SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 September 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
Commission File Number 1-13239
AEGIS REALTY, INC.
------------------
(Exact name of Registrant as specified in its charter)
Maryland 13-3916825
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
----------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
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. Yes X No
---- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
--------------- ---------------
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------------- ---------------
(Unaudited)
ASSETS
Real estate, net $173,862,830 $175,156,729
Investment in partnerships 5,554,651 5,746,841
Mortgage loan receivable 0 3,170,322
Loans receivable from affiliate 2,294,816 2,312,543
Cash and cash equivalents 5,051,056 1,474,473
Accounts receivable-tenants, net of allowance for
doubtful accounts of $432,000 and $383,000,
respectively 2,612,573 3,215,665
Deferred costs, net 4,059,707 5,679,884
Other assets 1,402,142 937,486
------------- -------------
TOTAL ASSETS $194,837,775 $197,693,943
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 66,228,994 $ 64,972,605
Accounts payable and other liabilities 4,879,974 4,476,477
Due to Advisor and affiliates 371,957 0
Distributions payable 2,116,470 2,115,590
------------- -------------
TOTAL LIABILITIES 73,597,395 71,564,672
------------- -------------
Minority interest of unitholders in the
Operating Partnership 6,514,901 6,941,884
------------- -------------
Commitments and Contingencies
SHAREHOLDERS' EQUITY:
Common stock; $.01 par value;
50,000,000 shares authorized; 8,052,847
and 8,049,179 shares issued and outstanding
in 2001 and 2000, respectively 80,528 80,491
Additional paid in capital 125,379,016 125,339,053
Distributions in excess of net income (10,734,065) (6,232,157)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 114,725,479 119,187,387
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 194,837,775 $ 197,693,943
============= =============
See accompanying notes to consolidated financial statements
2
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
---------------------------- ----------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000
---------------------------- ----------------------------
Revenues:
Rental income $ 4,962,540 $ 4,883,709 $ 14,950,445 $ 15,047,323
Tenant reimbursements 1,142,841 1,132,515 3,565,625 3,391,387
Income from equity investments 46,362 82,206 205,381 282,125
Interest income 100,625 139,391 690,707 424,381
Other 28,236 29,222 113,075 276,260
------------ ------------ ------------ ------------
Total revenues 6,280,604 6,267,043 19,525,233 19,421,476
------------ ------------ ------------ ------------
Expenses:
Repairs and maintenance 510,041 511,980 1,328,171 1,471,697
Operating 661,504 646,813 2,026,745 1,981,274
Real estate taxes 609,656 581,376 1,855,379 1,783,625
Interest 1,072,028 1,256,735 3,500,529 3,645,825
General and administrative 458,892 483,087 1,425,089 2,452,995
Depreciation and amortization 1,511,975 1,350,911 4,481,590 3,824,736
Terminated transaction costs 463,961 0 2,790,312 0
Other 200,737 231,520 697,716 727,562
------------ ------------ ------------ ------------
Total expenses 5,488,794 5,062,422 18,105,531 14,887,714
------------ ------------ ------------ ------------
Income before gain on sale of
real estate 791,810 1,204,621 1,419,702 4,533,762
Gain on sale of real estate 0 108,332 0 108,332
------------ ------------ ------------ ------------
Income before minority interest 791,810 1,312,953 1,419,702 4,642,094
Minority interest in income of
the Operating Partnership (70,143) (114,149) (124,379) (406,467)
------------ ------------ ------------ ------------
Net income $ 721,667 $ 1,198,804 $ 1,295,323 $ 4,235,627
============ ============ ============ ============
Net income per share:
Basic $ .09 $ .15 $ .16 $ .53
============ ============ ============ ============
Diluted $ .09 $ .15 $ .16 $ .53
============ ============ ============ ============
Weighted average shares
outstanding:
Basic 8,051,716 8,049,179 8,051,119 8,048,798
============ ============ ============ ============
Diluted 8,057,855 8,049,179 8,057,259 8,048,798
============ ============ ============ ============
See accompanying notes to consolidated finacial statements
3
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
COMMON STOCK ADDITIONAL DISTRIBUTIONS
------------------------ PAID-IN IN EXCESS OF
SHARES AMOUNT CAPITAL NET INCOME TOTAL
----------- ----------- ------------- --------------- ------------
Balance at
January 1, 2001 8,049,179 $80,491 $125,339,053 $ (6,232,157) $119,187,387
Net income 1,295,323 1,295,323
Issuance of shares of
common stock 3,668 37 39,963 40,000
Distributions (5,797,231) (5,797,231)
---------- ---------- ------------- ------------- -------------
Balance at
September 30, 2001 8,052,847 $80,528 $125,379,016 $(10,734,065) $114,725,479
========== ========== ============= ============= =============
See accompanying notes to consolidated financial statements
4
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,295,323 $ 4,235,627
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of real estate 0 (108,332)
Depreciation and amortization 4,466,642 3,867,519
Minority interest in income of
the Operating Partnership 124,379 406,467
Distributions from equity investments
in excess of income 160,240 98,799
Terminated transaction costs 2,467,087 0
Changes in operating assets and liabilities:
Accounts receivable-tenants 553,766 27,273
Allowance for doubtful accounts 49,326 154,343
Other assets (464,656) 434,230
Due to Advisor and affiliates 411,957 50,573
Accounts payable and other liabilities 403,497 1,179,228
Leasing commissions and costs (625,912) (828,804)
----------- -----------
Net cash provided by operating activities 8,841,649 9,516,923
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate (2,300,531) (4,789,200)
Dispositions (acquisitions) of real estate 0 (557,823)
Net proceeds for sale of real estate 0 154,409
Increase in deferred acquisition expenses (1,079,499) (542,774)
Increase in loans made to affiliate 0 (255,937)
Repayments of loans receivable from affiliate 17,727 15,858
Principal payments received on mortgage loans 3,217,220 26,281
----------- -----------
Net cash used in investing activities (145,083) (5,949,186)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,500,000 8,000,000
Periodic repayments of notes payable (243,611) (301,117)
Distributions paid to shareholders (5,796,351) (5,794,852)
Increase in deferred loan costs (28,659) (87,273)
Distributions paid to minority interest (551,362) (631,280)
Repayments of notes payable 0 (4,766,303)
----------- -----------
Net cash used in financing activities (5,119,983) (3,580,825)
----------- -----------
(continued)
See accompanying notes to consolidated financial statements
5
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
Net increase (decrease) in cash and cash equivalents 3,576,583 (13,088)
Cash and cash equivalents at the beginning of
the period 1,474,473 2,226,295
----------- -----------
Cash and cash equivalents at the end of the period $ 5,051,056 $ 2,213,207
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 3,314,119 $ 3,390,802
=========== ===========
See accompanying notes to consolidated financial statements
6
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
NOTE 1 - GENERAL
Aegis Realty, Inc. (the "Company") is a Maryland corporation that has qualified
as a real estate investment trust ("REIT") under the Internal Revenue Code of
1986 as amended (the "Code"). The Company was formed to acquire, own, operate
and renovate primarily supermarket-anchored neighborhood and community shopping
centers. As of September 30, 2001, the Company owned a portfolio of 28 retail
properties (the "Retail Properties") containing a total of approximately 3.0
million gross leaseable square feet and held partnership interests in two
suburban garden apartment properties (the "Multifamily Properties").
The Company is governed by a board of directors comprised of two independent
directors and three directors who are affiliated with Related Capital Company
("Related"), a nationwide, fully integrated real estate services firm. The
Company has engaged Related Aegis LP (the "Advisor"), a Delaware limited
partnership and an affiliate of Related, to manage its day-to-day affairs.
The Company owns all of its assets directly or indirectly through Aegis Realty
Operating Partnership, LP, a Delaware limited partnership (the "Operating
Partnership" or "OP"), of which the Company is the sole general partner and
holder of 91.32% of the units of partnership interest (the "OP Units") at
September 30, 2001. Also, at September 30, 2001, 5.54% of the OP Units are held
by the sellers of three of the Retail Properties acquired by the Company and
3.14% by affiliates of Related.
The consolidated financial statements include the accounts of the Company and
its subsidiary partnerships. All intercompany accounts and transactions with the
subsidiary partnerships have been eliminated in consolidation. Unless otherwise
indicated, the "Company", as hereinafter used, refers to Aegis Realty, Inc. and
its consolidated subsidiary partnerships.
The accompanying financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of September 30, 2001 and the results
of its operations for the three and nine months ended September 30, 2001 and
2000 and its cash flows for the nine months ended September 30, 2001 and 2000.
However, the operating results for the interim periods may not be indicative of
the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or
omitted. It is suggested that these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2000.
The consolidated financial statements of the Company are prepared on the accrual
basis of accounting in conformity with GAAP, which requires the Advisor to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported
7
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates and assumptions.
The Company has no items of other comprehensive income; therefore, the Company's
net income and comprehensive income are the same for all periods presented.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It was implemented for the Company beginning on January 1,
2001. Because the Company does not utilize derivatives, implementation of this
statement had no effect on the Company's financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements establish new standards for
accounting and reporting for business combinations and for goodwill and
intangible assets resulting from business combinations. SFAS 141 applies to all
business combinations initiated after June 30, 2001; the Company is required to
implement SFAS 142 on January 1, 2002. Management believes that implementation
of these statements will not have a material impact on the Company's financial
statements.
In August of 2001, the FASB issued SFAS No, 143, "Accounting for Asset
Retirement Obligations" (effective January 1, 2003) and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets" (effective
January 1, 2002). SFAS No. 143 requires the recording of the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. SFAS No. 144 supercedes existing accounting literature dealing with
impairment and disposal of long-lived assets, including discontinued operations.
It addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of, and expands current
reporting for discontinued operations to include disposals of a "component" of
an entity that has been disposed of or is classified as held for sale. The
Company is in the process of evaluating the financial statement impact of the
adoption these two standards.
Certain amounts in the 2000 financial statements have been reclassified to
conform to the 2001 presentation.
On December 21, 2000, the Company entered into a definitive acquisition
agreement to acquire a portfolio of 19 shopping centers and several retail
development opportunities (the "Acquisition Transaction") from Dallas,
Texas-based P'OB. Montgomery & Company (and its investment partners) ("POB").
Under the terms of the acquisition agreement, Aegis agreed to pay POB a total of
$203.5 million, comprised of cash, Aegis common shares and assumption of debt
encumbering the acquired shopping centers. On August 7, 2001, the Company
announced that it had terminated the Acquisition Transaction, by mutual consent
with POB, for a fee of $350,000. This fee plus prior deferred expenses relating
to the Acquisition Transaction of approximately $2,170,000 have been included in
the consolidated statement of operations as terminated transaction costs.
8
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
In light of the recent decision to terminate the Acquisition Transaction, the
Board of Directors has instructed management to focus on pursuing the sale of
the Company or its assets. In this regard, management has retained Robertson
Stephens to assist in developing an appropriate marketing strategy. If
acceptable values cannot be achieved, the Board of Directors will then pursue
alternative transactions with the goal of maximizing shareholder value. The
Company has discontinued its pursuit of additional investments and, accordingly,
wrote off approximately $270,000 of deferred acquisition costs included in the
consolidated statement of operations as terminated transaction costs.
NOTE 2 - REAL ESTATE
The components of real estate are as follows:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
Land $ 42,041,873 $ 40,267,037
Buildings and improvements 162,537,280 162,348,285
------------- -------------
204,579,153 202,615,322
Less: Accumulated depreciation (30,716,323) (27,458,593)
------------- -------------
$ 173,862,830 $ 175,156,729
============= =============
Amounts estimated to be recoverable from future operations and ultimate sales
are greater than the carrying value of each property owned at September 30,
2001. However, the carrying value of certain properties may be in excess of
their fair value as of such date.
NOTE 3 - DEFERRED COSTS
The components of deferred costs are as follows:
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
Deferred loan costs $ 3,466,331 $ 3,437,672
Deferred leasing commissions and costs 3,150,379 2,667,216
Deferred acquisition expenses 0 1,387,588
----------- -----------
6,616,710 7,492,476
Less: Accumulated amortization (2,557,003) (1,812,592)
----------- -----------
$ 4,059,707 $ 5,679,884
=========== ===========
The decline in deferred acquisition expenses is related to the decision to
terminate the Acquisition Transaction (see Note 1).
9
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
NOTE 4 - NOTES PAYABLE
As of September 30, 2001 and December 31, 2000, the Company had notes payable
with outstanding balances totaling $66,228,994 and $64,972,605, respectively.
Further information regarding the notes is as follows:
COLLATERAL/
DATE OF MONTHLY CARRYING
NOTE/ PAYMENT OUTSTANDING OUTSTANDING VALUE AT
MATURITY INTEREST OF PRINCIPAL BALANCE BALANCE SEPTEMBER 30,
NOTEHOLDER DATE RATE AND INTEREST AT 9/30/01 AT 12/31/00 2001
---------- --------- --------- ------------ ------------ ------------ -------------
Credit Facility (a) 12/30/97 (b) Interest $43,193,000 $41,693,000 (c) (d)
12/29/03 only
Heller 6/24/97 (e) 8.50% $19,992 2,503,650 2,523,267 Barclay Place/
Financial, Inc. 7/1/17 $4,089,485
Nomura 10/28/97 (f) 7.54% $33,130 3,717,515 3,800,498 Village At
Asset Capital 11/11/22 Waterford/
Corporation $6,184,778
Chase Bank 12/16/96 (g) 8.875% $51,717 6,242,816 6,290,934 Oxford Mall/
1/1/07 $ 8,616,806
Merrill Lynch 9/18/97 (h) 7.73% $79,509 10,572,013 10,664,906 Southgate/
Credit 10/1/07 ------------ ------------ $15,517,415
Corporation
$66,228,994 $64,972,605
============ ===========
(a) The Credit Facility is shared among Fleet Bank (28.57%), KeyBank National
Association (28.57%), Citizens Bank of Rhode Island (28.57%) and Sovereign Bank
(14.29%).
In connection with the Credit Facility, the Company must comply with various
financial covenants including maximum loan to value ratios, interest and fixed
charge coverage ratios, and net worth requirements. In connection with our
covenant compliance certification required subsequent to the filing of our
second quarter 10-Q, the Company was in compliance with all but one of these
covenants. The Company was not in compliance with a covenant requiring that
aggregate distributions by the Company during any consecutive four quarters not
exceed ninety percent of the Company's funds from operations ("FFO") for such
period. Unlike the covenant provisions based on adjusted net income, under the
covenant in question, the Company's FFO is not adjusted for extraordinary or
nonrecurring items. In both the second and third quarters of 2001, FFO was
significantly reduced by nonrecurring expenses related to the termination of the
POB transaction (Note 1). The Company received a waiver on this covenant from
each of the syndicate banks of the Credit Facility for the second quarter 2001.
The Company will not be in compliance with this covenant for the third quarter
of 2001 and is currently seeking a continued waiver from the syndicate banks.
(b) The interest rate under the Credit Facility can float 1/2% under Fleet
Bank's base rate or can be fixed in 30, 60, 90 and 180 day periods at various
spreads over the indicated Euro-contract, ranging from 1.75% to 2.125% depending
on the Company's ratio of total debt to total assets. The Company has currently
elected the 30 day rate which was 2.125% at September 30, 2001.
(c) Outstanding balance of an $80 million senior revolving credit facility
("Credit Facility").
(d) The Credit Facility was collateralized at September 30, 2001 by nineteen
Retail Properties and one investment in a partnership with carrying values of
$109,037,326 and $4,932,715, respectively. In addition, the obligation under the
Credit Facility is guaranteed by the Company, Summit Insured I, Summit Insured
II (two of the Company's subsidiaries) and TCR-Pinehurst Limited Partnership
(one of the two partnerships in which the Company has invested).
(e) Note was assumed upon purchase by the Company on June 30, 1998 of the
property collateralizing the note.
(f) Note was assumed upon purchase by the Company on April 22, 1998 of the
property collateralizing the note.
10
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
(g) Note was assumed upon purchase by the Company on November 24, 1998 of the
property collateralizing the note.
(h) Note was assumed upon purchase by the Company on December 9, 1998 of the
property collateralizing the note .
NOTE 5 - COMMON STOCK AND STOCK OPTIONS
Each independent director is entitled to receive annual compensation for
serving as a director in the aggregate amount of $17,500 payable in cash
(maximum of $7,500 per year) and/or shares of Common Stock valued based on
the fair market value at the date of issuance. In addition each independent
director received $7,500 in cash and stock valued at $10,000 as compensation
for serving on the special committee of the Board of Directors in connection
with the Acquisition Transaction. As of September 30, 2001 and December 31,
2000, 8,420 and 4,752 shares, respectively, having an aggregate value at the
date of issuance of $85,000 and $45,000, respectively, have been issued to
the Company's two independent directors as compensation for their services.
For the three and nine months ended September 30, 2001, the dilutive effect,
calculated using the treasury stock method, of the 241,522 stock options
granted August 12, 2001, was 6,140 shares.
NOTE 6 - RELATED PARTY TRANSACTIONS
Pursuant to the Advisory Agreement, the Advisor receives (i) acquisition fees
equal to 3.75% of the acquisition price of properties acquired; (ii) mortgage
selection fees based on the principal amount of mortgage loans funded; (iii)
asset management fees equal to .375% of the total invested assets of the
Company; (iv) a 1.5% liquidation fee based on the gross sales price of the
assets sold by the Company in connection with a liquidation of the Company's
assets; and (v) reimbursement of certain administrative costs incurred by the
Advisor on behalf of the Company.
The Company's Retail Properties are managed by RCC Property Advisors (the
"Property Manager"), an affiliate of the Advisor, for a fee equal to 4.5% of the
gross rental receipts from the Retail Properties, which is competitive with such
fees paid in the areas in which the properties are located. The Property Manager
also receives standard leasing commissions for space leased to new tenants and
for lease renewals and is reimbursed for certain expenses.
11
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
The costs incurred to related parties for the three and nine months ended
September 30, 2001 and 2000 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
----------------------- -----------------------
Expense reimbursements $ 73,449 $ 54,048 $ 215,087 $ 194,614
Property management fees 267,639 258,163 864,937 819,706
Leasing commissions and costs 292,143 275,595 483,835 604,446
Asset management fees 194,185 195,909 578,172 583,469
Acquisition fees 0 196 0 19,699
---------- ---------- ---------- ----------
$ 827,416 $ 783,911 $2,142,031 $2,221,934
---------- ---------- ---------- ----------
NOTE 7 - EARNINGS PER SHARE
Basic and diluted net income per share in the amount of $.09 and $.15 and $.16
and $.53 for the three and nine months ended September 30, 2001 and 2000,
respectively, equals net income for the period of $721,667 and $1,198,804 and
$1,295,323 and $4,235,627, respectively, divided by the weighted average number
of shares outstanding for the periods (8,051,716 and 8,049,179 and 8,051,119 and
8,048,798, respectively for the basic earnings per share and 8,057,855 and
8,049,179, and 8,057,259 and 8,048,798 for the diluted earnings per share).
There is no difference between basic and diluted net income per share with
respect to the conversion of the minority interests' OP Units outstanding at
September 30, 2001 and 2000 into an additional 765,780 shares of Common Stock
because the earnings of an OP Unit are equivalent to the earnings of a share of
Common Stock.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The three previously disclosed purported class actions against, among others,
the Advisor, Property Manager and/or the Company have been dismissed without
prejudice. Each of these three actions challenged Aegis' proposed acquisition of
a property portfolio and development business owned by a third party, which
transaction also involved the termination by Aegis of its external advisory
agreements and the purchase by Aegis of various assets owned by the Advisor and
Property Manager. Each suit alleged that the defendants breached their fiduciary
duties to the Aegis stockholders by, among other things, committing Aegis to pay
unwarranted fees and other consideration to affiliates of the Advisor. On August
27, 2001, the Company announced that it had terminated by mutual consent with
the third party the transaction that is at issue in each suit. As of October 29,
2001, each of the three lawsuits had been dismissed without prejudice. No money
was paid by any of the defendants to any plaintiff or any plaintiff's attorney
in connection with their dismissals.
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires long-term liquidity in order to invest in and maintain its
portfolio of retail properties and other investments. To date, this long-term
liquidity has come from proceeds from the Credit Facility, notes payable assumed
upon the purchase of certain properties and the issuance of shares of the
Company's Common Stock or OP Units in exchange for real estate. Although the
Credit Facility may be increased, the Company's charter dictates leverage of no
more than 50% of the Company's total market value. On a short-term basis, the
Company requires funds to pay its operating expenses and those of the retail
properties, to make improvements to the retail properties, pay its debt service
and make distributions to its shareholders. The primary sources of the Company's
short-term liquidity needs are the cash flow received from the retail properties
and interest income.
In light of the recent decision to terminate the Acquisition Transaction, the
Board of Directors has instructed management to focus on pursuing the sale of
the Company or its assets. In this regard, management has retained Robertson
Stephens to assist in developing an appropriate marketing strategy. If
acceptable values cannot be achieved, the Board of Directors will then pursue
alternative transactions with the goal of maximizing shareholder value.
In order to maintain its REIT status, the Company is required to distribute at
least 90% of its taxable income. Funds generated from operations are expected to
be sufficient to allow the Company to meet this requirement.
The Advisor believes that the stability of the Company's operations and its
ability to maintain liquidity are enhanced by the following factors:
(i) Geographic diversity of its portfolio of real estate and its mortgage note.
(ii) 47% of total revenues for the nine months ended September 30, 2001 were
earned from shopping center anchor tenants which are national and/or credit
tenants.
(iii) No single asset accounts for more than 8% of total revenues for the nine
months ended September 30, 2001.
(iv) Leases that provide for recovery of actual common area maintenance charges
and real estate taxes, thereby minimizing any effects from inflation.
(v) Leases that provide for increases in rents based on a percentage of
tenants' sales.
(vi) Maintaining and physically updating its portfolio of real estate such that
the properties remain competitive in their market areas in terms of occupancy
and rents.
During the nine months ended September 30, 2001, cash and cash equivalents of
the Company and its consolidated subsidiaries increased approximately
$3,577,000. This increase was primarily due to cash provided by operating
activities, $8,842,000, proceeds from the repayment of mortgage loans,
$3,217,000 and improvements to real estate ($2,301,000), which exceed net
proceeds from notes payable, $1,256,000, distributions paid to shareholders,
($5,796,000) principal payments on notes payable ($244,000), and distributions
paid to minority interest ($551,000). Included in the adjustments to reconcile
the net income to cash provided by operating activities
13
is depreciation and amortization in the amount of $4,467,000 and terminated
transaction costs of approximately $1,388,000.
The Company anticipates that cash generated from operations will provide for all
major repairs, replacements and tenant improvements on its real estate and will
provide sufficient liquidity to fund the Company's operating expenditures, debt
service and distributions.
The Company has the following problem assets which may adversely affect future
operations and liquidity:
(i) Safeway, the anchor tenant of Cactus Village Shopping Center, closed its
facility in December 1991 due to poor sales. The tenant continues to fully abide
by all significant aspects of its lease, which will expire in September 2006.
The Company is actively pursuing potential replacement tenants and, at the
appropriate time, hopes to be able to negotiate a termination agreement with
Safeway.
(ii) In July 1994, A&P closed its store in the Mountain Park Plaza Shopping
Center due to reduced sales and increased competition. The Company received
rental payments from the vacated tenant pursuant to the terms of the lease. In
December 2000, A&P bought out its lease for $300,000 and the Company entered
into a new lease with Publix, who is expected to take physical occupancy in the
third quarter of 2002. Physical construction has begun with the demolition of
approximately 56% of the center to make room for the new stand-alone Publix.
(iii) Three of White Oaks Plaza's anchors have vacated their spaces. Two
anchors, Wal-Mart and Winn-Dixie, are still paying rent and are current in their
rent payments.
(iv) Office Max, one of the anchor tenants of Town West which was under
sublease, vacated its space in February 2000. The original lessee is still
obligated to pay rent on the space through January 2004. Beginning April 2001,
the original lessee has ceased paying rent. As of September 30, 2001, the total
unpaid balance was $62,898.
(v) Food Lion, located in Barclay Place, closed its store in December 2000. It
is still obligated to pay rent through the expiration of its lease in December
2009, and is current with all rent payments.
In connection with the Credit Facility (Note 4), the Company must comply with
various financial covenants including maximum loan to value ratios, interest and
fixed charge coverage ratios, and net worth requirements. In connection with our
covenant compliance certification required subsequent to the filing of our
second quarter 10-Q, the Company was in compliance with all but one of these
covenants. The Company was not in compliance with a covenant requiring that
aggregate distributions by the Company during any consecutive four quarters not
exceed ninety percent of the Company's funds from operations ("FFO") for such
period. Unlike the covenant provisions based on adjusted net income, under the
covenant in question, the Company's FFO is not adjusted for extraordinary or
nonrecurring items. In both the second and third quarters of 2001, FFO was
significantly reduced by nonrecurring expenses related to the termination of the
POB transaction (Note 1). The Company received a waiver on this covenant from
each of the syndicate banks of the Credit Facility for the second quarter 2001.
The Company will not be in compliance with this covenant for the third quarter
of 2001 and is currently seeking a continued waiver from the syndicate banks.
In November 2001, a distribution of $1,932,683 ($.24 per share), which was
declared in September 2001, was paid to the stockholders from cash flow from
operations for the quarter ended September 30, 2001.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
RESULTS OF OPERATIONS
Rental income decreased approximately $97,000 for the nine months ended
September 30, 2001 as compared to 2000 primarily due to the decrease of
percentage rent for White Oak Plaza, Pablo Plaza, Westbird and Oxford Mall and
minimum unrealized straight line rent for Highland Fair, Westbird and Pablo
Plaza. This was offset by the increase in concession free rent for Highland
Fair, Westbird, and Pablo Plaza and minimum rent of Pablo Plaza, Governors
Square and Westbird. There was no significant difference for the three months
ended September 30, 2001 versus 2000.
14
Tenant reimbursements increased approximately $10,000 and $174,000 for the three
and nine months ended September 30, 2001 as compared to 2000 due to the increase
of the reimbursements of common charges at Pablo Plaza, Westbird, Applewood
Centre and Kokomo Plaza and the reimbursements of real estate taxes for Pablo
Plaza, Applewood Centre and Southgate.
Other income decreased approximately $163,000 for the nine months ended
September 30, 2001 as compared to 2000 primarily due to the lease settlements of
Marion City Square and White Oak Plaza paid in 2000. There was no significant
difference for the three months ended September 30, 2001 versus 2000.
Repairs and maintenance decreased approximately $144,000 for the nine months
ended September 30, 2001 as compared to 2000 primarily due to a decrease in
painting costs of Birdneck, Winery Square and Rolling Hills and snow removal
costs at White Oak Plaza, Marion City Square, Marketplace and Kokomo Plaza.
There was no significant difference for the three months ended September 30,
2001 versus 2000.
Interest expense decreased approximately $185,000 and $145,000 for the three and
nine months ended September 30, 2001 as compared to 2000, primarily due to the
pay off of the New York Life note payable.
Depreciation and amortization increased approximately $161,000 and $657,000 for
the three and nine months ended September 30, 2001, respectively, as compared to
2000 primarily due to the increase in depreciation expense for Westbird,
Governor's Square and Pablo Plaza and the increase in amortization of the Credit
Facility associated with deferred financing fees.
Terminated transaction costs are approximately $464,000 and $2,790,000 for the
three and nine months ended September 30, 2001, primarily due to the write-off
of deferred expenses related to the termination of the Acquisition Transaction
with POB.
FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
Funds from operations ("FFO"), represents income (or loss) before minority
interest (computed in accordance with generally accepted accounting principles)
("GAAP"), excluding gains (or losses) from debt restructuring or repayments and
sales of property, plus depreciation and amortization and including funds from
operations for unconsolidated joint ventures calculated on the same basis.
Income computed in accordance with GAAP includes straight-lining of property
rentals for rent escalations in the amounts of $23,788 and ($5,361) and $34,867
and $182,055 for the three and nine months ended September 30, 2001 and 2000,
respectively. FFO is calculated in accordance with the National Association of
Real Estate Investment Trusts ("NAREIT") definition. FFO does not represent cash
generated from operating activities in accordance with GAAP which is disclosed
in the Consolidated Statements of Cash Flows included in the financial
statements for the applicable periods, and is not necessarily indicative of cash
available to fund cash needs. There are no material legal or functional
restrictions on the use of FFO. FFO should not be considered as an alternative
to net income as an indicator of the Company's operating performance or as an
alternative to cash flows as a measure of liquidity. Management considers FFO a
supplemental measure of operating performance and along with cash flow from
operating activities, financing activities and investing activities, it provides
investors with an indication of the ability of the Company to incur and service
debt, to make capital expenditures and to fund other cash needs.
Funds available for distribution ("FAD") represents FFO plus recurring principal
receipts from mortgage loans less reserves for lease commissions, recurring
capital expenditures (excluding property acquisitions) and debt principal
amortization. FAD should not be considered an alter-
15
native to net income as a measure of the Company's financial performance or to
cash flow from operating activities (computed in accordance with GAAP) as a
measure of the Company's liquidity, nor is it necessarily indicative of
sufficient cash flow to fund all of the Company's needs.
FFO, as calculated in accordance with the NAREIT definition, and FAD for the
three and nine months ended September 30, 2001 and 2000 are summarized in the
following table:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Income (loss) before minority
interest $ 791,810 $ 1,312,953 $ 1,419,702 $ 4,642,094
Gain on sale of real estate 0 (108,332) 0 (108,332)
Depreciation and amortization of
real property 1,332,145 1,250,395 3,954,338 3,530,712
Depreciation and amortization
from equity investments 60,994 62,469 182,345 183,408
----------- ----------- ----------- -----------
Funds From Operations ("FFO") 2,184,949 2,517,485 5,556,385 8,247,882
Amortization of deferred
financing costs 190,598 114,881 563,670 336,807
Principal payments received
on mortgage loans 0 8,957 3,217,220 26,281
Straight-lining of property
rentals for rent escalations (23,788) 5,361 (34,867) (182,055)
Improvements to real estate (701,094) (2,011,334) (2,300,531) (4,789,200)
Principal repayments on
notes payable (79,750) (73,404) (243,611) (420,363)
Leasing commissions and costs (372,953) (348,900) (625,912) (828,804)
----------- ----------- ----------- -----------
Funds Available for Distribution
("FAD") $ 1,197,962 $ 213,046 $ 6,132,354 $ 2,390,548
=========== =========== =========== ===========
Distributions to shareholders and
minority interest $ 2,116,470 $ 2,115,590 $ 6,348,592 $ 6,351,345
=========== =========== =========== ===========
FFO payout ratio 96.9% 84.0% 114.3% 77.0%
=========== =========== =========== ===========
Cash flows from:
Operating activities $ 1,942,621 $ 2,774,900 $ 8,841,649 $ 9,516,923
=========== =========== =========== ===========
Investing activities $ (835,353) $(2,115,490) $ (145,083) $(5,949,186)
=========== =========== =========== ===========
Financing activities $(2,221,571) $(1,284,802) $(5,119,983) $(3,580,825)
=========== =========== =========== ===========
Weighted average common
shares and OP Units outstanding
Basic 8,817,496 8,814,959 8,816,899 8,820,890
=========== =========== =========== ===========
Diluted 8,823,635 8,814,959 8,823,039 8,820,890
=========== =========== =========== ===========
16
FORWARD-LOOKING STATEMENTS
Certain statements made in this report may constitute "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. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the demand for retail space or retail goods, availability and
creditworthiness of prospective tenants, lease rents and the terms and
availability of financing; adverse changes in the real estate markets including,
among other things, competition with other companies; risks of real estate
development and acquisition; governmental actions and initiatives; and
environment/safety requirements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.
INFLATION
Inflation did not have a material effect on the Company's results for the
periods presented.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The debt financing used to raise capital for the acquisition of the Company's
investments exposes the Company to fluctuations in market interest rates. Market
interest rates are highly sensitive to many factors, including governmental
policies, domestic and international political considerations and other factors
beyond the control of the Company.
Cash flows from the Company's investments do not fluctuate with changes in
market interest rates. In addition, as of September 30, 2001, approximately 35%
of the Company's total notes payable outstanding are fixed rate notes, and so
the payments on these instruments do not fluctuate with changes in market
interest rates. In contrast, payments required under the Credit Facility vary
based on market interest rates, primarily the 30 day Euro-contract rate. Thus,
an increase in market interest rates would result in increased payments under
the Credit Facility, without a corresponding increase in cash flows from the
Company's investments in the same amounts. For example, based on the $43,193,000
outstanding under the Credit Facility at September 30, 2001, the Company
estimates that an increase of 1% in the 30 day Euro-contract rate would decrease
the Company's annual net income by approximately $432,000; a 2% increase in the
30 day Euro-contract rate would decrease annual net income by approximately
$864,000. For the same reasons, a decrease in market interest rates would
generally benefit the Company, as a result of decreased payments under the
Credit Facility without corresponding decreases in cash flows from the Company's
investments. Various financial vehicles exist which would allow Company
management to mitigate the impact of interest rate fluctuations on the Company's
cash flows and earnings. Management may engage in such hedging strategies in the
future, depending on management's analysis of the interest rate environment and
the costs and risks of such strategies.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part 1. Financial Statements - Note 8 which is incorporated herein
by reference.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Termination and Release Agreement dated August 6, 2001
99.2 Aegis Realty, Inc. Press Release dated August 7, 2001
99.3 Amendment No. 1 to the Advisory Agreement among Aegis
Realty, Inc., Aegis Realty Operating Partnership, LP and
Related Aegis LP
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during this quarter.
18
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.
AEGIS REALTY, INC.
(Registrant)
Date: November 14, 2001 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Director, Chairman of the
Board, President and
Chief Executive Officer
Date: November 14, 2001 By: /s/ Michael I. Wirth
--------------------
Michael I. Wirth
Chief Financial Officer