Table of Contents      UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549    FORM 10-Q    xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
EXCHANGE ACT OF 1934  For the quarterly period ended September 30, 2010  OR   ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
EXCHANGE ACT OF 1934  For the transition period from _________ to _________  Commission file number 000-53841    AmREIT, Inc. (Exact Name of Registrant as Specified in Its Charter)  Maryland
     20-8857707(State or Other Jurisdiction of Incorporation or Organization)
     (I.R.S. Employer Identification No.)8 Greenway Plaza, Suite 1000
Houston, Texas
     77046(Address of Principal Executive Offices)
     (Zip Code)
  Registrants telephone number, including area code:(713) 850-1400    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. YESxNO  ̈  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ̈Yes ̈No  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer ̈
     
     Accelerated filer ̈Non-accelerated filer ̈
     
     Smaller reporting companyx(Do not check if a smaller reporting company)
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ̈NOx  Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:  Class
     
     Outstanding as of November 15, 2010AmREIT, Inc. Common Stock, $0.01 par value
     
     23,122,350 shares


---



AmREIT, Inc.
Quarterly Report on Form 10-Q
Quarter Ended September 30, 2010  Table of Contents  Item No.
     
     PagePART I - Financial Information1
     Financial Statements
     12
     Managements Discussion and Analysis of Financial Condition and Results of Operations
     283
     Quantitative and Qualitative Disclosures About Market Risk
     364
     Controls and Procedures
     36PART II - Other Information1
     Legal Proceedings
     372
     Unregistered Sales of Equity Securities and Use of Proceeds
     373
     Defaults Upon Senior Securities
     374
     [Removed and Reserved]
     375
     Other Information
     376
     Exhibits
     37Signatures
     38Exhibit Index
     39
     2


---



Table of Contents  PART I  FINANCIAL INFORMATION Item 1.  Financial Statements  AmREIT, INC. AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS 
September 30, 2010 and December 31, 2009 
(in thousands, except share data)  September 30
2010,
     
     December 31,
2009ASSETS
     
     (unaudited)Real estate investments at cost:Land
     
     $
     125,168
     
     $
     131,351Buildings
     
     
     138,904
     
     
     142,575Tenant improvements
     
     
     10,726
     
     
     9,883274,798
     
     
     283,809Less accumulated depreciation and amortization
     
     
     (27,462
     )
     
     (24,934
     )247,336
     
     
     258,875Net investment in direct financing leases
     
     
     
     
     
     21,057Acquired lease intangibles, net
     
     
     6,028
     
     
     7,194Investment in advised funds and other affiliates
     
     
     8,153
     
     
     9,527Net real estate investments
     
     
     261,517
     
     
     296,653Cash and cash equivalents
     
     
     4,103
     
     
     1,067Cash on deposit with qualified intermediary
     
     
     12,804
     
     
     Tenant receivables, net
     
     
     2,884
     
     
     3,697Accounts receivable, net
     
     
     1,877
     
     
     2,014Accounts receivable - related party, net
     
     
     309
     
     
     152Notes receivable
     
     
     4,135
     
     
     4,043Notes receivable - related party, net
     
     
     4,596
     
     
     4,669Deferred costs, net
     
     
     2,475
     
     
     2,703Other assets
     
     
     5,288
     
     
     5,334TOTAL ASSETS
     
     $
     299,988
     
     $
     320,332LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable
     
     $
     158,963
     
     $
     182,976Accounts payable and other liabilities
     
     
     10,152
     
     
     7,741Acquired below market lease intangibles, net
     
     
     1,502
     
     
     1,732Security deposits
     
     
     710
     
     
     705TOTAL LIABILITIES
     
     
     171,327
     
     
     193,154Stockholders equity:Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued
     
     
     
     
     
     Common stock, $0.01 par value, 1,000,000,000 shares authorized,
23,122,350 and 22,950,952 shares issued and outstanding, respectively
     
     
     232
     
     
     230Capital in excess of par value
     
     
     191,243
     
     
     190,975Accumulated distributions in excess of earnings
     
     
     (62,382
     )
     
     (63,908
     )Accumulated other comprehensive loss
     
     
     (432
     )
     
     (384)Cost of treasury stock, 55 and 0 shares, respectively
     
     
     
     
     
     TOTAL STOCKHOLDERS EQUITY
     
     
     128,661
     
     
     126,913Non-controlling interest
     
     
     
     
     
     265TOTAL EQUITY
     
     
     128,661
     
     
     127,178TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
     
     $
     299,988
     
     $
     320,332
  See Notes to Consolidated Financial Statements.  1


---



Table of Contents  AmREIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)  Three months ended September 30,
     
     Nine months ended September 30,2010
     
     2009
     
     2010
     
     2009Revenues:Rental income from operating leases
     
     $
     7,607
     
     $
     7,375
     
     $
     21,995
     
     $
     22,031Lease termination income
     
     
     
     
     
     
     
     
     
     
     
     1,065Real estate fee income
     
     
     15
     
     
     
     
     
     15
     
     
     Real estate fee income - related party
     
     
     907
     
     
     693
     
     
     1,815
     
     
     2,091Construction management fee income - related party
     
     
     97
     
     
     116
     
     
     267
     
     
     360Asset management fee income - related party
     
     
     370
     
     
     384
     
     
     1,110
     
     
     1,151Total revenues
     
     
     8,996
     
     
     8,568
     
     
     25,202
     
     
     26,698Expenses:General and administrative
     
     
     2,140
     
     
     1,375
     
     
     4,932
     
     
     4,811Property expense
     
     
     2,723
     
     
     1,897
     
     
     6,373
     
     
     5,964Legal and professional
     
     
     278
     
     
     141
     
     
     663
     
     
     1,221Real estate commissions
     
     
     5
     
     
     1
     
     
     6
     
     
     2Depreciation and amortization
     
     
     1,653
     
     
     1,856
     
     
     5,031
     
     
     5,605Impairment charge
     
     
     3,487
     
     
     
     
     
     3,487
     
     
     Total expenses
     
     
     10,286
     
     
     5,270
     
     
     20,492
     
     
     17,603Operating income (loss)
     
     
     (1,290
     )
     
     3,298
     
     
     4,710
     
     
     9,095Other income (expense):Interest and other income
     
     
     86
     
     
     98
     
     
     365
     
     
     371Interest and other income - related party
     
     
     89
     
     
     73
     
     
     195
     
     
     140Gain on debt extinguishment
     
     
     5,374
     
     
     
     
     
     5,374
     
     
     Loss from advised funds and other affiliates
     
     
     (133
     )
     
     (106
     )
     
     (1,071
     )
     
     (374
     )Income tax benefit (expense) for taxable REIT subsidiary
     
     
     (289
     )
     
     (78
     )
     
     (144
     )
     
     109Interest expense
     
     
     (2,419
     )
     
     (2,287
     )
     
     (7,256
     )
     
     (6,828
     )Income from continuing operations
     
     
     1,418
     
     
     998
     
     
     2,173
     
     
     2,513Income from discontinued operations, net of taxes
     
     
     1,467
     
     
     264
     
     
     2,050
     
     
     836Gain on sales of real estate acquired for resale, net of taxes
     
     
     5,549
     
     
     
     
     
     5,549
     
     
     1,897Income from discontinued operations
     
     
     7,016
     
     
     264
     
     
     7,599
     
     
     2,733Net income including noncontrolling interest
     
     
     8,434
     
     
     1,262
     
     
     9,772
     
     
     5,246Net income attributable to noncontrolling interest
     
     
     (149
     )
     
     (8
     )
     
     (173
     )
     
     (110
     )Net income attributable to AmREIT stockholders
     
     
     8,285
     
     
     1,254
     
     
     9,599
     
     
     5,136Distributions paid to Class C and D stockholders
     
     
     
     
     
     (2,507
     )
     
     
     
     
     (7,521
     )Net income (loss) available to stockholders
     
     $
     8,285
     
     $
     (1,253
     )
     $
     9,599
     
     $
     (2,385
     )Net income (loss) per share of common stock - basic and dilutedIncome (loss) before discontinued operations
     
     $
     0.05
     
     $
     (0.28
     )
     $
     0.09
     
     $
     (0.96
     )Income (loss) from discontinued operations
     
     $
     0.30
     
     $
     0.05
     
     $
     0.33
     
     $
     0.52Net income (loss)
     
     $
     0.35
     
     $
     (0.23
     )
     $
     0.42
     
     $
     (0.44
     )Weighted average shares of common stock used toCompute net income (loss) per share, basic and diluted
     
     
     23,122
     
     
     5,319
     
     
     23,098
     
     
     5,304
  See Notes to Consolidated Financial Statements.  2


---



Table of Contents  AmREIT, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY 
For the nine months ended September 30, 2010 
(in thousands) 
(unaudited)  Amount of
Common Stock
     
     Capital in
excess of
par value
     
     Accumulated
distributions
in excess of
earnings
     
     Accumulated
other
comprehensive
loss
     
     Cost of
treasury
stock
     
     Noncontrolling
Interest
     
     TotalBalance at December 31, 2009
     
     $
     230
     
     $
     190,975
     
     $
     (63,908
     )
     $
     (384
     )
     $
     
     
     $
     265
     
     $
     127,178Net income including noncontrolling interest
     
     
     
     
     
     
     
     
     9,772
     
     
     
     
     
     
     
     
     
     
     
     9,772Net income attributable to noncontrolling interest
     
     
     
     
     
     
     
     
     (173
     )
     
     
     
     
     
     
     
     173
     
     
     Change in fair value of hedge liability
     
     
     
     
     
     
     
     
     
     
     
     (48
     )
     
     
     
     
     
     
     
     (48
     )Deferred compensation issuance of restricted shares
     
     
     
     
     
     (1,669
     )
     
     
     
     
     
     
     
     
     
     
     
     
     
     (1,669
     )Issuance of shares of common stock
     
     
     2
     
     
     1,621
     
     
     
     
     
     
     
     
     115
     
     
     
     
     
     1,738Amortization of deferred compensation
     
     
     
     
     
     316
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     316Repurchase of shares of common stock
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     (115
     )
     
     
     
     
     (115
     )Distributions
     
     
     
     
     
     
     
     
     (8,073
     )
     
     
     
     
     
     
     
     (438
     )
     
     (8,511
     )Balance at September 30, 2010
     
     $
     232
     
     $
     191,243
     
     $
     (62,382
     )
     $
     (432
     )
     $
     
     
     $
     
     
     $
     128,661
   3


---



Table of Contents  AmREIT, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands, except share data)(unaudited)  Nine months ended September 30,2010
     
     2009Cash flows from operating activities:Net income including noncontrolling interest
     
     $
     9,772
     
     $
     5,246Adjustments to reconcile net income to net cash provided by operating activities:Proceeds from sale of real estate acquired for resale
     
     
     886
     
     
     1,500Gain on sale of real estate acquired for resale
     
     
     (5,549
     )
     
     (2,875
     )Gain on sale of real estate acquired for investment
     
     
     (1,216
     )
     
     Gain on debt extinguishment
     
     
     (5,374
     )
     
     Impairment charge
     
     
     3,487
     
     
     Bad debt expense
     
     
     1,295
     
     
     343Lease termination income
     
     
     
     
     
     (1,065
     )Loss from advised funds and other affiliates
     
     
     1,071
     
     
     374Cash receipts related to deferred related party fees
     
     
     (170
     )
     
     17Depreciation and amortization
     
     
     5,048
     
     
     5,600Amortization of above/below market rent
     
     
     (142
     )
     
     (40
     )Amortization of loan premium and financing cost
     
     
     332
     
     
     312Amortization of deferred compensation
     
     
     316
     
     
     374Distributions from advised funds and other affiliates
     
     
     11
     
     
     2Increase in tenant receivables
     
     
     (354
     )
     
     (247
     )Decrease in accounts receivable
     
     
     188
     
     
     87Decrease (increase) in accounts receivable - related party
     
     
     (157
     )
     
     583Cash receipts from direct financing leases more than (less than) income recognized
     
     
     237
     
     
     (6
     )Increase in other assets
     
     
     (530
     )
     
     (964
     )Decrease (increase) in accounts payable and other liabilities
     
     
     (1,009
     )
     
     2,211Decrease in accounts payable - related party
     
     
     (2
     )
     
     (285
     )Decrease (increase) in security deposits
     
     
     5
     
     
     (30
     )Net cash provided by operating activities
     
     
     8,145
     
     
     11,137Cash flows from investing activities:Improvements to real estate, including leasing costs
     
     
     (1,522
     )
     
     (1,205
     )Loans to affiliates
     
     
     (1,977
     )
     
     (1,252
     )Payments from affiliates
     
     
     1,550
     
     
     1,531Additions to furniture, fixtures and equipment
     
     
     (38
     )
     
     (8
     )Investment in advised funds and other affiliates
     
     
     (94
     )
     
     Distributions from advised funds and other affiliates
     
     
     555
     
     
     106Proceeds from sale of real estate acquired for resale
     
     
     14,053
     
     
     Cash deposited with a qualified intermediary
     
     
     (12,804
     )
     
     Proceeds from sale of investment property
     
     
     4,608
     
     
     Decrease in preacquisition costs
     
     
     
     
     
     4Net cash provided by (used in) investing activities
     
     
     4,331
     
     
     (824
     )Cash flows from financing activities:Proceeds from notes payable
     
     
     20,600
     
     
     8,094Payments of notes payable
     
     
     (21,103
     )
     
     (9,340
     )Payments for financing costs
     
     
     (382
     )
     
     (216
     )Purchase of treasury stock
     
     
     (22
     )
     
     Issuance of shares of common stock
     
     
     (22
     )
     
     Retirement of shares of common stock
     
     
     
     
     
     (277
     )Common dividends paid
     
     
     (8,073
     )
     
     (9,498
     )Distributions to noncontrolling interests
     
     
     (438
     )
     
     (99
     )Net cash used in financing activities
     
     
     (9,440
     )
     
     (11,336
     )Net increase (decrease) in cash and cash equivalents
     
     
     3,036
     
     
     (1,023
     )Cash and cash equivalents, beginning of period
     
     
     1,067
     
     
     2,335Cash and cash equivalents, end of period
     
     $
     4,103
     
     $
     1,312Supplemental schedule of cash flow information:Cash paid during the year for:Interest
     
     $
     7,812
     
     $
     7,602Income taxes
     
     
     362
     
     
     433
  Supplemental schedule of noncash investing and financing activities  See Note 2 for further discussion of non-cash investing and financing activities associated with the recapitalization and merger, including the issuance of AmREIT, Inc. shares of common stock in exchange for AmREIT class A, class  C, and class D common shares of beneficial ownership.  In 2010, we issued 185,500 restricted shares of common stock to employees and directors as part of their compensation arrangements.  The restricted shares vest over a three to seven-year period. We recorded approximately $1.7 million in deferred compensation related to the issuance of the restricted shares.  In 2009, we issued 64,000 restricted shares of common stock to AmREIT employees and directors as part of their compensation arrangements.  The restricted shares vest over a three to seven year period. We recorded approximately $580,000 in deferred compensation related to the issuance of the restricted shares.  During 2010, we sold 21 properties, all to third parties. These transactions generated proceeds of $19.5 million (after debt extinguishment), $12.8 million of which have been deposited with a qualified intermediary to be used for future property acquisition in accordance with section 1031 of the Internal Revenue Code of 1986, as amended (the Code). In conjuction with these dispositions, we extinguished $17.4 million of notes payable.  During 2009, we recognized $1.1 million in lease termination income related to a national tenant that declared bankruptcy and subsequently defaulted upon their operating ground lease with us. Upon default, ownership of the building transferred from the tenant to us as the ground lessor.  Accordingly, we recorded lease termination income in an amount equal to the fair value of the building.  See Notes to Consolidated Financial Statements.  4


---



Table of Contents  AmREIT, Inc. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2010 (unaudited)  1.  OUR RECENT HISTORY AND OUR BUSINESS  OUR RECENT HISTORY  We were organized by our predecessor, AmREIT, in April 2007 as REITPlus, Inc. (REITPlus), a Maryland corporation that elected to be taxed as a real estate investment trust (REIT). REITPlus was structured as an externally managed and advised REIT, with a wholly-owned subsidiary of AmREIT providing investment advisory and property and corporate management services.  During 2007, AmREIT initiated a strategic plan referred to as Vision 2010.  Vision 2010 was designed to create a more conforming business platform that would reduce the earnings volatility of AmREITs business model and that would also simplify its capital structure, with the ultimate goal of growing its portfolio of properties and providing liquidity for investors.  Vision 2010 included the following three phases:  
     Phase I consisted of business model changes which were designed to reduce the earnings volatility created by certain of AmREITs transactional operating subsidiaries.  In connection with Phase I, AmREIT simplified its operating platform and reduced its transactional volatility by exiting the general contracting business and the independent broker-dealer fund-raising business.  Additionally, it terminated the best efforts equity offering of REITPlus.  Together, these restructuring initiatives resulted in a one-time restructuring charge of approximately $2.5 million during 2008, but also reduced AmREITs annual overhead and general and administrative expenses.
     Phase II consisted of changes which were designed to simplify AmREITs equity capital structure. In December 2008, AmREIT voluntarily de-listed its Class A common shares of beneficial interest from trading on the NYSE Alternext Exchange. Then, at separate special meetings held on November 24, 2009, both AmREIT and REITPlus shareholders approved the merger of AmREIT with and into REITPlus (the Merger), resulting in a combined, conforming entity with a single class of common stock, which was renamed AmREIT, Inc..
     For the combined company, Phase III will consist of growing our portfolio of properties and identifying additional sources of liquidity for stockholders as the United States begins to exit the current recession and transition into recovery.  This growth objective is the sole focus of managements Vision 2012.
  Following our strategic combination with our predecessor, AmREIT, all of the independent members of the boards of both AmREIT and REITPlus, as well as H. Kerr Taylor, who served as chairman and chief executive officer of both companies, now form our seven-member Board of Directors. Since the Merger, we are and have been internally managed by the former management team of AmREIT.  Accordingly, the following discussion describes the business of AmREIT, Inc. which is comprised of the combined businesses previously conducted by AmREIT and REITPlus.  As further discussed in Note 2 to the accompanying consolidated financial statements, for accounting purposes, the Merger was treated as an asset acquisition, with AmREIT being the accounting acquirer deemed to have acquired the net assets of REITPlus. As a result, the accompanying consolidated financial statements reflect the historical financial position and results of operations of AmREIT prior to the Merger and those of the combined company following the Merger.  In these notes to the financial statements, we, us, our, or the Company refers to AmREIT, Inc., the combined company following the Merger of REITPlus with AmREIT, together with its predecessors and subsidiaries, including joint ventures, unless the context requires otherwise.  5


---



Table of Contents  OUR BUSINESS  AmREIT, Inc. owns, operates and creates value on Irreplaceable CornersTM in Texas, which is home to three of the top six major growth markets throughout the United States and has the 12th largest economy in the world based on GDP (ahead of Mexico, Russia and India). For over 25 years, we have provided our clients and investors with financial transparency, reliability and creation of value for future real estate investment growth. We have access to a variety of capital markets, including public and private financial companies and institutional investors,and our platform has grown from approximately $100 million in assets in 2002 to approaching $1 billion today. We have elected to be taxed as a REIT for federal income tax purposes. AmREIT, Inc. is headquartered in Houston, Texas, and has an office in Dallas, Texas.  Our core portfolio consists primarily of Irreplaceable Corners, which we define as corner properties in top U.S. growth markets with high barriers to entry, strong demographic purchasing power (i.e., target household income in a 1-mile radius of $100,000), high daytime and evening population (i.e., target average of 100,000 people in a 3-mile radius), high rate of cars per day, strong demand for retail space and distinctive qualities. Our advisory business invests in and advises various advised funds and joint ventures that own, develop and manage retail and mixed-use properties located within fast growing markets. We create value for our clients and investors through our expertise in development, redevelopment and daily operation of these properties.  2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  MERGER ACCOUNTING  Simultaneously with the Merger of AmREIT with and into REITPlus on November 24, 2009, wherein AmREIT acquired REITPluss net assets, AmREIT consummated a recapitalization of its equity structure by combining its three classes of common shares of beneficial interest into a single class of common stock.  The following discussion addresses the accounting treatment for the recapitalization as well as for the acquisition of REITPluss net assets.  Recapitalization Prior to the Merger, AmREIT had Class A common shares (Class A shares), Class C common shares (Class C shares) and Class D common shares (Class D shares) outstanding (collectively, the AmREIT Shares).  The AmREIT Declaration of Trust provided that any merger of AmREIT that resulted in Class A shares being converted into another security or other form of consideration must also result in Class C shares and Class D shares being converted or convertible into such securities or other consideration as if the Class C shares and Class D shares had first been converted into Class A shares at the conversion prices and fair market value per share of Class A as set forth in the Declaration of Trust.  The Class C shares and Class D shares were each convertible into Class A shares at their respective premiums pursuant to the Declaration of Trust.  In conjunction with the Merger, the AmREIT Shares were converted into a single class of AmREIT, Inc. common stock at exchange ratios reflecting the foregoing conversion principles.  The premium, which was $10.2 million, was recorded during 2009 as an additional dividend in accordance with U.S. generally accepted accounting principles (GAAP).  Given that AmREIT was the accounting acquirer, as discussed in more detail below, the foregoing exchange/conversion was treated for accounting purposes as a deemed recapitalization of AmREIT immediately prior to the acquisition of REITPluss net assets.  The Class C and Class D shareholders were issued 4,793,455 and 12,178,341 class A shares, respectively, in connection with the recapitalization on November 24, 2009.  Acquisition- Although REITPlus was the surviving legal entity in the Merger, AmREIT was deemed to be the acquirer for financial reporting purposes pursuant to Accounting Standards Codification (ASC) ASC 805Business Combinations. The transaction was treated legally as a Merger of the two entities; however, for accounting purposes the transaction was treated as an asset acquisition pursuant to ASC 805.The Merger was therefore treated as an acquisition by AmREIT of REITPluss net assets.  Accordingly, the accompanying statements of operations for the periods prior to the Merger represent the historical operating results of AmREIT. The operating results generated by REITPluss net assets were included in our 2009 operating results from November 24, 2009, the date of the Merger. The acquisition of REITPlus was accounted for by applying the acquisition method under ASC 805.  The purchase price for REITPlus was determined based on the fair value of the consideration given in exchange for the REITPlus net assets received in the acquisition.  The fair value of the consideration given was $7.2 million, (calculated as the 758,604 AmREIT shares deemed given in the transaction valued at $9.50/share) which management believes reflected the fair value of the net assets of REITPlus deemed acquired by AmREIT.  6


---



Table of Contents  AmREIT incurred costs of approximately $1.3 million in connection with the Merger which included fees for investment banking services, legal, accounting, due diligence, tax, valuation, printing and various other services necessary to complete the transaction.  Costs incurred in connection with the issuance of our common stock in the amount of $858,000 were recorded as a reduction of stockholders equity.  The remaining costs incurred in the amount of $441,000 were associated with the acquisition of REITPluss net assets.  Accordingly, they were initially capitalized as part of the assets acquired pursuant to GAAP applied to asset acquisitions, resulting in a total cost to AmREIT of approximately $7.6 million.  However, we subsequently expensed such acquisition costs in 2009 as an other-than-temporary impairment given that the carrying amount of REITPluss net assets acquired was in excess of their fair value to the extent of these costs.  The following represents the assets acquired and liabilities assumed by AmREIT in the acquisition. No other tangible or intangible assets were identified as part of the acquisition:  ($ in thousands)AssetsCash
     
     $
     743Remaining interest in Shadow Creek Ranch (a)
     
     
     5,769Investment in AmREIT (90,241 Class A shares) (b)
     
     
     720Prepaid expenses
     
     
     48Total assets acquired
     
     $
     7,280LiabilitiesAccounts payable and accrued liabilities
     
     
     Accounts payable  related party
     
     
     75Total liabilities assumed
     
     
     75Net assets acquired
     
     $
     7,205Less:
     Treasury shares
     
     
     (720
     )Acquisition costs
     
     
     (858
     )Net effect on equity
     
     $
     5,627
  (a)
     AmREIT owned a 16% interest in REITPlus Operating Partnership, LP (REITPlus OP) which held the investment in Shadow Creek Ranch and in AmREIT.  The remaining interest of $5.8 million represents AmREITs cost in acquiring the remaining 84% interest in Shadow Creek Ranch owned by REITPlus OP after expensing the $441,000 in acquisition costs as an other-than-temporary impairment.(b)
     The value of the investment in AmREIT was determined using a $9.50/share value of an AmREIT Class A share and represents the remaining 84% interest in the AmREIT shares owned by REITPlus OP.
  In connection with the Merger, each AmREIT Class A share was exchanged for one share of AmREIT, Inc. common stock. The following table calculates the number of shares of AmREIT, Inc. common stock outstanding after the effects of the AmREIT recapitalization and subsequent merger with REITPlus:  Number ofSharesREITPlus shares pre-Merger
     
     
     758,604AmREIT shares exchanged in the Merger -AmREIT shares post-recapitalization
     22,290,695Merger exchange rate
     1:1
     
     22,290,695Less:  Cancellation of AmREIT shares owned by REITPlus pre-Merger
     
     
     (90,241
     )AmREIT, Inc. shares immediately post-Merger (November 24, 2009)
     
     
     22,959,058
  7


---



Table of Contents  BASIS OF PRESENTATION  Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred.  The consolidated financial statements include our accounts as well as the accounts of any wholly- or majority-owned subsidiaries in which we have a controlling financial interest.Investments in joint ventures and partnerships where we have the ability to exercise significant influence but do not exercise financial and operating control are accounted for using the equity method.The Company consolidates certain joint ventures and partnerships in which it owns less than a 100% equity interest as defined in ASC 810,Consolidation.  All significant inter-company accounts and transactions have been eliminated through consolidation.  As discussed above, we exited the general contracting business and the independent broker-dealer fund-raising business in the fourth quarter of 2008.  Accordingly, the operating activity of these businesses, including all prior activity, has been reclassified as discontinued operations in the accompanying consolidated statements of operations.  See Discontinued Operations below for further detail.  The accompanying consolidated financial statements included in this Report for the three and nine months ended September 30, 2010 and 2009 are unaudited. In our opinion, all adjustments necessary for a fair presentation of such financial statementshave been included, and such adjustments consisted of normal recurring items.  REVENUE RECOGNITION  We lease space to tenants under agreements with varying terms.  The majority of the leases are accounted for as operating leases and, although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset.  Generally, possession or control occurs on the lease commencement date.  In cases where significant tenant improvements are made prior to lease commencement, the leased asset is considered to be the finished space, and revenue recognition therefore begins when the improvements are substantially complete.  Accrued rents are included in tenant receivables. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recorded within rental income from operating leases and is recognized in the period that the related expense is recorded. Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants sales volumes (contingent or percentage rent). Percentage rents are generally recognized when the tenants achieve the specified targets as defined in their lease agreements. During the nine months ended September 30, 2010 and 2009, we recognized percentage rents of $177,000 and $105,000, respectively.  The terms of certain leases require that the building/improvement portion of the lease be accounted for under the direct financing method which treats the building as if we had sold it to the lessee and entered into a long-term financing arrangement with such lessee. This accounting method is appropriate when the lessee has all of the benefits and risks of property ownership that they otherwise would if they owned the building versus leasing it from us.  All properties for which we accounted for the building/improvements under the direct financing method were sold during the third quarter of 2010.  We recognize lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured. Upon early lease termination, we provide for losses related to unrecovered intangibles and other assets and write off any assets or liabilities and the associated accumulated amortization. We did not recognize any lease termination fee income during the nine months ended September 30, 2010.  During the nine months ended September 30, 2009, we recognized $1.1 million in lease termination income related to a national tenant that declared bankruptcy and subsequently defaulted upon their operating ground lease with us.  Upon default, ownership of the building transferred from the tenant to us as the ground lessor.  Accordingly, we recorded lease termination income in an amount equal to the fair value of the building.  We have investments in advised funds and other affiliates that are accounted for under the equity method because we exercise significant influence over such entities.  We record our percentage interest in the earnings and losses of these entities in our accompanying consolidated statement of operations.  8


---



Table of Contents  We account for profit recognition on sales of real estate in accordance with ASC 360,Property, Plant and Equipment. Pursuant to ASC 360, profits from sales will not be recognized under the full accrual method by the Company until certain criteria are met.  Gains relating to transactions which do not meet the criteria for full accrual method of accounting are deferred and recognized when the full accrual method of accounting criteria are met or by using the installment or deposit methods of profit recognition, as appropriate in the circumstances.  We provide various real estate services, including development, construction management, property management, leasing and brokerage. The fees for these services are recognized as services are provided and are generally calculated as a percentage of revenues earned or to be earned or of property cost, as appropriate. Construction management contracts are recognized only to the extent of the fee revenue.  REAL ESTATE INVESTMENTS  Development PropertiesLand, buildings and improvements are recorded at cost.  Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges, acquisition costs and development costs.  Carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction, are capitalized as part of construction in progress.  The capitalization of such costs ceases at the earlier of one year from the date of completion of major construction or when the property, or any completed portion, becomes available for occupancy.  We capitalize as incurred costs associated with pending acquisitions of raw land.  Such costs are expensed if and when such land acquisition becomes no longer probable.During the nine months ended September 30, 2010, we had no capitalized interest and taxes on properties under development. During the nine months ended September 30, 2009, we had $20,000 of capitalized interest and taxes on properties under development.  Acquired Properties and Acquired Lease Intangibles We account for operating real estate acquisitions pursuant to ASC 805,Business Combinationsas we believe that most operating real estate meets the definition of a business pursuant to this guidance.  Accordingly, we allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values.  Identifiable intangibles include amounts allocated to acquire above and below market leases, the value of in-place leases and customer relationship value, if any.  We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.  Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property.  Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions and costs to execute similar leases.  In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions.  Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses.  Intangibles related to above market and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, respectively, over the remaining terms of the underlying leases.  Below market leases include fixed-rate renewal. Premiums or discounts on debt are amortized to interest expense over the remaining term of such debt.  Costs related to acquiring operating properties are expensed as incurred.  Depreciation Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years for buildings, up to 20 years for building and site improvements and over the term of the lease for tenant specific improvements.  Leasehold estate properties, properties on which we own the building and improvements but not the related ground, are amortized over the life of the lease.We re-evaluate the useful lives of our buildings and improvements as warranted by changing conditions at our properties.  As part of this re-evaluation, we first consider whether such changing conditions indicate a potential impairment, and we perform an impairment analysis as necessary, at the property level. In the case of a property redevelopment, we reassess the useful lives of specific buildings or other improvements to be demolished as part of that redevelopment once the redevelopment is probable to occur.  Properties Held for SaleProperties are classified as held for sale if we have decided to market the property for immediate sale in its present condition with the belief that the sale will be completed within one year.  Properties held for sale are carried at the lower of cost or fair value less cost to sell. Depreciation and amortization are suspended during the held for sale period. As of September 30, 2010 and December 31, 2009, no properties were classified as real estate held for sale.  9


---



Table of Contents  Our properties generally have operations and cash flows that can be clearly distinguished from the rest of the Company.  The operations and gains on sales reported in discontinued operations include those properties that have been sold or are held for sale and for which operations and cash flows have been clearly distinguished.  The operations of these properties have been eliminated from ongoing operations, and we will not have continuing involvement after disposition.  Prior period operating activity related to such properties has been reclassified as discontinued operations in the accompanying consolidated statements of operations.  Impairment We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including acquired lease intangibles and accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors which require that complex and subjective judgments be made by management.  Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant credit-worthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property.  During the third quarter of 2010, we identified a negative trend in the market for single-tenant properties located in tertiary markets.  Accordingly, we performed an impairment analysis on all seven of our properties with these characteristics.  The analysis indicated for six of such properties that the estimated undiscounted future cash flows associated with these assets would not be sufficient to recover their carrying values as of September 30, 2010.  As a result, we recorded impairments in the aggregate amount of $3.5 million on these six single-tenant, non-core properties in order to reduce their carrying values to their respective fair values. Our determination of fair-value was based on market data for similar assets. Four of these assets are being actively marketed by a third-party broker; however, these assets did not meet the held for a sale criterion because we do not believe a sale is probable in the next twelve months.  These four assets have an aggregate estimated fair value of $3.1 million and were impaired by $2.6 million.  The remaining two assets have an aggregate estimated fair value of $2.3 million and were impaired by $865,000.  These assets are not currently being marketed and their estimated fair values were determined by management based on a discounted future cash flow model. No impairment charges were recognized for the nine months ended 2009.  RECEIVABLES AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS  Tenant receivables Included in tenant receivables are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. Bad debt expenses and any related recoveries related to tenant receivables are included in property expense. Following is a summary of activity within our allowance for uncollectible accounts ($ in thousands):  Nine months ended September 30,2010
     
     2009Beginning of period
     
     $
     1,026
     
     $
     502Additional reserves
     
     
     1,091
     
     
     619Collections/reversals
     
     
     (245
     )
     
     (348
     )Write-offs
     
     
     (140
     )
     
     (44
     )Ending of period
     
     $
     1,732
     
     $
     729
  Accounts receivableIncluded in accounts receivable are various receivables that arise in the normal course of operating our business. During the nine months ended September 30, 2010, we reversed $51,000 of bad debt expense related to miscellaneous receivables that were collected during the period. During the nine months ended September 30, 2009, we recorded $84,000 in bad debt expense related to miscellaneous receivables. Additionally,included in accounts receivable as of September 30, 2010 is a $1.3 million receivable from the City of Pearland, Texas.  We acquired this receivable in June 2008 in conjunction with the acquisition of Shadow Creek Ranch Shopping Center by our affiliated funds in February 2008. The receivable is to be funded by one-third of the 1.5% sales tax that the City of Pearland collects from the shopping center.Bad debt expense and any related recoveries on general receivables are included in general and administrative expense.  10


---



Table of Contents  Note receivableIncluded in note receivable is a $4.0 million note from the sale of a tract of land adjacent to our Uptown Plaza  Dallas property located outside of downtown Dallas, Texas. In January 2010, we received a $50,000 extension fee from the buyer and extended the maturity date of the loan until December 31, 2010. With a 30-day notice period, the buyer has a one-time right to extend the maturity date of the loan until December 31, 2011 with payment of a $25,000 extension fee and an executed commitment for a construction loan on the property development.  Notes receivable  related party Included in related party notes receivable are loans made to our affiliated advised funds related to their acquisition or development of properties.  These loans bear interest at LIBOR plus a spread and are due upon demand.  During the nine months ended September 30, 2010, we recorded a $500,000 reserve on the note receivable from AmREIT Income and Growth Fund, Ltd, one of our advised funds, which is in liquidation.  The following is a summary of the notes receivable due from related parties as of September 30, 2010 ($ in thousands).  September 30, 2010
     
     December 31, 2009Related Party
     
     Face
Amount
     
     Reserve
     
     Carrying 
Amount
     
     Face
Amount
     
     Reserve
     
     Carrying 
AmountAmREIT Income and Growth Fund, Ltd
     
     $
     3,102
     
     $
     (500
     )
     $
     2,602
     
     $
     2,919
     
     $
     
     
     $
     2,919AmREIT Monthly Income and Growth Fund III, Ltd
     
     
     793
     
     
     
     
     $
     793
     
     
     1,376
     
     
     
     
     $
     1,376AmREIT Monthly Income and Growth Fund IV, L.P.
     
     
     1,201
     
     
     
     
     $
     1,201
     
     
     229
     
     
     
     
     $
     229Casa Linda, LP
     
     
     0
     
     
     
     
     $
     0
     
     
     145
     
     
     
     
     $
     145Total
     
     $
     5,096
     
     $
     (500
     )
     $
     4,596
     
     $
     4,669
     
     $
     0
     
     $
     4,669
  DISCONTINUED OPERATIONS  During 2008, we exited the general contracting business and the independent broker-dealer fund-raising business.  These businesses have been reflected as discontinued operations in the accompanying consolidated statement of operations along with any operating properties that we have sold during the reporting periods or that were held for sale.  We ceased all of the general contracting operations during 2009. No properties were held for sale as of September 30, 2010 and December 31, 2009. During 2010, we sold 21 properties, including all of our IHOP properties as further discussed in Note 3 below. The following is a summary of our discontinued operations for the three and nine months ended September 30, 2010 and 2009 (in thousands, except for per share data):  11


---



Table of Contents  Three months ended
September 30
     
     Nine months ended
September 302010
     
     2009
     
     2010
     
     2009Rental revenue
     
     $
     60
     
     $
     124
     
     $
     313
     
     $
     348Earned income from direct financing leases
     
     
     336
     
     
     566
     
     
     1,405
     
     
     1,677Construction revenues
     
     
     
     
     
     145
     
     
     
     
     
     1,002Interest and other income
     
     
     3
     
     
     
     
     
     3
     
     
     Interest and other income - related party
     
     
     4
     
     
     
     
     
     8
     
     
     Gain on sale of real estate acquired for resale
     
     
     5,549
     
     
     
     
     
     5,549
     
     
     1,897Gain on sale of real estate held for investment
     
     
     1,216
     
     
     
     
     
     1,216
     
     
     Total revenues
     
     
     7,168
     
     
     835
     
     
     8,494
     
     
     4,924Other general and administrative
     
     
     (70)
     
     
     3
     
     
     (65
     )
     
     14Property expense
     
     
     
     
     
     
     
     
     8
     
     
     8Construction costs
     
     
     
     
     
     137
     
     
     
     
     
     963Legal and professional
     
     
     5
     
     
     68
     
     
     30
     
     
     110Depreciation and amortization
     
     
     
     
     
     6
     
     
     10
     
     
     27Interest expense
     
     
     178
     
     
     353
     
     
     845
     
     
     1,031Federal income tax expense
     
     
     39
     
     
     4
     
     
     67
     
     
     38Total expenses
     
     
     152
     
     
     571
     
     
     895
     
     
     2,191Income from discontinued operations
     
     
     7,016
     
     
     264
     
     
     7,599
     
     
     2,733Basic and diluted income from discontinued operations per share
     
     $
     0.30
     
     $
     0.05
     
     $
     0.33
     
     $
     0.52
  DERIVATIVE FINANCIAL INSTRUMENTS  We account for our derivative financial instruments pursuant to ASC 815,Derivatives and Hedging.  ASC 815 requires that all derivative instruments, whether designated in hedging relationships or not, be recorded on the balance sheet at their fair value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Our use of derivative financial instruments to date has been limited to the use of interest rate swaps to mitigate our interest rate risk on variable-rate debt. We do not use derivative financial instruments for trading or speculative purposes. In December 2008, we entered into an interest rate swap for the purpose of hedging the interest rate risk on a variable-rate loan placed in conjunction with the refinancing of one of our properties.  We have designated this interest rate swap as a cash flow hedge for financial reporting purposes and have therefore recorded changes in the fair value of this hedge instrument to other comprehensive income. The swap settles monthly with an amount paid to or received from our counterparty being recorded as an adjustment to interest expense.  ASC 815 requires that changes in fair value of derivatives that qualify as cash flow hedges be recognized in other comprehensive income (OCI) while the ineffective portion of the derivatives change in fair value be recognized in the income statement as interest expense. Upon the settlement of a hedge, gains and losses associated with the transaction are recorded in OCI and amortized over the underlying term of the hedge transaction. We assess, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items.  All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.  DEFERRED COSTS  Deferred costs include deferred leasing costs and deferred loan costs, net of amortization.  Deferred loan costs are incurred in obtaining financing and are amortized to interest expense over the term of the debt agreements using the effective interest method. Deferred leasing costs consist of internal and external commissions associated with leasing our properties and are amortized to depreciation and amortization expense over the lease term.If a lease is terminated early or if a loan is repaid prior to maturity, the remaining costs will be disposed of.Accumulated amortization related to deferred loan costs as of September 30, 2010 and December 31, 2009 totaled $1.2 million and $1.3 million, respectively. Accumulated amortization related to leasing costs as of September 30, 2010 and December 31, 2009 totaled $1.1 million and $902,000, respectively.  12


---



Table of Contents  DEFERRED COMPENSATION  Our deferred compensation and long term incentive plan is designed to attract and retain the services of our directors and employees that we consider essential to our long-term growth and success. As such, it is designed to provide them with the opportunity to own shares, in the form of restricted shares, in us. All long term compensation awards are designed to vest over a period of three to seven years, promote retention of our team members and align their interests with those of our stockholders.  Restricted Share Issuances- Deferred compensation includes grants of shares of restricted common stock to our directors and employees as a form of long-term compensation. The share grants vest over a period of three to seven years.  We determine the fair value of the restricted shares as the number of shares awarded multiplied by the fair value per share of our common stock on the grant date. We amortize such fair value ratably over the vesting periods of the respective awards.  The following table presents restricted share activity during the nine months ended September 30, 2010.  Non-vested
Shares
     
     Weighted Average
grant
date fair valueBeginning of period
     
     
     278,192
     
     $
     8.20Granted
     
     
     185,500
     
     
     9.50Vested
     
     
     (21,095
     )
     
     8.23Forfeited
     
     
     (11,422
     )
     
     7.59End of period
     
     
     431,175
     
     $
     8.78
  The weighted-average grant date fair value of shares issued under our deferred compensation and long term incentive plan during the nine months ended September 30, 2010 was $9.50 per share.The total fair value of shares vested during the nine months ended September 30, 2010 and 2009 was $174,000 and $546,000, respectively.  Total compensation cost recognized related to restricted shares during the nine months ended September 30, 2010 and 2009 was $316,000 (net of $55,000 of forfeitures) and $374,000, respectively.  As of September 30, 2010, total unrecognized compensation cost related to restricted shares was $3.7 million, and the weighted average period of time over which we expect this cost to be recognized is 4.0 years.  Tax-Deferred Retirement Plan (401(k))- We maintain a defined contribution 401(k) retirement plan for our employees. This plan is available for all employees immediately upon employment.  The plan allows for contributions to be invested in an array of large, mid and small cap mutual funds. We match 50% of the employees contribution up to a maximum employee contribution of 4%. No portion of the employer matching contribution can be comprised of our common stock.  Share Options- We are authorized to grant options for shares of our common stock as either incentive or non-qualified share options, up to an aggregate of 6.0% of the total voting shares outstanding.  As of September 30, 2010 and December 31, 2009, no options have been granted.  INCOME TAXES  We account for federal and state income taxes under the asset and liability method.  Federal We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the Code), and are, therefore, not subject to federal income taxes to the extent of dividends paid, provided that we meet all conditions specified by the Code for retaining our REIT status, including the requirement that at least 90% of our REIT taxable income be distributed to shareholders.  Our real estate development and operating business, AmREIT Realty Investment Corporation and its subsidiaries (ARIC), is a fully integrated and wholly-owned business consisting of brokers and real estate professionals that provide development, acquisition, brokerage, leasing, construction management, asset and property management services to our portfolio and advised funds as well as to third parties. ARIC and our wholly-owned corporations that serve as the general partners of our advised funds are treated as taxable REIT subsidiaries for federal income tax purposes.  13


---



Table of Contents  State In May 2006, the State of Texas adopted House Bill 3 which modified the states franchise tax structure and replaced the previous tax based on capital or earned surplus with a tax based on margin (often referred to as the Texas Margin Tax) effective beginning with franchise tax reports filed on or after January 1, 2008. The Texas Margin Tax is computed by applying the applicable tax rate (1% for us) to the profit margin, which, generally, will be determined for us as total revenue less a 30% standard deduction.  Although House Bill 3 states that the Texas Margin Tax is not an income tax, we believe that ASC 740Income Taxes,applies to the Texas Margin Tax.  We have recorded a margin tax provision of $287,000 and $204,000 for the Texas Margin Tax for the nine months ended September 30, 2010 and 2009, respectively.  Deferred Tax Assets- To the extent that we are in a net deferred tax asset position at period end, we will determine whether it is more likely than not that we will generate sufficient future taxable income in order to realize that net asset. In making that determination, we will consider our current financial position, our result of operations for the current and preceding years, and our expectation of future operations.  As of September 30, 2010, we have recorded a $1 million valuation allowance based against our gross deferred tax asset of $2.5 million on that assessment. We believe it is more likely than not that we will realize the remaining $1.5 million net deferred tax asset by generating sufficient taxable income from the acquisition and opportunistic sale of properties acquired with the intent to resell them in the near term or from fees earned for services provided to our advised funds, such as leasing, property management, construction management, development, acquisition and disposition fees.  EARNINGS PER SHARE  Basic earnings per share is computed by dividing net income (loss) available to stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income (as adjusted as appropriate) by the weighted average number of shares of common stock outstanding plus the weighted average number of any dilutive potential shares of common stock. Our basic and diluted earnings per share are equal in that our potential common shares are limited to the non-vested shares issued as part of our long term compensation program discussed above. We include these non-vested shares as part of our basic earnings per share calculation because the non-vested shareholders share in dividends on a one-for-one basis with our common shareholders and the dividends on the non-vested shares are non-forfeitable.  The following table presents information necessary to calculate basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009, respectively, as indicated:  Three months ended
September 30
     
     Nine months ended
September 302010
     
     2009
     
     2010
     
     2009Net income (loss) available to stockholders*
     
     $
     8,285
     
     $
     (1,253
     )
     $
     9,599
     
     $
     (2,385
     )Weighted average shares of common stock outstanding*
     
     
     23,122
     
     
     5,319
     
     
     23,098
     
     
     5,304Basic and diluted income (loss) per share
     
     $
     0.35
     
     $
     (0.23
     )
     $
     0.42
     
     $
     (0.44
     )
  * In thousands  USE OF ESTIMATES  The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accompanying consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  FAIR VALUE MEASUREMENTS  We account for assets and liabilities measured at fair value in accordance with ASC 820,Fair Value Measurement and Disclosures. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entitys own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:  14


---



Table of Contents     Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.    Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.    Level 3 - Unobservable inputs for the asset or liability, which are typically based on the Companys own assumptions, as there is little, if any, related market activity.  ASC 820 requires the use of observable market data, when available, in making fair value measurements. Observable inputs that the market participants would use in pricing the asset or liability are developed based on market data obtained from sources independent of our own. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.  Derivative Financial Instruments  In determining the fair value of our derivative instruments, we consider whether credit valuation adjustments are necessary to appropriately reflect both our own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements.  Although we have determined that the majority of the inputs used to value our derivatives fall within level 2 of the fair value hierarchy, the credit valuation assumptions associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties.  However, as of September 30, 2010, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.  Notes Payable and Other Financial Instruments  Our consolidated financial instruments consist primarily of cash and cash equivalents, tenant receivables, accounts receivable, notes receivable, note receivable  related party, accounts payable and other liabilities and notes payable. The carrying value of our consolidated financial instruments is representative of their respective fair values due to the short-term maturity of these instruments. The carrying value of the Companys variable rate notes payable and the revolving line of credit approximate their carrying values. The fair value of fixed rate loans are estimated using cash flows discounted at current market rates which are available for debt with similar terms and maturities. As a result, we have determined that our notes payable in their entirety are classified in Level 2 of the fair value hierarchy. Fixed rate loans assumed in connection with real estate acquisitions are recorded in the accompanying consolidated financial statements at fair value at the time of acquisition. Based on our estimates, the fair value of our fixed rate notes payable was approximately $114 million and $133 million at September 30, 2010 and December 31, 2009, respectively.  The following table presents our assets and liabilities and related valuation inputs within the fair value hierarchy utilized to measure fair value as of September 30, 2010 (in thousands):  Level 1
     
     Level 2
     
     Level 3Derivative Liability
     
     $
     
     
     $
     432
     
     $
     Fixed rate notes payable
     
     
     
     
     
     114,396
     
     
     
  15


---



Table of Contents  Impairment of Long-lived Assets  Long-lived assets held and used are comprised primarily of real estate. During the nine months ended September 30, 2010 we established provisions for impairment of six of our non-core single tenant properties as discussed above. The following table presents our provisions and related valuation inputs within the fair value hierarchy utilized to measure the fair value of these properties as of September 30, 2010 (in thousands):  Level 1
     
     Level 2
     
     Level 3Real Estate Investments
     $
     
     
     $
     
     
     $
     3,487
  NEW ACCOUNTING STANDARDS  In June 2009, the FASB amended the consolidation guidance applicable to variable interest entities in ASC 810 Consolidation(formerly SFAS 167). The amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R),Consolidation of Variable Interest Entitiesan interpretation of ARB No. 51, and changes the way entities account for securitizations and variable interest entities as a result of the elimination of the Qualified Special Purpose Entity (QSPE) concept in SFAS No.166. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009 and early adoption is prohibited. The adoption of SFAS 167 did not have an effect on our results of operations or financial position.  STOCK ISSUANCE COSTS  Issuance costs incurred in the raising of capital through the sale of shares of common stock are treated as a reduction of stockholders equity.  CASH AND CASH EQUIVALENTS  We consider all highly-liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds.  We have restricted cash related to a pending 1031 exchange on our IHOP portfolio sale during the third quarter of 2010. Proceeds in the amount of $12.8 million are currently on deposit with a qualified intermediary, and we expect that cash will be invested in a replacement property in the first quarter of 2011, see further discussion at Note 3.  RECLASSIFICATIONS  Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the presentation used in the current year consolidated financial statement.  3.  INVESTMENTS IN ADVISED FUNDS  AAA CTL Notes, Ltd.  AAA CTL Notes I Corporation (AAA Corp), our wholly-owned subsidiary, invested as a general partner and limited partner in AAA CTL Notes, Ltd. (AAA).  AAA is a majority-owned subsidiary through which we purchased 15 IHOP Corp. (IHOP) leasehold estate properties and two IHOP fee simple properties.  We have consolidated AAA in our financial statements.  During 2009, AmREIT Income and Growth Fund, Ltd. (AIG) assigned to AmREIT its 19.6% ownership interest in AAA which was valued at $1.2 million in exchange for a corresponding reduction in AIGs note payable to AmREIT.  In September 2010, AAA sold its 17 IHOP properties to a third party for a gain of $4.9 million. This transaction generated proceeds of $14.1 million, of which $9.5 million has been deposited with a qualified intermediary to be used for future property acquisitions in accordance with section 1031 of the Internal Revenue Code of 1986, as amended (the Code).  The remaining proceeds have been distributed to the partners of AAA CTL Notes, Ltd.  We had previously assigned 50% of the residual economic interest in the general partner of AAA CTL Notes, Ltd. to certain of our key employees.  As a result of this sale and the performance of the AAA CTL Notes, Ltd. partnership since its inception, $3.0 million was distributed to these partners and is presented as a reduction of the gain on real estate acquired for resale in the accompanying consolidated financial statements.  16


---



Table of Contents  Advised Funds  As of September 30, 2010, we owned, through wholly-owned subsidiaries, interests in five real estate limited partnerships which are accounted for under the equity method as we exercise significant influence over, but do not control, the investee. In each of the partnerships, the limited partners have the right, with or without cause, to remove and replace the general partner by a vote of the unrelated limited partners owning a majority of the outstanding units. These real estate partnerships were formed to develop, own, manage and add value to properties with an average holding period of two to four years. Our interests in these advised funds range from 2.1% to 3.0%.  See Note 9 regarding transactions we have entered into with our advised funds.  AmREIT Income & Growth Fund, Ltd. (AIG) AmREIT Income & Growth Corporation (AIGC), our wholly-owned subsidiary, invested $200,000 as a limited partner and $1,000 as a general partner in AIG. We currently own an approximate 2.0% limited partner interest in AIG.  Pursuant to the AIG limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and to AIGC as, if and when the annual return thresholds have been achieved by the limited partners.  AmREIT Monthly Income & Growth Fund (MIG)AmREIT Monthly Income & Growth Corporation (MIGC), our wholly-owned subsidiary, invested $200,000 as a limited partner and $1,000 as a general partner in MIG. We currently own an approximate 1.3% limited partner interest in MIG. Pursuant to the MIG limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and to MIGC as, if and when the annual return thresholds have been achieved by the limited partners. MIG was originally scheduled to begin liquidation in November 2009; however, the liquidation has been extended to March 2013, pursuant to approval of approximately 63% of the limited partners.  AmREIT Monthly Income & Growth Fund II (MIG II)AmREIT Monthly Income & Growth II Corporation (MIGC II), our wholly-owned subsidiary, invested $400,000 as a limited partner and $1,000 as a general partner in MIG II. We currently own an approximate 1.6% limited partner interest in MIG II. Pursuant to the MIG II limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and to MIGC II as, if and when the annual return thresholds have been achieved by the limited partners.  MIG II was originally scheduled to begin liquidation in March 2011; however, the liquidation has been extended to March 2013, pursuant to approval of approximately 63% of the limited partners.  AmREIT Monthly Income & Growth Fund III (MIG III)AmREIT Monthly Income & Growth III Corporation (MIGC III), our wholly-owned subsidiary, invested $800,000 as a limited partner and $1,000 as a general partner in MIG III. Our $800,000 investment represents a 1.1% limited partner interest in MIG III.Pursuant to the MIG III limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and to MIGC III as, if and when the annual return thresholds have been achieved by the limited partners.  AmREIT Monthly Income & Growth Fund IV (MIG IV)AmREIT Monthly Income & Growth IV Corporation (MIGC IV), our wholly-owned subsidiary, invested $800,000 as a limited partner and $1,000 as a general partner in MIG IV.  Our $800,000 investment represents a 1.6% limited partner interest in MIG IV.Pursuant to the MIG IV limited partnership agreement, net sales proceeds from its liquidation will be allocated to the limited partners and to the MIGC IV as, if and when the annual return thresholds have been achieved by the limited partners.  17


---



Table of Contents  Advised funds  Financial Information  The following table sets forth certain financial information as of September 30, 2010 for the AIG, MIG, MIG II, MIG III and MIG IV advised funds:  Sharing Ratios(1)Merchant
Development
Fund
     
     Capital
under
Mgmt.
     
     LP
Interest
     
     GP
Interest
     
     LP
     
     GP
     
     LP
PreferenceAIG
     
     $
     3 million
     
     
     
     2.0
     %
     
     
     
     1.0
     %
     
     
     
     99
     %
     
     
     
     1
     %
     
     
     
     8
     %90
     %
     
     
     
     10
     %
     
     
     
     10
     %80
     %
     
     
     
     20
     %
     
     
     
     12
     %70
     %
     
     
     
     30
     %
     
     
     
     15
     %0
     %
     
     
     
     100
     %
     
     
     
     40% Catch Up60
     %
     
     
     
     40
     %
     
     
     
     ThereafterMIG
     
     $
     15 million
     
     
     
     1.3
     %
     
     
     
     1.0
     %
     
     
     
     99
     %
     
     
     
     1
     %
     
     
     
     8
     %90
     %
     
     
     
     10
     %
     
     
     
     10
     %80
     %
     
     
     
     20
     %
     
     
     
     12
     %0
     %
     
     
     
     100
     %
     
     
     
     40% Catch Up60
     %
     
     
     
     40
     %
     
     
     
     ThereafterMIG II
     
     $
     25 million
     
     
     
     1.6
     %
     
     
     
     1.0
     %
     
     
     
     99
     %
     
     
     
     1
     %
     
     
     
     8
     %85
     %
     
     
     
     15
     %
     
     
     
     12
     %0
     %
     
     
     
     100
     %
     
     
     
     40% Catch Up60
     %
     
     
     
     40
     %
     
     
     
     ThereafterMIG III
     
     $
     71 million
     
     
     
     1.1
     %
     
     
     
     1.0
     %
     
     
     
     99
     %
     
     
     
     1
     %
     
     
     
     10
     %0
     %
     
     
     
     100
     %
     
     
     
     40% Catch Up60
     %
     
     
     
     40
     %
     
     
     
     ThereafterMIG IV
     
     $
     50 million
     
     
     
     1.6
     %
     
     
     
     1.0
     %
     
     
     
     99
     %
     
     
     
     1
     %
     
     
     
     8.5
     %0
     %
     
     
     
     100
     %
     
     
     
     40% Catch Up60
     %
     
     
     
     40
     %
     
     
     
     Thereafter
   (1)
     Using AIG as an example of how the sharing ratios and limited partner preference provisions are applied, the limited partners share in 99% of the cash distributions until they receive their original invested capital plus an 8% preferred return.  Thereafter, the limited partners share in 90% of the cash distributions until they receive a 10% preferred return. This allocation process continues in accordance with the chart above.
  Other Affiliates  We have investments in entities other than the advised funds that are accounted for under the equity method because we exercise significant influence over such entities. We record our pro rata share of income or loss from the underlying entities based on our ownership interest.  AmREIT Woodlake, L.P.- In 2007, we invested $3.4 million in AmREIT Woodlake LP, for a 30% limited partnership interest. AmREIT Woodlake, LP was formed in 2007 to acquire, lease and manage Woodlake Square, a grocery-anchored shopping center located in Houston, Texas at the intersection of Westheimer and Gessner. In June 2008, we sold two-thirds (20%) of our interest in Woodlake Square to MIG IV.  Pursuant to the purchase agreement, the interest in the property was sold at its carrying value, resulting in no gain or loss to us. In July 2010, we and our affiliated partners entered into a joint venture with a third-party institutional partner wherein the partner acquired a 90% interest in the joint venture. As a result of this transaction, we now hold a 1% interest in Woodlake Square, which carries a promoted interest in profits and cash flows once an 11.65% return is met on the project. AmREIT Woodlake, LP recorded an impairment on the transaction.  Our portion of such impairment was approximately $62,000 and has been recorded in loss from advised funds and other affiliates in our consolidated statements of operations.  18


---



Table of Contents  AmREIT Westheimer Gessner, L.P.- In 2007, we invested $3.8 million in AmREIT Westheimer Gessner, LP for a 30% limited partnership interest. AmREIT Westheimer Gessner, LP was formed in 2007 to acquire, lease and manage Woodlake Pointe, a shopping center located in Houston, Texas at the southeast intersection of Westheimer and Gessner. In June 2008, we sold two-thirds (20%) of our interest in Woodlake Pointe to MIG IV. Pursuant to the purchase agreement, the interest in the property was sold at its carrying value, resulting in no gain or loss to us. As of September 30, 2010, we held a 10% interest in Woodlake Pointe.  AmREIT SPF Shadow Creek, L.P. As part of the AmREIT and REITPlus merger in November 2009, we acquired a 10% investment in AmREIT SPF Shadow Creek, LP which was formed in 2008 to acquire, lease and manage Shadow Creek Ranch, a shopping center located in Pearland, Texas at the intersection of Highway 288 and FM 518. The investment was recorded at $5.8 million on the date of the acquisition, net of acquisitions costs of $441,000, which were recorded as an other-than-temporary impairment.  4.  ACQUIRED LEASE INTANGIBLES  In accordance with ASC 805,Business Combinations, we have identified and recorded the value of intangibles at the property acquisition date.  Such intangibles include the value of acquired in-place leases and above and below market leases.  Acquired lease intangible assets (in-place leases and above-market leases), are amortized over the leases remaining terms, which range from one month to 20 years. The amortization of above-market leases is recorded as a reduction of rental income and the amortization of in-place leases is recorded to amortization expense.  The amortization expense related to in-place leases was approximately $1.1 million and $1.5 million during the nine months ended September 30, 2010 and 2009, respectively.  The amortization of above-market leases, which was recorded as a reduction of rental income, was approximately $88,000 and $248,000 during the nine months ended September 30, 2010 and 2009, respectively. Acquired lease intangible liabilities (below-market leases) are accreted over the leases remaining terms, which typically range from one month to 20 years. Accretion of below-market leases was approximately $230,000 and $288,000 during the nine months ended September 30, 2010 and 2009, respectively.  Such accretion is recorded as an increase to rental income. No new intangibles were recorded during 2010.  In-place and above-market lease amounts and their respective accumulated amortization are as follows (in thousands):  September 30,
2010
     
     December 31,
2009Acquired lease intangible assets:In-place leases
     
     $
     16,810
     
     $
     17,080In-place leases  accumulated amortization
     
     
     (10,973
     )
     
     (10,165
     )Above-market leases
     
     
     1,983
     
     
     1,983Above-market leases  accumulated amortization
     
     
     (1,792
     )
     
     (1,704
     )Acquired leases intangibles, net
     
     $
     6,028
     
     $
     7,194Acquired lease intangible liabilities:Below-market leases
     
     $
     3,773
     
     $
     3,840Below-market leases  accumulated amortization
     
     
     (2,271
     )
     
     (2,108
     )Acquired below-market lease intangibles, net
     
     $
     1,502
     
     $
     1,732
  19


---



Table of Contents  5.  NOTES PAYABLE  Our outstanding debt at September 30, 2010 and December 31, 2009 consists of the following (in thousands):  September 30, 2010
     
     December 31, 2009Fixed-rate mortgage loans (1)
     
     $
     124,753
     
     $
     151,406Variable-rate secured line of credit
     
     
     16,700
     
     
     19,529Variable-rate secured loans
     
     
     17,510
     
     
     12,041Total
     
     $
     158,963
     
     $
     182,976
  (1)Included in fixed-rate mortgage loans is a $17 million variable-rate debt instrument that has been effectively converted to a fixed-rate instrument pursuant to an interest rate swap agreement entered into with a third party.  In December 2009, we procured a $25.0 million secured credit facility (the Facility), the proceeds of which are to be used for the acquisition of properties and for working capital needs. The Facilitys interest rate is LIBOR plus a spread of 3.50%, with a floor of 5.00%, and we paid the lender a financing fee of approximately $163,000. The term of the Facility is one year expiring December 22, 2010, which can be extended for three one-year terms or which can be converted, at our option, to a three-year amortizing loan (20-year amortization) at the end of the first year, provided that there are no existing and continuing events of default at that time and that we pay an extension fee. The Facilitys borrowing base is determined based on the properties that are pledged as security against the Facility. The Facility contains covenants applicable to those pledged properties which, among other restrictions, require us to maintain a minimum net worth and, in certain cases of the occurrence of default, limit distributions to our stockholders. As of September 30, 2010, we were in compliance with all covenants. As of September 30, 2010, the interest rate was 5.00%, and we had $16.7 million outstanding and approximately $7.1 million available under the Facility, subject to the covenants above.  As of September 30, 2010, the weighted average interest rate on our fixed-rate debt is 5.74%, and the weighted average remaining life of such debt is 4.7 years. During the nine months ended September 30, 2010, we executed the following debt related transactions:  
     In June 2010, we procured $6.8 million of long-term financing secured by the pad sites on our MacArthur Park property located in Dallas, Texas.
     In July 2010, we extinguished $5.0 million of debt on one of our single-tenant properties upon sale to a third party.
     In September 2010, we extinguished $12.3 million of debt in connection with the sale of the IHOP portfolio
     In September 2010, we extinguished the $19.9 million mortgage on our Uptown Plaza property located in Dallas, Texas for a discounted payoff of $14.4 million, including retained escrows.  The payoff and applicable fees were funded by a $10.7 million loan with a new lender secured by our Uptown Plaza Dallas property and a $3.7 million draw on our Facility.  The new loan has a 3-year term and bears interest at LIBOR plus a spread of 3.25% with a floor of 4.75%.  Interest is calculated using a 25-year amortization period.  As a result of this transaction, we derecognized the former mortgage liability in accordance with ASC 405,Extinguishment of Liabilities, as cash was paid to the former lender and we were legally released of the obligation. Accordingly, we recorded a gain on debt extinguishment of $5.4 million in accordance with ASC 470,Debt.
  During the year ended December 31, 2009, we procured $7.0 million of long-term financing secured by five of our single-tenant properties located in The Woodlands, Texas.  As of September 30, 2010, scheduled principal repayments on notes payable were as follows (in thousands):  Scheduled Payments by Year
     
     Scheduled
Principal
Payments
     
     Maturities
     
     Total
Payments2010
     
     $
     255
     
     
     16,700
     (1)
     
     16,9552011
     
     
     1,268
     
     
     18,918
     
     
     20,1862012
     
     
     1,060
     
     
     2,531
     
     
     3,5912013
     
     
     1,120
     
     
     32,926
     
     
     34,0462014
     
     
     553
     
     
     
     
     
     553Thereafter
     
     
     1,759
     
     
     81,608
     
     
     83,367Unamortized debt premiums
     
     
     265
     
     
     
     
     
     265Total
     
     $
     6,280
     
     $
     152,683
     
     $
     158,963
  (1) This amount represents the outstanding balance on the Facility. The maturity date of the Facility can be extended for three one-year terms or can be converted to a three year amortizing loan as described above.  20


---



Table of Contents  6.  CONCENTRATIONS  As of September 30, 2010, Uptown Park in Houston, Texas, MacArthur Park in Dallas, Texas, and Plaza in the Park in Houston, Texas accounted for approximately 22%, 12% and 10%, respectively, of our consolidated total assets. Consistent with our strategy of investing in geographic areas that we know well, 15 of our properties are located in the Houston metropolitan area. These Houston properties represent 67% of our base rental income for the nine months ended September 30, 2010. Houston is Texas largest city and the fourth largest city in the United States.  The following are the base rents generated by our top tenants for the three and nine months ended September 30, 2010 and 2009 (in thousands):  Three months ended
September 30
     
     Nine months ended
September 30Tenant
     
     
     2010
     
     2009
     
     2010
     
     2009Kroger
     
     $
     529
     
     $
     529
     
     $
     1,587
     
     $
     1,587IHOP Corporation
     [1]
     
     370
     
     
     551
     
     
     1,419
     
     
     1,657CVS
     
     
     230
     
     
     230
     
     
     691
     
     
     691Walgreens
     [2]
     
     93
     
     
     183
     
     
     456
     
     
     513Landrys
     
     
     125
     
     
     126
     
     
     377
     
     
     377Hard Rock Cafe
     
     
     124
     
     
     112
     
     
     372
     
     
     335TGI Fridays
     
     
     113
     
     
     113
     
     
     338
     
     
     336Champps Americana
     
     
     106
     
     
     106
     
     
     317
     
     
     317Golden Corral
     
     
     105
     
     
     105
     
     
     315
     
     
     315Paesanos
     
     
     102
     
     
     101
     
     
     306
     
     
     279$
     1,897
     
     $
     2,156
     
     $
     6,178
     
     $
     6,407[1] - In September 2010, we sold all 19 of our IHOP properties.[2] - In July 2010, we sold a property on which Walgreens was the sole tenant.  We expect future rents from Walgreens to be consistent with the three months ended September 30, 2010.
  The above base rents have been recorded in the accompanying consolidated statement of operations as rental income from operating leases or earned income from direct financing leases as appropriate (see Note 2).  7.  DERIVATIVE INSTRUMENTS  In order to manage the volatility relating to interest rate risk, we may enter into interest rate swaps from time to time.  We do not use derivative financial instruments for trading or speculative purposes.  In December 2008, we entered into an interest rate swap with a notional amount of $17 million and a fixed rate of 5.11% to hedge the interest rate risk on the $17 million variable-rate loan that was procured in conjunction with the 2008 refinancing of the MacArthur Park property. The fair value of the swap was a liability of $432,000 and $384,000 at September 30, 2010 and December 31, 2009, respectively, and is recorded in accounts payable and other liabilities on the accompanying consolidated balance sheet.  The swap settles monthly with the amount paid to or received from our counterparty being recorded as an adjustment to interest expense. For the nine months ended September 30, 2010 and 2009, we have paid $268,000 and $255,000, respectively, related to this swap which is included in interest expense in the accompanying consolidated statement of operations.  Valuations are not actual market prices on which an offer would be made for unwinding any transactions but rather are calculated mathematical approximations of market values derived from proprietary models as of a given date. These valuations are calculated on a mid-market basis and do not include bid/offered spread that would be reflected in an actual price quotations; therefore, actual price quotations for unwinding our transactions would be different. These valuations and models rely on certain assumptions regarding past, present, and future market conditions. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.  21


---



Table of Contents  We have designated this interest rate swap as a hedge for financial reporting purposes.  Accordingly, gains or losses resulting from changes in the value of our derivatives are recorded as an adjustment to stockholders equity.  8.  STOCKHOLDERS EQUITY AND NONCONTROLLING INTEREST  Recapitalization and merger On November 24, 2009, the AmREIT Class C and D common shares were converted intoAmREIT Class A common shares pursuant to the AmREIT Declaration of Trust.  The AmREIT Class A shares were then simultaneously exchanged on a 1:1 basis for shares of AmREIT, Inc. stock.  Upon consummation of the Merger, AmREIT, Inc. had and has a single class of common stock outstanding as further described below.  Common Stock- Our charter authorizes us to issue 1,050,000,000 shares of capital stock, of which 1,000,000,000 shares of capital stock are designated as common stock with a par value of $0.01 per share and 50,000,000 shares of capital stock are designated as preferred stock with a par value of $0.01 per share.As of September 30, 2010, there were 23,122,352 shares of our common stock outstanding. Our payment of any future dividends to our common stockholders is dependent upon applicable legal and contractual restrictions, as well as our earnings and financial needs.  Stock Redemption Program Subject to certain restrictions and limitations, our stock redemption program allows stockholders to redeem their shares. We are not obligated to redeem shares of our common stock under the stock redemption plan, and stock redemptions and the share price paid will be made at the sole discretion of our Board of Directors.  Incentive Plans- Under the AmREIT, Inc. 2007 Independent Directors Stock Incentive Plan, the aggregate number of shares of our common stock subject to options, restricted stock awards, stock purchase rights, stock appreciation rights or other awards to our independent directors will be no more than 2,000,000 shares, all of which are available for issuance. Under the AmREIT, Inc. 1999 Flexible Incentive Plan, 1,288,739 shares of our common stock are available for awards of stock options, restricted stock awards, stock appreciation rights and other awards to our employees and non-employee directors.  Noncontrolling Interest Noncontrolling interest represents a third-party interest in entities that we consolidate as a result of our controlling financial interest in such investees.  9.  RELATED-PARTY TRANSACTIONS  See Note 3 regarding investments in advised funds and other affiliates and Note 2 regarding notes receivable from affiliates.  We earn real estate fee income by providing property acquisition, leasing, property management, construction (discontinued) and construction management services to our advised funds and joint ventures.  We are the sole owners of the companies that serve as the general partner for the funds.  Real estate fee income of $1.8 million and $2.1 million was paid by the funds to the Company for the nine months ended September 30, 2010 and 2009, respectively.  Additionally, construction revenues (included in discontinued operations) of $0 and $1.0 million were earned from the advised funds during the nine months ended September 30, 2010 and 2009, respectively.  Construction management fee income of $267,000 and $360,000 were earned from the advised funds during the nine months ended September 30, 2010 and 2009, respectively. The Company earns asset management fees from the funds for providing accounting related services, investor relations, facilitating the deployment of capital, and other services provided in conjunction with operating the advised funds and joint ventures.  Asset management fees of $1.1 million and $1.2 million were paid by the funds to us during the nine months ended September 30, 2010 and 2009, respectively.  Additionally, during the nine months ended September 30, 2010 and 2009, we were reimbursed by the advised funds $779,000 and $929,000, respectively, for administrative costs incurred on behalf of those funds.  We maintain a 1% general partner interest in the investment funds that we sponsor.  The funds are typically structured such that the limited partners receive 99% of the available cash flow until 100% of their original invested capital has been returned and a preferred return has been paid.  Once limited partner capital has been returned and the limited partners preferred return has been paid, the general partner thereafter shares in the available cash flow at various promoted levels (see Note 3).  22


---



Table of Contents  10.  REAL ESTATE ACQUISITIONS AND DISPOSITIONS  In July 2010, the general partner of AmREIT Woodlake, L.P. entered into a joint venture agreement with a third party whereby the new partner acquired a 90% interest in the sole property owned by AmREIT Woodlake, L.P.  As a result of this transaction, we now hold a 1% interest in the property. See further discussion in Note 3 above.  During the third quarter of 2010, we sold 21 non-core, single tenant assets to third parties which generated net proceeds of $19.5 million and resulted in total gains of $6.8 million. In conjunction with the sales, we extinguished outstanding debt in the amount of $17.4 million that was secured by the properties. Of these net proceeds, $12.8 million have been deposited with a qualified intermediary to be used for the future acquisition of properties in accordance with section 1031 of the Internal Revenue Code of 1986, as amended.  There were no acquisitions during the nine months ended September 30, 2010.  11.  COMMITMENTS AND CONTINGENCIES  In April 2010, we signed a new lease agreement for our office facilities which expires on October 31, 2012. In addition, we lease various office equipment for daily activities. Rental expense for the nine months ended September 30, 2010 and 2009 was $247,000 and $263,000, respectively.  We are involved in various matters of litigation arising in the normal course of business.  While we are unable to predict with certainty the amounts involved, our management and counsel are of the opinion that, when such litigation is resolved, any additional liability, if any, will not have a material effect on our consolidated financial statements.  12.  SUBSEQUENT EVENTS  We have evaluated all events or transactions as of the date through which the financial statements were made available for issuance. We did not have any material subsequent events that impacted our consolidated financial statements during this period.  13.  SEGMENT REPORTING  The operating segments presented are the segments for which separate financial information is available, and the revenues and operating performance of each segment is evaluated regularly by senior management in deciding how to allocate resources and in assessing performance. However, this operating performance data might not be indicative of what a third party would assess or evaluate for purposes of determining fair value of our segments.  The portfolio segment consists of our portfolio of single and multi-tenant shopping center projects. This segment consists of 24 properties located in 4 states. Expenses for this segment include depreciation, interest, noncontrolling interest, legal costs directly related to the portfolio of properties and property level expenses. Substantially all of our consolidated assets are in this segment.  Our real estate development and operating business is a fully integrated and wholly-owned business consisting of brokers and real estate professionals that provide development, acquisition, brokerage, leasing, and asset and property management services to our Irreplaceable Corner portfolio and advised funds as well as to third parties. Our asset advisory group consists of active management of five advised funds which were formed to develop, own, manage and add value to properties with an average holding period of two to four years. We invest in these funds as both the general partner and as a limited partner (see Note 3). We, as the general partner, manage the funds and, in return, receive management fees as well as potential profit participation.  Segment results for the nine months ended September 30, 2010 and 2009 are as follows:  23


---



Table of Contents  For the three months ended
September 30, 2010 (in thousands)
     
     Portfolio
     
     Real Estate
Operations
     
     Asset
Advisory
Group
     
     TotalRental income
     
     
     7,471
     
     
     136
     
     
     
     
     $
     7,607Real estate fee income - related party
     
     
     20
     
     
     902
     
     
     
     
     
     922Construction management fee income - related party
     
     
     
     
     
     97
     
     
     
     
     
     97Asset management fee income - related party
     
     
     
     
     
     
     
     
     370
     
     
     370Total revenue
     
     
     7,491
     
     
     1,135
     
     
     370
     
     
     8,996General and administrative
     
     
     1,017
     
     
     1,092
     
     
     31
     
     
     2,140Property expense
     
     
     2,712
     
     
     11
     
     
     
     
     
     2,723Legal and professional
     
     
     261
     
     
     12
     
     
     5
     
     
     278Real estate commissions
     
     
     
     
     
     5
     
     
     
     
     
     5Depreciation and amortization
     
     
     1,630
     
     
     23
     
     
     
     
     
     1,653Impairment Charge
     
     
     864
     
     
     2,623
     
     
     
     
     
     3,487Total expenses
     
     
     6,484
     
     
     3,766
     
     
     36
     
     
     10,286Interest expense
     
     
     (2,419
     )
     
     
     
     
     
     
     
     (2,419
     )Other income/ (expense)
     
     
     4,499
     
     
     927
     
     
     (299
     )
     
     5,127Income (loss) from continuing operations
     
     $
     3,087
     
     $
     (1,704
     )
     $
     35
     
     $
     1,418
     24


---



Table of Contents  For the three months ended
September 30, 2009 (in thousands)
     
     Portfolio
     
     Real Estate
Operations
     
     Asset
Advisory
Group
     
     TotalRental income
     
     
     7,225
     
     
     150
     
     
     
     
     $
     7,375Real estate fee income - related party
     
     
     
     
     
     693
     
     
     
     
     
     693Construction management fee income - related party
     
     
     
     
     
     116
     
     
     
     
     
     116Asset management fee income - related party
     
     
     
     
     
     
     
     
     384
     
     
     384Total revenue
     
     
     7,225
     
     
     959
     
     
     384
     
     
     8,568General and administrative
     
     
     357
     
     
     991
     
     
     27
     
     
     1,375Property expense
     
     
     1,868
     
     
     29
     
     
     
     
     
     1,897Legal and professional
     
     
     136
     
     
     5
     
     
     
     
     
     141Real estate commissions
     
     
     
     
     
     1
     
     
     
     
     
     1Depreciation and amortization
     
     
     1,832
     
     
     24
     
     
     
     
     
     1,856Total expenses
     
     
     4,193
     
     
     1,050
     
     
     27
     
     
     5,270Interest expense
     
     
     (2,287
     )
     
     
     
     
     
     
     
     (2,287
     )Other income/ (expense)
     
     
     124
     
     
     33
     
     
     (170
     )
     
     (13
     )Income (loss) from continuing operations
     
     $
     869
     
     $
     (58
     )
     $
     187
     
     $
     998
     25


---



Table of Contents  For the nine months ended
September 30, 2010 (in thousands)
     
     Portfolio
     
     Real Estate
Operations
     
     Asset
Advisory
Group
     
     TotalRental income
     
     
     21,596
     
     
     399
     
     
     
     
     $
     21,995Real estate fee income - related party
     
     
     10
     
     
     1,820
     
     
     
     
     
     1,830Construction management fee income - related party
     
     
     
     
     
     267
     
     
     
     
     
     267Asset management fee income - related party
     
     
     
     
     
     
     
     
     1,110
     
     
     1,110Total revenue
     
     
     21,606
     
     
     2,486
     
     
     1,110
     
     
     25,202General and administrative
     
     
     1,928
     
     
     2,899
     
     
     105
     
     
     4,932Property expense
     
     
     6,352
     
     
     21
     
     
     
     
     
     6,373Legal and professional
     
     
     686
     
     
     (29
     )
     
     6
     
     
     663Real estate commissions
     
     
     1
     
     
     5
     
     
     
     
     
     6Depreciation and amortization
     
     
     4,964
     
     
     67
     
     
     
     
     
     5,031Impairment Charge
     
     
     864
     
     
     2,623
     
     
     
     
     
     3,487Total expenses
     
     
     14,795
     
     
     5,586
     
     
     111
     
     
     20,492Interest expense
     
     
     (7,256
     )
     
     
     
     
     
     
     
     (7,256
     )Other income/ (expense)
     
     
     4,824
     
     
     1,057
     
     
     (1,162
     )
     
     4,719Income (loss) from continuing operations
     
     $
     4,379
     
     $
     (2,043
     )
     $
     (163
     )
     $
     2,173
     26


---



Table of Contents  For the nine months ended
September 30, 2009 (in thousands)
     
     Portfolio
     
     Real Estate
Operations
     
     Asset
Advisory
Group
     
     TotalRental income
     
     
     21,625
     
     
     406
     
     
     
     
     $
     22,031Lease termination fee income
     
     
     1,065
     
     
     
     
     
     
     
     
     1,065Real estate fee income - related party
     
     
     
     
     
     2,091
     
     
     
     
     
     2,091Construction management fee income - related party
     
     
     
     
     
     360
     
     
     
     
     
     360Asset management fee income - related party
     
     
     
     
     
     
     
     
     1,151
     
     
     1,151Total revenue
     
     
     22,690
     
     
     2,857
     
     
     1,151
     
     
     26,698General and administrative
     
     
     1,098
     
     
     3,609
     
     
     104
     
     
     4,811Property expense
     
     
     5,921
     
     
     43
     
     
     
     
     
     5,964Legal and professional
     
     
     657
     
     
     545
     
     
     19
     
     
     1,221Real estate commissions
     
     
     1
     
     
     1
     
     
     
     
     
     2Depreciation and amortization
     
     
     5,538
     
     
     67
     
     
     
     
     
     5,605Total expenses
     
     
     13,215
     
     
     4,265
     
     
     123
     
     
     17,603Interest expense
     
     
     (6,828
     )
     
     
     
     
     
     
     
     (6,828
     )Other income/ (expense)
     
     
     1,235
     
     
     (465
     )
     
     (524
     )
     
     246Income (loss) from continuing operations
     
     $
     3,882
     
     $
     (1,873
     )
     $
     504
     
     $
     2,513
     27


---



Table of Contents  Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations  References to we, us, our and the Company refer to AmREIT, Inc. and our consolidated subsidiaries, except where the context otherwise requires.  FORWARD-LOOKING STATEMENTS  Certain information presented in this Quarterly Report on Form 10-Q constitutes 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 (the Exchange Act). Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our business, financial condition, liquidity, results of operations, funds from operations and prospects could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a material difference include the following: changes in general economic conditions, changes in real estate market conditions, continued availability of proceeds from our debt or equity capital, our ability to locate suitable tenants for our properties, the ability of tenants to make payments under their respective leases, timing of acquisitions, development starts and sales of properties, the ability to meet development schedules and other risks, uncertainties and assumptions. Any forward-looking statement speaks only as of the date on which it was made, and the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operation results over time.  The following discussion should be read in conjunction with our accompanying consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as our 2009 consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. Historical results and trends which might appear should not be taken as indicative of future operations.  Executive Overview  We were organized by our predecessor, AmREIT, in April 2007 as REITPlus, Inc. (REITPlus), a Maryland corporation that elected to be taxed as a real estate investment trust (REIT). REITPlus was structured as an externally managed and advised REIT, with a wholly-owned subsidiary of AmREIT providing investment advisory and property and corporate management services.  During 2007, AmREIT initiated a strategic plan referred to as Vision 2010.  Vision 2010 was designed to create a more conforming business platform that would reduce the earnings volatility of AmREITs business model and that would also simplify its capital structure, with the ultimate goal of growing its portfolio of properties and providing liquidity for investors.  Vision 2010 included the following three phases:  
     Phase I consisted of business model changes which were designed to reduce the earnings volatility created by certain of AmREITs transactional operating subsidiaries.  In connection with Phase I, AmREIT simplified its operating platform and reduced its transactional volatility by exiting the general contracting business and the independent broker-dealer fund-raising business.  Additionally, it terminated the best efforts equity offering of REITPlus.  Together, these restructuring initiatives resulted in a one-time restructuring charge of approximately $2.5 million during 2008, but also reduced AmREITs annual overhead and general and administrative expenses.
     Phase II consisted of changes which were designed to simplify AmREITs equity capital structure. In December 2008, AmREIT voluntarily de-listed its Class A common shares of beneficial interest from trading on the NYSE Alternext Exchange.  Then, at separate special meetings held on November 24, 2009, both AmREIT and REITPlus shareholders approved the merger of AmREIT with and into REITPlus (the Merger), resulting in a combined, conforming entity with a single class of common stock, which was renamed AmREIT, Inc.
     For the combined company, Phase III will consist of growing our portfolio of properties and identifying additional sources of liquidity for stockholders as the United States begins to exit the current recession and transition into recovery.  This growth objective is the sole focus of managements Vision 2012.
  28


---



Table of Contents  Following our strategic combination with our predecessor, AmREIT, all of the independent members of the boards of both AmREIT and REITPlus, as well as H. Kerr Taylor, who served as chairman and chief executive officer of both companies, now comprise our seven-member Board of Directors. Since the Merger, we are and have been internally managed by the former management team of AmREIT.  Accordingly, the following discussion describes the business of AmREIT, Inc. which is comprised of the combined businesses previously conducted by AmREIT and REITPlus. As further discussed in Note 2 to the accompanying consolidated financial statements, for accounting purposes, the Merger was treated as an asset acquisition, with AmREIT being the accounting acquirer deemed to have acquired the net assets of REITPlus. As a result, the accompanying consolidated financial statements reflect the historical financial position and results of operations of AmREIT prior to the Merger and those of the combined company following the Merger effective November 24, 2009.  AmREIT, Inc. owns, operates and creates value on Irreplaceable CornersTM in Texas, which is home to three of the top six major growth markets throughout the United States and which has the 12th largest economy in the world based on GDP (ahead of Mexico, Russia and India). For over 25 years, we have provided our clients and investors with financial transparency, reliability and creation of value for future real estate investment growth. We have access to a variety of capital markets, including public and private financial companies and institutional investors,and our platform has grown from approximately $100 million in assets in 2002 to approaching $1 billion today. We have elected to be taxed as a REIT for federal income tax purposes. AmREIT, Inc. is headquartered in Houston, Texas and has an office in Dallas, Texas.  Our Structure  Our structure consists of three segments that are comprised of an institutional grade portfolio of Irreplaceable Corners and our advisory business, both of which are supported by our real estate development and operating group. For our results of operations by segment, see the accompanying Notes to Consolidated Financial Statements.  Portfolio of Todays Irreplaceable Corners  Our core portfolio consists primarily of Irreplaceable Corners. These are corner properties, primarily located in the top Texas markets with the following characteristics:  
     Located on a corner in major metropolitan area;
     High barriers to entry;
     Strong demographic purchasing power (i.e., target average household income in a 1-mile radius of $100,000);
     High daytime and evening population  (i.e., average of target 100,000 people in a 3-mile radius);
     High count of cars per day;
     Strong demand for retail space; and
     Desirability of layout and any other distinctive qualities such as advantageous lines of demarcation
  As of September 30, 2010, we owned a real estate portfolio consisting of 24 properties located in 4 states.  Leased to national, regional and local tenants, our properties are primarily located throughout Texas.  We are currently focused on the cities of Houston, Dallas and San Antonio, each of which represent three of the top six population and job growth markets in the United States. As owners and operators of real estate, we implement high standards of excellence in maintaining the value, aesthetics, tenant mix and safety of each of our properties.  As of September 30, 2010, our operating properties were leased at 92.0% occupancy based on leasable square footage as compared to 91.0% as of December 31, 2009.  Advisory Business  For 26 years, we have created financial solutions for our investors by offering real estate investment opportunities as a stable and dependable source of income and portfolio growth. We have successfully formed, invested in and advised 17 private and public investment vehicles over the past two and a half decades that have led to the acquisition, development and redevelopment of properties throughout the United States.Our advisory business invests in and advises various advised funds and joint ventures that own, develop and manage retail and mixed-use properties located within fast growing markets. We create value for our clients and investors through our expertise in the development, redevelopment and daily operation of these properties.  29


---



Table of Contents  Our advisory business invests in and actively manages five advised funds, which were formed to develop, own, manage, and add value to properties with an average holding period of two to four years. We invest in the limited partnerships that we manage as both the general partner and as a limited partner. We, as the general partner or advisor, manage the funds and, in return, receive management fees as well as potential profit participation interests.  The funds are structured such that the general partner does not receive a significant profit until after the limited partners in the funds have received or are deemed to have received their targeted return.  Real Estate Development and Operating Group  Our real estate operating and development business is comprised of a fully integrated real estate team that works directly with landlords, builders and developers. This team is primarily focused on managing, leasing and creating value for our owned and managed portfolio of Irreplaceable CornersTM and gives us a competitive edge on pricing and development opportunities.  Having a full complement of real estate professionals helps secure strong tenant relationships for both our portfolio and the advised fund portfolios managed by our advisory business.  Liquidity and Capital Resources  Due to the nature of our business and strategy, we typically generate significant amounts of cash from operations. The cash generated from operations is primarily paid to our common stockholders in the form of dividends. As a REIT, we must generally make annual distributions to our stockholders of at least 90% of our REIT taxable income.  Our short-term liquidity requirements consist primarily of normal recurring operating expenses, debt service requirements, recurring expenditures to maintain our properties, non-recurring expenditures (such as tenant improvements and other tenant lease costs) and dividends to our stockholders.  We anticipate that cash on hand and cash flows from operating activities will be sufficient to meet these short-term needs. During the nine months ended September 30, 2010 and 2009, we generated cash provided by operating activities of $8.1 million and $11.1 million, respectively. The primary drivers of the decrease in operating cash flows was a decrease in the proceeds from gain on sale of real estate acquired for resale when compared to the prior period as well as a decrease in cash flow associated with the timing of our property tax payments. During the 2010 period, we sold one non-core, single tenant property which generated proceeds of $886,000 as compared to proceeds of $1.5 million during the 2009 period. With respect to property taxes, we paid our 2009 taxes during the first quarter of 2010, but paid no property taxes during the similar period in 2009 (2008 taxes were paid in December 2008).  We have a $25.0 million secured credit facility (the Facility), the proceeds of which are to be used for the acquisition of properties and for working capital needs. The Facilitys interest rate is LIBOR plus a spread of 3.50%, with a floor of 5.00%. The term of the Facility is one year expiring December 22, 2010, can be extended for three one-year terms or can be converted, at our option, into a three-year amortizing loan (20-year amortization) at the end of the first year, provided that there are no existing and continuing events of default at the time of conversion. The Facilitys borrowing base is determined based on the properties that are pledged as security against the Facility. The Facility contains covenants applicable to those pledged properties which, among other restrictions, require us to maintain a minimum net worth and, in certain cases of the occurrence of default, limit distributions to our stockholders. As of September 30, 2010, we were in compliance with all covenants. As of September 30, 2010 the interest rate was 5.00%, and we had $16.7 million outstanding under the Facility.  We had an approximate borrowing base availability of $7.1 million under the Facility, subject to the covenants above. Amounts outstanding under the Facility are retired as needed with proceeds from long-term mortgages, cash generated from disposition of properties and cash flow generated by our operating properties.  During the second quarter of 2010, we retired approximately $6.8 million under the Facility, using the proceeds from the placement of a long-term mortgage on one of our unencumbered properties.  We expect to have availability of approximately $6.4 million under the Facility at year end 2010, based on our forecasted operating cash flows, debt service requirements, and capital expenditures during the balance of 2010.  Our long-term capital requirements consist primarily of maturities under our long-term mortgages and potential acquisitions.  The primary sources of capital for funding any debt maturities and acquisitions are our Facility, proceeds from both secured and unsecured mortgages, proceeds from equity issuances, cash generated from the sale of property and the formation of joint ventures.  30


---



Table of Contents  We intend to continue managing our debt prudently and conservatively so as to maintain a conservative capital structure.  As of September 30, 2010, approximately 79% of our debt is fixed, long-term mortgage financing.  The $16.7 million in debt obligations maturing in 2010 represents borrowings made under the Facility which, as discussed above, can be extended for three one-year terms or can be converted, at our option, to a three-year loan (20-year amortization), provided that there are no existing and continuing events of default at the time of conversion. The $18.9 million in 2011 debt maturities consists primarily of a $17.0 million loan on our MacArthur Park property, which includes two one-year extension options. We expect that we will be able to extend the note pursuant to these terms or refinance the note with another lender.  We routinely review our liquidity requirements, and, provided that we are able to extend or convert our Facility when it matures, we believe that our current cash flows from operations, coupled with our Facility, are sufficient to allow us to continue operations, satisfy our contractual obligations and pay dividends to our stockholders. As of September 30, 2010 and December 31, 2009, our cash and cash equivalents totaled $4.1 million and $1.1 million, respectively. Cash flows provided by (used in) operating activities, investing activities and financing activities for the nine months ended September 30, are as follows (in thousands):  2010
     
     2009Operating activities
     
     $
     8,145
     
     $
     11,137Investing activities
     
     $
     4,331
     
     $
     (824
     )Financing activities
     
     $
     (9,440
     )
     $
     (11,336
     )
  Until we acquire additional properties, any excess cash will be invested in short-term investments or overnight funds.   This investment strategy provides us with the liquidity to acquire properties at such time as those suitable for acquisition are sourced.  Investing Activities  We acquired no real estate assets during the nine months ended September 30, 2010. During the 2010 period, we generated proceeds of $4.6 million on the sale of three single tenant real estate investment assets. We did not dispose of any investment properties during the prior period. Additionally during the 2010 period, we generated proceeds of $14.1 million on the sale of seventeen single tenant real estate properties acquired for resale. Of these proceeds, $12.8 million have been deposited with a qualified intermediary to be used for future property acquisition in accordance with section 1031 of the Internal Revenue Code of 1986, as amended. Capital expenditures for additions to the existing portfolio totaled $1.5 million and $1.2 million for the nine months of 2010 and 2009, respectively.  Cash flows associated with loans to our advised funds were a net outflow of $427,000 during the nine months ended September 30, 2010 as compared to a net inflow of $279,000 during the nine months ended September 30, 2009.  As of September 30, 2010, we have notes receivable in the amount of $4.6 million due from our advised funds (net of allowances). We made these loans to the partnerships for the purpose of acquiring and/or developing properties. These loans bear interest at LIBOR plus a spread of 3.5% and are due upon demand. Of the balances outstanding, $1.0 million is secured by the advised funds ownership interest in unencumbered properties. During the third quarter of 2010, we recorded a reserve of $500,000 related to a $3.1 million note receivable due from AmREIT Income and Growth Fund, Ltd. (AIG), one of our advised funds.  AIG is currently in liquidation, and we believe that it is likely that the proceeds from the sale of its properties will be insufficient to fully extinguish the obligations of the entity.  We expect to receive payments on the remainder of these notes receivable from our other advised funds as they generate liquidity from property dispositions and from financings with third parties.  Financing Activities  Debt  During the nine months ended September 30, 2010, we had approximately $503,000 in net payments on notes payable.  In September 2010, we extinguished the $19.9 million mortgage on our Uptown Plaza property located in Dallas, Texas for a discounted payoff of $14.4 million, including retained escrows.  The payoff and applicable fees were funded by a $10.7 million loan with a new lender secured by our Uptown Plaza property and a $3.7 million draw on our Facility.  The new loan has a 3-year term and bears interest at LIBOR plus a spread of 3.25% with a floor of 4.75%.  Interest is calculated using a 25-year amortization period.  As a result of this transaction, we derecognized the former mortgage liability in accordance with ASC 405,Extinguishment of Liabilities, as cash was paid to the former lender and we were legally released of the obligation. Accordingly, we recorded a gain on debt extinguishment of $5.4 million in accordance with ASC 470,Debt.  31


---



Table of Contents  During 2010, we extinguished $17.4 million of debt in connection with the disposition of 21 single tenant, non-core real estate assets.  Equity  During the nine months ended September 30, 2010, we declared dividends to our stockholders of $8.1 million as compared to $9.5 million in the nine months ended September 30, 2009.  Effective with the July 2010 dividend, we reduced our annual dividend from $0.50 per share to $0.40 per share, and we changed our historical practice from paying dividends monthly to paying dividends quarterly in arrears. These changes resulted in a more conforming and conservative dividend structure, including a lower payout ratio (ratio of dividends to funds from operations) and reduced general and administrative costs associated with making fewer dividend payments during the year. The dividends paid are as follows (in thousands):  Post Merger
     
     Pre Merger - AmREITAmREIT, Inc.
     
     Class A
     
     Class C
     
     Class D2010
     Third Quarter
     
     $
     2,312
     
     
     n/a
     
     
     n/a
     
     
     n/aSecond Quarter
     
     $
     2,894
     
     
     n/a
     
     
     n/a
     
     
     n/aFirst Quarter
     
     $
     2,867
     
     
     n/a
     
     
     n/a
     
     
     n/a2009
     Fourth Quarter
     
     $
     964
     *
     $
     1,192
     
     $
     4,383
     **
     $
     6,626
     **Third Quarter
     
     
     n/a
     
     $
     660
     
     $
     724
     
     $
     1,782Second Quarter
     
     
     n/a
     
     $
     660
     
     $
     724
     
     $
     1,782First Quarter
     
     
     n/a
     
     $
     655
     
     $
     724
     
     $
     1,783
  * The fourth quarter dividends include dividends for the months of November and December (as merger was completed in November 2009).  ** The fourth quarter dividends include a $4.1 million premium (Class C) and a $6.0 million premium (Class D) associated with the share conversion of the Class C and D shares in relation to the Merger which was accounted for as an additional dividend in accordance with GAAP.  The United States has undergone and may continue to experience a prolonged recession that has been marked by pervasive and fundamental disruptions in the financial markets. Continued concerns regarding the uncertainty of whether the U.S. economy will be adversely affected by inflation, deflation or stagflation and the systemic impact of increased unemployment, volatile energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a severely distressed real estate market have contributed to increased market volatility and weakened business and consumer confidence.  The United States may not experience a sustained recovery and could suffer pronounced instability and decreased economic activity for an extended period of time. Our operations are sensitive to changes in overall economic conditions that impact our tenants, including, among other things, increased bad debts due to such recessionary pressures. A general reduction in the level of tenant leasing or shifts in tenant leasing practices could adversely affect our business, financial condition, liquidity, results of operations, funds from operations and prospects. It is difficult to determine the breadth and duration of the financial market problems and the many ways in which they may affect our tenants and our business in general. While we believe that we have sufficient access to cash in order to meet our contractual obligations, a significant additional deterioration in the U.S. economy or the bankruptcy or insolvency of one or more of our significant tenants could cause our 2010 cash resources to be insufficient to meet our obligations. If necessary, we have the ability to defer capital improvements and to defer payment of certain operating costs, including property taxes, until sufficient cash resources are available.  Off Balance Sheet Arrangements  As of September 30, 2010, none of our off balance sheet arrangements had or are reasonably likely to have a material effect on our liquidity or availability of, or requirement for, our capital resources. We own interests in several unconsolidated advised funds which are accounted for under the equity method as we exercise significant influence over, but do not control, the investee.  We have made loans to some of these affiliates as discussed above under Investing Activities.  32


---



Table of Contents  Results of Operations Comparison of the three months ended September 30, 2010 to the three months ended September 30, 2009  Revenues Total revenues increased by $428,000, or 5%, for the three months ended September 30, 2010 as compared to the same period in 2009 ($9.0 million in 2010 versus $8.6 in 2009). This increase was primarily attributable to increases in rental income and related-party real estate fee income.  Rental income increased by $232,000, or 3%, for the three months ended September 30, 2010 as compared to the same period in 2009 ($7.6 million in 2010 versus $7.4 million in 2009). This increase is primarily due to an increase in rental revenues associated with expense reimbursements resulting from favorable property tax refunds received during the 2009 period. This 2009 reduction was offset by a corresponding reduction in property expense during 2009.  Real estate fee income - related party increased by $214,000, or 31%, for the three months ended September 30, 2010 as compared to the same period in 2009 ($907,000 in 2010 versus $693,000 in 2009). This increase is primarily attributable to recognition of deferred fees resulting from the sale to a third party of 90% of our affiliated entities interest in the Woodlake Square property in July 2010.  Expenses Total operating expenses increased by $5.0 million, or 95%, for the three months ended September 30, 2010 as compared to the same period in 2009 ($10.3 million in 2010 versus $5.3 million in 2009). This increase was primarily attributable to an increase in general and administrative expense, property expense, legal and professional expense and impairment charge offset by a decrease in and depreciation and amortization.  General and administrative expense increased by $765,000, or 56%, for the three months ended September 30, 2010 as compared to the same period in 2009 ($2.1 million in 2010 versus $1.4 million in 2009). The increase was primarily due to a $500,000 reserve recorded on our related party note receivable due from AIG as discussed above in Liquidity and Capital Resources. The increase is also due to the timing of accruing our incentive compensation in order to match the earnings for the period with the related compensation expense.  Property expense increased by $826,000, or 44%, for the three months ended September 30, 2010 as compared to the same period in 2009 ($2.7 million in 2010 versus $1.9 million in 2009). The increase was primarily attributable to a higher amount of bad debt reserves recorded on our tenant receivables.  Legal and professional fee expense increased by $137,000, or 97%, for the three months ended September 30, 2010 as compared to the same period in 2009 ($278,000 in 2010 versus $141,000 in 2009).  This increase was primarily due to increased compliance requirements associated with the Merger in November 2009.  Impairment charge of $3.5 million represents the amount by which the carrying value of six of our non-core, single-tenant properties exceeded their estimated fair value based on an impairment analysis performed on seven of these properties.  During the third quarter of 2010, we identified a negative trend in the market for single-tenant properties located in tertiary markets.  Accordingly, we performed an impairment analysis on all of our properties with these characteristics.  The analysis indicated for six of such properties that the estimated undiscounted future cash flows associated with these assets would not be sufficient to recover their carrying values as of September 30, 2010.  As a result, we recorded impairments in the aggregate amount of $3.5 million on these six single-tenant, non-core properties in order to reduce their carrying values to their respective fair values. Our determination of fair-value was based on market data for similar assets. Four of these assets are being actively marketed by a third-party broker; however, these assets did not meet the held for sale criterion because we do not believe a sale is probable in the next twelve months. These four assets have an aggregate estimated fair value of $3.1 million and were impaired by $2.6 million.  The remaining two assets have an aggregate estimated fair value of $2.3 million and were impaired by $865,000.  These assets are not currently being marketed and their estimated fair values were determined by management based on a discounted future cash flow model. No impairment charges were recognized for the three months ended 2009.  33


---



Table of Contents  Depreciation and amortization expense decreased by $203,000, or 11%, for the three months ended September 30, 2010 as compared to the same period in 2009 ($1.7 million in 2010 versus $1.9 million in 2009).  The decrease is primarily attributable to a limited number of tenants that terminated their leases early in late 2009.  Other Income (expense)  Gain on debt extinguishment was $5.4 million for the three months ended September 30, 2010 and reflects the execution of a discounted payoff on our Uptown Plaza Dallas property mortgage during the third quarter of 2010.  Income from discontinued operations increased by $6.8 million, or 2558%, for the three months ended September 30, 2010 ($7.0 million in 2010 versus $264,000 in 2009).The increase is primarily attributable to our property disposition activity during 2010.  The sale of 21 non-core, single-tenant properties during the third quarter of 2010 is the primary driver of that activity and generated total gains of approximately $6.8 million.  Comparison of the nine months ended September 30, 2010 to the nine months ended September 30, 2009  Revenues Total revenues decreased by $1.5 million, or 6%, for the nine months ended September 30, 2010 as compared to the same period in 2009 ($25.2 million in 2010 versus $26.7 million in 2009). This decrease was primarily attributable to decreases in lease termination fee income, related party real estate fee income and construction management fee income.  Lease termination fee income from operating leases decreased by $1.1 million, or 100%, for the nine months ended September 30, 2010 as compared to the same period in 2009 ($0 in 2010 versus $1.1 million in 2009).  This decrease is primarily attributable to a national tenant declaring bankruptcy in 2009 and subsequently defaulting upon its ground lease with us.  Upon default, ownership of the building transferred from the tenant to us as the land owner.  Lease termination income for the 2009 period represents the fair value of the building.  Real estate fee income - related party decreased by $276,000, or 13%, for the nine months ended September 30, 2010 as compared to the same period in 2009 ($1.8 million in 2010 versus $2.1 million in 2009). This decrease is primarily attributable to a decrease in development fees and leasing commissions earned on the properties that we manage within our affiliated advised funds.  Construction management fee income - related party decreased by $93,000, or 26%, for the nine months ended September 30, 2010 as compared to the same period in 2009 ($267,000 in 2010 versus $360,000 in 2009). This decrease is primarily attributable to a decrease in construction management fees earned from a property within our affiliated advised funds whose development was completed in the second quarter of 2009.  Expenses Total operating expenses increased by $2.9 million, or 16%, for the nine months ended September 30, 2010 as compared to the same period in 2009 ($20.5 million in 2010 versus $17.6 million in 2009). This increase was primarily attributable to increases in property expense, and impairment charges, offset by decreases in legal and professional expense and depreciation and amortization expense.  Property expense increased by $409,000, or 7%, for the nine months ended September 30, 2010 as compared to the same period in 2009 ($6.4 million in 2010 versus $6.0 million in 2009).  The increase is primarily attributable to a higher amount of bad debt reserves recorded on our tenant receivables.  Impairment charge of $3.5 million represents the amount by which the carrying value of six of our non-core, single-tenant properties exceeded their estimated fair value based on an impairment analysis performed on seven of these properties.  During the third quarter of 2010, we identified a negative trend in the market for single-tenant properties located in tertiary markets.  Accordingly, we performed an impairment analysis on all of our properties with these characteristics.  The analysis indicated for six of such properties that the estimated undiscounted future cash flows associated with these assets would not be sufficient to recover their carrying values as of September 30, 2010.  As a result, we recorded impairments in the aggregate amount of $3.5 million on these six single-tenant, non-core properties in order to reduce their carrying values to their respective fair values. Our determination of fair-value was based on market data for similar assets. Four of these assets are being actively marketed by a third-party broker; however, these assets did not meet the held for sale criterion because we do not believe a sale is probable in the next twelve months.These four assets have an aggregate estimated fair value of $3.1 million and were impaired by $2.6 million.  The remaining two assets have an aggregate estimated fair value of $2.3 million and were impaired by $865,000.  These assets are not currently being marketed and their estimated fair values were determined by management based on a discounted future cash flow model. No impairment charges were recognized for the nine months ended 2009.  34


---



Table of Contents  Legal and professional fee expense decreased by $558,000, or 46%, for the nine months ended September 30, 2010 as compared to the same period in 2009 ($663,000 in 2010 versus $1.2 million in 2009).  This decrease is mainly attributable to legal costs incurred in 2009 associated with a litigation matter which was resolved in February 2010 to the mutual satisfaction of us and the other party.  Depreciation and amortization expense decreased by $574,000, or 10%, for the nine months ended September 30, 2010 as compared to the same period in 2009 ($5.0 million in 2010 versus $5.6 million in 2009).  The decrease is primarily attributable to accelerated depreciation resulting from a few tenants that terminated their leases early in late 2009.  Other Income (expense)  Gain on debt extinguishment was $5.4 million for the nine months ended September 30, 2010 and reflects the execution of a discounted payoff on our Uptown Plaza Dallas property mortgage during the third quarter of 2010.  Loss from advised funds increased by $697,000, or 186%, for the nine months ended September 30, 2010 (loss of $1.1 million in 2010 versus a loss of $374,000 in 2009). The increase is primarily attributable toincreased depreciation expense resulting from the impending redevelopment of the Woodlake Square property.  We reassessed and shortened the estimated useful lives of various buildings consistent with our current redevelopment plan.  Interest expense increased by $428,000, or 6%, for the nine months ended September 30, 2010 as compared to the same period in 2009 ($7.3 million in 2010 versus $6.8 million in 2009). This increase is due to a higher weighted average debt balance outstanding during the period, primarily attributable to the financing of a portfolio of previously unencumbered properties in December 2009, and due to an increase in the interest cost on our Facility which we refinanced in December 2009.  Income from discontinued operations increased by $4.9 million, or 178%, for the nine months ended September 30, 2010 ($7.6 million in 2010 versus $2.7 million in 2009).The increase is primarily attributable to our property disposition activity during 2010.  The sale of 21 non-core, single-tenant properties during the third quarter of 2010 is the primary driver of that activity and generated total gains of approximately $6.8 million.  Funds From Operations  We consider funds from operations (FFO), a non-GAAP measure, to be an appropriate measure of the operating performance of an equity REIT.  The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property held for investment, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. See Discontinued Operations discussion in Footnote 1 to our accompanying consolidated financial statements for detail of discontinued operations included in FFO. In addition, NAREIT recommends that extraordinary items not be considered in arriving at FFO. We calculate our FFO in accordance with this definition.  Most industry analysts and equity REITs, including us, consider FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or losses on dispositions and excluding depreciation, FFO is a helpful tool that can assist in the comparison of the operating performance of a companys real estate between periods or as compared to different companies.  Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income as the primary measure of our operating performance.  Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time.  Because real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical cost accounting is insufficient by itself.  There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs.  FFO should not be considered as an alternative to net income or other measurements under GAAP as an indicator of our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity.  35


---



Table of Contents  Below is the calculation of FFO and the reconciliation to net income, which we believe is the most comparable GAAP financial measure to FFO (in thousands):  Three Months
Ended September 30,
     
     Nine Months
Ended September 30,2010
     
     2009
     
     2010
     
     2009Income from continuing operations [1]
     
     $
     1,418
     
     $
     998
     
     $
     2,173
     
     $
     2,513Income from discontinued operations [2]
     
     
     7,016
     
     
     264
     
     
     7,599
     
     
     2,733Non-controlling interest
     
     
     (149
     )
     
     (8
     )
     
     (173
     )
     
     (110
     )Plus depreciation of real estate assets - from operations
     
     
     1,631
     
     
     1,827
     
     
     4,959
     
     
     5,501Plus depreciation of real estate assets - from discontinued operations
     
     
     
     
     
     6
     
     
     10
     
     
     27Adjustments for nonconsolidated affiliates [3]
     
     
     165
     
     
     132
     
     
     1,303
     
     
     396Less gain on sale of real estate assets acquired for investment
     
     
     (1,216
     )
     
     
     
     
     (1,216
     )
     
     Less Class C and D distributions shareholder
     
     
     
     
     
     (2,507
     )
     
     
     
     
     (7,521
     )Total Funds From Operations available to common stockholders
     
     $
     8,865
     
     $
     712
     
     $
     14,655
     
     $
     3,539
  [1]  Included in income from continuing operations for the three and nine months ended September 30, 2010, is a gain on debt extinguishment of $5.4 million and impairments on six of our single-tenant, non-core properties of $3.5 million.  [2]  Included in income from discontinued operations for the three and nine months ended September 30, 2010, is a gain on the sale of our real estate acquired for resale of $5.5 million, net of tax, and a gain on the sale of three assets held for investment of $1.2 million (see Note 10 to the consolidated financial statements). Included in income from discontinued operations for the three and nine months ended September 30, 2009, is a gain on the sale of a tract of land located adjacent to our Uptown Dallas property of $2.9 million ($1.9 million net of tax).  [3]  Included in adjustments for nonconsolidated affiliates for the nine months ended September 30, 2010 is $852,000 related to accelerated depreciation resulting from the redevelopment of the Woodlake Square property. We shortened the useful lives of certain buildings consistent with the redevelopment plan once that redevelopment became probable.  Item 3.  Quantitative and Qualitative Disclosures about Market Risk  Not applicable.  Item 4.  Controls and Procedures  Evaluation of Disclosure Controls and Procedures  Under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of September 30, 2010. Based on that evaluation, our CEO and CFO concluded that, as of September 30, 2010, our disclosure controls and procedures were effective in causing material information relating to us (including our consolidated subsidiaries) to be recorded, processed, summarized and reported by management on a timely basis and to ensure the quality and timeliness of our public disclosures with SEC disclosure obligations  Changes in Internal Controls  There has been no change to our internal control over financial reporting during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  36


---



Table of Contents  Part II  OTHER INFORMATION  Item 1.  Legal Proceedings.  We are involved in various matters of litigation arising in the normal course of business.  While we are unable to predict with certainty the amounts involved, our management and counsel are of the opinion that, when such litigation is resolved, any additional liability, if any, will not have a material effect on our consolidated financial statements.  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.  Our shares are no longer actively traded on an exchange. We do not currently have a public stock buyback program in place. However, our Board of Directors has authorized redemptions of up to $500,000 in cases where our stockholders initiate a redemption request due to financial hardship. As of September 30, 2010, we have redeemed approximately $115,000 of common stock in the aggregate for these cases.  Item 3.  Defaults Upon Senior Securities.  None.  Item 4.  [Removed and Reserved.]  Item 5.  Other Information.  None.  Item 6.  Exhibits.  The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Report.  37


---



Table of Contents  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.  AmREIT, Inc./s/ H. Kerr TaylorDate: November 15, 2010
     
     H. Kerr Taylor, Chairman of the Board of Directors, President and Chief Executive Officer/s/ Chad C. BraunDate: November 15, 2010
     
     Chad C. Braun, Executive Vice President, Chief Financial Officer, Treasury and Secretary
   38


---



Table of Contents  Exhibit Index  Exhibit No.3.1
     Articles of Amendment and Restatement (included as Exhibit 3.1 Amendment No. 3 to REITPluss Registration Statement on Form S-4, filed on September 9, 2009, and incorporated herein by reference).3.2
     Amended and Restated Bylaws (included as Exhibit 3.2 to the AmREIT, Inc.s Current Report on Form 8-k, filed on November 3, 2010, and incorporated herein by reference).31.1
     Certification pursuant to Rule 13a-14(a) of Chief Executive Officer (filed herewith).31.2
     Certification pursuant to Rule 13a-14(a) of Chief Financial Officer (filed herewith).32.1
     Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).32.2
     Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
   39


---