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AMRE > SEC Filings for AMRE > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for AMREIT, INC.

Form 10-Q for AMREIT, INC.


8-Aug-2013

Quarterly Report


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

References to "AmREIT," "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 current 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 Portfolio Activity

As of June 30, 2013, our portfolio consisted of 32 wholly-owned properties with approximately 1.4 million square feet of GLA, which were 95.1% occupied with a weighted average remaining lease term of 4.9 years. Our neighborhood and community shopping centers accounted for 89.9% of our GLA and 91.3% of our annualized base rent as of June 30, 2013. Our single-tenant retail properties comprised 10.1% of our GLA and 8.7% of our annualized base rent.

Fountain Oaks - On June 25, 2013, we completed the acquisition of Fountain Oaks, an approximately 161,000 square foot Kroger-anchored retail shopping center located in Atlanta, Georgia, for approximately $27.7 million exclusive of closing costs. The property was 88.7% leased on the closing date and was funded with borrowings under our $75 million Facility.

610 & Ella acquisition - 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 approximately $2.3 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.

MacArthur Park Joint Venture - On March 26, 2013, we entered 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 in the joint venture, and Goldman Sachs contributed cash for a 70% interest in the joint venture. 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 combined property of $43.9 million. The MacArthur Park Joint Venture fully repaid our existing mortgage loan secured by the MacArthur Park property of approximately $8.7 million (including a $2.1 million defeasance penalty). Upon closing the transaction, we received net cash proceeds of approximately $35.2 million which were used to repay borrowings under our $75 Million Facility. 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 and account for our ownership under the equity method since the date of the formation of the joint venture. Additionally, we are precluded 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. See also Note 4 to the Notes to Consolidated Financial Statements.

Preston Royal Shopping Center - On December 12, 2012, we purchased the Preston Royal Shopping Center, a retail shopping center containing approximately 230,000 square feet of GLA located in Dallas, Texas, for a purchase price of $66.2 million, exclusive of closing costs. At the time of the acquisition, the property was comprised of a fee simple interest on the northwest corner portion (Preston Royal West) and a ground leasehold interest on the northeast corner portion (Preston Royal East) with 27 years remaining on the underlying ground lease. Collectively, the two corners were 97.3% leased as of the closing date with major tenants including Tom Thumb, Barnes & Noble and Chico's. The purchase price was funded through a combination of cash on hand, draws on our $75 Million Facility and $23.4 million in mortgage financing on the property. The results of operations of Preston Royal Shopping Center are included in our financial statements from the date of acquisition. Our financial results for the three and six months ended June 30, 2013, include the results of the Preston Royal Shopping Center; however, our financial results for the three and six months ended June 30, 2012, do not contain any results from the Preston Royal Shopping Center as this period is prior to its acquisition. See Note 4 to the Notes to Consolidated Financial Statements for the pro forma results of our acquisitions.

On July 17, 2013, we acquired the underlying land related to the northeast corner of the shopping center in a separate transaction for $15.0 million thereby combining our ownership of both the shopping center buildings and improvements with the underlying land. The acquisition of the underlying land was funded through cash on hand and borrowings under our $75 Million Facility, which we subsequently repaid using proceeds from our 2013 Follow-on Offering.


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Pending Portfolio Acquisition and Disposition

Woodlake Square - On July 15, 2013, we entered into a purchase and sale agreement to purchase the Woodlake Square Shopping Center, a grocery-anchored shopping center located in Houston, Texas, from VIF II/AmREIT Woodlake, LP, a Texas limited partnership, for a purchase price of $41.6 million. The retail shopping center contains approximately 161,000 square feet of gross leasable area and had an occupancy of 88.0% as of June 30, 2013. Its major tenants include Randalls, Walgreens and Jos. A. Bank. We currently manage and hold a one percent ownership interest in the property through a joint venture with a third-party institutional partner and with MIG III and MIG IV, two of our Advised Funds. See Note 5 of the Notes to Consolidated Financial Statements for a discussion of our investments in our Advised Funds. We expect to fund the purchase price with cash on hand, amounts received from our 2013 Follow-on Offering and proceeds from mortgage financing to be secured by the property. The acquisition is expected to close in the third quarter of 2013. Pursuant to the purchase and sale agreement, we paid an initial earnest money deposit of approximately $2.1 million, which will be applied towards the purchase price on the date of closing. The purchase and sale agreement contains customary representations and warranties by us and the seller, and there remain other conditions precedent to our obligation to close the acquisition of the property, including the seller's delivery of title to the property. Accordingly, as of the date of this Quarterly Report, and until the closing of the acquisition, there can be no assurance that we will acquire the property.

Single tenant asset - On June 20, 2013, we entered into a purchase and sale agreement with a third party to sell our single tenant asset in Illinois for approximately $1.9 million. We expect to close on the sale of this asset during the third quarter of 2013. The agreement could be terminated by either party prior to expiration of a discovery period that expired on July 20, 2013. This asset did not meet the criteria to be reported as assets held for sale at of June 30, 2013 and is not presented as either assets held for sale or discontinued operations in these consolidated financial statements; however, we do expect the sale to qualify for discontinued operations presentation upon sale.

Our Advisory Services

Advised Funds - As of June 30, 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.

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 June 30, 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 $532.0 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.


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LEASING UPDATE

     The following table summarizes our leasing activity for comparable leases
for the three and six months ended June 30, 2013 and 2012.


                                     For the three months ended           For the six months ended
                                              June 30,                            June 30,
                                      2013                2012             2013             2012

Expirations
Number of leases                             19                  11               31               17
GLA                                      54,171              38,635           78,080           65,833
New Leases(1)
Number of leases                              2                   1                6                2
GLA                                       3,410               3,001           11,877            5,413
Expiring annualized base rent
per square foot                  $        27.25      $        34.00    $       24.67    $       29.10
New annualized base rent per
square foot                      $        28.47      $        42.50    $       31.99    $       34.26
% Change (Cash)                             4.5 %              25.0 %           29.7 %           17.7 %
Renewals(2)
Number of leases                             15                   8               24               13
GLA                                      48,090              34,076           67,097           58,520
Expiring annualized base rent
per square foot                  $        23.26      $        20.43    $       24.45    $       20.64
New annualized base rent per
square foot                      $        25.01      $        22.96    $       26.23    $       22.30
% Change (Cash)                             7.5 %              12.4 %            7.3 %            8.1 %
Combined
Number of leases                             17                   9               30               15
GLA                                      51,500              37,077           79,974           63,933
Expiring annualized base rent
per square foot                  $        23.52      $        21.53    $       24.48    $       21.35
New annualized base rent per
square foot                      $        25.24      $        24.54    $       27.09    $       23.31
% Change (Cash)                             7.3 %              14.0 %           10.7 %            9.2 %

(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.

RESULTS OF OPERATIONS

Recent Acquisitions and Disposition Activity

Recent and planned acquisition and disposition activity may affect our future results of operations. We expect to acquire Woodlake Square during the third quarter of 2013, and we have completed acquisitions of other properties and entered into a joint venture over the past several months that may affect our future results of operations. See also "EXECUTIVE OVERVIEW - Our Portfolio and Recent Portfolio Activity" for additional discussion. We include the results of operations from our acquisitions from the date they are acquired forward and our historical results of operations will not include any activity prior to their purchase. See also Note 4 to the Notes to Consolidated Financial Statements for the pro-forma effects of our completed acquisitions to our historical results. Our recently completed portfolio activity includes:

Preston Royal East underlying land - acquired July 17, 2013

Fountain Oaks - acquired June 26, 2013

Preston Royal Shopping Center - December 12, 2012


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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. Accordingly, our recent acquisitions of Fountain Oaks and Preston Royal Shopping Center and our contribution of our MacArthur Park property to our MacArthur Park Joint Venture are reported as non-same store in our comparison of results of operations below. 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.

Comparison of the three months ended June 30, 2013 to the three months ended June 30, 2012

Below are the results of operations for the three months ended June 30, 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 April 1, 2012 through June 30, 2013.

                                             Three months ended June 30,
                                              2013                2012           Change $     Change %
Same store properties (27 properties)
Rental income (1)                        $         5,735     $         5,766    $      (31 )       (0.5 )%
Recovery income (1)                                2,067               1,873           194         10.4 %
Percentage rent (1)                                   15                   -            15            *
Less:
Property expenses                                  1,955               1,938           (17 )       (0.9 )%
Same store net operating income                    5,862               5,701           161          2.8 %
Non-same store properties (5
properties)
Rental income (1)                                  1,319                 936           383         40.9 %
Recovery income (1)                                  570                 313           257         82.1 %
Less:
Property expenses                                    771                 329          (442 )     (134.3 )%
Non-same store net operating income                1,118                 920           198         21.5 %
Total net operating income(2)                      6,980               6,621           359          5.4 %

Other revenues (see further detail
below):                                            1,285               1,193            92          7.7 %

Less other expenses (see further
detail below):                                     7,284               6,368          (916 )      (14.4 )%
Net income                               $           981     $         1,446    $     (465 )      (32.2 )%

Other data
FFO(3)                                   $         3,997     $         3,708    $      289          7.8 %
Core FFO(3)                              $         4,123     $         3,708    $      415         11.2 %
Number of properties at end of period                 32                  29           n/a          n/a
Percent leased at end of period(4)                  95.1 %              95.8 %         n/a         (0.7 )%
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 June 30, 2013 and 2012, rental income from operating leases was $9,912 and $8,976, 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.


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(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 June 30, 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.

Same Store Properties - Property Revenues and Property Expenses

Rental income. Rental income decreased by $31,000, or 0.5%, on a same store basis to $5.7 million for the three months ended June 30, 2013, as compared to $5.8 million for the same period in 2012. An increase in rental rates that led to an $81,000 increase in rental income was offset by a decrease in occupancy that led to a $112,000 decrease in rental income.

Recovery income. Recovery income increased by $194,000, or 10.4%, on a same store basis to $2.1 million for the three months ended June 30, 2013, as compared to $1.9 million for the same period in 2012. This increase was primarily due to increased property tax assessments that were passed along to tenants.

Property expenses. Property expenses increased by $17,000, or 0.9%, on a same store basis to $2.0 million for the three months ended June 30, 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 $235,000 partially offset by a $152,000 reduction in bad debt expense and a $69,000 reduction in security expense.

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 Shopping Center in December 2012 partially offset by the loss of consolidated revenues and expenses for the three months ended June 30, 2013 after our sale of our MacArthur Park property to our MacArthur Park Joint Venture on March 26, 2013. 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 forward and our proportional share of revenue and expenses from our MacArthur Park property are no longer consolidated, but reported under the equity method and included in income (loss) from Advised Funds.

Other Revenues and income

Overall, other revenues and income increased by $92,000, or 7.7%, to $1.3 million for the three months ended June 30, 2013, as compared to $1.2 million for the same period in 2012, primarily due to the following (in thousands, except for percentages):

                                         Three months ended June 30,
                                          2013                2012          Change $      Change %
Amortization of straight-line
rents and above/below market
rents(1)                             $           206     $            88   $       118         134.1 %
Advisory services income - related
party:
Real estate fee income - related
party                                            640                 674           (34 )        (5.0 )%
Asset management fee income -
related party                                    156                 156             -             -
Construction management fee income
- related party                                   76                  55            21          38.2 %
Total advisory services income -
related party                                    872                 885           (13 )        (1.5 )%
Interest and other income                        154                 135            19          14.1 %
Interest and other income -
related party                                     53                  85           (32 )       (37.6 )%
Total other revenues                 $         1,285     $         1,193   $        92           7.7 %

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


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Amortization of straight-line rents and above/below market rents. Amortization of straight-line rents and above/below market rents increased by $118,000, or 134.1%, to $206,000 for the three months ended June 30, 2013 as compared to $88,000 for the same period in 2012. The increase was due to the acquisition of the Preston Royal Shopping Center in December 2012.

Other Expenses

     Overall, other expenses increased by $916,000, or 14.4%, to $7.3 million
for the three months ended June 30, 2013, as compared to $6.4 million for the
same period in 2012, primarily due to the following (in thousands, except for
percentages):

. . .
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