EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
"Comparative Summary of Selected Financial and Property Data" and the
consolidated financial statements and notes thereto appearing elsewhere in
this annual report. Historical results and trends which might appear
should not be taken as indicative of future operations. The statements
contained in this report that are not historical facts are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results may differ materially from those included in the
forward-looking statements. These forward-looking statements involve risks
and uncertainties including, but not limited to, the following: the
proposed merger with Paragon Group, Inc., changes in general economic
conditions in the markets that could impact demand for the Company's
product, and changes in financial markets and interest rates impacting the
Company's ability to meet its financing needs and obligations.
BUSINESS
Camden Property Trust and its subsidiaries ("Camden" or the "Company")
are engaged in the ownership, development, acquisition, management,
marketing and disposition of multifamily apartment communities in the
Southwest region of the United States. As of December 31, 1996, the
Company owned and operated 48 multifamily properties containing 17,611
units located in Houston, Dallas/Fort Worth, Austin, Corpus Christi, El
Paso, Phoenix and Tucson. These properties had a weighted average
occupancy rate of 94.0% for the year ended December 31, 1996. The Company
is developing five multifamily properties in Houston, Dallas and Phoenix
which will, when completed, add 1,778 units to its portfolio, and has one
site in Denver which it intends to develop.
On December 16, 1996, the Company announced the execution of a
definitive merger agreement pursuant to which Paragon Group, Inc. would be
merged with and into a wholly-owned subsidiary of Camden. The merger will
create the fourth largest multifamily real estate investment trust ("REIT")
with 35,364 units and approximately $1.25 billion in total assets. Each
share of Paragon will be exchanged for 0.64 shares of Camden. The exchange
ratio is based on Camden's closing price on December 4, 1996 of $27.75 per
share and $17.75 per share for Paragon. If Camden's share price falls
below $25.67 per share during a specified time frame as set forth in the
merger agreement, Paragon has the right to terminate the agreement, subject
to Camden's right to negate such termination right by increasing the
exchange ratio so that Paragon's shareholders receive the same aggregate
dollar value of Camden shares had Camden's share price remained at the
$25.67 per share threshold.
Paragon is a fully integrated REIT headquartered in Dallas, Texas
whose business is the operation, development and acquisition of multifamily
apartment communities in the Southwest, Midwest, North Carolina and
Florida. Paragon is a self-administered and self-managed REIT that, as of
December 31, 1996, owned interests in 57 completed multifamily properties
located in six states, with three additional multifamily properties under
construction. Subsequent to December 31, 1996, three of Paragon's
properties were sold and one of Paragon's construction properties was
completed.
The merger with Paragon has been structured as a tax-free transaction
and will be treated as a purchase for accounting purposes. The merger is
subject to the approval of both companies' shareholders. The meetings to
consider the transaction have been scheduled for April 15, 1997. It is
anticipated that the merger will be completed by the end of April 1997.
PAGE
Camden's real estate portfolio at December 31, 1996, 1995 and 1994 is summarized as
follows:
<CAPTIONS>
1996 1995 1994
---------------------- ---------------------- ----------------------
Units Projects %<F1> Units Projects %<F1> Units Projects %<F1>
----- -------- ----- ----- -------- ----- ----- -------- -----
OPERATING PROPERTIES
Texas
Houston 6,987 18 36% 6,598 20 33% 6,310 19 34%
Dallas 6,045 16 31 6,065 17 30 6,065 17 33
Austin 1,745 6 9 1,745 6 9 1,063 4 6
Other 1,585 5 8 1,513 5 8 1,524 6 8
------ -- --- ------ -- --- ------ -- ---
Total Texas Operating
Properties 16,362 45 84 15,921 48 80 14,962 46 81
Arizona 1,249 3 7 821 2 4 821 2 5
------ -- --- ------ -- --- ------ -- ---
Total Operating
Properties 17,611 48 91 16,742 50 84 15,783 48 86
------ -- --- ------ -- --- ------ -- ---
PROJECTS UNDER DEVELOPMENT<F2>
Texas
Houston 758 2 4 1,226 3 6 804 2 4
Dallas 732 2 4 920 2 5 456 1 2
Austin 682 2 4
Other 288 1 1 288 1 2
------ -- --- ------ -- --- ------ -- ---
Total Texas Development
Projects 1,490 4 8 2,434 6 12 2,230 6 12
Arizona 288 1 1 716 2 4 428 1 2
------ -- --- ------ -- --- ------ -- ---
Total Projects Under
Development 1,778 5 9 3,150 8 16 2,658 7 14
------ -- --- ------ -- --- ------ -- ---
Total Properties 19,389 53 100% 19,892 58 100% 18,441 55 100%
====== == === ====== == === ====== == ===
<FN>
<F1> Based on units.
<F2> Excludes one project in Denver on which construction had not commenced.
</FN>
At December 31, 1996, the Company had five development properties in various stages of
construction as follows:
<CAPTIONS>
Estimated
Number Total Project Estimated Estimated Estimated
of Cost<F1> Percent Completion Stabilization
Property and Location Units ($ millions) Complete<F1> Date Date
- ----------------------------- ------ ------------- --------- -------------- --------------
The Park at Arrowhead Springs
Phoenix, AZ 288 $16.0 76% 1st Qtr., 1997 4th Qtr., 1997
The Park at Sugar Grove
Houston, TX 380 19.3 88 1st Qtr., 1997 3rd Qtr., 1997
The Park at Centreport
Dallas, TX 268 14.0 15 1st Qtr., 1998 3rd Qtr., 1998
The Park at Buckingham
Dallas, TX 464 25.5 22 1st Qtr., 1998 3rd Qtr., 1998
Vanderbilt Square II
Houston, TX 378 24.6 40 1st Qtr., 1998 3rd Qtr., 1998
----- -----
Total 1,778 $99.4
===== =====
<FN>
<F1> Includes land and preconstruction costs.
</FN>
PAGE
In 1993, at the time of the initial public offering, 77% of Camden's
properties (based on the number of units) were located in Houston. At
December 31, 1996, after giving effect to the anticipated completion of the
projects under development, 40% of the Company's properties (based on the
number of units) were located in Houston.
At December 31, 1996 and 1995, the Company's investment in the various
geographic areas was as follows:
(Dollars in thousands)
1996 1995
--------------- ---------------
Texas
Houston $243,575 38% $230,664 38%
Dallas 207,628 32 201,578 33
Austin 65,677 10 64,559 11
Other 52,578 8 57,101 9
-------- --- -------- ---
Total Texas Properties 569,458 88 553,902 91
-------- --- -------- ---
Arizona 74,355 12 51,207 9
Other 2,732 2,489
-------- --- -------- ---
Total Properties $646,545 100% $607,598 100%
======== === ======== ===
The Company intends to further diversify geographically into the Midwest,
North Carolina and Florida through its planned merger with Paragon.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL STRUCTURE. The Company intends to continue maintaining what
management believes to be a conservative capital structure by: (i)
targeting a ratio of total debt to total market capitalization of less than
50%; (ii) extending and sequencing the maturity dates of its debt where
possible; (iii) borrowing at fixed rates; (iv) borrowing on an unsecured
basis; (v) maintaining a substantial number of unencumbered assets; and
(vi) maintaining a conservative debt service coverage ratio.
Camden has maintained on a quarterly basis a financial structure with
no more than 40% total debt to total market capitalization since its
initial public offering in July 1993. At December 31, 1996, the Company's
ratio of total debt to total market capitalization was approximately 32.6%
(based on the closing price of $28.63 per common share of the Company on
the New York Stock Exchange composite tape on December 31, 1996). This
ratio represents total consolidated debt of the Company (excluding the
Company's 7.33% Convertible Debentures due 2001 ["Convertible Debentures"])
as a percentage of the market value of the Company's common shares
(including common shares issuable upon conversion of the Convertible
Debentures, but excluding common shares issuable upon exercise of
outstanding options) plus total consolidated debt (excluding the
Convertible Debentures). The interest coverage ratio was 3.2 times and 3.4
times for 1996 and 1995, respectively. At December 31, 1996 and 1995,
84.3% and 68.6%, respectively, of the Company's properties (based on
invested capital) were unencumbered. After adjusting for the early 1997
retirement of two conventional mortgage loans, this unencumbered property
percentage increased to 90.1%.
LIQUIDITY. The Company intends to meet its short-term liquidity
requirements through cash flows provided by operations, the $150 million
unsecured credit facility (the "Unsecured Credit Facility" or "facility"),
construction loans, and other short-term borrowing arrangements. The
Company intends to use equity capital or senior unsecured debt to refinance
maturing secured debt, borrowings under its facility and other short-term
borrowing arrangements. The Company is establishing a medium-term note
program to be used to provide intermediate or long-term, unsecured
publicly-traded debt. The Company considers its ability to generate cash
to be sufficient, and expects to be able to meet future operating
requirements and shareholder distributions.
On December 13, 1996, the Company declared its fourth quarter dividend
in the amount of $0.475 per common share, bringing the total dividends for
the year to $1.90 per common share. The fourth quarter distributions were
paid on January 17, 1997 to shareholders of record as of December 30, 1996.
During the first quarter of 1997, the Company announced an increase in the
quarterly dividend rate to $0.49 per common share effective for 1997. The
Company intends to continue 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
expects to continue reducing the payout ratio by raising the dividends at a
rate which is less than the funds from operations growth rate.
FINANCIAL FLEXIBILITY. The Company concentrates its growth efforts
toward selective development and acquisition opportunities in its core
markets. During the year ended December 31, 1996, the Company incurred
$56.1 million in development costs and $6.3 million in acquisition costs
for new properties. The Company also seeks to selectively dispose of
assets that are either not in core markets, have a lower projected net
operating income growth rate than the overall portfolio, or no longer
conform to the Company's operating and investment strategies. The $29.8
million in net proceeds received from these asset disposals during 1996
were either reinvested in acquisitions or developments or were used to
retire debt.
The Company funds its developments and acquisitions through a
combination of equity capital, debt securities, conventional mortgage
loans, the Unsecured Credit Facility and other short-term borrowing
arrangements. In the past, the Company had also utilized construction
loans to fund its developments. The Unsecured Credit Facility is subject
to certain restrictions and financial covenants. The facility may be used
for acquisitions, developments and working capital purposes. During 1996,
the Company utilized the facility to retire three secured construction
loans aggregating $26.1 million and later refinanced that amount with
ten-year unsecured notes described below. The facility is currently
structured as a revolving facility until July 1997. The interest rate on
the facility, which is subject to changes in the Company's credit ratings,
was reduced to LIBOR plus 150 basis points or Prime during 1996.
Management is currently negotiating the terms of the facility with its bank
group and expects to be able to extend the maturity date and lower the
interest rate on this facility. Furthermore, management believes it will
continue to be able to extend the maturity date of this facility as needed
in the future. The facility is subject to certain restrictive covenants
including, among others, liquidity, net worth, leverage, capitalization and
cash flow ratios and limitations on capital investments. Such restrictions
also include a limitation on distributions to common shareholders that are
not to exceed 95% of funds from operations except as required to maintain
REIT status. As of December 31, 1996, the Company had $138.0 million
available under its facility.
Subsequent to December 31, 1996, the Company began utilizing
competitively bid short-term borrowings as an alternative to borrowing
under its Unsecured Credit Facility. Such borrowings vary in term and
pricing but have the same covenants as the facility and may be funded
through lenders outside of the facility bank group at rates substantially
below those of the facility. Since there are no commitments in place for
such arrangements, these borrowings cannot exceed the unused portion of the
facility.
On October 16, 1996, the Company completed a common share offering
from its previously filed shelf registration statement selling 1,090,000
shares at a gross price of $25.875 per share. The net proceeds of $27.6
million were used primarily to retire a $25.1 million secured construction
loan.
During 1996, the Company issued from its previously filed shelf
registration statement two issues of senior unsecured notes. The first
issue for an aggregate principal amount of $100 million accrues interest at
a rate of 6.6% per annum, has an average effective annual rate of 6.7%, and
matures within five years. The second issue for an aggregate principal
amount of $75 million accrues interest at a rate of 7.0% per annum, has an
average effective annual rate of 7.2%, and matures within ten years. These
two issues of senior unsecured notes received investment-grade ratings from
Moody's Investors Service, Standard & Poor's, and Duff & Phelps. Both
issues pay interest semi-annually and are direct, senior unsecured
obligations of the Company ranking equally with all other unsecured and
unsubordinated indebtedness of the Company. Both issues may be redeemed at
any time at the option of the Company subject to make-whole provisions.
The net proceeds from the first issue of $98.4 million were used to reduce
$93.4 million of indebtedness under the Unsecured Credit Facility, to pay
$4.9 million arising from the early settlement of hedging agreements
related to the indebtedness repaid and to pay $500,000 to extinguish a
bank's option related to a settled hedging agreement. The net proceeds
from the second issue of $73.6 million were used to reduce $64.0 million of
indebtedness under the facility and to repay the Company's only remaining
secured construction loan of $9.4 million.
Subsequent to December 31, 1996, the Company prepaid two of its 8.8%
conventional mortgage loans with outstanding balances at December 31, 1996
of $20.3 million and prepayment penalties of $203,000. The loans were
prepaid by utilizing funds from the Unsecured Credit Facility.
At December 31, 1996, a $25 million interest rate hedging agreement
remained in effect and is scheduled to mature in July 2000 with a bank's
option to extend to July 2002. The LIBOR rate on this $25 million hedging
agreement is fixed at 6.1%. The resulting fixed rate is equal to the 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. The differential to be paid or received on the interest rate
hedging agreement is accrued as interest rates change and is recognized
over the life of the agreement as an increase or decrease in interest
expense.
FUNDS FROM OPERATIONS
Funds from operations ("FFO") for the year ended December 31, 1996
increased $4.7 million over 1995, primarily due to properties added to the
portfolio and rental growth in the Company's Dallas and Houston markets.
Management considers FFO to be an appropriate measure of 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 principals), 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. The Company believes that in order to facilitate a clear
understanding of the consolidated historical operating results of the
Company, FFO should be examined in conjunction with net income as presented
in the consolidated financial statements and data included elsewhere in
this annual report. FFO should not be considered as an alternative to net
income as an indication of the Company's operating performance or to net
cash provided by operating activities as a measure of the Company's
liquidity. A calculation of FFO for the two years ended December 31, 1996
and 1995 follows:
(In thousands)
1996 1995
------- -------
Net income to common shareholders $ 8,709 $12,291
Real estate asset depreciation 22,946 19,299
Gain on sales of properties (115)
Extinguishment of hedges upon debt refinancing 5,351
------- -------
Funds from operations available to common
shareholders 36,891 31,590
Preferred share dividends 4 39
------- -------
Total funds from operations 36,895 31,629
Interest on convertible subordinated debentures 2,809 3,297
Amortization of deferred costs on convertible
debentures 295 334
------- -------
Funds from operations - fully diluted* $39,999 $35,260
======= =======
* Prior to March 1995, the NAREIT definition of FFO required the
add-back of non-real estate depreciation and amortization, such as
loan cost amortization. The amount for fully diluted funds from
operations for 1994 under the pre-March 1995 definition was $28,604.
RESULTS OF OPERATIONS
Changes in revenues and expenses related to the operating properties
from period to period are the result of property acquisitions,
developments, dispositions and improvements in the performance of core
properties in the portfolio. Where appropriate, comparisons are made on a
dollars-per-weighted-average-units basis in order to adjust for such
changes in the number of units owned during each period. Selected weighted
average revenues and expenses per operating unit for the three years ended
December 31, 1996 are as follows:
1996 1995 1994
------ ------ ------
Rental income per unit per month $ 508 $ 469 $ 435
Property operating and maintenance
per unit per year $2,339 $2,260 $2,143
Real estate taxes per unit per year $ 760 $ 700 $ 654
Weighted average number of operating units 17,362 16,412 13,694
1996 COMPARED TO 1995
The changes in operating results from 1995 to 1996 are due to
completion of the development of four properties aggregating 1,688 units,
the acquisition of an adjoining property containing 400 units, the
disposition of five properties containing 1,219 units and an increase in
revenues generated by the stabilized portfolio. The weighted average
number of units increased by 950 units, or 5.8%, from 16,412 to 17,362 for
the years ended December 31, 1995 and 1996, respectively. Total units
owned and operating were 16,742 and 17,611 at December 31, 1995 and 1996,
respectively.
The average rental income increased $39 per unit per month, or 8.3%,
from $469 to $508 for the years ended December 31, 1995 and 1996,
respectively. The increase was primarily due to a 4.7% increase in revenue
growth from the stabilized real estate portfolio that existed throughout
both periods, higher than average rental rates achieved on properties added
to the portfolio, and overall increases in average occupancy from 93.3% in
1995 to 94.0% in 1996.
Other income, which consisted of miscellaneous income earned from the
properties, third-party construction and management fees, and interest
income, increased $822,000 from 1995 to 1996. This 16.4% increase was due
to a larger number of units owned and in operation. Third-party
construction and management fee income totaled $1.0 million and $949,000
for the years ended December 31, 1995, and 1996, respectively.
Property operating and maintenance expenses and real estate taxes
increased $5.2 million, from $48.6 million to $53.8 million for the years
ended December 31, 1995 and 1996, respectively, which represented an annual
increase of $139 per unit. The Company's operating expense ratios
decreased from the prior year primarily as a result of the change in the
property mix due to development and property dispositions. Real estate
taxes increased as a result of increases in valuations of renovated and
developed properties and increases in property tax rates. Operating
expenses from the stabilized real estate portfolio in operation throughout
both periods increased 2.3% which, combined with the revenue increase,
resulted in a 6.8% increase in net operating income from these properties.
General and administrative expenses increased from $2.3 million in
1995 to $2.6 million in 1996, a rate consistent with the overall increase
in revenues.
Interest expense increased 25.4%, from $13.8 million in 1995 to $17.3
million in 1996, due to increased indebtedness related to the property
acquisition, completed developments and renovations, partially offset by
reductions in interest rates, reductions in debt as a result of the equity
offering in October 1996, the conversion of Convertible Debentures and
proceeds from dispositions. Interest capitalized was $5.3 million and $4.1
million for the years ended December 31, 1995 and 1996, respectively.
Depreciation and amortization increased 17.7% from $20.3 million in
1995 to $23.9 million in 1996 primarily due to developments and renovations
partially offset by property dispositions.
1995 COMPARED TO 1994
The weighted average number of units increased by 2,718 units, or
19.8%, from 13,694 units in 1994 to 16,412 units in 1995 as a result of
development. The completion of Woodland Park in the first quarter, The
Huntingdon in the second quarter, and Ridgecrest and the additional phase
of Miramar in the third quarter of 1995 added 1,070 units to the portfolio.
Total units owned and operating were 15,783 and 16,742 at December 31, 1994
and 1995, respectively.
Average rental income increased $34 per unit per month, or 7.8%, from
$435 to $469 from 1994 to 1995. The increase was primarily due to 4.6%
higher average rental rates from the stabilized real estate portfolio that
existed throughout both periods and higher than average rental rates
achieved on properties added to the portfolio.
Other income increased by $1.0 million, from $4.0 million in 1994 to
$5.0 million in 1995. The increase was due to a larger number of units
owned and in operation combined with an increase in third-party
construction and management fee income of $308,000 and related party
interest of $120,000. This increase was offset by $240,000 in interest
income earned from invested excess funds available after the offerings in
April 1994. Third-party construction and property management fee income
totaled $722,000 and $1.0 million for 1994 and 1995, respectively.
Property operating and maintenance expenses and real estate taxes
increased by $10.3 million, from $38.3 million in 1994 to $48.6 million in
1995, representing a $163 per unit annual increase of 5.8%. The Company's
operating expense ratios improved slightly over the prior year primarily as
a result of the Company's increased average rental rates, the installation
of water-saving devices in the Company's Texas properties, energy-efficient
lighting throughout properties in the portfolio and the addition of
higher-margin new properties to the portfolio. Such savings were partially
offset by increases in real estate taxes resulting from increases in
valuations of renovated properties, increases in property tax rates and the
change in the property mix through acquisitions and development. Operating
expenses from the stabilized real estate portfolio in operation throughout
both periods remained fairly level, which together with higher revenues,
resulted in a 7.1% increase in net operating income from these properties.
General and administrative expenses decreased by $311,000, from $2.6
million in 1994 to $2.3 million in 1995. On a per unit basis, the Company
experienced a decrease over the prior year due to the efficiencies of
operating a larger portfolio.
Interest expense increased by $5.0 million, from $8.8 million in 1994
to $13.8 million in 1995, due to increased indebtedness related to
properties acquired in 1994 and completed developments and renovations,
partially offset by reductions in debt as a result of the equity offering
in April 1994 and the conversion of Convertible Debentures. Interest
capitalized was $2.2 million and $5.3 million for the years ended December
31, 1994 and 1995, respectively.
Depreciation and amortization in 1995 increased to $20.3 million from
$16.2 million in 1994 due to acquisitions, completed developments and
renovations.
INFLATION
The Company leases 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.
PAGE
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, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the management of Camden
Property Trust. Our responsibility is to express an opinion on these
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, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/S/
- ---------------------
DELOITTE & TOUCHE LLP
Houston, Texas
February 21, 1997
PAGE
CAMDEN PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
--------------------
1996 1995
-------- --------
ASSETS
Real estate assets, at cost
Land $ 86,673 $ 81,544
Buildings and improvements 523,325 471,584
Projects under development, including land 36,547 54,470
-------- --------
646,545 607,598
Less: accumulated depreciation (56,369) (36,800)
-------- --------
590,176 570,798
Accounts receivable -- affiliates 148 369
Notes receivable -- affiliates 3,550 3,477
Deferred financing and other assets, net 4,847 4,839
Cash and cash equivalents 2,366 236
Restricted cash -- escrow deposits 2,423 2,633
-------- --------
Total assets $603,510 $582,352
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable
Unsecured $185,800 $122,783
Secured 58,382 112,676
Accounts payable 7,512 8,300
Accrued real estate taxes 13,246 11,865
Accrued expenses and other liabilities 7,675 6,276
Distributions payable 7,765 6,623
-------- --------
Total liabilities 280,380 268,523
7.33% Convertible Subordinated Debentures 27,702 44,050
Preferred Shares of Beneficial Interest;
$0.01 par value per share; 85 authorized,
issued and outstanding of Series A cumulative
convertible preferred shares (redeemable at
$23.00 per share) at December 31, 1995 1,950
Shareholders' Equity
Preferred shares of beneficial interest;
$0.01 par value per share; 10,000 shares
authorized; 85 Series A Preferred shares
outstanding at December 31, 1995
Common shares of beneficial interest;
$0.01 par value per share, 100,000 shares
authorized; 16,521 and 14,514 issued and
outstanding at December 31, 1996 and 1995,
respectively 165 145
Additional paid-in capital 348,339 299,808
Distributions in excess of net income (49,515) (29,625)
Unearned restricted share awards (3,561) (2,499)
-------- --------
Total shareholders' equity 295,428 267,829
-------- --------
Total liabilities and shareholders' equity $603,510 $582,352
======== ========
See Notes to Consolidated Financial Statements.
PAGE
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- ------- -------
Revenues
Rental income $105,785 $92,275 $71,468
Other income 5,821 4,999 3,988
-------- ------- -------
Total revenues 111,606 97,274 75,456
Expenses
Property operating and maintenance 40,604 37,093 29,352
Real estate taxes 13,192 11,481 8,962
General and administrative 2,631 2,263 2,574
Interest 17,336 13,843 8,807
Depreciation and amortization 23,894 20,264 16,239
-------- ------- -------
Total expenses 97,657 84,944 65,934
-------- ------- -------
Income before gain on sales of
properties and extinguishment of
hedges upon debt refinancing 13,949 12,330 9,522
Gain on sales of properties 115
Extinguishment of hedges upon debt
refinancing (5,351)
-------- ------- -------
Net income 8,713 12,330 9,522
Preferred share dividends (4) (39) (20)
-------- ------- -------
Net income to common shareholders $ 8,709 $12,291 $ 9,502
======== ======= =======
Net income per common and common
equivalent share $0.58 $0.85 $0.77
Distributions declared per common share $1.90 $1.84 $1.76
Weighted average number of common and
common equivalent shares outstanding 14,940 14,424 12,311
See Notes to Consolidated Financial Statements.
PAGE
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
<CAPTIONS>
Common Unearned
Shares of Additional Distributions Restricted
Beneficial Paid-in in Excess of Share
Interest Capital Net Income Awards
---------- ---------- ------------- ---------
SHAREHOLDERS' EQUITY, JANUARY 1, 1994 $ 92 $178,575 $ (2,683) $
Net income to common shareholders 9,502
Public offering of 3,450 common shares 34 77,424
Conversion of debentures 16 36,580
Restricted shares issued under benefit plan
(59 shares) 1 1,518 (1,134)
Cash distributions ($1.76 per share) (22,321)
---- -------- -------- --------
SHAREHOLDERS' EQUITY, DECEMBER 31, 1994 143 294,097 (15,502) (1,134)
---- -------- -------- --------
Net income to common shareholders 12,291
Common shares issued under dividend
reinvestment plan 28
Conversion of debentures 1 3,588
Restricted shares issued under benefit plan
(83 shares) 1 2,095 (1,365)
Cash distributions ($1.84 per share) (26,414)
---- -------- -------- --------
SHAREHOLDERS' EQUITY, DECEMBER 31, 1995 145 299,808 (29,625) (2,499)
---- -------- -------- --------
Net income to common shareholders 8,709
Public offering of 1,090 common shares 11 27,580
Common shares issued under dividend
reinvestment plan 31
Conversion of debentures 6 15,814
Restricted shares issued under benefit plan
(82 shares) 1 2,074 (1,062)
Common share options exercised (71 shares) 1 1,272
Conversion of preferred shares 1 1,952
Other (192)
Cash distributions ($1.90 per share) (28,599)
---- -------- -------- -------
SHAREHOLDERS' EQUITY, DECEMBER 31, 1996 $165 $348,339 $(49,515) $(3,561)
==== ======== ======== =======
See Notes to Consolidated Financial Statements.
PAGE
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
----------------------------
1996 1995 1994
------- ------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 8,713 $12,330 $ 9,522
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 23,894 20,264 16,239
Gain on sales of properties (115)
Extinguishment of hedges upon debt
refinancing 5,351
Accretion of discount on unsecured
notes payable 72
Net change in operating accounts 3,352 5,000 7,799
------- ------- --------
Net cash provided by operating
activities 41,267 37,594 33,560
CASH FLOW FROM INVESTING ACTIVITIES
Increase in real estate assets, net of
notes payable assumed (71,288) (96,183) (195,856)
Net proceeds from sales of properties 29,794
Increase in notes receivable for net
advances to affiliates (73) (833) (2,007)
Other (130) 13 (224)
------- ------- --------
Net cash used in investing activities (41,697) (97,003) (198,087)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of common
shares, net 27,591 77,506
Proceeds from issuance of convertible
debentures, net 81,884
Net (decrease) increase in lines
of credit (110,783) 50,759 14,849
Proceeds from notes payable 181,048 39,860 17,595
Extinguishment of hedges upon
debt refinancing (5,351)
Principal reduction on notes payable (61,614) (4,707) (12,042)
Distributions to common shareholders (27,457) (26,071) (19,730)
Payment of loan costs (2,253) (634) (790)
Other 1,379 197 116
------- ------- --------
Net cash provided by financing
activities 2,560 59,404 159,388
------- ------- --------
Net increase (decrease) in cash and
cash equivalents 2,130 (5) (5,139)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 236 241 5,380
------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,366 $ 236 $ 241
======= ======= ========
SUPPLEMENTAL INFORMATION
Cash paid for interest, net of
interest capitalized $15,585 $13,189 $ 7,532
Interest capitalized $ 4,129 $ 5,321 $ 2,167
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Conversion of 7.33% subordinated
debentures to common shares, net $15,820 $ 3,589 $ 36,596
Shares issued under benefit plans, net $ 2,449 $ 2,096 $ 1,519
Conversion of preferred shares and
dividends $ 1,953
Notes payable assumed upon purchase of
assets $ 17,632
See Notes to Consolidated Financial Statements.
PAGE
CAMDEN PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Camden Property Trust is a self-administered and self-managed real
estate investment trust ("REIT") organized on May 25, 1993. Camden
Property Trust and its subsidiaries ("Camden" or the "Company") are engaged
in the ownership, development, acquisition, management, marketing and
disposition of multifamily apartment communities in the Southwest region of
the United States. As of December 31, 1996, the Company owned and operated
54 multifamily properties located in Houston, Dallas/Fort Worth, Austin,
Corpus Christi, El Paso, Phoenix and Tucson, including five properties
under development and one future development property in Denver.
On December 16, 1996, the Company announced the execution of a
definitive merger agreement pursuant to which Paragon Group, Inc. would be
merged with and into a wholly-owned subsidiary of Camden expanding the
Company's geographic focus in 1997 to include the Midwest, North Carolina
and Florida. Each share of Paragon will be exchanged for 0.64 shares of
Camden. The exchange ratio is based on Camden's closing price on December
4, 1996 of $27.75 per share and $17.75 per share for Paragon. If Camden's
share price falls below $25.67 per share during a specified time frame as
set forth in the merger agreement, Paragon has the right to terminate the
agreement, subject to Camden's right to negate such termination right by
increasing the exchange ratio so that Paragon's shareholders receive the
same aggregate dollar value of Camden shares had Camden's share price
remained at the $25.67 per share threshold. The merger has been structured
as a tax-free transaction and will be treated as a purchase for accounting
purposes. The merger is subject to the approval of both companies'
shareholders. The meetings to consider the transaction have been scheduled
for April 15, 1997. It is anticipated that the merger will be completed by
the end of April 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements of
Camden include the assets, liabilities, and operations of the parent
company and its wholly-owned subsidiaries. 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.
Income Recognition. Rental, interest and other income are recognized
as earned.
Rental Operations. Camden owns and operates garden-style multifamily
apartment units 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. All operating
expenses, excluding depreciation, associated with occupied units for
properties in the development and leasing phase are expensed against
revenues generated by those units as they become occupied. In management's
opinion, due to the number of tenants, the type and diversity of submarkets
in which the properties operate, and the collection terms, there is no
concentration of credit risk.
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 time 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 are
capitalized at cost as land, buildings and improvements. All construction
and carrying costs are capitalized and reported on the balance sheet in
"Projects under development, including land" until such units are
completed. Upon completion of each building of the project, 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.
Upon achieving 90% occupancy, or one year from opening the leasing office,
whichever occurs first, all units are considered operating and the Company
begins expensing all items that were previously considered as carrying
costs.
The Company expenses recurring capital expenditures for items such as
carpets, appliances and HVAC units as these items are replaced in their
normal course. During a renovation, many of these items may be
capitalized, particularly to the extent that an inordinate number of such
items are replaced. Non-recurring capital expenditures for such items as
roof replacements are capitalized. The Company capitalized $9.6 million in
1996 and $8.3 million in 1995 of non-recurring renovations and improvements
to extend the economic lives and enhance its multifamily properties.
Carrying charges, principally interest and ad valorem taxes, of land
under development and buildings under construction are capitalized as part
of projects 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 $4.1 million in 1996,
$5.3 million in 1995 and $2.2 million in 1994. Capitalized ad valorem
taxes were $617,000 in 1996, $551,000 in 1995 and $221,000 in 1994.
All buildings and improvements are depreciated over their remaining
estimated useful lives of 10 to 35 years using the straight line method.
Subsequent expenditures for furnishings, equipment and other normal
recurring items are expensed as incurred. 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.
Impact of New Accounting Pronouncements. In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of ("SFAS No. 121"). SFAS No 121 requires
that certain long-lived assets and intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The adoption of SFAS No. 121 by
the Company in 1996 did not have a material effect on the Company's
financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). SFAS No. 123 prescribes a fair value-based method of determining
compensation expense related to stock-based awards granted to employees or
associates. The recognition provisions of SFAS No. 123 are optional;
however, entities electing not to adopt SFAS No. 123 are required to
disclose in annual financial statements issued for fiscal years beginning
after December 15, 1995 pro forma net income and earnings per share as if
SFAS No. 123 had been applied. The Company elected not to adopt the
recognition provisions of SFAS No. 123. See Note 6 for further information
on the Company's 1996 disclosures.
Property Operating and Maintenance Expenses. Property operating and
maintenance expenses included normal repairs and maintenance totaling $8.3
million in 1996, $7.3 million in 1995 and $5.6 million in 1994. In
addition, amounts incurred subsequent to the initial renovation and
rehabilitation periods for recurring expenditures such as carpets,
appliances, and furnishings and equipment which might otherwise be
capitalized, totaled $3.5 million in 1996, $2.8 million in 1995 and $1.9
million in 1994 and were included in expense.
Deferred Financing and Other Assets, Net. Deferred financing and
other assets are amortized ($838,000 in 1996, $871,000 in 1995 and $1.8
million in 1994) over the terms of the related debt or lives of the asset
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 term which range from three to ten years.
Accumulated depreciation and amortization was $1.8 million in 1996 and $1.2
million in 1995 for deferred financing, other assets, leasehold
improvements and equipment.
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.
Income Taxes and Distributions. Camden intends to maintain its
election as a REIT under the Internal Revenue Code of 1986, as amended. As
a result, the Company generally will not be subject to federal taxation to
the extent it distributes 95% of its REIT taxable income to its
shareholders and satisfies 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 principally due to the timing of the recognition of depreciation.
Such differences are primarily due to differences in the book/tax basis of
the real estate assets of $7.4 million and differences in methods of
depreciation and lives of the real estate assets. As a result of these
differences, the tax basis of the Company's net real estate assets exceeds
its book basis by $37.1 million and $13.6 million at December 31, 1996 and
1995, respectively.
Shareholders are taxed on distributions declared and must report such
distributions as either ordinary income, short-term gains, long-term gains,
or as return of capital.
A schedule of per share distributions paid by the Company is set forth
in the following table:
Year Ended December 31,
-------------------------
1996 1995 1994
----- ----- -----
Ordinary income $1.03 $1.37 $1.27
Return of capital 0.87 0.47 0.49
----- ----- -----
Total $1.90 $1.84 $1.76
===== ===== =====
Percentage of distributions representing
tax preference items 24.769% 20.119% 17.611%
Net Income Per Share. Net income per common and common equivalent
share of beneficial interest has been computed by dividing net income by
the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares include the weighted average number
of assumed equivalent shares outstanding from convertible preferred shares
of beneficial interest and common share options. Fully diluted net income
per common and common equivalent share of beneficial interest is not
materially dilutive and is not presented.
Reclassifications. Certain reclassifications have been made to
amounts in prior year financial statements to conform with current year
presentations.
3. NOTES PAYABLE
A summary of the Company's notes payable follows:
(In millions)
December 31,
-----------------
1996 1995
------ ------
Unsecured notes:
6 5/8% Senior Notes, due 2001 $ 99.6 $
7% Senior Notes, due 2006 74.2
Credit facility 12.0 122.8
------ ------
185.8 122.8
Secured notes:
Conventional mortgage loans 58.4 59.2
Construction loans 53.5
------ ------
58.4 112.7
------ ------
Total notes payable $244.2 $235.5
====== ======
Floating rate debt included in notes payable $ $ 26.3
====== ======
The Company funds its developments and acquisitions through a
combination of equity capital, debt securities, conventional mortgage
loans, a $150 million unsecured credit facility (the "Unsecured Credit
Facility" or "facility") and other short-term borrowing arrangements. In
the past, the Company had also utilized construction loans to fund its
developments. Subject to certain restrictions and financial covenants, the
facility may be used for acquisitions, developments and working capital
purposes. During 1996, the Company utilized the facility to retire three
secured construction loans aggregating $26.1 million and later refinanced
that amount with ten-year unsecured notes described below. The facility is
currently structured as a revolving facility until July 1997. The interest
rate on the facility, which is subject to changes in the Company's credit
ratings, was reduced to LIBOR plus 150 basis points or Prime during 1996.
Management is currently negotiating the terms of the facility with its bank
group and expects to be able to extend the maturity date and lower the
interest rate on this facility. Furthermore, management believes it will
continue to be able to extend the maturity date of this facility as needed
in the future. The facility is subject to certain restrictive covenants
including, among others, liquidity, net worth, leverage, capitalization and
cash flow ratios and limitations on capital investments. Such restrictions
also include a limitation on distributions to common shareholders that are
not to exceed 95% of funds from operations except as required to maintain
REIT status. As of December 31, 1996, the Company had $138.0 million
available under its facility.
Subsequent to December 31, 1996, the Company began utilizing
competitively bid short-term borrowings as an alternative to borrowing
under its Unsecured Credit Facility. Such borrowings vary in term and
pricing but have the same covenants as the facility and may be funded
through lenders outside of the facility bank group at rates substantially
below those of the facility. Since there are no commitments in place for
such arrangements, these borrowings cannot exceed the unused portion of the
facility.
On October 16, 1996, the Company completed a common share offering
from its previously filed shelf registration statement selling 1,090,000
shares at a gross price of $25.875 per share. The net proceeds of $27.6
million were used primarily to retire a $25.1 million secured construction
loan.
During 1996, the Company issued from its previously filed shelf
registration statement two issues of senior unsecured notes. The first
issue for an aggregate principal amount of $100 million accrues interest at
a rate of 6.6% per annum, has an average effective annual rate of 6.7%, and
matures within five years. The second issue for an aggregate principal
amount of $75 million accrues interest at a rate of 7.0% per annum, has an
average effective annual rate of 7.2%, and matures within ten years. These
two issues of senior unsecured notes received investment-grade ratings from
Moody's Investors Service, Standard & Poor's, and Duff & Phelps. Both
issues pay interest semi-annually and are direct, senior unsecured
obligations of the Company ranking equally with all other unsecured and
unsubordinated indebtedness of the Company. Both issues may be redeemed at
any time at the option of the Company subject to make-whole provisions.
The net proceeds from the first issue of $98.4 million were used to reduce
$93.4 million of indebtedness under the Unsecured Credit Facility, to pay
$4.9 million arising from the early settlement of hedging agreements
related to the indebtedness repaid and to pay $500,000 to extinguish a
bank's option related to a settled hedging agreement. The net proceeds
from the second issue of $73.6 million were used to reduce $64.0 million of
indebtedness under the facility and to repay the Company's only remaining
secured construction loan of $9.4 million.
The fixed rate conventional mortgage loans were secured by eight
multifamily properties containing 3,216 units with a net book value of
$90.3 million at December 31, 1996. The weighted average interest rate on
these loans was 7.5% through July 1996. At that time, the weighted average
interest rate increased to 8.4%. These fixed rate loans amortize principal
over periods ranging from 25 to 30 years, are payable in balloon payments
at final maturities, and require escrow balances for the payment of
insurance, taxes, improvements and repairs.
Subsequent to December 31, 1996, the Company prepaid two of its 8.8%
conventional mortgage loans with outstanding balances at December 31, 1996
of $20.3 million and prepayment penalties of $203,000. The loans were
prepaid by utilizing funds from the Unsecured Credit Facility.
At December 31, 1996, a $25 million interest rate hedging agreement
remained in effect and is scheduled to mature in July 2000 with a bank's
option to extend to July 2002. The LIBOR rate on this $25 million hedging
agreement is fixed at 6.1%. The resulting fixed rate is equal to the 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.
At December 31, 1996, all debt was fixed rate debt earning a weighted
average interest rate of 7.3%.
Scheduled principal repayments on all loans outstanding at December
31, 1996 over the next five years, excluding the loans retired subsequent
to year end, are $17.2 million in 1997, $12.2 million in 1998, $200,000 in
1999, $7.7 million in 2000, $100.3 million in 2001 and $86.3 million
thereafter.
4. CONVERTIBLE SUBORDINATED DEBENTURES
In April 1994, the Company issued $86.3 million aggregate principal
amount of 7.33% Convertible Subordinated Debentures due 2001 (the
"Debentures"). The Debentures are convertible at any time prior to
maturity into common shares of beneficial interest, $0.01 par value, of the
Company at a conversion price of $24.00 per share, subject to adjustment
under certain circumstances. The Debentures will not be redeemable by the
Company prior to maturity, except in certain circumstances intended to
maintain the Company's status as a REIT. Interest on the Debentures is
payable on April 1 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 of the Company.
As of December 31, 1996, $58.5 million in principal amount of the
Debentures had been converted to 2.4 million common shares. For the
converted Debentures, the earned but unpaid interest was forfeited by the
Debenture holders in accordance with the Indenture. In addition, $2.5
million of unamortized Debenture issue costs have been reclassified to
additional paid-in-capital. Had all these converted Debentures converted
as of the beginning of the period or issuance date, net income per common
and common equivalent share would have been $0.62, $0.85 and $0.78 per
share for the years ended December 31, 1996, 1995 and 1994, respectively.
Deferred Debenture issue costs of $900,000 and $1.7 million remained
outstanding at December 31, 1996 and 1995, respectively, and are being
amortized over the life of the Debentures.
During January 1997, an additional $5.8 million in principal amount of
Debentures had been converted to 240,000 common shares and the related
$175,000 of unamortized Debenture costs had been reclassified to additional
paid-in-capital. Had all converted Debentures converted as of the
beginning of the period, including these Debentures converted in January
1997, net income per common and common equivalent share would have been
$0.62 per share for the year ended December 31, 1996.
5. CONVERTIBLE PREFERRED SHARES
In 1993, the Company issued 84,783 shares of Series A cumulative
convertible preferred shares of beneficial interests in exchange for the
remaining multifamily operations of the Company's predecessor entities.
These operations consisted primarily of asset management and construction
activities. During the first quarter of 1996, the preferred shareholders
elected to convert all of their preferred shares into 85,369 common shares.
6. INCENTIVE AND BENEFIT PLANS
Incentive Plan. The Company has a non-compensatory option plan (the
"Plan") which provides for the issuance of a maximum of 1,450,000 common
shares. 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 ("Incentive
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 the Board of Trust Managers (the "Committee") of the
Company. No Incentive Award may be granted after May 27, 2003.
Following is a summary of the activity of the Plan for the three years
ended December 31, 1996:
Shares
Available
for
Issuance Options and Restricted Shares
-------- ----------------------------------
Weighted
Average
1996
1996 1996 Price 1995 1994
------- ------- ------ ------- -------
Balance at January 1 579,165 870,835 $23.12 834,900 489,000
Options
Granted 305,975
Exercised (71,450) 22.35
Forfeited 54,650 (54,650) 23.71 (47,175) (18,775)
------- ------- ------ ------- -------
Net Options 54,650 (126,100) 22.94 (47,175) 287,200
------- ------- ------ ------- -------
Restricted Shares
Granted (124,341) 124,341 24.73 90,956 61,050
Forfeited 25,716 (25,716) 24.37 (7,846) (2,350)
------- ------- ------ ------- -------
Net Restricted Shares (98,625) 98,625 24.83 83,110 58,700
------- ------- ------ ------- -------
Balance at December 31 535,190 843,360 $23.34 870,835 834,900
======= ======= ====== ======= =======
Exercisable options at
December 31 533,617 $22.86 406,008 163,000
Vested restricted shares at
December 31 56,781 $23.96 22,806 5,000
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 (other than non-employee trust manager options) 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 1996 were exercised at
prices ranging from $22.00 to $24.25 per share. At December 31, 1996,
options outstanding were at prices ranging from $21.38 to $26.25 per share.
Such options have a weighted average remaining contractual life of 6.5
years. Subsequent to December 31, 1996, an additional 300,000 of options
having an exercise price of $27.00 per share were granted.
Restricted shares have vesting periods ranging from three to five
years. Subsequent to December 31, 1996, an additional 109,359 of
restricted share awards having a purchase price of $0.01 per share were
granted.
The Company accounts for its Plan under the provisions of APB Opinion
No. 25. The pro forma net income and earnings per share disclosure
requirements of SFAS No. 123 did not impact the Company in 1995 or 1996 due
to the fact that the Company did not grant any option awards from January
1, 1995 through December 31, 1996 and the compensation expense calculated
on the Company's restricted shares under SFAS No. 123 did not materially
differ from the results obtained under APB Opinion No. 25.
401(k) Savings Plan. The Company has a 401(k) savings plan (the
"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 the Company. 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. The
Company 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 the Company's matching
contributions 33.33% after one year of service, 66.67% after two years of
service and 100% after three or more years of service. Expenses under the
Savings Plan were not material.
7. RELATED PARTY TRANSACTIONS
Apartment Connection, Inc. ("ACI") is a nonqualified-REIT subsidiary
that acts as a leasing agent providing tenants for apartment owners in
Houston, including properties owned by the Company. The Company has made
an unsecured working capital revolving line of credit available to ACI
which has been renewed annually. The loan has a maximum commitment of $1.2
million, earns interest at a fixed rate of 7.5% per annum and is payable in
full during July 1997. The loan's outstanding balance was $1.2 million and
$949,000 at December 31, 1996 and 1995, respectively. The loan is used to
fund working capital requirements of ACI in the ordinary course of its
business.
In conjunction with the equity offering in April 1994, the Chief
Executive Officer and Chief Operating Officer of the Company (the
"Executives") each purchased $1 million of common shares at the market
price of such shares. The Compensation Committee determined that it was in
the best interest of the Company that the Executives have greater ownership
interests in the Company. Accordingly, the Compensation Committee
determined that the Company should loan to each Executive 90% of the
purchase price of such common shares or $900,000. These loans have
five-year terms and bear interest at the fixed rate of 7.0%. The loans are
non-recourse, but are secured by a pledge of such common shares, and do not
require any prepayments of principal until maturity. During July 1995, the
Executive's loans were transferred to ACI. ACI obtained a $1.8 million
unsecured loan from the Company with the same interest rate and maturity as
the underlying Executive loans.
During 1995, the Company formed Teleserve, Inc. (formerly Camden
Communications One, Inc.), doing business as CamTel ("CamTel"). CamTel is
a nonqualified-REIT subsidiary that was established to provide fiber optic,
central office switched telecommunications service to residents in the
Company's properties and third parties. The Company has made an unsecured
revolving line of credit available to CamTel with a maximum commitment of
$5.9 million which had an outstanding balance of $585,000 and $44,000 at
December 31, 1996 and 1995, respectively. The loan earns interest at 7.0%,
is payable in full in June 1999 and is used to fund asset additions or
other operating costs. As of December 31, 1996, the Company had invested
$3.8 million in telecommunications equipment for 22 of its properties.
The Company entered into an alliance in 1995 with one of Houston's
cable television operators to provide cable service to the residents of the
Company's properties. The Company, through ACI, made a revolving line of
credit available to an unrelated third party, Cable Leasing, Inc. ("CLI"),
with a maximum commitment of $950,000 to purchase existing and future
distribution systems on a large portion of the Company's Houston
properties. The loan earned interest at 15.5% per annum and required
monthly payments of interest. The loan was secured by the distribution
systems and service agreements on the Company's properties. The
outstanding balance at December 31, 1995 was $728,000. Camden acquired the
assets of CLI on July 31, 1996 for $700,000. CLI used the net proceeds
from the sale to pay off the outstanding balance on the line of credit it
had with the Company through ACI.
The Company had management agreements with investment partnerships in
which the Executives had a combined 1% economic interest, with respect to
two multifamily properties and two high-rise condominium properties owned
by such partnerships. The management agreements provided for the exclusive
right to lease, operate and manage these four properties. The Company also
insured certain aspects of the business operations of the investment
partnerships under the Company's insurance policies. The management
agreements required the Company to be reimbursed for the actual costs
incurred by the Company in making such insurance available. Management
fees earned on the two multifamily properties amounted to $184,000,
$306,000 and $295,000 for the years ended 1996, 1995 and 1994,
respectively. The Company received a $244,000 fee in November 1996 upon
the sale of the two multifamily properties. The management agreements
related to the two high-rise condominium properties provided for a fee of
$33,813 per quarter in the aggregate until the payments of such management
fees was terminated on December 31, 1995. Although the management
agreements were not the result of arm's length negotiations, the Company
believes that they were no more favorable to the owners than the fees that
would have been paid to unaffiliated third parties under similar
circumstances.
8. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosure is made for informational purposes only and
does not purport to represent fair values of Camden's financial
instruments. This information is based on estimates determined by using
available market information and appropriate valuation methodologies.
However, considerable judgement is necessary to interpret market data and
develop the related estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that could
be realized upon 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.
Cash and cash equivalents, receivables, accounts payable, accrued
expenses and other liabilities and distributions payable are carried at
amounts which reasonably approximate their fair value.
(In millions)
December 31,
-------------------------------------
1996 1995
----------------- -----------------
Fair Carrying Fair Carrying
Value Amount Value Amount
------ -------- ------ --------
Senior notes $174.6 $173.8 $ $
Credit facility 12.0 12.0 122.8 122.8
Conventional mortgage loans* 61.0 58.4 61.7 59.2
Construction loans 53.5 53.5
* Subsequent to December 31, 1996, two conventional mortgage loans with
carrying amounts of $20.3 million and fair value amounts of $20.6
million were retired utilizing funds from the Unsecured Credit Facility.
The fair value of the senior notes and the conventional mortgage loans
were estimated using discounted cash flows at approximate borrowing rates
available as of the date presented. The fair values of the credit facility
and the construction loans approximate their carrying value. The
conventional mortgage loans were subject to prepayment penalties of
$792,000 at December 31, 1996.
At December 31, 1996, the Company had an outstanding interest rate
swap agreement of $25 million. The Company does not use this instrument
for trading purposes, rather, it has entered into the interest rate swap
agreement to hedge the impact of interest rate fluctuations on $25 million
of floating rate debt. This interest rate swap agreement is valued at an
amount for which it could be settled at December 31, 1996. Settlement
amounts were based upon estimates obtained from dealers. If the Company
had settled the $25 million interest rate swap agreement with a
counterparty at December 31, 1996, the Company would have incurred an
unwind charge of $269,000. At December 31, 1995, the Company had $150
million outstanding in interest rate swap agreements with potential unwind
charges of $6.3 million. See Note 3 for discussion of the early settlement
of certain interest rate swap agreements that occurred during 1996.
The fair value estimates presented herein are based on information
available to management as of December 31, 1996 and 1995. Such amounts
have not been comprehensively revalued for purposes of these financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
9. 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,
----------------------------
1996 1995 1994
------ ------ ------
Decrease (increase) in assets:
Restricted cash - escrow deposits $ 210 $ (68) $ (624)
Accounts receivable - affiliates 221 65 (1)
Other assets 929 (335) (1,446)
Increase (decrease) in liabilities:
Accounts payable (788) 3,143 2,990
Accrued real estate taxes 1,381 1,552 3,508
Accrued expenses and other liabilities 1,399 643 3,372
------ ------ ------
Net change in operating accounts $3,352 $5,000 $7,799
====== ====== ======
10. COMMITMENTS AND CONTINGENCIES
Construction Contracts. As of December 31, 1996, the Company was
obligated for approximately $39.9 million of additional expenditures (a
substantial amount of which is to be provided by debt).
Lease Commitments. At December 31, 1996, Camden had long-term
operating leases covering certain land, office facilities and equipment.
Rental expense totaled $475,000 in 1996, $476,000 in 1995 and $419,000 in
1994. Minimum annual rental commitments for the years ending December 31,
1997 through 2001 are $500,000, $294,000, $56,000, $26,000 and $21,000
respectively, and $534,000 in the aggregate thereafter.
Employment Agreements. The Company has employment agreements with six
of its senior officers, the terms of which expire at various times through
August 20, 1999. 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.
Contingencies. Camden is subject to various legal proceedings and
claims that arise in the ordinary course of business. These matters are
generally covered by insurance. While the resolution of these matters
cannot be predicted with certainty, management believes that the final
outcome of such matters will not have a material adverse effect on the
financial position or results of operations of Camden.
11. SUBSEQUENT EVENTS
In the ordinary course of its business, the Company issues 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
periods varying from 25 to 180 days during which it will evaluate the
properties and conduct its 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 the Company will acquire
any property as to which the Company 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. The Company is 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.
The Company is currently in the due diligence period on contracts for
the purchase of land for development or acquisition of properties. No
assurance can be made that the Company will be able to complete the
negotiations or become satisfied with the outcome of the due diligence.
The Company seeks to selectively dispose of assets that are either not
in core markets, have a lower projected net operating income growth rate
than the overall portfolio, or no longer conform to the Company's operating
and investment strategies. The proceeds from these sales may be reinvested
in acquisitions or developments or used to retire debt.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended December 31,
1996 and 1995 are as follows:
(In thousands, except per share amounts)
First Second Third Fourth Total
------- ------- ------- ------- --------
1996:
Revenues $26,590 $27,231 $28,768 $29,017 $111,606
Net income (loss) to common
shareholders (1,750) 3,498 2,801 4,160 8,709
Net income (loss) per common
and common equivalent share (0.12)* 0.24 0.19 0.26 0.58
1995:
Revenues $22,548 $23,498 $25,085 $26,143 $ 97,274
Net income to common share-
holders 3,105 3,099 2,908 3,179 12,291
Net income per common and common
equivalent share 0.22 0.22 0.20 0.22 0.85
* Includes a $(5,351) or $(0.37) per share impact from the extinguishment
of hedges upon debt refinancing.
13. PRICE RANGE OF COMMON SHARES (UNAUDITED)
The high and low sales prices per share of the Company's 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
------- ------- -------------
1996:
First $24 3/4 $22 3/4 $0.475
Second 25 21 3/4 0.475
Third 26 1/2 22 3/4 0.475
Fourth 29 1/4 25 5/8 0.475
1995:
First $25 $20 3/4 $0.46
Second 23 5/8 20 1/4 0.46
Third 23 1/4 20 7/8 0.46
Fourth 24 20 1/8 0.46
PAGE
CAMDEN PROPERTY TRUST
COMPARATIVE SUMMARY OF SELECTED FINANCIAL AND PROPERTY DATA
(In thousands, except per share and property data amounts)
<CAPTIONS>
Camden Property Trust Camden Predecessors
---------------------------------------- ---------------------
Years Ended December 31, July 29 to January 1 Year Ended
----------------------------- December to July December
1996 1995 1994 31, 1993 28, 1993 31, 1992
--------- -------- -------- --------- -------- --------
OPERATING DATA
Revenues:
Rental income $105,785 $ 92,275 $ 71,468 $ 16,785 $16,721 $ 20,645
Other income 5,821 4,999 3,988 782 900 988
-------- -------- -------- -------- ------- --------
Total revenues 111,606 97,274 75,456 17,567 17,621 21,633
Expenses:
Property operating and maintenance 40,604 37,093 29,352 6,907 7,380 9,426
Real estate taxes 13,192 11,481 8,962 1,910 1,989 2,560
General and administrative 2,631 2,263 2,574 291 343 503
Interest 17,336 13,843 8,807 1,340 4,364 5,840
Depreciation and amortization 23,894 20,264 16,239 3,572 3,045 4,037
-------- -------- -------- -------- ------- --------
Total expenses 97,657 84,944 65,934 14,020 17,121 22,366
-------- -------- -------- -------- ------- --------
Income before gain on sales and
extinguishment of hedges 13,949 12,330 9,522 3,547 500 (733)
Gain on sales of property 115
Extinguishment of hedges upon debt
refinancing (5,351)
-------- -------- -------- -------- ------- --------
Net income (loss) $ 8,713 $12,330 $ 9,522 $ 3,547 $ 500 $ (733)
======= ========
Preferred share dividends (4) (39) (20)
-------- -------- -------- --------
Net income to common shareholders $ 8,709 $ 12,291 $ 9,502 $ 3,547
======== ======== ======== ========
Net income per common and common
equivalent share $ 0.58 $ 0.85 $ 0.77 $ 0.39
Distributions per common share $ 1.90 $ 1.84 $ 1.76 $ 0.68
Weighted average number of common
and common equivalent shares
outstanding 14,940 14,424 12,311 9,114
BALANCE SHEET DATA (AT END OF PERIOD)
Real estate assets $646,545 $607,598 $510,324 $296,545 $141,391
Accumulated depreciation (56,369) (36,800) (17,731) (3,388) (6,735)
Total assets 603,510 582,352 504,284 304,345 149,500
Notes payable 244,182 235,459 149,547 111,513 102,201
Series A Preferred Shares 1,950 1,950 1,950
Shareholders'/Partners' Equity 295,428 267,829 277,604 175,984 41,209
Common shares outstanding 16,521 14,514 14,273 9,162
OTHER DATA
Cash flows provided by (used in)
Operating activities $ 41,267 $ 37,594 $ 33,560 $ 16,554 $ 1,942 $ 4,289
Investing activities (41,697) (97,003) (198,087) (237,346) (4,297) (79,064)
Financing activities 2,560 59,404 159,388 226,171 1,073 75,630
Funds from operations<F1> 36,895 31,629 25,741 7,119 3,545 3,304
Funds from operations assuming
conversions of convertible
securities 39,999 35,260 28,604 7,119 3,545 3,304
PROPERTY DATA
Number of operating properties
(at end of period) 48 50 48 32 17 16
Number of operating units
(at end of period) 17,611 16,742 15,783 11,064 6,040 5,836
Number of operating units
(weighted average) 17,362 16,412 13,694 7,935 5,996 4,479
Weighted average monthly revenue
per unit $ 536 $ 494 $ 459 $ 434 $ 426 $ 402
Properties under development
(at end of period) 6 9 8 3 1
<FN>
<F1> 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, should be disregarded in its calculation.
Prior to March 1995, the NAREIT definition of FFO required the add back of non-real estate
depreciation and amortization, such as loan cost amortization. Camden has reported FFO
according to the definitions prescribed by NAREIT for each of the periods presented above. FFO
does not represent cash flows from operating activities as defined by GAAP and should not be
considered as an alternative to net income as an indicator of Camden's operating performance.
FFO is not a measure of liquidity, nor is it indicative of cash available to fund other cash
flow needs, including principal amortization, capital improvements and distributions to
shareholders. Further, FFO as disclosed by other REITs may not be comparable to Camden's
calculation of FFO.
</FN>