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AMRE > SEC Filings for AMRE > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for AMREIT, INC.

Form 10-K for AMREIT, INC.


21-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 Core 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 29-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.


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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 generally seek to invest in properties within our Core Markets 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;

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 Recent Growth, Capitalization and Liquidity

Emerging from the severe recession that occurred over the last several years, we have taken the following steps to simplify our capital structure, grow our business and increase our liquidity:

In August 2012, we completed the sale of 4,153,226 shares of our Class B common stock at an offering price of $14.00 per share (our 2012 Offering). We simultaneously listed our Class B Common Stock on the NYSE under the symbol "AMRE." We received net proceeds of approximately $52.7 million, a portion of which was used to repay $45.3 million of mortgage debt.

A one-for-one conversion of our Class A common stock into shares of Class B common stock was approved by our stockholders at our 2013 annual meeting of stockholders held on April 18, 2013. The conversion was executed on April 25, 2013, and the converted shares were listed and became tradable on the NYSE at that time. In connection with such conversion, we simultaneously changed the designation of the Class B common stock to "Common Stock" such that we now have a single class of common stock outstanding. Our Common Stock is listed on the NYSE.

On June 21, 2013, we filed a universal shelf registration statement on Form S-3 with the SEC, which was declared effective on July 1, 2013 (our 2013 Shelf Registration Statement). On July 19, 2013, we completed the sale of 3,450,000 shares of our Common Stock, including 450,000 shares of our Common Stock sold pursuant to exercise of an over-allotment option by the underwriters at a price to the public of $18.25 per share (our 2013 Follow-on Offering). The proceeds were used to repay borrowings under our $75 Million Facility and to fund the acquisition of Woodlake Square, a Randall's anchored neighborhood shopping center in Houston, Texas with approximately 157,000 square feet of GLA.

Our 2013 Shelf Registration Statement allows us, from time to time, to offer and sell up to $350 million of our debt and/or equity securities over the three-year period following its effectiveness. As of the date of this report, we have approximately $287 million in our securities available for future issuance under our 2013 Shelf Registration Statement.


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Our Portfolio

As of December 31, 2013, our portfolio consisted of 32 wholly-owned properties with approximately 1.5 million square feet of GLA, which were 94.2% occupied and 94.8% leased with a weighted average remaining lease term of 6.5 years. Our neighborhood and community shopping centers accounted for 91.7% of our GLA and 92.4% of our ABR as of December 31, 2013. Our single-tenant retail properties comprised 8.3% of our GLA and 7.6% of our ABR.

Our Acquisition and Disposition Activity During 2013

In connection with executing our investment strategy, we completed the following acquisitions and dispositions during the year ended December 31, 2013:

On April 4, 2013, we acquired 1.26 acres of unimproved land located at the intersection of Loop 610 & Ella Boulevard in Houston, Texas for $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. We subsequently sold the property on November 12, 2013, for $7.5 million, which resulted in a gain of $2.3 million. This gain is reflected in the gain on sale of real estate acquired for resale, net of taxes, on our consolidated statements of operations for the year ended December 31, 2013.

On September 18, 2013, we acquired the Woodlake Square shopping center from VIF II/AmREIT Woodlake, LP, a joint venture controlled by an unaffiliated institutional partner, for a purchase price of $41.6 million. Woodlake Square is a grocery-anchored shopping center located in Houston, Texas. The shopping center contains approximately 157,000 square feet of GLA and had an occupancy of 88.6% at the time of purchase. Its major tenants include Randalls, Walgreens and Jos. A. Bank.

Prior to our acquisition, Woodlake Square was owned by a joint venture between AEW Capital, which owned a 90% interest, and MIG III and MIG IV (two of our Advised Funds), which owned a 3% and 6% interest in the joint venture, respectively. We owned a 1% interest and managed the property for the joint venture. The purchase price was negotiated on an arms-length basis between the Company and AEW Capital. We funded the purchase price with cash on hand and escrow deposits of approximately $18.1 million (primarily funded by from our 2013 Follow-on Offering), a first mortgage loan from PNC Bank in the amount of $23.0 million and assumption of approximately $449,000 in net liabilities and prorations (primarily accrued property taxes).

On August 12, 2013, we completed the sale of a non-core, single tenant asset in Illinois for $1.9 million. We recorded a gain on sale of $799,000 which is included in the gain on sale of real estate acquired for resale, net of taxes, on our consolidated statement of operations for the year ended December 31, 2013.

On July 17, 2013, we acquired the ownership of the underlying land at our Preston Royal East property for $15.4 million combining our ownership of the shopping center improvements we purchased during 2012 with the land of the Preston Royal East property. 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.

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 $27.7 million exclusive of closing costs. The property was 88.7% leased on the closing date, and the acquisition was funded through a draw on our $75 Million Facility, which we subsequently repaid using proceeds from our 2013 Follow-on Offering.

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 ("MacArthur Park Phase I"), excluding a Target store, for $25.5 million and placed mortgage financing on the combined property of $43.9 million. The MacArthur Park Joint Venture fully defeased our existing mortgage loan secured by the MacArthur Park property of $8.7 million (including a $2.1 million defeasance penalty). Upon closing the transaction, we received from the joint venture a cash distribution of $35.2 million, which was used to repay borrowings under our $75 Million Facility. We recorded a gain of $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. The gain is included in gain on sale of real estate acquired for investment on our consolidated statements of operations for the year ended December 31, 2013. We 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.


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Redevelopment Initiatives

We evaluate our properties on an ongoing basis in order to identify opportunities to create value through redevelopment. Our properties are generally single-story, retail properties located in markets characterized by high population density and affluence. We believe that higher density development is economically viable and desirable in the near term on several of our properties. We have identified two such properties in the Houston market - Uptown Park and The Courtyard on Post Oak, both of which are located in Uptown Houston, which we believe is one of the most active commercial districts in the country. Uptown Houston has a combination of office, residential and mixed-use development projects currently underway with a combined value of over $1 billion. Uptown Park is a low-density, single-story project located on 17 acres at the intersection of Post Oak and Loop 610. The Courtyard on Post Oak is comprised of 13,600 square feet of single-story retail space on 69,000 square feet of land at the intersection of San Felipe and Post Oak. If these properties are developed, we intend to develop them in partnership with a qualified developer that has a national reputation and in joint venture structures that allow us to maintain ownership of the land and enter into a long-term lease with a qualified, reputable co-developer of each of the sites.

Uptown Park - The first redevelopment site at Uptown Park is now occupied by one single-story building with GLA of 12,200 square feet housing three tenants. The building is situated on approximately 50,000 square feet of land. We believe that the site is best suited for an expanded retail footprint with feathered parking and a for-rent multi-family tower above. We anticipate executing a ground lease with an experienced luxury multi-family developer that will develop and own the multi-family improvements. We will seek to own the retail improvements in a condominium interest. We estimate that our total capital investment will be between $10 and $15 million in the retail portion of the project, and we expect to have an agreement with a developer in the next several months with construction commencing in late 2014. We have categorized this property as 'under redevelopment' and are taking the appropriate steps for lease terminations and/or relocations.

The Courtyard on Post Oak - The Courtyard on Post Oak is now occupied by two single-story buildings with combined GLA of approximately 13,600 square feet. One building consists of 9,600 square feet which we have fully leased down, and we have negotiated a lease termination option with the tenant in the remaining 4,000 square foot building which will allow us to take control of the premises in January 2015. We are currently discussing this redevelopment opportunity with nationally-known multi-family, office and hospitality developers. Similar to the Uptown Park opportunity, we anticipate executing a ground lease with a developer and will seek to own the retail improvements in a condominium interest. There is less certainty regarding the estimated timing and costs related to this opportunity than with Uptown Park above. We have also categorized The Courtyard on Post Oak as 'under redevelopment' as we have been leasing the property down in connection with the impending redevelopment.

Our Advisory Services

Advised Funds - As of December 31, 2013, our Advised Funds included four high net worth investment funds, one institutional joint venture with J.P. Morgan Investment Management, one institutional joint venture with Goldman Sachs and one joint venture with two of our high net worth investment funds, MIG III and MIG IV. In August 2012, AIGF, one of our former high net worth investment funds, sold its remaining real estate asset, and the fund was liquidated. We have sponsored, raised debt and equity capital for and managed 21 advised funds over the past 29 years.


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As the sole owner of the general partner of each of the remaining 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 December 31, 2013, our Advised Funds held all or a portion of the ownership interests in 16 properties with approximately 2.4 million square feet of GLA and an undepreciated book value of $509 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.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

Our results of operations and financial condition, as reflected in the accompanying consolidated financial statements and related notes, require us to make estimates and assumptions that are subject to management's evaluation and interpretation of business conditions, retailer performance, changing capital market conditions and other factors related to the ongoing viability of our tenants, which are inherently imprecise and may differ significantly from the actual results achieved. We believe the following are our more critical accounting policies due to the significance, subjectivity and judgment used in determining our estimates included in the preparation of our consolidated financial statements. See also Note 2 of the Notes to Consolidated Financial Statements for a discussion of the application of these and other accounting policies. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate based upon the circumstances.

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 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. Accrued rents are included in tenant receivables. 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. Accrued rents are included in tenant and accounts receivable, net on our consolidated balance sheets.

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 providing accounting related services, investor relations, facilitating the deployment of capital, and other services provided in conjunction with operating the fund, which are calculated as a percentage of equity under management. See also Note 11 of the Notes to Consolidated Financial Statements for a detail of our advisory services income - related party.

Real Estate Acquisitions

We allocate the purchase price of acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based upon their respective fair values as required by GAAP. The allocation and determination of respective fair values require significant judgment and inherently complex calculations. We typically obtain the assistance of third party advisors in making these determinations. See also Note 3 of the Notes to Consolidated Financial Statements.


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Identifiable intangibles include amounts allocated to acquired above and below market leases, the value of in-place leases and customer relationships, if any. We determine fair value based upon estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based upon a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods, considering market conditions, and 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 above and in-place lease value 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 lease amortization includes fixed-rate renewal periods where we believe the renewal is reasonably assured. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt.

We capitalize costs associated with pending acquisitions of raw land once the acquisition of the property is determined to be probable, but we expense acquisition costs for operating properties as incurred. During the years ended December 31, 2013, 2012 and 2011, we incurred acquisition costs of $299,000, $687,000 and $229,000, respectively.

Depreciation

Depreciation is computed using the straight-line method over an estimated useful life of 39 - 50 years for buildings, up to 20 years for site improvements and over the life of the respective leases for tenant improvements. Leasehold estate properties, where we own the building and improvements but not the related ground, are amortized over the life of the lease. The determination of useful lives requires judgment and includes significant estimates that management reassesses as circumstances warrant.

Impairment of Long Lived Assets

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 in 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. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors that require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant credit-worthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. We did not recognize any impairment charges on long lived assets during the years ended December 31, 2013, 2012 and 2011.

Investments in Advised Funds

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. We record our percentage interest in the earnings and losses of these entities in our statement of operations on a net basis as prescribed under GAAP. We review our investments in Advised Funds for impairment in a similar manner as performed on our properties. If we believe there is a decline in the fair value of the investment that is other-than-temporary, we will impair the investment and a loss will be recorded by the amount by which the carrying value of the investment exceeds its fair value.


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LEASING ACTIVITY AND TRANSACTIONS

     The following table summarizes our leasing activity for comparable leases
for the years ended December 31, 2013, 2012 and 2011.


                                  For the year ended December 31,
                                   2013           2012        2011
Expirations
Number of leases                         50            44          53
GLA                                 133,796       180,245     187,605
New Leases(1)
Number of leases                         10             5           7
GLA                                  19,419        12,997      14,231
Expiring ABR per square foot   $      25.67    $    27.22   $   28.36
New ABR per square foot        $      31.65    $    34.84   $   30.85
% Change (Cash)                        23.3 %        28.0 %       8.8 %
Renewals(2)
Number of leases                         36            30          38
GLA                                  94,572       115,501     143,324
Expiring ABR per square foot   $      26.27    $    23.91   $   24.92
New ABR per square foot        $      28.40    $    25.27   $   25.74
% Change (Cash)                         8.1 %         5.7 %       3.3 %
Combined
Number of leases                         46            35          45
GLA                                 113,991       128,498     157,555
Expiring ABR per square foot   $      26.17    $    24.24   $   25.23
New ABR per square foot        $      28.95    $    26.24   $   26.20
% Change (Cash)                        10.6 %         8.2 %       3.8 %

(1) Comparable leases are defined as 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

Trends, Acquisition and Disposition Activity

As we initiate redevelopment plans at certain properties, such as Uptown Park and The Courtyard on Post Oak, we may experience declines in overall occupancy and rental income arising from tenant lease-down activity, lease terminations and holding space vacant while the property is under redevelopment. Such declines may persist after the redevelopment has been completed.

We include the results of operations from our acquisitions from the date they are acquired forward. Our historical results of operations therefore do not include any operating activity prior to their purchase. See also Note 3 of the Notes to Consolidated Financial Statements for the pro-forma effects of our completed acquisitions on our historical results. During the years ended December 31, 2013, 2012 and 2011, we completed the following acquisitions and dispositions that may affect the comparability of our period over period results of operations as well as our future results of operations:

- 610 & Ella - acquired April 4, 2013; sold November 12, 2013
- Woodlake Square - acquired September 18, 2013
- Sunbelt Rentals - sold August 12, 2013
- Preston Royal Village -acquired December 12, 2012; land under northeast corner acquired July 17, 2013
- Fountain Oaks - acquired June 25, 2013
- MacArthur Park - contributed to MacArthur Park Joint Venture March 26, 2013
- Alpharetta Commons - acquired July 29, 2011


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- McAlisters Delis - sold July 6, 2011
- Brookwood Village - acquired May 10, 2011
- Market at Lake Houston - acquired February 25, 2011

Our 30% retained ownership in the MacArthur Park Joint Venture grants us the ability to exercise significant influence over the operation and management . . .

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