SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
Form 10Q
___________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended
June 30, 2002
Commission file number: 000-29778
Merry Land Properties, Inc.
| State of Incorporation: Georgia | I.R.S. Employer Identification Number: 58-2412761 |
___________
P.O. Box 1417
Augusta, Georgia
(Address of Principal Executive Offices)
| 706 722-6756 | 30903 |
| (Registrant’s Telephone | (Zip Code) |
| Number, Including Area Code) |
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 twelve months, and (2) has been subject to such filing requirements for the past ninety days: Yes X. No____.
The number of shares of common stock outstanding as of June 30, 2002 was 2,739,685.
Form 10-Q - Merry Land Properties, Inc.
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 .........................3
Consolidated Statements of Income -
Three and Six Months ended June 30, 2002 and 2001.......................................4
Consolidated Statements of Cash Flows -
Six Months ended June 30, 2002 and 2001.................................................5
Notes to Consolidated Financial Statements.................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................17
Item 2. Changes in Securities and Use of Proceeds................................................17
Item 3. Defaults upon Senior Securities..........................................................17
Item 4. Submission of Matters to a Vote of Security Holders......................................17
Item 5. Other Information........................................................................17
Item 6. Exhibits and Reports on Form 8-K.........................................................18
SIGNATURES.................................................................................................19
Form 10-Q - Part I. Financial Information
Item 1-. Financial Statements
Merry Land Properties, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Unaudited
June 30, 2002 December 31, 2001
---------------------- -----------------------
ASSETS
Real estate assets, at cost:
Land held for mining, development and sale $ 4,178,045 $ 4,658,330
Apartments 86,793,879 78,844,915
Apartment held for sale 7,117,826 7,078,875
Commercial rental property 3,305,192 2,564,034
Furniture and equipment 1,993,155 1,971,482
Development in progress 20,160,868 21,828,302
---------------------- -----------------------
Total cost 123,548,965 116,945,938
Accumulated depreciation and depletion (17,834,251) (16,492,470)
---------------------- -----------------------
105,714,714 100,453,468
INVESTMENT IN JOINT VENTURE 367,083 421,932
CASH AND CASH EQUIVALENTS 4,866,286 3,601,636
ESCROWED CASH 1,979,104 1,963,745
OTHER ASSETS
Assets of discontinued operations - 10,867,588
Notes receivable 356,828 377,867
Deferred loan costs 1,197,627 1,393,741
Other receivable 289,915 375,036
Deferred tax asset 2,239,647 4,140,846
Other 464,144 105,310
---------------------- -----------------------
4,548,161 17,260,388
---------------------- -----------------------
TOTAL ASSETS $ 117,475,348 $ 123,701,169
====================== =======================
NOTES PAYABLE
Liabilities of discontinued operations $ - $ 13,681,491
Construction loans 23,084,321 19,438,919
Mortgage loans 71,077,669 70,340,145
---------------------- -----------------------
94,161,990 103,460,555
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accrued interest 584,114 694,166
Accrued property taxes 385,403 563,816
Deferred revenue - 28,747
Construction retainage 1,559,433 1,431,717
Payables and accrued liabilities 1,899,371 1,774,708
---------------------- -----------------------
4,428,321 4,493,154
STOCKHOLDERS' EQUITY
Common stock, at $1 stated value, 2,739,685 and 2,714,086 shares issued
and outstanding at June 30, 2002 and December 31, 2001, respectively 2,739,685 2,714,086
Capital surplus 9,891,262 9,686,018
Unamortized compensation (1,730,782) (1,725,590)
Cumulative undistributed net earnings 8,341,510 5,245,288
Receivable from ESOP (356,638) (172,342)
---------------------- -----------------------
18,885,037 15,747,460
---------------------- -----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 117,475,348 $ 123,701,169
====================== =======================
The accompanying notes are an integral part of these consolidated balance sheets.
Form 10-Q - Part I. Financial Information
Item 1- Financial Statements
Merry Land Properties, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------------- ---------------------------------
INCOME 2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Rental income $ 4,105,140 $ 4,148,431 $ 8,089,769 $ 8,220,461
Royalty income 150,609 159,136 274,029 277,904
Interest income 16,342 38,533 30,394 97,922
Management fees 94,276 126,907 203,184 218,884
Development fees 12,000 - 112,000 20,000
Sale of condominium 561,836 200,000 561,836 502,000
Sale of land - - 98,742 -
Sale of mitigation credits 126,961 - 126,961
Other income (8,712) 31,828 (20,228) 31,828
---------------- ---------------- ---------------- ----------------
5,058,452 4,704,835 9,476,687 9,368,999
EXPENSES
Rental expense 1,625,255 1,585,258 2,979,650 3,036,457
Cost of condominium sold 500,325 174,890 500,325 438,127
Interest expense 1,400,959 1,536,465 2,785,612 3,026,640
Depreciation 671,345 606,452 1,342,692 1,211,456
Amortization 30,396 21,033 49,557 42,065
General and administrative expense 1,027,730 870,721 2,106,914 1,738,405
---------------- ---------------- ---------------- ----------------
5,256,010 4,794,819 9,764,750 9,493,150
---------------- ---------------- ---------------- ----------------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES (197,558) (89,984) (288,063) (124,151)
Income tax benefit (71,334) (37,964) (105,699) (50,940)
---------------- ---------------- ---------------- ----------------
LOSS FROM CONTINUING OPERATIONS (126,224) (52,020) (182,364) (73,211)
Income from apartments sold, net of an income tax expense of
$35,375 for the second quarter 2001 and $22,947 and $61,551
for the first six months in 2002 and 2001, respectively - 57,790 37,488 100,553
Gain from sale of apartments, net of $1,983,951 in income taxes - - 3,241,099 -
---------------- ---------------- ---------------- ----------------
INCOME FROM DISCONTINUED OPERATIONS - 57,790 3,278,587 100,553
NET (LOSS) INCOME $ (126,224) $ 5,770 $ 3,096,223 $ 27,342
================ ================ ================ ================
WEIGHTED AVERAGE COMMON SHARES 2,351,806 2,282,053 2,350,606 2,280,853
LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE
$ (0.05) $ (0.03) $ (0.07) $ (0.03)
EARNINGS FROM DISCONTINUED OPERATIONS PER COMMON SHARE
$ 0.00 $ 0.03 $ 1.39 $ 0.04
(LOSS) EARNINGS PER COMMON SHARE $ (0.05) $ 0.00 $ 1.32 $ 0.01
The accompanying notes are an integral part of these consolidated income statements.
Form 10-Q - Part I Financial Information
Item 1- Financial Statements
Merry Land Properties, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001
----------------- -----------------
Net income $ 3,096,223 $ 27,342
Adjustments to reconcile net income to net cash from operations:
Income from discontinued operations, net of taxes (3,278,587) (100,553)
Deferred income tax benefit (105,699) (50,940)
Cost of condominium sold 500,325 438,127
Gain on sale real property and land (98,742) -
Depreciation and amortization expense 1,392,249 1,253,521
Amortization of compensation element of restricted stock grants 179,152 161,771
Increase in other assets (347,518) (183,015)
(Decrease) increase in net payables and liabilities (56,788) 198,784
----------------- -----------------
Net cash provided by operating activities 1,280,615 1,739,267
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development (5,851,362) (7,197,470)
Sale (purchase) of real property and land 102,600 (1,336,849)
Capitalized costs, improvements and replacements (1,201,493) (888,735)
(Increase) decrease in receivable from ESOP (184,296) 248,040
Distributions from joint ventures 54,849 -
Payments received on notes receivable 21,039 34,525
----------------- -----------------
Net cash used in investing activities (7,058,663) (9,140,489)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term loan - 2,525,862
Proceeds from construction loans 3,645,402 4,613,775
Repayment of line of credit - (1,500,000)
Proceeds from mortgage loan 1,070,000 -
Repayments of mortgage loans (332,476) (319,531)
Increase in deferred loan costs (11,039) (75,000)
(Increase) decrease in escrows (159,508) 11,101
----------------- -----------------
Net cash provided by financing activities 4,212,379 5,256,207
CASH FLOWS FROM DISCONTINUED OPERATIONS 2,830,319 275,492
NET INCREASE (DECREASE) IN CASH 1,264,650 (1,869,523)
CASH AT BEGINNING OF PERIOD 3,601,636 4,452,189
----------------- ----------------
CASH AT END OF PERIOD $ 4,866,286 $ 2,582,666
================= =================
Interest paid: $ 3,819,073 $ 3,982,034
Income taxes paid: $ - $ -
Merry Land Properties, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
1. Organization
Merry Land Properties, Inc. was formed on September 3, 1998, as a corporate subsidiary of Merry Land & Investment Company, Inc. On October 15, 1998, the common stock of Merry Land Properties was spun off to the common shareholders of Merry Land & Investment Company on the basis of one share of Merry Land Properties stock for every twenty shares of Merry Land & Investment Company.
2. Basis of Presentation
The consolidated financial statements were prepared by the Company without audit, but in the opinion of management reflect all adjustments necessary (which adjustments are of a normal and recurring nature) for the fair presentation of the Company's financial position as of June 30, 2002 and results of operations for the three and six month periods ended June 30, 2002. Results of operations for the interim 2002 period are not necessarily indicative of results expected for the full year. Certain information and disclosures have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission; the Company believes that the disclosures herein are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the audited financial statements and notes included in Merry Land's latest annual report on Form 10K for the fiscal year ended December 31, 2001.
3. Discontinued Operations
On March 12, 2002, Merry Land sold both Magnolia Villas and West Wind apartments, located in Savannah, for a total of $16.4 million, recognizing a pretax gain of $5.2 million. As a result of the sales, the company's financial statements have been prepared with these two community's net assets, results of operations, cash flows, and their gain from sale isolated and shown as "discontinued operations". All historical statements have been restated to conform to this presentation in accordance with statement of Financial Accounting Standard No. 144.
Summarized financial information for the discontinued operations is as follows:
Three months ending June 30, Six months ending June 30,
---------------------------- ---------------------------------------
2001 2002 2001
---------------------------- ------------------ -------------------
Rental income $ 729,618 $ 566,441 $ 1,428,991
Operating expenses (260,109) (261,325) (519,514)
Depreciation (96,147) (33,405) (192,295)
---------------------------- ------------------ -------------------
Operating income 373,362 271,711 717,182
Interest expense (274,642) (207,573) (543,969)
Amortization expense (5,555) (3,703) (11,109)
---------------------------- ------------------ -------------------
Income before taxes 93,165 60,435 162,104
Income tax expense (35,375) (22,947) (61,551)
---------------------------- ------------------ -------------------
Net income $ 57,790 $ 37,488 $ 100,553
============================ ================== ===================
December 31, 2001
----------------------------
Apartments $13,078,721
Accumulated depreciation (2,211,133)
Mortgage debt (13,681,491)
---------------------------- ---------------------
Net liabilities of discontinued operations $(2,813,903)
============================
In August 2001, Merry Land sold the 248 unit Woodcrest apartment community. This former community is not included as part of discontinued operations. The community’s net operating income after depreciation for the first six months of 2001 was $448 thousand on gross rents of $784 thousand and operating expense excluding depreciation of $272 thousand.
4. Assets Held for Sale
Merry Land presently has under contract Summit Place, an apartment community the company considers to have less opportunity for growth than our remaining communities. However, there can be no assurance that this transaction will be consummated. The community’s net operating income after depreciation for the first six months in 2002 was $363 thousand on gross rents of $754 thousand and operating expense excluding depreciation of $301 thousand. Its $6.7 million net book value is less than the projected sales price less closing costs.
5. Earnings Per Share and Share Information
Basic earnings per common share is computed on the basis of the weighted average number of shares outstanding during each period excluding unvested shares issued to employees under our Management Incentive Plan. As Merry Land had losses from continuing operations for all periods presented, all stock equivalents were considered to be antidilutive and excluded from weighted shares outstanding.
The potential dilutive stock equivalent excluded when calculating weighted average shares outstanding is as follows:
Three months ended June 30, Six months ended June 30,
------------------------------- -----------------------------------
2002 2001 2002 2001
-------------- --------------- ---------------- -----------------
Dilutive potential common shares 2,570,753 2,446,093 2,534,259 2,434,348
-------------- --------------- ---------------- -----------------
6. Segment Information
Merry Land has three reportable segments: Apartment Communities, Commercial Properties and Land, and Third Party Services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Form 10K of the year ended December 31, 2001 as modified to conform with SFAS No. 144.
Commercial Third Party
Three months ending June 30, 2002 Apartments and Land Services Corporate Consolidated
--------------- ------------- ------------- ------------- ---------------
Real estate rental revenue $ 3,981,015 $ 124,089 $ - $ - $ 4,105,104
Real estate expense (1,547,749) (76,207) - - (1,623,956)
Depreciation and amortization (580,616) (52,127) - (68,998) (701,741)
--------------- ------------- ------------- ------------- ---------------
Income from real estate 1,852,650 (4,245) - (68,998) 1,779,407
Other income - 351,081 94,276 3,513 448,870
--------------- ------------- ------------- ------------- ---------------
Segment income 1,852,650 346,836 94,276 (65,485) 2,228,277
Interest expense - - - (1,460,417) (1,460,417)
General and administrative (256,424) (113,780) (141,336) (516,190) (1,027,730)
--------------- ------------- ------------- ------------- ---------------
Income before taxes 1,596,226 233,056 (47,060) (2,042,092) (259,870)
Income tax benefit - - - 94,994 94,994
--------------- ------------- ------------- ------------- ---------------
Income from continuing operations 1,596,226 233,056 (47,060) (1,947,098) (164,876)
Income from discontinued operations (24,975) - - 63,627 38,652
--------------- ------------- ------------- ------------- ---------------
Net income $ 1,571,251 $ 233,056 $ (47,060) $(1,883,471) $ (126,224)
=============== ============= ============= ============= ===============
Capital investments $ 238,157 $ 3,363,180 $ - $ 21,471 $ 3,622,808
=============== ============= ============= ============= ===============
Total real estate assets $ 78,782,797 $26,745,929 $ - $ 185,988 $105,714,714
=============== ============= ============= ============= ===============
Commercial Third Party
Three months ending June 30, 2001 Apartments and Land Services Corporate Consolidated
--------------- ------------- ------------- ------------- ---------------
Real estate rental revenue $ 4,077,541 $ 70,890 $ - $ - $ 4,148,431
Real estate expense (1,482,731) (102,527) - - (1,585,258)
Depreciation and amortization (514,275) (52,127) - (61,083) (627,485)
--------------- ------------- ------------- ------------- ---------------
Income from real estate 2,080,535 (83,764) - (61,083) 1,935,688
Other income 35,000 184,246 126,907 35,360 381,513
--------------- ------------- ------------- ------------- ---------------
Segment income 2,115,535 100,482 126,907 (25,723) 2,317,201
Interest expense - - - (1,536,465) (1,536,465)
General and administrative (140,395) (91,343) (140,791) (498,192) (870,721)
--------------- ------------- ------------- ------------- ---------------
Income before taxes 1,975,140 9,139 (13,884) (2,060,380) (89,985)
Income tax benefit - - - 37,964 37,964
--------------- ------------- ------------- ------------- ---------------
Income from continuing operations 1,975,140 9,139 (13,884) (2,022,416) (52,021)
Income from discontinued operations 373,361 - - (315,570) 57,791
--------------- ------------- ------------- ------------- ---------------
Net income $ 2,348,501 $ 9,139 $ (13,884) $(2,337,986) $ 5,770
=============== ============= ============= ============= ===============
Capital investments $ 359,369 $ 3,662,232 $ - $ 6,593 $ 4,028,194
=============== ============= ============= ============= ===============
Total real estate assets $ 1,520,687 $ 1,986,964 $ - $ (33,458) $ 3,474,193
=============== ============= ============= ============= ===============
Commercial Third Party
Six months ending June 30, 2002 Apartments and Land Services Corporate Consolidated
--------------- ------------- ------------- ------------- ---------------
Real estate rental revenue $ 7,897,731 $ 192,038 $ - $ - $ 8,089,769
Real estate expense (2,833,311) (146,339) - - (2,979,650)
Depreciation and amortization (1,161,233) (104,254) - (126,762) (1,392,249)
--------------- ------------- ------------- ------------- ---------------
Income from real estate 3,903,187 (58,555) - (126,762) 3,717,870
Other income - 673,243 203,184 10,166 886,593
--------------- ------------- ------------- ------------- ---------------
Segment income 3,903,187 614,688 203,184 (116,596) 4,604,463
Interest expense - - - (2,785,612) (2,785,612)
General and administrative (542,500) (208,632) (326,916) (1,028,866) (2,106,914)
--------------- ------------- ------------- ------------- ---------------
Income before taxes 3,360,687 406,056 (123,732) (3,931,074) (288,063)
Income tax benefit - - - 105,699 105,699
--------------- ------------- ------------- ------------- ---------------
Income from continuing operations 3,360,687 406,056 (123,732) (3,825,375) (182,364)
Income from discontinued operations 5,496,761 - - (2,218,174) 3,278,587
--------------- ------------- ------------- ------------- ---------------
Net income $ 8,857,448 $ 406,056 $ (123,732) $(6,043,549) $ 3,096,223
=============== ============= ============= ============= ===============
Capital investments $ 376,097 $ 6,655,085 $ - $ 21,673 $ 7,052,855
=============== ============= ============= ============= ===============
Total real estate assets $ 78,782,797 $26,745,929 $ - $ 185,988 $105,714,714
=============== ============= ============= ============= ===============
Commercial Third Party
Six months ending June 30, 2001 Apartments and Land Services Corporate Consolidated
--------------- ------------- ------------- ------------- ---------------
Real estate rental revenue $ 8,074,569 $ 145,892 $ - $ - $ 8,220,461
Real estate expense (2,844,276) (192,181) - - (3,036,457)
Depreciation and amortization (1,028,549) (104,254) - (120,718) (1,253,521)
--------------- ------------- ------------- ------------- ---------------
Income from real estate 4,201,745 (150,543) - (120,718) 3,930,483
Other income 35,000 361,777 218,884 94,749 710,410
--------------- ------------- ------------- ------------- ---------------
Segment income 4,236,745 211,234 218,884 (25,969) 4,640,893
Interest expense - - - (3,026,640) (3,026,640)
General and administrative (386,854) (184,884) (247,900) (918,767) (1,738,405)
--------------- ------------- ------------- ------------- ---------------
Income before taxes 3,849,891 26,350 (29,016) (3,971,376) (124,152)
Income tax benefit - - - 50,940 50,940
--------------- ------------- ------------- ------------- ---------------
Income from continuing operations 3,849,891 26,350 (29,016) (3,920,436) (73,212)
Income from discontinued operations 717,181 - - (616,627) 100,554
--------------- ------------- ------------- ------------- ---------------
Net income $ 4,567,072 $ 26,350 $ (29,016) $(4,537,063) $ 27,342
=============== ============= ============= ============= ===============
Capital investments $ 707,374 $ 8,766,116 $ - $ 27,277 $ 9,500,767
=============== ============= ============= ============= ===============
Total real estate assets $ 85,382,351 $22,772,857 $ - $ 281,315 $108,436,523
=============== ============= ============= ============= ===============
Form 10-Q - Part I. Financial Information
Item 2.
Merry Land Properties, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Recent Events
As part of Merry Land's continuing program of disposing of properties that do not meet its investment criteria, we have agreed to sell Summit Place, a 226 unit apartment community in Charleston. This sale, if consummated, would result in a recognition of gain and a corresponding increase in our net book value, but would reduce net rental income generated from apartments until the proceeds could be reinvested in other income producing properties.
Apartments
At June 30, 2002 Merry Land owned or had an interest in 2,043 apartment units in nine communities and 164 completed units from two communities under construction. These communities are described in the following table.
Six months ended June 30,
--------------------------------------------------------
Average Occupancy (1) Average Rental Rate (2)
-------------------------- --------------------------
Community Units 2002 2001 2002 2001
------------------------------ --------- ------------ ----------- ------------ -----------
Wholly Owned Communities
Quarterdeck 230 94% 97% $ 778 $ 774
Summit Place 226 95% 97% 545 562
Waters Edge 200 98% 96% 639 665
Merritt at James Island (3) 139 87% 100% 1,034 969
Windsor Place 224 96% 97% 646 658
--------- ------------ ----------- ------------ -----------
Total-Charleston 1,019 95% 97% 705 685
Greentree 194 96% 97% 669 652
Hammocks at Long Point 308 96% 97% 899 870
Huntington 147 98% 96% 677 665
Merritt at Whitemarsh (4) 25 0% - 907 -
Marsh Cove 188 96% 96% 785 738
--------- ------------ ----------- ------------ -----------
Total-Savannah 862 97% 96% 785 754
Total-wholly owned 1,881 95% 97% $ 741 $ 711
Joint Venture Communities
Cypress Cove (5) 326 79% 98% $ 791 $ 767
--------- ------------ ----------- ------------ -----------
Total-joint venture 326 79% 98% $ 791 $ 767
Total-all 2,207 93% 97% $ 748 $ 719
(1) The average physical occupancy at each month end for the period held.
(2) The weighted average monthly rent charged for occupied owned units and rents asked for unoccupied owned units at June 30.
(3) Community under construction with 139 of the 230 total units placed in service.
(4) Community under construction with 25 of the 241 total units placed in service.
(5) Merry Land holds a 10% interest in this apartment community.
Results of Operations for the Six Months Ended June 30, 2002 and 2001
Rental Operations-All Apartments. The following table describes the operating performance of Merry Land's wholly owned apartment communities including both West Wind apartments and Magnolia Villa apartments which were sold in March 2002 and also Woodcrest apartments which was sold in August 2001. (Dollars in thousands, except average monthly rent)
Six months ended June 30,
% Change from ----------------------------
Change 2000 to 2001 2002 2001
-------------- ----------------- ------------- -------------
Rental income (11)% $(1,040) $ 8,464 $ 9,504
Operating expenses (8)% (269) 3,095 3,364
Depreciation (2)% (26) 1,195 1,221
-------------- ----------------- ------------- -------------
Total expenses (6)% (295) 4,290 4,585
Operating income after depreciation (15)% $ (745) $ 4,174 $ 4,919
Average occupancy (1) - (0.8)% 95.7% 96.5%
Average monthly rent (2) 4.3% $ 30 $ 741 $ 711
Expense ratio (3) - 0.4 % 35.0% 34.6%
(1) Represents the average physical occupancy at each month end for the period held.
(2) Represents weighted average monthly rent charged for occupied units and rents asked for unoccupied units at June 30.
(3) Represents total operating expenses divided by rental revenues.
Operating income after depreciation for the second quarter 2002 totaled $1.9 million, down $600 thousand from $2.5 million in 2001. In the second quarter of 2002, rental income decreased 17% to $4.0 million from $4.8 million in 2001 and operating expense decreased 11% to $1.5 million from $1.7 million. These decreases were primarily due to the sale of the three apartment communities but were offset by additional net income from the units placed in service at the Merritt at James Island development.
Operating income after depreciation from both West Wind and Magnolia Villas totaled $271 thousand for the first six months in 2002 and $718 thousand, in 2001. Rental income for these two communities was $566 thousand in 2002 and $1.4 million in 2001. Operating income after depreciation from Woodcrest was $448 thousand for the first six months in 2001 on rental income of $784 thousand and operating expenses of $272 thousand.
Construction continues slowly at Merritt at James Island in Charleston where we have received 175 of the 230 units at the end of July 2002. Construction on this $17.9 million community is expected to complete by fall and the demand for these units continues to be strong. Operating income after depreciation for the first six months in 2002 was $215 thousand on gross rents of $633 thousand and operating expenses of $266 thousand.
Construction at Merritt at Whitemarsh Island in Savannah is moving along somewhat more rapidly, and we have recently received our clubhouse and 50 apartment units. The total construction cost will be approximately $19.8 million and should be completed by January 2003.
Rental Operations-Same Store Apartments.The following table compares the performance of the 1,717 units of our eight wholly owned residential communities which we owned for the first six months of both 2002 and 2001. ("same store" results) (Dollars in thousands, except average monthly rent; see footnotes above)
Six months ended June 30,
% Change from -------------------------------
Change 2001 to 2002 2002 2001
---------- --------------- -------------- ---------------
Rental income (0)% $ (36) $ 7,236 $ 7,272
Personnel (9)% (70) 746 816
Utilities (16)% (35) 185 221
Operating 9 % 21 262 241
Maintenance and grounds 4 % 21 530 509
Taxes and insurance 12 % 84 812 728
Depreciation 5 % 45 1,010 965
---------- --------------- -------------- ---------------
Total expenses 2 % 65 3,545 3,480
Operating income after depreciation (3)% $ (101) $ 3,691 $ 3,792
Average occupancy (1) - (0.3)% 96.3% 96.6%
Average monthly rent (2) 1 % $ 7 $ 715 $ 709
Expense ratio (3) - 0.6 % 35.0% 34.6%
Same store operating income before depreciation for the first six months in 2002 was down 1.2% on revenue decline of 0.5% and an increase in operating expenses by 0.8%. Occupancy at June 30, 2002 was 96.0%, down from 96.9% a year ago. We continue to feel the effects of a weakening national economy and reduced demand for apartments. Income growth is expected to remain modest for the rest of this year, with the higher insurance and operating costs offsetting gains from increased revenues later this year.
Operating income for Charleston was down 2.8% on a revenue decrease of 1.7% and an increase in operating expenses by 0.2%. The decrease in revenue was due to a 1.8% decrease in average monthly rent and 0.5% drop in average occupancy.
Operating income for Savannah remained flat on a revenue increase of 0.7% and operating expense increase of 1.4%. The average monthly rent increased by 3.6% while its average occupancy dropped 0.2%.
Rental Operations-Commercial. The company owns three commercial properties in the Augusta area whose overall occupancy was approximately 80% at June 30, 2002. In March, we relocated our corporate offices from the Ellis Street office building to the newly renovated space in our Leonard Building, also in downtown Augusta.
Operating income before depreciation was $73 thousand in 2002 compared to breakeven in 2001. The increase is primarily due to the new lease on our Ellis Street building.
Land. We own 4,131 acres of unimproved land, of which 2,948 acres are subject to clay and sand mining leases. At the end of last year, we established a 392 acre wetlands mitigation bank within our 2,848 acre Brickyard Tract in Augusta, which permanently sets aside this area as a wildlife and ecological preserve. In the second quarter of 2002 we sold 95 of the 129 currently available mitigation credits for a total of $189 thousand; recognizing a gain of $126 thousand. Additional credits will become available for sale upon the completion of specified improvements to the property.
Other land income, for the most part mineral royalties, was $283 thousand for the first six months in 2002 down slightly from $291 thousand in 2001.
Property Management Fees. Management fee income decreased slightly in the first six months of 2002 to $203 thousand from $219 thousand the same period in 2001. The total units managed were 1,316 at the end of the second quarter 2002, down 745 units from 2,061 units in 2001.
Development Fees. Development fee income was $112 thousand for the first half 2002, up from $20 thousand in 2001.
Sale of Land. In January 2002, we sold a 5.7-acre tract of land from the Brickyard Tract in Augusta for $103 thousand, recognizing a pretax gain of $99 thousand.
Sale of Condominium. We have sold six out of the seven condominium units at 214 Calhoun Street in Charleston; four units in 2001 and two units in the second quarter of 2002. Total sales proceeds have been $1.7 million, and we have recognized cumulative pretax gains of $283 thousand.
Interest Expense. Total interest expense decreased $577 thousand to $3.0 million for the first six months in 2002, from $3.6 million in 2001. The increase in construction loan interest was more than offset by the increase in interest capitalized related to our developments and by the decrease in mortgage interest expense resulting from the sale of the Woodcrest apartments in August 2001 and both the West Wind Landing and Magnolia Villas apartments in March 2002. The term loan was paid off in December 2001. (Dollars in thousands for the following table)
Six months ended June 30,
Change from ----------------------------------
2001 to 2002 2002 2001
---------------- -------------- --------------
Term loan $ (67) $ - $ 67
Construction loans 385 707 322
Mortgage loans (277) 2,794 3,071
---------------- -------------- --------------
Total interest cost 41 3,501 3,460
Capitalized for development (282) (716) (434)
---------------- -------------- --------------
Interest expense-continuing operations (241) 2,785 3,026
Mortgage loans-discontinued operations (336) 208 544
---------------- -------------- --------------
Total interest expense $ (577) $ 2,993 $ 3,570
General and Administrative Expenses. General and administrative expenses increased 21% to $2.1 million for the first six months of 2002 from $1.7 million in 2001 primarily due to a greater number of corporate employees and an increase in third party management costs.
Loss From Continuing Operations Before Taxes. The loss from continuing operations before taxes increased to $288 thousand for the first six months in 2002 from a $124 thousand loss for 2001. While net rental income remained flat ( rental income less rental, depreciation and interest expense), the $226 thousand increase in gains from the sale of land and mitigation credits and the $76 thousand increase in development and management fee income were more than offset by the $368 thousand increase in corporate administrative expense and the $98 thousand decrease in interest and other income.
Income From Discontinued Operations. On March 12, 2002, Merry Land sold both Magnolia Villas and West Wind apartments, located in Savannah, for a total of $16.4 million, recognizing a pretax gain of $5.2 million. Their total cost was $13.1 million and they had a net book value of $10.9 million. Their total net income after interest and income taxes was $37 thousand and $101 thousand for the first six months in 2002 and 2001, respectively.
Funds From Operations. For the first six months of 2002 funds from operations totaled $1.2 million down from $1.5 million in 2001. The reduction in FFO was due primarily to the sale of Woodcrest in August 2001 and both West Wind Landing and Magnolia Villas in March 2002. (Dollars in thousands)
Six months ended June 30,
---------------------------------
2002 2001
------------- ---------------
Loss from continuing operations $ (182) $ (73)
Add: depreciation of real estate owned 1,303 1,177
Add: tax benefit resulting from permanent difference in
book and tax basis 104 93
Less: gain on sale of land, net of tax effect (61) -
------------- ---------------
Funds from continuing operations 1,164 1,197
Income from discontinued operations 3,278 101
Add: depreciation of real estate owned 33 192
Less: gain on sale of apartments, net of tax effect (3,241) -
------------- ---------------
Funds from discontinued operations 70 293
Total funds from operations $ 1,234 $1,490
============= ===============
Weighted average common shares outstanding-
Basic 2,351 2,281
Diluted 2,534 2,434
The company believes that funds from operations are an important measure of its operating performance. Funds from operations do not represent cash flows from operations as defined by accounting principles generally accepted in the United States, GAAP, and should not be considered as an alternative to net income, or as an indicator of the company's operating performance, or as a measure of the company's liquidity. The company defines funds from operations as net income computed in accordance with GAAP, excluding non-recurring items and net realized gains (losses), plus depreciation of operating real estate.
Financial Structure. We use debt to finance most of our acquisitions and development activities and, as a result, are a highly leveraged company. At June 30, 2002 total debt equaled 83% of total capitalization at cost and 78% of total capitalization with equity valued at market. (2,739,685 shares outstanding at the June 30, 2002 closing price of $9.96 per share). (Dollars in thousands)
Equity at Equity at
Book % of Market % of
Value Total Value Total
-------------- ----------- --------------- ------------
Construction loan $ 23,084 20% $ 23,084 19%
Mortgage loans 71,078 63% 71,078 59%
-------------- ----------- --------------- ------------
Total debt 94,162 83% 94,162 78%
Common stock 18,885 17% 27,287 22%
-------------- ----------- --------------- ------------
Total capitalization $113,047 100% $121,449 100%
============== =========== =============== ============
Liquidity. We expect to meet our short-term liquidity requirements with working capital, cash provided by operating activities, lines of credit, construction loans, and the possible sale of land, apartments, or other assets. Our primary short-term liquidity needs include operating expenses, capital improvements, and the completion of the Merritt at Whitemarsh and the Merritt at James Island development communities. A weak national economy might continue to affect cash generated by our stabilized communities.
We expect to meet our long-term liquidity requirements from a variety of sources including operating cash flow, additional mortgage loans and other borrowings, the possible sale of apartment communities and other assets and the issuance and sale of debt and equity securities in public and private markets. Our long term liquidity needs include the maturity of the mortgage and term loan debt and the financing of acquisitions and development.
Cash Flows. Cash and cash equivalents totaled $4.9 million at June 30, 2002, up $1.3 million from $3.6 million at December 31, 2001. Net cash provided by continuing operations was $1.3 million but we used an additional $1.2 million for capital improvements on existing properties and for renovating our new corporate office. Merry Land also received $2.9 million as a result of the sale ofWest Wind and Magnolia Villas. We spent $1.5 million net of construction loans on the existing developments and acquired the Central Park development land for $825 thousand. We also received $102 thousand from the sale of clay land and a net $500 thousand from net mortgage loan proceeds and escrow repayments.
Critical Accounting Policies. A critical accounting policy is one which is both important to the portrayal of a company's financial condition and results and requires significant judgment or complex estimation processes. As Merry Land is in the business of developing, owning and managing apartment properties, our critical accounting policies relate to cost capitalization, depreciation and amortization, and impairment of long-lived assets.
We expense pre-development costs incurred on a potential project until it becomes probable that the project will go forward. After a project becomes probable, all subsequently incurred predevelopment costs are capitalized. If the decision is made to not commence development of a project that had been deemed probable, all previously capitalized predevelopment costs are expensed. Once development of the project commences, Merry Land capitalizes interest, real estate taxes, and certain internal personnel and associated costs directly related to the project under development and construction based on the portion of the project which remains under construction.
When a project is completed and placed in service, it is depreciated on a straight-line basis over its estimated useful life. Projects are depreciated over 5 to 50 years. As required by generally accepted accounting principles, Merry Land periodically evaluates its real estate assets to determine if there has been any impairment in their carrying values and records impairment losses if the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts or there are other indicators of impairment. At June 30, 2002, Merry Land did not own any real estate assets that were impaired.
Inflation. Substantially all of our leases are for terms of one year or less, which should enable us to replace existing leases with new leases at higher rental rates in times of rising prices. We believe that this would offset the effect of cost increases stemming from inflation.
Forward Looking Statements. This filing includes statements that are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding expectations with respect to market conditions, development projects, acquisitions, occupancy rates, capital requirements, sources of funds, expense levels, operating performance, and other matters. These assumptions and statements are subject to various factors, unknown risks and uncertainties, including general economic conditions, local market factors, delays and cost overruns in construction, completion and rent up of development communities, performance of consultants or other third parties, environmental concerns, and interest rates, any of which may cause actual results to differ from the company's current expectations.
Form 10-Q - Part I. Financial Information
Item 3.
Merry Land Properties, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the company's reported market risk since December 31, 2001.
Form 10-Q - Merry Land Properties, Inc.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the company's Annual Meeting of Shareholders held April 18, 2002, the following vote totals were recorded:
1. Election of Director: Shares voted - 2,425,850
For | Against | Abstain | |
| W. Tennent Houston | 2,425,850 | 2,23,840 | 0 |
In addition to Mr. Houston, the following Directors continued in
office following the meeting: Michael N. Thompson, Jefferson B.A. Knox, David
W. Cobb, and Stewart R. Speed.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
(3.i) Articles
of Incorporation, as amended by Articles of Amendment to Articles of
Incorporation re Series A Redeemable Cumulative Preferred Stock (incorporated
herein by reference to Exhibit 3(i) to the company’s Annual Report on Form
10-K filed March 31, 2000, file number 000-29778).
(3.ii) By-laws,
as amended on January 28, 1999, (incorporated herein by reference to Exhibit
3(ii) of Item 14 to the company’s Annual Report on Form 10-K for the year
ended December 31, 2000).
(99.1) Certification of Periodic Financial Report
b. The registrant filed no form 8K reports during the second quarter of 2002.
Form 10-Q - Merry Land Properties, Inc.
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.
MERRY LAND PROPERTIES, INC.
/s/ Dorrie E. Green
Dorrie E. Green
Vice President and
Chief Financial Officer
August 13, 2002