AmREIT, Inc. Q4 2007 Earnings Call Transcript

Mar.12.08 | About: AmREIT (AMRE)

AmREIT, Inc. (AMY) Q4 2007 Earnings Call March 12, 2008 11:00 AM ET

Executives

Tripp Sullivan – Corporate Communications

Kerr Taylor – Chairman & Chief Executive Officer

Chad Braun - Chief Financial Officer

Analysts

Philip Martin - Cantor Fitzgerald

Tony Howard - Hilliard Lyons

Christopher Lucas - Robert W. Baird & Co.

Operator

Good morning and thank you for holding. Welcome to the AmREIT fourth quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Tripp Sullivan of Corporate Communications. Please go ahead sir.

Tripp Sullivan

Thank you Rob, and good morning everyone. Thank you for joining us today to discuss AmREIT's fourth quarter 2007 results. On the call today are Kerr Taylor, Chairman and Chief Executive Officer and Chad Braun, Chief Financial Officer.

The results as well as notice to the accessibility of this conference call, on a listen-only basis over the internet, were released yesterday in a press release that's been covered by the financial media. For those of you who did not receive a copy of the fourth quarter earnings release and supplemental information, you can reach me at 615-254-3376 or download it from www.amreit.com by going to the investor's section and clicking on financial reports. Also, for those who want to listen to a recording of the prepared comments today, we will have a replay available by phone or via webcast on the website.

Before we begin the call, I'd like to remind you that some of the statements made in this call are forward-looking statements and as such are subject to many factors that could cause actual results to differ materially from the company's expectations. These factors are described in the company's SEC filings. AmREIT undertakes no obligation to publicly update or revise any forward-looking statements.

Now I'll turn the call over to Kerr.

Kerr Taylor

Thank you, Tripp. Good morning and thank you for your interest in AmREIT. As we previously disclosed, the fourth quarter was not up to our expectations in terms of transactional volume and getting some sales completed. That resulted in a disappointing year for us in terms of our financial reporting metrics. We will address those recent trends in this morning's call and how we are responding in 2008. But I wouldn’t want that to detract from the very important accomplishments during the year and the quarter.

Those accomplishments included investing $63 million in three separate real estate transactions; building up a pipeline of new transactions that as of the year-end totaled approximately $170 million; growing our advisory business to a total of $159 million under management; increasing our portfolio to approximately $1 billion of assets including those under contract in our pipeline; increasing our unsecured credit facility to $70 million while reducing the borrowing cost by 50 basis points; hiring Charles Scoville, a 25-year leasing veteran to be our Managing Vice President and Director of Leasing and Property Management; paying off our Class B shareholders entirely, creating an accretive win for our Class A shareholders and meeting the expectations of our Class B holders; and finally, launching REITPlus, a $550 million publicly registered non-traded REIT offering.

Looking back on it, 2007 was a difficult year, but progress was made in terms of our platform to grow towards our goal of $2-3 billion and reach scalability. I will talk more about our specific plans for 2008 in a few minutes. First, I'd like to turn the call over to Chad Braun, our Chief Financial Officer, to talk about our performance for the quarter and our outlook.

Chad Braun

Thanks Kerr. As Tripp mentioned earlier, we did file our fourth quarter financial supplement last evening which you can also download on our website. This goes into more specific detail on some of our balance sheet categories and further breaks down the components of our earnings.

Consistent with our announcement in late December, the fourth quarter results reflected the lack of transactional activity due to the termination of the sale of our AAA CTL Notes IHOP portfolio. We reported FFO after restructuring charges related to Class B redemption of $0.30 per share.

This morning, I would like to provide some color on our overall and segment results, and then update you on our plans for 2008. In order of percentage of gross corporate FFO that is available to all classes of shareholder, our three segments rank as follows: the portfolio of Irreplaceable Corners, our asset advisory business and our real estate development and operating business.

Within the portfolio of Irreplaceable Corners, we finished the quarter with a total of 50 properties including those held for sale, with 91% of our total rental income being generated from properties located in major Texas metropolitan areas. At December 31, the portfolio occupancy was 98.1%, up 1.6% from 96.5% on 12/31/06. The strong same center NOI growth in the portfolio was led again by year-over-year improvement in occupancy and improvement in leasing spreads. For the quarter, same center NOI growth was approximately 10%, and leasing spreads were approximately 11%.

The debt on our balance sheet is entirely related to the real estate portfolio, and as of 12/31/07, our debt-to-asset ratio is approximately 49% based on historical cost. Based on a blended market cap rate approach, our debt-to-market value of assets is approximately 41%. 83% of our $181 million in debt is fixed rate mortgages with an average maturity of over six years and an average interest rate of approximately 6%. The balance is floating rate debt associated with our credit facility, which currently has approximately $40 million of availability and matures in November of '09.

The portfolio contributed revenue of approximately $8.1 million for the quarter, up slightly when compared to the $7.4 million for the same period in 2006. For the quarter, G&A for this segment was approximately $1 million or 12.7% of revenues, a decrease compared to the 20.7% for the same period last year. The decrease in G&A as a percentage of revenue is attributable to a combination of portfolio revenue growth, tighter controls on costs as well as a reduction in incentive compensation during the quarter. This resulted in total FFO from the portfolio segment of $3.5 million for the quarter.

Just as a reminder for financial reporting purposes, we reduce total company net income and FFO by the dividends paid on our non-traded stock. From a segment perspective, these dividends are allocated in proportion to the net income generated. For the portfolio segment, this was approximately $3.6 million for the quarter, resulting in a loss to FFO from the portfolio for the quarter of $0.02 per Class A common share.

The second segment is our asset advisory group, comprised of our securities operations as well as our merchant development partnership funds. During the quarter, this group raised approximately $15 million in our funds and returned approximately $7 million as AmREIT Income & Growth Fund began liquidation, increasing assets under management in our five actively managed funds to approximately $159 million compared with $121 million at the same time a year ago.

Within this group our securities operations have generally operated at a loss, due to the overhead and staffing required to raise the associated funds. For the fourth quarter, the group reported a net loss of $693,000 compared with a net loss of $44,000 in the prior year quarter. Within our merchant development funds, we received current income as well as the carried interest and profit participation interest, as the general partner in these funds.

On a current basis, we were able to earn recurring asset management fees as well as leverage the expertise within our real estate group and earn real estate fees for services performed such as property management, leasing and development. During the quarter, our merchant development funds operated at a gain of $494,000 including $359,000 in recurring asset management fee income compared with a gain of $43,000 for the same period in 2006, which includes $267,000 in asset management fee income.

Together, this group generated a net loss of $198,000 for the fourth quarter compared with a net loss of $1,000 in the prior year period, and a net loss to FFO of $6,000 compared with a net loss to FFO of $46,000 a year ago.

The third segment is our real estate operating and development business. This transactional group generated revenues of $5.2 million for the quarter down from $10.1 million in the same period a year ago. This reduction in revenue is due to overall timing of transactional activities, lack of transactional activities, and the termination of the AAA CTL Notes sales contract previously announced.

Revenue in the fourth quarter was primarily comprised of $428,000 in development fees, $776,000 in commissions and acquisition fees, $398,000 in construction fees net of construction expense, and $229,000 in property management fees. With expenses of $5.3 million for the quarter, including $3.4 million in direct construction costs, this segment generated a net loss and loss to FFO of $36,000 for the fourth quarter compared with net income and FFO of $3.2 million in the prior year period.

During the quarter, we completed the transaction that helps us reach one of our main goals for 2007. Simplifying and maximizing our capital structure, we completed the Class B redemption of approximately a million shares at a price of $10.18 per share. As we paid a conversion premium of $0.93 per share on the redemption, we were required by GAAP to treat this premium as an additional dividend to our Class B shareholders, which was $933,000 or approximately $0.15 per share. We expect the transaction will result in an annual accretion of approximately $0.02 per share.

Another major event during the quarter was REITPlus being declared effective by the SEC and receiving a "No Objection" letter from FINRA, allowing us to begin offering the common stock through our broker-dealer network. We have cleared all state regulatory authorities except for Pennsylvania and Tennessee. As we've noted before, by advising REITPlus we will earn recurring fees such as asset management and property management fees, and transactional fees such as acquisition fees, development fees and sales commissions. We will be participating in a 15% promoted interest after the REITPlus stockholders receive a return of their invested capital plus a 7% preferred return per annum.

Now, turning to our guidance for 2008; when we announced our initial guidance back in late December, we gave the following assumptions: Raising approximately $130 million in advisory capital through REITPlus, our expectations were that we would have this capital available most of the year to deploy. Based on where we stand today on fundraising with REITPlus, we now expect to only have approximately $80 million that is deployable during the year.

Number two, closing on approximately $100 million in projects during the first half of 2008 that are currently identified and under letter of intent. Based on a joint venture purchase we closed earlier this month, and only taking our 20% ownership of that purchase, we have closed, or have under contract in various stages, approximately $80 million.

Number three, we remain on track with the remaining assumptions we previously made, which include: number one, closing on approximately $170 million in additional projects; number two, continuing our same-store NOI growth within the portfolio of between 2% and 4%; number three, expanding geographically to open an Atlanta office staffed with a Southeast leader; and finally, expanding the staffing of the advisory business to include six full territories and a national sales manager.

The big change you will note on our guidance is the use of a modified FFO number. We're estimating 2008 modified FFO to be $0.85 to $0.89 per share, which compares with the FFO guidance we initially projected. Looking strictly at the neighboring definition of FFO, our expectations for 2008 are $0.61 to $0.69 in FFO per Class A share.

Now what do we mean by modified FFO? Modified FFO adjustments will include adding back any premiums charged in conjunction with the redemption of either the Class C or the Class D common shares. Additionally, we will adjust FFO for the monetization of value created in our advisory funds, which may take place through financing transactions or other avenues that generate monetization of profits and cash flow, but not necessarily GAAP earnings.

As we begin to liquidate and monetize our general partner interest in our advised funds, such as AAA CTL Notes or AmREIT Income & Growth Fund, this may result in accretive cash flow without earnings recognition, such as through syndications or refinancing opportunities.

When we pre-announced the fourth quarter, we noted that we were assessing our strategic opportunities on the AAA CTL Notes portfolio. We indicated we would either take the portfolio back out to sell, refinance the portfolio, or re-syndicate the portfolio. As we previously indicated, we are currently working on all three alternatives for this portfolio - An outright sale, a refinance whereby we can cash out our limited partners and realize cash proceeds for our back-end interest and maintain the ownership of the residual income stream, or a re-syndication of the portfolio.

Given the current state of the capital markets, we are pursuing all of these initiatives. And we will continue to update the market on our progress each quarter until we finalize this transaction. The problem for us from a reporting standpoint is that the sale would be included in FFO, but the latter two options could not be. Although from a cash flow standpoint, they would have the same result.

With that I will turn the call be to Kerr to speak about our 2008, and address our decision to begin reporting with a focus on cash flow.

Kerr Taylor

Thank you, Chad. For the last 18 months or, we've worked very hard to make sure public investors understood exactly who we are. An established real-estate company which has elected to be taxed as a REIT, it has two distinct companies within one, the first being an institutional-grade portfolio of Irreplaceable Corners with top quartile REIT performance metrics. And the second, an advisory that has a long history bringing returns to its investors and partners, through a series of closed end funds, as well as an extensive independent broker-dealer network.

Although we aren't like many other REITs in the public REIT universe today, or what might be considered the strictly portfolio REITs, we have been unfortunately grouped with them for comparative purposes. Since we don't fit that short-term quarterly numbers mold, there continues to be a lot of value in the total company today that is not reflected in the public market valuations.

For instance, if you look strictly at our portfolio, we put it up against any other shopping center REIT in the country, its occupancy is now 98%. Leasing spreads are double digit. And same center NOI has averaged around 4-6% annually. That being said we are not a Weingarten's or a Regency. Never have been, never will be and quite frankly we have no desire to be. Both are very good companies, but that's not who we are.

Our business model is that of an institutional advisory company who creates different types of funds. We are more akin to a Hines interest, which is a well-established private real-estate company, who has sponsored core value added and opportunistic funds for many years. There are others like us that are less well-known in the public world, but with established reputations among the independent broker-dealers, or IBDs.

The thing we all share in common is that we are judged by our investor partners for the long-term returns we deliver to them and the cash flows we are able to deliver. In this model, distributions and cash flows that hit the specified returns you promised are what matters the most. Making a long-term disciplined approach, such as pulling out of overheated markets, like we did in 2007, is also valued, more than pursuing investments that simply meet quarterly goals.

Our plan for 2008 is first and foremost not to try to be anything that we aren't. As I've said before, we are not a shopping center REIT. We will not attempt to fit ourselves into that square peg in '08. We are a company that creates values and drives NOI on properties through a series of closed end funds, as well as supports a fast growing advisory business that raises capital through the IBD channel.

Here is what you can expect from us in '08. First, we will be patient on the portfolio. We do not anticipate much core growth in our portfolio, due to the lack of a currency to fund it, namely, an undervalued stock price. We will look at the portfolio this year as more of its own closed end fund.

Second, we will continue to build out our advisory platform. We are not at critical mass to reduce any volatility associated with our business yet. In fact, we've come to the realization that to continue growing our IBD funding sources we will have to continue investing resources to grow that platform. The most important activity in the life of our company today is the newest piece of this platform, REITPlus. Taking the next six months to get REITPlus up and running is the top priority for us this year. Nothing else comes close. With the base of fees and capital this private REIT represents, it will largely determine the course of our growth in 2009 and beyond.

Third, we will continue to maximize the value of our existing closed end funds to achieve the necessary returns promised to those investor partners, while realizing the value inherit in our participation and backing interest in those funds. This value will come from asset sales, re-financings or re-syndications.

Fourth, we will continue to build up our institutional channel. We've established relationships with institutional and joint venture partners, and expect to continue accessing this source of capital. In February, we closed on our fourth JV property acquisition with JP Morgan and the purchase of a 660,000 square foot regional center located on what we call a tomorrow's Irreplaceable Corner in the Houston region. JP Morgan took an 80% interest and our advised funds took a 20% interest. In a market where new JV transactions are few and far between, we were pleased to continue our successful relationship with JP Morgan.

Fifth, our focus will remain on both the short term and the long term, but our primary objective will be to build long-term shareholder value and continuing to build and enhance our ANV. Our reporting metrics will take into account the short-term oriented NAREIT calculation of FFO, which would naturally exclude any value creation in our closed end funds, and a more accurate measure of that value with the modified FFO. As Chad mentioned earlier this metric will take into account the actual distributions and cash flows available to our shareholders and pay their dividends and drive the value of their investments.

2008 will be an interesting year, no doubt about it. The economy continues to soften and the focus is on the consumer. Credit markets continue to clamp down and a "flight to quality" is of effect. We're seeing the benefit of this "flight to quality" in our funds business currently, and in our institutional channel. We hope to see that occur in the public markets in the months ahead.

We believe 2008 will be a pivotal year as we grow our platform and prepare to reach the $2 - 3 billion mark over the next few years. Our portfolio is first class and so is our team of professionals. Whereas many companies will find themselves boxed in, I believe this year will be a launching pad for AmREIT toward reaching scalability.

With that I'd like to turn the call back to Rob to facilitate any questions you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question is from Chris Lukas, from Robert W. Baird. Please go ahead, sir.

Christopher Lucas - Robert W. Baird

Good morning guys. I also wanted to thank you, Chad, for the detailed comparative guidance that you provided. But before I go into those questions, I'd like to ask Kerr a couple of macro questions about what you're seeing in terms of the economy in your primary markets of Houston and Dallas in terms of jobs, and the overall housing market.

Kerr Taylor

We're all across Texas but concentrated in the three big markets of Houston, Dallas and San Antonio. Each one is a little different. But Texas, Chris, is doing pretty well as we travel around the rest of the country. Job growth is still strong in all three of our markets throughout Texas. We're seeing home sales slow, but not like we're seeing on the East and West coasts. And we're seeing of course the oil business, which really is a large driver, particularly in our Texas market. And the chemical markets continue to grow.

We're optimistic, but we do stay also somewhat concerned about consumer spending. And we see that that probably will be dampened. But again, in our core areas, particularly in our Irreplaceable Corners, we continue to see in-migration, particularly baby-boomers, into the central parts of our market, which has really been, I think, fundamental to our growth in NOI, in same-store sale growth over the last 24 months.

Christopher Lucas - Robert W. Baird

And then, Kerr, are you guys seeing any more change in product availability in terms of the retail properties either at the fund level, or at the core level, just in terms of volume? Are you seeing any change there? And if you could maybe comment on what you're seeing in terms of pricing by either cap rate or per square foot numbers?

Kerr Taylor

Right. Chris I was at a dinner last night with JP Morgan and Metropolitan Life and a couple of other groups that are pretty active down in our area. And all of us were remarking that, whereas last year was very painful for us, having to stay on the sidelines and not seeing, really, the kind of quality that we're used to or we'd want to invest in and cap rates so low that it was very difficult to make creative investments.

We are absolutely seeing a loosening up of that and our pipeline is now as good as it's been in probably 24 months. So we are seeing that, but we also are going through, I think, a transitional stage where buyer and seller expectations are still being wrestled with, and so having transactions actually come together are happening - obviously from our transactions in this last quarter and in our pipeline - but it's continuing, I think, to trend toward a more full and robust pipeline. I do think cap rates on A-minus to B type properties are probably spread 50 to 75 basis points, and on A properties, like we have, probably 25 basis points. That's just my gut feeling from what I'm seeing in the marketplace.

Christopher Lucas - Robert W. Baird

Okay, thank you, that's very helpful. And then, in terms of just - I believe you have some tenants that report of sales to you guys on some regular basis. Are you seeing any trends there that have you concerned about their abilities to maintain their rent?

Kerr Taylor

I'll answer that, and I'll flip it over to Chad, because he obviously focuses on those numbers very closely. But in our investment committee meetings, as we look at our trends within our tenants, we see still very across the board - a macro statement - we're seeing very good sales still in the markets that we are serving. And what particularly we're seeing Chris, is pressure on rental rights for tenants.

Because we're seeing that a lot of the shopping centers on the Post Oaks and in the uptown areas of Dallas, and down on the river where we own properties in San Antonio, those one-story shopping centers are being torn down and put into mixed use. And the replacement properties are sometimes 50% more in rental rates for that same retail space. So that's been a positive driver on our rollover rents. So Chad, you want to complement any of that, or?

Chad Braun

Yeah, I totally agree and a number of our tenants report quarterly, most of our tenants report annually. It's over the last 30 - 45 days all of that data and information has been coming in. And really across the board the tenants that do report their sales are continuing to trend upwards. Using some of the same examples that Kerr did, South Bank, our property on the RiverWalk and our ownership of that, and even going back to prior ownership, that property sales have increased year-over-year, without exception.

Uptown park here in Houston, sales have increased as well, while at the same time driving occupancy up to 99% at Uptown Park, and growing rents with leasing spreads north of 14%. So we are seeing at the Irreplaceable Corners in the infill locations the lack of competition, the high quality retail environment that that creates, even in a tenuous national economic situation, and our tenants thus far remain very healthy and no signs that we have any major weakness.

Christopher Lucas - Robert W. Baird

Okay. Thank you. And then, I guess, two specific questions as it relates, I guess, to guidances. On the REITPlus expectations, in terms of investable capital for this year, I guess, December you had quoted $130 million, and this current guidance you’re quoting $80 million in the essentially investable capital. What caused the reduction in your guidance? Was it a function of timing of the approvals, or has it been a function of investor demand at this point?

Chad Braun

I think, in large part, it’s, I’ll say, all of the above. If I were to prioritize that, getting through the SEC, getting through FINRA and then, as you know, registering the offering with each of the states in order to sell in those states, combined with getting your selling group back up and running.

As we closed down MIG IV - which was our last great deal offering that we had available through the IBD marketplace last year - as we closed that down, went through regulatory approval on REITPlus and then build that selling group back up there is a lag period there, some of which is conditioned upon having the state approval and being able to sell in those states.

So that’s clearly paid an impact on the timing. Number two, I would say is just building our internal team. We’ve talked about the fact that tail-end of last year, we did loose a couple of our sales folks. We are in the process of building that back. We’ve hired a national sales manager. We’ve hired a regional wholesaler from one of the territories and in the process of building that back and look to have six fully staffed territories, I’ll say in the near term.

And then third is definitely just the overall capital crunch liquidity issues that are in the marketplace. Over the last year, as an industry, the IBD channel raised about $11 billion in equity. Two years prior to it had been closer to probably $6 or $7 billion. This year expectations are somewhere probably closer to that $5 to $6 billion. So I think there’s still interest that's are out there, but it’s a matter of getting up to speed and making sure that we get our fair share of what’s our there.

The other thing to keep in mind is as we bring a product like this out, there is a ramp-up. And so where you go initially from getting the approval, getting the selling agreements, there’s a digestion period of that. And then the sales start coming in, or the capital starts coming in. In those early months, it’s a couple of hundred thousand growing to a couple million a month, and we look to plateau, if you will, at a, using a big spread, call it $15 million, $20 million , $25 million a month.

As you move that delta a couple of months one direction or the other from December of 2008, that’s going to impact the usable dollars that you’ve raised, and all of those point to going from $130 million to $80 million. And the last thing I’ll add to that in $80 million, there are a lot of moving parts to that, and at this point, based on our selling group, our team, and our expectations, $80 million is our best estimate at this point, and we’ll continue to communicate back to you and to the market on a quarterly basis with where we are and what we see.

Christopher Lucas - Robert W. Baird

I guess, Kerr, kind of as a follow-up, You’ve had these kind of products before, and I guess the last cycle where we’ve seen an accommodative Fed and a weakening economy was in 2002 and 2003. How did that environment impact your sales relative to prior periods? Is that a good thing because you’ve got lower alternative investments like money market funds and CDs or, because of the concern about the economy, people are not willing to invest?

Kerr Taylor

Really two answers to that. One is, I think the overall cash coming in - funds flow into the real estate market will be slower, will be dampened. I think that’s a good thing, actually. I think that’s the reason why sellers are starting to loosen up. They understand the reality of it. The market just got too hot. I’ve seen that in the ‘74 cycle, in the mid ‘80s and then ‘98, right before '98. I think we’re seeing that again now.

For real estate operating companies that are fully integrated, that have the ability to get out there and find properties that are great locations but need to be worked on, that are broken in some areas, that is what works best, that’s the kind of market we like the best, and we’re positioned to take advantage of it.

I think that’s why we are attracting partners like JP Morgan, who recognize we have those skill sets, and I think that, given some time, we'll, over the next 12 to 24 months, really start growing roots within our IBD market as well as the institution, continue that.I’m looking at 12 to 24 months, and I believe we’ll be in a very, very good position as REITPlus gets up, gets its fly wheel, so to speak, spinning, and the market place continues to become more normal, and the type of opportunities that are there.Did I answer your question, Chris?

Christopher Lucas - Robert W. Baird

Yes. That’s fine Kerr. And my last question, and then I’ll get back in, is just on the AAA CTL monetization. Chad, if you could, which outcome gives you the best cash flow return? Is it an outright sale, the syndication, the refinance with the continuing ownership? Which one provides the best short and long term return to you?

Chad Braun

The short answer to that is a sale. I mean a sale, obviously at the appropriate price and at market value, produces the best cash flow and the best overall return. However, given the strength of the portfolio, given the credit of the tenant, and the way that those leases are structured with the 10% guaranteed rental increases every five years, we are seeing some attractive financing that’s out there that will provide good returns, allow us the cash flow and the monetization to pay off our limited partners, to basically, in essence, redeem their units, meet their expectations and provide general partner promoted interest through those financing sources. But the best use for alternative is a sale.

Christopher Lucas - Robert W. Baird

Okay. So given your modified FFO guidance, of, with $0.85 to $0.89, is the $0.85 a refinance and the $0.89 a sale, or is that number actually wider than that given the particular outcomes that could be there?

Kerr Taylor

I would say, under either of those scenarios, a sale or a refinance, the refinance is obviously what is contemplated from a modified perspective, because if we are able to consummate a sale that would receive FFO treatment, as that is a “held for resale”, not a “held for investment” asset as part of our advisory funds. So that gain on sale would flow through our FFO calculation, keeping in mind shares outstanding and what moves guidance a $0.01, having a $0.04 range between $0.85 and $0.89 is, I would submit is still pretty tight, and either a refinance or a sale would hit that.

A sales transaction would most probably - in a vacuum, all other things staying constant - as far as other assumptions go, would probably push us above our guidance.

Christopher Lucas - Robert W. Baird

Okay. So if I’m hearing you correctly and going through this, your NAREIT guidance essentially doesn’t contemplate a AAA CTL sale.

Kerr Taylor

Correct.

Christopher Lucas - Robert W. Baird

And your modified guidance, I guess what I’m hearing you say really is, that also doesn’t contemplate a sale. It really, more likely, contemplates one of the other two outcomes.

Kerr Taylor

Correct.

Christopher Lucas - Robert W. Baird

Okay. That’s all I have. Thanks a lot, guys. I appreciate your conference.

Kerr Taylor

Thanks Chris

Operator

Thank you. Our next question comes from Tony Howard from Hilliard Lyons. Please go ahead.

Tony Howard - Hilliard Lyons

Good morning Kerr and Chad.I've got a follow up to this very last question, Chad. If I’m not mistaken, the prior guidance of lets say $0.85, or whatever that range was, did not include the sale of the AAA Note portfolio in the past.

Chad Braun

Correct.

Tony Howard - Hilliard Lyons

So now you’re saying in order to get to close to the $0.85, it would have to require the sale.

Chad Braun

That is correct. And again, that goes back to, I’ll say kind of the first bullet that we discussed in capital raising or usable capital raising expectations going from $130 million to $80 million, and then the translation that that had, and deployable capital real estate transactions and transactional revenues or incomes associated with that.

Tony Howard - Hilliard Lyons

So that is basically then offsetting what you were expecting to get from the sale.

Chad Braun

Yes.

Tony Howard - Hilliard Lyons

So we’re basically talking like $0.20 to $0.25 a share.

Chad Braun

Yes.

Tony Howard - Hilliard Lyons

This is more of a comment. You were saying that getting rid of the Class B share was accretive. In order to redeem the shares it costs you $0.15 a share, and you basically only earn $0.02. It seems to me it's going to take you five to six years basically to break even, for getting rid of the Class B shares.

Chad Braun

Yeah. I would have two follow up comments to that. One being a continued effort for simplification of the balance sheet, clarity in the balance sheet, and having thatbe reflected in public market valuations. The other side to that, there is obviously a current accretion from cash flow which is what we’ve talked about on the $0.02 per share. But in addition to that, you’ve got an NAV accretion and bringing those shares, in vis-à-vis what the NAV of the company is, long term, we believe, and our board believes, that that also provides both current accretion from a cash flow standpoint of $0.02 per share as well as long term accretion, based on the overall quality of the portfolio and company NAV.

Tony Howard - Hilliard Lyons

I noticed this time around in your supplement, you didn’t try to do a NAV calculation.

Chad Braun

We did not. And I think just given the turmoil in the marketplace, the number of discussions that have taken place in the analyst community from Green Street and others on where cap rates are and the speculation of cap rates, we felt, at this point, better to pull that out as opposed to leave that in there.

Tony Howard - Hilliard Lyons

Clarification on the same-store NOI, I didn’t get that number for the fourth quarter and for the year.

Chad Braun

Fourth quarter, same property NOI growth was about 10% with leasing spreads of about 11% and year-over-year 2007, we’re sitting at about 5% same property NOI growth.

Tony Howard - Hilliard Lyons

And when you’re talking about the same property, you’re talking about the ten core portfolio properties?

Chad Braun

Yes. And if by same, meaning that we’re talking about the quarterly numbers, the population only including properties that we owned in the fourth quarter of '06 and '07, and then for the year-over-year, properties that were owned for the full period of '06 versus the full period of '07.

Tony Howard - Hilliard Lyons

Okay. Kerr I have a big picture kind of issue. You say you don’t want to be a Weingarten or a retail REIT.Right now though, your diversification strategy has not worked. And it looks like 2008 could be another difficult year for you. Where will you get to the point where you say you may have to go back to more a simplistic retail REIT kind of format?

Kerr Taylor

Well Tony you know, around our board table every quarter we focus on really one thing more than any other, and that’s how do we create shareholder value? How do we drive NAV? That’s what we’ve been doing over the last five years as we’ve grown from a $100 million, pretty much as small portfolio group, to a billion that has $400 million of Irreplaceable Corners that we believe has good NAV creation and another $600 million of partnership assets that are continuing to grow.

We believe, again, as you look at inherent value of the company, that we have created good value. And that having the two legs, so to speak, and particularly in a market like we are now, where a lot of folks, I think, are going to be boxed in and have no alternatives, that we will have alternatives, as was demonstrated three weeks ago when we closed a $100 million transaction with JP Morgan. But I would have to admit that right now, with the share prices that we’re seeing, particularly in our stock, that it’s disappointing. And we are looking at alternatives in which we cancontinue to try to reflect the value that we believe is there. So I would respectfully say that we have, we believe, a very good model that will allow us to continue to grow, and ultimately I think we’ll be, so to speak, dedicated in our strategy, but right now we are in a difficult market and it's hard to reflect that value creation. We hope to change that.

Tony Howard – Hilliard Lyons

And as a follow up, in the past you’ve tried to raise capital by doing your B, C and D non-traded shares and now it’s costing you, so and now you’re trying to do this REITPlus as a way to raise capital instead of being a more pure retail REIT kind of a format. It seems like your past strategy in trying to raise capital and trying to diversify has cost you and I understand your attempts to try to increase value, but I have not seen that happen, especially given where your stock is right now.

Kerr Taylor

Well, I do agree with where the stock is right now and I’ve been listening to some other earnings calls within our neighborhood and I know everyone’s a little disappointed with evaluations we’re getting. But I’m with you Tony. I’m not arguing with you. But I would take objection to whether or not we’re creating value. I think we have and we’re going to be able to continue to grow. I think there’s good value in the advisory business, that's not being reflected.

I think the primary issue is, I believe, not whether we’ve created NAV growth. I think that can be calculated and I think reasonable minds would come to the conclusion that we have created value within the portfolio. The question I believe, and the issue that we’re wrestling with, and we're taking it very seriously, is how do we unlock the value of the whole platform? And we are looking at that very seriously.

But as we said in my opening remarks, we believe the most important thing for us to do right now is to get REITPlus, which is simply another closed end fund, from our perspective, which is what we’ve been doing for 24 years. We haven’t changed that. We’ve been doing that from day one and just continue. This is a pivot point for us to go from a fund that’s $50 million to $500 million. Obviously it’s a lot of cost to grow that fund 10 times, and so we are going through some of that and digesting it but we’ll persevere through it.

Tony Howard – Hilliard Lyons

Okay. Thank you.

Kerr Taylor

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Philip Martin from Cantor Fitzgerald. Please go ahead.

Philip Martin – Cantor Fitzgerald

Good morning. I knew I wouldn’t be forgotten about but I wanted to just, Kerr, follow up on some of the comments you had made earlier. I mean obviously it sounds like the opportunity you're seeing out there versus, let's say, a year ago or 18 months ago even are better. Can you provide some perspective in terms of levered and unlevered – let’s go with levered returns? Again, the JP Morgan transaction, when that transaction - or maybe even some transactions you’re looking at right now - when you’re looking to underwrite those, what types of levered returns are you underwriting to today versus 12 to 18 months ago?

Kerr Taylor

I guess we have to stipulate what level of debt, and we’re fairly conservative, and we're usually about 50%.

Philip Martin – Cantor Fitzgerald

Okay, and excluding fees from this – it's just, kind of, pure real estate, IRRs, trends, etcetera.

Kerr Taylor

I think the range would be on a leverage of that basis today 9 to 12 depending on the nature of the property. If it's to stabilize property you’re going to be in the lower end of that of course and if it's an added value play, it’s going to be more the higher end. The transaction we did with JP Morgan is kind of in between. It’s a wonderful existing project, but it still has some lease up and we’ve put our team on that and there’s a little lease up risk involved but we believe we've got it well handled and so we’re able to do a little better on our overall yields.

The other question, I think, that maybe underneath this one is, are we seeing the spreads between the cost of our debt and the potential returns starting to increase? And I believe the answer is yes. I believe looking – I know, sitting at the table with one of the big lenders last night – they are skittish. The spreads are wide, but they’re still interested and wanting to lend, as we were able to do last month on our type of assets. In other words there is a "flight to quality", and so I think, again, as we move into a weaker marketplace we’ll be able to transact where maybe a class B or a B-minus project will have a more difficult time doing that.

Philip Martin – Cantor Fitzgerald

And when you look at this pipeline, can you quantify kind of value-add versus stabilized in percentage terns?

Kerr Taylor

Again, we’re billing primarily the REITPlus platform right now, and as we look at that we always like to step out with more of a stabilized platform to establish the dividend and establish the security of the portfolio, the reliability of it. And so that is what we’re doing. We do have a transaction that is a value add as well - a wonderful corner - but it already has in place returns that are not normal cap rate – I mean, they’re a little below the market cap rates, but the good upside is we look at turning that project into more of a mixed use project.

Philip Martin – Cantor Fitzgerald

Okay. Now shifting gears a little bit, Chad, in terms of 2000 lease expirations can you give us a sense of the progress you’ve made with the lease expirations in 2008? Have you reached any agreement with some of these leases that are expiring?

Chad Braun

Yes, in round numbers we’ve got about 51,000 square feet scheduled for expiration in ’08, and again, that's talking about the core portfolio. So, about 51,000 square feet expiring. That is spread over about 17 leases. So on average we’re talking about 3,000 square foot leases. In 2008 we do not have any major tenant leases that are coming up for renewal and our leasing group led by Charles Scoville has done a wonderful job of getting out ahead of those renewals and expirations, and feedback from the team of feedback from the tenants has been very good. There should not be any surprises or big holes out there as it relates to 2008.

Philip Martin – Cantor Fitzgerald

How about from a retention rate standpoint, what would you expect your retention rate to be this year?

Chad Braun

I think pretty high. I mean, part of the challenge and of the things that we talk about internally, 98%, 98.1% occupancy is obviously very good. There is a school of thought that says lease down a little bit, be a little bit harder on leasing spreads and the ability to drive those rents up, and that you may even be willing to sacrifice a little bit of occupancy in order to really push and drive rents at those centers. I certainly don’t want to give the impression that we’re down in a lease down mode because we’re not. I think our retention will be good, but, again, the demand in the back fill of space that we have at our highly occupied centers - if we end up losing a tenant that’s not the end of the world and that may allow us to push that space and push that rent to an even better market rate. But, all in all, I think our retention will be pretty good this year.

Philip Martin – Cantor Fitzgerald

Okay, that’s kind of what I was getting to here. At this occupancy level it affords you some pricing power and some opportunities to maybe a lease down. Now, in terms of Atlanta, can you just talk about, let’s go out 24 months, maybe even 36 months - the road map for growth, as I like to say, what is that road map in Atlanta? Give us some idea of potential scale and I think one of the concerns, I think, as you grow into Atlanta - at least maybe a concern for me is, can you duplicate what you have done in Houston, which is very good, can you duplicate that in a market like Atlanta?

Kerr Taylor

That’s a great question. The incubator test for us was over the last two and a half to three years of opening our Dallas office under the leadership of Steve Hefner and watching that office mature and grow and get its processes in place so that it works well with Houston. We feel that after that two and a half, three year period now, we’re very comfortable with our processes and with the duplication that we’ve been able to do.

And if you look at our growth that’s happened up in Dallas it’s really echoed very much and paralleled our growth in Houston. And so we’re going to take a very conservative step into Atlanta and we’ll do it when we find the right leader. Maybe you'll come and join us! We’ll find the right leader and then we’ll do just what we did in Dallas, and then we’ll look to the west coast and follow that as the markets really open that opportunity. So we’ll be taking a careful step, but it’s one we’ve been working on now for three years.

Philip Martin – Cantor Fitzgerald

And in terms of scale in two to three years, in terms of assets, where do you think you could be?

Kerr Taylor

Well as I said in my opening remarks Phillip, I’ll be disappointed if we’re not in that $2 - 3 billion within that two to three year period.

Philip Martin – Cantor Fitzgerald

Okay. I appreciate the answers. Thanks Again

Kerr Taylor

Thanks Phillip.

Operator

(Operator Instructions) I would like to turn the conference back to Mr. Sullivan for any final remarks. Please go ahead.

Tripp Sullivan

Okay, thank you for your participation today. Again, we encourage you to download a copy of the fourth quarter supplemental from the website. Should you have any follow-up questions or comments please do not hesitate to call Kerr, Chad or myself. Thank you for your continued support and interest in AmREIT and we look forward with speaking with you again on the first quarter conference call. Thank you.

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