1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 1-12672
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)
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 [ ]
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 22,302,373 August 7, 1997
================================================================================
2
BAY APARTMENT COMMUNITIES, INC.
FORM 10-Q
INDEX
PAGE
-----
PART I -- FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996....... 1
Consolidated Statements of Operations for the Quarters ended June 30, 1997
and 1996.................................................................. 2
Consolidated Statements of Operations for the Six Months ended June 30, 1997
and 1996.................................................................. 3
Consolidated Statements of Cash Flows for the Six Months ended June 30, 1997
and 1996.................................................................. 4
Notes to Consolidated Financial Statements.................................. 5-12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 13-22
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings........................................................... 23
ITEM 2. Changes in Securities....................................................... 23
ITEM 3. Defaults Upon Senior Securities............................................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders......................... 23
ITEM 5. Other Information........................................................... 23
ITEM 6. Exhibits and Reports on Form 8-K............................................ 23-24
Signatures............................................................................ 25
i
3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
Real estate assets:
Land................................................................ $ 184,594 $152,277
Buildings and improvements.......................................... 612,193 511,583
Furniture, fixtures and equipment................................... 43,360 35,542
-------- --------
840,147 699,402
Less accumulated depreciation....................................... (64,415) (52,554)
-------- --------
Operating real estate assets........................................ 775,732 646,848
Construction in progress............................................ 86,917 50,945
-------- --------
Net real estate assets........................................... 862,649 697,793
Cash and cash equivalents............................................. 1,846 920
Restricted cash....................................................... 1,267 960
Other assets, net..................................................... 14,946 12,236
-------- --------
Total assets................................................ $ 880,708 $711,909
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable......................................................... $ 277,988 $273,688
Accounts payable and accrued expenses................................. 5,278 5,450
Dividends payable..................................................... 10,428 8,939
Other liabilities..................................................... 7,657 4,553
-------- --------
Total liabilities................................................ 301,351 292,630
-------- --------
Contingencies (Note 4)................................................ -- --
-------- --------
Minority interest..................................................... 3,215 7,002
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000,000 shares authorized;
2,308,800 shares of Series A outstanding at both June 30, 1997
and December 31, 1996; 405,022 shares of Series B outstanding at
both June 30, 1997 and December 31, 1996; 2,300,000 shares of
Series C outstanding at June 30, 1997 and no shares of Series C
outstanding at December 31, 1996................................. 50 27
Common stock, $.01 par value; 40,000,000 shares authorized;
22,275,002 shares outstanding at June 30, 1997; 19,007,988 shares
outstanding at December 31, 1996................................. 223 190
Paid-in capital..................................................... 603,249 435,723
Dividends in excess of accumulated earnings......................... (27,380) (23,663)
-------- --------
Total shareholders' equity....................................... 576,142 412,277
-------- --------
Total liabilities and shareholders' equity.................. $ 880,708 $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)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED QUARTER ENDED
JUNE 30, JUNE 30,
1997 1996
------------- -------------
Revenue:
Rental............................................................ $28,817 $17,906
Other............................................................. 963 487
------- -------
Total revenue............................................. 29,780 18,393
------- -------
Expenses:
Property operating................................................ 6,772 4,108
Property taxes.................................................... 2,250 1,465
General and administrative........................................ 1,517 814
Abandoned project costs........................................... 450 50
Interest and financing............................................ 3,800 3,635
Depreciation and amortization..................................... 6,426 4,226
------- -------
Total expenses............................................ 21,215 14,298
------- -------
Income before minority interest and extraordinary item.............. 8,565 4,095
Minority interest................................................... (86) (12)
------- -------
Income before extraordinary item.................................... 8,479 4,083
Extraordinary item.................................................. -- (511)
------- -------
Net income.......................................................... 8,479 3,572
Preferred dividend requirement:
Series A and B.................................................... (1,146) (1,048)
Series C.......................................................... (149) --
------- -------
Earnings available to common shares................................. $ 7,184 $ 2,524
======= =======
Earnings per common share:
Income before minority interest and extraordinary item............ $ 0.33 $ 0.24
Minority interest................................................. -- --
------- -------
Income before extraordinary item.................................. 0.33 0.24
Extraordinary item................................................ -- (0.04)
------- -------
Earnings available to common shares............................... $ 0.33 $ 0.20
======= =======
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 OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
---------------- ----------------
Revenue:
Rental....................................................... $ 54,211 $ 34,000
Other........................................................ 1,827 865
------- -------
Total revenue........................................ 56,038 34,865
------- -------
Expenses:
Property operating........................................... 12,744 7,845
Property taxes............................................... 4,163 2,687
General and administrative................................... 2,884 1,674
Abandoned project costs...................................... 530 50
Interest and financing....................................... 7,117 7,107
Depreciation and amortization................................ 12,125 8,197
------- -------
Total expenses....................................... 39,563 27,560
------- -------
Income before minority interest and extraordinary item......... 16,475 7,305
Minority interest.............................................. (224) (27)
------- -------
Income before extraordinary item............................... 16,251 7,278
Extraordinary item............................................. -- (511)
------- -------
Net income..................................................... 16,251 6,767
Preferred dividend requirement:
Series A and B............................................... (2,292) (1,999)
Series C..................................................... (149) --
------- -------
Earnings available to common shares............................ $ 13,810 $ 4,768
======= =======
Earnings per common share:
Income before minority interest and extraordinary item....... $ 0.66 $ 0.43
Minority interest............................................ (0.01) --
------- -------
Income before extraordinary item............................. 0.65 0.43
Extraordinary item........................................... -- (0.04)
------- -------
Earnings available to common shares.......................... $ 0.65 $ 0.39
======= =======
Dividends declared per common share............................ $ 0.82 $ 0.80
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
6
BAY APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
---------------- ----------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income................................................... $ 16,251 $ 6,767
NONCASH EXPENSES INCLUDED IN NET INCOME:
Depreciation and amortization................................ 12,125 8,197
Minority interest............................................ 224 27
Extraordinary item........................................... -- 511
CASH PROVIDED BY (USED FOR) OPERATING ASSETS AND LIABILITIES:
Restricted cash.............................................. (307) --
Other assets................................................. (2,974) (99)
Accounts payable and accrued expenses........................ (172) (487)
Other liabilities............................................ 3,104 1,577
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 28,251 16,493
--------- ---------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Capital improvements......................................... (1,939) (414)
Acquisition of properties.................................... (109,042) (53,628)
Construction in progress..................................... (52,866) (50,151)
--------- ---------
NET CASH (USED FOR) INVESTING ACTIVITIES....................... (163,847) (104,193)
--------- ---------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from stock offerings, net of issuance costs......... 163,349 49,481
Exercise of stock options.................................... 572 330
Deferred financing costs paid................................ -- 32
Notes payable principal payments............................. (370) (176)
Borrowings on construction notes payable..................... -- 20
Borrowings on lines of credit................................ 151,500 98,864
Repayments on lines of credit................................ (159,700) (51,014)
Partner and minority interest distributions, net of
contributions............................................. (350) (34)
Dividends paid............................................... (18,479) (10,991)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................... 136,522 86,512
--------- ---------
Increase (decrease) in cash and cash equivalents............... 926 (1,188)
Cash and cash equivalents, beginning of period................. 920 1,677
--------- ---------
Cash and cash equivalents, end of period....................... $ 1,846 $ 489
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)...................... $ 6,678 $ 7,772
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Noncash transfers of construction in progress................ $ 16,894 $ 28,716
========= =========
Assumption of note payable by the Company.................... $ 12,870 $ --
========= =========
Dividends declared but not paid.............................. $ 10,428 $ 6,339
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
7
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 June
30, 1997, the Company owned 41 apartment communities, of which 33 are in
Northern California and eight are in Southern California, comprising 10,544
apartment homes, and had four 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
Lafayette Place (formerly 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 $49,200. 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.
In April 1997, the Company 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 $58,600. 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 TimberWood (formerly The Village), SunScape
(formerly Banbury Cross) and Cardiff Gardens.
5
8
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In June 1997, the Company sold in an underwritten public offering 2,300,000
shares of 8.5 percent, five year non-call Series C Cumulative Redeemable
Preferred Stock at a price of $25 per share. The net proceeds, after all
anticipated issuance costs, were approximately $55,500. The net proceeds were
used to reduce borrowings under the Company's unsecured line of credit, which
were used to fund the acquisition and development of additional apartment
communities, including the Villa Serena, Amador Oaks and Genesee Gardens
communities and one land site in San Francisco.
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 the period ended December 31, 1996. The results of operations for the
quarter ended June 30, 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. The accompanying consolidated
financial statements also include the accounts of Bay Rincon, LP, a California
limited partnership ("Bay Rincon"). The Company is the sole general partner of
Bay Rincon. 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 161,283 and 3,812 as of June 30, 1997 and December 31, 1996,
respectively. Countrybrook Partnership Units redeemed for cash aggregated 762 as
of June 30, 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.
6
9
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 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 $78 and $31 for the quarters ended June 30, 1997 and 1996,
respectively.
Restricted Cash
Restricted cash at June 30, 1997 and December 31, 1996 consists of
replacement reserves related to the debt on the Barrington Hills, Crossbrook,
Rivershore, Canyon Creek, Sea Ridge and Countrybrook communities.
Earnings per Common Share
Earnings per share with respect to the Company for the quarters ended June
30, 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
7
10
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 June 30, 1997 and June 30, 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 22,091,943 and 12,645,967 for the
quarters ended June 30, 1997 and June 30, 1996, respectively. Earnings per share
is net of the preferred stock dividend requirements for the relevant period,
which were $1,295 and $1,048 for the quarters ended June 30, 1997 and June 30,
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.
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, in order 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 and is amortized over the
remaining life of the agreements.
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 No. 129 are effective for financial
statements issued for periods ending after December 15, 1997. The impact of the
adoption of SFAS No. 128 and No. 129 on the Company's earnings per share and
financial statements is not
8
11
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
expected to have a material impact on the Company's financial statements for the
quarter ended June 30, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and No. 131 "Disclosure of Segment
Information." SFAS 130 establishes the disclosure requirements for reporting
comprehensive income in an entity's annual and interim financial statements and
becomes effective for the Company for the fiscal year ending December 31, 1998.
Comprehensive income includes unrealized gains and losses on securities
currently reported by the Company as a component of stockholders' equity which
the Company would be required to include in a financial statement and display
the accumulated balance of other comprehensive income separately in the equity
section of the consolidated balance sheet. The Company has not yet determined
what effect, if any, this pronouncement will have on the Company's results of
operations.
SFAS 131 establishes standards for determining an entity's operating
segments and the type and level of financial information to be disclosed. SFAS
131 becomes effective for financial statements issued for periods ending after
December 15, 1997. The Company has not yet determined what effect, if any, this
pronouncement will have on the Company's consolidated financial statements.
2. INTEREST CAPITALIZED
Interest costs associated with projects under development or reconstruction
aggregating $1,396 and $492 for the quarters ended June 30, 1997 and 1996,
respectively, have been capitalized.
3. NOTES PAYABLE
JUNE 30, 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
9
12
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
-------- --------
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. 13,263 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. 8,532 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. 10,379 10,445
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 convenants which require
20% of the apartment homes to be leased or held available for lease
to low income families. 38,763 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 convenants which require 20% of
the apartment homes to be leased or held available for lease to low
income families. 17,583 17,600
-------- --------
Subtotal........................................................ 175,900 176,142
-------- --------
10
13
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
-------- --------
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. 19,983 20,111
-------- --------
Subtotal........................................................ 19,983 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 (6.53% and 6.50% at June 30, 1997 and December
31, 1996, respectively, including the amortization of deferred
financing costs). The bonds contain convenants which require 20% of
the apartment homes to be leased or held available for lease to low
income families. 20,800 20,800
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 (5.90% at both June 30, 1997 and December 31,
1996, 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
-------- --------
Fixed Rate:
Cardiff Gardens is encumbered by a first deed of trust maturing May
1, 2004. Interest only payments are required monthly at a fixed
interest rate of 7.25%. 12,870 --
-------- --------
Subtotal........................................................ 12,870 --
-------- --------
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%. 40,800 49,000
-------- --------
Subtotal........................................................ 40,800 49,000
-------- --------
Total Notes Payable........................................ $277,988 $273,688
======== ========
11
14
BAY APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Principal payments on outstanding notes payable as of June 30, 1997 are due
as follows:
1997...................................................... $ 21,461
1998...................................................... 1,396
1999...................................................... 42,301
2000...................................................... 1,615
2001...................................................... 1,734
Thereafter................................................ 209,481
--------
Total........................................... $277,988
========
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 July 1997, the Company engaged in the following transactions:
- Negotiated an amendment to its $200,000 Unsecured Line of Credit. The
amendment included a one year extension to May 2000 from May 1999 and a
reduction in the interest rate from various LIBOR rates plus 1.55% to
various LIBOR rates plus .90%.
- Purchased the Regency apartment community for $13,887. This community
contains 195 apartment homes and is located in Daly City, California.
- Announced the resignation of Geoffrey L. Baker, Vice President, Chief
Development and Acquisitions Officer and Director, effective September 5,
1997.
- Refinanced approximately $20,800 in tax-exempt bonds associated with its
acquisition of City Heights Apartments, a 185-apartment home community in
San Francisco, which the Company purchased in October 1995. The new
variable rate 30-year tax-exempt bonds have been fixed for ten years at
an all-in interest rate of approximately 5.8 percent. They replace $20.8
million in variable rate bonds which, as of June 30, 1997, carried an
all-in interest rate of approximately 6.5 percent. The fully amortizing
bonds were reissued by the city of San Francisco and are rated AAA by
Standard & Poor's. Credit enhancement for the refinancing was provided by
the Federal National Mortgage Association ("FNMA").
As of August 7, 1997, the Company had elected to issue an additional 1,809
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 August 7, 1997.
12
15
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 June 30, 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
Lafayette Place (formerly
Martinique Gardens)(g) August 7, 1996
1997 ACQUISITION COMMUNITIES(J)
- ---------------------------------------------
COMMUNITY DATE ACQUIRED
- ---------------------------- ---------------
SummerWalk (formerly Rancho
Penasquitos) January 3, 1997
TimberWood (formerly The
Village) March 13, 1997
SunScape (formerly Banbury
Cross) April 1, 1997
Cardiff Gardens April 18, 1997
Villa Serena April 25, 1997
Amador Oaks April 30, 1997
Genesee Gardens May 16, 1997
1996 DEVELOPMENT COMMUNITY
- -------------------------------------------------
COMMUNITY DATE STABILIZED(H)
- ----------------------------- ------------------
Rosewalk(i) February 1997
The 1996 and 1997 Acquisition and Development Communities are collectively
termed the "Acquisition Communities."
- ---------------
(a) Substantial reconstruction at Parc Centre was completed during the quarter
ended June 30, 1997. The reconstruction included 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 undergoing 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) Substantial reconstruction at Larkspur Canyon was completed during the
quarter ended June 30, 1997. This reconstruction included 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.
13
16
(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) Lafayette Place, formerly known as 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.
(j) All of the 1997 Acquisition Communities are undergoing, or will be
undergoing in the future, substantial reconstruction and repositioning
programs.
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 JUNE 30, 1997 TO THE QUARTER ENDED JUNE 30,
1996.
The Company's results of operations are summarized as follows for the
quarters ended June 30, 1997 and 1996 (Dollars in thousands):
FOR THE QUARTER
ENDED JUNE 30,
-------------------
1997 1996 $-CHANGE %-CHANGE
------- ------- -------- --------
Revenue:
Rental............................... $28,817 $17,906 $10,911 60.9 %
Other................................ 963 487 476 97.7 %
------- ------- ------- -------
Total revenue..................... 29,780 18,393 11,387 61.9 %
------- ------- ------- -------
Expenses:
Property operating................... 6,772 4,108 2,664 64.8 %
Property taxes....................... 2,250 1,465 785 53.6 %
General and administrative........... 1,517 814 703 86.4 %
Abandoned project costs.............. 450 50 400 800.0 %
Interest and financing............... 3,800 3,635 165 4.5 %
Depreciation and amortization........ 6,426 4,226 2,200 52.1 %
------- ------- ------- -------
Total expenses.................... 21,215 14,298 6,917 48.4 %
------- ------- ------- -------
Income before minority interest and
extraordinary item................... 8,565 4,095 4,470 109.2 %
Minority interest...................... (86) (12) (74) 616.7 %
------- ------- ------- -------
Income before extraordinary item....... 8,479 4,083 4,396 107.7 %
Extraordinary item..................... -- (511) 511 (100.0 %)
------- ------- ------- -------
Net income............................. $ 8,479 $ 3,572 $ 4,907 137.4 %
======= ======= ======= =======
14
17
Revenue from rental property increased primarily as a result of the
addition of the Acquisition Communities. The 1996 and 1997 Acquisition
Communities contributed $4,835 and $3,299, respectively, to the increase. The
1996 Development Community contributed $1,220 to the increase. The remainder of
the portfolio increased rental revenue by $1,557, of which $1,452 was
attributable to the Same Store communities (defined below).
Other income increased during the quarter ended June 30, 1997 as compared
to the quarter ended June 30, 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 $2,664 increase, $1,302 was attributable
to the 1996 Acquisition Communities, $154 was attributable to the 1996
Development Community and $895 was attributable to the 1997 Acquisition
Communities. The remainder of the portfolio increased property operating
expenses by $313, of which $184 was attributable to the Same Store communities
(defined below). In addition, the Acquisition Communities contributed $810 to
the increase in property taxes and the remainder of the portfolio decreased by
$25.
General and administrative costs increased for the quarter ended June 30,
1997 as compared with the quarter ended June 30, 1996, primarily due to the
growth in employee-related costs and costs needed to manage the Acquisition
Communities. Abandoned project costs increased due to a one-time write-off of
$450 as a result of the termination of the Company's efforts to acquire a
multifamily portfolio. The 1997 and 1996 amounts are net of $1,504 and $470,
respectively, of allocated indirect project costs capitalized to construction
and reconstruction projects, representing approximately 43% and 35% of total
general and administrative expense, which includes abandoned project costs, for
the quarters ended June 30, 1997 and 1996, respectively.
Interest and financing expense increased for the quarter ended June 30,
1997 as compared to the quarter ended June 30, 1996 due to increased borrowing
for new acquisitions offset in part by higher capitalization of interest from
increased development, construction and reconstruction activity and a lower
overall cost of funds.
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 JUNE 30, 1997 AND
1996:
FOR THE QUARTER
ENDED JUNE 30,
-------------------
(DOLLARS IN THOUSANDS) 1997 1996 $-CHANGE %-CHANGE
------- ------- -------- --------
Revenue.................................... $18,377 $16,810 $1,567(2) 9.3%
Expenses................................... 5,261 5,099 162(3) 3.2%
------- ------- ------ ----
EBITDA..................................... $13,116 $11,711 $1,405 12.0%
======= ======= ====== ====
- ---------------
(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 six months ended June 30, 1997 and
to which the Company made no major renovations after January 1, 1996.
(2) Same Store revenues increased due to rental increases of $1,452, lease
termination fee increases of $41 and a net increase in other income of $74.
(3) Same Store expenses increased primarily as a result of a one-time property
tax escape assessment charge of $77 in the quarter ended June 30, 1997, a
$40 increase in repairs and maintenance and the purchase of additional,
portfolio-wide earthquake insurance commencing in July 1996 resulting in $61
of expense in the quarter ended June 30, 1997. Other miscellaneous Same
Store expenses decreased $16.
15
18
CURRENT DEVELOPMENT COMMUNITIES
The Company has acquired four land sites on which it is building, or plans
to commence building in the future, the following Current Development
Communities which will contain an aggregate of approximately 1,527 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 710
apartment homes. The original total budgeted construction cost of this community
is $95.7 million. The site, located approximately at the intersection 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 were completed and occupied in July 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.
- SAN FRANCISCO, CA SITE. The Company acquired, through a limited
partnership in which it is the sole general partner, a portion of a city block
in the Rincon Hill area of San Francisco for approximately $7.8 million. The
Company intends to build twin, 16-story towers on top of a four story parking
garage on this site. As currently planned, the community will have between 201
and 220 apartment homes, approximately 2,900 square feet of retail space and
between 224 and 271 controlled access parking spaces. The site is on Beale
Street, between Harrison and Folsom Streets, almost two blocks north of the Bay
Bridge, approximately three blocks south of Market Street and three blocks west
of the Embarcadero and San Francisco Bay. The Company has received substantially
all necessary public approvals for the project. The Company expects to begin
construction of the community early next year, with initial occupancy expected
in early 1999. The community will contain one, two and three bedroom apartment
homes, with resident amenities including a health club, meeting and conference
rooms, business center, leasing pavilion and parking deck gardens.
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
16
19
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 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, 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 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 with respect to its Series C Cumulative Redeemable
Preferred Stock 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 June 30, 1997, the proceeds from the Unsecured Line of Credit were
used primarily for the acquisition, development and construction of the four
Current Development Communities and reconstruction of the 1996 and 1997
Acquisition Communities.
17
20
In April 1997, the Company assumed $12,870,000 of seller financing in
connection with the acquisition of the Cardiff Gardens community.
The Company's outstanding debt as of June 30, 1997 is summarized as
follows:
(DOLLARS IN THOUSANDS) BALANCE AVAILABLE MATURES RATE INTEREST RATE PROTECTION
-------- --------- --------------- ----- ------------------------
Tax-exempt variable rate $ 88,520 $ -- November 2022- 6.48%(a) Interest rate is
under interest rate swap June 2025 fixed until June 2010.
Tax-exempt variable rate 87,380 -- November 2007- 5.88%(b) Interest rate is
under interest rate swap March 2017 fixed until March 2004.
Tax-exempt fixed rate 19,983 -- March 2012 7.87%(c) Interest rate is
fixed until April 2002.
Tax-exempt variable rate 20,800 -- March 2018 6.53%(d)
Tax-exempt variable rate 7,635 -- March 2023 5.90%(e)
Fixed rate 12,870 -- May 2004 7.25%
-------- --------
Subtotal 237,188 --
$200,000 Unsecured
Line of Credit(f) 40,800 159,200 May 1999 LIBOR+1.55%
-------- --------
Total $277,988 $ 159,200
======== ========
- ---------------
(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 6.53% rate represents an all-in financing cost, including amortization
of all deferred financing costs. The Company refinanced these bonds in July
1997. The new variable rate 30-year tax-exempt bonds have been fixed for ten
years at an all-in interest rate of 5.8%.
(e) The 5.90% 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 4.00%.
(f) Amounts drawn on the Unsecured Line of Credit were used primarily for
development, construction and reconstruction purposes. On July 2, 1997, the
Company received a one year extension on the Unsecured Line of Credit, which
extended the maturity date to May 2000, along with a reduction in the
interest rate to LIBOR+0.90%.
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 $49.2 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.
In April 1997, the Company 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 $58.6 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 TimberWood (formerly The Village), SunScape (formerly
Banbury Cross) and Cardiff Gardens.
In May 1997, the Company received credit ratings from Standard & Poor's
("S&P") and Moody's Investors Service ("Moody's"). S&P assigned a BBB corporate
credit rating to the Company and a BBB-rating to the Company's cumulative
preferred stock shelf registration and noted a stable outlook for the Company.
Moody's assigned a rating of "baa3" to the Company's cumulative preferred stock.
As a result of the credit ratings from S&P and Moody's, the Company, in
June 1997, sold in a underwritten public offering 2,300,000 shares of 8.5
percent, five year non-call, Series C Cumulative Redeemable Preferred Stock at a
price of $25 per share. The net proceeds, after all anticipated issuance costs,
were approximately $55.5 million. The net proceeds were used to reduce
borrowings under the Unsecured
18
21
Line of Credit, which were used to fund the acquisition and development of
additional apartment communities, including amounts borrowed to fund the
acquisition of the Villa Serena, Amador Oaks and Genesee Gardens communities and
one land site in San Francisco.
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 six months ended June 30, 1997
increased to $28,251,000 from $16,493,000 for the six months ended June 30,
1996, primarily due to higher net income before noncash charges for depreciation
and amortization from the addition of the Acquisition Communities, and an
increase in certain refundable security deposits payable. This increase is
offset in part by increases in other assets primarily due to certain increases
in prepaid insurance, security deposit reserves and an operating impound account
as required in connection with the acquisition of Countrybrook.
Net cash used for investing activities was $163,847,000 and $104,193,000
for the six months ended June 30, 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 $136,522,000 and $86,512,000
for the six months ended June 30, 1997 and 1996, respectively. This increase is
primarily due to the net proceeds received by the Company from the January and
April 1997 common stock offerings, and the June 1997 offering of the Series C
Cumulative Redeemable Preferred Stock, offset in part by the increased dividends
paid, and notes payable principal payments.
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.
NATURAL DISASTERS
Many of the communities are located in the general vicinity of active
earthquake faults. In June 1997, the Company obtained a seismic risk analysis
from an engineering firm which estimated the probable maximum loss ("PML") for
each of the 41 communities owned at that time and Toscana, a community currently
under construction, individually and for all of such communities combined. To
establish a PML, the engineers first define a severe earthquake event for the
applicable geographic area, which is an earthquake that has only a 10%
likelihood of occurring over a 50-year period. The PML is determined as the
structural and architectural damage and business interruption loss that has a
10% probability of being exceeded in the event of such an earthquake. Because
the communities are concentrated in the San Francisco Bay Area, the engineers'
analysis defined an earthquake on the San Andreas Fault with a Richter Scale
magnitude of 8.0 as a severe earthquake with a 10% probability of occurring
within a 50-year period, and established an aggregate PML at that time of $63.8
million for the 41 communities owned at that time and Toscana, which is a PML
level that is expected to be exceeded only 10% of the time in the event of such
a severe earthquake. This aggregate PML could be higher as a result of
variations in soil classifications and structural vulnerabilities. Two of the
communities had individual PMLs of 30%, while seven communities had PMLs of 25%,
and the remaining 33 communities owned at such time each had PMLs of 20% or
less. The Company has obtained an individual PML assessment for the one
community acquired since June 1997. That community had an individual PML of 30%.
No assurance can be given that an earthquake would not cause damage or losses
greater than the PML assessments indicate, that future PML levels will not be
higher than the current PML levels for the communities, or that future
acquisitions or developments will not have PML assessments indicating the
possibility of greater damage or losses than currently indicated.
19
22
In July 1997, the Company renewed its earthquake insurance, both for
physical damage and lost revenues, with respect to the 41 communities then owned
and Toscana. In addition, the community acquired subsequent to June 1997 is
included under the Company's earthquake insurance policy. For any single
occurrence, the Company self-insures the first $25 million of loss, and has in
place $35 million of coverage above this amount, with a 5% deductible subject to
a maximum of $2.43 million. In addition, the Company's general liability and
property casualty insurance provides coverage for personal liability and fire
damage. In the event that an uninsured disaster or a loss in excess of insured
limits were to occur, the Company could lose its capital invested in the
affected community, as well as anticipated future revenues from such community,
and would continue to be obligated to repay any mortgage indebtedness or other
obligations related to the community. Any such loss could materially and
adversely affect the business of the Company and its financial condition and
results of operations.
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 June 30, 1997, FFO increased to $14,591,000 from
$8,179,000 for the quarter ended June 30, 1996. This increase is primarily due
to higher net income and real estate depreciation add back due to the addition
of the Acquisition Communities.
20
23
Funds from Operations and Funds Available for Distribution for the quarters
ended June 30, 1997, March 31, 1997, December 31, 1996, September 30, 1996 and
June 30, 1996 are summarized as follows:
CALCULATION OF FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
QUARTER ENDED
-------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
PER UNIT DATA) 1997 1997 1996 1996 1996
----------- ----------- ----------- ----------- -----------
Net income...................... $ 8,479 $ 7,771 $ 7,014 $ 5,845 $ 3,572
Series C preferred dividend
requirement................... (149) -- -- -- --
Depreciation -- real estate
assets........................ 6,173 5,462 5,201 4,899 4,008
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 88 87 87 88
---------- ---------- ---------- ---------- ----------
FFO(2).......................... 14,591 13,321 12,302 10,831 8,179
Recurring adjustments to net
income:
Amortization of origination
fees on credit
facilities(3).............. -- -- -- -- 41
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.............. 120 105 79 49 38
Capital expenditures(5)....... (471) (281) (448) (457) (252)
Loan principal payments....... (213) (157) (175) (131) (88)
---------- ---------- ---------- ---------- ----------
Funds Available for Distribution
("FAD")....................... $ 14,072 $ 13,033 $ 11,803 $ 10,337 $ 7,963
========== ========== ========== ========== ==========
Weighted average shares
outstanding(6)................ 24,833,801 22,989,978 22,000,544 19,686,087 15,205,997
========== ========== ========== ========== ==========
- ---------------
(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.
21
24
(5) Capital improvements represent amounts expended primarily at communities
acquired or developed prior to 1996. A breakdown of the expenditures for the
quarter ended June 30, 1997 is as follows:
TOTAL PER UNIT
QUARTER ENDED QUARTER ENDED
JUNE 30, 1997 JUNE 30, 1997
-------------- --------------
Non-revenue generating:
Exterior painting...................................... $ 262 $ 25
Leasing pavilion rehabilitation........................ 65 6
Landscaping............................................ 55 5
Security gate system................................... 19 2
Other capital expenditures............................. 70 7
------ -----
Subtotal -- capital expenditures.................... 471 45
------ -----
Revenue generating:
Water submeters........................................ 288 27
Appliances............................................. 222 21
Trash compactors....................................... 136 13
Fixtures............................................... 114 11
TV cable system........................................ 68 6
------ -----
Subtotal............................................ 828 78
------ -----
Total capital improvements..................... $1,299 $123
====== =====
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 June 30, 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.
22
25
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 "Countrybrook 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 Countrybrook Partnership, 298,577 units of limited
partnership interests ("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 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. During the
period April 1, 1997 through June 30, 1997, 122,797 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.
The Company is relying on the exemption provided in Rule 506 based upon factual
respresentations received from the recipients of the shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 25, 1997. The
shareholders voted to elect Gilbert M. Meyer, Geoffrey L. Baker, Max L. Gardner,
Bruce A. Choate, John J. Healy, Jr., Brenda J. Mixson and Thomas H. Nielsen to
serve as directors of the Company until the 1998 Annual Meeting of Shareholders
and until their respective successors are duly elected and qualified.
17,206,539 votes were cast for, and 19,457 votes were withheld from the
election of Mr. Meyer.
17,206,539 votes were cast for, and 19,457 votes were withheld from the
election of Mr. Baker.
17,206,539 votes were cast for, and 19,457 votes were withheld from the
election of Mr. Gardner.
17,206,539 votes were cast for, and 19,457 votes were withheld from the
election of Mr. Choate.
17,206,539 votes were cast for, and 19,457 votes were withheld from the
election of Mr. Healy.
17,206,539 votes were cast for, and 19,457 votes were withheld from the
election of Ms. Mixson.
17,206,539 votes were cast for, and 19,457 votes were withheld from the
election of Mr. Nielsen.
The shareholders voted to ratify the 1994 Stock Incentive Plan, as amended
and restated. 16,452,947 votes were cast in favor of this proposal, 753,248
votes were cast against it, 19,800 votes abstained and 1 broker non-vote was
recorded.
The shareholders also voted to ratify the Board of Director's appointment
of Coopers & Lybrand LLP to serve as independent accountants for the Company for
the fiscal year ending December 31, 1997. 17,215,016 votes were cast in favor of
this proposal, 4,300 votes were cast against it, and 6,680 votes abstained. No
broker non-votes were recorded.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
23
26
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(i).4 Articles Supplementary relating to the 8.50% Series C Cumulative Redeemable
Preferred Stock of the Company. (Incorporated by reference to Exhibit 3(i).1
to Form 8-K of Bay Apartment Communities, Inc. dated July 25, 1997.)
3(ii).1 Amended and Restated 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 Agreement dated as of May 16, 1997, between the Company, J.E. Butler &
Associates, Inc. and AP Companies, Ltd., relating to the formation of Bay
Rincon, LP.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
1. Form 8-K of the Company dated April 21, 1997, regarding the acquisition of
six additional properties by the Company, consisting of four apartment home
communities and two land sites, for an aggregate purchase price of
approximately $73.81 million.
2. Form 8-K/A of the Company dated April 21, 1997, conforming the signature
page to the Form 8-K of the Company dated April 21, 1997.
3. Form 8-K/A of the Company dated June 16, 1997, regarding the acquisition of
two additional apartment home communities by the Company.
4. Form 8-A of the Company dated June 18, 1997, filing the Form of Articles
Supplementary relating to rights and preferences of the 8.50% Series C
Cumulative Redeemable Preferred Stock of the Company.
24
27
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: August 13, 1997 /s/ GILBERT M. MEYER
--------------------------------------
Gilbert M. Meyer
President and Chairman of the Board
Date: August 13, 1997 /s/ JEFFREY B. VAN HORN
--------------------------------------
Jeffrey B. Van Horn
Chief Financial Officer
(Authorized Officer of the Registrant
and Principal Financial Officer)
25
28
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------ ------------------------------------------------------------------------ ------------
10.1 Agreement dated as of May 16, 1997, between the Company, J.E. Butler &
Associates, Inc. and AP Companies, Ltd., relating to the formation of
Bay Rincon, LP..........................................................
27.1 Financial Data Schedule.................................................