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EXHIBIT 13.1
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with all of the
financial statements and notes appearing elsewhere in this report. Historical
results and trends which might appear should not be taken as indicative of
future operations.
We have made statements in this report that are "forward-looking" in that
they do not discuss historical fact, but instead note future expectations,
projections, intentions or other items relating to the future. You should not
rely on these forward-looking statements because they are subject to known and
unknown risks, uncertainties and other factors that may cause our actual results
or performance to differ materially from those contemplated by the
forward-looking statements. Many of those factors are noted in conjunction with
the forward-looking statements in the text. Other important factors that could
cause actual results to differ include:
the results of our efforts to implement our property
development strategy;
the effect of economic conditions;
our failure to qualify as a real estate investment trust;
our cost of capital;
the actions of our competitors and our ability to respond
to those actions;
changes in government regulations, tax rates and similar
matters;
and environmental uncertainties and natural disasters.
These forward-looking statements represent our estimates and assumptions
only as of the date of this report.
Business
Camden Property Trust is a real estate investment trust and, with our
subsidiaries, reports as a single business segment. Our activities relate to the
ownership, development, construction and management of multifamily apartment
communities in the Southwest, Southeast, Midwest and Western regions of the
United States. As of December 31, 1999, we owned interests in, operated or were
developing 159 multifamily properties containing 55,785 apartment homes located
in nine states. Our properties, excluding properties in lease-up and under
development during 1999, had a weighted average occupancy rate of 93% for the
year ended December 31, 1999. This represents the average occupancy for all our
properties in 1999 weighted by the number of apartment homes in each property.
Six of our multifamily properties containing 2,474 apartment homes were under
development at December 31, 1999. Additionally, we have several sites which we
intend to develop into multifamily apartment communities.
On April 8, 1998, we acquired, through a tax-free merger, Oasis
Residential, Inc., a publicly traded Las Vegas-based multifamily REIT. Through
this acquisition, we acquired 52 completed multifamily properties and 15,514
apartment homes. Each share of Oasis common stock outstanding on April 8, 1998
was exchanged for 0.759 of a Camden common share. Each share of Oasis Series A
cumulative convertible preferred stock outstanding on April 8, 1998 was
exchanged for one Camden Series A cumulative convertible preferred share with
terms and conditions comparable to the Oasis preferred stock. We issued 12.4
million common shares and 4.2 million preferred shares in exchange for the
outstanding Oasis common and preferred stock, respectively. We assumed
approximately $484 million of Oasis debt, at fair value in the merger. The
accompanying consolidated financial statements include the operations of Oasis
since April 1, 1998, the effective date of the Oasis merger for accounting
purposes.
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In connection with the merger with Oasis, on June 30, 1998, we completed a
transaction in which Camden USA, Inc., one of our wholly owned subsidiaries, and
TMT-Nevada, L.L.C., a Delaware limited liability company, formed Sierra-Nevada
Multifamily Investments, LLC. We entered into this transaction to reduce our
market risk in the Las Vegas area. TMT-Nevada holds an 80% interest in
Sierra-Nevada and Camden USA holds the remaining 20% interest.
In the above transaction, we transferred to Sierra-Nevada 19 apartment
communities containing 5,119 apartment homes for an aggregate of $248 million.
Prior to the merger, Oasis owned 100% of each of these communities. In the
merger, Camden USA acquired these communities. As a result, after the merger and
prior to the Sierra-Nevada transaction, Camden USA owned 100% of each of these
19 properties which are located in Las Vegas, Nevada. This transaction was
funded with capital invested by the members of Sierra-Nevada, the assumption of
$9.9 million of existing nonrecourse indebtedness, the issuance of 17
nonrecourse cross collateralized and cross defaulted loans totaling $180 million
and the issuance of two nonrecourse second lien mortgages totaling $7 million.
On April 15, 1997, we acquired, through a tax-free merger, Paragon Group,
Inc., a Dallas-based multifamily REIT. Through this acquisition, we acquired 50
multifamily properties and 15,975 apartment homes. Each share of Paragon common
stock outstanding on April 15, 1997 was exchanged for 0.64 of our common shares.
We issued 9.5 million common shares in exchange for all of the outstanding
shares of Paragon common stock, issued 2.4 million limited partnership units in
Camden Operating, L.P. and assumed approximately $296 million of Paragon debt,
at fair value, in the Paragon acquisition. The accompanying consolidated
financial statements include the operations of Paragon since April 1, 1997, the
effective date of the Paragon acquisition for accounting purposes.
Our multifamily property portfolio, excluding land we hold for future
development and joint venture properties we do not manage, at December 31, 1999,
1998 and 1997 is summarized as follows:
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1999 1998 (a) 1997
-------------------------------------------------------------------------------------------
Apartment Apartment Apartment
Homes Properties % (b) Homes Properties % (b) Homes Properties % (b)
---------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Operating Properties
Texas
Houston 8,258 19 16% 6,345 15 13% 6,345 16 18%
Dallas (d) 9,381 26 18 9,381 26 17 9,381 26 24
Austin 1,745 6 4 1,745 6 4 1,745 6 5
Other 1,641 5 3 1,641 5 3 1,585 5 4
---------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Total Texas Operating 21,025 56 41 19,112 52 37 19,056 53 51
Properties
Arizona 2,326 7 5 2,326 7 5 1,894 5 5
California 1,272 3 3 1,272 3 3
Colorado (c) 2,312 7 4 1,972 6 3
Florida 7,335 17 15 7,261 17 14 6,355 17 18
Kentucky 1,016 4 2 1,142 5 2 1,142 5 3
Missouri 3,327 8 7 3,327 8 7 3,487 10 10
Nevada (c) 11,963 41 14 12,163 41 14
North Carolina (d) 2,735 10 4 2,735 10 4 2,735 10 6
---------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Total Operating Properties 53,311 153 95 51,310 149 89 34,669 100 93
---------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Properties Under Development
Texas
Houston (e) 2,213 5 4 1,365 3 4
Dallas 620 1 1 600 1 1
---------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Total Texas 620 1 1 2,813 6 5 1,365 3 4
Development Properties
Arizona 332 1 1 325 1 1 240 1 1
California 380 1 1 380 1 1
Colorado 218 1 558 2 1
Florida (e) 492 1 1 1,150 3 2 306 1 1
Kentucky 432 1 1 432 1 1 432 1 1
---------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Total Properties Under Development 2,474 6 5 5,658 14 11 2,343 6 7
---------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
Total Properties 55,785 159 100% 56,968 163 100% 37,012 106 100%
========== ======= ========== ======= ========== =======
Less: Joint Venture
Apartment Homes (c) (d) 6,504 6,704 1,264
----------- ----------- -----------
Total Apartment Homes
- Owned 100% 49,281 50,264 35,748
=========== =========== ===========
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(a) Includes the combination of operations at December 31, 1998 of two
adjacent properties in Nevada, which were acquired in the Oasis merger,
two adjacent properties in Houston and two adjacent properties in Florida.
(b) Based on number of apartment homes we owned 100%.
(c) The 1999 and 1998 figures include properties held in joint ventures as
follows: one property with 321 apartment homes in Colorado in which we own
a 50% interest, the remaining interest is owned by an unaffiliated private
investor; and 19 properties with 4,919 apartment homes (5,119 apartment
homes at December 31, 1998) in Nevada owned through Sierra-Nevada
Multifamily Investments, LLC in which we own a 20% interest.
(d) The 1999, 1998 and 1997 figures include properties held in a joint venture
as follows: one property with 708 apartment homes in Dallas and two
properties with 556 apartment homes in North Carolina in which we own a
44% interest, the remaining interest is owned by unaffiliated private
investors.
(e) The 1999 figures exclude two properties classified as Properties Under
Development at December 31, 1998 as follows: one property with 300
apartment homes in Houston which is now classified as land held for future
development, and one property with 352 apartment homes in Florida which
was sold during the year.
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At December 31, 1999, we had three completed properties under lease-up as
follows:
Product Number of % Leased Estimated
Type Apartment at 3/2/00 Date of Date of
Property and Location Homes Completion Stabilization
- ----------------------------------------- ------------ --------------- ------------- -------------- -----------------
The Park at Goose Creek
Baytown, TX Affordable 272 96% 3Q99 1Q00
The Park at Holly Springs
Houston, TX Garden 548 66% 3Q99 4Q00
The Park at Greenway
Houston, TX Urban 756 82% 4Q99 3Q00
At December 31, 1999, we had six development properties in various stages
of construction as follows:
Product Number of Estimated Estimated Estimated
Type Apartment Cost Date of Date of
Property and Location Homes ($ millions)* Completion Stabilization
- --------------------------------------------- --------------- ----------- ----------------- -------------- ---------------
In Lease-Up
The Park at Caley Garden 218 $ 18.4 1Q00 2Q00
Denver, CO
The Park at Lee Vista Garden 492 33.1 1Q00 1Q01
Orlando, FL
The Park at Oxmoor Garden 432 22.3 1Q00 1Q01
Louisville, KY
---------- ----------
Subtotal 1,142 73.8
---------- ----------
Under Construction
The Park at Arizona Center Urban 332 24.7 1Q00 1Q01
Phoenix, AZ
The Park at Farmers Market, Phase I Urban 620 50.1 4Q00 4Q01
Dallas, TX
The Park at Crown Valley Garden 380 42.9 1Q01 4Q01
Mission Viejo, CA
---------- -----------
Subtotal 1,332 117.7
---------- -----------
Total for 6 development properties 2,474 $ 191.5
========== ===========
*As of December 31, 1999, we had incurred $143.6 million of the estimated
$191.5 million.
Properties under development in our consolidated financial statements
includes land held for development totaling $94.8 million at December 31, 1999.
Included in this amount is $74.7 million related to the development of three
urban land projects located in Dallas, Houston and Long Beach, California.
At December 31, 1999, we had a $30.4 million investment in 38 acres in
downtown Dallas which are being used for development of The Park at Farmers
Market, Phase I, and the proposed future development of Phase II. We are also in
the planning phase related to the possible development of 55 for-sale townhomes
in this area. The remaining land may be sold to third parties for commercial and
retail development. Additionally, we had $44.3 million in land under development
in two properties located in Houston and Long Beach. These properties are
currently in the planning stage to determine the number of apartment homes that
will be developed based on demand in these areas over the next three to five
years. We also may sell certain parcels of these two properties to third parties
for commercial and retail development.
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At year end, we were obligated under an earnest money contract to sell two
parcels of land totaling approximately $15 million. We expect to complete this
transaction late in the first quarter to early in the second quarter of 2000.
Our multifamily property portfolio is diversified throughout markets in the
Southwest, Southeast, Midwest and Western regions of the United States. At
December 31, 1999 and 1998, our investment in various geographic areas,
excluding investment in joint ventures, was as follows:
(Dollars in thousands)
1999 1998
------------------- --------------------
Texas
Houston $ 402,997 15% $ 347,069 14%
Dallas 393,223 15 370,538 15
Austin 69,162 3 67,832 3
Other 59,200 2 57,705 2
------------- ----- ------------ -------
Total Texas Properties 924,582 35 843,144 34
------------- ----- ------------ -------
Arizona 148,871 6 133,047 5
California 177,394 7 139,602 6
Colorado 184,798 7 158,837 7
Florida 393,569 15 376,235 15
Kentucky 69,322 3 56,954 2
Missouri 172,454 6 169,741 7
Nevada 491,226 18 487,679 20
North Carolina 93,949 3 90,219 4
------------- ----- ------------ -------
Total Properties $ 2,656,165 100% $ 2,455,458 100%
============= ===== ============ =======
Liquidity and Capital Resources
Financial Structure
We intend to continue maintaining what management believes to be a
conservative capital structure by:
(i) using what management believes is a prudent combination
of debt and common and preferred equity;
(ii) extending and sequencing the maturity dates of our debt
where possible;
(iii) managing interest rate exposure using fixed rate debt
and hedging, where management believes it is appropriate;
(iv) borrowing on an unsecured basis in order to maintain a
substantial number of unencumbered assets; and
(v) maintaining conservative coverage ratios.
The interest expense coverage ratio, net of capitalized interest, was 3.7
times for each of the years ended December 31, 1999 and 1998. At December 31,
1999 and 1998, 76.0% and 73.2%, respectively, of our properties (based on
invested capital) were unencumbered.
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Liquidity
We intend to meet our short-term liquidity requirements through cash flows
provided by operations, our unsecured line of credit discussed in the financial
flexibility section and other short-term borrowings. We expect that our ability
to generate cash will be sufficient to meet our short-term liquidity needs,
which include:
(i) normal operating expenses;
(ii) current debt service requirements;
(iii) recurring capital expenditures;
(iv) property development;
(v) common share repurchases; and
(vi) distributions on our common and preferred equity.
We consider our long-term liquidity requirements to be the repayment of
maturing debt and borrowings under our unsecured line of credit and funding of
acquisitions. We intend to meet our long-term liquidity requirements through the
use of common and preferred equity capital, senior unsecured debt and property
dispositions.
In 1998, we began repurchasing our securities under a program approved by
our Board of Trust Managers. The plan allows us to repurchase or redeem up to
$200 million of our securities through open market purchases and private
transactions. Management believes that we can reinvest available cash flow into
our own securities at yields which exceed those currently available on direct
real estate investments. In management's opinion, these repurchases can be made
without incurring additional debt and without reducing our financial
flexibility. At December 31, 1999, we had repurchased approximately 5.7 million
common shares and redeemed approximately 104,000 units at a total cost of $149.7
million. Management expects to complete the remaining repurchases during 2000.
As of December 31, 1999, we had $259 million available under the unsecured
line of credit. In December 1999, we filed a universal shelf registration
statement providing for the issuance of up to $660.2 million in debt securities,
preferred shares, common shares or warrants, all of which was available at year
end. Additionally, at December 31, 1999, we had $75.3 million available under
our $500 million shelf registration filed in April 1997 and $14.5 million
available from our medium-term note program. Subsequent to year end, we filed a
post-effective amendment to combine these three programs into a single $750
million universal shelf registration. We have significant unencumbered real
estate assets which could be sold or used as collateral for financing purposes
should other sources of capital not be available.
We are currently seeking to selectively dispose of up to $150 million of
real estate assets that management believes have a lower projected net operating
income growth rate than the overall portfolio, or no longer conform to our
operating and investment strategies. We currently anticipate using the potential
proceeds from these sales to retire debt and repurchase shares. However, we
cannot assure you that we will complete these sales or that the final outcomes
of these sales, if completed, will be on terms favorable to us.
On January 17, 2000, we paid a distribution of $0.52 per share for the
fourth quarter of 1999 to all holders of record of our common shares as of
December 20, 1999, and paid an equivalent amount per unit to holders of limited
partnership units in Camden Operating, L.P. Total distributions to common
shareholders and holders of operating partnership units for the year ended
December 31, 1999 were $2.08 per share or unit. We determine the amount of cash
available for distribution to unitholders in accordance with the partnership
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agreements and have made and intend to continue to make distributions to the
holders of operating partnership units in amounts equivalent to the per share
distributions paid to holders of common shares. We intend to continue to make
shareholder distributions in accordance with REIT qualification requirements
under the federal tax code while maintaining what management believes to be a
conservative payout ratio, and expect to continue reducing the payout ratio. The
dividend payout ratio was 65% and 68.5% for the year ended December 31, 1999 and
1998, respectively.
On February 15, 2000, we paid a quarterly dividend on our preferred shares
of $0.5625 per share to all preferred shareholders of record as of December 20,
1999. Total dividends to holders of preferred shares for the year ended December
31, 1999 were $2.25 per share.
Financial Flexibility
We intend to concentrate our growth efforts toward selective development
and acquisition opportunities in our current markets, and through the
acquisition of existing operating portfolios and development properties in
selected new markets. During the year ended December 31, 1999, we incurred
$188.5 million in development costs and no acquisition costs. We are developing
six additional properties at an aggregate cost of approximately $191.5 million
of which we incurred $81.9 million during 1999. At year end, we were obligated
for approximately $45 million under construction contracts (a substantial amount
of which is to be funded by debt). We fund our developments and acquisitions
through a combination of equity capital, partnership units, medium-term notes,
construction loans, other debt securities and the unsecured line of credit. We
also seek to selectively dispose of assets that management believes have a lower
projected net operating income growth rate than the overall portfolio, or no
longer conform to our operating and investment strategies. Such sales may
generate capital for acquisitions and new developments, debt reduction, and
common share repurchases.
During the third quarter of 1999, we entered into a line of credit with 14
banks for a total commitment of $375 million. This line of credit replaced our
three previous lines of credit which totaled $275 million. The new line of
credit is scheduled to mature in August 2002. The scheduled interest rate is
currently based on a spread over LIBOR or Prime. The scheduled interest rates
are subject to change as our credit ratings change. Advances under the line of
credit may be priced at the scheduled rates, or we may enter into bid rate loans
with participating banks at rates below the scheduled rates. These bid rate
loans have terms of six months or less and may not exceed the lesser of $187.5
million or the remaining amount available under the line of credit. The line of
credit is subject to customary financial covenants and limitations. At year end,
we were in compliance with all covenants and limitations.
As an alternative to our unsecured line of credit, we from time to time
borrow using competitively bid unsecured short-term notes with lenders who may
or may not be a part of the unsecured line of credit bank group. Such borrowings
vary in term and pricing and are typically priced at interest rates below those
available under the unsecured line of credit.
During the first quarter of 1999, our operating partnership issued $100
million of 8.5% Series B Cumulative Redeemable Perpetual Preferred Units.
Distributions on the preferred units are payable quarterly in arrears. The
preferred units are redeemable for cash by the operating partnership on or after
the fifth anniversary of the date of issuance at par plus the amount of any
accumulated and unpaid distributions. The preferred units are convertible after
10 years by the holder into our 8.5% Series B Cumulative Redeemable Perpetual
Preferred Shares. The preferred units are subordinate to present and future
debt. We used the net proceeds to reduce indebtedness outstanding under the
unsecured lines of credit and repurchase common shares.
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During the third quarter of 1999, our operating partnership issued $35.5
million of 8.25% Series C Cumulative Redeemable Perpetual Preferred Units.
Distributions on the preferred units are payable quarterly in arrears. The
preferred units are redeemable for cash by the operating partnership on or after
the fifth anniversary of the date of issuance at par plus the amount of any
accumulated and unpaid distributions. The preferred units are convertible after
10 years by the holder into our 8.25% Series C Cumulative Redeemable Perpetual
Preferred Shares. The preferred units are subordinate to present and future
debt. Subsequent to year end, our operating partnership issued an additional
$17.5 million Series C preferred units. We used the net proceeds to reduce
indebtedness outstanding under the unsecured lines of credit and repurchase
common shares.
During the first quarter of 1999, we issued $39.5 million aggregate
principal amount of senior unsecured notes from our $196 million medium-term
note shelf registration. These fixed rate notes, due in January 2002 through
2009, bear interest at a weighted average rate of 7.07%, payable semiannually on
January and July 15. We used the net proceeds to reduce indebtedness outstanding
under the unsecured lines of credit.
During the second quarter of 1999, we issued $15 million principal amount
of senior unsecured notes from our $196 million medium-term note shelf
registration. These fixed rate notes, due in March 2002, bear interest at a rate
of 6.74%, payable semiannually on March and September 15. We used the net
proceeds to reduce indebtedness outstanding under the unsecured lines of credit.
Also during the second quarter of 1999, we issued from our $500 million
shelf registration an aggregate principal amount of $200 million of five-year
senior unsecured notes. Interest on the notes accrues at an annual rate of 7.0%
and is payable semi-annually on April and October 15, commencing on October 15,
1999. The notes are direct, senior unsecured obligations and rank equally with
all other unsecured and unsubordinated indebtedness. We may redeem the notes at
any time subject to a make-whole provision. The proceeds from the sale of the
notes were $197.7 million, net of issuance costs. We used the net proceeds to
reduce indebtedness under the unsecured lines of credit and for general working
capital purposes.
Market Risk
We use fixed and floating rate debt to finance acquisitions, developments
and maturing debt. These transactions expose us to market risk related to
changes in interest rates. Management's policy is to review our borrowings and
attempt to mitigate interest rate exposure through the use of derivative
instruments. Our policy regarding the use of derivative financial instruments in
managing market risk exposures is consistent with the prior year and is not
expected to change in future years. We do not use derivative financial
instruments for trading or speculative purposes.
We currently have a $25 million interest rate swap agreement designated as
a partial hedge of floating rate debt. The swap is scheduled to mature in July
2000, but the issuing bank has an option to extend this agreement to July 2002.
The interest rate is fixed at 6.1%, resulting in an interest rate exposure equal
to the difference between 6.1% and the actual base rate on the related
indebtedness. This swap continues to be used as a hedge to manage the risk of
interest rate fluctuations on the unsecured line of credit and other floating
rate indebtedness.
During September 1999, we executed three interest rate swap agreements
totaling $70 million which are scheduled to mature in October 2000. These swaps
are being used as a hedge of interest rate exposure on our $90 million
medium-term notes issued in October 1998 which mature in October 2000.
Currently, the interest rate on the medium-term notes is fixed at 7.23%. The
interest rates on the swaps are reset monthly based on the one-month LIBOR rate
plus a spread which resulted in an effective interest rate on the swaps of 7.70%
at December 31, 1999.
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For fixed rate debt, interest rate changes affect the fair market value but
do not impact net income to common shareholders or cash flows. Conversely, for
floating rate debt, interest rate changes generally do not affect the fair
market value but do impact net income to common shareholders and cash flows,
assuming other factors are held constant.
At December 31, 1999, after adjusting for the effect of the interest rate
swap agreements, we had fixed rate debt of $940.6 million and floating rate debt
of $224.5 million. Holding other variables constant (such as debt levels), a one
percentage point variance in interest rates would change the unrealized fair
market value of the fixed rate debt by approximately $33.8 million. The net
income to common shareholders and cash flows impact on the next year resulting
from a one percentage point variance in interest rates on floating rate debt
would be approximately $2.2 million, holding all other variables constant.
Funds from Operations
Management considers FFO to be an appropriate measure of performance of an
equity REIT. The National Association of Real Estate Investment Trusts currently
defines FFO as net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. Our definition
of diluted FFO also assumes conversion at the beginning of the period of all
convertible securities, including minority interest, which are convertible into
common equity.
We believe that in order to facilitate a clear understanding of our
consolidated historical operating results, FFO should be examined in conjunction
with net income as presented in the consolidated financial statements and data
included elsewhere in this report. FFO is not defined by generally accepted
accounting principles. FFO should not be considered as an alternative to net
income as an indication of our operating performance or to net cash provided by
operating activities as a measure of our liquidity. Further, FFO as disclosed by
other REIT's may not be comparable to our calculation. Our diluted FFO for the
year ended December 31, 1999 increased $14.4 million, or 10.4%, over 1998
primarily due to the Oasis merger, property acquisitions, developments and
improvements in the performance of the stabilized properties in the portfolio.
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The calculation of basic and diluted FFO for the years ended December 31,
1999 and 1998 follows:
(In thousands)
1999 1998
----------- -----------
Funds from operations
Net income to common shareholders $ 52,252 $ 47,962
Real estate depreciation 87,491 76,740
Real estate depreciation from unconsolidated ventures 3,198 2,253
Loss on sale of property held in unconsolidated ventures 738
Gain on sales of properties and joint venture interests (2,979)
----------- -----------
Funds from operations - basic 140,700 126,955
Preferred share dividends 9,371 9,371
Income allocated to operating partnership units 2,014 1,322
Interest on convertible subordinated debentures 258 317
Amortization of deferred costs on convertible debentures 26 31
----------- -----------
Funds from operations - diluted $ 152,369 $ 137,996
=========== ===========
Weighted average shares - basic 41,236 41,174
Common share options and awards granted 431 399
Preferred shares 3,207 2,416
Minority interest units 2,624 2,610
Convertible subordinated debentures 146 180
----------- -----------
Weighted average shares - diluted 47,644 46,779
=========== ===========
Results of Operations
Changes in revenues and expenses related to the operating properties from
period to period are primarily due to the Oasis and Paragon mergers, property
acquisitions, developments, dispositions and improvements in the performance of
the stabilized properties in the portfolio. Where appropriate, comparisons are
made on a dollars-per-weighted-average-apartment homes basis in order to adjust
for such changes in the number of apartment homes owned during each period.
Selected weighted average revenues and expenses per operating apartment home for
the three years ended December 31, 1999 are as follows:
1999 1998 1997
------------ ----------- ------------
Rental income per apartment home per month $ 623 $ 591 $ 535
Property operating and maintenance per apartment home per year $ 2,367 $ 2,290 $ 2,414
Real estate taxes per apartment home per year $ 798 $ 742 $ 718
Weighted average number of operating apartment homes 45,606 42,411 29,280
1999 Compared to 1998
For the year ended December 31, 1999, income before gain on sales of
properties and joint venture interests, losses on early retirement of debt and
minority interests increased $10.3 million, or 17.5%, as compared to the year
ended December 31, 1998. This increase is primarily due to the Oasis merger, the
transfer of 19 properties into the Sierra-Nevada joint venture, the development
of 2,855 apartment homes, the acquisition of 2,226 apartment homes, the
disposition of 1,752 apartment homes and an increase in net operating income
generated by the stabilized portfolio. The weighted average number of apartment
homes increased by 3,195 apartment homes, or 7.5%, from 42,411 to 45,606 for the
years ended December 31, 1998 and 1999, respectively. Total operating properties
were 126 and 130 at December 31, 1998 and 1999, respectively. The weighted
average number of apartment homes and the operating properties exclude the
impact of our ownership interest in operating properties and apartment homes
owned in joint ventures.
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Rental income per apartment home per month increased $32, or 5.4%, from
$591 to $623 for the years ended December 31, 1998 and 1999, respectively. The
increase was primarily due to a 3.0% increase in revenues from the stabilized
real estate portfolio, higher average rental rates on properties added to the
portfolio through the Oasis merger, and four of the five acquired properties,
and completion of new development properties. Additionally, seven of the eight
disposed properties had average rental rates significantly lower than the
portfolio average.
Other property income increased $4.1 million from $18.1 million to $22.1
million for the years ended December 31, 1998 and 1999, respectively, which
represents a monthly increase of $4 per apartment home. This increase in other
property income was primarily due to a larger number of apartment homes owned
and in operation and a $2.7 million increase from revenue sources such as
telephone, cable and water.
Fee and asset management income increased $3.8 million from $1.6 million to
$5.4 million for the years ended December 31, 1998 and 1999, respectively. This
increase is primarily due to fees generated from the construction and renovation
of multifamily properties for third parties.
Property operating and maintenance expenses increased $10.8 million, from
$97.1 million to $108.0 million, but decreased as a percent of total property
income from 30.5% to 29.7% for the years ended December 31, 1998 and 1999,
respectively. Our operating expense ratio decreased from the prior year
primarily as a result of our continued focus on creating operating efficiencies
in the stabilized portfolio, and the impact of our April 1, 1998 adoption of a
new accounting policy, whereby expenditures for floor coverings, appliances and
HVAC unit replacements are expensed in the first five years of a property's life
and capitalized thereafter. Prior to the adoption of this policy, we had been
expensing these costs. Had this policy change been adopted as of January 1,
1998, the 1998 operating expense ratio would have been 30.1%.
Real estate taxes increased $4.9 million from $31.5 million to $36.4
million for the years ended December 31, 1998 and 1999, respectively, which
represents an annual increase of $56 per apartment home. Real estate taxes per
apartment home have increased due to increases in the valuations of renovated,
acquired and developed properties and increases in property tax rates. This
increase per apartment home was partially offset by lower property taxes in the
portfolio added through the Oasis merger.
General and administrative expenses increased from $8.0 million in 1998 to
$10.6 million in 1999, and increased as a percent of revenues from 2.5% to 2.9%.
The general and administrative expense ratio increase is primarily attributable
to the impact of our March 20, 1998 adoption of Issue No. 97-11, Accounting for
Internal Costs Relating to Real Estate Property Acquisitions, which required
certain costs that were previously capitalized to be expensed, an increase in
compensation costs and additional expenses associated with training and
information systems functions.
Interest expense increased from $50.5 million in 1998 to $57.9 million in
1999 primarily due to increased indebtedness related to the Oasis merger,
completed developments, renovations and property acquisitions. Additionally, the
average interest rate on our debt increased slightly from 7.1% for 1998 to 7.2%
for the year ended 1999. Interest capitalized was $16.4 million and $9.9 million
for the years ended December 31, 1999 and 1998, respectively.
Depreciation and amortization increased from $78.1 million to $89.5
million. This increase was due primarily to the Oasis merger, developments,
renovations and property acquisitions.
Gains on sales of properties and joint venture interests increased $3.0
million due to gains from the disposition of two multifamily properties
containing 358 units and our joint venture investment in two commercial office
buildings. The gains recorded on these dispositions were partially offset by a
loss on the sale of a retail/commercial center. These gains do not include a
118
loss on the sale of a 408 unit property held in a joint venture of $738,000
which is included in "Equity in Income of Joint Ventures."
1998 Compared to 1997
The changes in operating results from 1997 to 1998 are primarily due to the
Oasis and Paragon mergers, the development of five properties aggregating 2,074
apartment homes, the acquisition of seven properties containing 3,123 apartment
homes, the disposition of 11 properties containing 2,986 apartment homes and an
increase in net operating income generated by the stabilized portfolio. The
weighted average number of apartment homes increased by 13,131 apartment homes,
or 44.8%, from 29,280 to 42,411 for the years ended December 31, 1997 and 1998,
respectively. Total operating properties were 97 and 126 at December 31, 1997
and 1998, respectively. The weighted average number of apartment homes and the
operating properties exclude the impact of our ownership interest in operating
properties and apartment homes owned in joint ventures.
Rental income per apartment home per month increased $56, or 10.5%, from
$535 to $591 for the years ended December 31, 1997 and 1998, respectively. The
increase was primarily due to increased revenue growth from the stabilized real
estate portfolio, higher average rental rates on properties added to the
portfolio through the Oasis merger, the acquisition of seven properties and the
completion of new development properties.
Other property income increased $8.6 million from $9.4 million to $18.1
million for the years ended December 31, 1997 and 1998, respectively. This
increase in other property income was primarily due to a larger number of
apartment homes owned and in operation and a $2.9 million increase from new
revenue sources such as telephone, cable and water.
Property operating and maintenance expenses increased $26.5 million, from
$70.7 million to $97.1 million, but decreased as a percent of total property
income from 35.8% to 30.5% for the years ended December 31, 1997 and 1998,
respectively. Our operating expense ratios decreased from the prior year
primarily as a result of operating efficiencies resulting from operating a
larger portfolio and the impact of our April 1, 1998 adoption of a new
accounting policy, whereby expenditures for carpet, appliances and HVAC unit
replacements are expensed in the first five years of a property's life and
capitalized thereafter. Prior to the adoption of this policy, we had been
expensing these costs. Had this policy change not been adopted, the 1998
operating expense ratio would have been 32.0%.
Real estate taxes increased $10.4 million from $21.0 million to $31.5
million for the years ended December 31, 1997 and 1998, respectively, which
represents an annual increase of $24 per apartment home. Real estate taxes per
apartment home have increased primarily due to increases in the valuations of
renovated, acquired and developed properties, and increases in property tax
rates. This increase per apartment home was partially offset by lower property
taxes in the portfolio added through the Oasis merger.
General and administrative expenses increased from $4.4 million in 1997 to
$8.0 million in 1998, and increased as a percent of revenues from 2.2% to 2.5%.
The general and administrative expense ratio increase is mainly attributable to
the impact of our March 20, 1998 adoption of Issue No. 97-11, Accounting for
Internal Costs Relating to Real Estate Property Acquisitions, which required
certain costs that were previously capitalized to be expensed, which was
partially offset by efficiencies resulting from operating a larger portfolio.
119
Interest expense increased from $28.5 million in 1997 to $50.5 million in
1998 due to increased indebtedness related to the Oasis and Paragon mergers,
completed developments, renovations and property acquisitions. This increase was
partially offset by reductions in average interest rates on our debt, the equity
offering that occurred in July 1997 and property dispositions. Interest
capitalized was $9.9 million and $3.3 million for the years ended December 31,
1998 and 1997, respectively.
Depreciation and amortization increased from $44.8 million to $78.1
million. This increase was due primarily to the Oasis and Paragon mergers,
developments, renovations and property acquisitions.
Gain on sales of properties decreased $10.2 million due to the December
1997 disposition of four properties containing 1,400 apartment homes.
Dispositions in 1998 resulted in no book gain or loss.
Inflation
We lease apartments under lease terms generally ranging from six to
thirteen months. Management believes that such short-term lease contracts lessen
the impact of inflation due to the ability to adjust rental rates to market
levels as leases expire.
Year 2000 Conversion
We recognized the need to ensure that our computer equipment and software,
other equipment and operations would not be adversely impacted by the change to
the calendar Year 2000. As such, we took steps to identify and resolve potential
areas of risk by implementing a comprehensive Year 2000 action plan. The plan
was divided into four phases: identification, assessment,
notification/certification, and testing/contingency plan development; and
included three major elements: computer systems, other equipment and third
parties. We have completed all four phases of our Year 2000 action plan.
The Year 2000 issue did not pose significant operating problems for our
computer systems, since the majority of computer equipment and software products
we utilize were already compliant or were converted or modified as part of
system upgrades unrelated to the Year 2000 issue. We have developed a
contingency plan which will permit our primary computer systems operations to
continue if any Year 2000 issues presently unknown to us occur in the future.
We communicated with our key third party service providers and vendors,
including those who had previously sold equipment to us, and obtained
information and compliance certificates, wherever possible, regarding their
state of readiness with respect to the Year 2000 issue. Although all of our key
third party service providers and vendors indicated that they are or were
expected to be ready regarding the Year 2000 issue, and we are not aware of any
material Year 2000 issues regarding these third parties readiness, we cannot be
certain that the representations of these third parties were accurate or their
systems will continue to be Year 2000 compliant.
Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which requires recognition of all
derivatives as either assets or liabilities in the financial statements and
measurement of those instruments at fair value. The initial effective date of
SFAS No. 133 was delayed, and is now effective for all periods beginning after
June 15, 2000. Management believes that the adoption of SFAS No. 133 will not
have a material impact on our consolidated financial statements.
120
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Camden Property Trust
We have audited the accompanying consolidated balance sheets of Camden Property
Trust as of December 31, 1999 and 1998, and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the management of Camden Property Trust. Our responsibility is
to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Camden Property Trust at December
31, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Houston, Texas
February 4, 2000
121
CAMDEN PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
------------------------------
1999 1998
-------------- ---------------
Assets
Real estate assets, at cost
Land $ 354,833 $ 321,752
Buildings and improvements 2,122,793 1,917,026
-------------- ---------------
2,477,626 2,238,778
Less: accumulated depreciation (253,545) (167,560)
-------------- --------------
Net operating real estate assets 2,224,081 2,071,218
Properties under development, including land 178,539 216,680
Investment in joint ventures 21,869 32,484
-------------- --------------
Total real estate assets 2,424,489 2,320,382
Accounts receivable-- affiliates 2,228 831
Notes receivable:
Affiliates 1,800 1,800
Other 34,442
Other assets, net 14,744 15,036
Cash and cash equivalents 5,517 5,647
Restricted cash 4,712 4,286
-------------- --------------
Total assets $ 2,487,932 $ 2,347,982
============== ==============
Liabilities and Shareholders' Equity
Liabilities
Notes payable:
Unsecured $ 820,623 $ 632,923
Secured 344,467 369,645
Accounts payable 20,323 24,180
Accrued real estate taxes 24,485 21,474
Accrued expenses and other liabilities 33,987 28,278
Distributions payable 27,114 25,735
-------------- --------------
Total liabilities 1,270,999 1,102,235
Minority interests:
Preferred units 132,679
Common units 64,173 71,783
-------------- -------------
Total minority interests 196,852 71,783
7.33% Convertible Subordinated Debentures 3,406 3,576
Shareholders' Equity
Preferred shares of beneficial interest; $2.25 Series A Cumulative
Convertible, $0.01 par value per share, liquidation preference
of $25 per share, 10,000 shares authorized, 4,165 issued and
outstanding at December 31, 1999 and 1998 42 42
Common shares of beneficial interest; $0.01 par value per share;
100,000 shares authorized; 45,317 and 45,123 issued at
December 31, 1999 and 1998, respectively 448 447
Additional paid-in capital 1,303,645 1,299,539
Distributions in excess of net income (132,198) (98,897)
Unearned restricted share awards (8,485) (10,039)
Less: treasury shares, at cost (146,777) (20,704)
-------------- --------------
Total shareholders' equity 1,016,675 1,170,388
-------------- --------------
Total liabilities and shareholders' equity $ 2,487,932 $ 2,347,982
============== ==============
See Notes to Consolidated Financial Statements.
122
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues
Rental income $ 341,168 $ 300,632 $ 187,928
Other property income 22,148 18,093 9,446
----------- ----------- -----------
Total property income 363,316 318,725 197,374
Equity in income of joint ventures 683 1,312 1,141
Fee and asset management 5,373 1,552 743
Other income 1,924 2,250 531
----------- ----------- -----------
Total revenues 371,296 323,839 199,789
----------- ----------- -----------
Expenses
Property operating and maintenance 107,972 97,137 70,679
Real estate taxes 36,410 31,469 21,028
General and administrative 10,606 7,998 4,389
Interest 57,856 50,467 28,537
Depreciation and amortization 89,516 78,113 44,836
----------- ----------- -----------
Total expenses 302,360 265,184 169,469
----------- ----------- -----------
Income before gain on sales of properties and joint venture
interests, losses related to early retirement of debt and
minority interests 68,936 58,655 30,320
Gain on sales of properties and joint venture interests 2,979 10,170
Losses related to early retirement of debt (397)
----------- ----------- -----------
Income before minority interests 71,915 58,655 40,093
Income allocated to minority interests
Preferred unit distributions (8,278)
Operating partnership units (2,014) (1,322) (1,655)
----------- ----------- -----------
Total income allocated to minority interests (10,292) (1,322) (1,655)
----------- ----------- -----------
Net income 61,623 57,333 38,438
Preferred share dividends (9,371) (9,371)
----------- ----------- -----------
Net income to common shareholders $ 52,252 $ 47,962 $ 38,438
=========== =========== ===========
Basic earnings per share $ 1.27 $ 1.16 $ 1.46
Diluted earnings per share $ 1.23 $ 1.12 $ 1.41
Distributions declared per common share $ 2.08 $ 2.02 $ 1.96
Weighted average number of common shares outstanding 41,236 41,174 26,257
Weighted average number of common and common dilutive 44,291 44,183 28,356
equivalent shares outstanding
See Notes to Consolidated Financial Statements.
123
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
Preferred Common Additional Distributions Unearned Treasury
Shares of Shares of Paid-In in Excess of Restricted Shares
Beneficial Beneficial Capital Net Income Share
Interest Interest Awards
---------- ---------- ------------ -------------- ----------- ----------
Shareholders' Equity, January 1, 1997 $ $ 165 $ 348,339 $ (49,515) $ (3,561) $
Net income to common shareholders 38,438
Common shares issued in Paragon Acquisition
(9,466 shares) 95 262,275
Public offering of 4,830 common shares 48 142,579
Common shares issued under dividend reinvestment plan 38
Conversion of debentures 851 shares) 9 21,061
Restricted shares issued under benefit plan
(188 shares) 2 5,519 (3,407)
Restricted shares placed into Rabbi Trust (261 shares) (3) 3
Common share options exercised (33 shares) 1 773
Conversion of Operating Partnership units (5 shares) 154
Cash distributions ($1.96 per share) (52,449)
---------- ---------- ------------ -------------- ----------- ----------
Shareholders' Equity, December 31, 1997 317 780,738 (63,526) (6,965)
---------- ---------- ------------ -------------- ----------- ----------
Net income to common shareholders 47,962
Common shares issued in Oasis Merger (12,393 shares) 124 395,404
Preferred shares issued in Oasis Merger (4,165 shares 42 104,083
Common shares issued under dividend reinvestment plan 35
Conversion of debentures (102 shares) 1 2,408
Restricted shares issued under benefit plan (232 shares) 2 6,675 (3,076)
Employee Stock Purchase Plan (136)
Restricted shares placed into Rabbi Trust (236 shares) (2) 2
Common share options exercised (82 shares) 1 428
Conversion of Operating Partnership units (346 shares) 4 9,904
Repurchase of common shares (801 shares) (20,704)
Cash distributions ($2.02 per share) (83,333)
---------- ---------- ------------ -------------- ----------- ----------
Shareholders' Equity, December 31, 1998 42 447 1,299,539 (98,897) (10,039) (20,704)
---------- ---------- ------------ -------------- ----------- ----------
Net income to common shareholders 52,252
Common shares issued under dividend reinvestment plan 28
Conversion of debentures (7 shares) 169
Restricted shares issued under benefit plan (90 shares) 1 2,041 1,559
Employee Stock Purchase Plan (522)
Restricted shares placed into Rabbi Trust (35 shares) 5 (5)
Common share options exercised (80 shares) 1,806
Conversion of Operating Partnership units (23 shares) 479
Repurchase of minority interest units 100
Repurchase of common shares (4,890 shares) (126,073)
Cash distributions ($2.08 per share) (85,553)
---------- ---------- ------------ -------------- ----------- ----------
Shareholders' Equity, December 31, 1999 $ 42 $ 448 $1,303,645 $ (132,198) $ (8,485) $(146,777)
========== ========== ============ ============== =========== ==========
See Notes to Consolidated Financial Statements.
124
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------------
1999 1998 1997
----------- ----------- ------------
Cash Flow from Operating Activities
Net income $ 61,623 $ 57,333 $ 38,438
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 89,516 78,113 44,836
Equity in income of joint ventures, net of cash received 2,491 1,278 929
Gain on sales of properties and joint venture interests (2,979) (10,170)
Losses related to early retirement of debt 397
Minority interest. 2,014 1,322 1,655
Accretion of discount on unsecured notes payable 320 169 142
Net change in operating accounts 11,036 204 (10,253)
----------- ----------- ------------
Net cash provided by operating activities 164,021 138,419 65,974
Cash Flow from Investing Activities
Cash of Oasis and Paragon at acquisition 7,253 9,847
Net proceeds from Sierra-Nevada transaction 226,128
Increase in real estate assets (213,352) (335,567) (133,206)
Net proceeds from sales of properties 13,226 42,513 37,826
Net proceeds from sale of joint venture interests 5,465 6,841
Increase in investment in joint ventures (2,012) (4,922)
Decrease in investment in joint ventures 1,505 1,478 4,624
Increase in notes receivable (23,530)
Net decrease in affiliate notes receivable 5,389 7,749
Other (1,873) (4,126) (549)
----------- ----------- ------------
Net cash used in investing activities (220,571) (55,013) (73,709)
Cash Flow from Financing Activities
Net increase (decrease) in unsecured lines of credit and short-term (66,000) 146,792 31,000
borrowings
Debt repayments from Sierra-Nevada translation (114,248)
Proceeds from notes payable 253,380 152,600 100,000
Repayment of notes payable (25,178) (160,225) (206,097)
Proceeds from issuance of preferred units, net 132,679
Proceeds from issuance of common shares 142,627
Distributions to shareholders and minority interests (108,253) (89,115) (55,514)
Repurchase of common shares and units (128,929) (20,704)
Losses related to early retirement of debt (397)
Other (1,279) 673 218
----------- ----------- ------------
Net cash provided by (used in) financing activities 56,420 (84,227) 11,837
----------- ----------- ------------
Net (decrease) increase in cash and cash equivalents (130) (821) 4,102
Cash and cash equivalents, beginning of period 5,647 6,468 2,366
----------- ----------- ------------
Cash and cash equivalents, end of period $ 5,517 $ 5,647 $6,468
=========== ============ ===========
Supplemental Information
Cash paid for interest, net of interest capitalized $ 54,226 $ 51,574 $ 27,155
Interest capitalized 16,396 9,929 3,338
Supplemental Schedule of Noncash Investing and Financing Activities
Acquisition of Oasis (including the Sierra-Nevada transaction)
and Paragon, net of cash acquired:
Fair value of assets acquired $ 835 $ 793,513 $ 650,634
Liabilities assumed 835 505,721 332,839
Common shares issued 395,528 262,370
Preferred shares issued 104,125
Fair value of minority interest 21,520 65,272
Notes payable assumed upon purchase of properties 22,424 16,022
Conversion of 7.33% subordinated debentures to common shares, net 169 2,409 21,070
Value of shares issued under benefit plans, net 2,047 6,821 5,372
Conversion of operating partnership units to common shares 479 9,881 153
Notes receivable issued upon sale of real estate assets 10,912
See Notes to Consolidated Financial Statements.
125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Camden Property Trust is a self-administered and self-managed real estate
investment trust organized on May 25, 1993. We, with our subsidiaries, report as
a single business segment, with activities related to the ownership,
development, construction and management of multifamily apartment communities in
the Southwest, Southeast, Midwest and Western regions of the United States. As
of December 31, 1999, we owned interests in, operated or were developing 159
multifamily properties containing 55,785 apartment homes located in nine states.
Six of our multifamily properties containing 2,474 apartment homes were under
development at December 31, 1999. Additionally, we have several sites which we
intend to develop into multifamily apartment communities.
Acquisition of Oasis Residential, Inc. On April 8, 1998, we acquired,
through a tax-free merger, Oasis Residential, Inc., a publicly traded Las
Vegas-based multifamily REIT. Through this acquisition, we acquired 52 completed
multifamily properties and 15,514 apartment homes at the date of acquisition.
Each share of Oasis common stock outstanding on April 8, 1998 was exchanged for
0.759 of a Camden common share. Each share of Oasis Series A cumulative
convertible preferred stock outstanding on April 8, 1998 was exchanged for one
Camden Series A cumulative convertible preferred share with terms and conditions
comparable to the Oasis preferred stock. We issued 12.4 million common shares
and 4.2 million preferred shares in exchange for the outstanding Oasis common
and preferred stock, respectively. We assumed approximately $484 million of
Oasis debt, at fair value, in the merger. The accompanying consolidated
financial statements include the operations of Oasis since April 1, 1998, the
effective date of the Oasis merger for accounting purposes.
In connection with the merger with Oasis, on June 30, 1998, we completed a
transaction in which Camden USA, Inc., one of our wholly owned subsidiaries, and
TMT-Nevada, L.L.C., a Delaware limited liability company, formed Sierra-Nevada
Multifamily Investments, LLC. We entered into this transaction to reduce our
market risk in the Las Vegas area. TMT-Nevada holds an 80% interest in
Sierra-Nevada and Camden USA holds the remaining 20% interest.
In the above transaction, we transferred to Sierra-Nevada 19 apartment
communities containing 5,119 apartment homes for an aggregate of $248 million.
Prior to the merger, Oasis owned 100% of each of these communities. In the
merger, Camden USA acquired these communities. As a result, after the merger and
prior to the Sierra-Nevada transaction, Camden USA owned 100% of each of these
19 properties which are located in Las Vegas, Nevada. This transaction was
funded with capital invested by the members of Sierra-Nevada, the assumption of
$9.9 million of existing nonrecourse indebtedness, the issuance of 17
nonrecourse cross collateralized and cross defaulted loans totaling $180 million
and the issuance of two nonrecourse second lien mortgages totaling $7 million.
Acquisition of Paragon Group, Inc. On April 15, 1997, we acquired, through
a tax-free merger, Paragon Group, Inc., a Dallas-based multifamily REIT. Through
this acquisition, we acquired 50 multifamily properties and 15,975 apartment
homes. Each share of Paragon common stock outstanding on April 15, 1997 was
exchanged for 0.64 of our common shares. We issued 9.5 million common shares in
exchange for all of the outstanding shares of Paragon common stock, issued 2.4
million limited partnership units in Camden Operating, L.P. and assumed
approximately $296 million of Paragon debt, at fair value, in the Paragon
acquisition. The accompanying consolidated financial statements include the
operations of Paragon since April 1, 1997, the effective date of the Paragon
acquisition for accounting purposes.
126
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
our assets, liabilities, and operations and those of our wholly-owned
subsidiaries and partnerships in which our aggregate ownership is greater than
50%. Those entities owned less than 50% are accounted for using the equity
method. All significant intercompany accounts and transactions have been
eliminated in consolidation. 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 at the date of the financial statements, results of operations
during the reporting periods and related disclosures. Actual results could
differ from those estimates.
Operating Partnership and Minority Interests. Approximately 29% of our
multifamily apartment units at December 31, 1999 are held in our operating
partnership. This operating partnership has issued both common and preferred
limited partnership units. As of December 31, 1999 we held 82.3% of the common
limited partnership units and the sole 1% general partnership interest. The
remaining 16.7% of the common limited partnership units are primarily held by
former officers, directors and investors of Paragon, who collectively owned
1,977,270 common limited partnership units at December 31, 1999. Each common
limited partnership unit is redeemable for one common share of Camden or cash at
our election. Holders of common limited partnership units are not entitled to
rights as shareholders prior to redemption of their common limited partnership
units. No member of our management owns common limited partnership units and
only two of our eight Trust Managers own common limited partnership units.
Additionally, in conjunction with the Oasis merger, we acquired the
controlling managing member interest in Oasis Martinique, LLC which owns one
property in Orange County, California and is included in our consolidated
financial statements. The remaining interests comprising 754,270 units are
exchangeable into 572,490 of our common shares.
Minority interests in the accompanying consolidated financial statements
relate to holders of common limited partnership units and Martinique units, as
well as holders of preferred limited partnership units, which are discussed in
Note 8.
Cash and Cash Equivalents. All cash and investments in money market
accounts and other securities with a maturity of three months or less at the
date of purchase, are considered to be cash and cash equivalents.
Restricted Cash. Restricted cash mainly consists of escrow deposits held by
lenders for property taxes, insurance and replacement reserves. Substantially
all restricted cash is invested in short-term securities.
Real Estate Assets, at Cost. Real estate assets are carried at cost plus
capitalized carrying charges. Expenditures directly related to the development,
acquisition, and improvement of real estate assets, excluding those costs
prohibited by EITF 97-11 described in the New Accounting Pronouncements section,
are capitalized at cost as land, buildings and improvements. All construction
and carrying costs are capitalized and reported on the balance sheet in
"Properties under development, including land" until individual buildings are
completed. Upon completion of each building, the total cost of that building and
the associated land is transferred to "Land" and "Buildings and improvements"
and the assets are depreciated over their estimated useful lives using the
straight line method of depreciation. All operating expenses, excluding
depreciation, associated with occupied apartment homes for properties in the
development and leasing phase are expensed against revenues generated by those
apartment homes as they become occupied. Upon achieving 90% occupancy, or
127
generally one year from opening the leasing office (with some allowances for
larger than average properties), whichever comes first, all apartment homes are
considered operating and we begin expensing all items that were previously
considered as carrying costs.
If there is an event or change in circumstance that indicates a potential
impairment in the value of a property has occurred, our policy is to assess any
potential impairment by making a comparison of the current and projected
operating cash flows for such property over its remaining useful life, on an
undiscounted basis, to the carrying amount of the property. If such carrying
amounts are in excess of the estimated projected operating cash flows of the
property, we would recognize an impairment loss equivalent to an amount required
to adjust the carrying amount to its estimated fair market value.
Real estate to be disposed of is reported at the lower of its carrying
amount or its estimated fair value, less its cost to sell. Depreciation expense
is not recorded during the period in which such assets are held for sale.
We capitalized $33.4 million and $26.1 million in 1999 and 1998,
respectively, of renovation and improvement costs which extended the economic
lives and enhanced the earnings of our multifamily properties. If the accounting
policy described below had been adopted as of January 1, 1998, the amounts
capitalized for 1998 would have been $27.2 million.
Effective April 1, 1998, we implemented prospectively a new accounting
policy whereby expenditures for carpet, appliances and HVAC unit replacements
are capitalized and depreciated over their estimated useful lives. Previously,
all such replacements had been expensed. We believe that the newly adopted
accounting policy is preferable as it is consistent with standards and practices
utilized by the majority of our peers and provides a better matching of expenses
with the related benefit of the expenditure. The change in accounting principle
is inseparable from the effect of the change in accounting estimate and is
therefore treated as a change in accounting estimate. See the New Accounting
Pronouncements section for the effect of this change and our adoption of a new
accounting pronouncement for the year ended December 31, 1998.
Carrying charges, principally interest and real estate taxes, of land under
development and buildings under construction are capitalized as part of
properties under development and buildings and improvements to the extent that
such charges do not cause the carrying value of the asset to exceed its net
realizable value. Capitalized interest was $16.4 million in 1999, $9.9 million
in 1998 and $3.3 million in 1997. Capitalized real estate taxes were $3.2
million in 1999, $1.4 million in 1998 and $557,000 in 1997.
All initial buildings and improvements costs are depreciated over their
remaining estimated useful lives of 5 to 35 years using the straight line
method. Capital improvements subsequent to the initial renovation period are
depreciated over their expected useful lives of 3 to 15 years using the straight
line method.
Other Assets, Net. Deferred financing costs are amortized over the lives of
the asset or the terms of the related debt on the straight line method.
Leasehold improvements and equipment are depreciated on the straight line method
over the shorter of the expected useful lives or the lease terms which range
from 3 to 10 years. Accumulated depreciation and amortization for such assets
was $5.6 million in 1999 and $4.1 million in 1998.
Interest Rate Swap Agreements. The differential to be paid or received on
interest rate swap agreements is accrued as interest rates change and is
recognized over the life of the agreements as an increase or decrease in
interest expense. We do not use these instruments for trading or speculative
purposes.
Income Recognition. Rental and other property income is recorded when due
from residents and is recognized monthly as it is earned. Interest and all other
sources of income are recognized as earned.
128
Rental Operations. We own and operate multifamily apartment homes that are
rented to residents on lease terms ranging from six to thirteen months, with
monthly payments due in advance. None of the properties are subject to rent
control or rent stabilization. Operations of apartment properties acquired are
recorded from the date of acquisition in accordance with the purchase method of
accounting. In management's opinion, due to the number of residents, the type
and diversity of submarkets in which the properties operate, and the collection
terms, there is no concentration of credit risk.
Income Taxes and Distributions. We have maintained and intend to maintain
our election as a REIT under the Internal Revenue Code of 1986, as amended. As a
result, we generally will not be subject to federal taxation to the extent we
distribute 95% of our REIT taxable income to our shareholders and satisfy
certain other requirements. Accordingly, no provision for federal income taxes
has been included in the accompanying consolidated financial statements.
Taxable income differs from net income for financial reporting purposes due
principally to the timing of the recognition of depreciation expense. This
difference is primarily due to the difference in the book/tax basis of the real
estate assets and the differing methods of depreciation and useful lives of the
assets. During 1999, book depreciation expense exceeded the amount reported for
tax purposes by $21.1 million. The net book basis of our real estate assets
exceeds our net tax basis by $198.5 million at December 31, 1999.
A schedule of per share distributions we paid and reported to our
shareholders is set forth in the following tables:
Year Ended December 31,
-------------------------------------
Common Share Distributions 1999 1998 1997
--------- ---------- ----------
Ordinary income $ 2.08 $ 1.68 $ 1.30
20% Long-term capital gain 0.10 0.12
25% Sec. 1250 capital gain 0.24 0.08
Return of capital 0.46
--------- ---------- ----------
Total $ 2.08 $ 2.02 $ 1.96
========= ========== ==========
Percentage of distributions representing tax preference items. 12.187% 9.052% 17.013%
Year Ended December 31
--------------------------
Preferred Share Dividends 1999 1998*
---------- --------
Ordinary income $ 2.25 $ 1.40
20% Long-term capital gain 0.09
25% Sec. 1250 capital gain 0.20
---------- --------
Total $ 2.25 $ 1.69
========== ========
* Preferred share dividends for 1998 only include dividends paid from the date
of the Oasis merger through December 31,1998.
Property Operating and Maintenance Expenses. Property operating and
maintenance expenses included normal repairs and maintenance totaling $24.5
million in 1999, $21.5 million in 1998 and $14.6 million in 1997.
Earnings Per Share. Basic earnings per share has been computed by dividing
net income to common shareholders by the weighted average number of common
shares outstanding. Diluted earnings per share has been computed by dividing net
income to common shareholders (as adjusted) by the weighted average number of
common and common dilutive equivalent shares outstanding.
129
The following table presents basic and diluted earnings per share for the
periods indicated (in thousands, except per share amounts):
Year Ended December 31,
-----------------------------------------
1999 1998 1997
---------- ---------- ----------
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding 41,236 41,174 26,257
========== ========== ==========
Basic earnings per share $ 1.27 $ 1.16 $ 1.46
========== ========== ==========
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding 41,236 41,174 26,257
Shares issuable from assumed conversion of:
Common share options and awards granted 431 399 330
Minority interest units 2,624 2,610 1,769
---------- ---------- ----------
Weighted average common shares outstanding, as adjusted 44,291 44,183 28,356
========== ========== ==========
Diluted earnings per share $ 1.23 $ 1.12 $ 1.41
========== ========== ==========
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income $ 61,623 $ 57,333 $ 38,438
Less: preferred share dividends 9,371 9,371
---------- ---------- ----------
Net income to common shareholders (basic earnings per share 52,252 47,962 38,438
computation)
Minority interests 2,014 1,322 1,655
---------- ---------- ----------
Net income to common shareholders, as adjusted (diluted
earnings per share computation) $ 54,266 $ 49,284 $ 40,093
========== ========== ==========
Reclassifications. Certain reclassifications have been made to amounts in
prior year financial statements to conform with current year presentations.
New Accounting Pronouncements. In March 1998, the Emerging Issues Task
Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a
consensus decision on Issue No. 97-11, Accounting for Internal Costs Relating to
Real Estate Property Acquisitions, which requires that internal costs of
identifying and acquiring operating properties be expensed as incurred for
transactions entered into on or after March 20, 1998. Prior to our adoption of
this policy, we had been capitalizing such costs. Had we adopted Issue No. 97-11
and the new accounting policy for floor coverings, appliances and HVAC unit
replacements as of January 1, 1998, net income to common shareholders would have
increased $650,000 or $0.02 per basic and diluted earnings per share for the
year ended December 31, 1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
which requires recognition of all derivatives as either assets or liabilities in
the financial statements and measurement of those instruments at fair value. The
initial effective date of SFAS No. 133 was delayed, and is now effective for all
periods beginning after June 15, 2000. Management believes that the adoption of
SFAS No. 133 will not have a material impact on our consolidated financial
statements.
130
3. NOTES RECEIVABLE
We have entered into agreements with unaffiliated third parties to develop,
construct, and manage four multifamily projects containing 1,357 apartment
homes. We are providing financing for a portion of each project in the form of
notes receivable which mature in 2004. These notes earn interest at 10% annually
and are secured by second liens on the assets and partial guarantees by the
third party owners. Payments on the notes are to be from operating cash flow of
the individual properties. At December 31, 1999, these notes had principal
balances totaling $28.1 million. We anticipate funding up to an aggregate of $41
million in connection with these projects. We earn fees for managing the
development, construction and eventual operations of these properties. We have
the option to purchase these properties in the future at a price to be
determined based upon the property's performance and an agreed valuation model.
Additionally, we have a $6.3 million note receivable which bears interest
at 12% and matures in June 2000.
4. NOTES PAYABLE
The following is a summary of our indebtedness:
(In millions)
December 31,
-------------------------
1999 1998
------------ ------------
Senior Unsecured Notes:
6.73% - 7.28% Notes, due 2001 - 2006 $ 523.1 $ 323.9
6.68% - 7.70% Medium-Term Notes, due 2000 - 2009 181.5 127.0
Unsecured Lines of Credit and Short-Term Borrowings 116.0 182.0
---------- ----------
820.6 632.9
Secured Notes - Mortgage Loans (5.75% - 8.63%), due 2001-2028 344.5 369.7
---------- ----------
Total notes payable $1,165.1 $ 1,002.6
========== ==========
Floating rate debt included in unsecured notes payable, net
of interest rate swap agreements (5.75% - 8.50%) $ 161.0 $ 157.0
Floating rate tax-exempt debt included in mortgage loans (6.95% - 7.15%) $ 63.5 $ 64.3
Net book value of real estate assets subject to mortgage notes $ 605.5 $ 646.6
In August 1999, we entered into a line of credit with 14 banks for a total
commitment of $375 million. This line of credit replaces our three previous
lines of credit which totaled $275 million. The new line of credit is scheduled
to mature in August 2002. The scheduled interest rate is currently based on a
spread over LIBOR or Prime. The scheduled interest rates are subject to change
as our credit ratings change. Advances under the line of credit may be priced at
the scheduled rates, or we may enter into bid rate loans with participating
banks at rates below the scheduled rates. These bid rate loans have terms of six
months or less and may not exceed the lesser of $187.5 million or the remaining
amount available under the line of credit. The line of credit is subject to
customary financial covenants and limitations. At year end, we were in
compliance with all covenants and limitations.
As of December 31, 1999, we had $259 million available under our unsecured
line of credit. The weighted average balance outstanding on the unsecured lines
of credit during the year ended December 31, 1999 was $74.3 million, with a
maximum outstanding balance of $220 million.
131
During September 1999, we executed three interest rate swap agreements
totaling $70 million which are scheduled to mature in October 2000. These swaps
are being used as a hedge of interest rate exposure on our $90 million
medium-term notes issued in October 1998 which mature in October 2000.
Currently, the interest rate on the medium-term notes is fixed at 7.23%. The
interest rates on the swaps are reset monthly based on the one-month LIBOR rate
plus a spread which resulted in an effective interest rate on the swaps of 7.70%
at December 31, 1999.
During the first quarter of 1999, we issued $39.5 million aggregate
principal amounts of senior unsecured notes from our $196 million medium-term
note shelf registration. These fixed rate notes, due in January 2002 through
2009, bear interest at a weighted average rate of 7.07%, payable semiannually on
January and July 15. We used the net proceeds to reduce indebtedness outstanding
under the unsecured lines of credit.
During the second quarter of 1999, we issued $15 million aggregate
principal amounts of senior unsecured notes from our $196 million medium-term
note shelf registration. These fixed rate notes, due in March 2002, bear
interest at a rate of 6.74%, payable semiannually on March and September 15. We
used the net proceeds to reduce indebtedness outstanding under the unsecured
lines of credit.
Also during the second quarter, we issued from our $500 million shelf
registration an aggregate principal amount of $200 million of five-year senior
unsecured notes. Interest on the notes accrues at an annual rate of 7.0% and is
payable semi-annually on April and October 15, commencing on October 15, 1999.
The notes are direct, senior unsecured obligations and rank equally with all
other unsecured and unsubordinated indebtedness. We may redeem the notes at any
time subject to a make-whole provision. We used the net proceeds of $197.7
million to reduce indebtedness under the unsecured lines of credit and for
general working capital purposes.
At December 31, 1999, we maintained a $25 million interest rate hedging
agreement which is scheduled to mature in July 2000. The issuing bank has an
option to extend this agreement to July 2002. The LIBOR rate is fixed at 6.1%,
resulting in the fixed rate equal to 6.1% plus the actual LIBOR spread on the
related indebtedness. This swap continues to be used as a hedge to manage the
risk of interest rate fluctuations on the unsecured lines of credit and other
floating rate indebtedness.
At December 31, 1999, the weighted average interest rate on floating rate
debt was 7.45%.
Scheduled principal repayments on all notes payable outstanding at December
31, 1999 over the next five years are $107.0 million in 2000, $167.5 million in
2001, $156.4 million in 2002, $125.5 million in 2003, $235.3 million in 2004 and
$373.4 million thereafter.
5. CONVERTIBLE SUBORDINATED DEDENTURES
In April 1994, we issued $86.3 million aggregate principal amount of 7.33%
Convertible Subordinated Debentures due 2001. The debentures are convertible at
any time prior to maturity into our common shares of beneficial interest at a
conversion price of $24 per share, subject to adjustment under certain
circumstances. The debentures will not be redeemable prior to maturity, except
in certain circumstances intended to maintain our status as a REIT. Interest on
the debentures is payable on April and October 1 of each year. The debentures
are unsecured and subordinated to present and future senior debt and will be
effectively subordinated to all debt and other liabilities.
132
6. INCENTIVE AND BENEFIT PLANS
We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations in accounting for our share-based compensation. Under APB No.
25, since the exercise price of share options equals the market price of our
shares at the date of grant, no compensation expense is recorded. Restricted
shares are recorded to compensation expense over the vesting periods based on
the market value on the date of grant, and no compensation expense is recorded
for our Employee Stock Purchase Plan ("ESPP"), since the ESPP is considered
non-compensatory. We have adopted the disclosure-only provisions of SFAS No.
123, Accounting for Stock-Based Compensation.
Incentive Plan. We have a non-compensatory option plan which was amended in
the second quarter of 1997 by our shareholders and trust managers. This
amendment resulted in an increase in the maximum number of common shares
available for issuance under the plan to 10% of the common shares outstanding at
any time. Compensation awards that can be granted under the plan include various
forms of incentive awards including incentive share options, non-qualified share
options and restricted share awards. The class of eligible persons that can
receive grants of incentive awards under the plan consists of non-employee trust
managers, key employees, consultants, and directors of subsidiaries as
determined by a committee of our Board of Trust Managers. No incentive awards
may be granted after May 27, 2003.
Following is a summary of the activity of the plan for the three years
ended December 31, 1999:
Shares Options and Restricted Shares
Available
for
Issuance
------------- ----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
1999 1999 1999 Price 1998 1998 Price 1997 1997 Price
------------- --------- ------------ ---------- ------------ ---------- ------------
Balance at January 1 1,280,362 2,838,499 $ 28.03 1,303,849 $ 24.94 843,360 $ 23.34
Current Year Share Adjustment (a) (477,959)
Options
Granted (603,072) 603,072 24.88 1,657,008 29.32 310,050 26.99
Exercised (79,650) 22.67 (82,327) 22.96 (33,042) 23.39
Forfeited 139,768 (139,768) 27.38 (271,538) 23.57 (4,333) 24.00
------------- --------- ------------ ---------- ------------ ---------- ------------
Net Options (463,304) 383,654 27.71 1,303,143 30.92 272,675 27.47
------------- --------- ------------ ---------- ------------ ---------- ------------
Restricted Shares
Granted (142,826) 142,826 25.31 248,769 29.06 193,724 28.42
Forfeited (53,274) 27.01 (17,262) 27.67 (5,910) 26.39
------------- --------- ------------ ---------- ------------ ---------- ------------
Net Restricted Shares (142,826) 89,552 26.79 231,507 29.16 187,814 28.48
------------- --------- ------------ ---------- ------------ ---------- ------------
Balance at December 31 196,273 3,311,705 $ 27.50 2,838,499 $ 28.03 1,303,849 $ 24.94
============= ========= ============ ========== ============ ========== ============
Exercisable options at December 31 1,056,076 $ 27.86 586,607 $ 26.15 565,600 $ 22.95
Vested restricted shares at December 31 343,702 $ 25.93 213,782 $ 25.20 123,341 $ 24.46
(a) Current year share adjustment is the net affect from the repurchase of our
common shares and the increase in shares available due to the increase in
shares outstanding.
Options are exercisable, subject to the terms and conditions of the plan,
in increments of 33.33% per year on each of the first three anniversaries of the
date of grant. The plan provides that the exercise price of an option will be
determined by the committee on the day of grant and to date all options have
been granted at an exercise price which equals the fair market value on the date
of grant. Options exercised during 1999 were exercised at prices ranging from
$22 to $24.25 per share. At December 31,1999, options outstanding were at prices
133
ranging from $22 to $29.44 per share. Such options have a weighted average
remaining contractual life of eight years.
In 1998, in connection with the merger with Oasis, we assumed the Oasis
stock incentive plans. We converted all unexercised Oasis stock options issued
under the former Oasis stock incentive plans that are held by former employees
of Oasis into 894,111 options to purchase Camden common shares based on the
0.759 exchange ratio described in Note 1. The options are exercisable at prices
ranging from $28.66 to $33.76. All of the Oasis options became fully vested upon
conversion, are exercisable, and have a weighted average remaining contractual
life of five years. These options are exercisable at a weighted average price of
$30.29.
The fair value of each option grant, excluding the Oasis stock options, was
estimated on the date of grant utilizing the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1999, 1998,
and 1997, respectively: risk-free interest rates of 4.9%, 5.5% to 5.6%, and 6.3%
to 6.9%, expected life of ten years, dividend yield of 7.6%, 7.8% and 6.3%, and
expected share volatility of 13.7%, 13.9%, and 14.4%. The weighted average fair
value of options granted in 1999, 1998, and 1997, respectively, was $0.91, $1.27
and $2.63 per share.
Restricted shares have vesting periods of up to five years. The
compensation cost for restricted shares has been recognized at the fair market
value of our shares.
Employee Stock Purchase Plan. In July 1997, we established and commenced an
ESPP for all active employees, officers, and trust managers who have completed
one year of continuous service. Participants may elect to purchase Camden common
shares through payroll or director fee deductions and/or through quarterly
contributions. At the end of each six-month offering period, each participant's
account balance is applied to acquire common shares on the open market at 85% of
the market value, as defined, on the first or last day of the offering period,
whichever price is lower. Effective for the 2000 plan year, each participant
must hold the shares purchased for nine months in order to receive the discount.
A participant may not purchase more than $25,000 in value of shares during any
plan year, as defined. No compensation expense was recognized for the difference
in price paid by employees and the fair market value of our shares at the date
of purchase. There were 98,456 and 32,678 shares purchased under the ESPP during
1999 and 1998, respectively. No shares were purchased in 1997. The weighted
average fair value of ESPP shares purchased in 1999 and 1998 was $27.42 and
$30.41 per share, respectively. On January 4, 2000, 17,298 shares were purchased
under the ESPP related to the 1999 plan year.
If we applied the recognition provisions of SFAS No. 123 to our option
grants and ESPP, our net income to common shareholders and related basic and
diluted earnings per share would be as follows (in thousands, except per share
amounts):
Year Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
Net income to common shareholders $ 51,076 $ 47,360 $ 38,381
Basic earnings per share $ 1.24 $ 1.15 $ 1.46
Diluted earnings per share $ 1.20 $ 1.10 $ 1.41
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
Rabbi Trust. In February 1997, we established a rabbi trust in which salary
and bonus amounts awarded to certain officers under the key employee share
option plan and restricted shares awarded to certain officers and trust managers
may be deposited. We account for the rabbi trust similar to a compensatory stock
option plan. At December 31, 1999, approximately 532,000 restricted shares were
held in the rabbi trust.
134
401(k) Savings Plan. We have a 401(k) savings plan which is a voluntary
defined contribution plan. Under the savings plan, every employee is eligible to
participate beginning on the earlier of January 1 or July 1 following the date
the employee has completed six months of continuous service with us. Each
participant may make contributions to the savings plan by means of a pre-tax
salary deferral which may not be less than 1% nor more than 15% of the
participant's compensation. The federal tax code limits the annual amount of
salary deferrals that may be made by any participant. We may make matching
contributions on the participant's behalf. A participant's salary deferral
contribution will always be 100% vested and nonforfeitable. A participant will
become vested in our matching contributions 33.33% after one year of service,
66.67% after two years of service and 100% after three years of service.
Expenses under the savings plan were not material.
7. COMMON SHARE REPURCHASE PROGRAM
In October 1999, the Board of Trust Managers authorized us to repurchase or
redeem up to $100 million of our securities through open market purchases and
private transactions. This amount is in addition to the initial $50 million the
Board authorized for repurchase or redemption in September 1998, and the
additional $50 million the Board authorized for repurchase or redemption in
March 1999. As of December 31, 1999, we had repurchased 5,691,826 common shares
and redeemed 103,864 units for a total cost of $146.8 million and $2.9 million,
respectively. Management expects to complete the remaining repurchases during
2000.
8. PREFERRED UNITS
In February 1999, our operating partnership issued $100 million of 8.5%
Series B Cumulative Redeemable Perpetual Preferred Units. Distributions on the
preferred units are payable quarterly in arrears. The preferred units are
redeemable for cash by the operating partnership on or after the fifth
anniversary of issuance at par plus the amount of any accumulated and unpaid
distributions. The preferred units are convertible after 10 years by the holder
into our 8.5% Series B Cumulative Redeemable Perpetual Preferred Shares. The
preferred units are subordinate to present and future debt. We used the net
proceeds to reduce indebtedness outstanding under the unsecured lines of credit
and repurchase common shares.
During the third quarter of 1999, our operating partnership issued $35.5
million of 8.25% Series C Cumulative Redeemable Perpetual Preferred Units.
Distributions on the preferred units are payable quarterly in arrears. The
preferred units are redeemable for cash by the operating partnership on or after
the fifth anniversary of issuance at par plus the amount of any accumulated and
unpaid distributions. The preferred units are convertible after 10 years by the
holder into our 8.25% Series C Cumulative Redeemable Perpetual Preferred Shares.
The preferred units are subordinate to present and future debt. Subsequent to
year end, our operating partnership issued $17.5 million of the 8.25% Series C
Cumulative Redeemable Perpetual Preferred Units. We used the net proceeds to
reduce indebtedness outstanding under the unsecured lines of credit and
repurchase common shares.
9. CONVERTIBLE PREFERRED SHARES
The 4,165,000 preferred shares pay a cumulative dividend quarterly in
arrears in an amount equal to $2.25 per share per annum. The preferred shares
generally have no voting rights and have a liquidation preference of $25 per
share plus accrued and unpaid distributions. The preferred shares are
convertible at the option of the holder at any time into common shares at a
conversion price of $32.4638 per common share (equivalent to a conversion rate
of 0.7701 per common share for each preferred share), subject to adjustment in
certain circumstances. The preferred shares are not redeemable prior to April
30, 2001.
135
10. RELATED PARTY TRANSACTIONS
Two of our executive officers have loans totaling $1.8 million with one of
our nonqualified-REIT subsidiaries. The executives utilized amounts received
from these loans to purchase our common shares in 1994. The loans mature in
February 2004 and bear interest at the fixed rate of 5.23%. These loans are full
recourse obligations of the officers and do not require any prepayments of
principal until maturity.
In connection with the Paragon and Oasis mergers and the formation of
Sierra-Nevada, we began performing property management services for owners of
affiliated properties. Management fees earned on the properties amounted to
$845,000, $583,000, and $279,000 for the years ended December 31, 1999, 1998,
and 1997, respectively.
In connection with the Oasis merger, we entered into consulting agreements
with two former Oasis executives, one of whom currently serves as a trust
manager, to locate potential investment opportunities in California. We paid
consulting fees totaling $389,000 and $340,000 to these executives in 1999 and
1998, respectively.
In December 1999, our Board of Trust Managers approved a plan which
permitted six of our senior executive officers to complete the purchase of
666,034 shares of our common shares of beneficial interest in open market
transactions for a total of $17.5 million. The purchases were funded with
unsecured full recourse personal loans made to each of the executives by a third
party lender. The loans mature in five years, bear interest at 7.5% and require
interest to be paid quarterly. In order to facilitate the employee share
purchase transactions, we entered into a guaranty agreement with the lender for
payment of all indebtedness, fees and liabilities of the officers to the lender.
Simultaneously, we entered into a reimbursement agreement with each of the
executive officers whereby each executive officer has indemnified us and
absolutely and unconditionally agreed to reimburse us fully for any amounts paid
by us pursuant to the terms of the guaranty agreement, including interest from
the date amounts are paid by us until repayment by the officer. We have not had
to perform under the guaranty agreement.
Subsequent to year end, the Board approved a plan for four of our senior
executive officers to complete the purchase of an additional $5.5 million of
our common shares. We have provided additional guarantees for these purchases.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure about fair value for all financial
instruments, whether or not recognized, for financial statement purposes.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1999 and 1998.
Considerable judgment is necessary to interpret market data and develop
estimated fair values. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts we could obtain on disposition of the
financial instruments. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
As of December 31, 1999 and 1998, management estimates that the fair value
of cash and cash equivalents, accounts receivable, notes receivable, accounts
payable, accrued expenses and other liabilities and distributions payable are
carried at amounts which reasonably approximate their fair value.
As of December 31, 1999, the outstanding balance of fixed rate notes
payable of $985.6 million (excluding $25 million of variable rate debt fixed
through an interest rate swap agreement) had a fair value of $963.5 million as
estimated based upon interest rates available for the issuance of debt with
136
similar terms and remaining maturities. The floating rate notes payable balance
at December 31, 1999 approximates fair value.
The fair value of our interest rate swap agreements, which are used for
hedging purposes, are estimated by obtaining quotes from an investment broker.
At December 31, 1999, there were no carrying amounts related to these
arrangements in the consolidated balance sheet, and the fair value of these
agreements was approximately $90,000.
As of December 31, 1998, the carrying amount of fixed and floating rate
debt, including interest rate swap agreements, approximated fair value.
We are exposed to credit risk in the event of nonperformance by
counterparties to our interest rate swap agreements, but have no off-balance
sheet risk of loss. We anticipate that our counter parties will fully perform
their obligations under the agreements.
12. NET CHANGE IN OPERATING ACCOUNTS
The effect of changes in the operating accounts on cash flows from
operating activities is as follows:
(In thousands) Year Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ ------------
Decrease (increase) in assets:
Accounts receivable - affiliates $ (1,085) $ 1,496 $ 853
Other assets, net 38 1,518 2,046
Restricted cash (426) 1,272 (1,733)
Increase (decrease) in liabilities:
Accounts payable (3,768) 11,570 434
Accrued real estate taxes 3,011 3,879 842
Accrued expenses and other liabilities 13,266 (19,531) (12,695)
------------ ------------ ------------
Net change in operating accounts $ 11,036 $ 204 $ (10,253)
============ ============ ============
13. COMMITMENTS AND CONTINGENCIES
Construction Contracts. As of December 31, 1999, we were obligated for
approximately $45.0 million of additional expenditures (a substantial amount of
which is to be provided by debt).
Lease Commitments. At December 31, 1999, we had long-term leases covering
certain land, office facilities and equipment. Rental expense totaled $1.7
million in 1999, $1.0 million in 1998 and $783,000 in 1997. Minimum annual
rental commitments for the years ending December 31, 2000 through 2004 are $1.5
million, $1.3 million, $1.1 million, $1.0 million and $1.0 million,
respectively, and $8.1 million in the aggregate thereafter.
Employment Agreements. We have employment agreements with six of our senior
officers, the terms of which expire at various times through August 20, 2001.
Such agreements provide for minimum salary levels as well as various incentive
compensation arrangements, which are payable based on the attainment of specific
goals. The agreements also provide for severance payments in the event certain
situations occur such as termination without cause or a change of control. The
severance payments vary based on the officer's position and amount to one times
the current salary base for four of the officers and 2.99 times the average
annual compensation over the previous three fiscal years for the two remaining
officers. Six months prior to expiration, unless notification of termination is
given by the senior officers, these agreements extend for one year from the date
of expiration.
137
Contingencies. Prior to our merger with Oasis, Oasis had been contacted by
certain regulatory agencies with regards to alleged failures to comply with the
Fair Housing Amendments Act (the "Fair Housing Act") as it pertained to nine
properties (seven of which we currently own) constructed for first occupancy
after March 31, 1991. On February 1, 1999, the Justice Department filed a
lawsuit against us and several other defendants in the United States District
Court for the District of Nevada alleging (1) that the design and construction
of these properties violates the Fair Housing Act and (2) that we, through the
merger with Oasis, had discriminated in the rental of dwellings to persons
because of handicap. The complaint requests an order that (i) declares that the
defendant's policies and practices violate the Fair Housing Act; (ii) enjoins us
from (a) failing or refusing, to the extent possible, to bring the dwelling
units and public use and common use areas at these properties and other covered
units that Oasis has designed and/or constructed into compliance with the Fair
Housing Act, (b) failing or refusing to take such affirmative steps as may be
necessary to restore, as nearly as possible, the alleged victims of the
defendants alleged unlawful practices to positions they would have been in but
for the discriminatory conduct and (c) designing or constructing any covered
multi-family dwellings in the future that do not contain the accessibility and
adaptability features set forth in the Fair Housing Act; and requires us to pay
damages, including punitive damages, and a civil penalty.
With any acquisition, we plan for and undertake renovations needed to
correct deferred maintenance, life/safety and Fair Housing matters. We are
currently in the process of determining the extent of the alleged noncompliance
on the properties discussed above and the remaining changes that may be
necessitated. At this time, we are not able to provide an estimate of costs and
expenses associated with the resolution of this matter, however, management does
not expect the amount to be material. There can be no assurance that we will be
successful in the defense of the Justice Department action.
We are 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 our consolidated financial statements.
14. SUBSEQUENT EVENTS
In the ordinary course of our business, we issue letters of intent
indicating a willingness to negotiate for the purchase or sale of multifamily
properties or development land. In accordance with local real estate market
practice, such letters of intent are non-binding, and neither party to the
letter of intent is obligated to pursue negotiations unless and until a
definitive contract is entered into by the parties. Even if definitive contracts
are entered into, the letters of intent and resulting contracts contemplate that
such contracts will provide the purchaser with time to evaluate the properties
and conduct due diligence and during which periods the purchaser will have the
ability to terminate the contracts without penalty or forfeiture of any deposit
or earnest money. There can be no assurance that definitive contracts will be
entered into with respect to any properties covered by letters of intent or that
we will acquire or sell any property as to which we may have entered into a
definitive contract. Further, due diligence periods are frequently extended as
needed. An acquisition or sale becomes probable at the time that the due
diligence period expires and the definitive contract has not been terminated. We
are then at risk under an acquisition contract, but only to the extent of any
earnest money deposits associated with the contract, and is obligated to sell
under a sales contract.
We are currently in the due diligence period for the purchase of land for
development. No assurance can be made that we will be able to complete the
negotiations or become satisfied with the outcome of the due diligence.
138
At year end, we were obligated under an earnest money contract to sell two
parcels of land totaling approximately $15 million. We expect to complete this
transaction late in the first quarter to early in the second quarter of 2000.
We are currently seeking to selectively dispose of up to $150 million of
real estate assets that management believes have a lower projected net operating
income growth rate than the overall portfolio, or no longer conform to our
operating and investment strategies. We currently anticipate using the potential
proceeds from these sales to retire debt and repurchase shares. However, we
cannot assure you that we will complete these sales or that the final outcomes
of these sales, if completed, will be on terms favorable to us.
15. QUARTERLY FINANCIAL DATA (unaudited)
Summarized quarterly financial data for the years ended December 31, 1999
and 1998 are as follows:
(In thousands, except per share amounts)
First Second Third Fourth Total
---------- ----------- ----------- ---------- -----------
1999:
Revenues $ 88,835 $ 91,412 $ 94,177 $ 96,872 $ 371,296
Net income to common shareholders 13,706* 12,838 13,535** 12,173 52,252
Basic earnings per share 0.32* 0.31 0.33** 0.30 1.27
Diluted earnings per share 0.31* 0.30 0.32** 0.29 1.23
1998***:
Revenues $ 58,592 $ 91,587 $ 86,549 $ 87,111 $ 323,839
Net income to common shareholders 8,961 9,568 14,650 14,783 47,962
Basic earnings per share 0.28 0.22 0.33 0.33 1.16
Diluted earnings per share 0.27 0.21 0.31 0.32 1.12
* Includes a $720 or $0.02 basic and diluted earnings per share impact
related to gain on the sale of a property.
** Includes a $2,259 or $0.06 basic earnings and $0.05 diluted earnings per
share impact related to gain on sales of properties.
*** Includes results of the Oasis merger beginning April 1, 1998.
16. Price Range of Common Shares (unaudited)
The high and low sales prices per share of our common shares, as reported
on the New York Stock Exchange composite tape, and distributions per share
declared for the quarters indicated were as follows:
High Low Distributions
------------ -------------- -----------------
1999:
First $ 26 11/16 $ 24 3/16 $ 0.520
Second 28 3/16 24 1/8 0.520
Third 28 3/16 25 15/16 0.520
Fourth 27 3/4 25 9/16 0.520
1998:
First $ 30 9/16 $ 28 5/8 $ 0.505
Second 31 1/16 27 15/16 0.505
Third 30 7/16 25 0.505
Fourth 27 7/8 24 1/2 0.505
139
CAMDEN PROPERTY TRUST
COMPARATIVE SUMMARY OF SELECTED FINANCIAL AND PROPERTY DATA
(In thousands, except per share amounts)
Year Ended December 31,
----------------------------------------------------------------------
1999 1998* 1997** 1996 1995
------------- ------------- ------------- ----------- -----------
Operating Data
Revenues:
Rental income $ 341,168 $ 300,632 $ 187,928 $ 105,785 $ 92,275
Other property income 22,148 18,093 9,446 4,453 3,617
------------- ------------- ------------- ----------- -----------
Total property income 363,316 318,725 197,374 110,238 95,892
Equity in income of joint ventures 683 1,312 1,141
Fee and asset management 5,373 1,552 743 949 1,029
Other income 1,924 2,250 531 419 353
------------- ------------- ------------- ----------- -----------
Total revenues 371,296 323,839 199,789 111,606 97,274
------------- ------------- ------------- ----------- -----------
Expenses
Property operating and maintenance 107,972 97,137 70,679 40,604 37,093
Real estate taxes 36,410 31,469 21,028 13,192 11,481
General and administrative 10,606 7,998 4,389 2,631 2,263
Interest 57,856 50,467 28,537 17,336 13,843
Depreciation and amortization 89,516 78,113 44,836 23,894 20,264
------------- ------------- ------------- ----------- -----------
Total expenses 302,360 265,184 169,469 97,657 84,944
------------- ------------- ------------- ----------- -----------
Income before gain on sales of properties and joint
venture interests, losses related to early
retirement of debt and minority interests 68,936 58,655 30,320 13,949 12,330
Gain on sales of properties and joint venture interests 2,979 10,170 115
Losses related to early retirement of debt (397) (5,351)
------------- ------------- ------------- ----------- -----------
Income before minority interests 71,915 58,655 40,093 8,713 12,330
Income allocated to minority interests
Preferred unit distributions (8,278)
Operating partnership units (2,014) (1,322) (1,655)
------------- ------------- ------------- ----------- -----------
Total income allocated to minority interests (10,292) (1,322) (1,655)
------------- ------------- ------------- ----------- -----------
Net income 61,623 57,333 38,438 8,713 12,330
Preferred share dividends (9,371) (9,371) (4) (39)
------------- ------------- ------------- ---------- -----------
Net income to common shareholders $ 52,252 $ 47,962 $ 38,438 $ 8,709 $ 12,291
============= ============= ============= =========== ===========
Basic earnings per share $ 1.27 $ 1.16 $ 1.46 $ 0.59 $ 0.86
Diluted earnings per share $ 1.23 $ 1.12 $ 1.41 $ 0.58 $ 0.86
Distributions per common share $ 2.08 $ 2.02 $ 1.96 $ 1.90 $ 1.84
Weighted average number of common shares outstanding . 41,236 41,174 26,257 14,849 14,325
Weighted average number of common and common 44,291 44,183 28,356 14,979 14,414
dilutive equivalent shares outstanding
Balance Sheet Data (at end of period)
Real estate assets $ 2,678,034 $ 2,487,942 $ 1,397,138 $ 646,545 $ 607,598
Accumulated depreciation (253,545) (167,560) (94,665) (56,369) (36,800)
Total assets 2,487,932 2,347,982 1,323,620 603,510 582,352
Notes payable 1,165,090 1,002,568 480,754 244,182 235,459
Minority interests 196,852 71,783 63,325
Convertible subordinated debentures 3,406 3,576 6,025 27,702 44,050
Series A Preferred Shares issued in 1993 1,950
Shareholders' Equity 1,016,675 1,170,388 710,564 295,428 267,829
Common shares outstanding 39,093 43,825 31,694 16,521 14,514
140
CAMDEN PROPERTY TRUST
COMPARATIVE SUMMARY OF SELECTED FINANCIAL AND PROPERTY DATA (continued)
(In thousands, except property data amounts)
Year Ended December 31,
-------------------------------------------------------------------
1999 1998* 1997** 1996 1995
------------ ------------ ------------- ------------ -------------
Other Data
Cash flows provided by (used in):
Operating activities $ 164,021 $ 138,419 $ 65,974 $ 41,267 $ 37,594
Investing activities (220,571) (55,013) (73,709) (41,697) (97,003)
Financing activities 56,420 (84,227) 11,837 59,404
2,560
Funds from operations*** 152,369 137,996 75,753 39,999 35,260
Property Data
Number of operating properties (at end of period) 153 149 100 48 50
Number of operating apartment homes (at end of period) 53,311 51,310 34,669 17,611 16,742
Number of operating apartment homes (weighted average) 45,606 42,411 29,280 17,362 16,412
Weighted average monthly total property
income per apartment home $ 664 $ 626 $ 562 $ 529 $ 487
Properties under development (at end of period) 6 14 6 5 9
* Effective April 1, 1998 we acquired Oasis.
** Effective April 1, 1997 we acquired Paragon.
*** Management considers FFO to be an appropriate measure of the performance of
an equity REIT. The National Association of Real Estate Investment Trusts
("NAREIT") currently defines FFO as net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate depreciation and
amortization, and after adjustments for unconsolidated partnerships and
joint ventures. In addition, extraordinary or unusual items, along with
significant non-recurring events that materially distort the comparative
measure of FFO are typically disregarded in its calculation. Our definition
of diluted FFO also assumes conversion at the beginning of the period of
all convertible securities, including minority interests, which are
convertible into common equity. We believe that in order to facilitate a
clear understanding of our consolidated historical operating results, FFO
should be examined in conjunction with net income as presented in the
consolidated financial statements and data included elsewhere in this
report. FFO is not defined by generally accepted accounting principles. FFO
should not be considered as an alternative to net income as an indication
of our operating performance or to net cash provided by operating
activities as a measure of our liquidity. Further, FFO as disclosed by
other REIT's may not be comparable to our calculation.