owned from January 1, 2012 through March 31, 2013.

                                              Three months ended March 31,
                                            2013                2012         Change $      Change %
Same store properties (27
properties)
Rental income (1)                      $         5,740     $         5,731   $       9            0.2 %
Recovery income (1)                              2,075               1,820         255           14.0 %
Percentage rent (1)                                 14                  32         (18 )       (56.3) %
Less:
Property expenses                                2,099               1,924        (175 )        (9.1) %
Same store net operating income                  5,730               5,659          71            1.3 %
Non-same store properties (4
properties)
Rental income (1)                                2,170                 942       1,228          130.4 %
Recovery income (1)                                792                 315         477          151.4 %
Percentage rent (1)                                 20                   -          20          100.0 %
Less:
Property expenses                                1,016                 364        (652 )      (179.1) %
Non-same store net operating income              1,966                 893       1,073          120.2 %
Total net operating income(2)                    7,696               6,552       1,144           17.5 %

Other revenues and income (see
further detail below):                           8,971               1,394       7,577              *

Less other expenses (see further
detail below):                                   8,271               6,689      (1,582 )       (23.7) %
Net income                             $         8,396     $         1,257   $   7,139          567.9 %

Other data
FFO(3)                                 $         4,139     $         3,627   $     512           14.1 %
Core FFO(3)                            $         4,303     $         3,627   $     676           18.6 %
Number of properties at end of
period                                              31                  29         n/a            n/a
Percent leased at end of period(4)                96.5 %              95.9 %       n/a            0.6 %
Distributions per share                $          0.20     $          0.20   $       -              -

(1) Rental income from operating leases on the consolidated statements of operations 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, 2013 and 2012, rental income from operating leases was $11,074 and $8,929, 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 and Core FFO to net income, and a statement disclosing the reasons why our management believes that presentations of FFO and Core FFO provide useful information to investors and, to the extent material, any additional purposes for which our management uses FFO and Core FFO, see "Funds From Operations" below.

(4) Percent leased is calculated as (i) GLA under commenced leases as of March 31, 2013, divided by (ii) total GLA, expressed as a percentage.

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


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Same Store Properties - Property Revenues and Property Expenses

Rental income. Rental income remained comparable with an increase of $9,000 on a same store basis. Of this increase, $93,000 was driven by an increase in average rental rates partially offset by a decrease related to average occupancy of $84,000.

Recovery income. Recovery income increased by $255,000, or 14.0%, on a same store basis to $2.1 million for the three months ended March 31, 2013, as compared to $1.8 million for the same period in 2012. This increase was primarily due to increased property tax assessments.

Property expenses. Property expenses increased by $175,000, or 9.1%, on a same store basis to $2.1 million for the three months ended March 31, 2013, as compared to $1.9 million for the same period in 2012. This same store increase was primarily attributable to increased property tax assessments of approximately $250,000 partially offset by recovery of bad debts of $85,000.

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

Our rental income, tenant recovery income and property expenses increased for our non-same store properties due to the acquisition of the Preston Royal Village Shopping Center in December 2012. The results of operations for Preston Royal East and Preston Royal West have been recorded in our consolidated statements of operations from the date of acquisition.

Other Revenues and income:

Overall, other revenues and income increased by $7.6 million, to $9.0 million for the three months ended March 31, 2013, as compared to $1.4 million for the same period in 2012, primarily due to the following (in thousands, except for percentages):

                                             Three months ended
                                                 March 31,
                                             2013          2012       Change $     Change %
Amortization of straight-line rents and
above/below market rents(1)               $      263    $       89   $      174            *
Advisory services income - related
party:
Real estate fee income - related party           628           918         (290 )      (31.6 )%
Asset management fee income - related
party                                            155           155            -            *
Construction management fee income -
related party                                     60            58            2          3.4 %
Total advisory services income -
related party                                    843         1,131         (288 )      (25.5 )%
Interest and other income                        113           102           11         10.8 %
Interest and other income - related
party                                             56            72          (16 )      (22.2 )%
Gain on sale of interest in real estate
assets                                         7,696             -        7,696        100.0 %
Total other revenues and income           $    8,971    $    1,394   $    7,577            *

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

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

Amortization of straight-line rents and above/below market rents. Amortization of straight-line rents and above / below market rents increased $174,000 to $263,000 for the three months ended March 31, 2013 as compared to $89,000 for the same period in 2012. The increase was due to the acquisition of Preston Royal Village Shopping Center during December 2012.

Real estate fee income - related party. Real estate fee income - related party decreased by $290,000, or 31.6%, to $628,000 for the three months ended March 31, 2013, as compared to $918,000 for the same period in 2012. This decrease was due to disposition fees earned upon the sale of a land parcel during 2012 with no such similar sale activity during 2013.


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Gain on sale of interest in real estate assets. On March 26, 2013, we completed the entry into the MacArthur Park Joint Venture with Goldman Sachs whereby we contributed our MacArthur Park property to the MacArthur Park Joint Venture for a 30% interest and Goldman Sachs contributed cash for a 70% interest. See also Note 3 of the Notes to Consolidated Financial Statements. We recorded a gain of approximately $7.7 million representing the cash proceeds received in excess of 70% of the carrying value of the MacArthur Park net assets contributed by us.

Other Expenses:

     Overall, other expenses increased by $1.6 million, or 23.7%, to $8.3
million for the three months ended March 31, 2013, as compared to $6.7 million
for the same period in 2012, primarily due to the following (in thousands,
except for percentages):


                                             Three months ended
                                                 March 31,
                                             2013          2012       Change $     Change %
Straight-line bad debt expense
(recoveries)(1)                           $        4    $      (75 ) $      (79 )     (105.3 )%
General and administrative                     1,951         1,484         (467 )      (31.5 )%
Legal and professional                           252           222          (30 )      (13.5 )%
Real estate commissions                           52            86           34         39.5 %
Acquisition costs                                  -             -            -            *
Depreciation and amortization                  3,299         2,227       (1,072 )      (48.1 )%
Loss from Advised Funds                          148            36         (112 )          *
State income taxes                                72            75            3          4.0 %
Interest expense                               2,493         2,634          141          5.4 %
Total other expenses                      $    8,271    $    6,689   $   (1,582 )      (23.7 )%

(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 expense (recoveries). Straight-line bad debt recoveries decreased by $79,000, to an expense of $4,000 for the three months ended March 31, 2013, as compared to a recovery of $75,000 for the same period in 2012. This decrease was primarily attributable to recoveries that were recorded during 2012 as certain tenants with accrued rent balances showed signs of improvement in their business during the first quarter of 2012, and we determined that a reserve was no longer needed.

General and administrative. General and administrative expense increased by $467,000, or 31.5%, to $2.0 million for the three months ended March 31, 2013, as compared to $1.5 million for the same period in 2012. This increase was primarily attributable to (i) additional deferred compensation expense of approximately $123,000 associated with the 312,499 shares of restricted Class B common stock issued to management in connection with our 2012 Offering, (ii) . . .

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