SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10Q
___________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal quarter ended
MARCH 31, 1998
Commission file number: 001-11081
MERRY LAND & INVESTMENT COMPANY, INC.
State of Incorporation: Georgia I.R.S. Employer Identification Number:
58-0961876
___________
P.O. Box 1417
Augusta, Georgia
(Address of Principal Executive Offices)
706 722-6756 30903
(Registrant's Telephone (Zip Code)
Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such
filing requirements for the past ninety days: Yes X . No____.
The number of shares of common stock outstanding as of April 30, 1998 was
42,761,213.
Form 10-Q - Merry Land & Investment Company, Inc.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance sheets - March 31, 1998 and December 31, 1997
Statements of income - Three months ended March 31, 1998 and 1997
Statements of cash flows - Three months ended March 31, 1998 and 1997
Notes to condensed financial statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Form 10-Q - Part I. Financial Information
Item 1- Financial Statements
Merry Land & Investment Company, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, December 31,
PROPERTIES AT COST 1998 1997
---------- ----------
Apartments $1,507,945 $1,496,109
Apartments under development 51,300 48,342
Commercial rental property 5,375 5,363
Land held for investment or future development 4,090 4,090
Operating equipment 3,780 3,676
---------- ----------
1,572,490 1,557,580
Less accumulated depreciation and depletion (155,324) (142,617)
---------- ----------
1,417,166 1,414,963
CASH AND SECURITIES
Cash and cash equivalents 45 570
Repurchase Agreements 79,854 -
Marketable securities 2,131 1,963
---------- ----------
82,030 2,533
OTHER ASSETS
Notes receivable 1,397 1,412
Other receivables 189 249
Deferred loan costs 4,421 4,639
Other 6,102 4,085
---------- ----------
12,109 10,385
---------- ----------
TOTAL ASSETS $1,511,305 $1,427,881
========== ==========
NOTES PAYABLE
Mortgage loans $ 70,109 $ 70,282
Senior notes 460,000 460,000
Note payable-credit line --- 67,800
---------- ----------
530,109 598,082
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accrued interest 8,724 6,622
Resident security deposits 1,333 1,597
Accrued property taxes 8,083 10,780
Accrued employee compensation 1,545 3,471
Other 8,270 9,997
---------- ----------
27,955 32,467
STOCKHOLDERS' EQUITY
Preferred stock, at $25 and $50 liquidation preference, 20,000 369,672 269,677
shares authorized
Common stock, at $1 stated value, 100,000 shares authorized
42,706 and 39,177 shares issued 42,706 39,177
Capital surplus 594,789 525,744
Cumulative undistributed net earnings (24,648) (15,730)
Notes receivable from stockholders and ESOP (29,601) (21,691)
Accumulated other comprehensive income 323 155
---------- ----------
953,241 797,332
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY $1,511,305 $1,427,881
========== ==========
The accompanying notes are an integral part of these statements.
Form 10-Q - Part I. Financial Information
Item 1- Financial Statements
Merry Land & Investment Company, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three months ended March 31,
-------------------------------
1998 1997
---- ----
Rental income $ 59,244 $ 47,861
Mineral royalties 391 95
Mortgage interest 29 28
Other interest 420 738
Dividends 44 559
Other income 373 3,501
--------- ---------
60,501 52,782
Rental expense 15,096 12,686
General and administrative expense 1,207 1,056
Interest 8,730 5,626
Taxes and insurance 7,129 5,585
Depreciation - real estate 12,679 9,425
Depreciation - other 135 84
Amortization - financing costs 237 142
--------- ---------
45,213 34,604
Income before net realized loss 15,288 18,178
Net realized loss (15) -
--------- ---------
NET INCOME 15,273 18,178
Dividends to preferred shareholders 6,770 5,831
--------- ---------
NET INCOME AVAILABLE
FOR COMMON SHARES $ 8,503 $ 12,347
========= =========
Weighted average common shares outstanding
- basic 39,935 37,957
- diluted 40,035 37,983
EARNINGS PER COMMON SHARE
- basic $ .21 $ .33
========= =========
- diluted $ .21 $ .33
========= =========
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ .41 $ .39
========= =========
The accompanying notes are an integral part of these statements.
Form 10-Q - Part I.
Financial Information
Item 1- Financial Statements
Merry Land & Investment Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended March 31,
----------------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Rents and royalties received $ 59,745 $ 47,975
Interest received 565 701
Dividends received 44 559
Rental expense (15,704) (13,481)
General and administrative expense (1,650) (1,587)
Interest expense (6,629) (3,338)
Property taxes and insurance expense (10,654) (7,376)
Other (480) (370)
--------- ---------
Net cash provided by operating activities: 25,237 23,083
INVESTING ACTIVITIES:
Sale of securities - 16,046
Sale of real property 261 -
Purchase of real property (242) -
Development of real property (12,622) (16,668)
Recurring capital expenditures (1,627) (1,328)
Improvements to existing properties (1,246) (851)
Other (2,928) 48
--------- ---------
Net cash used by investing activities (18,404) (2,753)
FINANCING ACTIVITIES:
Net repayments - bank debt (67,800) -
Net repayments - mortgage loans (173) (38)
Cash dividends paid - common (17,421) (14,793)
Cash dividends paid - preferred (6,769) (5,830)
Sale of common stock 68,026 4,537
Sale of preferred stock 96,633 (121)
--------- ---------
Net cash provided (used) by financing activities 72,496 (16,245)
NET INCREASE IN CASH 79,329 4,085
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 570 32,793
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79,899 $ 36,878
========= =========
The accompanying notes are an integral part of these statements.
Form 10-Q - Part I. Financial Information
Item 1- Financial Statements
Merry Land & Investment Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reconciliation of Net Income to Cash Flows from Operating Activities
(In thousands)
(Unaudited)
Three months ended March 31,
----------------------------
1998 1997
----- -----
Net income $15,273 $18,178
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,051 9,651
Increase in interest and accounts receivable 52 (1,237)
Decrease in other assets (1,438) (308)
Decrease in accounts payable and accrued interest (1,701) (3,201)
------- -------
Net cash provided by operating activities $25,237 $23,083
======= =======
The accompanying notes are an integral part of these statements.
Merry Land & Investment Company, Inc.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
1. Nature of Business
Merry Land & Investment Company, Inc. is a real estate investment trust
(REIT), which owns and operates upscale apartment communities in nine
Southern states including Alabama, Florida, Georgia, Maryland, North
Carolina, South Carolina, Tennessee, Texas, and Virginia. As a qualified
REIT the Company pays no corporate income taxes on earnings distributed to
stockholders.
The consolidated financial statements for the three month periods ended
March 31, 1998 and March 31, 1997 reflect all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim period.
2. Marketable Securities
The cost and market value of securities by major classification at
March 31, 1998 were as follows (dollars in thousands):
Unrealized
Cost Market Gain
---- ------ ----------
Common stock $1,808 $2,131 $323
3. Borrowings
Borrowings at March 31, 1998 were as follows (dollars in thousands):
9.760% mortgage notes(a) $ 12,622
7.750% mortgage note(b) 9,600
7.625% mortgage note(c) 5,126
7.210% mortgage note(d) 9,397
7.125% mortgage note(e) 14,651
7.570% mortgage note(f) 9,803
8.250% mortgage note(g) 8,910
6.625% senior unsecured notes(h) 120,000
7.250% senior unsecured notes(i) 40,000
6.875% senior unsecured notes(j) 40,000
6.875% senior unsecured notes(k) 40,000
7.250% senior unsecured notes(l) 120,000
6.690% senior unsecured notes(m) 50,000
6.900% senior unsecured notes(n) 50,000
Advance under unsecured line of credit(o) -
--------
$530,109
========
(a) $10.6 million and $2.0 million, 9.760% mortgage notes, principal and
interest payable monthly, maturity 2001.
(b) 7.750% mortgage note, interest payable monthly only until November
1998 at which both principal and interest will be payable monthly,
maturity 2002.
(c) 7.625% mortgage note, principal and interest payable monthly, maturity
2005.
(d) 7.210% mortgage note, principal and interest payable monthly, maturity
2001.
(e) $0.8 million and $8.0 million and $5.9 million, 7.125% mortgage
notes, principal and interest payable monthly, maturity 2006.
(f) 7.570% mortgage note, principal and interest payable monthly, maturity
2001.
(g) 8.250% mortgage note, principal and interest payable monthly, maturity
2001.
(h) 6.625% notes, interest payable semi-annually, principal installments of
$40.0 million each due 1999, 2000,
and 2001.
(i) 7.250% notes, interest payable semi-annually, maturity 2002.
(j) 6.875% notes, interest payable semi-annually, maturity 2003.
(k) 6.875% notes, interest payable semi-annually, maturity 2004.
(l) 7.250% notes, interest payable semi-annually, maturity 2005.
(m) 6.690% notes, principal and interest payable semi-annually, maturity 2006.
(n) 6.900% notes, principal and interest payable semi-annually, maturity
August, 2007.
(o) $200 million line of credit bearing interest equal to floating LIBOR plus
0.60%, maturity September, 2000.
The Company estimates that the fair value of borrowings approximates
their carrying value at March 31, 1998. Maturities of borrowings at March
31 were as follows (dollars in thousands):
1998 $ 552
1999 40,853
2000 40,921
2001 80,138
2002 49,764
2003 40,489
2004 40,526
2005 124,804
2006 62,062
2007 50,000
---------
$ 530,109
=========
4. Earings Per Share and Share Information
In 1997, the Company adopted SFAS 128, "Earnings Per Share". In
accordance with this standard, basic earnings per share is computed on
the basis of the weighted average number of shares outstanding during
the year. Diluted earnings per share is computed giving effect to
dilutive stock options and dilutive preferred stock with an applicable
reduction in preferred dividends. Basic and diluted earnings per share
are computed as follows (dollars in thousands):
Three months ended March 31,
------------------------------
1998 1997
---- ----
BASIC:
Net Income $15,273 $18,178
Preferred dividend requirement 6,770 5,831
------- -------
Net income available for common $ 8,503 $12,347
======= =======
Average common shares outstanding 39,935 37,957
Basic earnings per share $ 0.21 $ 0.33
DILUTED:
Net income $15,273 $18,178
Preferred dividend requirement 6,770 5,831
------- -------
Net income available for common $ 8,503 $12,347
Dilutive stock options 100 26
Average common shares outstanding 39,935 37,957
------- -------
Average diluted common shares outstanding $40,035 $37,983
======= =======
Diluted earnings per share $ 0.21 $ 0.33
5. Income Taxes and Dividend Policy
As discussed in Note 1, the Company has elected to be taxed as a REIT. The
Internal Revenue Code provides that a REIT, which in any taxable year meets
certain requirements and distributes to its stockholders at least 95% of its
ordinary taxable income, will not be subject to federal income taxation on
taxable income which is distributed. The Company intends to distribute the
required amounts of income in 1998 to qualify as a REIT and to avoid paying
income taxes. On March 31, 1998, the Company paid dividends per share as
follows:
Series A Preferred $0.43750
Series B Preferred $0.55125
Series C Preferred $0.53750
Series D Preferred $1.03625
Series E Preferred(a) $0.02436
Common $0.41000
(a) Series E Preferred was issued on February 13, 1998, therefore the dividends
per share have been prorated.
6. Recent Accounting Pronouncements
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". The Company had comprehensive income, which is comprised of net income
and unrealized gains or losses on marketable securities held as available for
sale, of $15,440,810 and $16,705,911 for the period ending March 31, 1998 and
1997 respectively.
Form 10-Q - Merry Land & Investment Company, Inc.
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands except apartment and per share data)
OVERVIEW
Merry Land & Investment Company, Inc. is an apartment operating company
and is one of the largest owners and operators of upscale garden apartments in
the United States. At March 31, 1998, the Company had a total market
capitalization of $1.9 billion and owned a high quality portfolio of 105
apartment communities containing 29,616 units. The communities are
geographically diversified throughout the Southern United States, located in
twenty-eight metropolitan areas, each with a population in excess of 250,000,
extending from the Washington, D.C. area to Texas and Florida. Substantially
all of the Company's apartment communities command rental rates in the upper
range of their markets.
Operating Strategy. The Company's strategy is to own and operate a
significant number of communities in every major market in the Southern United
States, and to establish a reputation recognized among apartment dwellers
throughout this region for high quality communities and first class service.
The accomplishment of this strategy should allow the Company to increase funds
from operations and distributions to shareholders by producing greater cash
flows at its apartment communities through significant marketing advantages and
operating efficiencies. The Company adds to its holdings by buying existing
apartment communities, by buying communities under construction and in the
initial lease-up stage (primarily from merchant builders) and by developing
communities from the ground up. The following table further describes the
Company's apartment holdings by major market as of March 31, 1998 (dollars in
thousands except rental rates):
Average Average
% of Occupancy(1) Rental Rate(2)
Market Units Cost Total Cost 1998 1997 1998 1997
- ------ ----- ---- ---------- ---- ---- ---- ----
Atlanta 4,235 $209,150 13.9% 90.7% 92.4% $713 $669
Dallas 3,208 209,518 13.9 87.4 90.8 841 849
Jacksonville 2,550 107,287 7.1 94.2 93.4 635 621
Charlotte 2,459 113,716 7.5 94.5 92.2 650 615
Orlando 2,404 119,220 7.9 94.0 96.1 695 669
Houston 1,457 87,474 5.8 92.5 n/a 837 n/a
Tampa 1,449 71,038 4.7 98.1 96.6 679 652
Ft. Myers 1,268 59,338 3.9 96.2 97.2 681 664
Raleigh 1,256 48,954 3.2 94.2 94.5 631 621
Austin 1,249 80,551 5.3 86.7 95.3 841 842
Savannah 1,149 55,286 3.7 92.1 93.3 691 630
Ft. Lauderdale 1,144 72,625 4.8 94.5 91.3 866 850
Charleston 880 34,196 2.3 97.5 94.5 565 548
All others 4,908 239,592 16.0 93.0 90.8 710 626
----- --------- ----- ---- ---- ---- ----
29,616 $1,507,945 100.0% 92.7% 92.9% $716 $677
__________
(1) Represents the average of physical occupancy at each month end for
the period held.
(2) Represents weighted average monthly rent charged for occupied units
and rents asked for unoccupied
units at March month end.
Growth. Merry Land intends to increase its holdings of apartments
primarily through the acquisition of apartment communities and also through
apartment development. The following table summarizes the Company's growth in
recent years (dollars in thousands):
1998(1) 1997 1996 1995
---------- ---------- ---------- ----------
Units acquired - 4,104 2,475 3,444
Units developed 90 936 414 -
Total units owned at end of period 29,616 29,526 24,936 22,296
Total cost of apartments $1,507,945 $1,496,109 $1,175,427 $1,009,056
Total apartment rental income $ 59,121 $ 208,363 $ 176,053 $ 144,283
__________
(1) Represents totals at March 31, 1998.
Acquisition of Communities under Development. The Company has also
agreed to acquire the following communities to be built by unrelated
third parties (dollars in thousands):
Estimated Estimated
Community Location Units Cost Close
- --------- -------- ----- --------- ---------
Villages of Prairie Creek I Dallas, Texas 236 $19,800 2Q1998
Creekside Homes at Legacy Dallas, Texas 380 31,200 3Q1998
Villages of Prairie Creek II Dallas, Texas 228 19,500 1Q1999
--- -------
844 $70,500
Villages of Prairie Creek I and Creekside Homes at Legacy have both
been completed. Villages of Prairie Creek I is 79% occupied and 83%
leased with closing expected during the second quarter of 1998.
Creekside Homes at Legacy is 62% occupied and 76% leased with closing
expected during the third quarter of 1998. The Company will pay the
seller an amount equal to the lesser of the budgeted cost or the
seller's actual cost plus additional amounts upon the attainment of
specified occupancy and net operating cash flow levels based on
agreed upon formulas. Although the third party developer bears the
development and construction risk, the Company actively monitors
construction quality of the communities.
Development. At March 31, 1998, the Company had six
communities with 2,408 units under construction (of which
960 units have been delivered) and one community with 220
units under development. These communities will be
completed at an expected total cost of $203.3 million. In
addition, the Company owns land suitable for the
construction of 1,240 additional units. The communities
under development offer features typical of very high end
properties, including nine foot ceilings, high levels of
trim and finish, garages and extensive amenities.
The following table summarizes the Company's current
development communities and recently completed communities.
Estimated cost consists of land, direct construction costs
and indirect costs, including projected fees to third party
development managers and allocated overhead (dollars in
thousands, except cost per unit):
Cost of
Total Units
Total Estimated Total Placed
Estimated Cost Cost Units in in Estimated
Location Community Units Cost Per Unit to Date Service Service Completion
- -------- --------- ----- --------- --------- ------- -------- ------- ----------
Completed, Unstabilized
- -----------------------
Greensboro Adams Farm II (1) 200 $ 13,100 $65,500 $ 13,062 200 $13,062 3Q 1997
Under Construction
- ------------------
Atlanta River Sound 586 $ 42,000 $71,672 $ 41,976 586 $41,976 4Q 1997
Savannah Long Point I 308 22,900 74,351 22,615 284 21,383 2Q 1998
Richmond Wyndham 264 24,500 92,803 20,179 90 8,964 3Q 1998
Greensboro Bridford Lake I 320 24,500 76,563 12,610 - - 4Q 1998
Atlanta Satellite Place 424 34,000 80,189 9,104 - - 1999
Richmond Spring Oak 506 38,800 76,680 - - 1999
----- --------- ------- --------- --- -------
2,408 $ 186,700 $77,533 $ 113,045 960 $72,323
Under Development
- -----------------
Nashville Cherry Creek III (1) 220 $ 16,600 $75,455 $ 4,416 1999
Future Development
- ------------------
Savannah Long Point II (1) 352 $ 1,154
Nashville Bell Road I 360 1,911
Nashville Bell Road II 328 1,741
Greensboro Bridford Lake II (1) 200 1,356
----- ----------
1,240 $ 6,162
__________
(1) Adjoins an existing community owned by the Company.
Recent Events
Acquisition of Communities from Trammell Crow Residential.
On April 1, 1998, the Company closed the purchase of twelve
communities containing 3,538 units from Trammell Crow Residential,
a national apartment development and management company, and
its affiliates. The purchase of a thirteenth property will close
upon the completion of construction probably in the second quarter
of 1998. For the total 3,994 units, the sellers will receive
consideration of $248.0 million, including partnership units
in Merry Land's newly created subsidiary DownREIT partnership,
cash and the assumption of debt.
Of the twelve communities acquired, three are located in
Orlando, four in Tampa, three in Jacksonville and one each in
Sarasota and Daytona. This high quality portfolio averages
seven years of age, 941 square feet per unit and $714 monthly
rent, and was 95% occupied as of March 31, 1998. These
characteristics are very similar to those of Merry Land's
existing Florida holdings. Merry Land has employed
substantially all of the staff at the communities and
additional management personnel from Trammell Crow Residential.
Merry Land has substantial infrastructure in place in Florida
and expects to quickly integrate the new communities into its
Orlando based Florida Management Area.
The following is a detailed listing of the communities
acquired:
Year Sq. ft.
Community Location Built Units Per Unit Avg. Rent Occup.
- --------- -------- ----- ----- -------- --------- ------
Wood Forest Daytona Beach 1985 144 822 $561 92%
Oaks at Baymeadows Jacksonville 1985 248 995 619 94
Oaks at Regency Jacksonville 1985 159 844 539 85
Oaks at Orange Park Jacksonville 1986 280 845 589 94
Vinings at Lake Buena Vista Orlando 1988 400 927 674 99
Chicasaw Crossing Orlando 1986 292 850 594 95
Vinings Club at Metrowest Orlando 1997 411 1,182 1,001 93
Vinings at Lenox Place Orlando 1998 456 1,011 875 (1)
Beneva Place Sarasota 1986 192 882 680 99
Vinings Club at Boot Ranch Tampa 1996 432 956 803 94
Vinings at Carrollwood Place Tampa 1995 432 970 733 96
Forest Place Tampa 1985 244 813 554 96
Horizon Place Tampa 1985 304 841 599 96
---- ----- ----- ----- ---
Weighted Average or Total 1990 3,994 941 $714 95%
__________
(1) Under construction at March 31, 1998. Expected to
close during the second quarter of 1998.
The Company believes that this transaction is a significant
step in its strategy to become recognized by renters throughout
the South as the region's leading provider of high-quality
apartment homes. With this transaction, Merry Land further
enhances its leadership position in the Florida luxury
apartment market with 14,256 high quality units in that state
and with particularly strong concentrations in Orlando, Tampa
and Jacksonville. The Company expects this transaction will
help it to further capitalize on its significant marketing
advantages and operating efficiencies in the state.
The acquisition represents a 17% increase in the
Company's total investment in apartments, and a 50%
increase in its Florida holdings. Merry Land's
Florida communities now represents 43% of the
Company's total investment in apartments. The
following table includes Merry Land's apartment
holdings at April 1, 1998:
% of
TOTAL COST TOTAL COST
----- ---- ----------
Florida 14,256 $747,420,328 42.6%
Texas 5,914 377,542,701 21.5
Georgia 5,760 278,247,332 15.8
N. Carolina 4,423 198,739,385 11.3
S. Carolina 1,308 47,830,505 2.7
Tennessee 879 47,365,670 2.7
Virginia 596 35,103,440 2.0
Maryland 198 12,147,319 0.7
Alabama 276 11,548,002 0.7
------ -------------- -----
33,610 $1,755,944,682 100.0%
To fund the acquisition Merry Land assumed $113.4 million
of debt, including $96.7 million of tax exempt debt bearing
interest at an average rate of approximately 5.0%. Merry Land
also formed a subsidiary DownREIT partnership which issued
operating partnership units with an aggregate value of $30.6
million to the sellers. An additional $5.4 million of units
will be issued upon the closing of the thirteenth community.
The units are redeemable for cash or, at the Company's option,
for shares of Merry Land common stock on a one for one basis,
beginning one year after closing. The Company will file a
registration statement allowing the common stock exchanged for
the units to be publicly traded. The balance of the purchase
price was paid in cash.
Sale of Preferred Stock. In an offering completed
on February 13, 1998, the Company issued 4.0 million
shares of Series E Cumulative Redeemable Preferred
Stock at $25.00 per share for net proceeds of
$96.6 million. This issue bears a dividend rate of
7.625% and is not callable by the Company until
February 13, 2003. The Company used the net proceeds
to pay down its line of credit, to provide funds to
close the Trammell Crow transaction and to acquire
and develop additional apartment communities. The
Series E Preferred Stock is rated BBB by Standard &
Poor's Corporation and Duff & Phelps Credit Rating
Co. and Baa3 by Moody's Investors Services, Inc. and
ranks equally with the Company's other series of
preferred stock.
Sale of Common Stock. In a public offering
completed on March 16, 1998, the Company sold 3.0
million shares of common stock at $22.625 per share
for net proceeds of $64.5 million. The Company used
the net proceeds to close the Trammell Crow
transaction and to provide funds to acquire and
develop additional apartment communities.
Year 2000. The Company has evaluated its
information systems and believes that it faces no
significant costs or risks associated with the "Year
2000" problem.
Results of Operations for the Three Months Ended
March 31, 1998 and 1997.
Rental Markets. In the aggregate, the Company's
Southern rental markets were in equilibrium for the
first quarter of 1998. Occupancy totaled 93.7% at
stabilized communities, all except development
communities under lease-up, compared with 93.3% for
the first quarter of 1997. While levels of new
construction throughout the South remain high, the
Company believes that if general economic activity,
job growth and household formation in the South remain
strong, occupancy and rent growth should remain
satisfactory.
Rental Operations - Total Portfolio. The
operating performance of the Company's apartment
portfolio is summarized in the following table
(dollars in thousands except average monthly rent):
Change from Three Months
% Change 1997 to 1998 1998 1997
-------- ------------ ---- ----
Rents 23.9% $11,414 $59,121 $47,707
Operating expenses (1) 18.9 2,388 15,030 12,642
Taxes and insurance 27.2 1,495 6,996 5,501
---- ------- ------- -------
Subtotal (1) 21.4 3,883 22,026 18,143
25.5% $ 7,531 $37,095 $29,564
Average occupancy (2) (0.2)% (3) 92.7% 92.9%
Average monthly rent(4) 5.7% $716 $677
Expense ratio (5) (0.7)% (3) 37.3% 38.0%
__________
(1) Excludes depreciation and amortization.
(2) Represents the average physical occupancy at each month
end for the period held.
(3) Represents increase or decrease between periods.
(4) Represents weighted average monthly rent charged
for occupied units and rents asked for unoccupied units at March 31.
(5) Represents total of operating expenses, taxes and
insurance divided by rental revenues.
Acquisitions in the last three quarters of 1997 and the
delivery of 848 units from the Company<O~>s development program
since the first quarter of 1997 increased the weighted average
number of apartments owned to 29,556 in the three month period of
1998 from 25,039 in the three month period of 1997. Rental
revenues, expenses and taxes and insurance rose accordingly.
The 5.7% increase in portfolio average rental
rates in the three month period of 1998 from the three
month period of 1997 resulted from both higher rents
at the Company<O~>s continuing properties and also the
higher rents charged at the communities the Company
acquired and put in service in 1997 and 1998, whose
monthly rents averaged $822 at March 31, 1998, versus
the total portfolio average of $716.
Rental Operations - Same Store. The performance
of the 23,645 units which the Company held for the
three month period of both 1998 and 1997 ("same
store" results), is summarized in the following
table (dollars in thousands, except average monthly
rent; see footnotes above):
Change from Three Months
% Change 1997 to 1998 1998 1997
-------- ------------ ---- ----
Rental income 3.0% $1,366 $46,512 $45,146
Personnel 1.3 66 4,955 4,889
Utilities (13.8) (290) 1,811 2,101
Operating 6.6 154 2,488 2,334
Maintenance and grounds 3.4 88 2,671 2,583
Taxes and insurance (0.3) (16) 5,197 5,213
----- ------ ------- -------
Subtotal (1) 0.0 2 17,122 17,120
4.9% $1,364 $29,390 $28,026
Average occupancy (2) 0.9% 94.3% 93.4%
Average monthly rent(4) 2.2% $691 $676
Expense ratio (5) (1.1)% 36.8% 37.9%
Rental income rose by $1.4 million or 3.0% for those
properties held for all of both periods, as a result of 0.9%
higher occupancy and 2.3% higher average rental rates. At March
31, 1998 same store occupancy was 94.3%, up from 93.4% at March
31, 1997.
Total operating expenses were flat in 1998 from
the same period in 1997. Operating costs increased
6.6% due to higher marketing and advertising costs,
while utilities expense decreased by $0.3 million or
13.8% as the Company has passed a portion of its water
expense to the residents. Accruals for property taxes
and insurance were flat with the same period in 1997.
Rental Operations - Development Communities.
$12.6 million was expended in the three month period
of 1998 for apartments under development, bringing the
cumulative investment to $134.9 million, including
capitalized interest of $9.9 million. Some dilution of
earnings may occur to the extent that leasing lags
behind the delivery of units.
90 units of Carriage Homes at Wyndham community
were delivered in the first quarter of 1998. The
operating results for the three month period of 1998
and 1997 for all development communities is summarized
in the following table (dollars in thousands; see
footnotes above):
Three months
---------------------
1998 1997
------ ------
Units 1,460 1,019
Rental income $2,583 $1,794
Operating expense (1) 639 477
Taxes and insurance 277 131
------ ------
Subtotal (1) 916 608
$1,667 $1,186
At March 31, 1998, 72.5% of the 1,460 units delivered at
Carriage Homes at Wyndham, Hammocks at Long Point, Madison at
River Sound and Madison at Adams Farm were leased at an average
rental rate of $851 per unit, or $.80 per square foot.
Rental Operations - Other Communities. "Other
communities" are those not included in same store
communities or development communities. These include
communities bought or sold in part or in whole in
1997. At March 31, 1998, these communities included
4,511 units. The performance of the other communities
for the three month period of 1998 and 1997 is
summarized in the following table (dollars in
thousands; see footnotes above):
Three months
-----------------------
1998 1997
------- ------
Units 4,511 450
Rental income $10,026 $767
Operating expense (1) 2,466 258
Taxes and insurance 1,522 157
------- ----
Subtotal (1) 3,988 415
$ 6,038 $352
Interest, Dividend and Other Investment Income. Dividend
income decreased as the Company essentially completed liquidation
of its holdings of marketable securities in the second quarter of
1997 and invested the proceeds in apartments. Interest, dividend
and other investment income are summarized in the following table
(dollars in thousands):
Three months
---------------------
1998 1997
------ -------
Interest income $ 449 $ 766
Dividend income 44 559
Other investment income - 3,501
------ ------
Total $ 493 $4,826
Interest Expense. Interest expense totaled $8.7
million in the three month period of 1998, up from
$5.6 million in the three month period of 1997.
Average debt outstanding rose to $553.4 million in the
three month period of 1998 from $387.5 million in the
three month period of 1997, primarily as a result of
the issuance of the 6.90% senior unsecured notes in
July, 1997, the issuance of the 6.69% senior unsecured
notes in October, 1997, and the assumption of mortgage
notes in 1997 related to apartment acquisitions. The
weighted average interest rate charged on all the
Company's debt decreased to 7.0% in the three month
period of 1998 from 7.1% for the three month period in
1997 as a result of an average interest rate of 6.80%
on the $100 million senior unsecured notes issued
during 1997. During the three month period of 1998,
$1.1 million of interest related to the Company<O~>s
development projects was capitalized versus $1.2
million in the three month period of 1997.
Interest expense and average debt balances are summarized
below (dollars in thousands):
Three Months ended March 31,
------------------------------------------------------
1998 1997
-------------------- --------------------
AMOUNT RATE(1) AMOUNT RATE(1)
------ ------- ------ -------
Interest expense $ 9,874 $ 6,844
Capitalized interest (1,144) (1,218)
---------- ---------
Total interest 8,730 5,626
Senior notes 460,000 6.9% 360,000 7.0%
Mortgage notes 70,167 7.9% 27,527 8.7%
Line of credit - banks 23,267 6.2% -
---------- ---- ---------
Average balance outstanding 553,434 7.0% 387,527 7.1%
__________
(1) Weighted average interest rate.
General and Administrative Expenses. General and
administrative expenses in the three month period of
1998 were $1.2 million, or 2.0% of rental revenues as
compared to 2.2% for all of 1997. General and
administrative expenses increased $0.2 million in the
first three months in 1998 versus the first three
months in 1997 due primarily to higher corporate
headcount and their associated costs. The Company has
continued to invest in the areas of property
management, acquisition and development, and
accounting to provide better service to its residents
and to compete more efficiently in a rapidly evolving
industry. The Company expects that its overhead
expense measured as a percentage of revenues will
remain among the lowest of apartment REITs.
Net Income. Net income totaled $15.3 million in the three
month period of 1998 and $18.2 million for the three month period
of 1997. Net income available for common shareholders totaled
$8.5 million in the three month period of 1998 and $12.3 million
for the three month period of 1997. The decreases in net income
and net income available for common shareholders for 1998 when
compared to 1997 arose principally from the decrease in other
income as a result of discontinuing cash management activities.
Rental operations (rental income less rental expense,
depreciation and taxes and insurance) increased due to an
increase in owned apartments but was offset by higher interest
expense and preferred dividends. Net income per common share in
the three month period of 1998 decreased to $.21 from $.33 in the
three month period of 1997.
Dividends to Preferred Shareholders. Dividends to
preferred shareholders totaled $6.8 million in the
three month period of 1998 and $5.8 million in the
three month period of 1997. Preferred dividends are
summarized in the following table (dollars in
thousands):
Three months
--------------------------
1998 1997
---- ----
Series A Preferred share dividends $ 82 $ 118
Series B Preferred share dividends 2,205 2,205
Series C Preferred share dividends 2,472 2,472
Series D Preferred share dividends 1,036 1,036
Series E Preferred share dividends 975 0
------ -------
Total preferred dividends $6,770 $5,831
The increase in preferred dividends arose from the issuance
of $100.0 million of Series E preferred shares in February, 1998.
Holders of the Company's Series A Preferred Stock have
converted 4.4 million of the 4.6 million Series A shares
originally issued in June 1993 into 5.9 million shares of the
Company's common stock as the common dividend was raised above
the equivalent preferred dividend.
Funds from Operations. Funds from operations
decreased 2.3% to $26.0 million in the three month
period of 1998 as compared to $26.6 million in the
three month period of 1997. Funds from operations
available to common shares decreased 2.6% to $21.2
million in the three month period of 1998 compared to
$21.8 million in the three month period of 1997. These
decreases were principally due to decreases in other
income produced by the active management of cash
raised in securities offerings which was not yet
invested in apartments. There was no other income from
securities for the first quarter of 1998 while $3.5
million was received for the first quarter of 1997.
At March 31, 1998, the Company held no material
marketable equity securities. "Core FFO", those
earnings produced exclusively by non cash management
activities, rose 12.5% to $26.0 million from $23.1
million for the first quarter of 1997.
The following is a reconciliation of net income
to funds from operations (data in thousands, except
per share data):
Three months
---------------------------
1998 1997
------- -------
Net income from operations $15,273 $14,677
Net income - marketable securities - 3,501
------- -------
Total net income 15,273 18,178
Less preferred dividends paid 6,770 5,831
------- -------
Net income available for common shares 8,503 12,347
Add depreciation of real estate owned 12,679 9,425
Add net realized loss 15 -
------- -------
Funds from operations available to common shares 21,196 21,773
Add convertible preferred dividends 4,759 4,795
------- -------
Funds from operations-fully diluted $25,955 $26,567
======= =======
Less income from marketable securities - (3,501)
------- -------
Core funds from operations - fully diluted $25,955 $23,066
======= =======
Weighted average common shares outstanding -
Basic 39,935 37,957
Diluted 40,035 37,983
Fully diluted (assuming conversion of
all convertible preferred stock) 50,263 48,319
The Company believes that funds from operations is an
important measure of its operating performance. Funds from
operations does not represent cash flows from operations as
defined by generally accepted accounting principles, GAAP, and
should not be considered as an alternative to net income or as an
indicator of the Company's operating performance, or as a
measure of the Company's liquidity. Based on published
recommendations of a task force of the National Association of
Real Estate Investment Trusts, the Company defines funds from
operations as net income computed in accordance with GAAP,
excluding non-recurring costs and net realized gains, plus
depreciation of real property.
Liquidity and Capital Resources
Financial Structure. The Company's senior notes
and its preferred stock are rated investment grade by
Standard & Poor's Corporation (BBB+/BBB), Moody's
Investors Services, Inc. (Baa2/Baa3) and Duff & Phelps
Credit Rating Co. (BBB+/BBB). At March 31, 1998,
total debt equaled 36% of total capitalization at
cost, and 28% of total capitalization with common
stock valued at market. At that date, the Company's
financial structure was as follows (dollars in
thousands):
Common Stock
% of at Market % of
Cost Total Value Total
---- ----- ----- -----
Advances under line of credit $ - 0% $ - 0%
Mortgage loans 70,109 4 70,109 4
6.625% senior unsecured notes, 1999 40,000 3 40,000 2
6.625% senior unsecured notes, 2000 40,000 3 40,000 2
6.625% senior unsecured notes, 2001 40,000 3 40,000 2
7.25% senior unsecured notes, 2002 40,000 3 40,000 2
6.875% senior unsecured notes, 2003 40,000 3 40,000 2
6.875% senior unsecured notes, 2004 40,000 3 40,000 2
7.25% senior unsecured notes, 2005 120,000 8 120,000 6
6.69% senior unsecured notes, 2006 50,000 3 50,000 3
6.90% senior unsecured notes, 2007 50,000 3 50,000 3
---------- --- --------- ---
Total debt 530,109 36% 530,109 28%
Series D preferred stock 50,000 3% 50,000 3%
Series E preferred stock 100,000 7% 100,000 5%
Common stock (1) 803,241 54% 1,184,406 64%
---------- ---- ---------- ----
Total equity 953,241 64% 1,334,406 72%
Total capitalization $1,483,350 100% $1,864,515 100%
========== ==== ========== ====
__________
(1) Assumes conversion of all outstanding convertible
preferred stock into common stock.
At March 31, 1998, the Company had no borrowings
outstanding under its lines of credit. Borrowings under
the line bear interest at 0.60% above the thirty day
London Interbank Offered Rates. At March 31, 1998, the
Company's loan agreements and the covenants under its
senior unsecured notes would have allowed it to borrow
$450.9 million on an unsecured basis.
It generally is not the practice of the Company to
finance its acquisitions using mortgage debt, though
at times the Company finds it advantageous to assume
such debt in order to successfully negotiate and close
property acquisitions. At March 31, 1998, the Company
had seven mortgage loans outstanding, which were
assumed in 1997 and 1996 in connection with the
purchase of seven communities. On April 1, 1998 the
Company assumed one additional conventional mortgage
associated with one of the Trammell Crow Residential
properties as well as $97 million of tax-exempt
mortgage debt with respect to nine Trammell Crow
Residential properties.
On April 1, 1998, following the close of the
Trammell Crow Residential acquisition of twelve
properties, total debt equaled 40% of total
capitalization at cost, and 32% of total
capitalization with common stock valued at market. At
that date, the Company's financial structure was as
follows (dollars in thousands):
Common Stock
at Market
Cost % of Total Value % of Total
----------- ---------- ----------- ----------
Secured debt $ 183,464 11% $ 183,464 9%
Unsecured debt 460,000 28% 460,000 23%
----------- ---- ----------- ----
Total debt $ 643,464 40% $ 643,464 32%
Series D&E preferred stock 150,000 9% 150,000 7%
Common stock (1) 833,810 51% 1,211,667 60%
----------- ---- ----------- ----
Total equity 983,810 60% 1,361,667 68%
Total capitalization - 4/1/98 $1,627,273 100% $2,005,131 100%
__________
(1) Assumes conversion of all outstanding convertible preferred
and DownREIT partnership units into common stock.
At April 1, 1998, the Company's loan agreements
and the covenants under its senior unsecured notes
would have allowed it to borrow an additional $419.9
million on an unsecured basis.
Liquidity. Merry Land expects to meet its short-
term liquidity requirements with cash provided by
operating activities and by borrowing under its line
of credit. The Company's primary short-term
liquidity needs are operating expenses, apartment
acquisitions, apartment development and capital
improvements. The Company essentially completed the
liquidation of its holdings of marketable securities
which were acquired as a temporary investment pending
the acquisition or development of additional apartment
communities.
The Company expects to meet its long-term
liquidity requirements, including scheduled debt
maturities and permanent financing for property
acquisitions and development, from a variety of
sources, including operating cash flow, additional
borrowings and the issuance and sale of debt and
equity securities in the public and private markets.
The following table summarizes the Company's capital
requirements resulting from its acquisition and development
commitments as of March 31, 1998. Not included in this table are
additional acquisitions and developments, debt repayments or the
additional sales of debt or equity securities (dollars in
thousands):
Estimated capital requirements:
- -------------------------------
Development communities costs through 1999 85,877
Acquisition of communities under development 70,500
Acquisition of Trammell Crow Residential Portfolio 248,000
-------
Total future commitments 404,377
Estimated capital sources:
- --------------------------
Cash on hand at 3/31/98 79,899
Marketable securities held at 3/31/98 2,131
Issuance of DownREIT OP units - Trammell Crow Residential Portfolio 36,003
Assumption of debt - Trammell Crow Residential Portfolio 113,407
Funds available under line of credit 200,000
-------
Total capital sources 431,440
Excess of capital sources over requirements $ 27,063
=========
Cash Flows. The following table summarizes
cash flows for the three month periods of 1998 and
1997 (dollars in thousands):
SOURCES AND USES OF CASH:
-------------------------
Three Months
-------------------------
1998 1997
---- ----
Operating activities $ 25,237 $ 23,083
Sale of Merry Land common stock 67,952 3,864
Sale of Merry Land preferred stock 96,633 -
Sale of real property 261 -
Other 90 2,262
-------- --------
Total sources of cash 190,173 29,209
Acquisitions of and improvements to properties (3,115) (2,179)
Development of properties (12,622) (16,668)
Dividends paid (24,191) (20,623)
Repayment of bank debt (67,800) -
Other (2,948) (159)
-------- --------
Total uses (110,676) (39,629)
Increase (decrease) in cash, cash equivalents
and marketable securities $79,497 ($10,420)
Cash, cash equivalents and marketable securities
increased by $79.5 million in 1998 mainly due to the
sale of Merry Land common and preferred equity. On
April 1, 1998, Merry Land used the majority of the
proceeds from the security offerings to close the
Trammell Crow Residential acquisition. The
Company's operating cash flow has increased to
$25.2 million in the three month period of 1998 from
$23.1 million in the three month period of 1997. Net
rental income from apartments increased as the size
of the portfolio grew. The primary use of cash has
been apartment development and improvements and
dividends. Expenditures for apartment communities
under development decreased to $12.6 million in the
first three months of 1998 from $16.7 million in the
first three months of 1997 as the level of
construction decreased. The Company expects
development expenditures to increase further for the
remainder of 1998 as construction of additional
apartment communities commences. Dividends paid in
the three month period of 1998 increased from the
same period in 1997 due to an increase in the amount
of preferred stock outstanding, an increase in the
average amount of common stock outstanding, and in
the case of the Company's common stock, an
increase in the quarterly dividend per share to
$0.41 in the first quarter of 1998 from $0.39 per
share.
Capital Expenditures. The Company
capitalizes the direct and indirect cost of
expenditures for the acquisition or
development of apartments and for
replacements and improvements. Replacements
are non-revenue producing capital
expenditures which recur on a regular
basis, but which have estimated useful
lives of more than one year, such as
carpet, vinyl flooring and exterior
repainting. Improvements are expenditures
which significantly increase the revenue
producing capability or which significantly
reduce the cost of operating assets. At
newly acquired communities, the Company
often finds it necessary to upgrade the
physical appearance of the properties and
to complete maintenance and repair work
which had been deferred by prior owners.
These activities often result in heavier
capital expenditures in the early years of
Company ownership, and some of these
expenditures which would be considered
replacements at stabilized communities (as
defined below) are classified as
improvements at newly acquired properties.
Interest, real estate taxes and other
carrying costs incurred during the
development period of apartments under
construction are capitalized and, upon
completion of the project, depreciated over
the lives of the projects.
The following table summarizes the capital
expenditures for the three month periods of
1998 and 1997 (dollars in thousands, except
per unit data):
Three months
------------------------
1998 1997
---- ----
Apartment communities:
Acquisitions $ - $ -
Development projects:
Development costs 11,478 15,450
Capitalized interest 1,144 1,218
Replacements for stabilized communities (1) 1,431 1,006
Improvements (2) 1,198 712
Commercial properties 12 97
Corporate level expenditures 474 364
------- -------
Total capital expenditures $15,737 $18,847
======= =======
Per Unit:
Replacements for stabilized communities (1) $61 $47
Improvements (2) $41 $28
__________
(1) Stabilized communities are those properties which have been owned
for at least one full calendar year. In the three month period of
1998, 23,645 units were stabilized as compared to 21,156 units in
the three month period of 1997.
(2) Improvements include expenditures for all properties owned during
the period, including replacements at newly acquired communities.
The Company expects that the level of
expenditures for replacements and improvements will
increase for the remainder of 1998 due primarily to
the installation of water submeters at a number of
communities and other expenditures scheduled for
completion to enhance or maintain the Company's
apartment communities' position in their markets.
Inflation. Substantially all of the
Company's leases are for terms of one year or
less, which should enable the Company to replace
existing leases with new leases at higher rentals in
times of rising prices. The Company believes that
this would offset the effect of cost increases
stemming from inflation.
Forward Looking Statements. This
filing includes statements that are
"forward looking statements" regarding
expectations with respect to market
conditions, development projects,
acquisitions, occupancy rates, capital
requirements, sources of funds, expense
levels, operating performance and other
matters. These assumptions and statements
are subject to various factors, unknown
risks and uncertainties, including general
economic conditions, local market factors,
delays and cost overruns in construction,
completion and rent up of development
communities, performance of consultants or
other third parties, environmental
concerns, and interest rates, any of which
may cause actual results to differ from the
Company's current expectations.
Merry Land & Investment Company, Inc.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
---------
(3.i) Amended and Restated Articles of Incorporation (incorporated
herein by reference to Exhibit 4(a) to the Company's Shelf
Registration Statement on Form S-3 filed December
15, 1995, file number 33-65067), as amended by Articles of
Amendment to Articles of Incorporation re: Series D Preferred
Stock (incorporated herein by reference to Exhibit 4 to the
Company's current report on Form 8-K filed December 11, 1996),
and as further amended by Articles of Amendment to Articles of
Incorporation re: Series E Preferred Stock (incorporated herein
by reference to Exhibit B of the Company's Form 8-A12B filed on
February 11, 1998).
(3.ii) By-laws (incorporated herein by reference to Exhibit 3(ii) of
Item 14 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
(10) Material Contracts.
(10.1) Contribution Agreement between the Company and certain
Affiliates of Trammell Crow Residential dated February 23, 1998
(incorporated herein by reference to Exhibit 10 to the
Company's Form 8-K filed February 23, 1998).
(27) Financial Data Schedules
b. Reports on Form 8-K. The registrant filed reports on Form 8-K during
the first quarter of 1998 as follows with respect to the following
matters.
Form Items Dated Filed Location Financial Statements
- ---- ----- ----------- -------- --------------------
8-K 5 (Completion of Public Offering of
Series E Preferred Stock) February 13, 1998 N/A N/A
8-K 5,7 (Contract for acquisition of
thirteen apartment communities) February 23, 1998 Florida Audited Statements and
Pro Forma Financial
Statements
8-K 5 (Completion of Public Offering of
Common Stock) March 16, 1998 N/A N/A
Form 10-Q - Merry Land & Investment Company,
Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MERRY LAND & INVESTMENT COMPANY, INC.
/s/ Dorrie E. Green
_____________________________
Dorrie E. Green
Vice President and
Chief Financial Officer
May 14, 1998