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 June 30, 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)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Common shares of beneficial interest, par value $0.01 per share, 24,849,875 shares
The number of shares outstanding of each of the registrant's classes of common stock,
as of July 31, 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 June 30, 2002 and December 31, 2001 | 3 |
| Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001 | 4 |
| Consolidated Statements of Cash Flows for the 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 | 13 |
Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 31 |
| ||
Part II | ||
Item 1: | Legal Proceedings | 32 |
| Item 2: | Changes in Securities | 32 |
| Item 3: | Defaults Upon Senior Securities | 32 |
| Item 4: | Submission of Matters to a Vote of Security Holders | 32 |
| Item 5: | Other Information | 32 |
| Item 6: | Exhibits and Reports on Form 8-K | 32 |
| Signature | 33 |
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
GABLES RESIDENTIAL TRUST | ||||||
| June 30, 2002 (Unaudited) | December 31, 2001 | |||||
ASSETS: Cash and cash equivalents | $ $ $ |
| ||||
)
$
$
248,955
1,204,680
109,324
158,340
20,898
14,678
1,756,875
( 230,118
1,526,757
4,231
12,013
4,351
41,854
1,589,206
)
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable
Accrued interest payable
Preferred dividends payable
Real estate taxes payable
Accounts payable and accrued expenses - construction
Accounts payable and accrued expenses - operating
Security deposits
Total liabilities
Minority interest of common unitholders in Operating Partnership
Minority interest of Series B preferred unitholders in Operating Partnership
Series Z Preferred Shares at $25.00 liquidation preference,
180 shares issued and outstanding
Commitments and contingencies
Shareholders' equity:
Excess shares, $0.01 par value, 51,000 shares authorized
Preferred shares, $0.01 par value, 20,000 shares authorized,
Series A Preferred Shares at $25.00 liquidation preference,
4,600 shares issued and outstanding; Series Z Preferred
Shares and Series B Preferred Units, exchangeable into
Series B Preferred Shares, reported above
Common shares, $0.01 par value, 100,000 shares authorized,
28,702 and 28,293 shares issued at June 30, 2002 and
December 31, 2001, respectively
Additional paid-in capital
Treasury shares at cost, 3,859 and 3,929 common shares
at June 30, 2002 and December 31, 2001, respectively
Deferred long-term compensation
Accumulated earnings
Total shareholders' equity
Total liabilities and shareholders' equity
$
$
843,370
8,436
1,332
14,536
7,401
17,864
4,434
897,373
95,842
50,192
4,500
-
115,000
287
488,476
(92,565
(1,928
5,353
514,623
1,562,530
)
)
$
$
877,231
8,384
1,220
17,065
9,082
16,914
4,834
934,730
96,952
50,192
4,500
-
115,000
283
478,731
( 94,144
( 1,628
4,590
502,832
1,589,206
)
)
The accompanying notes are an integral part of these consolidated balance sheets.
| |||||||||
Three Months | |||||||||
Six Months
Ended June 30,
2002
2001
2002
2001
Revenues:
Rental revenues
Other property revenues
Total property revenues
$
52,564
3,220
55,784
$
54,710
3,329
58,039
$
106,567
6,237
112,804
$
107,346
6,200
113,546
Property management revenues
Development revenues, net
Equity in income (loss) of joint ventures
Interest income
Other revenues
Total other revenues
69
40
120
805
2,861
404
(33
227
768
2,844
)
259
1,136
181
1,751
6,950
2,926
411
37
454
995
4,823
Total revenues
118,369
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
19,913
12,205
1,489
1,619
10,199
275
1,753
428
-
47,881
18,756
11,482
1,407
1,197
11,694
263
1,674
192
-
46,665
39,178
24,195
3,398
3,344
20,480
532
3,675
881
-
95,683
36,583
22,216
2,813
2,353
22,371
524
3,557
340
400
91,157
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
10,764
-
462
14,218
7,386
580
24,071
17,906
1,801
27,212
7,386
2,218
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
11,226
(1,486
(1,078
8,662
-
-
-
)
)
(3,832
(1,078
17,274
174
-
174
)
)
43,778
(7,183
(2,156
34,439
56
2,363
2,419
)
)
36,816
( 6,311
(2,156
28,349
339
-
339
)
)
net of minority interest
(1,360
)
-
(1,360
)
-
Net income
7,302
17,448
35,498
28,688
Dividends to preferred shareholders
)
)
)
( 4,885
Net income available to common shareholders
$
$
23,803
Weighted average number of common shares outstanding - diluted
30,931
30,212
24,662
30,802
23,521
30,113
Per Common Share Information - Basic:
Income from continuing operations (net of preferred dividends)
Income from discontinued operations
Income before extraordinary item (net of preferred dividends)
Extraordinary loss, net of minority interest
Net income available to common shareholders
Per Common Share Information - Diluted:
Income from continuing operations (net of preferred dividends)
Income from discontinued operations
Income before extraordinary item (net of preferred dividends)
Extraordinary loss, net of minority interest
Net income available to common shareholders
$
$
$
$
$
$
$
$
$
$
0.25
- -
0.25
(0.05)
0.20
0.25
- -
0.25
(0.05)
0.19
$
$
$
$
$
$
$
$
$
$
0.62
0.01
0.63
- -
0.63
0.62
0.01
0.62
- -
0.62
$
$
$
$
$
$
$
$
$
$
1.20
0.10
1.30
(0.06
1.24
1.19
0.10
1.29
(0.05
1.24
)
)
$
$
$
$
$
$
$
$
$
$
1.00
0.01
1.01
-
1.01
0.99
0.01
1.00
-
1.00
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 June 30, 2002, we were an 80.7% 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 June 30, 2002, we managed a total of 159 multifamily apartment communities comprising 44,969 apartment homes for assets owned by us and our third-party clients. At June 30, 2002, we owned 73 stabilized multifamily apartment communities comprising 20,325 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 eight multifamily apartment communities under development or in lease-up at June 30, 2002 that are expected to comprise 1,830 apartment homes upon completion and an indirect 20% interest in four apartment communities under development or in lease-up at June 30, 2002 that are expected to comprise 1,077 apartment homes upon completion. In addition, as of June 30, 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. On August 9, 2002, we redeemed the Series A Preferred Shares at $25.00 per share plus accrued and unpaid dividends.
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 June 30, 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 that currently provides $500 million of equity capacity. The debt portion of this shelf registration statement has been fully utilized after our February 2001 and July 2002 senior unsecured note offerings.
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 June 30, 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 used to paydown outstanding borrowings under our credit facilities. 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 three months ended June 30, 2002 and 2001, we recognized $0.0 million and $0.3 million, respectively, of deferred gain associated with a parcel of land we sold in 2000. During the six months ended June 30, 2002 and 2001, we recognized $0.1 million and $0.5 million, respectively, of deferred gain associated with this land sale.
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, which was recognized in the first quarter of 2002.
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. As of June 30, 2002, we had recognized $2.5 million of this gain. We recognized $0.5 million and $0.3 million of this gain during the three months ended June 30, 2002 and 2001, respectively, and $0.9 million and $0.8 million during the six months ended June 30, 2002 and 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 an annual rate of 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.
In July 2002, we issued $180 million of senior unsecured notes which bear interest at an annual rate of 5.75%, were priced to yield 5.81% and mature in July 2007. The net proceeds of $178 million were used to redeem all outstanding shares of the 8.3% Series A Cumulative Redeemable Preferred Shares totaling $115 million on August 9, 2002 and to reduce borrowings under our unsecured credit facilities.
Debt Refinancing
In May 2002, we called $48.4 million of secured tax-exempt bond indebtedness with an interest rate of 6.375% and re-issued the bonds on an unsecured basis at a rate of 4.75%. In connection with the early extinguishment of debt, we incurred a prepayment penalty of $1,451 and wrote-off unamortized deferred financing costs totaling $236. Such charges totaling $1,687 are reflected as an extraordinary loss in the statements of operations and are presented net of minority interest of $327. The previous bonds required monthly principal amortization payments that were retained in an escrow account and were not applied to reduce the outstanding principal balance of the loan. Such principal payments held in escrow totaling $4,121 were released in May 2002. This refinancing transaction allowed us to improve our debt constant by 2.75%, unencumber six communities comprising 2,028 apartment homes and achieve a positive net present value result.
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 June 30, 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 June 30, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
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.
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 therequirement 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. There were no asset sales during the second 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 | Six Months | |||||||
2002 | ||||||||
2001
2002
2001
Equity in income of joint ventures
Total revenues
$ -
-
-
$ 663
32
695
$ 197
45
242
$ 1,304
60
1,364
Real estate asset depreciation and amortization
Interest expense
Total expenses
-
-
-
139
87
478
48
34
173
279
159
934
Income from discontinued operations, net of minority interest
-
174
)
56
)
339
Minority interest of common unitholders in Operating Partnership
Gain on disposition of discontinued operations, net of minority interest
-
-
-
-
(582
2,363
)
-
-
$ -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
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:
Ended June 30,
Ended June 30,
(net of preferred dividends) - basic
Minority interest of common unitholders in Operating Partnership
attributable to continuing operations
Income from continuing operations
(net of preferred dividends) - diluted
$
$
6,220
1,486
7,706
$
$
14,832
3,832
18,664
$
$
29,554
7,183
36,737
$
$
23,464
6,311
29,775
Minority interest of common unitholders in Operating Partnership
attributable to discontinued operations
Income from discontinued operations - diluted
$
-
-
$
43
217
$
595
3,014
$
91
430
Minority interest of common unitholders in Operating Partnership
Income before extraordinary item (net of preferred dividends) - diluted
$
1,486
7,706
$
15,006
3,875
18,881
$
7,778
39,751
$
6,402
30,205
Minority interest attributable to extraordinary loss
Extraordinary loss, net of minority interest - diluted
$
( 327
( 1,687
)
)
)
$
$
-
-
-
$
(327
(1,687
)
)
)
$
$
-
-
Net income - basic
Minority interest of common unitholders in Operating Partnership,
including minority interest attributable to extraordinary item
Net income - diluted
$
4,860
1,159
6,019
$
15,006
3,875
18,881
$
7,451
38,064
$
6,402
30,205
Common shares (denominator):
Average shares outstanding - basic
Incremental shares from assumed conversions of:
Outstanding common Units
Stock options
Other
Average shares outstanding - diluted
5,960
163
6
30,931
23,842
6,209
155
6
30,212
5,972
162
6
30,802
6,435
151
6
30,113
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% of our total revenues for the three months ended June 30, 2002 and 2001, and 95% and 96% of our total revenues for the six months ended June 30, 2002 and 2001, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
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 $35,871 and $39,283 for the three months ended June 30, 2002 and 2001, respectively, and $73,626 and $76,963 for the six months ended June 30, 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 Way People 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 fully in tegrated 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 for 2002 to increase at a rate ahead of inflation due in part to increasing insurance costs, along with higher turnover and marketing costs associated with the current national economic conditions. In addition, we expect property revenues on a same-store basis to be lower in 2002 than in 2001. 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. On August 9, 2002, we redeemed the Series A Preferred Shares at $25.00 per share plus accrued and unpaid dividends.
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 June 30, 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 that currently provides $500 million of equity capacity. The debt portion of this shelf registration statement has been fully utilized after our February 2001 and July 2002 senior unsecured note offerings.
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 used to paydown outstanding borrowings under our credit facilities. 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 three months ended June 30, 2002 and 2001, we recognized $0.0 million and $0.3 million, respectively, of deferred gain associated with a parcel of land we sold in 2000. During the six months ended June 30, 2002 and 2001, we recognized $0.1 million and $0.5 million, respectively, of deferred gain associated with this land sale.
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, which was recognized in the first quarter of 2002.
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. As of June 30, 2002, we had recognized $2.5 million of this gain. We recognized $0.5 million and $0.3 million of this gain during the three months ended June 30, 2002 and 2001, respectively, and $0.9 million and $0.8 million during the six months ended June 30, 2002 and 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 an annual rate of 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.
In July 2002, we issued $180 million of senior unsecured notes which bear interest at an annual rate of 5.75%, were priced to yield 5.81% and mature in July 2007. The net proceeds of $178 million were used to redeem all outstanding shares of the 8.3% Series A Cumulative Redeemable Preferred Shares totaling $115 million on August 9, 2002 and to reduce borrowings under our unsecured credit facilities.
Debt Refinancing
In May 2002, we called $48.4 million of secured tax-exempt bond indebtedness with an interest rate of 6.375% and re-issued the bonds on an unsecured basis at a rate of 4.75%. In connection with the early extinguishment of debt, we incurred a prepayment penalty of $1,451 and wrote-off unamortized deferred financing costs totaling $236. Such charges totaling $1,687 are reflected as an extraordinary loss in the statements of operations and are presented net of minority interest of $327. The previous bonds required monthly principal amortization payments that were retained in an escrow account and were not applied to reduce the outstanding principal balance of the loan. Such principal payments held in escrow totaling $4,121 were released in May 2002. This refinancing transaction allowed us to improve our debt constant by 2.75%, unencumber six communities comprising 2,028 apartment homes and achieve a positive net present value result.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
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 indicators of impairment and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. At June 30, 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. There were no asset sales during the second 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 | Six Months | |||||||
2002 | ||||||||
2001
2002
2001
Equity in income of joint ventures
Total revenues
$ -
-
-
$ 663
32
695
$ 197
45
242
$ 1,304
60
1,364
Real estate asset depreciation and amortization
Interest expense
Total expenses
-
-
-
139
87
478
48
34
173
279
159
934
Income from discontinued operations, net of minority interest
-
174
)
56
)
339
Minority interest of common unitholders in Operating Partnership
Gain on disposition of discontinued operations, net of minority interest
-
-
-
-
(582
2,363
)
-
-
$ -
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Results of Operations
Comparison of operating results for the three months ended June 30, 2002 (the "2002 Period") to the three months ended June 30, 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 June 30, 2002 and 2001 is summarized as follows:
Three Months Ended June 30, | ||||||
|
| $ | % 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 | $47,296 1,646 2,143 3,162 1,537 - $55,784 | $47,617 1,797 853 3,751 - 4,021 $58,039 | $ (321 (151 1,290 (589 1,537 (4,021 $ (2,255 |
| (0.7% (8.4% 151.2% ( 15.7% - ( 100.0% (3.9% |
|
Property operating and maintenance expenses |
|
|
|
| ||
Same store communities (a) | $16,796 | $15,630 | $ 1,166 |
| 7.5% |
|
Revenues in excess of specified expenses | $35,871 | $39,283 | $(3,412 | ) | (8.7% | ) |
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 the 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 throughout both the 2002 Period and the 2001 Period. (d) Communities that were in renovation subsequent to April 1, 2001. (e) Communities that were acquired subsequent to April 1, 2001. (f) Communities that were sold subsequent to April 1, 2001 that are not included in discontinued operations. | ||||||
Total property revenues decreased $2,255, or 3.9%, from $58,039 to $55,784 due to 2001 and 2002 sales of apartment communities that are not reflected in discontinued operations, a decrease in the number of available apartment homes due to renovations, and a decrease in same-store performance as a result of national economic weakness. These decreases were partially offset by an increase in the number of apartment homes resulting from the development and acquisition of additional communities. Below is additional data regarding the changes in total property revenues for two of the six community categories presented in the preceding table:
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Same store communities:
Market | Number of Communities | Number of Apartment Homes | % of 2002 Period NOI | Physical Occupancy During the 2002 Period | Change in Physical Occupancy | $ Change in Revenues | % Change in Revenues | |||
South Florida | 16 16 14 7 7 4 64 | 4,549 5,020 3,613 1,677 1,423 1,243 17,525 | 29.2% 26.1% 18.9% 11.6% 9.4% 4.8% 100.0% | 92.6% 93.0% 91.7% 92.9% 95.5% 90.4% 92.7% | ( 1.1% | ) | $151 |
| 1.2% |
|
Development and lease-up communities:
| Number of Communities | Number of Apartment Homes | % of Total Apartment Homes | Physical Occupancy During the 2002 Period | 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% | 58.1% 40.4% 22.8% 94.9% 50.6% | $ 371 380 319 220 $1,290 |
Property management revenues increased $349, or 23.6%, from $1,478 to $1,827 due primarily to the May 2001 acquisition of the D.C. Management Co.
Development revenues, net decreased $335, or 82.9%, from $404 to $69 due primarily to 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:
2002 Period | |||||
Stabilized (a) | Development | Sales (c) | Total | 2001 | |
Gables' share of joint venture results: |
|
|
|
|
|
|
|
|
| |
| (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 April 1, 2002 that are not included in discontinued operations. | ||||||||||
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Interest income decreased $107, or 47.1%, from $227 to $120 due to a decrease in interest-bearing deposits and a decrease in interest rates.
Other revenues increased $37, or 4.8%, from $768 to $805 due to an increase in revenues from our third-party brokerage and corporate rental housing services, offset by income earned during the 2001 Period related to certain non-routine items.
Property operating and maintenance expense (exclusive of depreciation and amortization) increased $1,157, or 6.2%, from $18,756 to $19,913 due to an increase in the number of apartment homes resulting from the development and acquisition of additional communities, as well as same-store expenses increasing at a rate ahead of inflation due to increasing insurance costs, along with higher turnover and marketing costs associated with the current national economic conditions. This increase is offset in part by the 2001 and 2002 sales of apartment communities.
Real estate depreciation and amortization expense increased $723, or 6.3%, from $11,482 to $12,205 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 $504, or 19.4%, from $2,604 to $3,108 due primarily to the May 2001 acquisition of the D.C. Management Co. 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 $1,495, or 12.8%, from $11,694 to $10,199 due primarily to a decrease in outstanding indebtedness associated with the 2001 and 2002 sales of apartment communities and a decrease in interest rates. These decreases are offset in part by an increase in operating debt associated with the development and acquisition of additional communities.
General and administrative expense increased $79, or 4.7%, from $1,674 to $1,753 due primarily to inflationary increases in expenses.
Corporate asset depreciation and amortization increased $236, or 122.9%, from $192 to $428 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.
Gain on sale of land and development rights of $462 in the 2002 Period relates to recognition of deferred gain associated with the 2001 contribution of land and development rights into the GRAP JV Two.
Gain on sale of previously depreciated operating real estate assets of $7,386 in the 2001 Period relates to the sale of a community in Atlanta comprising 386 apartment homes.
Gain on sale of land and development rights of $580 in the 2001 Period is comprised of (1) $289 associated with the 2001 contribution of land into the GRAP JV and (2) recognition of $291 of deferred gain associated with a land sale in 2000.
Extraordinary loss from early extinguishment of debt, net of minority interest of $1,360 in the 2002 Period represents the write-off of unamortized deferred financing costs totaling $236 and a prepayment penalty of $1,451 associated with the early retirement of $48.4 million of secured tax-exempt bond indebtedness, net of the $327 portion of the loss attributable to the minority interest unitholders. These bonds had an interest rate of 6.375% which we were able to reissue on an unsecured basis at a rate of 4.75% resulting in a positive net present value.
Comparison of operating results for the six months ended June 30, 2002 (the "2002 Period") to the six months ended June 30, 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 six months ended June 30, 2002 and 2001 is summarized as follows:
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Six Months | |||||||||
$ Change | % 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 |
|
| $ $ | 90,739 3,124 1,270 7,541 2,250 8,622 113,546 | $ $ |
|
| (0.1% 5.4% 200.1% (12.8% 237.7% (89.6% (0.7% |
|
Property operating and maintenance expenses |
| 31,905 - 2,032 2,683 2,281 277 39,178 | $ $ | | $ $ | |
| |
|
Revenues in excess of specified expenses | $ | 73,626 | $ | 76,963 | $ | (3,337 | ) | (4.3% | ) |
Revenues in excess of specified expenses as a |
|
|
|
| ) | ||||
| (a) Communities that were owned and fully stabilized throughout both the 2002 Period and the 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 throughout both the 2002 Period and the 2001 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 decreased $742, or 0.7%, from $113,546 to $112,804 due to 2001 and 2002 sales of apartment communities that are not reflected in discontinued operations, a decrease in the number of available apartment homes due to renovations and a decrease in same-store performance as a result of national economic weakness. These decreases were partially offset by an increase in the number of apartment homes resulting from the development and acquisition of additional communities. Below is additional data regarding the changes in total property revenues for two of the six community categories presented in the preceding table:
Same store communities:
Market | Number of | Number of Apartment Homes | % of 2002 Period NOI | Physical Occupancy During the 2002 Period | Change in Physical Occupancy | $ Change in Revenues | % Change in Revenues |
Houston | 16 | 5,020 4,017 3,613 1,677 1,423 1,243 16,993 | 27.5% 25.2% 20.2% 12.3% 9.8% 5.0% 100.0% | 93.9% | (0.4%) | $1,251 522 (910) (604) (55) (311) $(107) | 5.2% |
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Development and lease-up communities:
Market | Number of Communities | Number of Apartment Homes | % of Total Apartment Homes | Physical Occupancy During the 2002 Period | Change in Revenues |
Orlando | 1 |
315
296
263
177
1,051
30.0%
28.2%
25.0%
16.8%
100.0%
54.4%
30.3%
15.8%
90.8%
44.4%
$823
554
449
715
$2,541
Property management revenues increased $697, or 23.8%, from $2,926 to $3,623 due primarily to the May 2001 acquisition of the D.C. Management Co.
Development revenues, net decreased $152, or 37.0%, from $411 to $259 due primarily to 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:
2002 Period | ||||||||||
Gables' share of joint venture results: | Stabilized (a) | Development | Sales (c) | Total | 2001 | |||||
$ 1,552 |
| $ 671 |
| $ 169 |
| $ 2,392 |
| $ 3,121 |
| |
| (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 $273, or 60.1%, from $454 to $181 due to a decrease in interest-bearing deposits and a decrease in interest rates.
Other revenues increased $756, or 76.0%, from $995 to $1,751 due to an increase in revenues from our third-party brokerage and corporate rental housing services, offset by income earned during the 2001 Period related to certain non-routine items.
Property operating and maintenance expense (exclusive of depreciation and amortization) increased $2,595, or 7.1%, from $36,583 to $39,178 due to an increase in the number of apartment homes resulting from the development and acquisition of additional communities, as well as same-store expenses increasing at a rate ahead of inflation due to increasing insurance costs, along with higher turnover and marketing costs associated with the current national economic conditions. This increase is offset in part by the 2001 and 2002 sales of apartment communities.
Real estate depreciation and amortization expense increased $1,979, or 8.9%, from $22,216 to $24,195 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Property management expense for owned communities and third party properties on a combined basis increased $1,576, or 30.5%, from $5,166 to $6,742 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 $1,891, or 8.5%, from $22,371 to $20,480 due primarily to a decrease in outstanding indebtedness associated with the 2001 and 2002 sales of apartment communities and a decrease in interest rates. These decreases are offset in part by an increase in operating debt associated with the development and acquisition of additional communities.
General and administrative expense increased $118, or 3.3%, from $3,557 to $3,675 due primarily to inflationary increases in expenses.
Corporate asset depreciation and amortization increased $541, or 159.1%, from $340 to $881 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 $1,801 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 $953 in deferred gain associated with the contribution of land and development rights into the GRAP JV Two in the 2002 Period, and (3) recognition of $85 of deferred gain associated with a land sale in 2000.
Gain on sale of previously depreciated operating real estate assets of $7,386 in the 2001 Period is related to the sale of an apartment community in Atlanta comprising 386 apartment homes.
Gain on sale of land and development rights of $2,218 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) $747 associated with the contribution of land into the GRAP Two JV in the 2001 period and (3) recognition of $527 of deferred gain associated with a land sale in 2000.
Income from discontinued operations, net of minority interest increased $2,080, or 613.6%, from $339 to $2,419 due primarily to the $2,363 gain on disposition of discontinued operations, net of minority interest recognized in the 2002 Period.
Extraordinary loss from early extinguishment of debt, net of minority interest of $1,360 in the 2002 Period represents the write-off of unamortized deferred financing costs totaling $236 and a prepayment penalty of $1,451 associated with the early retirement of $48.4 million of secured tax-exempt bond indebtedness, net of the $327 portion of the loss attributable to the minority interest unitholders. These bonds had an interest rate of 6.375% which we were able to reissue on an unsecured basis at a rate of 4.75%, resulting in an positive net present value.
Liquidity and Capital Resources
Net cash provided by operating activities of continuing operations increased from $51,663 for the six months ended June 30, 2001 to $53,028 for the six months ended June 30, 2002 due to (1) a change in other assets between periods of $5,951 and (2) a change in restricted cash between periods of $249. Such increases were offset in part by (1) a decrease of $1,885 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, extraordinary loss, and unusual items and (b) after operating distributions received from joint ventures, and (2) a change in other liabilities between periods of $2,950. Net cash provided by operating activities of discontinued operations decreased from $893 to $194 due to the disposition of discontinued operations in the 2002 Period.
We had $68,465 of net cash used in investing activities for the six months ended June 30, 2001 compared to $16,982 of net cash provided by investing activities for the six months ended June 30, 2002. During the six months ended June 30, 2002, we expended $39.1 million related to development expenditures, $6.4 million related to recurring, non-revenue enhancing capital expenditures for operating apartment communities, $4.7 million related to non-recurring, renovation/revenue enhancing capital expenditures, and $0.8 million related to our investment in joint ventures. During the six months ended June 30, 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
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
with the disposition of discontinued operations and (3) $3.0 million in connection with our share of the net proceeds from the sale of joint venture real estate assets. During the six months ended June 30, 2001, we expended $108.5 million related to development expenditures, $5.7 million related to recurring, non-revenue enhancing capital expenditures for operating apartment communities, $5.3 million related to non-recurring, renovation/revenue enhancing capital expenditures, $2.3 million related to our investment in joint ventures, and $3.1 million related to other investments. In addition, during the six months ended June 30, 2001, we deposited $1.3 million, net, into an escrow account to fund acquisition activities. During the six months ended June 30, 2001, we received cash of (1) $18.4 million in connection with our contribution of interests in certain land and development rights to the GRAP JV Two and (2) $39.4 million in connection with the sale of wholly-owned real estate assets.
We had $16,875 of net cash provided by financing activities for the six months ended June 30, 2001 compared to $69,571 of net cash used in financing activities for the six months ended June 30, 2002. During the six months ended June 30, 2002, we paid dividends and distributions totaling $44.0 million, had net repayments of borrowings of $33.9 million, a prepayment penalty of $1.5 million, and deferred financing costs of $1.0 million. These payments were offset by proceeds from the exercise of share options of $7.3 million and principal payments released from escrow, net, of $3.6 million. During the six months ended June 30, 2001, we had net borrowings of $52.4 million and proceeds from the exercise of share options of $7.6 million. These net borrowings and share option proceeds were offset by payments for dividends and distributions totaling $41.0 million and deferred financing costs of $1.8 million.
We have elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of the REIT's ordinary taxable income to shareholders. It is our current intention to adhere to these requirements and maintain our REIT status. As a REIT, we generally will not be subject to federal income tax on distributed taxable income. We utilize Gables Residential Services, a taxable REIT subsidiary, to provide management and other services to third parties that a REIT may be prohibited from providing. Taxable REIT subsidiaries are subject to federal, state and local income taxes.
As of June 30, 2002, we had total indebtedness of $843,370, cash and cash equivalents of $4,864, and principal escrow deposits reflected in restricted cash of $462. Our indebtedness has an average of 3.8 years to maturity at June 30, 2002. The aggregate maturities of notes payable at June 30, 2002 are as follows:
| Balloon Principal Payment due at Maturity | Total | |
2002 | $ 1,838 | $ 82,392 | $84,230 |
The 2003 maturities include four tax-exempt bonds totaling $44,930. These bonds are enhanced by four letters of credit provided by a letter of credit facility that was entered into in October 1997. The letter of credit facility has an initial term of five years with unlimited one-year extension options. We have exercised the first of our one-year extension options resulting in a maturity date of October 2003. Three of the underlying bonds mature in 2007 and the fourth matures in 2024.
Dividends historically have been paid from cash provided by operating activities. We anticipate that dividends will continue to be paid from cash provided by operating activities.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
We have met and expect to continue to meet our short-term liquidity requirements, generally through net cash provided by operations. Our net cash provided by operations has been adequate, and we believe that it will continue to be adequate, to meet both operating requirements and payment of dividends in accordance with REIT requirements. Expenditures for improvements and renovations to our communities, in addition to monthly principal amortization payments, are expected to be funded from net cash provided by operations, borrowings under our credit facilities, or the disposition of assets. We anticipate that construction and development activities as well as land purchases, will be initially funded primarily through borrowings under our credit facilities described below.
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 2005 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 $199.2 million at June 30, 2002. As of June 30, 2002, we had $40.0 million in borrowings outstanding under the facility and, therefore, had $159.2 million of remaining capacity on the $199.2 million available.
$75 Million Borrowing Facility
We have a $75 million unsecured borrowing facility with a bank that matures in May 2005. The interest rate and maturity date related to each draw on this facility is agreed to by both parties prior to each draw. At June 30, 2002, we had $59.5 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 $1.4 million in borrowings outstanding under this facility at June 30, 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.
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
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
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 June 30, 2002: | ||||||||||
Percent at June 30, 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 | ||||||||||
45%
-
-
97%
66%
53%
21
-
-
-
4 Q 2003
Co-Investment Development and Lease-up Communities (c):
274
$ 32
79%
12%
1 Q 2001
2 Q 2002
(d)
Totals 2,006 $252 $112
100%
28%
24%
100%
73%
67%
4 Q 2000
Village I (e)
320
35
4 Q 2000
506
$50
(a) Stabilized occupancy is defined as the earlier to occur of (i) 93% physical occupancy or (ii) one year after completion of construction.
(b) This community represents the reconstruction of 124 apartment homes previously owned and operated by us into 255 apartment homes.
The first phase of 22 apartment homes was substantially complete at June 30, 2002. The second phase of 233 apartment homes is expected to be
substantially complete by September 30, 2004. The remaining 166 apartment homes in this community are still being operated by us.
(c) These communities are owned by the Gables Residential Apartment Portfolio JV Two in which we have a 20% interest.
(d) Construction loan proceeds are expected to fund $22 million of the costs to complete at June 30, 2002. 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.
(e) This community includes 40,000 square feet of commercial space which was 100% leased at June 30, 2002.
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 our 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 June 30, 2002
Community | No. of Apt. Homes | June 30, 2002 | June 30, 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 Remo Gables Town Colony Gables Town Place Gables Wellington Hampton Lakes Hampton Place Mahogany Bay San Michele I San Michele II Vinings at Hampton Village Totals/ Averages |
| 96% 96% 96% 92% 91% 93% 98% 98% 95% 94% 97% 97% 93% 94% 84% 96% 93% 95% 95% 96% 95% 92% 93% 89% 95% 96% 88% 85% 88% 93% 87% 93% 93% 93% 93% 89% 93% 95% 97% 78% 96% 96% 97% 88% 96% 97% 92% 94% 90% 96% 95% 92% 88% 85% 92% 93% |
| $ 991 797 709 854 1,018 999 905 800 1,114 961 999 971 1,093 1,120 800 795 732 $ 940 $1,196 890 946 1,217 906 1,285 1,089 1,188 797 777 741 773 684 998 960 960 982 1,019 $ 942 $763 1,100 1,058 986 981 892 1,728 1,619 1,320 899 896 1,049 831 795 827 1,550 1,524 877 $1,060 | $1.01 0.93 0.92 0.94 1.19 1.24 1.03 0.95 1.22 1.12 1.01 1.05 1.07 1.10 0.95 0.94 0.84 $1.04 $0.96 1.18 1.14 1.09 0.98 0.82 1.02 1.00 0.87 0.81 0.75 0.78 0.75 1.00 0.88 0.82 0.99 0.90 $0.89 $0.78 0.87 1.08 0.82 0.81 1.00 1.37 1.12 0.72 1.05 1.07 0.78 0.79 0.83 0.82 1.16 1.10 0.73 $0.93 |
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
Stabilized Apartment Communities as of June 30, 2002
Community | No. of Apt. Homes | June 30, 2002 | June 30, 2002 Scheduled Rent Per Unit Square Foot |
Austin, TX |
| 92% 98% 96% 91% 92% 90% 96% 93% 95% 97% 95% 99% 93% 94% 91% 97% 96% 95% 92% 95% 92% 93% 98% 93% 92% 86% 92% 89% 100% 100% 97% 96% 96% | $1,143 1,464 1,080 1,342 870 1,230 1,360 $1,192 $1,345 1,381 863 1,196 964 981 1,992 1,197 956 $1,159 $865 689 689 $735 $911 688 655 649 $719 $1,194 -- -- $1,194 $2,665 $2,665 | $1.20 1.26 1.10 1.42 1.05 1.13 1.46 $1.24 $1.23 1.31 0.90 1.31 1.07 0.93 1.33 1.19 0.94 $1.11 $0.87 0.74 0.78 $0.79 $0.80 0.73 0.73 0.68 $0.74 $1.03 -- -- $1.03 $2.74 $2.74 |
Grand Totals/Averages | 22,735 | 93% | $ 990 | $0.98 |
| (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 June 30, 2002 | ||||
Type of Indebtedness | Balance | Interest Rate (a) | Total Rate (b) | Years to Maturity |
| Fixed Rate: | ||||
Unsecured fixed-rate notes | $412,674 | 7.14% | 7.14% | 2.79 |
Secured fixed-rate notes | 138,101 | 7.71% | 7.71% | 5.81 |
Total fixed-rate indebtedness | $571,530 | 7.23% | 7.26% | 3.88 |
Variable Rate: |
|
|
|
|
Tax-exempt variable-rate loans | $170,955 | 1.28% | 2.27% | 4.08 |
Unsecured variable-rate credit facilities | 100,885 | 2.56% | 2.56% | 2.87 |
Total variable-rate indebtedness | $271,840 | 1.76% | 2.38% | 3.63 |
Total portfolio debt (c), (d) | $843,370 | 5.47% | 5.69% | 3.80 |
(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 June 30, 2002 for purposes of interest capitalization were $108,413. (d) Excludes (i) $16.4 million of tax-exempt bonds related to a joint venture in which we own a 25% interest, (ii) $82.0 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 | Six Months | |||||||
| 2002 | 2001 | 2002 | 2001 | |||||
| Net income available to common shareholders Minority interest of common unitholders in Operating Partnership: Continuing operations Discontinued operations Total | $ 4,860 1,486 - 1,486 | $ 15,006 | $30,613 7,183 595 7,778 | $23,803 6,311 91 6,402 | ||||
| Extraordinary loss, net of minority interest 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 | 1,360 12,205 - - 342 - 12,547 | - 11,482 139 388 54 12,063 | 1,360 24,195 48 693 51 24,987 | - 22,216 279 861 105 23,461 | ||||
| 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 | - - - - - - - | (7,386 - - - - - (7,386 |
| (17,906 (2,198 (1,007 (747 (21,858 |
| (7,386 - - - - - (7,386 |
| |
| Funds from operations - basic and diluted | $ 20,253 | $23,558 | $42,880 | $46,280 | ||||
| Recurring, non-revenue enhancing capital expenditures: Carpet and flooring Appliances Other additions and improvements Total capital expenditures | $ 1,630 199 1,701 3,530 | $ 1,234 158 1,779 3,171 | $ 2,842 351 3,171 6,364 | $ 2,045 332 3,336 5,713 | ||||
| Adjusted funds from operations - diluted | $16,723 | $20,387 | $36,516 | $40,567 | ||||
Average shares and Units outstanding - basic | 30,762 | 30,051 | 30,634 | 29,956 | ||||
| Average shares and Units outstanding - diluted | 30,931 | 30,212 | 30,802 | 30,113 | ||||
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 | ||
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| None | |
Item 2: | Changes in Securities | ||
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| During the period commencing on April 1, 2002 and ending on June 30, 2002, we issued to limited partners of the Operating Partnership 2,433 common shares (valued at approximately $73,963 at the time of issuance) in exchange for 2,433 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 | ||
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| None | |
Item 4: | Submission of Matters to a Vote of Security Holders | ||
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| We held our annual meeting of shareholders on May 24, 2002. Our shareholders voted to elect John W. McIntyre and Chris D. Wheeler to serve as Class II Trustees. These Class II Trustees were elected to serve until our 2005 annual meeting and until their successors are duly elected and qualified. The votes cast for, and withheld from, the election of the aforementioned trustees are listed below: | |
| Item 5: | Other Information | ||
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| None | |
Item 6: | Exhibits and Reports on Form 8-K | ||
| (a) | Exhibits | |
| 10.1* Fourth Amended and Restated $225 million Revolving Credit Facility dated June 27, 2002, by and among Gables Realty Limited Partnership and Gables-Tennessee Properties, L.L.C. (as the Borrowers) and Wachovia Bank, N.A., Wachovia Securities, Inc., J.P. Morgan Chase Bank, AmSouth Bank, PNC Bank, National Association, SouthTrust Bank, Bank of America, N.A., Wells Fargo Bank, N.A., and Suntrust Bank (collectively, as Lenders) and Wachovia Bank, N.A. (as agent). 10.2 * Severance Agreement for Stephen G. Sweet | |||
(b) | Reports on Form 8-K | ||
| (i) A Form 8-K was filed with the Securities and Exchange Commission on May 30, 2002 to disclose a change in our certifying accountants from Arthur Andersen LLP to Deloitte & Touche LLP. - ---------- * Filed herewith | |||
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.
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| GABLES RESIDENTIAL TRUST |
Date: | August 14, 2002 |
| /s/ Marvin R. Banks, Jr. |
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| Marvin R. Banks, Jr. |