In late July, AmREIT (AMEX: AMY) purchased two Kroger-anchored shopping centers and the 34,704-square foot Bakery Square, consisting of a free-standing Walgreen's and a shopping center anchored by Bank of America. The Houston properties were the latest catches in AmREIT's ongoing effort to build a portfolio of "irreplaceable corners," or premier retail frontage properties in high traffic, highly populated areas.
Since listing its shares on the American Stock Exchange in 2002, the Houston-based firm has been amassing a retail portfolio consisting of single-tenant and multi-tenant properties. In 2003, the firm increased its adjusted funds from operations per share by 29 percent, and in late 2004, AmREIT provided guidance for a 15 percent to 18 percent gain in AFFO in 2004. AmREIT's Chairman, Chief Executive Officer and President H. Kerr Taylor spoke with Portfolio to provide this snapshot on his company.
Going Public
AmREIT's listing on the American Stock Exchange in 2002 marked the public debut of a firm that has been operating for 20 years.
"We began laying the foundation for our business back in the mid-1980s, when we decided to focus on creating value on high quality retail corners and raising capital from the financial planning community," Taylor says. "Our goal has always been to build a powerful business model that will allow us to become a leading company in generating long-term dependable monthly income."
According to Taylor, REITs provide the best alignment of management and shareholder interests. As a graduate student in 1974, Taylor focused his master's studies on REITs. "I've been amazed by the stellar growth of dividends and all-in returns that the industry has been able to create for its shareholders," he says. "It's a difficult record to compete with for investors wanting dependable income."
Business Strategy
The firm acquires and develops retail assets located on the previously described "irreplaceable corners." To execute its strategy, AmREIT has been organized as a self-advised, publicly traded REIT supported by three businesses: a real estate operating and development business, a securities business and a retail partnership business. The structure is a unique and defining feature of the company.
The real estate operating and development subsidiary, AmREIT Realty Investment Corp., focuses on development, acquisition, management, leasing and brokerage. A taxable REIT subsidiary, AmREIT Realty Investment, generates fee income by providing services to third parties and AmREIT's affiliated retail partnership investment funds.
AmREIT Securities Co. is a subsidiary registered with the National Association of Securities Dealers that allows AmREIT to source funding from the financial planning community. The subsidiary raises capital for AmREIT and retail partnerships through the issuance of non-traded classes of common shares that may be converted into the publicly listed Class A issue at specified future dates. In 2004, the company fully subscribed a $40 million offering and subsequently commenced funding a $170 million offering.
Taylor explains two advantages of raising capital through the financial planning community. "First, it is very accretive to our shareholders and, second, money is received on a daily basis, allowing for a matching of funds to real estate projects," he says.
The firm deploys the capital raised and then moderately leverages the capital.
"There is no other company that I'm aware of that is accessing real estate capital from the financial planning marketplace that is inside advised," Taylor states. "All of our people, all of our efforts, all of the profits from everything that we do flow to the AmREIT shareholder."
AmREIT's Securities Co. also raises capital through the financial planning community for the REIT's retail partnership business that sells limited partnership interests to accredited retail investors. The retail partnership business acquires, develops and sells free-standing and shopping center properties to add short-term value for its partners. Assets are held for a short time and disposed. AmREIT has sponsored 15 prior partnerships and has come full circle on 12 of the offerings. At the end of the third quarter 2004, AmREIT directly managed approximately $50 million in equity in the three current active partnerships.
Growth Objectives
"Our core strategy is to continue to own the best corners in our marketplace," Taylor says. "We have constructed a business model that will help us achieve our overall goal of being the leading company in generating dependable monthly income over the long term."
Reaching a certain level of market capitalization or attaining a targeted portfolio size are not goals the company specifically focuses on. "Big is not what we're after," Taylor relates. "We're after quality."
Nevertheless, portfolio growth ensues from the firm's efforts to generate income for shareholders. At the end of 2003, AmREIT stated it's seeking to increase the size of its property portfolio from $101 million to $200 million in the following 12 months to 18 months. Through third quarter 2004, completed transactions and contracted deals enabled the firm to realize about 65 percent of its objective, and it remained on track to achieve the goal.
The firm relies upon a series of measures to vet its deals, and the process attempts to ensure that an irreplaceable corner does not become "replaceable."
"After 20 years of doing business, we have developed a process that allows us to measure a property's potential for success," Taylor says. "One of the metrics that we study includes locations with high barriers to entry for new development.
Car counts and unobstructed frontage visibility are also important in identifying the type of property AmREIT wants to own. "We want someone to be able to drive in front of the property and see our tenants," Taylor says. "We don't like basements, second floors or sight-obstructed properties."
Besides acquisitions and development, AmREIT is busy identifying $10 million to $15 million of non-core assets for disposition. According to a recent filing, the REIT also wants to rebalance its tenant concentration and has implemented a strategy to expand its holdings in shopping centers.
Key Issues
One of AmREIT's most pressing issues, according to Taylor, is retaining and building its management team.
"I'm always talking to analysts and shareholders about the ‘people metric,'" he says. "People are not the whole of the matter, but they are the heart of the matter. It is the ingredient that can never be compromised, and my number one job is bringing aboard the best people and keeping them."
Sourcing deals and continuing to build the portfolio is another important matter the firm confronts each day. "In a fast growing market, like we now find ourselves in, we must constantly go the extra mile in creating and harvesting high quality properties," Taylor explains. "It's extremely demanding work, and it takes a lot of discipline. We say ‘no' a lot and sometimes it's painful."
Taylor concedes the firm has made mistakes. One such stumble was purchasing a single-tenant property with an inside step-down elevation. "You may have a good corner and a good building, but you may have to find a replacement tenant that doesn't mind that sort of elevation," he says.
"Like any other company, wisdom comes with experience. We try to stay with things that we believe embody core, enduring principles of good real estate investing," Taylor says.
The Bottom Line
So, why should an investor purchase AmREIT shares? Taylor quickly lists three reasons. "Great people, quality real estate, and a powerful business model honed over two decades," he says.
As for achieving its goal of generating dependable income for investors, the firm declared its 20th consecutive quarterly dividend increase in October. AmREIT's portfolio growth supports an annual increase in dividends ranging from 7 percent to 10 percent, according to the firm's third quarter earnings release.
At the end of the third quarter 2004, AmREIT reported a portfolio with total assets of $167 million. The majority of the firm's rental revenue comes from multi-tenant shopping centers. Management projects that the portfolio could expand to $400 million by mid-year 2006 as the firm continues to develop and acquire retail properties in Texas and other targeted markets.
"Our core strategy is to continue to own the best corners in our marketplace in order to attract the very best retail companies in America," Taylor says.
Art Gering is a regular contributor to Portfolio.
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