SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number:1-12590
GABLES RESIDENTIAL TRUST
(Exact name of Registrant as specified in its Charter)
MARYLAND |
| 58-2077868 |
|
6551 Park of Commerce Blvd., Suite 100
Boca Raton, Florida 33487
(Address of principal executive offices, including zip code)
(561) 997-9700
(Registrant's telephone number, including area code)
2859 Paces Ferry Road, Suite 1450
Atlanta, Georgia 30339
(Former name, former address and former fiscal year, if changed since last report)
Common shares of beneficial interest, par value $0.01 per share, 24,795,175 shares
The number of shares outstanding of each of the registrant's classes of common stock,
as of April 30, 2002
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 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.
(1) | (X) YES | ( ) NO |
(2) | (X) YES | ( ) NO |
GABLES RESIDENTIAL TRUST
FORM 10 - Q INDEX
Part I | Financial Information | Page |
Item 1: | Financial Statements | |
| Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 | 3 |
| Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 | 4 |
| Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 | 5 |
| Notes to Consolidated Financial Statements | 6 |
Item 2: | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 |
Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 27 |
| ||
Part II | ||
Item 1: | Legal Proceedings | 28 |
| Item 2: | Changes in Securities | 28 |
| Item 3: | Defaults Upon Senior Securities | 28 |
| Item 4: | Submission of Matters to a Vote of Security Holders | 28 |
| Item 5: | Other Information | 28 |
| Item 6: | Exhibits and Reports on Form 8-K | 28 |
| Signature | 29 |
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
GABLES RESIDENTIAL TRUST | ||||||
| March 31, 2002 (Unaudited) | December 31, 2001 | |||||
ASSETS: Cash and cash equivalents | $ $ |
| ) | $ $ |
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY: | $ $ |
| ) ) | $ $ |
| ) ) |
The accompanying notes are an integral part of these consolidated balance sheets. | ||||||
54,003
3,017
57,020
$ 52,636
2,871
55,507
Property management revenues
Development revenues, net
Equity in income of joint ventures
Interest income
Other revenues
Total other revenues
1,448
7
70
227
227
1,979
Total revenues
57,486
Expenses:
Property operating and maintenance
(exclusive of items shown separately below)
Real estate asset depreciation and amortization
Property management - owned
Property management - third party
Interest expense and credit enhancement fees
Amortization of deferred financing costs
General and administrative
Corporate asset depreciation and amortization
Unusual items
Total expenses
19,265
11,990
1,957
1,677
10,281
257
1,922
453
-
47,802
17,827
10,734
1,461
1,101
10,677
261
1,883
148
400
44,492
Income from continuing operations before gain on sale of real estate assets
Gain on sale of previously depreciated operating real estate assets
Gain on sale of land and development rights
13,307
17,906
1,339
12,994
- -
1,638
Income from continuing operations before minority interest
Minority interest of common unitholders in Operating Partnership
attributable to continuing operations
Minority interest of preferred unitholders in Operating Partnership
Income from continuing operations
Income from discontinued operations, net of minority interest
Gain on disposition of discontinued operations, net of minority interest
Income from discontinued operations, net of minority interest
32,552
( 5,697
( 1,078
25,777
56
2,363
2,419
)
)
14,632
( 2,479
( 1,078
11,075
165
-
165
)
)
Net income
28,196
11,240
Dividends to preferred shareholders
( 2,443
)
( 2,443
Net income available to common shareholders
$
25,753
$ 8,797
Weighted average number of common shares outstanding - basic
Weighted average number of common shares outstanding - diluted
24,520
30,670
23,197
30,012
Per Common Share Information - Basic:
Income from continuing operations (net of preferred dividends)
Income from discontinued operations
Net income available to common shareholders
Per Common Share Information - Diluted:
Income from continuing operations (net of preferred dividends)
Income from discontinued operations
Net income available to common shareholders
$
$
$
$
$
$
0.95
0.10
1.05
0.95
0.10
1.04
$ 0.37
$ 0.01
$ 0.38
$ 0.37
$ 0.01
$ 0.38
The accompanying notes are an integral part of these consolidated statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
Unless the context otherwise requires, all references to "we," "our" or "us" in this report refer collectively to Gables Residential Trust ("Gables"), a Maryland real estate investment trust ("REIT"), and its subsidiaries, including Gables Realty Limited Partnership, a Delaware limited partnership, considered as a single enterprise. Gables GP, Inc., a wholly-owned subsidiary of Gables Residential Trust, is the sole general partner of Gables Realty Limited Partnership.
1. ORGANIZATION AND FORMATION
We are a REIT formed in 1993 under Maryland law to continue and expand the operations of our privately owned predecessor organization. We completed our initial public offering on January 26, 1994.
We are a fully integrated real estate company engaged in the multifamily apartment community management, development, construction, acquisition and disposition businesses. We also provide related brokerage and corporate rental housing services. Substantially all of these businesses are conducted through Gables Realty Limited Partnership (the "Operating Partnership"). We control the Operating Partnership through Gables GP, Inc., a wholly-owned subsidiary and the sole general partner of the Operating Partnership. This structure is commonly referred to as an umbrella partnership REIT or "UPREIT." At March 31, 2002, we were an 80.6% economic owner of the common equity of the Operating Partnership. Substantially all of our third-party management businesses are conducted through a wholly-owned subsidiary, Gables Residential Services.
Our limited partnership and indirect general partnership interests in the Operating Partnership entitle us to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to our ownership interest therein and entitles us to vote on all matters requiring a vote of the limited partners. Generally, the other limited partners of the Operating Partnership are persons who contributed their direct or indirect interests in certain real estate assets to the Operating Partnership primarily in connection with the IPO and the 1998 acquisition of the real estate assets and operations of Trammell Crow Residential South Florida ("South Florida"). The Operating Partnership is obligated to redeem each common unit of limited partnership interest ("Unit") held by a person other than us at the request of the holder for an amount equal to the fair market value of one of our common shares at the time of such redemption, provided that we, at our option, may elect to acquire each Unit presented for redemption for one common share or cash. With each redemption, our percentage ownership interest in the Operating Partnership will increase. In addition, whenever we issue common shares or preferred shares, we are obligated to contribute any net proceeds to the Operating Partnership, and the Operating Partnership is obligated to issue an equivalent number of common or preferred units, as applicable, to us.
As of March 31, 2002, we managed a total of 158 multifamily apartment communities comprising 44,580 apartment homes for assets owned by us and our third-party clients. At March 31, 2002, we owned 72 stabilized multifamily apartment communities comprising 20,272 apartment homes, an indirect 25% interest in one stabilized apartment community comprising 345 apartment homes, an indirect 20% interest in three stabilized apartment communities comprising 947 apartment homes, and an indirect 8.3% interest in three stabilized apartment communities comprising 1,118 apartment homes. We also owned seven multifamily apartment communities under development or in lease-up at March 31, 2002 that are expected to comprise 1,586 apartment homes upon completion and an indirect 20% interest in four apartment communities under development or in lease-up at March 31, 2002 that are expected to comprise 1,077 apartment homes upon completion. In addition, as of March 31, 2002, we owned parcels of land on which we intend to develop two apartment communities that we currently expect will comprise an estimated 761 apartment homes. We also have rights to acquire additional parcels of land on which we believe we could develop communities. Any future development is subject to permits and other governmental approvals, as well as our ongoing business review, and may not be undertaken or completed.
2. COMMON AND PREFERRED EQUITY ACTIVITY
Secondary Common Share Offerings
Since the IPO, we have issued a total of 14,831 common shares in eight offerings, generating $347,771 in net proceeds which were generally used (1) to reduce outstanding indebtedness under interim financing vehicles utilized to fund development and acquisition activities and (2) for general working capital purposes, including funding of future development and acquisition activities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
Preferred Share Offerings
On July 24, 1997, we issued 4,600 shares of 8.30% Series A Cumulative Redeemable Preferred Shares (liquidation preference $25.00 per share). The net proceeds from this offering of $111.0 million were used to reduce outstanding indebtedness under interim financing vehicles. We have the option to redeem the Series A Preferred Shares at $25.00 per share plus accrued and unpaid dividends on or after July 24, 2002. The Series A Preferred Shares have no stated maturity, sinking fund or mandatory redemption, and are not convertible into any other Gables securities.
On June 18, 1998, we issued 180 shares of 5.0% Series Z Cumulative Redeemable Preferred Shares (liquidation preference $25.00 per share) in connection with the acquisition of a parcel of land for future development. The Series Z Preferred Shares, which are subject to mandatory redemption on June 18, 2018, may be redeemed at our option at any time for $25.00 per share plus accrued and unpaid dividends. The Series Z Preferred Shares are not subject to any sinking fund or convertible into any other Gables securities.
Issuances of Common Operating Partnership Units
Since the IPO, the Operating Partnership has issued a total of 4,421 Units in connection with the South Florida acquisition, the acquisition of other operating apartment communities and the acquisition of a parcel of land for future development.
Issuance of Preferred Operating Partnership Units
On November 12, 1998, the Operating Partnership issued 2,000 of its 8.625% Series B Preferred Units to an institutional investor. The net proceeds from this issuance of $48.7 million were used to reduce outstanding indebtedness under interim financing vehicles. We have the option to redeem the Series B Preferred Units after November 14, 2003. These Units are exchangeable by the holder into 8.625% Series B Cumulative Redeemable Preferred Shares of Gables on a one-for-one basis; however, this exchange right is generally not exercisable until after November 14, 2008. The Series B Preferred Units have no stated maturity, sinking fund or mandatory redemption.
Common Equity Repurchase Program
We have a common equity repurchase program pursuant to which we are authorized to purchase up to $150 million of our outstanding common shares or Units. We have repurchased shares from time to time in open market and privately negotiated transactions, depending on market prices and other conditions, using proceeds from sales of selected assets. Units have also been repurchased for cash upon their presentation for redemption by unitholders. As of March 31, 2002, we had repurchased 3,980 common shares and 295 Units for a total of $102,279.
Shelf Registration Statement
We have an effective shelf registration statement on file with the Securities and Exchange Commission providing $500 million of equity capacity and $300 million of debt capacity. We believe it is prudent to maintain shelf registration capacity in order to facilitate future capital-raising activities. To date, there have been no issuances under this shelf registration statement other than the issuance of $150 million of senior unsecured notes in February 2001.
3. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated accounts of Gables and its subsidiaries, including the Operating Partnership and Gables Residential Services. We consolidate the financial statements of all entities in which we have a controlling financial interest, as that term is defined under generally accepted accounting principles ("GAAP"), through either majority voting interest or contractual agreements. Our investments in non-majority owned and/or non-controlled joint ventures are accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been adjusted for the minority interest of unitholders in the Operating Partnership. Because Units, if presented for redemption, can be exchanged for Gables common shares on a one-for-one basis, minority interest of unitholders in the Operating Partnership is calculated based on the weighted average of common shares and Units outstanding during the applicable period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
The accompanying interim unaudited financial statements have been prepared in accordance with GAAP for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments (consisting only of normally recurring adjustments) considered necessary for a fair presentation for these interim periods have been included. The results of operations for the interim period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the financial statements included in our Form 10-K for the year ended December 31, 2001.
4. PORTFOLIO AND OTHER FINANCING ACTIVITY
Community and Land Dispositions
In January 2002, we sold two apartment communities in Houston comprising 502 apartment homes and a 13.3 acre parcel of land adjacent to one of the communities. The net proceeds from these sales totaled $37 million and were used to paydown outstanding borrowings under our credit facilities. In March 2002, we sold an apartment community in Atlanta comprising 311 apartment homes. The net proceeds from this sale totaled $25 million and were deposited into an escrow account to fund future potential acquisition activities. The gain from the land sale was $0.8 million and the aggregate gain from the sale of the previously depreciated operating real estate assets was $20.1 million, all of which was recognized in the first quarter of 2002. In addition, during the first quarter of 2002, we recognized $0.1 million of deferred gain associated with a parcel of land we sold in 2000.
In March 2002, the Gables Residential Apartment Portfolio JV (the "GRAP JV") sold two stabilized apartment communities located in Houston and South Florida, comprising 702 apartment homes, for $59 million. Our share of the net sales proceeds after repayment of construction loan indebtedness of $25 million was $6 million, resulting in a gain of $1.7 million.
During 2001, we contributed our interest in certain land and development rights to the Gables Residential Apartment Portfolio JV Two (the "GRAP JV Two") in return for (1) cash of $18.5 million and (2) capital account credit of $4.6 million. The $2.8 million of gain we will record associated with this contribution is being recognized when earned using the percentage of completion method since we serve as the developer and general contractor for the joint venture. We recognized $0.5 million and $1.6 million of this gain during the three months ended March 31, 2002 and the year ended December 31, 2001, respectively.
During 2001, we sold an apartment community located in Atlanta comprising 386 apartment homes, an apartment community located in Houston comprising 776 apartment homes, an apartment community located in Dallas comprising 536 apartment homes and a 2.5 acre parcel of land adjacent to one of our development communities located in Atlanta. The net proceeds from these sales totaled $93.6 million, $9 million of which was deposited into an escrow account and used to fund acquisition activities. The balance of the net proceeds was used to repay a $16 million note assumed in connection with our September 2001 acquisition of the Gables State Thomas Ravello community and to paydown outstanding borrowings under interim financing vehicles. The gain from the land sale was $0.9 million and the aggregate gain from the sale of the previously depreciated operating real estate assets was $34.1 million, all of which was recognized in 2001. In addition, during the year ended December 31, 2001, we recognized $0.7 million of deferred gain associated with a parcel of land we sold in 2000.
Community Acquisitions
On September 28, 2001, we acquired the 80% membership interest of our venture partner in the GRAP JV in the Gables State Thomas Ravello apartment community located in Dallas comprising 290 apartment homes. In consideration for such community, we paid $12 million in cash and assumed a $16 million secured variable-rate note. This consideration was based on a valuation of the asset of $31 million and is net of our $3 million share of the venture distribution. We recorded a $5 million charge to unusual items in the third quarter of 2001 associated with the write-off of building components that will be replaced in connection with a remediation program to address water infiltration issues plaguing the asset.
On August 28, 2001, we acquired an apartment community located in Washington, D.C. comprising 82 apartment homes for approximately $25 million.
On August 1, 2001, we acquired the 75% interest of our venture partner in the Gables Metropolitan Uptown apartment community located in Houston comprising 318 apartment homes. The asset was valued at approximately $27 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
On March 30, 2001, we acquired the 80% membership interests of our venture partner in the GRAP JV in the Gables Palma Vista and Gables San Michelle II apartment communities located in South Florida comprising 532 apartment homes for $66 million. This cash consideration was based on a valuation of the assets of $75 million and is net of our $9 million share of the venture distribution.
Other Acquisition
In May 2001, we acquired a property management company based in Washington, D.C. that managed approximately 3,600 units in 24 multifamily apartment communities located in Washington, D.C. and the surrounding area at the time of the acquisition (the "D.C. Management Co."). The total investment is approximately $1.6 million and is structured to be paid in three installments based on results of the acquired business operations.
Senior Unsecured Note Issuance
In February 2001, we issued $150 million of senior unsecured notes which bear interest at 7.25%, were priced to yield 7.29% and mature in February 2006. The net proceeds of $148.5 million were used to reduce borrowings under our unsecured credit facilities and repay our $40 million term loan, which had a November 2001 maturity date.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued, establishing accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statements of operations, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, was effective for us beginning January 1, 2001. The impact of SFAS No. 133 on our financial statements will depend on the extent, type and effectiveness of our hedging activities. SFAS No. 133 could increase volatility in net income and other comprehensive income. We had no derivative instruments in place from January 1, 2001 to March 31, 2002.
In June 2001, SFAS No. 141, "Business Combinations," (effective for us July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets," (effective for us January 1, 2002) were issued. SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. We have not accounted for any of our business combinations since our IPO using the pooling method of accounting and did not have goodwill or other intangible assets at December 31, 2001 or March 31, 2002. As a result, the adoption of SFAS No. 141 and SFAS No. 142 did not have a significant impact on our financial statements.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations," (effective for us January 1, 2003) was issued. SFAS No. 143 requires that entities recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We believe that the adoption of SFAS No. 143 will not have a significant impact on our financial statements.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," (effective for us January 1, 2002) was issued. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and among other factors, establishes criteria beyond that previously specified in SFAS No. 121 to determine when a long-lived asset is to be considered as held for sale. The implementation of SFAS No. 144 requires that the gains and losses from the disposition of certain real estate assets and the related historical operating results be included in discontinued operations in the statements of operations for all periods presented. In the normal course of business, we recycle invested capital by disposing of existing assets and redeploying the proceeds in order to enhance total returns to shareholders. Although net income is not affected, we expect to reclassify results previously included in continuing operations to discontinued operations for any qualifying dispositions in accordance with SFAS No. 144. We believe that the impairment provisions of SFAS No. 144 are similar to SFAS No. 121 and that the adoption thereof will not have a significant impact on our financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
In April 2002, SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections," was issued. SFAS No. 145 (effective for us January 1, 2003), among other things, eliminates the requirement that all gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item. However, a gain or loss arising from such an event or transaction would continue to be classified as an extraordinary item if the event or transaction is both unusual in nature and infrequent in occurrence per the criteria in APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." As part of the transition guidance, although net income would not be affected, gains and losses from debt extinguishment in prior periods that do not meet the criteria in APB No. 30 must be reclassified to continuing operations for all periods presented.
6. DISCONTINUED OPERATIONS
We adopted SFAS No. 144 effective January 1, 2002 which requires, among other things, that the operating results of certain real estate assets sold subsequent to January 1, 2002 be included in discontinued operations in the statements of operations for all periods presented. Three of our wholly-owned operating real estate assets and two operating real estate assets owned by the GRAP JV were sold during the first quarter of 2002.
We retained management of two of the three wholly-owned assets and one of the two GRAP JV assets sold. Due to our continuing involvement with the operations of the three assets sold that we are continuing to manage, the operating results of these assets are included in continuing operations. The operating results for both the wholly-owned asset comprising 256 apartment homes located in Houston and the GRAP JV asset comprising 382 apartment homes located in Houston sold that we are not continuing to manage are included in discontinued operations in the statements of operations for all periods presented. Interest expense has been allocated to the results of the discontinued operations in accordance with EITF No. 87-24.
Condensed financial information of the results of operations for the real estate assets sold included in discontinued operations is as follows:
Three Months | ||||
2002 | ||||
2001
$ 197
45
242
$ 641
28
669
)
)
)
7. EARNINGS PER SHARE
Basic earnings per share are computed based on net income available to common shareholders and the weighted average number of common shares outstanding. Diluted earnings per share reflect the assumed issuance of common shares under our share option and incentive plan and upon conversion of Units. The numerator and denominator used for both basic and diluted earnings per share computations are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
$
$
Net income - basic | $ $ | 25,753 6,292 32,045 | $ $ | 8,797 |
Common shares (denominator): |
| |||
Average shares outstanding - basic | 24,520 5,985 160 5 30,670 | 23,197 |
8. SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our senior management group.
We own, operate and develop multifamily apartment communities in major markets located in Texas, Georgia, Florida, Washington, D.C. and Tennessee. Such apartment communities generate rental revenue and other income through the leasing of apartment homes to a diverse base of residents. We evaluate the performance of each of our apartment communities on an individual basis. However, because each of our apartment communities has similar economic characteristics, residents, and products and services, our apartment communities have been aggregated into one reportable segment. This segment comprises 95% and 97% of our total revenues for the three months ended March 31, 2002 and 2001, respectively.
The primary financial measure for our reportable business segment is net operating income ("NOI"), which represents total property revenues less property operating and maintenance expenses (as reflected in the accompanying statements of operations). Accordingly, NOI excludes certain expenses included in the determination of net income. Current year NOI is compared to prior year NOI and current year budgeted NOI as a measure of financial performance. The NOI yield or return on total capitalized costs is an additional measure of financial performance. NOI from our wholly-owned apartment communities included in continuing operations totaled $37,755 and $37,680 for the three months ended March 31, 2002 and 2001, respectively. All other segment measurements are disclosed in our consolidated financial statements.
We also provide management, brokerage, corporate rental housing and development and construction services to third parties. These operations, on an individual and aggregate basis, do not meet the quantitative thresholds for segment reporting under current accounting literature.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
We are a REIT focused within the multifamily industry in demand-driven markets throughout the United States that have high job growth and are resilient to economic downturns. Our operating performance relies predominantly on net operating income from our apartment communities. Net operating income is determined by rental revenues and operating expenses, which are affected by the demand and supply dynamics within our markets. Our performance is also affected by the general availability and cost of capital and our ability to develop and acquire additional apartment communities with returns in excess of our blended cost of capital.
Business Objectives and Strategy
Our objective is to increase shareholder value by producing consistent high quality earnings to sustain dividend growth and annual total returns that exceed the multifamily sector average. To achieve that objective, we employ a number of business strategies. First, our long-term investment strategy is research-driven, with the objective of creating a portfolio of high quality assets in approximately six to eight strategically selected markets that are complementary through economic diversity and characterized by high job growth and resiliency to national economic downturns. We believe such a portfolio will provide predictable growth in operating cash flow on a sustainable basis. Second, we adhere to a strategy of owning and operating high quality, class AA/A apartment communities under the Gables brand. We believe that such communities, when located in highly desirable areas to live and supplemented with high quality service and amenities, attract the affluent renter-by-choice who is willing to pay a premium for location preference, superior service and high quality communities. The resulting portfolio should maintain high levels of occupancy and rental rates. This, coupled with more predictable operating expenses and reduced capital expenditure requirements associated with high quality construction materials, should lead to operating margins that exceed national averages for the multifamily sector and sustainable growth in operating cash flow. Third, our aim is to be recognized as the employer of choice within the industry. Our mission ofTaking Care of the WayPeople Live is a cornerstone of our strategy, involving innovative human resource practices that we believe will attract and retain the highest caliber associates. Because of our long-established presence as a f ully integrated apartment management, development, construction, acquisition and disposition company within our markets, we have the ability to offer multi-faceted career opportunities among the various disciplines within the industry. Finally, our capital strategy is to maximize return on invested capital while maintaining financial flexibility through a conservative, investment grade credit profile. We judiciously manage our capital and are able to recycle existing capital through asset dispositions. We believe the successful execution of these strategies will result in operating cash flow and dividend growth, producing annual total returns that exceed the multifamily REIT sector average.
We believe we are well positioned to continue achieving our objectives because of our long-established presence as a fully integrated real estate company in our markets. This local market presence creates a competitive advantage in generating increased cash flow from (1) property operations during different economic cycles and (2) new investment opportunities that involve site selection, market information and requests for entitlements and zoning petitions.
Portfolio-wide occupancy levels have been reduced slightly and portfolio-wide rental rate growth has slowed as a result of national economic weakness. We expect portfolio-wide rental expenses to increase at a rate ahead of both inflation and property revenues for 2002. Our ongoing evaluation of the growth prospects for a specific asset may result in a determination to dispose of the asset. In that event, we would intend to sell the asset and utilize the net proceeds from any such sale to invest in new assets expected to have better growth prospects, reduce indebtedness or, in certain circumstances with appropriate approval from our board of trustees, repurchase outstanding common shares. We maintain staffing levels sufficient to meet existing construction, acquisition and leasing activities. When market conditions warrant, we adjust staffing levels to mitigate a negative impact on results of operations.
Forward-Looking Statements
This report contains 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. Actual results or developments could differ materially from those projected in such statements as a result of certain factors set forth in the section entitled "Certain Factors Affecting Future Operating Results" and elsewhere in this report.The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying consolidated financial statements and notes thereto.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Common and Preferred Equity Activity
Secondary Common Share Offerings
Since the IPO, we have issued a total of 14,831 common shares in eight offerings, generating $347,771 in net proceeds which were generally used (1) to reduce outstanding indebtedness under interim financing vehicles utilized to fund our development and acquisition activities and (2) for general working capital purposes, including funding of future development and acquisition activities.
Preferred Share Offerings
On July 24, 1997, we issued 4,600 shares of 8.30% Series A Cumulative Redeemable Preferred Shares (liquidation preference $25.00 per share). The net proceeds from this offering of $111.0 million were used to reduce outstanding indebtedness under interim financing vehicles. We have the option to redeem the Series A Preferred Shares at $25.00 per share plus accrued and unpaid dividends on or after July 24, 2002. The Series A Preferred Shares have no stated maturity, sinking fund or mandatory redemption, and are not convertible into any other Gables securities.
On June 18, 1998, we issued 180 shares of 5.0% Series Z Cumulative Redeemable Preferred Shares (liquidation preference $25.00 per share) in connection with the acquisition of a parcel of land for future development. The Series Z Preferred Shares, which are subject to mandatory redemption on June 18, 2018, may be redeemed at our option at any time for $25.00 per share plus accrued and unpaid dividends. The Series Z Preferred Shares are not subject to any sinking fund or convertible into any other Gables securities.
Issuances of Common Operating Partnership Units
Since the IPO, the Operating Partnership has issued a total of 4,421 Units in connection with the 1998 acquisition of the real estate assets and operations of South Florida, the acquisition of other operating apartment communities and the acquisition of a parcel of land for future development.
Issuance of Preferred Operating Partnership Units
On November 12, 1998, the Operating Partnership issued 2,000 of its 8.625% Series B Preferred Units to an institutional investor. The net proceeds from this issuance of $48.7 million were used to reduce outstanding indebtedness under interim financing vehicles. We have the option to redeem the Series B Preferred Units after November 14, 2003. These Units are exchangeable by the holder into 8.625% Series B Cumulative Redeemable Preferred Shares of Gables on a one-for-one basis; however, this exchange right is generally not exercisable until after November 14, 2008. The Series B Preferred Units have no stated maturity, sinking fund or mandatory redemption.
Common Equity Repurchase Program
We have a common equity repurchase program pursuant to which we are currently authorized to purchase up to $150 million of our outstanding common shares or Units. We have repurchased shares from time to time in open market and privately negotiated transactions, depending on market prices and other conditions, using proceeds from sales of selected assets. Units have also been repurchased for cash upon their presentation for redemption by unitholders. As of March 31, 2002, we had repurchased 3,980 common shares and 295 Units for a total of $102,279.
Shelf Registration Statement
We have an effective shelf registration statement on file with the Securities and Exchange Commission providing $500 million of equity capacity and $300 million of debt capacity. We believe it is prudent to maintain shelf registration capacity in order to facilitate future capital raising activities. To date, there have been no issuances under this shelf registration statement other than the issuance of $150 million of senior unsecured notes in February 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Portfolio and Other Financing Activity
Community and Land Dispositions
In January 2002, we sold two apartment communities in Houston comprising 502 apartment homes and a 13.3 acre parcel of land adjacent to one of the communities. The net proceeds from these sales totaled $37 million and were used to paydown outstanding borrowings under our credit facilities. In March 2002, we sold an apartment community in Atlanta comprising 311 apartment homes. The net proceeds from this sale totaled $25 million and were deposited into an escrow account to fund future potential acquisition activities. The gain from the land sale was $0.8 million and the aggregate gain from the sale of the previously depreciated operating real estate assets was $20.1 million, all of which was recognized in the first quarter of 2002. In addition, during the first quarter of 2002, we recognized $0.1 million of deferred gain associated with a parcel of land we sold in 2000.
In March 2002, the Gables Residential Apartment Portfolio JV (the "GRAP JV") sold two stabilized apartment communities located in Houston and South Florida, comprising 702 apartment homes, for $59 million. Our share of the net sales proceeds after repayment of construction loan indebtedness of $25 million was $6 million, resulting in a gain of $1.7 million.
During 2001, we contributed our interest in certain land and development rights to the Gables Residential Apartment Portfolio JV Two (the "GRAP JV Two") in return for (1) cash of $18.5 million and (2) capital account credit of $4.6 million. The $2.8 million of gain we will record associated with this contribution is being recognized when earned using the percentage of completion method since we serve as the developer and general contractor for the joint venture. We recognized $0.5 million and $1.6 million of this gain during the three months ended March 31, 2002 and the year ended December 31, 2001, respectively.
During 2001, we sold an apartment community located in Atlanta comprising 386 apartment homes, an apartment community located in Houston comprising 776 apartment homes, an apartment community located in Dallas comprising 536 apartment homes and a 2.5 acre parcel of land adjacent to one of our development communities located in Atlanta. The net proceeds from these sales totaled $93.6 million, $9 million of which was deposited into an escrow account and used to fund acquisition activities. The balance of the net proceeds was used to repay a $16 million note assumed in connection with our September 2001 acquisition of the Gables State Thomas Ravello community and to paydown outstanding borrowings under interim financing vehicles. The gain from the land sale was $0.9 million and the aggregate gain from the sale of previously depreciated operating real estate assets was $34.1 million, all of which was recognized in 2001. In addition, during the year ended December 31, 2001, we recognized $0.7 million of deferred gain associated with a parcel of land we sold in 2000.
Community Acquisitions
On September 28, 2001, we acquired the 80% membership interest of our venture partner in the GRAP JV in the Gables State Thomas Ravello apartment community located in Dallas comprising 290 apartment homes. In consideration for such community, we paid $12 million in cash and assumed a $16 million secured variable-rate note. This consideration was based on a valuation of the asset of $31 million and is net of our $3 million share of the venture distribution. We recorded a $5 million charge to unusual items in the third quarter of 2001 associated with the write-off of building components that will be replaced in connection with a remediation program to address water infiltration issues plaguing the asset.
On August 28, 2001, we acquired an apartment community located in Washington, D.C. comprising 82 apartment homes for approximately $25 million.
On August 1, 2001, we acquired the 75% interest of our venture partner in the Gables Metropolitan Uptown apartment community located in Houston comprising 318 apartment homes. The asset was valued at approximately $27 million.
On March 30, 2001, we acquired the 80% membership interests of our venture partner in the GRAP JV in the Gables Palma Vista and Gables San Michelle II apartment communities located in South Florida comprising 532 apartment homes for $66 million. This cash consideration was based on a valuation of the assets of $75 million and is net of our $9 million share of the venture distribution.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Other Acquisition
In May 2001, we acquired a property management company based in Washington, D.C. that managed approximately 3,600 units in 24 multifamily apartment communities located in Washington, D.C. and the surrounding area at the time of the acquisition (the "D.C. Management Co."). The total investment is approximately $1.6 million and is structured to be paid in three installments based on results of the acquired business operations.
Senior Unsecured Note Issuance
In February 2001, we issued $150 million of senior unsecured notes which bear interest at 7.25%, were priced to yield 7.29% and mature in February 2006. The net proceeds of $148.5 million were used to reduce borrowings under our unsecured credit facilities and repay our $40 million term loan, which had a November 2001 maturity date.
Critical Accounting Policies and Recent Accounting Pronouncements
Our financial statements are prepared in accordance with United States generally accepted accounting principles (GAAP) and a summary of our significant accounting policies is included in Notes 4 and 5 to the consolidated financial statements included in our Form 10-K for the year ended December 31, 2001. Notes 5 and 6 to the accompanying consolidated financial statements include a summary of recent accounting pronouncements and their actual or expected impact on our financial statements. Our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from these estimates. As an owner, operator and developer of apartment communities, our critical accounting policies relate to cost capitalization and asset impairment evaluation.
Cost Capitalization
As a vertically integrated real estate company, we have in-house investment professionals involved in development, construction and acquisition. We include direct costs associated with development and construction activities in the capitalized development cost of wholly-owned assets. We charge direct costs associated with development and construction activities for third parties and unconsolidated joint ventures against our revenues from the services being provided. Such costs are ultimately reflected in net development revenues using the percentage of completion method. As required by GAAP, we expense all internal costs associated with the acquisition of operating apartment communities to general and administrative expense in the period such costs are incurred. We maintain staffing levels sufficient to meet existing development, construction and acquisition activities. When market conditions warrant, we adjust staffing levels to mitigate a negative impact on results of operations.
Our real estate development pursuits are subject to permits and other governmental approvals, as well as our ongoing business review of the underlying real estate fundamentals and the impact on our capital structure. We do not always move forward with development of our real estate pursuits, and therefore, we evaluate the viability of real estate pursuits and the recoverability of capitalized pursuit costs regularly. Based on this periodic review, we expense any costs that are deemed unrealizable at that time to general and administrative expense.
During the development and construction of a new apartment community, we capitalize related interest costs, as well as other carrying costs such as property taxes and insurance. We begin to expense these items as the construction of the community becomes substantially complete and the residential apartment homes become available for initial occupancy. Accordingly, we gradually reduce the amounts we capitalize as construction is being completed. During the lease-up period, as a community transitions from initial occupancy to stabilized occupancy, revenues are generally insufficient to cover interest, carrying costs and operating expenses. The size and duration of this lease-up deficit depends on how quickly construction is completed, how quickly the apartments available for occupancy are leased, and what rent levels are achieved at the community.
Asset Impairment Evaluation
Under GAAP, real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. As noted above, the cost of buildings and improvements includes interest, property taxes, insurance, and allocated development overhead incurred during the construction period. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the estimated useful lives of 20-40 years for buildings and improvements and 5 years for furniture, fixtures and equipment. As required by GAAP, we periodically evaluate our real estate assets to determine if there has been any impairment in their carrying value and record impairment losses if there are
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
indicators of impairment and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. At March 31, 2002, we did not own any real estate assets that meet the impairment criteria.
Discontinued Operations
We adopted SFAS No. 144 effective January 1, 2002 which requires, among other things, that the operating results of certain real estate assets sold subsequent to January 1, 2002 be included in discontinued operations in the statements of operations for all periods presented. Three of our wholly-owned operating real estate assets and two operating real estate assets owned by the GRAP JV were sold during the first quarter of 2002.
We retained management of two of the three wholly-owned assets and one of the two GRAP JV assets sold. Due to our continuing involvement with the operations of the three assets sold that we are continuing to manage, the operating results of these assets are included in continuing operations. The operating results for both the wholly-owned asset comprising 256 apartment homes located in Houston and the GRAP JV asset comprising 382 apartment homes located in Houston sold that we are not continuing to manage are included in discontinued operations in the statements of operations for all periods presented. Interest expense has been allocated to the results of the discontinued operations in accordance with EITF No. 87-24.
Condensed financial information of the results of operations for the real estate assets sold included in discontinued operations is as follows:
Three Months | ||||
2002
2001
$ 197
45
242
$ 641
28
669
)
)
)
Results of Operations
Comparison of operating results for the three months ended March 31, 2002 (the "2002 Period") to the three months ended March 31, 2001 (the "2001 Period").
Our net income is generated primarily from the operation of our apartment communities. For purposes of evaluating comparative operating performance, we categorize our operating communities based on the period each community reaches stabilized occupancy. A community is considered to have achieved stabilized occupancy on the earlier to occur of (1) attainment of 93% physical occupancy or (2) one year after completion of construction. The operating performance for all of our wholly-owned apartment communities combined for the three months ended March 31, 2002 and 2001 is summarized as follows:
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Three Months Ended March 31, | ||||||
|
| $ | % Change | |||
| Rental and other property revenues: Same store communities (a) Triple net master lease communities (b) Development and lease-up communities (c) Renovation communities (d) Acquired communities (e) Sold communities (f) Total property revenues | $45,561 1,646 1,668 3,411 3,836 898 $57,020 | $45,319 1,327 417 3,791 53 4,600 $55,507 | $ 242 319 1,251 ( 380 3,783 ( 3,702 $ 1,513 |
| 0.5% 24.0% 300.0% ( 10.0% 7137.7% ( 80.5% 2.7% |
|
Property operating and maintenance expenses |
|
|
|
| ||
Same store communities (a) | $15,712 | $14,775 | $ 937 |
| 6.3% |
|
Revenues in excess of specified expenses | $37,755 | $37,680 | $ 75 | 0.2% | ||
Revenues in excess of specified expenses as a percentage of total |
|
|
|
| ) | |
| (a) Communities that were owned and fully stabilized throughout both the 2002 Period and 2001 Period ("same store"). (b) Communities that were subject to a triple net master lease agreement throughout both the 2002 Period and the 2001 Period. (c) Communities in the development and/or lease-up phase that were not fully stabilized during all or any of the 2002 Period. (d) Communities that were in renovation subsequent to January 1, 2001. (e) Communities that were acquired subsequent to January 1, 2001. (f) Communities that were sold subsequent to January 1, 2001 that are not included in discontinued operations. | ||||||
Total property revenues increased $1,513, or 2.7%, from $55,507 to $57,020 due to an increase in the number of apartment homes resulting from the development and acquisition of additional communities and an increase in rental rates on communities stabilized throughout both periods (same store), offset by a decrease in same store occupancy. Such increases are offset in part by the decrease in revenues associated with the 2001 and 2002 sales of apartment communities that are not included in discontinued operations. Below is additional data regarding the increases in total property revenues for two of the six community categories presented in the preceding table:
Same store communities:
| Number of Communities | Number of Apartment Homes | Percent of 2002 Period NOI | Physical Occupancy During 2002 | Change in Occupancy | Change in Revenues | % Change in Revenues | |||
Houston | 16 14 14 7 7 4 62 | 5,020 4,017 3,613 1,677 1,423 1,243 16,993 | 27.5% 25.2% 20.3% 12.3% 9.7% 5.0% 100% | 94.9% 95.5% 91.7% 91.1% 95.5% 89.9% 93.7% | ( 0.2% 0.2% ( 3.1% ( 4.1% ( 0.4% ( 3.5% ( 1.4% | ) | $690 399 ( 374 ( 361 25 ( 137 $242 |
| 5.8% |
|
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Development and lease-up communities:
| Number of Communities | Number of Apartment Homes | Percent of Total Apartment Homes | Occupancy During 2002 | Change in Revenues |
| Orlando Houston Atlanta Dallas | 1 1 2 1 5 | 315 296 263 177 1,051 | 30.0% 28.2% 25.0% 16.8% 100.0% | 52.6% 20.5% 8.9% 86.7% 38.8% | $ 452 174 129 496 $1,251 |
Property management revenues increased $348, or 24.0%, from $1,448 to $1,796 due primarily to the May 2001 acquisition of the D.C. Management Co.
Development revenues, net increased $183, or 2,614.3%, from $7 to $190 due primarily to a $425 reduction in the estimated net development revenues from the GRAP JV recorded in the 2001 Period, offset in part by a decrease in development and construction services provided to third parties.
Our share of the operating results for the apartment communities in which we have a joint venture interest for the 2002 Period and 2001 Period is as follows:
QTD 2002 Period | ||||||||||
Stabilized |
| Sales | Total | 2001 | ||||||
Gables' share of joint venture results: | (a) | (b) | (c) |
|
| |||||
Rental and other revenues | $ 779 |
| $ 282 |
| $ 169 |
| $ 1,230 |
| $ 1,781 |
|
(a) Communities that were owned and fully stabilized throughout the 2002 Period.
(b) Communities in the development and/or lease-up phase that were not fully stabilized during all or any of the 2002 Period.
(c) Communities that were sold subsequent to January 1, 2002 that are not included in discontinued operations.
Interest income decreased $166, or 73.1%, from $227 to $61 due to a decrease in interest-bearing deposits and a decrease in interest rates.
Other revenues increased $719, or 316.7%, from $227 to $946 due to an increase in revenues from our third-party brokerage and corporate rental housing services.
Property operating and maintenance expense (exclusive of depreciation and amortization) increased $1,438, or 8.1%, from $17,827 to $19,265 due to an increase in the number of apartment homes resulting from the development and acquisition of additional communities, as well as increased payroll, insurance, marketing and maintenance costs at our same store communities. This increase is offset in part by the 2001 and 2002 sales of apartment communities.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Real estate depreciation and amortization expense increased $1,256, or 11.7%, from $10,734 to $11,990 due primarily to the impact of the development and acquisition of additional communities and capital improvements made to existing operating communities, offset by the impact of the 2001 and 2002 sales of apartment communities.
Property management expense for owned communities and third party properties on a combined basis increased $1,072, or 41.8%, from $2,562 to $3,634 due primarily to the May 2001 acquisition of the D.C. Management Co. and certain software licensing fees incurred in the 2002 Period. We allocate property management expenses to both owned communities and third-party properties based on the proportionate share of total apartment homes and units managed.
Interest expense and credit enhancement fees decreased $396, or 3.7%, from $10,677 to $10,281 due primarily to a decrease in outstanding indebtedness associated with the 2001 and 2002 sales of apartment communities and a decrease in interest rates.
General and administrative expense increased $39, or 2.1%, from $1,883 to $1,922 due primarily to inflationary increases in expenses.
Corporate asset depreciation and amortization increased $305, or 206.1%, from $148 to $453 due to (1) an increase in amortization resulting from the management contracts acquired in connection with the May 2001 acquisition of the D.C. Management Co. and (2) the depreciation of our new general ledger and web-based property management system, eGables, beginning January 2002.
Unusual items of $400 in the 2001 Period represent a reserve associated with our equity investment in Broadband Residential, Inc., a high speed internet access provider.
Gain on sale of previously depreciated operating real estate assets of $17,906 in the 2002 Period relates to the sale of two wholly-owned communities comprising 557 apartment homes located in Houston and Atlanta in the 2002 Period.
Gain on sale of land and development rights of $1,339 in the 2002 Period is comprised of (1) $763 associated with the sale of 13.3 acres of land in Houston in the 2002 Period, (2) recognition of $491 in deferred gain associated with the contribution of land and development rights into the GRAP JV Two in the 2001 Period and (3) recognition of $85 of deferred gain associated with a land sale in 2000.
Gain on sale of land and development rights of $1,638 in the 2001 Period is comprised of (1) $944 associated with the sale of 2.5 acres of land in Atlanta in the 2001 Period, (2) $458 associated with the contribution of land into the GRAP JV Two in the 2001 Period and (3) recognition of $236 of deferred gain associated with a land sale in 2000.
Income from discontinued operations, net of minority interest increased $2,254, or 1,366.1%, from $165 to $2,419 due primarily to the $2,363 gain on disposition of discontinued operations, net of minority interest recognized in the 2002 Period.
Liquidity and Capital Resources
Net cash provided by operating activities of continuing operations increased from $11,256 for the three months ended March 31, 2001 to $14,148 for the three months ended March 31, 2002 due to (1) a change in other assets between periods of $7,964 and (2) an increase of $418 in income from continuing operations(a) before certain non-cash or non-operating items, including depreciation, amortization, equity in income of joint ventures, minority interest of unitholders in Operating Partnership, gain on sale of real estate assets, long-term compensation expense, and unusual items and (b) after operating distributions received from joint ventures. Such increases were offset in part by (1) a change in other liabilities between periods of $5,327 and (2) a change in restricted cash between periods of $163. Net cash provided by operating activities of discontinued operations decreased from $454 to $194 due to the disposition of discontinued operations in the 2002 Period.
We had $65,581 of net cash used in investing activities for the three months ended March 31, 2001 compared to $16,946 of net cash provided by investing activities for the three months ended March 31, 2002. During the three months ended March 31, 2002, we expended $18.2 million related to development expenditures, $2.8 million related to recurring, non-revenue enhancing capital expenditures for operating apartment communities, and $5.1 million related to non-recurring, renovation/revenue enhancing capital expenditures. During the three months ended March 31, 2002, we received cash of (1) $46.8 million in connection with the sale of wholly-owned real estate assets, (2) $18.4 million in connection with the disposition of discontinued operations and (3) $3.0 million in connection with our share of the net
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
proceeds from the sale of joint venture real estate assets. In addition, during the three months ended March 31, 2002, $25.0 million of the sales proceeds were deposited into escrow to fund future potential acquisition activities. During the three months ended March 31, 2001, we expended $90.8 million related to development expenditures, $2.5 million related to recurring, non-revenue enhancing capital expenditures for operating apartment communities, and $1.1 million related to non-recurring, renovation/revenue enhancing capital expenditures. During the three months ended March 31, 2001, we received cash of (1) $15.6 million in connection with our contribution of interests in certain land and development rights to the GRAP JV Two and (2) $5.4 million in connection with the sale of land adjacent to one of our development communities. In addition, during the three months ended March 31, 2001, $7.9 million of the $8.5 million in sales proceeds held in escrow at December 31, 2000 was released to fund development activities.
2002 | $85,053 |
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
We expect to meet certain of our long-term liquidity requirements, such as scheduled debt maturities, repayment of short-term financing of construction and development activities and possible property acquisitions, through long-term secured and unsecured borrowings, the issuance of debt securities or equity securities, private equity investments in the form of joint ventures, or through the disposition of assets which, in our evaluation, may no longer meet our investment requirements.
$225 Million Credit Facility
We have a $225 million unsecured revolving credit facility provided by a consortium of banks. The facility currently has a maturity date of May 2004 with a one-year extension option. Borrowings under the facility currently bear interest at our option of LIBOR plus 0.85% or prime minus 0.25%. Such scheduled interest rates may be adjusted up or down based on changes in our senior unsecured credit ratings. We may also enter into competitive bid loans with participating banks for up to $112.5 million at rates below the scheduled rates. In addition, we pay an annual facility fee currently equal to 0.20% of the $225 million commitment. Availability under the facility, which is based on the value of our unencumbered real estate assets as compared to the amount of our unsecured indebtedness, was $217.4 million at March 31, 2002. As of March 31, 2002, we had $100.0 million in borrowings outstanding under the facility and, therefore, had $117.4 million of remaining capacity on the $217.4 million available.
$75 Million Borrowing Facility
We have a $75 million unsecured borrowing facility with a bank that matures in May 2004. The interest rate and maturity date related to each draw on this facility is agreed to by both parties prior to each draw. At March 31, 2002, we had $19.4 million in borrowings outstanding under this facility.
$25 Million Credit Facility
We have a $25 million unsecured revolving credit facility with a bank that currently bears interest at LIBOR plus 0.85%. The facility currently has a maturity date of October 2002 with unlimited one-year extension options. We had no borrowings outstanding under this facility at March 31, 2002.
Restrictive Covenants
Certain of our debt agreements contain customary representations, covenants and events of default, including covenants which restrict the ability of the Operating Partnership to make distributions in excess of stated amounts, which in turn restricts our discretion to declare and pay dividends. In general, during any fiscal year, the Operating Partnership may only distribute up to 95% of its consolidated income available for distribution (as defined in the related agreement) exclusive of distributions of capital gains for such year. The applicable debt agreements contain exceptions to these limitations to allow the Operating Partnership to make any distributions necessary to allow us to maintain our status as a REIT. We do not anticipate that this provision will adversely effect the ability of the Operating Partnership to make distributions or our ability to declare dividends, under our current dividend policy.
Inflation
Substantially all leases at our communities are for a term of one year or less, which may enable us to seek increased rents upon renewal of existing leases or commencement of new leases in times of rising prices. The short-term nature of these leases generally serves to lessen the impact of cost increases arising from inflation.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Certain Factors Affecting Future Operating Results
This report contains 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 words "believe," "expect," "anticipate," "intend," "estimate," "assume" and other similar expressions which are predictions of or indicate future events and trends and which do not relate solely to historical matters identify forward-looking statements. These statements include, among other things, statements regarding our intent, belief or expectations with respect to the following: (1) the declaration or payment of distributions, (2) potential developments or acquisitions or dispositions of real estate assets, assets or other entities, (3) our policies regarding investments, indebtedness, acquisitions, dispositions, financings, conflicts of interest and other matters, (4) our qualification as a REIT under the Code, (5) the real estate markets in which we operate, (6) in general, the availability of debt and equity financing, interest rates and general economic conditions, and (7) trends affecting our financial condition or results of operations.
Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such a difference include, but are not limited to, the following: (1) we may abandon or fail to secure development opportunities, (2) construction costs of a community may exceed original estimates, (3) construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs and reduced rental revenues, (4) occupancy rates and market rents may be adversely affected by local economic and market conditions which are beyond our control, (5) financing may not be available or may not be available on favorable terms, (6) our cash flow may be insufficient to meet required payments of principal and interest, and (7) existing indebtedness may mature in an unfavorable credit environment, preventing such indebtedness from being refinanced or, if financed, causing such refinancing to occur on terms that are not as favorable as the terms of existing indebtedness. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Development and Lease-up Communities at March 31, 2002
Percent at March 31, 2002 | Actual or Estimated Quarter of | |||||||||
| Community | No. of | Total | Cost to Complete | Complete | Leased | Occupied | ||||
Constr-
uction
Start
Initial
Occu-
pancy
Constr-
uction
End
Stab-
ilized
Occupancy
(millions)
(millions)
(a)
| Wholly-Owned Development and Lease-up Communities: | ||||||||||
| Atlanta, GA | ||||||||||
| Gables Montclair | ||||||||||
20%
98%
13%
6%
--
--
94%
39%
32%
2
98%
61%
59%
4 Q 2000
Co-Investment Development and Lease-up Communities (b):
274
$ 32
64%
--
1 Q 2001
320
35
4 Q 2000
1,077
2,663
$109
$355
(d)
(a) Stabilized occupancy is defined as the earlier to occur of (i) 93% occupancy or (ii) one year after completion of construction.
(b) These communities are owned by the GRAP JV Two in which we have a 20% interest.
(c) This development community includes 40,000 square feet of commercial space which was 87% leased at March 31, 2002.
(d) Construction loan proceeds are expected to fund $34 million of these costs. The remaining costs will be funded by capital contributions
to the venture from our venture partner and us in a funding ratio of 80% and 20%, respectively.
The following is a "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. The projections and estimates contained in the table above are forward-looking statements. These forward-looking statements involve risks and uncertainties and actual results may differ materially from those projected in such statements. Risks associated with Gables' development, construction, and lease-up activities, which could impact the forward-looking statements made, include: development opportunities may be abandoned; construction costs of a community may exceed original estimates, possibly making the community uneconomical; and construction and lease-up may not be completed on schedule, resulting in increased debt service and construction costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Stabilized Apartment Communities at March 31, 2002
Community | No. of Apt. Homes | March 31, 2002 | March 31, 2002 Scheduled Rent Per Unit Square Foot |
| Houston, TX Gables Austin Colony Gables Bradford Place Gables Bradford Pointe Gables Champions Gables Cityscape Gables Citywalk/ Waterford Sq. Gables Edgewater Gables Lions Head Gables Metropolitan Uptown Gables Meyer Park I Gables of First Colony Gables Piney Point Gables Pin Oak Green Gables Pin Oak Park Gables Rivercrest I Gables Rivercrest II Gables Windmill Landing Totals/Averages Atlanta, GA Briarcliff Gables Buckhead Gables Gables Cityscape Gables Metropolitan I (JV) Gables Mill Gables Northcliff Gables Vinings Gables Walk Gables Wood Arbor Gables Wood Crossing Gables Wood Glen Gables Wood Knoll Lakes at Indian Creek Rock Springs Estates Roswell Gables I Roswell Gables II Spalding Gables Wildwood Gables Totals/Averages Boca Raton, FL Cotton Bay Gables Crestwood (JV) Gables Boca Place Gables Boynton Beach I Gables Boynton Beach II Gables Kings Colony Gables Mizner on the Green Gables Palma Vista Gables San Michele I Gables San Michele II Gables San Remo Gables Town Colony Gables Town Place Gables Wellington Hampton Lakes Hampton Place Mahogany Bay Vinings at Hampton Village Totals/ Averages |
| 97% 93% 93% 96% 95% 97% 96% 97% 93% 94% 97% 97% 92% 92% 97% 96% 91% 95% 94% 96% 96% 93% 95% 95% 96% 94% 87% 87% 91% 93% 92% 87% 91% 91% 93% 93% 92% 97% 93% 85% 94% 94% 98% 94% 91% 87% 89% 92% 95% 95% 94% 96% 97% 95% 99% 94% |
| $ 914 797 709 854 1,018 999 903 769 1,114 961 987 976 1,086 1,109 768 763 732 $ 931 $1,196 890 946 1,212 906 1,285 1,089 1,188 797 777 741 773 684 980 960 960 982 1,006 $ 940 $763 1,097 1,058 986 981 890 1,728 1,619 1,525 1,505 1,320 904 896 1,049 821 782 827 877 $1,056 | $0.94 0.93 0.92 0.94 1.19 1.24 1.02 0.91 1.22 1.12 0.99 1.05 1.06 1.09 0.91 0.90 0.84 $1.03 $0.96 1.18 1.14 1.08 0.98 0.82 1.02 1.00 0.87 0.81 0.75 0.78 0.75 0.96 0.88 0.82 0.99 0.89 $0.91 $0.78 0.87 1.08 0.82 0.81 1.00 1.37 1.12 1.14 1.09 0.72 1.05 1.07 0.78 0.78 0.82 0.82 0.73 $0.93 |
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Stabilized Apartment Communities as of March 31, 2002
Community | No. of Apt. Homes | March 31, 2002 | March 31, 2002 Scheduled Rent Per Unit Square Foot |
Austin, TX |
| 92% 87% 93% 100% 90% 91% 96% 93% 95% 97% 93% 94% 94% 97% 98% 96% 95% 90% 93% 89% 91% 91% 89% 94% 88% 90% 86% 100% 100% 97% 94% 94% | $1,152 1,565 1,166 1,342 892 1,230 1,360 $1,220 $1,345 1,381 863 1,196 964 981 1,197 956 $1,069 $856 689 689 $733 $894 688 661 636 $714 $1,194 -- -- $1,194 $2,665 $2,665 | $1.21 1.35 1.18 1.42 1.08 1.13 1.46 $1.27 $1.23 1.31 0.90 1.31 1.07 0.93 1.19 0.94 $1.07 $0.87 0.74 0.78 $0.79 $0.79 0.73 0.73 0.68 $0.73 $1.03 -- -- $1.03 $2.74 $2.74 |
Grand Totals/Averages | 22,682 | 93% | $ 980 | $0.97 |
| (a) (b) | This property is in renovation; therefore, occupancy is based on apartment homes available for lease. This property is leased to a single user group pursuant to a triple net master lease. Accordingly, scheduled rent data is not reflected as it is not comparable to the rest of our portfolio. | |
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
| Portfolio Indebtedness Summary at March 31, 2002 | |||||
Type of Indebtedness | Balance | Percentage | Interest Rate (a) | Total Rate (b) | Years to Maturity |
| Fixed Rate: | |||||
Unsecured fixed-rate senior notes | $250,000 | 28.0% | 7.07% | 7.07% | 3.50 |
Secured fixed-rate notes | 138,615 | 16.1% | 7.71% | 7.71% | 6.06 |
Total fixed-rate indebtedness | $572,352 | 66.3% | 7.37% | 7.40% | 4.14 |
Variable Rate: |
|
|
|
|
|
Tax-exempt variable-rate loans | $170,955 | 19.8% | 1.49% | 2.48% | 4.34 |
Unsecured variable-rate credit facilities | 119,389 | 13.8% | 2.45% | 2.45% | 2.12 |
Total variable-rate indebtedness | $290,344 | 33.7% | 1.88% | 2.47% | 3.43 |
Total portfolio debt (c), (d) | $862,696 | 100.0% | 5.53% | 5.74% | 3.90 |
(a) Interest Rate represents the weighted average interest rate incurred on our indebtedness, exclusive of deferred financing cost amortization and credit enhancement fees, as applicable. (b) Total Rate represents the Interest Rate (a) plus credit enhancement fees, as applicable. (c) Interest associated with construction activities is capitalized as a cost of development and does not impact current earnings. The qualifying construction expenditures at March 31, 2002 for purposes of interest capitalization were $138,571. (d) Excludes (i) $16.4 million of tax-exempt bonds related to a joint venture in which we own a 25% interest, (ii) $73.8 million of indebtedness related to joint ventures in which we own a 20% interest, and (iii) $52.1 million of indebtedness related to a joint venture in which we own an 8.3% interest. | |||||
SUPPLEMENTAL DISCUSSION - Funds From Operations and Adjusted Funds From Operations
We consider funds from operations ("FFO") to be a useful performance measure of the operating performance of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund distributions and capital expenditures. We believe that in order to facilitate a clear understanding of our operating results, FFO should be examined in conjunction with net income as presented in the financial statements and data included elsewhere in this report. FFO is determined based on the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). FFO, as defined by NAREIT, represents net income (loss) determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies due to the fact that not all real estate companies use the same definition. However, our FFO is comparable to the FFO of real estate companies that use the NAREIT definition. Adjusted funds from operations ("AFFO") is defined as FFO less recurring, non-revenue enhancing capital expenditures. FFO and AFFO should not be considered alternatives to net income as indicators of our operating performance or as alternatives to cash flows as measures of liquidity. FFO does not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital expenditures, and distributions to shareholders and unitholders. Additionally, FFO does not represent cash flows from operating, investing or financing activities as defined by GAAP. Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a discussion of our cash needs and cash flows. A reconciliation of FFO and AFFO follows:
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Three Months Ended March 31, | ||||
| 2002 | 2001 | |||
| Net income available to common shareholders Minority interest of common unitholders in Operating Partnership: Continuing operations Discontinued operations Total | $25,753 5,697 595 6,292 | $ 8,797 | ||
| Real estate depreciation and amortization: Wholly-owned real estate assets - continuing operations Wholly-owned real estate assets - discontinued operations Joint venture real estate assets - continuing operations Joint venture real estate assets - discontinued operations Total | 11,990 48 351 51 12,440 | 10,734 140 473 51 11,398 | ||
| Gain on sale of previously depreciated operating real estate assets: Wholly-owned real estate assets - continuing operations Wholly-owned real estate assets - discontinued operations Joint venture real estate assets - continuing operations Joint venture real estate assets - discontinued operations Total | ( 17,906 ( 2,198 ( 1,007 ( 747 ( 21,858 |
| - - - - - - - - | |
| Funds from operations - basic and diluted | $22,627 | $22,722 | ||
| Recurring, non-revenue enhancing capital expenditures: Carpet and flooring Appliances Other additions and improvements Total capital expenditures | 1,212 152 1,470 2,834 | 811 174 1,557 2,542 | ||
| Adjusted funds from operations - diluted | $19,793 | $20,180 | ||
Average shares and Units outstanding - basic | 30,505 | 29,860 | ||
| Average shares and Units outstanding - diluted | 30,670 | 30,012 | ||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our capital structure includes the use of variable rate and fixed rate indebtedness. As such, we are exposed to the impact of changes in interest rates. We periodically seek input from third-party consultants regarding market interest rate and credit risk in order to evaluate our interest rate exposure. In certain situations, we may utilize derivative financial instruments in the form of rate caps, rate swaps or rate locks to hedge interest rate exposure by modifying the interest rate characteristics of related balance sheet instruments and prospective financing transactions. We do not utilize such instruments for trading or speculative purposes.
We typically refinance maturing debt instruments at then-existing market interest rates and at terms which may be more or less than the interest rates and terms on the maturing debt.
Refer to our Annual Report on Form 10-K for the year ended December 31, 2001 for detailed disclosure about quantitative and qualitative disclosures about market risk. Quantitative and qualitative disclosures about market risk have not materially changed since December 31, 2001.
Item 1: | Legal Proceedings | ||
|
| None | |
Item 2: | Changes in Securities | ||
|
| During the period commencing on January 1, 2002 and ending on March 31, 2002, we issued to limited partners of the Operating Partnership 121,893 common shares (valued at approximately $3,623,879 at the time of issuance) in exchange for 121,893 Units. Such shares were issued in reliance on an exemption from registration under Section 4 (2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. | |
Item 3: | Defaults Upon Senior Securities | ||
|
| None | |
Item 4: | Submission of Matters to a Vote of Security Holders | ||
|
| None | |
Item 5: | Other Information | ||
|
| None | |
Item 6: | Exhibits and Reports on Form 8-K | ||
| (a) | Exhibits | |
| None | |||
| (b) | Reports on Form 8-K | |
| None | |||
SIGNATURE
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.
|
|
| GABLES RESIDENTIAL TRUST |
Date: | May 14, 2002 |
| /s/ Marvin R. Banks, Jr. |
|
|
| Marvin R. Banks, Jr. |
