54
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
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: changes in general economic conditions in the markets
that could impact demand for the rental of the Company's properties, and changes
in financial markets and interest rates impacting the Company's ability to meet
its financing needs and obligations.
BUSINESS
Camden Property Trust, a Houston-based real estate investment trust
("REIT"), and its subsidiaries (collectively, "Camden" or the "Company") report
as a single business segment, with activities related to the ownership,
development, acquisition, management, marketing and disposition of multifamily
apartment communities in the Southwest, Southeast, Midwest and Western regions
of the United States. As of December 31, 1998, the Company owned interests in
and operated or was developing 163 multifamily properties containing 56,968
apartment homes located in nine states. These properties had a weighted average
occupancy rate of 93% for the year ended December 31, 1998. Fourteen of the
Company's multifamily properties containing 5,658 apartment homes were under
development at December 31, 1998. The Company has several additional sites which
it intends to develop into multifamily apartment communities.
On April 8, 1998, the Company acquired through a tax-free merger (the
"Oasis Merger"), Oasis Residential, Inc. ("Oasis"), a publicly traded Las
Vegas-based multifamily REIT. The acquisition increased the size of the
Company's portfolio from 100 to 152 completed multifamily properties and from
34,669 to 50,183 apartment homes at the date of acquisition. Upon completion of
ten properties under development at the date of acquisition, the Company's
portfolio would have increased to 54,314 apartment homes in 162 properties. As
provided in the Plan of Merger dated December 16, 1997, as amended, each of the
shares of Oasis common stock outstanding on April 8, 1998 was exchanged for
0.759 share of the Company's common shares. Each share of Oasis Series A
cumulative convertible preferred stock (the "Oasis Preferred Stock") outstanding
on April 8, 1998 was reissued as one Camden Series A Cumulative Convertible
Preferred Share (the "Preferred Shares") with terms and conditions comparable to
the Oasis Preferred Stock. The Company issued 12.4 million common shares and 4.2
million Preferred Shares in exchange for the outstanding Oasis common stock and
outstanding Oasis Preferred Stock, respectively. Approximately $484 million of
Oasis debt, at fair value, was assumed in the merger. In connection with the
Oasis Merger, the Company also acquired the managing member interest in Oasis
Martinique, LLC. The remaining interests (the "Martinique Units") are
exchangeable into 672,490 common shares and are accounted for as a minority
interest. In connection with the Oasis Merger, Camden disclosed its intentions
of entering into a joint venture investment (the "Joint Venture") in order to
transfer into the Joint Venture 19 apartment communities containing 5,119
apartment homes located in Las Vegas (the "Third Party Transaction").
55
On June 30, 1998, the Company completed the Third Party Transaction for an
aggregate of $248 million with a private limited liability company (the "LLC").
The Company retained a 20% interest in the LLC, which is included in investment
in joint ventures. The Third Party Transaction was funded with capital invested
by the LLC members, 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. The LLC assumed the $190 million of treasury
locks which Camden had entered into during the first quarter of 1998 as a hedge
against interest rate exposure for the LLC. The treasury locks were unwound by
the LLC simultaneously with the completion of the funding for the Third Party
Transaction. Camden used the net proceeds from the Third Party Transaction to
reduce outstanding debt by $124 million, including the $9.9 million of existing
indebtedness noted above, and set aside $112 million into an escrow account
which was used to complete tax-free exchange property acquisitions, retire debt
and repurchase the Company's common shares pursuant to the Company's share
repurchase program. No book gain or loss was recorded by Camden as a result of
the Third Party Transaction. Camden continues to provide property management
services for these assets.
On April 15, 1997, the Company acquired through a tax-free merger, Paragon
Group, Inc. ("Paragon"), a Dallas-based multifamily REIT. The acquisition
increased the size of the Company's portfolio from 53 to 103 multifamily
properties, and from 19,389 to 35,364 apartment homes (the "Paragon
Acquisition"). Each share of Paragon common stock outstanding on April 15, 1997
was exchanged for 0.64 shares of the Company's common shares. The Company issued
9.5 million shares in exchange for all of the outstanding shares of Paragon
common stock and 2.4 million limited partnership units ("OP Units") in Camden
Operating, L.P. (the "Operating Partnership") and assumed approximately $296
million of Paragon debt, at fair value, in connection with 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.
56
The Company's multifamily property portfolio, excluding land held for
future development and joint venture properties not managed by the Company, at
December 31, 1998, 1997 and 1996 is summarized as follows:
1998 (a) 1997 1996
---------------------------- ----------------------------- ------------------------------
Apartment Apartment Apartment
Homes Properties % (b) Homes Properties % (b) Homes Properties % (b)
--------- ------------ ----- ------------ ---------- ----- ---------- ------------ ------
Operating Properties
Texas
Houston 6,345 15 13% 6,345 16 18% 6,987 18 36%
Dallas (c) (d) 9,381 26 17 9,381 26 24 6,045 16 31
Austin 1,745 6 4 1,745 6 5 1,745 6 9
Other 1,641 5 3 1,585 5 4 1,585 5 8
----------- ------- ------ ----------- ------ ----- ----------- ------ -------
Total Texas Operating Properties 19,112 52 37 19,056 53 51 16,362 45 84
Arizona 2,326 7 5 1,894 5 5 1,249 3 7
California 1,272 3 3
Colorado (c) 1,972 6 3
Florida 7,261 17 14 6,355 17 18
Kentucky 1,142 5 2 1,142 5 3
Missouri 3,327 8 7 3,487 10 10
Nevada (c) 12,163 41 14
North Carolina (c) (d) 2,735 10 4 2,735 10 6
----------- ------- ------ ----------- ------ ----- ----------- ------ -------
Total Operating Properties 51,310 149 89 34,669 100 93 17,611 48 91
----------- ------- ------ ----------- ------ ----- ----------- ------ -------
Properties Under Development
Texas
Houston 2,213 5 4 1,365 3 4 758 2 4
Dallas 600 1 1 732 2 4
----------- ------- ------ ----------- ------ ----- ----------- ------ -------
Total Texas Development Properties 2,813 6 5 1,365 3 4 1,490 4 8
Arizona 325 1 1 240 1 1 288 1 1
California 380 1 1
Colorado 558 2 1
Florida 1,150 3 2 306 1 1
Kentucky 432 1 1 432 1 1
----------- ------- ------ ----------- ------ ----- ----------- ------ -------
Total Properties Under Development 5,658 14 11 2,343 6 7 1,778 5 9
----------- ------- ------ ----------- ------ ----- ----------- ------ -------
Total Properties 56,968 163 100% 37,012 106 100% 19,389 53 100%
======= ====== ====== ===== ====== =======
Less: Joint Venture
Apartment Homes (c) (d) 6,704 1,264
----------- ----------- -----------
Total Apartment Homes
- Owned 100% 50,264 35,748 19,389
=========== =========== ===========
(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 owned 100%.
(c) The 1998 figures include properties held in joint ventures as follows: one
property with 708 apartment homes in Dallas and two properties with 556
apartment homes in North Carolina in which the company owns a 44%
interest, one property with 321 apartment homes in Colorado in which the
company owns a 50% interest, and 19 properties with 5,119 apartment homes
in Nevada in which the company owns a 20% interest.
(d) The 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 the company owns a 44%
interest.
57
At December 31, 1998, the Company had one property under lease-up as
follows:
Estimated
Product Number of % Leased Date of Date of
Property and Location Type Apartment Homes at 1/27/99 Completion Stabilization
- ----------------------------------------- ---------- ----------------- ------------- -------------- -----------------
The Park at Towne Center
Glendale, AZ Garden 240 78% 4Q98 2Q99
At December 31, 1998, the Company had 14 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
- ------------------------------------------- ------------ ------------- -------------- ------------ ---------------
Renaissance Pointe II
Orlando, FL Garden 306 $ 17.3 1Q99 3Q99
The Park at Goose Creek
Baytown, TX Affordable 272 11.8 2Q99 4Q99
The Park at Midtown
Houston, TX Urban 337 21.5 2Q99 4Q99
The Park at Interlocken
Denver, CO Garden 340 34.9 3Q99 1Q00
The Park at Holly Springs
Houston, TX Garden 548 37.1 3Q99 3Q00
The Park at Caley
Denver, CO Urban 218 18.3 4Q99 1Q00
The Park at Oxmoor
Louisville, KY Garden 432 22.1 4Q99 3Q00
The Park at Greenway
Houston, TX Urban 756 55.7 4Q99 4Q00
The Park at Arizona Center
Phoenix, AZ Urban 325 22.0 1Q00 3Q00
The Park at Lee Vista
Orlando, FL Garden 492 32.8 1Q00 4Q00
The Park at Mission Viejo
Mission Viejo, CA Garden 380 42.0 2Q00 4Q00
The Park at Farmers Market, Phase I
Dallas, TX Urban 600 45.9 4Q00 3Q01
---------- ----------
5,006 361.4
Marina Pointe II To Be To Be
Tampa, FL Garden 352 25.2 Determined Determined
The Park at Steeplechase To Be To Be
Houston, TX Affordable 300 13.5 Determined Determined
---------- -----------
Total for 14 development properties 5,658 $ 400.1
========== ===========
* At December 31, 1998, the Company had incurred $182.3 million of the
estimated $400.1 million.
58
Camden has diversified into other markets in the Southwest region and into
the Southeast, Midwest and Western regions of the United States. At December 31,
1998 and 1997, the Company's investment in the various geographic areas,
excluding investment in joint ventures, was as follows:
(Dollars in thousands)
1998 1997
------------------- ------------------
Texas
Houston $ 347,069 14% $ 265,404 19%
Dallas 370,538 15 321,101 23
Austin 67,832 3 66,365 5
Other 57,705 2 53,462 4
------------- ----- ------------ -----
Total Texas Properties 843,144 34 706,332 51
------------- ----- ------------ -----
Arizona 133,047 5 102,520 8
California 139,602 6
Colorado 158,837 7 3,083
Florida 376,235 15 240,008 17
Kentucky 56,954 2 55,210 4
Missouri 169,741 7 173,939 13
Nevada 487,679 20
North Carolina 90,219 4 100,957 7
------------- ----- ------------ -----
Total Properties $ 2,455,458 100% $ 1,382,049 100%
============= ===== ============ =====
LIQUIDITY AND CAPITAL RESOURCES
Financial Structure. The Company intends to continue maintaining what
management believes to be a conservative capital structure by: (i) using a
prudent combination of debt, common and preferred equity; (ii) extending and
sequencing the maturity dates of its debt where possible; (iii) managing
interest rate exposure using fixed rate debt and hedging, where appropriate;
(iv) borrowing on an unsecured basis; (v) maintaining a substantial number of
unencumbered assets; and (vi) maintaining conservative coverage ratios. The
interest coverage ratio was 3.8 times and 3.6 times for the years ended December
31, 1998 and 1997, respectively. At December 31, 1998 and 1997, 73.2% and 78.9%,
respectively, of the Company's properties (based on invested capital) were
unencumbered.
Liquidity. The Company intends to meet its short-term liquidity
requirements through cash flows provided by operations, its unsecured lines of
credit (the "Unsecured Lines of Credit") described in the Financial Flexibility
section and other short-term borrowings. The Company uses common and preferred
equity capital and senior unsecured debt to refinance maturing secured debt and
borrowings under its Unsecured Lines of Credit. As of December 31, 1998, the
Company had $18 million available under the Unsecured Lines of Credit.
Subsequent to December 31, 1998, the Company added an additional $75 million in
capacity to its Unsecured Lines of Credit, increasing its total capacity to $275
million, raised an additional $39.5 million from the sale of senior unsecured
notes, and completed the private placement of $100 million of its perpetual
preferred units. The Company filed a universal shelf registration statement in
April 1997 providing for the issuance of up to $500 million in equity, debt,
preferred or convertible securities, of which $275 million remains unused.
Additionally, in March 1997 the Company implemented a $196 million medium-term
note program used to provide intermediate and long-term, unsecured
publicly-traded debt financing. Finally, the Company has significant
unencumbered real estate assets which could be sold or used as collateral for
financing purposes should other sources of capital not be available. The Company
considers its ability to generate cash to be sufficient, and expects to be able
to meet future operating cash requirements and to pay distributions to
shareholders and partners.
59
On January 15, 1999, the Company paid a distribution of $0.505 per share
for the fourth quarter of 1998 to all holders of record of Camden's common
shares as of December 22, 1998, and paid an equivalent amount per unit to
holders of OP Units. Total distributions to common shareholders and holders of
OP Units for the year ended December 31, 1998 were $2.02 per share for holders
who held common shares and OP Units for the full year. For the period from
January 1, 1998 through the date of the Oasis Merger, Oasis paid distributions
of $0.4525 per share to common shareholders. The Company determines the amount
of cash available for distribution in accordance with the partnership agreements
and has distributed and intends to continue to make distributions to the holders
of OP Units in amounts equivalent to the per share distributions paid to holders
of common shares. 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 distributions at a
rate which is less than the funds from operations ("FFO") growth rate.
On February 15, 1999, the Company paid a quarterly dividend on its
Preferred Shares, which were reissued for Oasis Preferred Stock in conjunction
with the merger of Oasis. The dividend in the amount of $0.5625 per share was
paid to all preferred shareholders of record as of December 22, 1998. Total
dividends to holders of Preferred Shares from the date of the Oasis Merger
through December 31, 1998 were $1.6875 per share. For the period from January 1,
1998 through the date of the Oasis Merger, Oasis paid dividends of $0.5625 per
share to preferred shareholders.
Financial Flexibility. The Company concentrates its growth efforts toward
selective development and acquisition opportunities in its core markets, and
through the acquisition of existing operating portfolios and development
properties in selected new markets. During 1998, the Company incurred $193.2
million in development costs and $139.2 million in acquisition costs. In
addition, Camden issued 12.4 million common shares, 4.2 million Preferred Shares
and assumed $484 million of indebtedness, at fair value, to purchase Oasis. The
Company has announced plans to develop 14 additional properties at an aggregate
cost of approximately $400.1 million, of which $182.3 million had been incurred
through December 31, 1998. The Company funds its developments and acquisitions
through a combination of equity capital, partnership units, medium-term notes,
construction loans, other debt securities and the Unsecured Lines of Credit. The
Company also seeks to selectively dispose of assets that are 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 $275.5 million in net proceeds received from these
asset disposals, including the Third Party Transaction, during 1998 were
reinvested in acquisitions and developments, used to retire debt and used to
repurchase the Company's common shares.
The Company's Unsecured Lines of Credit mature July 1999 through July 2000.
Prior to maturity, the Company intends to have these notes extended,
renegotiated or repaid. The scheduled interest rates on the loans currently
range from LIBOR plus 95 basis points to prime. These scheduled rates are
subject to change as the Company's credit ratings change. Advances under the
Unsecured Lines of Credit may be priced at the scheduled rates, or the Company
may enter into bid rate loans ("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 $75 million or the remaining amount
available under the Unsecured Lines of Credit. The Unsecured Lines of Credit are
subject to customary financial covenants and limitations. As an alternative to
its Unsecured Lines of Credit, the Company from time to time borrows using
competitively bid unsecured short-term notes with lenders who may or may not be
a part of the Unsecured Lines of Credit bank groups. Such borrowings vary in
term and pricing and are typically priced at interest rates below those
available under the Unsecured Lines of Credit.
As a result of the Oasis Merger, the Company assumed $228 million in
conventional mortgage loans with interest rates currently ranging from 5 3/4% to
8 5/8%. As of December 31, 1998, $201 million of the conventional mortgage loans
assumed remained outstanding.
In conjunction with the Oasis Merger, Camden assumed $150 million in senior
unsecured notes payable issued by Oasis in November 1996. These notes are due in
equal increments in November 2001, 2003, 2006 and bear interest at annual rates
ranging from 6 3/4% to 7 1/4%, payable quarterly.
60
Proceeds from the Third Party Transaction were used to reduce outstanding
debt by $124 million, including $9.9 million of existing indebtedness and
approximately $114 million on the Unsecured Lines of Credit, and $112 million
was set aside into an escrow account which was used to complete tax-free
exchange property acquisitions, retire debt and repurchase the Company's common
shares.
In October 1998, the Company issued $102 million principal amounts of
senior unsecured notes from its $196 million medium-term note shelf
registration. These fixed rate notes, due in October 2000, bear interest at a
weighted average rate of 7.19 %, payable semiannually on March 15 and September
15. The net proceeds were used to liquidate the $75 million Reset Notes, pay off
certain mortgage notes payable, and reduce indebtedness incurred under the
Unsecured Lines of Credit. At December 31, 1998, $69 million of the medium-term
note program remained unused.
Subsequent to December 31, 1998, the Company issued $39.5 million principal
amounts of senior unsecured notes from its $196 million medium-term note shelf
registration. These fixed rate notes, due in January 2002 through January 2009,
respectively, bear interest at a weighted average rate of 7.07%, payable
semiannually on January 15 and July 15. The net proceeds were used to reduce
indebtedness outstanding under the Unsecured Lines of Credit.
On February 23, 1999, the Operating Partnership issued $100 million of 8.5%
Series B Cumulative Redeemable Perpetual Preferred Units ("Preferred Units").
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 registered preferred shares of the Company. The
Preferred Units are subordinate to present and future debt of the Operating
Partnership and the Company.
MARKET RISK
The Company uses fixed and floating rate debt to finance acquisitions,
developments and maturing debt. These transactions expose the Company to market
risk related to changes in interest rates. Derivative financial instruments,
specifically interest rate swap agreements, are occasionally used to manage this
risk. The Company currently has 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 LIBOR rate is fixed at 6.1%, resulting in a fixed rate equal
to 6.1% plus the actual LIBOR spread on the related indebtedness. The Company's
policy as to the occasional 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. The Company does not use derivative financial
instruments for trading purposes.
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, 1998, after adjusting for the effect of the interest rate
swap agreement, Camden had fixed rate debt of $781.3 million and floating rate
debt of $221.3 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 $30 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.
61
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. 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. The Company's definition of FFO also assumes conversion at the
beginning of the period of all convertible securities, including minority
interests, which are convertible into common equity.
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 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 the Company's
operating performance or to net cash provided by operating activities as a
measure of the Company's liquidity. Further, FFO as disclosed by other REITs may
not be comparable to the Company's calculation. Camden's FFO for the year ended
December 31, 1998 increased $62.2 million over 1997 primarily due to the Oasis
Merger, the Paragon Acquisition, property acquisitions, developments and
improvements in the performance of the stabilized properties in the portfolio.
The calculation of FFO for the two years ended December 31, 1998 follows:
1998 1997
--------- ----------
(In thousands)
Net income to common shareholders $ 47,962 $ 38,438
Real estate depreciation 76,740 43,769
Minority interests 1,322 1,655
Real estate depreciation from unconsolidated ventures 2,253 906
Interest on convertible subordinated debentures 317 670
Amortization of deferred costs on convertible debentures 31 88
Preferred share dividends 9,371
Gain on sales of properties (10,170)
Losses related to early retirement of debt 397
--------- ----------
Funds from operations $137,996 $ 75,753
========= ==========
Weighted average number of common and common dilutive and
antidilutive equivalent shares outstanding 46,779 28,882
RESULTS OF OPERATIONS
Changes in revenues and expenses related to the operating properties from
period to period are primarily due to the Oasis Merger, the Paragon Acquisition,
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, 1998 are as follows:
1998 1997 1996
------------ ----------- ------------
Rental income per apartment home per month $ 591 $ 535 $ 508
Property operating and maintenance per apartment home per year $ 2,290 $ 2,414 $ 2,339
Real estate taxes per apartment home per year $ 742 $ 718 $ 760
Weighted average number of operating apartment homes 42,411 29,280 17,362
62
1998 COMPARED TO 1997
The changes in operating results from 1997 to 1998 are primarily due to the
Oasis Merger, the Paragon Acquisition, 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 the Company's
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 seven acquired properties and 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 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. The Company's 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 the Company's 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, the Company 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 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 the Company's March 20, 1998 adoption of Issue No. 97-11,
Accounting for Internal Costs Relating to Real Estate Property Acquisitions,
discussed in Note 2 in the Company's consolidated financial statements, which
was partially offset by efficiencies resulting from operating a larger
portfolio.
Interest expense increased from $28.5 million in 1997 to $50.5 million in
1998 due to increased indebtedness related to the Oasis Merger, the Paragon
Acquisition, completed developments, renovations and property acquisitions. This
increase was partially offset by reductions in average interest rates on the
Company's 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 Merger, the Paragon
Acquisition, 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.
63
1997 COMPARED TO 1996
The changes in operating results from 1996 to 1997 are primarily due to the
Paragon Acquisition, development of ten properties aggregating 3,823 apartment
homes, and an increase in net operating income generated by the stabilized
portfolio. The weighted average number of apartment homes increased by 11,918
apartment homes, or 68.6%, from 17,362 to 29,280 for the years ended December
31, 1996 and 1997, respectively. Total operating properties were 48 and 97 at
December 31, 1996 and 1997, respectively. The 29,280 weighted average apartment
homes and the 97 operating properties exclude the impact of the Company's
ownership interest in 1,264 apartment homes on three properties owned in joint
ventures.
Rental income per apartment home per month increased $27, or 5.3%, from
$508 to $535 for the years ended December 31, 1996 and 1997, 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 Paragon Acquisition and completion of new development
properties.
Other property income increased $5.0 million from $4.5 million to $9.4
million for the years ended December 31, 1996 and 1997, respectively. This
increase in other property income was due to a larger number of apartment homes
owned and in operation and a $2.2 million increase from new revenue sources such
as telephone, cable and water.
Property operating and maintenance expenses increased $30.1 million, from
$40.6 million to $70.7 million, but decreased as a percent of total property
income from 36.8% to 35.8% for the years ended December 31, 1996 and 1997,
respectively. The Company's operating expense ratios decreased from the prior
year primarily as a result of operating efficiencies resulting from operating a
larger portfolio together with savings in utilities and other costs.
Real estate taxes increased $7.8 million from $13.2 million to $21.0
million for the years ended December 31, 1996 and 1997, respectively, which
represents an annual decrease of $42 per apartment home. Real estate taxes per
apartment home have decreased due to lower property taxes for the Company's
properties outside of Texas. This decrease per apartment home was offset by
increases in the valuations of renovated, acquired and developed properties, and
increases in property tax rates.
General and administrative expenses increased from $2.6 million in 1996 to
$4.4 million in 1997, and decreased slightly as a percent of revenues from 2.4%
to 2.2%.
Interest expense increased from $17.3 million in 1996 to $28.5 million in
1997 due to increased indebtedness related to the Paragon Acquisition, completed
developments and renovations. This increase was partially offset by reductions
in average interest rates on the Company's debt and an equity offering that
occurred in July 1997. Interest capitalized was $3.3 million and $4.1 million
for the years ended December 31, 1997 and 1996, respectively.
Depreciation and amortization increased from $23.9 million to $44.8 million
primarily due to the Paragon Acquisition, developments and renovations.
Gain on sales of properties increased $10.2 million due to the gain on
disposition of four properties containing 1,400 apartment homes in December
1997.
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.
64
YEAR 2000 CONVERSION
Camden has recognized the need to ensure that its computer equipment and
software ("computer systems"), other equipment and operations will not be
adversely impacted by the change to the calendar Year 2000. As such, the Company
has taken steps to identify and resolve potential areas of risk by implementing
a comprehensive Year 2000 action plan. The plan is divided into four phases:
identification, assessment, notification/certification, and testing/contingency
plan development; and includes three major elements: computer systems, other
equipment and third parties. The Company is on the fourth phase for its computer
systems, and the third phase for its other equipment and third party services.
The Company believes that the Year 2000 issue will not pose significant
operating problems for the Company's computer systems, since the significant
computer equipment and software products the Company utilizes are already
compliant and are being converted or modified by March 31, 1999 as part of
system upgrades unrelated to the Year 2000 issue. The Company is in the process
of developing a contingency plan which will permit its primary computer systems
operations to continue if the testing of such conversions and modifications are
not completed by March 31, 1999.
The total cost to the Company of addressing the Year 2000 issues with
respect to its own computer systems, other equipment and operations is expected
to be minimal because the Company is not performing its computer systems
upgrades and conversions to address the Year 2000 issues. Additionally, the
majority of Year 2000 issues are being addressed by use of internal resources
and the Company does not separately track such internal costs which are
principally payroll and related costs. The Company's minimal cost estimate does
not include time and costs that may be incurred by the Company as a result of
the failure of any third parties to become Year 2000 ready or costs to implement
any contingency plans.
The Company is communicating with its key third party service providers and
vendors, including those who have previously sold equipment to the Company, to
obtain information and compliance certificates, if possible, regarding their
state of readiness with respect to the Year 2000 issue. Failure of certain third
parties to remediate Year 2000 issues affecting their respective businesses on a
timely basis, or to implement contingency plans sufficient to permit
uninterrupted continuation of their businesses in the event of a failure of
their systems, could have a material adverse impact on the Company's business
and results of operations. However, failure of third parties to remediate Year
2000 issues affecting the Company's previously purchased equipment is not
expected to have a material adverse impact on the Company's business or results
of operations. Final determination of third party Year 2000 readiness is
expected to be substantially complete in early 1999, however, none of the
responses received from third party service providers as of January 26, 1999
have indicated any problem with bringing their services into Year 2000
compliance. The Company intends to continue to monitor the progress made by
third parties, test critical system interfaces and formulate appropriate
contingency and business continuation plans to address third party issues
identified through its evaluations and assessments.
The Company presently believes that the most reasonably likely worst case
scenario with respect to the Year 2000 issues is the failure of third party
service providers, including utility suppliers and banks, to become Year 2000
compliant. This could result in interruptions in services to the Company's
apartment communities for a period of time and could adversely affect the
Company's access to credit and money markets which, in turn, could result in
loss of normal operating capacity by the Company. If the Company's computer
systems completely fail, the Company would be able to continue affected
functions either manually or through non-Year 2000 compliant systems. The
Company does not believe that the increased costs associated with such
interruptions could exceed $1 million.
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. SFAS No. 133 is effective for
all periods beginning after June 15, 1999. Management is evaluating what, if
any, effect on the Company's consolidated financial statements will occur upon
the implementation of SFAS No. 133.
65
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, 1998 and 1997, and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
January 26, 1999 (except for Notes 3, 6, 11 and 12 as to which the date is
February 23, 1999)
66
CAMDEN PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
------------------------------
1998 1997
-------------- ---------------
Assets
Real estate assets, at cost
Land $ 321,752 $ 182,909
Buildings and improvements 1,917,026 1,155,335
-------------- --------------
2,238,778 1,338,244
Less: accumulated depreciation (167,560) (94,665)
-------------- --------------
Net operating real estate assets 2,071,218 1,243,579
Properties under development, including land 216,680 43,805
Investment in joint ventures 32,484 15,089
-------------- --------------
2,320,382 1,302,473
Accounts receivable - affiliates 831 950
Notes receivable - affiliates 1,800 1,796
Other assets, net 15,036 7,885
Cash and cash equivalents 5,647 6,468
Restricted cash-- escrow deposits 4,286 4,048
-------------- --------------
Total assets $ 2,347,982 $ 1,323,620
============== ==============
Liabilities and Shareholders' Equity
Liabilities
Notes payable:
Unsecured $ 632,923 $ 316,941
Secured 369,645 163,813
Accounts payable 24,180 13,698
Accrued real estate taxes 21,474 16,568
Accrued expenses and other liabilities 28,278 15,881
Distributions payable 25,735 16,805
-------------- --------------
Total liabilities 1,102,235 543,706
Minority Interests 71,783 63,325
7.33% Convertible Subordinated Debentures 3,576 6,025
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, 1998 42
Common shares of beneficial interest; $0.01 par value per share; 100,000
shares authorized; 45,123 and 31,954 issued at
December 31, 1998 and 1997, respectively 447 317
Additional paid-in capital 1,299,539 780,738
Distributions in excess of net income (98,897) (63,526)
Unearned restricted share awards (10,039) (6,965)
Less: treasury shares, at cost ` (20,704)
-------------- --------------
Total shareholders' equity 1,170,388 710,564
-------------- --------------
Total liabilities and shareholders' equity $ 2,347,982 $ 1,323,620
============== ==============
See Notes to Consolidated Financial Statements.
67
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
REVENUES
Rental income $ 300,632 $ 187,928 $ 105,785
Other property income 18,093 9,446 4,453
----------- ----------- -----------
Total property income 318,725 197,374 110,238
Equity in income of joint ventures 1,312 1,141
Fee and asset management 1,552 743 949
Other income 2,250 531 419
----------- ----------- -----------
Total revenues 323,839 199,789 111,606
----------- ----------- -----------
EXPENSES
Property operating and maintenance 97,137 70,679 40,604
Real estate taxes 31,469 21,028 13,192
General and administrative 7,998 4,389 2,631
Interest 50,467 28,537 17,336
Depreciation and amortization 78,113 44,836 23,894
----------- ----------- -----------
Total expenses 265,184 169,469 97,657
----------- ----------- -----------
INCOME BEFORE GAIN ON SALES OF PROPERTIES, LOSSES RELATED TO EARLY
RETIREMENT OF DEBT AND MINORITY INTERESTS 58,655 30,320 13,949
GAIN ON SALES OF PROPERTIES 10,170 115
LOSSES RELATED TO EARLY RETIREMENT OF DEBT (397) (5,351)
----------- ----------- -----------
INCOME BEFORE MINORITY INTERESTS 58,655 40,093 8,713
MINORITY INTERESTS (1,322) (1,655)
----------- ----------- -----------
NET INCOME 57,333 38,438 8,713
PREFERRED SHARE DIVIDENDS (9,371) (4)
----------- ----------- -----------
NET INCOME TO COMMON SHAREHOLDERS $ 47,962 $ 38,438 $ 8,709
=========== =========== ===========
BASIC EARNINGS PER SHARE $ 1.16 $ 1.46 $ 0.59
DILUTED EARNINGS PER SHARE $ 1.12 $ 1.41 $ 0.58
DISTRIBUTIONS DECLARED PER COMMON SHARE $ 2.02 $ 1.96 $ 1.90
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 41,174 26,257 14,849
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON DILUTIVE
EQUIVALENT SHARES OUTSTANDING 44,183 28,356 14,979
See Notes to Consolidated Financial Statements.
68
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
Preferred Common Unearned
Shares of Shares of Additional Distributions Restricted
Beneficial Beneficial Paid-In in Excess of Share Treasury
Interest Interest Capital Net Income Awards Shares
---------- ---------- ---------- ------------- ----------- --------
SHAREHOLDERS' EQUITY, JANUARY 1, 1996 $ $ 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)
---------- ---------- ---------- ------------- ----------- ---------
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 9 21,061
Restricted shares issued under benefit plan (194 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 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 1 2,408
Restricted shares issued (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 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)
========= =========== =========== ========== =========== ==========
See Notes to Consolidated Financial Statements.
69
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------------
1998 1997 1996
----------- ----------- ------------
Cash Flow from Operating Activities
Net income $ 57,333 $ 38,438 $ 8,713
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 78,113 44,836 23,894
Equity in income of joint ventures, net of cash received 1,278 929
Gain on sales of properties (10,170) (115)
Losses related to early retirement of debt 397 5,351
Minority interests 1,322 1,655
Accretion of discount on unsecured notes payable 169 142 72
Net change in operating accounts 204 (10,253) 3,352
----------- ----------- ------------
Net cash provided by operating activities 138,419 65,974 41,267
Cash Flow from Investing Activities
Cash of Oasis and Paragon at acquisition 7,253 9,847
Net proceeds from Third Party Transaction 226,128
Increase in real estate assets (335,567) (133,206) (71,288)
Net proceeds from sales of properties 42,513 37,826 29,794
Net proceeds from sale of joint venture 6,841
Increase in investment in joint ventures (4,922)
Decrease in investment in joint ventures 1,478 4,624
Net decrease (increase) in affiliate notes receivable 5,389 7,749 (73)
Other (4,126) (549) (130)
----------- ----------- ------------
Net cash used in investing activities (55,013) (73,709) (41,697)
Cash Flow from Financing Activities
Net increase (decrease) in unsecured lines of credit and short-term borrowings 146,792 31,000 (110,783)
Debt repayments from Third Party Transaction (114,248)
Proceeds from notes payable 152,600 100,000 181,048
Repayment of notes payable (160,225) (206,097) (61,614)
Proceeds from issuance of common shares 142,627 27,591
Distributions to shareholders and minority interests (89,115) (55,514) (27,457)
Repurchase of common shares (20,704)
Payment of loan costs (1,430) (988) (2,253)
Losses related to early retirement of debt (397) (5,351)
Other 2,103 1,206 1,379
----------- ----------- -----------
Net cash (used in) provided by financing activities (84,227) 11,837 2,560
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (821) 4,102 2,130
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,468 2,366 236
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,647 $ 6,468 $2,366
=========== =========== ===========
70
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Year Ended December 31,
------------------------------------
1998 1997 1996
----------- ----------- ------------
Supplemental Information
Cash paid for interest, net of interest capitalized $ 51,574 $ 27,155 $ 15,585
Interest capitalized $ 9,929 $ 3,338 $ 4,129
Supplemental Schedule of Noncash Investing and Financing Activities
Acquisition of Oasis (including the Third Party Transaction) and Paragon, net
of cash acquired:
Fair value of assets acquired $ 793,513 $ 650,634
Liabilities assumed 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 $ 2,409 $ 21,070 $ 15,820
Value of shares issued under benefit plans, net $ 6,821 $ 5,372 $ 2,449
Conversion of preferred shares and dividends $ 1,953
See Notes to Consolidated Financial Statements.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Camden Property Trust ("Camden" or the "Company") is a Houston-based
self-administered and self-managed real estate investment trust ("REIT")
organized on May 25, 1993. Camden and its subsidiaries report as a single
business segment, with activities related to the ownership, development,
acquisition, management, marketing and disposition of multifamily apartment
communities in the Southwest, Southeast, Midwest and Western regions of the
United States. As of December 31, 1998, the Company owned interests in, operated
or was developing 163 multifamily properties containing 56,968 apartment homes
located in nine states. Fourteen of the Company's multifamily properties
containing 5,658 apartment homes were under development at December 31, 1998.
The Company has several additional sites which it intends to develop into
multifamily apartment communities.
Acquisition of Oasis Residential, Inc. On April 8, 1998, the Company
acquired through a tax-free merger (the "Oasis Merger"), Oasis Residential, Inc.
("Oasis"), a publicly traded Las Vegas-based multifamily REIT. The acquisition
increased the size of the Company's portfolio from 100 to 152 completed
multifamily properties, and from 34,669 to 50,183 apartment homes at the date of
acquisition. Upon completion of ten properties under development at the date of
acquisition, the Company's portfolio would have increased to 54,314 apartment
homes in 162 properties. As provided in the Plan of Merger dated December 16,
1997, as amended, each of the shares of Oasis common stock outstanding on April
8, 1998 was exchanged for 0.759 share of the Company's common shares. Each share
of Oasis Series A cumulative convertible preferred stock (the "Oasis Preferred
Stock") outstanding on April 8, 1998 was reissued as one Camden Series A
Cumulative Convertible Preferred Share (the "Preferred Shares") with terms and
conditions comparable to the Oasis Preferred Stock. The Company issued 12.4
million common shares and 4.2 million Preferred Shares in exchange for the
outstanding Oasis common stock and outstanding Oasis Preferred Stock,
respectively. Approximately $484 million of Oasis debt, at fair value, was
assumed in the merger. In connection with the Oasis Merger, the Company also
acquired the managing member interest in Oasis Martinique, LLC. The remaining
interests (the "Martinique Units") are exchangeable into 672,490 common shares
and are accounted for as a minority interest. In connection with the Oasis
Merger, Camden disclosed its intentions of entering into a joint venture
investment (the "Joint Venture") in order to transfer into the Joint Venture 19
apartment communities containing 5,119 apartment homes located in Las Vegas (the
"Third Party Transaction").
On June 30, 1998, the Company completed the Third Party Transaction for an
aggregate of $248 million with a private limited liability company (the "LLC").
The Company retained a 20% interest in the LLC, which is included in investment
in joint ventures. The Third Party Transaction was funded with capital invested
by the LLC members, 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. The LLC assumed the $190 million of treasury
locks which Camden had entered into during the first quarter of 1998 as a hedge
against interest rate exposure for the LLC. The treasury locks were unwound by
the LLC simultaneously with the completion of the funding for the Third Party
Transaction. Camden used the net proceeds from the Third Party Transaction to
reduce outstanding debt by $124 million, including the $9.9 million of existing
indebtedness noted above, and set aside $112 million into an escrow account
which was used to complete tax-free exchange property acquisitions, retire debt
and repurchase the Company's common shares pursuant to the Company's share
repurchase program. No book gain or loss was recorded by Camden as a result of
the Third Party Transaction. Camden continues to provide property management
services for these assets.
72
The Oasis Merger has been recorded under the purchase method of accounting.
In accordance with generally accepted accounting principles, the purchase price
was allocated to the net assets acquired based on their estimated fair values.
No goodwill was recorded in this transaction. The accompanying consolidated
financial statements include the operations of Oasis since April 1, 1998, the
effective date of the Oasis Merger for accounting purposes. Pro forma unaudited
consolidated operating results of the Company for the years ended December 31,
1998 and 1997, assuming that the Oasis Merger and the Third Party Transaction
had occurred as of January 1, 1997, are summarized below (in thousands, except
per share amounts):
Year Ended
December 31,
-----------------------------
1998 1997
------------- --------------
Total revenues $ 337,868 $ 282,274
Net income to common shareholders $ 51,440 $ 59,181
Basic earnings per share $ 1.16 $ 1.53
Diluted earnings per share $ 1.10 $ 1.49
These pro forma results do not purport to be indicative of the results of
operations which actually would have resulted had the Oasis Merger and the Third
Party Transaction been completed on the date indicated, nor are they necessarily
indicative of future operations.
Acquisition of Paragon Group, Inc. On April 15, 1997, the Company acquired
through a tax-free merger, Paragon Group, Inc. ("Paragon"), a Dallas-based
multifamily REIT. The acquisition increased the size of the Company's portfolio
from 53 to 103 multifamily properties, and from 19,389 to 35,364 apartment homes
(the "Paragon Acquisition"). Each share of Paragon common stock outstanding on
April 15, 1997 was exchanged for 0.64 shares of the Company's common shares. The
Company issued 9.5 million shares in exchange for all of the outstanding shares
of Paragon common stock and 2.4 million limited partnership units ("OP Units")
in Camden Operating, L.P. (the "Operating Partnership") and assumed
approximately $296 million of Paragon debt, at fair value, in connection with
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.
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 and partnerships in which its 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. Approximately 29.0% of Camden's multifamily
apartment units at December 31, 1998, are held in the Operating Partnership of
which Camden holds 81.56% interest and the sole 1% general partner interest. The
remaining 17.44% of the Operating Partnership interests are held by former
officers, directors and investors in Paragon, who collectively owned 2,000,109
OP Units at December 31, 1998. Minority interests in the accompanying
consolidated financial statements relate to holders of these OP Units and the
Martinique Units described in Note 1. Each OP Unit is redeemable for one common
share of Camden or cash at the election of the Company. Holders of OP Units are
not entitled to rights as shareholders of the Company prior to redemption of
their OP Units. No member of the Company's management team owns OP Units and
only two of the eight Trust Managers of the Company own OP Units.
73
Cash and Cash Equivalents. All cash and investments in money market
accounts and other securities with a maturity of three months or less, 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
"Projects under development, including land" until such apartment homes 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 apartment homes are considered operating and the Company begins 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, the Company's 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, the Company would recognize an impairment loss equivalent to an
amount required to adjust the carrying amount to its estimated fair market
value.
The Company capitalized $26.1 million and $13.3 million in 1998 and 1997,
respectively, of renovation and improvement costs which extended the economic
lives and enhanced the earnings of its multifamily properties. If the accounting
policy described below had been adopted as of January 1, 1997, the amounts
capitalized for 1998 and 1997 would have increased to $27.2 million and $17.4
million, respectively.
Effective April 1, 1998, the Company 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. The Company believes that
the newly adopted accounting policy is preferable as it is consistent with
standards and practices utilized by the majority of the Company's 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 New Accounting Pronouncements section for the effect of
this change and the Company's adoption of a new accounting pronouncement on
Camden's financial results for the nine months ended December 31, 1998.
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 $9.9 million in 1998, $3.3 million in 1997 and $4.1
million in 1996. Capitalized ad valorem taxes were $1.4 million in 1998,
$557,000 in 1997 and $617,000 in 1996.
All buildings and improvements are depreciated over their remaining
estimated useful lives of 10 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.
74
Other Assets, Net. Other assets 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 was $4.1 million in 1998 and
$2.9 million in 1997 for other assets, deferred financing, 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. The Company does not use these instruments for trading
purposes, rather it uses them to hedge the impact of interest rate fluctuations
on floating rate debt.
Income Recognition. Rental, other property income, interest and all other
sources of income are recognized as earned.
Rental Operations. Camden owns and operates 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. 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. 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. Camden has maintained and 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 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 1998, book depreciation expense exceeded the amount reported for
tax purposes by $19.3 million. As a result of these cumulative book/tax
differences, the net book basis of the Company's real estate assets exceeds its
net tax basis by $344 million at December 31, 1998. At December 31, 1997, the
net book basis exceeded the net tax basis by $85 million.
75
A schedule of per share distributions paid by the Company to be reported by
the shareholders is set forth in the following table:
Year Ended December 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
Ordinary income $ 1.68 $ 1.30 $ 1.03
20% Long-term capital gain 0.10 0.12
25% Sec. 1250 capital gain 0.24 0.08
Return of capital 0.46 0.87
---------- ---------- ----------
Total $ 2.02 $ 1.96 $ 1.90
========== ========== ==========
Percentage of distributions representing tax preference items. 9.052% 17.013% 24.769%
Dividends paid to preferred shareholders totaled $1.69 per share for 1998,
with $1.40 representing ordinary income, $0.09 representing 20% long-term
capital gain, and $0.20 representing 25% Sec. 1250 capital gain.
A schedule of 1998 per share distributions paid by Oasis to Oasis
shareholders prior to the Oasis Merger is set forth in the following table:
1998
----------------------------
Common Preferred
------------ ------------
Ordinary income $ 0.28 $ 0.56
Return of capital 0.17
------------ ------------
Total $ 0.45 $ 0.56
============ ============
Property Operating and Maintenance Expenses. Property operating and
maintenance expenses included normal repairs and maintenance totaling $21.5
million in 1998, $14.6 million in 1997 and $8.3 million in 1996.
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.
76
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated (in thousands, except per
share amounts):
Year Ended December 31,
-----------------------------------------
1998 1997 1996
---------- ---------- ----------
BASIC EARNINGS PER SHARE
Weighted Average Common Shares Outstanding 41,174 26,257 14,849
========== ========== ==========
Basic Earnings Per Share $ 1.16 $ 1.46 $ 0.59
========== ========== ==========
DILUTED EARNINGS PER SHARE
Weighted Average Common Shares Outstanding 41,174 26,257 14,849
Shares Issuable from Assumed Conversion of:
Common Share Options and Awards Granted 399 330 130
Minority Interest Units 2,610 1,769
---------- ---------- ----------
Weighted Average Common Shares Outstanding, as Adjusted 44,183 28,356 14,979
========== ========== ==========
Diluted Earnings Per Share $ 1.12 $ 1.41 $ 0.58
========== ========== ==========
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net Income $ 57,333 $ 38,438 $ 8,713
Less: Preferred Share Dividends 9,371 4
---------- ---------- ----------
Net Income to Common Shareholders (Basic Earnings Per Share
Computation) 47,962 38,438 8,709
Preferred Share Dividends 4
Minority Interests 1,322 1,655
---------- ---------- ----------
Net Income to Common Shareholders, as Adjusted (Diluted
Earnings Per Share Computation) $ 49,284 $ 40,093 $ 8,713
========== ========== ==========
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 Accounting Standards
Executive Committee ("AcSEC") of the American Institute of Certified Public
Accountants ("AICPA") reached a consensus on Statement of Position ("SOP") No.
98-1, Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use. SOP No. 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company believes the adoption of
this SOP will not have a material effect on the Company's consolidated financial
statements.
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 Camden's adoption of this policy, the Company had
been capitalizing such costs. The effect of the Company's adoption of Issue No.
97-11 and the new accounting policy for carpet, appliances and HVAC unit
replacements on the nine months ended December 31, 1998 was to increase the net
income to common shareholders by $3.2 million ($0.08 per basic earnings per
share and $0.07 per diluted earnings per share).
In April 1998, the AcSEC of the AICPA reached a consensus on SOP No. 98-5,
Reporting on the Costs of Start-Up Activities, which provides that costs of
start-up activities and organization costs be expensed as incurred. SOP No. 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. The Company believes the adoption of this SOP will not have a material
effect on the Company's consolidated financial statements.
77
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.
SFAS No. 133 is effective for all periods beginning after June 15, 1999.
Management is evaluating what, if any, effect on the Company's consolidated
financial statements will occur upon the implementation of SFAS No. 133.
3. NOTES PAYABLE
The following is a summary of the Company's indebtedness:
(In millions)
December 31,
-----------------------
1998 1997
---------- -----------
Senior Unsecured Notes:
6 5/8% - 7 1/4% Notes, due 2001 - 2006 $ 323.9 $ 174.0
6.92% - 7.23% Medium-Term Notes, due 2000 - 2004 127.0 25.0
Unsecured Lines of Credit and Short-Term Borrowings 182.0 43.0
Reset Notes 75.0
----------- ---------
632.9 317.0
Secured Notes - Mortgage Loans (5 7/10% - 8 5/8%), due 1999-2025 369.7 163.8
----------- ---------
Total notes payable $ 1,002.6 $ 480.8
=========== =========
Floating rate debt included in unsecured notes payable, net of $25 million
hedging agreement (6 1/4% - 7 3/4%) $ 157.0 $ 93.0
Floating rate tax-exempt debt included in mortgage loans (5 7/10% - 5 3/4%) $ 64.3
As of December 31, 1998, the Company had $18 million available under its
revolving unsecured lines of credit ("Unsecured Lines of Credit"). The weighted
average balance outstanding on the Unsecured Lines of Credit during the year
ended December 31, 1998 was $129 million, with a maximum outstanding balance of
$189 million. In February 1999, the Company added an additional $75 million in
capacity to its Unsecured Lines of Credit, increasing its total capacity to $275
million.
The Unsecured Lines of Credit mature July 1999 through July 2000. Prior to
maturity, the Company intends to have these notes extended, renegotiated or
repaid. The scheduled interest rates on the loans currently range from LIBOR
plus 95 basis points to prime. These scheduled rates are subject to change as
the Company's credit ratings change. Advances under the Unsecured Lines of
Credit may be priced at the scheduled rates, or the Company may enter into bid
rate loans ("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 $75 million or the remaining amount available under the
Unsecured Lines of Credit. The Unsecured Lines of Credit are subject to
customary financial covenants and limitations. As an alternative to its
Unsecured Lines of Credit, the Company from time to time borrows using
competitively bid unsecured short-term notes with lenders who may or may not be
a part of the Unsecured Lines of Credit bank groups. Such borrowings vary in
term and pricing and are typically priced at interest rates below those
available under the Unsecured Lines of Credit.
As a result of the Oasis Merger, the Company assumed $228 million in
conventional mortgage loans with interest rates currently ranging from 5 3/4% to
8 5/8%. As of December 31, 1998, $201 million of the conventional mortgage loans
assumed remained outstanding.
In conjunction with the Oasis Merger, Camden assumed $150 million in senior
unsecured notes payable issued by Oasis in November 1996. These notes are due in
equal increments in November 2001, 2003, 2006 and bear interest at annual rates
ranging from 6 3/4% to 7 1/4%, payable quarterly.
78
Proceeds from the Third Party Transaction were used to reduce outstanding
debt by $124 million, including $9.9 million of existing indebtedness and
approximately $114 million on the Unsecured Lines of Credit, and $112 million
was set aside into an escrow account which was used to complete tax-free
exchange property acquisitions, retire debt and repurchase the Company's common
shares.
In October 1998, the Company issued $102 million principal amounts of
senior unsecured notes from its $196 million medium-term note shelf
registration. These fixed rate notes, due in October 2000, bear interest at a
weighted average rate of 7.19%, payable semiannually on March 15 and September
15. The net proceeds were used to liquidate the $75 million Reset Notes, pay off
certain mortgage notes payable, and reduce indebtedness incurred under the
Unsecured Lines of Credit.
At December 31, 1998, the Company 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 a 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, 1998, the weighted average interest rate on floating rate
debt was 6.6%.
Subsequent to December 31, 1998, the Company issued $39.5 million principal
amounts of senior unsecured notes from its $196 million medium-term note shelf
registration. These fixed rate notes, due in January 2002 through January 2009,
respectively, bear interest at a weighted average rate of 7.07%, payable
semiannually on January 15 and July 15. The net proceeds were used to reduce
indebtedness outstanding under the Unsecured Lines of Credit.
Scheduled principal repayments on all loans outstanding at December 31,
1998 over the next five years are $18.6 million in 1999, $295.6 million in 2000,
$167.7 million in 2001, $6.2 million in 2002, $125.7 million in 2003 and $388.8
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 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, 1998, $82.7 million in principal amount of the Debentures had been
converted to 3.4 million common shares. For the converted Debentures, the earned
but unpaid interest was forfeited by the Debenture holders in accordance with
the Indenture and the unpaid interest payable was credited to additional
paid-in-capital. In addition, $3.2 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, basic earnings per share
would have been $1.17, $1.46 and $0.62 per share for the years ended December
31, 1998, 1997 and 1996, respectively. Diluted earnings per share would have
been $1.12, $1.41 and $0.62 per share for the years ended December 31, 1998,
1997 and 1996, respectively. Deferred Debenture issue costs of $58,000 and
$142,000 remained outstanding at December 31, 1998 and 1997, respectively, and
are being amortized over the life of the Debentures.
79
5. INCENTIVE AND BENEFIT PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations in accounting for its share-based compensation. Under APB No.
25, since the exercise price of employee share options equals the market price
of the Company's 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 the Company's Employee Stock Purchase Plan
("ESPP"), since the ESPP is considered non-compensatory. The Company has adopted
the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.
Incentive Plan. The Company has a non-compensatory option plan (the "Plan")
which was amended in the second quarter of 1997 by the Company's 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 (collectively,
the "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 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, 1998:
Shares
Available for
Issuance Options and Restricted Shares
------------- ---------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
1998 1997 1996
1998 1998 Price 1997 Price 1996 Price
------------- ----------- ----------- ----------- ----------- ------------ ---------
Balance at January 1 1,748,983 1,303,849 $ 24.94 843,360 $ 23.34 870,835 $ 23.12
Current Year Share Adjustment
Due to Plan Amendment 1,165,618
Options
Granted (1,657,008) 1,657,008 29.32 310,050 26.99
Exercised (82,327) 22.96 (33,042) 23.39 (71,450) 22.35
Forfeited 271,538 (271,538) 23.57 (4,333) 24.00 (54,650) 23.71
------------- ----------- ----------- ----------- ----------- ------------ ---------
Net Options (1,385,470) 1,303,143 30.92 272,675 27.47 (126,100) 22.94
------------- ----------- ----------- ----------- ----------- ------------ ---------
Restricted Shares
Granted (248,769) 248,769 29.06 193,724 28.42 124,341 24.73
Forfeited (17,262) 27.67 (5,910) 26.39 (25,716) 24.37
------------- ----------- ----------- ----------- ----------- ------------ ---------
Net Restricted Shares (248,769) 231,507 29.16 187,814 28.48 98,625 24.83
------------- ----------- ----------- ----------- ----------- ------------ ---------
Balance at December 31 1,280,362 2,838,499 $ 28.03 1,303,849 $ 24.94 843,360 $ 23.34
============= =========== =========== =========== =========== ============ =========
Exercisable options at December 31 586,607 $ 26.15 565,600 $ 22.95 533,617 $ 22.86
Vested restricted shares at December 31 213,782 $ 25.20 123,341 $ 24.46 56,781 $ 23.96
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
80
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 1998 were exercised
at prices ranging from $22 to $24 per share. At December 31, 1998, options
outstanding were at prices ranging from $22 to $29.44 per share. Such options
have a weighted average remaining contractual life of nine years.
The Company 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 six 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 1998 and
1997, respectively: risk-free interest rates ranging from 5.5% to 5.6% and 6.3%
to 6.9%, expected life of ten years, dividend yield of 7.8% and 6.3%, and
expected share price volatility of 13.9% and 14.4%. The weighted average fair
value of options granted in 1998 and 1997, respectively, was $1.27 per share and
$2.63 per share.
Restricted shares have vesting periods of up to five years. The
compensation cost for restricted shares has been appropriately recognized at
fair market value of the Company's shares.
Employee Stock Purchase Plan. In July 1997, the Company established and
commenced an ESPP for all active employees, officers, and trust managers who
have completed one month 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. 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 the Company's shares at the date of
purchase. There were 32,678 and 0 shares purchased under the ESPP during 1998
and 1997, respectively. The weighted average fair value of ESPP shares purchased
in 1998 was $30.41 per share. On January 4, 1999, 31,761 shares were purchased
under the ESPP related to the 1998 Plan Year.
If the Company applied the recognition provisions of SFAS No. 123 to its
option grants and ESPP, the Company's 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,
-----------------------
1998 1997
----------- ----------
Net income to common shareholders $ 47,360 $ 38,381
Basic earnings per share $ 1.15 $ 1.46
Diluted earnings per share $ 1.10 $ 1.41
The Company did not grant any option awards in 1996. The effects of
applying SFAS No. 123 in this pro forma disclosure are not indicative of future
amounts.
Rabbi Trust. In February 1997, the Company established a rabbi trust (the
"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 may be deposited. The Company accounts for the Rabbi Trust
similar to a compensatory stock option plan. At December 31, 1998, approximately
497,000 restricted shares were held in the Rabbi Trust.
81
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.
6. COMMON SHARE REPURCHASE PROGRAM
In September 1998, the Board of Trust Managers authorized the Company to
repurchase up to $50 million of Camden's common shares through open market
purchases and private transactions. At December 31, 1998 the Company had
repurchased 801,400 common shares for a total cost of $20.7 million. As of
February 23, 1999, an additional 1,142,310 shares were purchased with the
remaining $29.3 million.
7. CONVERTIBLE PREFERRED SHARES
The 4,165,000 Preferred Shares reissued in conjunction with the Oasis
Merger 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 by the Company prior to April 30, 2001.
8. RELATED PARTY TRANSACTIONS
Camden Connection, Inc. ("CCI") (formerly Apartment Connection, Inc.) is a
nonqualified-REIT subsidiary. CCI was established to act as a leasing agent
providing tenants for apartment owners in Houston, including properties owned by
the Company. Locator fees paid by the Company to CCI were $79,000, and $136,000
for the years ended 1997, and 1996, respectively. The Company made an unsecured
working capital revolving line of credit available to CCI, which was renewable
annually. The loan had a maximum commitment of $1.2 million and earned interest
at a fixed rate of 7.5% per annum. During 1997, the operations of CCI were sold
and the loan was paid off.
Two of the Company's executive officers (the "Executives") have loans
totaling $1.8 million with one of the Company's nonqualified-REIT subsidiaries.
The Executives utilized amounts received from these loans to purchase common
shares of the Company. The loans mature in April of 1999 and bear interest at
the fixed rate of 7.0%. These loans are non-recourse, but are secured by a
pledge of such common shares, and do not require any prepayments of principal
until maturity. The Company is currently in the process of renegotiating the
maturity date and interest rate terms of these loans with the Executives.
In connection with the Paragon Acquisition, Oasis Merger and the Third
Party Transaction, the Company began performing residential services for owners
of affiliated properties. Management fees earned on the properties amounted to
$583,000 and $279,000 for the years ended December 31, 1998 and 1997,
respectively.
Prior to 1997, the Company had management agreements in which the
Executives had 1% economic interests with respect to four properties. Fees
earned amounted to $428,000 for the year ended 1996. 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.
82
In connection with the Oasis Merger, the Company entered into consulting
agreements with two former Oasis executives, one of whom currently serves as a
trust manager of the Company, to locate potential investment opportunities in
California through Camden Capital, Inc., a subsidiary of the Company. During
1998, the Company paid consulting fees totaling $340,000 to these executives. At
December 31, 1998, Camden Capital had invested approximately $4.9 million in
three operating properties and one development property held in two joint
ventures which the Company does not manage.
9. FAIR VALUE DISCLOSURE 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, 1998 and December 31,
1997. 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 the Company 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, 1998 and 1997, management estimates that the fair value
of (i) 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; and (ii) based upon the Company's
effective borrowing rate for issuance of debt with similar terms and remaining
maturities, the carrying amounts of fixed rate debt approximate fair value.
The Company is exposed to credit risk in the event of nonperformance by
counterparties to its interest rate swap agreements, but has no off-balance
sheet risk of loss. The Company anticipates that its counter parties will fully
perform their obligations under the agreements.
10. 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,
-----------------------------------------
1998 1997 1996
------------ ------------ ------------
Decrease (increase) in assets:
Accounts receivable - affiliates $ 1,496 $ 853 $ 210
Other assets, net 1,518 2,046 221
Restricted cash - escrow deposits 1,272 (1,733) 929
Increase (decrease) in liabilities:
Accounts payable 11,570 434 (788)
Accrued real estate taxes 3,879 842 1,381
Accrued expenses and other liabilities (19,531) (12,695) 1,399
------------ ------------ ------------
Net change in operating accounts $ 204 $ (10,253) $ 3,352
============ ============ ============
11. COMMITMENTS AND CONTINGENCIES
Construction Contracts. As of December 31, 1998, the Company was obligated
for approximately $124.2 million of additional expenditures (a substantial
amount of which is to be provided by debt).
83
Lease Commitments. At December 31, 1998, Camden had long-term leases
covering certain land, office facilities and equipment. Rental expense totaled
$1.0 million in 1998, $783,000 in 1997 and $475,000 in 1996. Minimum annual
rental commitments for the years ending December 31, 1999 through 2003 are $1.0
million, $982,000, $916,000, $899,000 and $935,000, respectively, and $9.6
million 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. 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.
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 the Company currently owns) constructed for first
occupancy after March 31, 1991. On February 1, 1999, the Justice Department
filed a lawsuit against us 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 the Company, through the merger with
Oasis, has 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 the Company
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 it 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 the
Company to pay damages, including punitive damages, and a civil penalty.
The Company is currently inspecting these properties to determine the
extent of the alleged noncompliance and the changes that may be necessitated. At
this time, the Company is not able to provide an estimate of costs and expenses
associated with this matter. There can be no assurance that the Company will be
successful in the defense of the Justice Department action. If this lawsuit is
successful, the Company could suffer a material adverse impact.
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 consolidated financial statements of Camden.
12. SUBSEQUENT EVENTS
On February 23, 1999, the Operating Partnership issued $100 million of 8.5%
Series B Cumulative Redeemable Perpetual Preferred Units ("Preferred Units").
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 registered preferred shares of the Company. The
Preferred Units are subordinated to present and future debt of the Operating
Partnership and the Company.
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 time to evaluate the properties
and conduct its due diligence and during which time the purchaser will have the
ability to terminate the contracts without penalty or forfeiture of any deposit
84
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 or sell 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 for the purchase of
land for development. 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 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.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 1998
and 1997 are as follows:
(In thousands, except per share amounts)
First Second Third Fourth Total
---------- ----------- ----------- ---------- -----------
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
1997**:
Revenues $ 29,472 $ 54,072 $ 56,939 $ 59,306 $ 199,789
Net income to common shareholders 4,064 6,429 8,260 19,685* 38,438
Basic earnings per share 0.25 0.24 0.27 0.62* 1.46
Diluted earnings per share 0.24 0.24 0.27 0.59* 1.41
* Includes a $10,170 or $0.32 basic earnings and $0.29 diluted earnings per
share impact related to gain on sales of properties.
** Includes results of the Paragon Acquisition and the Oasis Merger beginning
April 1, 1997 and 1998, respectively.
14. 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
------------- ------------- ------------------
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
1997:
First $ 28 3/4 $ 26 3/4 $ 0.490
Second 31 5/8 26 1/2 0.490
Third 31 5/8 28 5/8 0.490
Fourth 33 3/16 29 1/4 0.490
85
CAMDEN PROPERTY TRUST
COMPARATIVE SUMMARY OF SELECTED FINANCIAL AND PROPERTY DATA
(In thousands, except per share amounts)
Years Ended December 31,
--------------------------------------------------------------------
1998* 1997** 1996 1995 1994
------------- ------------- ----------- ----------- -----------
OPERATING DATA
Revenues:
Rental income $ 300,632 $ 187,928 $ 105,785 $ 92,275 $ 71,468
Other property income 18,093 9,446 4,453 3,617 2,811
------------- ------------- ----------- ----------- -----------
Total property income 318,725 197,374 110,238 95,892 74,279
Equity in income of joint ventures 1,312 1,141
Fee and asset management 1,552 743 949 1,029 721
Other income 2,250 531 419 353 456
------------- ------------- ----------- ----------- -----------
Total revenues 323,839 199,789 111,606 97,274 75,456
------------- ------------- ----------- ----------- -----------
Expenses
Property operating and maintenance 97,137 70,679 40,604 37,093 29,352
Real estate taxes 31,469 21,028 13,192 11,481 8,962
General and administrative 7,998 4,389 2,631 2,263 2,574
Interest 50,467 28,537 17,336 13,843 8,807
Depreciation and amortization 78,113 44,836 23,894 20,264 16,239
------------- ------------- ----------- ----------- -----------
Total expenses 265,184 169,469 97,657 84,944 65,934
------------- ------------- ----------- ----------- -----------
Income before gain on sales of properties, losses related
to early retirement of debt and minority interests 58,655 30,320 13,949 12,330 9,522
Gain on sales of properties 10,170 115
Losses related to early retirement of debt (397) (5,351)
------------- ------------- ----------- ---------- -----------
Income before minority interests 58,655 40,093 8,713 12,330 9,522
Minority interests (1,322) (1,655)
------------- ------------- ----------- ---------- -----------
Net income 57,333 38,438 8,713 12,330 9,522
Preferred share dividends (9,371) (4) (39) (20)
------------- ------------- ----------- ---------- -----------
Net income to common shareholders $ 47,962 $ 38,438 $ 8,709 $ 12,291 $ 9,502
============= ============= =========== =========== ===========
Basic earnings per share $ 1.16 $ 1.46 $ 0.59 $ 0.86 $ 0.78
Diluted earnings per share $ 1.12 $ 1.41 $ 0.58 $ 0.86 $ 0.77
Distributions per common share $ 2.02 $ 1.96 $ 1.90 $ 1.84 $ 1.76
Weighted average number of common shares outstanding 41,174 26,257 14,849 14,325 12,188
Weighted average number of common and common
dilutive equivalent shares outstanding 44,183 28,356 14,979 14,414 12,310
BALANCE SHEET DATA (AT END OF PERIOD)
Real estate assets $ 2,487,942 $ 1,397,138 $ 646,545 $ 607,598 $ 510,324
Accumulated depreciation (167,560) (94,665) (56,369) (36,800) (17,731)
Total assets 2,347,982 1,323,620 603,510 582,352 504,284
Notes payable 1,002,568 480,754 244,182 235,459 149,547
Minority interests 71,783 63,325
Convertible subordinated debentures 3,576 6,025 27,702 44,050 47,800
Series A Preferred Shares issued in 1993 1,950 1,950
Shareholders' Equity 1,170,388 710,564 295,428 267,829 277,604
Common shares outstanding 43,825 31,694 16,521 14,514 14,273
86
CAMDEN PROPERTY TRUST
COMPARATIVE SUMMARY OF SELECTED FINANCIAL AND PROPERTY DATA (CONTINUED)
(In thousands, except property data amounts)
Years Ended December 31,
-------------------------------------------------------------------
1998* 1997** 1996 1995 1994
------------ ------------- ------------ ------------- -------------
OTHER DATA
Cash flows provided by (used in):
Operating activities $ 138,419 $ 65,974 $ 41,267 $ 37,594 $ 33,560
Investing activities (55,013) (73,709) (41,697) (97,003) (198,0877)
Financing activities (84,227) 11,837 2,560 59,404 159,388
Funds from operations*** 137,996 75,753 39,999 35,260 28,604
PROPERTY DATA
Number of operating properties (at end of period) 149 100 48 50 48
Number of operating apartment homes (at end of period) 51,310 34,669 17,611 16,742 15,783
Number of operating apartment homes (weighted average) 42,411 29,280 17,362 16,412 13,694
Weighted average monthly total property
income per apartment home $ 626 $ 562 $ 529 $ 487 $ 452
Properties under development (at end of period) 14 6 5 9 8
*Effective April 1, 1998 the Company acquired Oasis.
**Effective April 1, 1997 the Company 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. 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 adopted the new FFO
definition prescribed by NAREIT during 1995. The Company's definition of
FFO also assumes conversion at the beginning of the period of all
convertible securities, including minority interests, which are
convertible into common equity. 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 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 the Company's operating
performance or to net cash provided by operating activities as a measure
of the Company's liquidity. Further, FFO as disclosed by other REIT's may
not be comparable to the Company's calculation.