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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
COMMISSION FILE NUMBER 1-12672
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BAY APARTMENT COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 77-0404318
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
4340 STEVENS CREEK BLVD., #275, SAN JOSE, CALIFORNIA 95129
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
408-983-1500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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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 (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 ninety (90) days:
Yes [X] No [ ]
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest
practicable date.
CLASS SHARES OUTSTANDING DATE
------------------------------------------------------- ------------------ -----------
Common, $.01 par value................................. 22,271,676 May 8, 1997
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2
BAY APARTMENT COMMUNITIES, INC.
FORM 10-Q
INDEX
PAGE
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PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996............. 1
Consolidated Statements of Operations for the Quarters ended March 31, 1997 and
1996............................................................................ 2
Consolidated Statements of Cash Flows for the Quarters ended March 31, 1997 and
1996............................................................................ 3
Notes to Consolidated Financial Statements......................................... 4-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 12-19
PART II -- OTHER INFORMATION
Item 1: Legal Proceedings............................................................ 20
Item 2: Changes in Securities........................................................ 20
Item 3: Defaults Upon Senior Securities.............................................. 20
Item 4: Submission of Matters to a Vote of Security Holders.......................... 20
Item 5: Other Information............................................................ 20
Item 6: Exhibits and Reports on Form 8-K............................................. 20-21
Signatures........................................................................... 22
3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
(Dollars in thousands, except per share data)
ASSETS
Real estate assets:
Land.............................................................. $ 159,730 $152,277
Buildings and improvements........................................ 531,394 511,583
Furniture, fixtures and equipment................................. 37,298 35,542
-------- --------
728,422 699,402
Less accumulated depreciation..................................... (58,121) (52,554)
-------- --------
Operating real estate assets...................................... 670,301 646,848
Construction in progress.......................................... 60,804 50,945
-------- --------
Net real estate assets......................................... 731,105 697,793
Cash and cash equivalents........................................... 1,128 920
Restricted cash..................................................... 1,100 960
Other assets, net................................................... 15,882 12,236
-------- --------
TOTAL ASSETS........................................................ $ 749,215 $711,909
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable....................................................... $ 264,731 $273,688
Accounts payable and accrued expenses............................... 3,694 5,450
Dividends payable................................................... 9,540 8,939
Other liabilities................................................... 4,449 4,553
-------- --------
TOTAL LIABILITIES................................................... 282,414 292,630
-------- --------
Contingencies (Note 4).............................................. -- --
-------- --------
Minority interest................................................... 6,098 7,002
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000,000 shares authorized;
2,308,800 shares of Series A outstanding at both March 31, 1997
and December 31, 1996; 405,022 shares of Series B outstanding
at both March 31, 1997 and December 31, 1996................... 27 27
Common stock, $.01 par value; 40,000,000 shares authorized;
20,472,785 shares outstanding at March 31, 1997; 19,007,988
shares outstanding at December 31, 1996........................ 205 190
Paid-in capital................................................... 485,904 435,723
Dividends in excess of accumulated earnings....................... (25,433) (23,663)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.......................................... 460,703 412,277
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $ 749,215 $711,909
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
4
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
QUARTER ENDED QUARTER ENDED
MARCH 31, MARCH 31,
1997 1996
------------- -------------
(Dollars in thousands, except per share data)
Revenue:
Rental.......................................................... $25,393 $16,094
Other........................................................... 864 378
------- -------
Total revenue........................................... 26,257 16,472
------- -------
Expenses:
Property operating.............................................. 5,971 3,737
Property taxes.................................................. 1,914 1,222
General and administrative...................................... 1,447 860
Interest and financing.......................................... 3,317 3,472
Depreciation and amortization................................... 5,699 3,970
------- -------
Total expenses.......................................... 18,348 13,262
------- -------
Income before minority interest................................... 7,909 3,210
Minority interest................................................. (138) (15)
------- -------
Net income........................................................ 7,771 3,195
Preferred dividend requirement.................................... (1,146) (951)
------- -------
Earnings available to common shares............................... $ 6,625 $ 2,244
======= =======
Earnings per common share:
Income before minority interest................................. $ 0.34 $ 0.19
Minority interest............................................... (0.01) --
------- -------
Earnings available to common shares............................. $ 0.33 $ 0.19
======= =======
Dividends declared per common share............................... $ 0.41 $ 0.40
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
5
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED QUARTER ENDED
MARCH 31, MARCH 31,
(Dollars in thousands) 1997 1996
------------- -------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income....................................................... $ 7,771 $ 3,195
NONCASH EXPENSES INCLUDED IN NET INCOME:
Depreciation and amortization.................................... 5,699 3,971
Minority interest................................................ 138 15
CASH PROVIDED BY (USED FOR) OPERATING ASSETS AND LIABILITIES:
Restricted cash.................................................. (140) --
Other assets..................................................... (3,778) (1,827)
Accounts payable and accrued expenses............................ (1,756) 76
Other liabilities................................................ (104) 228
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... 7,830 5,658
------- ------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Capital expenditures............................................. (640) (162)
Acquisition of properties........................................ (20,562) (376)
Construction in progress......................................... (17,677) (6,492)
------- ------
NET CASH (USED FOR) INVESTING ACTIVITIES........................... (38,879) (7,030)
------- ------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from stock offerings, net of issuance costs............. 49,271 --
Exercise of stock options........................................ 80 181
Deferred financing costs paid.................................... -- 32
Notes payable principal payments................................. (157) (88)
Borrowings on construction notes payable......................... -- 20
Borrowings on lines of credit.................................... 36,500 8,764
Repayments on lines of credit.................................... (45,300) (2,564)
Partner and minority interest distributions...................... (197) (16)
Dividends paid................................................... (8,940) (5,420)
------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................... 31,257 909
------- ------
Increase (decrease) in cash and cash equivalents................... 208 (463)
Cash and cash equivalents, beginning of period..................... 920 1,677
------- ------
Cash and cash equivalents, end of period........................... $ 1,128 $ 1,214
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized).......................... $ 4,080 $ 3,736
======= ======
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Noncash transfers of construction in progress.................... $ 7,818 $18,096
======= ======
Dividends declared but not paid.................................. $ 9,540 $ 5,574
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
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BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization, Initial Public Offering and Subsequent Offerings
Bay Apartment Communities, Inc. (the "Company") and its wholly-owned
partnerships and subsidiaries were formed in 1978 to develop, lease and manage
upscale apartment communities. Before March 17, 1994, the Company was a part of
the Greenbriar Group which consisted of the Greenbriar Development Company and
certain affiliated entities. The Greenbriar Group included one land parcel held
for future development, 12 apartment communities transferred to the Company in
the reorganization transactions and the partnerships that held 11 of these
apartment communities. The Greenbriar Development Company became Bay Apartment
Communities, Inc. as a result of certain reorganization transactions in
connection with the sale of shares of common stock in an initial public
offering. Also included in this reorganization was the combination of building
and management affiliates into the Company. The Company is a self-administered
and self-managed real estate investment trust ("REIT") which acquires, builds,
owns and manages apartment communities primarily in Northern California. At
March 31, 1997, the Company owned 36 apartment communities, of which 31 are in
Northern California and five are in Southern California, comprising 9,187
apartment homes, and had three communities in Northern California under
development.
On March 17, 1994, the Company completed its initial public offering of
10,889,742 shares of common stock, and received $199,998 in net proceeds (the
"Initial Offering"). The net proceeds were used to pay off mortgage debt,
purchase five apartment communities, purchase outside partners' partnership
interests, and pay debt origination costs (primarily legal fees). In October
1995, the Company issued 2,308,800 shares of Series A preferred stock receiving
net proceeds of approximately $48,269. The proceeds were used to purchase land
for future construction, pay off and close a construction loan and pay down debt
on credit lines which were subsequently drawn on to purchase apartment
communities.
In May 1996, the Company issued 1,248,191 shares of common stock in a
direct placement and 413,223 shares of common stock and 405,022 shares of Series
B preferred stock in an underwritten offering and received $49,481 in net
proceeds. The proceeds were used to purchase three communities, Parc Centre,
Parkside Commons, and Sunset Towers, and to repay borrowings on a secured credit
facility. The Company's secured credit facilities were subsequently closed,
resulting in the write-off of $511, representing unamortized loan and non-use
fees, which was recorded as an extraordinary item. On August 5, 1996, the
Company completed an underwritten public offering of 5,750,000 shares of common
stock and received $134,026 in net proceeds. The net proceeds were used to
purchase two apartment communities, Crowne Ridge (formerly Channing Heights) and
Martinique Gardens, and to repay amounts borrowed under the Company's unsecured
line of credit, including amounts borrowed to purchase four apartment
communities acquired prior to the closing of the offering; Countrybrook,
Larkspur Canyon, The Fountains, and Mill Creek.
In January 1997, the Company sold in an underwritten public offering
1,400,000 shares of common stock at a price of $37.125 per share. The net
proceeds to the Company, after all anticipated issuance costs, were
approximately $49,271. The net proceeds were used to repay borrowings under the
Company's unsecured line of credit, which were used to fund the acquisition and
development of additional apartment communities, including the SummerWalk
(formerly Rancho Penasquitos) acquisition.
The interim unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in conjunction with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements required by generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. These
unaudited financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for
4
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BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the period ended December 31, 1996. The results of operations for the quarter
ended March 31, 1997 are not necessarily indicative of the operating results for
the full year. Management believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments and eliminations, consisting only of normal, recurring adjustments
necessary for a fair presentation of the financial statements for the interim
periods have been included.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, and its wholly-owned partnerships and subsidiaries. The
accompanying consolidated financial statements also include the accounts of Bay
Countrybrook L.P., a Delaware limited partnership (the "Countrybrook
Partnership"). The general partner of the Countrybrook Partnership is a
wholly-owned subsidiary of the Company, Bay GP, Inc., a Maryland corporation.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Bay Countrybrook L.P.
In connection with the formation of the Countrybrook Partnership, 298,577
units of limited partnership interests ("Units") were issued to the existing
partners of the contributor of the Countrybrook community. Under the terms of
the Countrybrook Partnership's Limited Partnership Agreement, holders of Units
have the right to require the Countrybrook Partnership to redeem their Units for
cash, subject to certain conditions. The Company may, however, elect to deliver
an equivalent number of shares of common stock to the holders of Units in
satisfaction of the Countrybrook Partnership's obligation to redeem the Units
for cash. Countrybrook Partnership Units converted into the Company's common
stock aggregated 38,486 and 3,812 as of March 31, 1997 and December 31, 1996,
respectively. Countrybrook Partnership Units redeemed for cash aggregated 762 as
of March 31, 1997. No Countrybrook Partnership Units were redeemed for cash as
of December 31, 1996.
Operating Real Estate Assets
Subsequent to occupancy, significant expenditures, generally exceeding $5,
which improve or extend the life of the asset are capitalized. The operating
real estate assets are stated at cost and consist of land, buildings and
improvements, furniture, fixtures and equipment, and other costs incurred during
development and construction.
Apartment homes available for occupancy are generally leased on a one year
or less basis. Rental income and operating costs incurred during the initial
lease-up period are fully recognized as they accrue.
Capitalization of Costs During Development and Reconstruction
Cost capitalization during development of constructed assets (including
interest and related loan fees, property taxes and other direct and indirect
costs) begins when active development commences and ends when the asset is
delivered and a certificate of occupancy is issued. Cost capitalization during
reconstruction of acquired assets (including interest and related loan fees,
property taxes and other direct and indirect costs) begins when apartment homes
are taken out of service for reconstruction and ends when the apartment home
reconstruction is completed and placed in service.
Depreciation
Depreciation is calculated on operating real estate assets using the
straight-line method over their estimated useful lives, which range from ten to
thirty years. Furniture, fixtures and equipment are generally
5
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BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
depreciated using the straight-line method over their estimated useful lives,
which range from five to seven years.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended, (the "Code"). A corporate REIT is a legal entity which
holds real estate interests and through certain levels of payments of dividends
to shareholders and other criteria, is permitted to reduce or avoid the payment
of federal and state income taxes at the corporate level. As a result, the
Company will not be subject to federal and state income taxation at the
corporate level if certain requirements are met. Accordingly, no provision for
federal and state income taxes has been made.
Deferred Financing Costs
Included in other assets, net are costs associated with obtaining debt
financing and credit enhancements. Such costs are being amortized over the term
of the associated debt or credit enhancement.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments with an
original maturity of three months or less from the date acquired. Interest
income amounted to $104 and $50 for the quarters ended March 31, 1997 and 1996,
respectively.
Restricted Cash
Restricted cash at March 31, 1997 and December 31, 1996 consists of
replacement reserves related to the debt on the Barrington Hills, Crossbrook,
Rivershore, Canyon Creek and Sea Ridge communities.
Earnings per Common Share
Earnings per share with respect to the Company for the quarters ended March
31, 1997 and 1996 is computed based upon the weighted average number of common
shares outstanding during the period plus (in periods where they have a dilutive
effect) the net additional number of shares which would be issuable upon the
exercise of stock options assuming that the Company used the proceeds received
to repurchase outstanding shares at market prices.
Additionally, other potentially dilutive securities, which may not qualify
as common stock equivalents, are considered when calculating earnings per share
on a primary and fully diluted basis. The assumed conversion of such securities
during the quarters ended March 31, 1997 and 1996, results in an antidilutive
effect; therefore, earnings per share presentation on a primary and fully
diluted basis is unnecessary. The weighted average number of shares outstanding
utilized in the calculations are 20,277,531 and 11,660,268 for the quarters
ended March 31, 1997 and 1996, respectively. Earnings per share is net of the
preferred stock dividend requirement for the period, which were $1,146 and $951
for the quarters ended March 31, 1997 and 1996, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
6
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BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Geographic Risk
Primarily all of the Company's apartment communities are located in
Northern California and most are located in the San Francisco Bay Area. This
geographic concentration could expose the Company to a significant loss should
one event affect the entire area such as an earthquake or other environmental
event.
Financial Instruments
The Company enters into interest rate swap agreements (the "Swap
Agreements"), with parties whose credit ratings by Standard and Poor's Ratings
Group are AAA to limit the Company's exposure should interest rates rise above
specified levels. The Swap Agreements are held for purposes other than trading.
The amortization of the cost of the Swap Agreements is included in amortization
expense. The remaining unamortized cost of the Swap Agreements is included in
"Other assets, net" on the balance sheet.
Accounting for Stock-based Compensation
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans.
Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share" and No.
129, "Disclosure of Information about Capital Structure." SFAS No. 128,
established standards for computing and presenting earnings per share ("EPS"),
replacing the presentation of primary EPS with a presentation of basic EPS. SFAS
No. 129 consolidates the existing disclosure requirements regarding an entity's
capital structure. SFAS No. 128 and 129 are effective for financial statements
issued for periods ending after December 15, 1997 and accordingly, management
has not determined the impact on the Company's financial statements for the
quarter ended March 31, 1997.
2. INTEREST CAPITALIZED
Interest costs associated with projects under development or reconstruction
aggregating $1,025 and $314 for the quarters ended March 31, 1997 and 1996,
respectively, have been capitalized.
7
10
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
TAX-EXEMPT VARIABLE RATE UNDER INTEREST RATE SWAPS:
Foxchase (Phase I and II) and Fairway Glen are encumbered by first
deeds of trust which collateralize three housing bond issues maturing
November 1, 2007. The Company has entered into an interest rate swap
agreement with a financial institution under which the interest rate
is fixed until March 2004 at an effective rate of 5.88%. Such Bonds
require monthly payments of interest only. The bonds contain
covenants which require 20% of the apartment homes to be leased or
held available for lease to low or moderate income families.......... $ 35,980 $ 35,980
Waterford and Villa Mariposa are encumbered by first deeds of trust
which collateralize two housing bond issues. The Company has entered
into an interest rate swap agreement with a financial institution
under which the interest rate is fixed until March 2004 at an
effective rate of 5.88%. Such bonds require monthly payments of
interest only and mature on August 1, 2014 and March 1, 2017,
respectively. The bonds contain covenants which require 20% of the
apartment homes to be leased or held available for lease to low or
moderate income families............................................. 51,400 51,400
Barrington Hills is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025, fully
amortizing over the term. The Company has entered into an interest
rate swap agreement under which the interest rate is fixed until June
2010 at an effective rate of 6.48%, including the amortization of
deferred financing costs. The bonds contain covenants which require
20% of the apartment homes to be leased or held available for lease
to low or moderate income families................................... 13,301 13,338
Crossbrook is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025, fully
amortizing over the term. The Company has entered into an interest
rate swap agreement under which the interest rate is fixed until June
2010 at an effective rate of 6.48%, including the amortization of
deferred financing costs. The bonds contain covenants which require
20% of the apartment homes to be leased or held available for lease
to low or moderate income families................................... 8,556 8,579
Rivershore is encumbered by a first deed of trust which
collateralizes housing bond issues maturing November 15, 2022, fully
amortizing over the term. The Company has entered into an interest
rate swap agreement under which the interest rate is fixed until June
2010 at an effective rate of 6.48%, including the amortization of
deferred financing costs. The bonds contain covenants which require
20% of the apartment homes to be leased or held available for lease
to low or moderate income families................................... 10,412 10,445
8
11
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, DECEMBER 31,
1997 1996
-------- --------
Canyon Creek is encumbered by a first deed of trust which
collateralizes housing bond issues maturing June 15, 2025, fully
amortizing over the term. The Company has entered into an interest
rate swap agreement under which the interest rate is fixed until June
2010 at an effective rate of 6.48%, including the amortization of
deferred financing costs. The bonds contain covenants which require
20% of the apartment homes to be leased or held available for lease
to low income families............................................... $ 38,800 $ 38,800
Sea Ridge is encumbered by a first deed of trust which collateralizes
housing bond issues maturing June 15, 2025, fully amortizing over the
term. The Company has entered into an interest rate swap agreement
under which the interest rate is fixed until June 2010 at an
effective rate of 6.48%, including the amortization of deferred
financing costs. The bonds contain covenants which require 20% of the
apartment homes to be leased or held available for lease to low
income families...................................................... 17,600 17,600
-------- --------
Subtotal........................................................ 176,049 176,142
-------- --------
TAX-EXEMPT FIXED RATE:
Countrybrook is encumbered by a first deed of trust which
collateralizes housing bond issues maturing March 1, 2012, partially
amortizing over the term. The interest rate on the bonds is fixed
until April 2002 at an effective interest rate of 7.87%, including
the amortization of deferred financing costs. The bonds contain
covenants which require 20% of the apartment homes to be leased or
held available for lease to low or moderate income families.......... 20,047 20,111
-------- --------
Subtotal........................................................ 20,047 20,111
-------- --------
TAX-EXEMPT VARIABLE RATE:
City Heights is encumbered by a first deed of trust which
collateralizes housing bond issues maturing March 1, 2018. Interest
only payments are required monthly at a variable rate set weekly by
the remarketing agent (6.51% and 6.50% at March 31, 1997 and December
31, 1996, respectively, including the amortization of deferred
financing costs). The bonds contain covenants which require 20% of
the apartment homes to be leased or held available for lease to low
income families. The bonds have been placed with an institutional
investor who has the right to require the Company to repurchase the
bonds by August 15, 1997. The Company has the current right to
repurchase the bonds at its option. The Company plans to exercise
this repurchase option and reissue the bonds in the third quarter of
1997................................................................. 20,800 20,800
9
12
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, DECEMBER 31,
1997 1996
-------- --------
Larkspur Canyon is encumbered by a first deed of trust which
collateralizes housing bond issues maturing March 1, 2023. Interest
only payments are required monthly at a variable rate set weekly by
the remarketing agent (5.15% and 5.90% at March 31, 1997 and December
31, 1996, respectively, including the amortization of deferred
financing costs). The bond payments are secured by a $7,823
irrevocable direct pay letter of credit. The bonds contain covenants
which require 20% of the apartment homes to be leased or held
available for lease to low or moderate income families............... $ 7,635 $ 7,635
-------- --------
Subtotal........................................................ 28,435 28,435
-------- --------
CREDIT LINE:
Unsecured line of credit (the "Unsecured Line of Credit") with an
aggregate borrowing amount of up to $200,000 maturing May 1999. This
line bears interest at various LIBOR rates plus 1.55%................ 40,200 49,000
-------- --------
Subtotal........................................................ 40,200 49,000
-------- --------
Total Notes Payable........................................ $ 264,731 $273,688
======== ========
Principal payments on outstanding notes payable as of March 31, 1997 are
due as follows:
1997.............................................. $ 21,675
1998.............................................. 1,396
1999.............................................. 41,701
2000.............................................. 1,614
2001.............................................. 1,734
Thereafter........................................ 196,611
--------
Total........................................ $264,731
========
4. CONTINGENCIES
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, management believes that the final outcome of such matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
5. SUBSEQUENT EVENTS
In April 1997, the Company engaged in the following transactions:
- Purchased the Banbury Cross apartment community for $28,001. This
community contains 400 apartment homes and is located in Huntington
Beach, California.
- Acquired for $1,452 the 1.43 acre parcel adjacent to the 7.44 acre parcel
on The Alameda in downtown San Jose, California which was purchased in
February 1997. The Company plans to build a community, Paseo Alameda, on
this 8.87 acre site comprising 305 apartment homes and approximately
15,000 square feet of retail space.
10
13
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Purchased the Cardiff Gardens apartment community for $18,877. This
community contains 252 apartment homes and is located in Campbell,
California.
- Sold in a direct placement 1,662,000 shares of common stock at a price of
$36.125 per share. The net proceeds to the Company, after all anticipated
issuance costs, were approximately $58.7 million. The net proceeds were
used to repay borrowings under the Unsecured Line of Credit, which were
used to fund the acquisition and development of additional apartment
communities, including The Village, Banbury Cross and Cardiff Gardens.
- Purchased the Villa Serena apartment community for $17,718. This
community contains 301 apartment homes and is located in Rancho Santa
Margarita, California.
- Acquired the Amador Oaks apartment community for $23,209. This community
contains 204 apartment homes and is located in Dublin, California.
As of May 8, 1997, the Company had elected to issue an additional 122,797
shares of common stock to limited partners of the Countrybrook Partnership who
had requested a redemption of their Countrybrook Partnership Units for cash. All
of these shares had been issued as of May 8, 1997.
11
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q 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 Company's actual results could
differ materially from those set forth in the forward-looking statements as a
result of, among other factors, the risk factors set forth below and in the
Company's filings with the Securities and Exchange Commission, changes in
general economic conditions and changes in the assumptions used in making such
forward-looking statements.
RESULTS OF OPERATIONS
The following discussion sets forth historical results of operations for
the Company for the quarters ended March 31, 1997 and 1996. The following table
outlines the communities acquired or leased-up during 1996 and 1997:
1996 ACQUISITION
COMMUNITIES
- ------------------------------------------
COMMUNITY DATE ACQUIRED
- -------------------------- --------------
Parc Centre(a) May 15, 1996
Parkside Commons May 15, 1996
Sunset Towers(b) May 22, 1996
Countrybrook(c) July 12, 1996
Larkspur Canyon(d) July 19, 1996
The Fountains July 26, 1996
Mill Creek(e) July 26, 1996
Crowne Ridge (formerly
Channing Heights)(f) August 7, 1996
Martinique Gardens(g) August 7, 1996
1996 DEVELOPMENT
COMMUNITY
- ----------------------------------------------
COMMUNITY DATE STABILIZED(H)
- -------------------------- ------------------
Rosewalk(i) February 1997
1997 ACQUISITION
COMMUNITIES
- -------------------------------------------
COMMUNITY DATE ACQUIRED
- -------------------------- ---------------
SummerWalk (formerly
Rancho Penasquitos) January 3, 1997
The Village March 13, 1997
The 1996 and 1997 Acquisition and Development Communities are collectively
termed the "Acquisition Communities."
- ---------------
(a) Parc Centre is undergoing substantial reconstruction including the
replacement of the community's roofs, repairing and repainting exterior
siding, substantially refurbishing its landscaping, redecorating the
interior of all apartment homes, rebuilding its leasing facility and fitness
center and gating the community.
(b) Sunset Towers is about to undergo substantial reconstruction including
moving and rebuilding the community's leasing facility, upgrading all of its
interior hallways and foyers, modifying its exterior siding, upgrading its
landscaping and repairing its roofs and boilers.
(c) Countrybrook is undergoing substantial reconstruction including the
replacement of the community's leasing facility and fitness center,
repairing and repainting its exterior siding, replacing the community's
roofs, adding approximately 115 garages, substantially upgrading its
landscaping and gating the community.
(d) Larkspur Canyon is undergoing substantial reconstruction including repairing
and repainting the community's exterior, replacing the leasing facility and
fitness center and adding garages and a gate system.
(e) Mill Creek is undergoing substantial reconstruction including replacing the
community's roofs, decks and some exterior siding, repairing and repainting
its exterior, renovating its leasing center and fitness center, adding
garages and upgrading its landscaping.
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15
(f) Crowne Ridge, formerly known as Channing Heights, is undergoing substantial
reconstruction including the replacement of the community's roofs, raised
walkways and decks, repairing and repainting exterior siding, upgrading the
apartment interiors, replacing its leasing facility and fitness center and
substantially upgrading its landscaping.
(g) Martinique Gardens is undergoing substantial reconstruction including
replacing its roofs, repairing and repainting its exterior siding, replacing
all apartment home interiors, rebuilding its leasing facility and fitness
center, adding a substantial number of new garages, replacing its roadways,
the swimming pool and all of the landscaping.
(h) Stabilized occupancy is defined as the first calendar month following
completion of construction in which the community has a physical occupancy
of at least 95%.
(i) The Rosewalk community consists of 10.8 acres of land on which 300 apartment
homes have been built. Construction of the community was completed in
January 1997, occupancy commenced in August 1996 and stabilization occurred
in February 1997.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the cost of
improvements to bring an acquired community up to standards established for the
market position intended for that community will prove inaccurate, as well as
general investment risks associated with any new real estate investment.
Although the Company undertakes an evaluation of the physical condition of each
new community before it is acquired, certain defects or necessary repairs may
not be detected until after the community is acquired, which could significantly
increase the Company's total acquisition costs.
COMPARISON OF THE QUARTER ENDED MARCH 31, 1997 TO THE QUARTER ENDED MARCH 31,
1996.
The Company's results of operations are summarized as follows for the
quarters ended March 31, 1997 and 1996 (Dollars in thousands):
FOR THE QUARTER
ENDED MARCH 31,
-------------------
1997 1996 $-CHANGE %-CHANGE
------- ------- -------- --------
Revenue:
Rental........................................... $25,393 $16,094 $9,299 57.8%
Other............................................ 864 378 486 128.6%
------- ------- ------ -----
Total revenue............................ 26,257 16,472 9,785 59.4%
------- ------- ------ -----
Expenses:
Property operating............................... 5,971 3,737 2,234 59.8%
Property taxes................................... 1,914 1,222 692 56.6%
General and administrative....................... 1,447 860 587 68.3%
Interest and financing........................... 3,317 3,472 (155) (4.5)%
Depreciation and amortization.................... 5,699 3,971 1,728 43.5%
------- ------- ------ -----
Total expenses........................... 18,348 13,262 5,086 38.4%
------- ------- ------ -----
Income before minority interest.................... 7,909 3,210 4,699 146.4%
Minority interest.................................. (138) (15) (123) 820.0%
------- ------- ------ -----
Net income......................................... $ 7,771 $ 3,195 $4,576 143.2%
======= ======= ====== =====
Revenue from rental property increased primarily as a result of the
addition of the Acquisition Communities. The 1996 and 1997 Acquisition
Communities contributed $5,818 and $431, respectively, to the increase. The 1996
Development Community contributed $1,099 to the increase. The remainder of the
portfolio increased rental revenue by $1,951, $1,599 of which was attributable
to the Same Store communities (defined below).
13
16
Other income increased during the quarter ended March 31, 1997 as compared
to the quarter ended March 31, 1996 primarily as a result of the additional
miscellaneous income from the Acquisition Communities.
Property operating expenses increased primarily as a result of the addition
of the Acquisition Communities. Of the $2,234 increase, $1,544 was attributable
to the 1996 Acquisition Communities, $148 was attributable to the 1996
Development Community and $142 was attributable to the 1997 Acquisition
Communities. The remainder of the portfolio increased property operating
expenses by $400, $369 of which was attributable to the Same Store communities
(defined below). In addition, the Acquisition Communities contributed $648 of
the $692 increase in property taxes.
General and administrative costs increased for the quarter ended March 31,
1997 as compared with the quarter ended March 31, 1996, primarily due to the
growth in employee-related costs needed to manage the Acquisition Communities.
The 1997 and 1996 amounts are net of $1,252 and $446, respectively, of allocated
indirect project costs capitalized to construction and reconstruction projects,
representing approximately 46% and 34% of total general and administrative
expense for the quarters ended March 31, 1997 and 1996, respectively.
Interest and financing expense decreased for the quarter ended March 31,
1997 as compared to the quarter ended March 31, 1996 due to lower cost of funds
and higher capitalization of interest due to increased development, construction
and reconstruction activity.
Depreciation and amortization expense increased due to the addition of the
Acquisition Communities.
THE COMPANY'S RESULTS OF PROPERTY OPERATIONS (EARNINGS BEFORE INTEREST,
TAXES, DEPRECIATION AND AMORTIZATION -- "EBITDA") FOR THE "SAME STORE"
COMMUNITIES (1) IS SUMMARIZED BELOW FOR THE QUARTERS ENDED MARCH 31, 1997 AND
1996:
FOR THE QUARTER
ENDED MARCH 31,
-------------------
1997 1996 $-CHANGE %-CHANGE
------- ------- -------- --------
(Dollars in thousands)
Revenue............................................ $17,921 $16,145 $1,776(2) 11.0%
Expenses........................................... 5,182 4,795 387(3) 8.1%
------- ------- ------ ----
EBITDA............................................. $12,739 $11,350 $1,389 12.2%
======= ======= ====== ====
- ---------------
(1) The Same Store communities consist of 24 apartment communities comprising a
total of 6,230 apartment homes. These communities include all those which
were owned for all of 1996 and during the quarter ended March 31, 1997 and
to which the Company made no major renovations after January 1, 1996.
(2) Same Store revenues increased due to rental increases of $1,521, vacancy
reductions of $83, lease termination fee increases of $71 and a net increase
in other income of $101.
(3) Same Store expenses increased primarily as a result of a $123 increase in
management and administrative costs, a one-time property tax refund of $110
received in the quarter ended March 31, 1996, a $112 increase in repairs and
maintenance and the purchase of an additional, portfolio-wide earthquake
insurance commencing in July 1996 resulting in $61 of expense in the quarter
ended March 31, 1997, offset in part by a $50 reduction in marketing and
advertising costs. The remaining $31 increase in Same Store expenses is due
to increases in other miscellaneous expenses.
CURRENT DEVELOPMENT COMMUNITIES
The Company has acquired three land sites on which it is building, or plans
to commence building in the near future, the following Current Development
Communities with a total of 1,325 apartment homes.
- TOSCANA, SUNNYVALE, CA. The Company purchased this partially built and
abandoned 17.8 acre site in May 1996 on which the Company is building 709
apartment homes. The original total budgeted construction cost of this
community is $95.7 million. The site, located approximately at the
intersection
14
17
of Highway 101 and Lawrence Expressway, is at the center of Silicon
Valley. This Current Development Community will contain a large leasing
pavilion, business center, fitness center, two swimming pools, including
one 75 foot lap pool, a small commercial area, secure underground parking
and a perimeter gate system. Stabilized operations are expected in the
fourth quarter of 1998, and the first apartment homes are expected to be
occupied in the third quarter of 1997.
- CENTREMARK, SAN JOSE, CA. The Company purchased 2.5 acres of this 7.9
acre site in May 1996. The remainder of this site was purchased in
December 1996 after obtaining substantially all of the necessary public
approvals for development of the community. The site is located at the
intersection of Stevens Creek Blvd. and Interstate 280, in the northwest
corner of San Jose, almost immediately adjacent to the City of Cupertino.
The planned 311 apartment home community with a total budgeted
construction cost of $44.1 million will include a large leasing facility,
business center, fitness center, 65 foot lap pool, secure underground
parking and perimeter gate system. Stabilized operations are expected in
the fourth quarter of 1998, and the first apartment homes are expected to
be occupied in the first quarter of 1998.
- PASEO ALAMEDA, SAN JOSE, CA. The Company purchased 7.44 acres of this
8.87 acre site in February 1997 after it obtained substantially all of
the necessary public approvals for development of the community. The
remainder of this site was purchased in April 1997. The site is located
on a major street, approximately one mile from downtown San Jose. The
Company intends to build a 305 apartment home community at a total
budgeted construction cost of $44.4 million with a large leasing
pavilion, business center, fitness center, 75 foot lap pool, a small
commercial area and secure underground parking. Stabilized operations are
expected in the second quarter of 1999, and the first apartment homes are
expected to be occupied in the second quarter of 1998.
For new development communities, the Company's goal, on average, is to
achieve projected EBITDA as a percentage of total budgeted construction cost of
approximately 10%. Projected EBITDA as a percentage of total budgeted
construction cost represents EBITDA projected to be received in the first
calendar year after a community reaches stabilized occupancy (i.e., the first
month when the community has a weighted average physical occupancy of at least
95%), based on current market rents, less projected stabilized property
operating and maintenance expenses, before interest, income taxes, depreciation
and amortization. Total budgeted construction cost is based on current
construction costs, including interest capitalized during the construction
period. Market rents and construction costs reflect those prevailing in the
community's market at the time the Company's development budgets are prepared
taking into consideration certain changes to those market conditions anticipated
by the Company at the time. Although the Company attempts to anticipate changes
in market conditions, the Company cannot predict with certainty what those
changes will be. For example, upon the acquisition of the Toscana land site in
May 1996, the Company estimated that the total budgeted construction cost would
be $95.7 million. Since that time, the Company has only obtained bids for the
construction of the first two phases of this four-phase project. Construction
costs are increasing and management believes that when the last two phases are
bid late in 1997 that the total construction cost for this development will be
higher than the original budget. Nonetheless, because of increases in prevailing
market rents management believes that it will still be able to achieve projected
EBITDA as a percentage of total budgeted construction cost of at least 10%.
Management believes that it may experience similar increases in construction
costs and market rents with respect to the CentreMark and Paseo Alameda
development communities.
There are risks associated with the Company's development and construction
activities which include: development and acquisition opportunities explored by
the Company may be abandoned; construction costs of a community may exceed
original estimates due to increased materials, labor or other expenses, which
could make completion of the community uneconomical; occupancy rates and rents
at a newly completed community are dependent on a number of factors, including
market and general economic conditions, and may not be sufficient to make the
community profitable; financing may not be available on favorable terms for the
development of a community; and construction and lease-up may not be completed
on schedule, resulting in increased debt service expense and construction costs.
Development activities are also subject to risks
15
18
relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy, and other required governmental permits
and authorizations. The occurrence of any of the events described above could
adversely affect the Company's ability to achieve its projected yields, or
achieve stabilized occupancy at the time originally estimated, on communities
under development or reconstruction and could prevent the Company from making
expected distributions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has considered its short-term liquidity needs and anticipates
that these needs will be fully funded from cash flows provided by operating
activities. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements and the
distributions required to maintain the Company's REIT qualification under the
Code.
The Company expects to fund certain committed construction, acquisition and
reconstruction projects with a combination of working capital and borrowings
under the Unsecured Line of Credit. The Company intends to use available working
capital first and available proceeds under its Unsecured Line of Credit second.
As of March 31, 1997, the proceeds from the Unsecured Line of Credit were
used primarily for the acquisition, development and construction of the three
Current Development Communities and reconstruction of the 1996 and 1997
Acquisition Communities.
The Company's outstanding debt as of March 31, 1997 is summarized as
follows:
INTEREST RATE
BALANCE AVAILABLE MATURES RATE PROTECTION
-------- -------- ---------------- ------------ ----------------
(Dollars in thousands)
Tax-exempt variable rate
under interest rate
swap................... $ 88,669 $ -- November 2022 - 6.48%(a) Interest rate is
June 2025 fixed until June
2010.
Tax-exempt variable rate
under interest rate
swap................... 87,380 -- November 2007 - 5.88%(d) Interest rate is
March 2017 fixed until
March 2004.
Tax-exempt fixed rate.... 20,047 -- March 2012 7.87%(c) Interest rate is
fixed until
April 2002.
Tax-exempt variable
rate................... 20,800 -- March 2018 6.51%(d)
Tax-exempt variable
rate................... 7,635 -- March 2023 5.15%(e)
-------- --------
Subtotal............ 224,531 --
$200,000 Unsecured Line
of Credit(f)........... 40,200 159,800 May 1999 LIBOR +
1.55%
-------- --------
Total.......... $264,731 $159,800
======== ========
- ---------------
(a) The 6.48% rate represents an all-in financing cost, including amortization
of deferred financing costs.
(b) The 5.88% rate excludes the amortization of financing costs paid by the
sponsor prior to the Initial Offering; if such costs were included, the
all-inclusive effective rate would be 6.30%.
(c) The 7.87% rate represents an all-in financing cost, including amortization
of deferred financing costs.
(d) The 6.51% rate represents an all-in financing cost, including amortization
of all deferred financing costs. The Company has the right to repurchase
these bonds and currently plans to repurchase and reissue them on a long
term fixed rate basis by August 15, 1997.
(e) The 5.15% rate represents an all-in financing cost, including amortization
of all deferred financing costs. The debt floats in a seven-day put bond
mode with a current interest rate of 3.25%.
16
19
(f) Amounts drawn on the Unsecured Line of Credit were used primarily for
development, construction and reconstruction purposes.
In January 1997, the Company sold in an underwritten public offering
1,400,000 shares of common stock at a price of $37.125 per share. The net
proceeds to the Company, after all anticipated issuance costs, were
approximately $49.3 million. The net proceeds were used to repay borrowings
under the Unsecured Line of Credit, which were used to fund the acquisition and
development of additional apartment communities, including the SummerWalk
(formerly Rancho Penasquitos) acquisition.
The Company anticipates that its cash flow and cash available from its $200
million Unsecured Line of Credit will be adequate to meet its liquidity
requirements for the foreseeable future. The Company anticipates that dividends
will be paid from Funds Available for Distribution (defined below).
Net cash provided by operations for the quarter ended March 31, 1997
increased to $7,830,000 from $5,658,000 for the quarter ended March 31, 1996,
primarily due to higher net income before noncash charges for depreciation and
amortization from the addition of the Acquisition Communities. This increase is
offset in part by increases in other assets primarily due to an increase in
prepaid insurance and an increase in deposits for potential acquisitions. The
increase in cash provided by operations is also offset in part by decreases in
accounts payable and accrued expenses partially due to accrued property taxes
paid.
Net cash used for investing activities was $38,879,000 and $7,030,000 for
the quarters ended March 31, 1997 and 1996, respectively. This increase reflects
the expenditures for the purchases of the 1997 Acquisition Communities, the
amounts used to complete construction of the Rosewalk community, the
acquisition, development and construction of the Current Development Communities
and the costs incurred on the refurbishment and reconstruction projects.
Net cash provided by financing activities was $31,257,000 and $909,000 for
the quarters ended March 31, 1997 and 1996, respectively. This increase is
primarily due to the net proceeds received by the Company from the January 1997
common stock offering, offset in part by the net repayment on the Unsecured Line
of Credit and increased dividends paid.
INFLATION
Substantially all of the leases at the Company's apartment communities are
for a term of one year or less, which may enable the Company to counter the
adverse effects of inflation by increasing rents upon renewal of existing leases
or commencement of new leases. However, these short-term leases permit a
resident to leave at the end of the lease term at minimal or no cost to the
resident.
FUNDS FROM OPERATIONS
AND FUNDS AVAILABLE FOR DISTRIBUTION
Many industry analysts consider Funds from Operations an appropriate
measure of performance of an equity REIT. Funds from Operations ("FFO") as
defined by the National Association of Real Estate Investment Trusts ("NAREIT")
means net income (or loss) (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. This definition was revised by
NAREIT effective for periods after 1995 to exclude the add back of non-real
estate depreciation and the amortization of recurring deferred financing costs.
The Company believes that in order to facilitate a clear understanding of the
historical operating results, FFO should be examined in conjunction with net
income (loss) as presented in the financial statements. FFO should not be
considered as a substitute for net income (loss) as a measure of results of
operations or for cash flow from operations as a measure of liquidity.
For the quarter ended March 31, 1997, FFO increased to $13,321,000 from
$6,982,000 for the quarter ended March 31, 1996. This increase is primarily due
to higher net income and real estate depreciation add back due to the addition
of the Acquisition Communities.
17
20
Funds from Operations and Funds Available for Distribution for the quarters
ended March 31, 1997, December 31, 1996, September 30, 1996, June 30, 1996 and
March 31, 1996 are summarized as follows:
CALCULATION OF FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
QUARTER ENDED
--------------------------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1997 1996 1996 1996 1996
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per
unit data)
Net income........................... $ 7,771 $ 7,014 $ 5,845 $ 3,572 $ 3,195
Depreciation -- real estate assets... 5,462 5,201 4,899 4,008 3,692
Extraordinary item................... -- -- -- 511 --
Non-recurring adjustments to net
income:
Amortization of non-recurring
costs, primarily legal, from the
issuance of tax-exempt
bonds(1)........................ 88 87 87 88 95
---------- ---------- ---------- ---------- ----------
FFO(2)............................... 13,321 12,302 10,831 8,179 6,982
Recurring adjustments to net income:
Amortization of origination fees on
credit facilities(3)............ -- -- -- 41 104
Amortization of reincorporation
costs........................... 7 7 7 7 7
Amortization of credit enhancement
costs(4)........................ 38 38 38 38 38
Depreciation -- non real estate
assets.......................... 105 79 49 38 35
Capital improvements(5)............ (640) (448) (457) (252) (162)
Loan principal payments............ (157) (175) (131) (88) (88)
---------- ---------- ---------- ---------- ----------
Funds Available for Distribution
("FAD")............................ $ 12,674 $ 11,803 $ 10,337 $ 7,963 $ 6,916
---------- ---------- ---------- ---------- ----------
Weighted average shares
outstanding(6)..................... 22,989,978 22,000,544 19,686,087 15,205,997 13,969,068
========== ========== ========== ========== ==========
- ---------------
(1) Represents the amortization of pre-1986 bond issuance costs carried forward
to the Company, under the pooling of interest method of accounting, and
costs associated with the reissuance of tax-exempt bonds incurred prior to
the Initial Offering in order to preserve the tax-exempt status of the bonds
at the Initial Offering.
(2) FFO before recurring adjustments to net income represents the definition of
FFO adopted by the NAREIT Board of Governors for periods after 1995.
(3) Represents origination fees and costs incurred at the initial setup of
secured credit facilities that were closed in May 1996. Such costs were
amortized over the life of the respective credit facilities and, therefore,
the unamortized loan fees were recorded as an extraordinary item in May
1996.
(4) Represents origination fees and costs incurred at the initial setup of the
credit enhancements used for the issuance of tax-exempt bonds. Such costs
are amortized over the life of the respective credit enhancements.
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21
(5) Capital improvements represent amounts expended primarily at communities
acquired or developed prior to 1996. A breakdown of the expenditures for the
quarter ended March 31, 1997 is as follows:
TOTAL PER UNIT
QUARTER ENDED QUARTER ENDED
MARCH 31, 1997 MARCH 31, 1997
-------------- --------------
Non-revenue generating:
Leasing pavilion rehabilitation................. $110 $ 12
Exterior painting............................... 63 7
Security gate system............................ 44 5
Landscaping..................................... 24 3
Other capital expenditures...................... 39 4
---- ---
Subtotal -- capital expenditures............. 280 31
---- ---
Revenue generating:
TV cable system................................. 219 24
Fixtures........................................ 77 8
Appliances...................................... 64 7
---- ---
Subtotal..................................... 360 39
---- ---
Total capital improvements........................ $640 $ 70
==== ===
The Company, as a matter of policy, expenses any apartment-related
expenditure of less than $5. These normally include any expenditure related
to the interior of an apartment. The Company typically capitalizes
non-revenue generating expenditures such as those for new security gate
systems, leasing pavilion reconstruction and redecorating, roofing repair
and replacement, exterior siding repair and repainting and parking area
resurfacing. The Company also capitalizes revenue generating expenditures
and cashflow enhancing improvements such as those expended for construction
of new garages or installation of water conservation devices which almost
immediately and permanently either earn additional revenue or reduce
expenses. Appliances represent primarily the acquisition of washer/dryer
units for apartments which generate additional rental and other income.
Capitalized expenditures as described here exclude major reconstruction
costs incurred in conjunction with the acquisition and repositioning of
newly purchased apartment communities. Such costs are added to the purchase
price of those communities. The per unit calculation for the quarter is
based on the ending number of units in the portfolio at March 31, 1997.
(6) The weighted average shares outstanding shown differs from the weighted
average shares outstanding for the purpose of calculating earnings per share
because the conversion of preferred stock is antidilutive for calculating
earnings per share, but dilutive for the purposes of calculating FFO per
share.
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22
PART II -- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
(C) RECENT SALES OF UNREGISTERED SECURITIES
On July 12, 1996, the Company entered into an Agreement of Limited
Partnership of Bay Countrybrook L.P. (the "Partnership"), the general partner of
which is Bay GP, Inc., a wholly-owned subsidiary of the Company, for the purpose
of acquiring the Countrybrook community. In connection with the formation of the
Partnership, 298,577 units of limited partnership interests ("LP Units") were
issued to the existing partners of the contributor of the Countrybrook community
pursuant to an exemption from registration provided in Rule 506 of Regulation D
under the Securities Act of 1933, as amended (the "Securities Act"). Under the
terms of the limited partnership agreement, holders of LP Units have the right
to require the partnership to redeem their LP Units for cash, subject to certain
conditions. The Company may, however, elect to deliver an equivalent number of
shares of common stock to the holders of LP Units in satisfaction of the
Partnership's obligation to redeem the LP Units for cash. As of March 31, 1997,
38,486 LP Units have been redeemed by the Company in exchange for shares of
common stock pursuant to the exemption from registration provided in Rule 506 of
Regulation D under the Securities Act
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
Index to Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
3(i).1 Amended and Restated Articles of Incorporation of the Company. (Incorporated by
reference to Exhibit 3(i).1 to Form 8-B of Bay Apartment Communities, Inc. dated
June 8, 1995).
3(i).2 Forms of Articles Supplementary of the Company. (Incorporated by reference to
Exhibit 3(i).1 to Form 8-K of Bay Apartment Communities, Inc. dated September
25, 1995).
3(i).3 Articles Supplementary relating to the Series B Preferred Stock of the Company.
(Incorporated by reference to Exhibit 3(i).1 to Form 8-K of Bay Apartment
Communities, Inc. dated May 6, 1996.)
3(ii).1 Amended and Restated to By-laws of the Company. (Incorporated by reference to
Exhibit 10.1 to Form 8-B of Bay Apartment Communities, Inc. dated June 8, 1995).
10.1 Underwriting Agreement dated January 22, 1997, between the Company and
PaineWebber Incorporated regarding the sale of 1,400,000 shares of common stock.
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23
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
10.2 Price Determination Agreement dated January 22, 1997, between the Company and
PaineWebber Incorporated regarding the pricing of the sale of 1,400,000 shares
of common stock.
27.1 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
1. Form 8-K of the Company, dated January 21, 1997, regarding an employment
agreement and reports prepared for the Company by Ann Roulac and Company and the
Rosen Consulting Group. These reports provide the Company with information
including, but not limited to, general market overviews, and demographic trends.
21
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BAY APARTMENT COMMUNITIES, INC.
Date: May 14, 1997 /s/ GILBERT M. MEYER
-----------------------------------------------
Gilbert M. Meyer
President and Chairman of the Board
Date: May 14, 1997 /s/ JEFFREY B. VAN HORN
-----------------------------------------------
Jeffrey B. Van Horn
Chief Financial Officer
(Authorized Officer of the Registrant
and Principal Financial Officer)
22
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
10.1 Underwriting Agreement dated January 22, 1997, between the Company and
PaineWebber Incorporated regarding the sale of 1,400,000 shares of common stock.
10.2 Price Determination Agreement dated January 22, 1997, between the Company and
PaineWebber Incorporated regarding the pricing of the sale of 1,400,000 shares
of common stock.
27.1 Financial Data Schedule.