UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-10524
UNITED DOMINION REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0857512
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 South Sixth Street, Richmond, Virginia 23219-3802
(Address of principal executive offices - zip code)
(804) 780-2691
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to filing requirements
for at least the past 90 days.
Yes X No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
88,143,261 shares of common stock outstanding as of August 5, 1997
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands,except for share data)
(Unaudited)
June 30, December 31,
1997 1996
-------------- ------------
Assets
Real estate owned:
Real estate held for investment (Note 3) $ 2,135,654 $ 2,007,612
Less: accumulated depreciation 181,662 173,291
------------ -----------
1,953,992 1,834,321
Real estate under development 62,716 37,855
Real estate held for disposition 85,431 39,556
Cash and cash equivalents 8,296 13,452
Other assets 33,220 41,720
------------ -----------
Total assets $ 2,143,655 $ 1,966,904
============ ===========
Liabilities and shareholders' equity
Notes payable-secured (Note 4) $ 389,106 $ 376,560
Notes payable-unsecured (Note 5) 626,242 668,275
Distributions payable to common shareholders 22,037 19,699
Accounts payable, accrued expenses and other liabilities 54,511 49,962
------------ -----------
Total liabilities 1,091,896 1,114,496
Minority interest of unitholders in operating partnership 2,021 2,029
Shareholders' equity:
Preferred stock, no par value; $25 liquidation preference,
25,000,000 shares authorized;
4,200,000 shares 9.25% Series A Cumulative Redeemable 105,000 105,000
6,000,000 shares 8.60% Series B Cumulative Redeemable 150,000 --
Common stock, $1 par value; 150,000,000 shares authorized
87,274,566 shares issued and outstanding (81,982,551 in 1996) 87,275 81,983
Additional paid-in-capital 882,257 814,795
Notes receivable from officer-shareholders (9,198) (5,926)
Distributions in excess of net income (165,596) (147,529)
Unrealized gain on securities available-for-sale -- 2,056
------------ -----------
Total shareholders' equity 1,049,738 850,379
------------ -----------
Total liabilities and shareholders' equity $ 2,143,655 $ 1,966,904
============ ===========
See accompanying notes.
2
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
--------- ---------- --------- -----------
Revenues
Rental income $ 95,382 $ 57,197 $ 185,366 $ 112,036
Interest and other non-property income 137 445 388 795
--------- --------- --------- -----------
95,519 57,642 185,754 112,831
Expenses
Rental expenses:
Utilities 5,658 3,857 12,124 8,385
Repairs and maintenance 14,206 10,597 26,179 19,136
Real estate taxes 7,796 4,209 14,907 8,189
Property management 3,297 1,247 6,074 2,748
Other rental expenses 10,000 5,279 19,289 10,453
Real estate depreciation 19,127 10,805 35,289 21,365
Interest 19,769 11,237 38,919 21,883
General and administrative 1,820 1,549 3,653 2,932
Other depreciation and amortization 395 276 845 560
Impairment loss on real estate held for disposition -- 290 -- 290
--------- --------- --------- -----------
82,068 49,346 157,279 95,941
Income before gains (losses) on sales of investments and
minority interest of unitholders in operating partnership 13,451 8,296 28,475 16,890
Gains on sales of investments 1,254 (129) 3,374 836
Minority interest of unitholders in operating partnership (28) (1) (59) (1)
--------- --------- --------- -----------
Net income 14,677 8,166 31,790 17,725
Dividends to preferred shareholders 3,611 2,428 6,039 4,856
--------- --------- --------- -----------
Net income available to common shareholders $ 11,066 $ 5,738 $ 25,751 $ 12,869
========= ========= ========= ===========
Net income per common share $ .13 $ .10 $ .30 $ .23
========= ========= ========= ===========
Dividends declared per common share $ .2525 $ .24 $ .5050 $ .48
========= ========= ========= ===========
Weighted average number of common shares outstanding 86,877 56,666 85,967 56,566
See accompanying notes.
3
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, 1997 1996
- ------------------------------------------------------------------------------------ -------------- -----------
Operating Activities
Net income $ 31,790 $ 17,725
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 36,134 21,925
Minority interest of unitholders in operating partnership 59 1
Impairment loss on real estate held for disposition -- 290
Gains on sales of investments (3,374) (836)
Amortization of deferred financing costs 810 617
Changes in operating assets and liabilities:
Increase in operating liabilities 2,473 8,555
Increase in operating assets (4,572) (1,184)
---------- --------
Net cash provided by operating activities 63,320 47,093
Investing Activities
Acquisition of real estate, net of debt and liabilities assumed (150,615) (77,723)
Capital expenditures (45,966) (24,856)
Development of real estate assets (24,861) (2,955)
Net proceeds from sales of investments 27,089 15,794
Proceeds from interest rate hedge transaction 1,538 --
Payments on notes receivable 2,142 2
---------- --------
Net cash used in investing activities (190,673) (89,738)
Financing Activities
Net proceeds from the issuance of common stock 59,670 1,141
Net proceeds from the sale of preferred stock 145,275 --
Net proceeds from the sale of common stock through the dividend reinvestment
and stock purchase plan 14,538 3,733
Gross proceeds from the issuance of unsecured notes payable 125,000 111
Net borrowings (repayments) of short-term bank borrowings (104,750) 82,400
Distributions paid to preferred shareholders (4,856) (4,856)
Distributions paid to common shareholders (41,482) (26,257)
Distributions paid to minority interest unitholders (67) --
Scheduled mortgage principal payments (2,773) (1,213)
Mortgage financing proceeds released from construction funds -- 2,665
Payments on unsecured notes (63,414) (10,000)
Non-scheduled payments on secured notes payable (3,350) (77)
Payment of financing costs (1,594) (314)
---------- --------
Net cash provided by financing activities 122,197 47,333
Net increase (decrease) in cash and cash equivalents (5,156) 4,688
Cash and cash equivalents, beginning of period 13,452 2,904
---------- --------
Cash and cash equivalents, end of period $ 8,296 $ 7,592
========== ========
Supplemental Information
Interest paid during the period $ 37,628 $ 22,087
Secured debt assumed through the acquisition of properties 22,063 15,748
See accompanying notes.
4
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(In thousands, except share and per share amounts)
(unaudited)
Common Stock, $1 Par Value Preferred Stock
-------------------------- ------------------------
Number Number
of Shares Amount of Shares Amount
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 81,982,551 $81,983 4,200,000 $105,000
Common shares issued in public offering 4,000,000 4,000 - -
Preferred shares-Series B issued in public offering - - 6,000,000 150,000
Exercise of common share options 30,697 30 - -
Common shares purchased by officers, net of repayments 230,000 230 - -
Common shares issued through dividend reinvestment and
stock purchase plan 1,030,680 1,031 - -
Common shares issued through employee stock purchase plan 638 1 - -
Net income - - - -
Preferred stock-Series A distributions declared ($1.16 per share) - - - -
Preferred stock-Series B distributions declared ($.56 per share) - - - -
Common stock distributions declared ($.5050 per share) - - - -
Realized gain on securities available-for-sale - - - -
=========== ============ ============ =============
Balance at June 30, 1997 87,274,566 $87,275 10,200,000 $255,000
========== ============ ============ =============
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(In thousands, except share and per share amounts)
(unaudited)
Unrealized
Gain on
Additional Receivable Distributions Securities Total
Paid-in from Officer in Excess of Available- Shareholders'
Capital Shareholders Net Income for-Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $814,795 ($5,926) ($147,529) $2,056 $850,379
Common shares issued in public offering 55,420 - - - 59,420
Preferred shares-Series B issued in public offering (4,908) - - - 145,092
Exercise of common share options 284 - - - 314
Common shares purchased by officers, net of repayments 3,149 (3,272) - - 107
Common shares issued through dividend reinvestment and
stock purchase plan 13,507 - - - 14,538
Common shares issued through employee stock purchase plan 10 - - - 11
Net income - - 31,790 - 31,790
Preferred stock-Series A distributions declared ($1.16 per share) - - (4,856) - (4,856)
Preferred stock-Series B distributions declared ($.56 per share) - - (1,183) - (1,183)
Common stock distributions declared ($.5050 per share) - - (43,818) - (43,818)
Realized gain on securities available-for-sale - - - (2,056) (2,056)
========= ========== ============== ============ ==============
Balance at June 30, 1997 $882,257 ($9,198) ($165,596) $0 $1,049,738
========= ========== ============== ============ ==============
See accompanying notes.
5
UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of presentation
The accompanying consolidated financial statements include the accounts of
United Dominion Realty Trust, Inc. and its wholly owned subsidiaries, including
United Dominion Realty, L.P., its Operating Partnership, (collectively, the
"Company"). The financial statements of the Company include the minority
interest of unitholders in the operating partnership. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of financial position
at June 30, 1997 and results of operations for the interim periods ended June
30, 1997 and 1996. Such adjustments are normal and recurring in nature. The
interim results presented are not necessarily indicative of results that can be
expected for a full year. The accompanying consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes appearing in the Company's December 31, 1996 Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
2. Reclassifications
Certain previously reported amounts have been reclassified to conform with the
current financial statement presentation.
3. Real estate held for investment
The following table summarizes real estate held for investment:
June 30, December 31,
Dollars in thousands 1997 1996
- ----------------------------------------------------------------------
Land and land improvements $ 376,185 $ 353,092
Buildings and improvements 1,631,006 1,537,387
Furniture, fixtures and equipment 124,215 115,308
Construction in progress 4,248 1,825
----------- ------------
Real estate held for investment $ 2,135,654 $ 2,007,612
=========== ===========
4. Notes payable - secured
Notes payable-secured, which encumber $756.6 million or 33% of the Company's
real estate owned ($1.6 billion or 67% of the Company's real estate owned is
unencumbered) consist of the following at June 30, 1997:
Principal Weighted Average Weighted Average No. Communities
Dollars in thousands Balance Interest Rate Years to Maturity Encumbered
- -----------------------------------------------------------------------------------------------------
Fixed-Rate Mortgage Notes $ 122,132 8.3% 3.7 20
Fixed-Rate Tax-Exempt Notes 116,732 6.9% 23.8 17
Fixed-Rate REMIC Financings 90,022 7.8% 3.5 27
Fixed-Rate Secured Notes (a) 45,000 7.3% 2.1 6
-------------------------------------------------------------------
Total Fixed-Rate Notes 373,886 7.7% 10.9 70
Variable-Rate Secured Notes 13,020 6.3% 2.2 2
Variable-Rate Tax-Exempt Notes 2,200 5.4% 5.4 1
-------------------------------------------------------------------
Total Variable-Rate Notes 15,220 6.2% 2.6 3
-------------------------------------------------------------------
Total notes payable - secured $ 389,106 7.7% 9.5 73
===================================================================
(a) Variable-rate secured notes payable which have been effectively swapped to a
fixed-rate at June 30, 1997 consist of a $40 million variable-rate secured
senior credit facility which encumbers six apartment communities and a $5
million variable-rate construction note payable. The interest rate swap
agreements have an aggregate notional value of $45 million under which the
Company pays a fixed-rate of interest and receives a variable-rate on the
notional amounts. The interest rate swap agreements effectively change the
Company's interest rate exposure on $45 million from a variable-rate to a
weighted average fixed-rate of approximately 7.3%.
6
UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Notes payable - unsecured
A summary of notes payable - unsecured is as follows:
June 30, December 31,
Dollars in thousands 1997 1996
------------- ------------
Commercial Banks
Borrowings outstanding under
revolving credit facilities and
other bank debt $ 20,500 (a) $ 125,250
Insurance Companies--Senior Unsecured Notes
7.98% due March, 1997-2003 44,571 (b) 52,000
8.72% due November, 1996-1998 (c) 4,000 4,000
--------- ---------
48,571 56,000
Other (d) 7,171 6,040
Senior Unsecured Notes - Other
7.00% Note due January 15, 1997 (e) -- 55,985
7.25% Notes due April 1, 1999 75,000 75,000
8.50% Debentures due September 15, 2024 (f) 150,000 150,000
7.95% Medium-Term Notes due July 12, 2006 125,000 125,000
7.25% Notes due January 15, 2007 125,000 --
7.07% Medium-Term Notes due November 15, 2006 25,000 25,000
7.02% Medium-Term Notes due November 15, 2005 50,000 50,000
--------- ---------
550,000 480,985
--------- ---------
Total Unsecured Notes Payable $ 626,242 $ 668,275
========= =========
(a) The weighted average balance outstanding for the three months
ended June 30, 1997 was $78.9 million and carried a weighted
average daily interest rate of 6.2%. The weighted average balance
outstanding for the six months ended June 30, 1997 was $75.1
million and carried a weighted average daily interest rate of
6.2%. The weighted average interest rate at June 30, 1997 was
6.4%.
(b) Payable in six equal annual principal installments of $7.4
million.
(c) Payable in two equal annual principal installments of $2 million.
(d) Includes $6.7 million and $5.6 million at June 30, 1997 and
December 31, 1996, respectively, of deferred gain from the
termination of interest rate hedge transactions.
(e) Represents an unsecured note assumed in connection with the South
West Property Trust Inc. statutory merger (the "South West
Merger") on December 31, 1996. The note was repaid on January 3,
1997.
(f) Debentures include an investor put feature which grants a one time
option to redeem debentures in September 2004.
6. Accounting Pronouncements
During the first quarter of 1997, the Financial Accounting Standards Board
issued a new statement on the calculation of earnings per share (SFAS No. 128)
which is effective beginning in the fourth quarter of 1997. Early adoption is
prohibited. Under the new statement, primary and fully dilutive earnings per
share are replaced with basic and diluted earnings per share. The Company's
basic earnings per share and diluted earnings per share for the three month and
six month periods ended June 30, 1997 and 1996 according to the new statements
would not change from the reported amounts.
7. Subsequent Events
On August 1, 1997, the Company sold a portfolio of six apartment communities
containing 1,204 apartment homes which had a weighted average age of 26 years
for an aggregate sales price of approximately $34.7 million. For financial
reporting purposes, the Company will recognize an approximate $9.6 million gain
on the sale. The transaction was structured to qualify as a like-kind exchange
under Section 1031 of the Internal Revenue Code, so the related capital gains
can be deferred for federal income tax purposes. A seventh property included in
the portfolio is scheduled to close in September 1997.
7
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company considers portions of this information to be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved.
The Company is an owner and operator of primarily middle income apartment
communities across the Sunbelt. The communities are located in 22 major markets
dispersed throughout a 15 state area extending from Delaware to Nevada where it
seeks to be a market leader by operating a sufficiently sized portfolio of
apartments within each market. The Company believes this market diversification
increases investment opportunity and decreases the risk associated with cyclical
local real estate markets and economies. The Company's investment strategy
focuses on acquiring apartment communities in its major markets where it can add
value. The following table summarizes the Company's major apartment market
information:
Three Months Ended Six Months Ended
As of June 30, 1997 June 30, 1997 June 30, 1997
----------------------------------------- ------------------------ ----------------------
Average Average
Number of Number of % of Monthly Monthly
Apartment Apartment Apartment Economic Rental Economic Rental
Market Communities Homes Homes Occupancy** Rates* Occupancy** Rates
- ----------------------------------------------------------- ------------------------ ----------------------
Held for investment
Dallas, TX 22 8,117 14% 93.7% $ 544 93.4% $ 538
Richmond, VA 10 3,253 5% 91.5% 551 90.8% 547
Columbia, SC 11 3,234 5% 92.5% 498 90.9% 498
Raleigh, NC 10 2,951 5% 94.0% 649 94.9% 646
Charlotte, NC 13 2,915 5% 94.5% 573 93.2% 570
Tampa, FL 10 2,913 5% 93.4% 572 93.9% 568
Orlando, FL 9 2,816 5% 96.5% 570 95.3% 568
Eastern NC 10 2,530 4% 95.9% 560 95.5% 558
Greensboro, NC 9 2,222 4% 84.2% 545 84.7% 544
Nashville, TN 8 2,116 4% 91.6% 584 91.6% 581
San Antonio, TX 5 1,983 3% 92.7% 614 92.5% 614
Baltimore, MD 7 1,614 3% 92.0% 656 92.4% 653
Greenville, SC 7 1,566 3% 85.6% 526 85.5% 525
Atlanta, GA 6 1,462 2% 90.2% 600 89.2% 600
Houston, TX 4 1,450 2% 91.1% 465 90.5% 464
Hampton Roads, VA 6 1,428 2% 90.3% 556 89.8% 554
Jacksonville, FL 3 1,157 2% 85.2% 596 86.3% 595
Washington, DC 5 1,113 2% 86.3% 736 86.6% 734
Ft. Lauderdale, FL 4 960 2% 94.1% 786 94.3% 783
Memphis, TN 4 935 2% 89.3% 514 90.3% 511
Austin, TX 3 867 1% 87.7% 533 88.9% 532
Phoenix, AZ 3 712 1% 91.4% 643 90.6% 643
Other 33 7,624 13% 91.4% 559 91.1% 558
----------------------------------- ---------------------- --------------------
202 55,938 94% 91.9% 572 91.7% 570
Held for disposition 16 3,499 6% 91.4% 506 91.2% 504
--------------------------------- ---------------------- --------------------
Total 218 59,437 100% 91.9% $568 91.6% $566
================================= ====================== ====================
* Average monthly rental rates represent potential rent collections
(gross potential rents less market adjustments), which approximate net
effective rents. These figures exclude 1997 acquisitions.
** Economic occupancy is defined as rental income (gross potential rent
less vacancy loss, management units, units held out of service, move-in
concessions and credit loss) divided by potential collections (gross
potential rent less management units, units held out of service and
move-in concessions) for the period, expressed as a percentage. These
figures exclude 1997 acquisitions.
8
Liquidity and Capital Resources
As a qualified real estate investment trust ("REIT"), the Company distributes a
substantial portion of its cash flow to its shareholders in the form of
quarterly distributions. The Company seeks to retain sufficient cash to cover
normal operating needs, including routine replacements and to help fund
additional acquisitions and development activity. For the six months ended June
30, 1997, the Company's cash flow from operating activities exceeded cash
distributions paid to preferred and common shareholders by approximately $17.0
million. The Company utilizes a variety of primarily external financing sources
to fund portfolio growth, major capital improvement programs and balloon debt
payments. The Company's bank lines of credit generally have been used to
temporarily finance these expenditures and subsequently this short-term bank
debt has been replaced with longer term debt or equity.
Operating Activities
For the six months ended June 30, 1997, the Company's cash flow from operating
activities increased approximately $16.2 million over the same period last year.
This increase was primarily a result of the significant expansion of the
Company's portfolio of apartment communities as discussed below and under
"Results of Operations".
The Company considers its cash provided by operating activities adequate to meet
its operating requirements and payments of distributions to both common and
preferred shareholders.
Investing Activities
During the six months ended June 30, 1997, net cash used for investing
activities was approximately $190.7 million compared to approximately $89.7
million for the same period last year. The level of investing activities
primarily reflects the increased levels of the Company's acquisition, capital
expenditure and development programs.
Acquisitions
The Company expects to purchase between 7,000 and 9,000 apartment homes at an
aggregate purchase price between $300 million and $400 million during 1997. The
Company's seeks to acquire apartment communities that can provide a first year
weighted average return on average investment of approximately 9.7% which may
vary depending on market conditions.
During the first six months of 1997, the Company acquired 12 apartment
communities containing 4,106 apartment homes and the second phase of an
apartment community acquired in 1996 containing 100 apartment homes at a total
cost of approximately $176.1 million, including closing costs. All of the
apartment communities acquired were located in the Company's major markets. The
apartment communities acquired were as follows:
Purchase
Purchase No. Apt. Year Price Cost
Date Name/Location Homes Built (000's) per Home
- ----------------------------------------------------------------------------------------------
02/19/97 Club at Hickory Hollow/Nashville, TN 406 1987 $17,371 $42,800
02/28/97 Stoney Pointe/ Charlotte, NC* 400 1991 17,355 43,400
02/28/97 Crosswinds/Wilmington, NC 380 1990 19,326 50,900
02/28/97 Dominion Trinity Park/ Raleigh, NC* 380 1994 22,155 58,300
03/25/97 Anderson Mill/Austin, TX 350 1984 14,305 40,900
03/27/97 Oak Ridge/Dallas, TX 486 1983 17,290 35,600
03/27/97 Breckenridge/Nashville, TN 190 1986 8,480 44,600
04/22/97 Northwinds II/Greensboro, NC** 100 1997 4,765 47,700
05/09/97 Green Oaks I/Houston, TX*** 440 1985 15,260 34,700
05/09/97 Skyhawk/Houston, TX 224 1984 9,456 42,200
06/06/97 Cambridge Woods/Tampa, FL 274 1985 8,957 32,700
06/18/97 Kelly Crossing/Dallas, TX 304 1984 11,653 38,300
06/25/97 Green Oaks II/Houston, TX*** 272 1985 9,680 35,600
----------------------------------------
1997 Total/Weighted Average 4,206 1987 $176,053 $41,900
========================================
9
* In connection with the acquisition of Dominion Trinity Park
and Stoney Pointe, the Company assumed two mortgage notes
payable aggregating $22 million with a weighted average
interest rate of approximately 8.4%.
** This represents the second phase of an apartment community
acquired by the Company in August, 1996.
*** These two properties will be operated as one apartment
community under the name Green Oaks Apartments.
On July 1, 1997, the Company acquired a portfolio of five apartment communities
containing 934 apartment homes for an aggregate purchase price of approximately
$36.0 million, including closing costs. All of the properties are located in
Florida.
Real estate under development
At June 30, 1997, the Company had 1,234 apartment homes under development as
outlined below (dollars in thousands):
Total
Development Estimated Expected
No. Apt. Completed Costs Development Cost Completion
Property Location Homes Apt. Homes to Date Cost per Home Date
- --------------------------------------------------------------------------------------------------------------------
Apartment Communities
Providence Court Charlotte, NC 420 326 $ 27,801 $ 29,698 $ 70,700 4Q `97
Dominion Franklin Nashville, TN 360 -- 2,888 23,236 64,500 4Q `98
------------------------------------------------------------
780 326 30,689 52,934 67,900
Additional Phases
England Run II Fredericksburg, VA 168 -- 6,139 10,740 63,900 3Q `97
Brantley Pines II Ft. Myers, FL 96 96 6,637 6,755 70,400 2Q `97
Oak Park II Dallas, TX 80 80 4,332 4,581 57,300 1Q `97
Oak Forest II Dallas, TX 260 24 7,948 10,612 40,800 1Q `98
Steeplechase II Greensboro, NC 176 -- 4,325 11,616 66,000 3Q `97
Greenway Park II Phoenix, AZ 20 -- 641 1,282 64,100 4Q `97
Mill Creek II Wilmington, NC 180 -- 1,357 11,719 65,100 3Q `98
Other -- -- 648 -- --
------------------------------------------------------------
980 200 32,027 57,305 $ 58,500
------------------------------------------------------------
1,760 526 $ 62,716 $110,239 $ 62,600
=============================================================
Consistent with the Company's acquisition strategy, development activity is
expected to be focused primarily in its major markets. During the first six
months of 1997, the Company invested approximately $24.9 million in nine
properties currently under development, which includes two apartment communities
and seven additional phases to existing apartment communities. The Company
expects to spend in excess of $60 million on development activity during 1997.
At various times during the first six months of 1997, 421 apartment homes were
completed and became available for occupancy, including the completion of the
additional phase at Oak Park Apartments and Brantley Pines Apartments.
Development activity is generally progressing on schedule and on budget.
Absorption at the completed apartment homes in Charlotte, North Carolina and Ft.
Myers, Florida has been slower than projected year to date, however, absorption
has been very good at the Dallas, Texas property. These additions did not have a
material impact on results of operations for the quarter or six months ended
June 30, 1997.
Capital Expenditures
During the six months ended June 30, 1997, the Company spent approximately $46.0
million on capital improvements to its apartment portfolio. The Company has a
policy of capitalizing expenditures related to acquisitions and the enhancement
of the value, or the substantial extenuation of the useful life of an existing
asset. Some of these capital expenditures relate to an upgrade program that
began in 1996 to modernize certain of the Company's older apartment communities.
These upgrades primarily involve updating kitchens and bathrooms and are
designed to enhance rent growth and add value to the apartment communities. In
addition, the Company has several initiatives in place such as: (i) submetering
of water and sewer to residents where local and state regulations allow the cost
to be passed to the resident, (ii) gating and fencing apartment communities,
(iii) installing monitoring devices such as intrusion alarms or controlled
access devices, (iv) enlarging fitness centers and (v) adding business centers.
Capital expenditures
10
during 1997 are expected to be similar to 1996 levels with the Company spending
approximately $400 per mature apartment home on revenue enhancing expenditures
and $400 to $500 per unit on recurring capital expenditures.
Disposition of investments
Securities available-for-sale
During the first quarter of 1997, the Company sold its investment in the
preferred stock of First Washington Realty Trust, Inc. obtained as partial
consideration in the 1995 sale of four commercial properties. The Company
received approximately $9.9 million in cash proceeds from the sale of the stock
and recognized approximately a $2.1 million gain on the sale for financial
reporting purposes.
Real estate held for disposition
During the first quarter of 1997, the Company transferred seven apartment
communities aggregating $33.7 million, net of accumulated depreciation, from
real estate held for investment to real estate held for disposition. During the
second quarter of 1997, the Company transferred six apartment communities
aggregating $29.6 million net of accumulated depreciation, from real estate held
for investment to real estate held for disposition. These six properties are
encumbered by tax-exempt bonds and are being offered for sale in a portfolio
transaction. On August 7, 1997, the Company executed a contingent contract to
sell these communities at an aggregate sales price of $47.9 million. There is no
assurance that transaction will be consummated. The Company continually
undertakes portfolio review analyses with the objective of identifying
properties that do not meet the long-term investment objectives of the Company
which are then to be sold. The Company does not anticipate any losses from the
sales of any of these properties.
Real estate held for disposition included in the Consolidated Balance Sheet in
the aggregate amount of $85.4 million, net of accumulated depreciation and
valuation allowance includes: (i) 16 apartment communities containing 3,499
apartment homes aggregating $72.6 million, (ii) two shopping centers aggregating
$8.8 million, (iii) three other commercial properties aggregating $2.4 million
and (iv) one parcel of land in the amount of $1.6 million. Real estate held for
disposition contributed net rental income (rental income less rental expenses
and depreciation expense) in the aggregate amount of approximately $3.2 million
and $6.8 million for the three and six months ended June 30, 1997, respectively.
The Company expects to dispose of these properties within the next twelve
months.
During the second quarter of 1997, the Company sold three apartment communities
containing 822 apartment homes and one shopping center for an aggregate sales
price of $20.8 million and received net cash proceeds of approximately $17.1
million. For financial reporting purposes, the Company recognized an approximate
$1.3 million gain on the sale of investments in connection with these sales. One
of these properties was structured to qualify as a like-kind exchange under
Section 1031 of the Internal Revenue Code, so the related capital gain was
deferred for federal income tax purposes.
On August 1, 1997, the Company sold a portfolio of six apartment communities
containing 1,204 apartment homes which had a weighted average age of 26 years
for an aggregate sales price of approximately $34.7 million. For financial
reporting purposes, the Company will recognize an approximate $9.6 million gain
on the sale. The transaction was structured to qualify as a like-kind exchange
under Section 1031 of the Internal Revenue Code, so the related capital gains
can be deferred for federal income tax purposes. A seventh property included in
the portfolio is scheduled to close in September 1997.
11
Financing Activities
Financial Structure
The following table outlines the Company's financial structure at June 30, 1997:
Balance at Weighted Average Capitalization
June 30, 1997 Interest Rate Percentage
------------- ---------------- --------------
Fixed Rate Secured Debt $ 373,886 7.7% 14.9%
Fixed Rate Unsecured Debt 605,742 7.5% 24.1%
------------- ---- -----
979,628 7.6% 39.0%
Variable Rate Secured Debt 15,220 6.2% 0.6%
Variable Rate Unsecured Debt 20,500 6.4% 0.8%
------------- ---- -----
35,720 6.3% 1.4%
------------- ---- -----
Total Debt 1,015,348 7.6% 40.4%
Preferred stock at market 260,952 8.9%* 10.3%
Common stock at market 1,238,497 n/a 49.3%
------------- -----
Equity capitalization at market 1,499,449 n/a 59.6%
------------- ---- -----
Total market capitalization
(debt & equity) $ 2,514,797 n/a 100.0%
============= ======
*Represents the weighted average dividend rate.
Net cash provided by financing activities during the six months ended June 30,
1997 was approximately $122.2 million compared to $47.3 million for the same
period last year, reflecting the significant debt and equity financing
activities during the first six months of 1997.
On January 28, 1997, the Company issued 4,000,000 shares of its common stock at
$15.75 per share for an aggregate value of approximately $63 million. Net
proceeds of approximately $59.7 million were used to repay an unsecured credit
facility assumed in connection with the South West Merger.
The Company also received approximately $14.5 million under its Dividend
Reinvestment and Stock Purchase Plan (the "Plan") during the six months ended
June 30, 1997 which included approximately $10.4 million in optional cash
investments and $4.1 million of reinvested dividends. The Company expects to
generate in excess of $35 million in proceeds from the Plan during 1997.
In anticipation of the issuance of unsecured debt in early 1997, the Company
entered into a $100 million (notional amount) Treasury rate lock agreement in
November 1996. On January 27, 1997, the Company issued $125 million of 7.25%
Notes due January 15, 2007 under its $462.5 million shelf registration
statement. The Notes were priced to yield 7.31% which was 79 basis points over
the 10 year Treasury at the time of issuance. The interest rate protection
agreement was terminated simultaneously with the $125 million Note issuance and
the Company received $1.5 million in cash. This had the economic effect of
lowering the interest rate on the Notes to approximately 7.14%. Net proceeds of
approximately $124 million were used to curtail bank debt and purchase apartment
communities.
On May 29, 1997, the Company sold 6,000,000 shares of 8.60% Series B Redeemable
Preferred Stock at $25 per share. Net proceeds of approximately $145.3 million
were primarily used to repay short-term bank debt.
Derivative Instruments
The Company has, from time to time, used derivative instruments to synthetically
alter on-balance sheet liabilities or to hedge anticipated financing
transactions. Derivative contracts did not have a material impact on the results
of operations during the three and six months ended June 30, 1997 and 1996.
12
On May 1, 1997, the Company terminated an interest rate swap agreement with a
commercial lender with notional amounts from $79 million to $83 million which
effectively changed the Company's interest exposure from a variable rate to a
weighted average fixed rate of 6.45%. No gain or loss was recognized on this
termination.
Credit facilities
At June 30, 1997, the Company had the following credit facilities:
Three Months Ended June 30, 1997 Six Months Ended June 30, 1997
----------------------------------- ----------------------------------
Weighted Average Weighted Average
Weighted Average Interest Rate Weighted Average Interest Rate
Amount of Amount Three Months Amount Six Months
Credit facility facility Outstanding June 1997 Outstanding June 1997
- ----------------------------- ----------------------------------- ----------------------------------
Revolving credit $ 70,000 $ 46,465 6.2% $ 52,107 6.2%
Line of credit 33,500 -- -- -- --
Interim credit 75,000 32,516 6.2% 22,954 6.2%
----------- ----------------------------------- ----------------------------------
$ 178,500 $ 78,981 6.2% $ 75,061 6.2%
=========== =================================== ==================================
On August 4, 1997, the Company closed on a new $200 million three year revolving
credit facility and a $50 million one year unsecured line of credit. Under the
new facility, pricing is based upon the higher of the Company's senior unsecured
debt ratings from S & P and Moody's which are currently BBB+ and Baa1,
respectively. At these rating levels, contractual interest under the new
revolving credit facility is LIBOR plus 42 1/2 basis points. The credit facility
also includes a $100 million competitive bid option which allows the Company to
solicit bids from participating banks at rates below the contractual rate.
The Company's liquidity and capital resources are believed to be more than
adequate to meet its cash requirements for the next several years. The Company
expects to meet its short- and long-term capital requirements, such as balloon
debt maturities, property acquisitions, development activity and significant
capital improvements, primarily through the public and private sale of capital
stock and the issuance of medium and long-term unsecured notes payable. The
Company may also fund its capital requirements through (i) the assumption of
mortgage indebtedness, (ii) sales of properties, (iii) common shares sold
through the Company's Dividend Reinvestment and Stock Purchase Plan, (iv)
retained operating cash flow and (v) the issuance of operating partnership
units. The Company's senior debt is currently rated BBB+ by Standard & Poor's
and Baa1 by Moody's. As a result of its investment grade debt ratings, the
Company expects to use unsecured debt as its primary debt funding source.
Depending upon the volume and timing of acquisition activity, the Company
anticipates raising additional debt and equity capital during the next twelve
months to finance capital requirements while striving to minimize the overall
cost of capital. During the second quarter of 1997, the Company filed a shelf
registration statement for approximately $675 million of debt and preferred and
common equity securities.
Funds from Operations
Funds from operations ("FFO") is defined as income before gains (losses) on
sales of investments, minority interest of unitholders in operating partnership
and extraordinary items (computed in accordance with generally accepted
accounting principles) plus real estate depreciation, less preferred dividends
and after adjustment for significant non-recurring items, if any. The Company
computes FFO in accordance with the recommendations set forth by the National
Association of Real Estate Investment Trusts ("NAREIT"). The Company considers
FFO in evaluating property acquisitions and its operating performance, and
believes that FFO should be considered along with, but not as an alternative to,
net income and cash flows as a measure of the Company's operating performance
and liquidity. FFO does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs.
13
For the three months ended June 30, 1997, FFO increased 70.8% to $29.0 million,
compared with $17.0 million for the same period last year. For the six months
ended June 30, 1997, FFO increased 71.3% to $57.7 million, compared with $33.7
million for the same period last year. The increase in FFO was principally due
to the increased net rental income from the Company's 26,719 non-mature
apartment homes in 86 apartment communities acquired and developed subsequent to
January 1, 1996.
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) (In thousands)
1997 1996 % Change 1997 1996 % Change
-------------------------------- -------------------------------
Calculation of funds from operations:
Income before gains (losses) on sales of
investments, minority interest of
unitholders in operating partnership
and extraordinary item $ 13,451 $ 8,296 62.1% $ 28,475 $ 16,890 68.6%
Adjustments:
Real estate depreciation 19,127 10,805 77.0% 35,289 21,365 65.2%
Dividends to preferred shareholders (3,611) (2,428) 48.7% (6,039) (4,856) 24.4%
Impairment loss on real estate held
for disposition -- 290 -- -- 290 --
-------------------------------- -------------------------------
Funds from operations $ 28,967 $ 16,963 70.8% $ 57,725 $ 33,689 71.3%
================================ ===============================
Results of Operations
The Company's net income is primarily generated from the operations of its
apartment communities. For purposes of evaluating the Company's comparative
operating performance, the Company categorizes its apartment communities into
two categories (i) mature-those communities acquired, developed and stabilized
prior to January 1, 1996 and held throughout both 1997 and 1996 and (ii)
non-mature-those communities acquired, developed or sold subsequent January 1,
1996.
For the three and six months ended June 30, 1997, the Company reported increases
over the same period last year in rental income, income before gains (losses) on
sales of investments and minority interest of unitholders in operating
partnership and net income. For the six months ended June 30, 1997, net income
available to common shareholders increased $12.9 million, with a corresponding
increase of $.07 per share compared to the same period last year and for the
three months ended June 30, 1997, net income available to common shareholders
increased $5.3 million, with a corresponding increase of $.03 per share compared
to the same period last year . Since the beginning of 1996, the Company acquired
and developed a total of 26,719 apartment homes in 86 apartment communities
(including 14,320 completed apartment homes in 44 apartment communities acquired
in the South West Merger) and sold seven apartment communities containing 1,474
apartment homes, representing a net 73.8% expansion in the number of apartment
homes owned during that period. These non-mature apartment homes provided a
substantial portion of the aggregate reported increases.
All Apartment Communities
The operating performance for the Company's 218 apartment communities containing
59,437 completed apartment homes (and 1,474 apartment homes in seven apartment
communities sold since January 1, 1996) for the three and six months ended June
30, 1997 and 148 apartment communities containing 36,361 apartment homes for the
three and six months ended June 30, 1996, respectively, is summarized as
follows:
14
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) (In thousands)
-------------------------------- ----------------------------------
1997 1996 % Change 1997 1996 % Change
-------------------------------- ----------------------------------
Rental income $ 94,632 $ 55,602 70.2% $ 183,867 $ 108,698 69.2%
Rental expenses (40,740) (24,502) 66.3% (78,134) (47,541) 64.3%
Real estate depreciation (19,127) (10,805) 77.0% (35,289) (21,271) 65.9%
-------------------------------- ----------------------------------
Net rental income (1) $ 34,765 $ 20,295 71.3% $ 70,444 $ 39,886 76.6%
================================ ==================================
Weighted average number
of apartment homes 58,678 35,423 65.6% 57,545 34,942 64.7%
Economic occupancy (2) 91.9% 93.3% (1.4%) 91.6% 93.2% (1.6%)
Average monthly rents $ 568 $ 548 3.6% $ 566 $ 545 3.9%
(1) Net rental income for an apartment community is defined as total rental
income, less rental expenses, less real estate depreciation.
(2) Economic occupancy is defined as rental income (gross potential rent less
vacancy loss, management units, units held out of service, move-in
concessions and credit loss) divided by potential collections (gross
potential rent less management units, units held out of service and move-in
concessions) for the period, expressed as a percentage.
Due to the acquisition and development of 26,719 apartment homes since January
1, 1996 (the Company also sold seven apartment communities containing 1,474
apartment homes during this same period), the weighted average number of
apartment homes increased 64.7% to 57,545 for the six months ended June 30, 1997
and 65.6% to 58,678 for the three months ended June 30, 1997 . As a result of
the increase in the number of apartment homes acquired since January 1, 1996,
the Company has experienced significant increases in rental income, rental
expenses and real estate depreciation for the three and six months ended June
30, 1997.
Mature Apartment Communities
The operating performance for the Company's 135 mature apartment communities
containing 33,163 apartment homes for the three and six months ended June 30,
1997 and 1996 is summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) (In thousands)
---------------------------------- --------------------------------
1997 1996 % Change 1997 1996 % Change
---------------------------------- --------------------------------
Rental income $ 53,767 $ 51,946 3.5% $106,847 $103,104 3.6%
Rental expenses (23,666) (22,970) 3.0% (46,622) (45,204) 3.1%
Real estate depreciation (11,750) (10,288) 14.2% (20,699) (20,381) 1.6%
---------------------------------- --------------------------------
Net rental income $ 18,351 $ 18,688 (1.8%) $ 39,526 $ 37,519 5.3%
================================== ================================
Economic occupancy 92.4% 93.3% (0.9%) 92.1% 93.1% (1.0%)
Average monthly rents $ 567 $ 545 4.0% $ 563 $ 541 4.1%
For the six months ended June 30, 1997, the Company's mature communities
provided approximately 58% of the Company's apartment rental income and 56% of
its net rental income. During the first six months of 1997, the Company's mature
apartment communities experienced good rent and other income growth. Compared to
the same period last year, total rental income from these apartment homes grew
3.6%, or approximately $3.7 million, reflecting an increase in average monthly
rents of 4.1% to $563 per month. In addition, other income, primarily fee
income, increased approximately $802,000 or 23.8%. The rental rate increase was
offset by a 1.0% decline in economic occupancy to 92.1%, which resulted from a
decrease in physical occupancy of 1.0%. The economic occupancy declined due to
the weakening of certain major southeastern markets during the last half of 1996
including Columbia and Greenville, South Carolina, Washington DC, Jacksonville,
Florida, Richmond and Hampton Roads, Virginia and Atlanta, Georgia. Overall,
economic occupancy bottomed out in January 1997 at 90.7% and has trended upward
during
15
the remainder of the year to 92.2% for June 1997. The Company attributes the
market softness primarily to increased home buying, a slowdown in job growth and
an oversupply of apartment homes in certain of the southeastern markets. For the
quarter ended June 30, 1997, total rental income from these apartment homes grew
3.5%, or approximately $1.8 million, reflecting an increase in average monthly
rents of approximately $2.2 million or 4.0% to $567. Other income increased
approximately $374,000 or 21.3%, over the same period last year while economic
occupancy declined .9% to 92.4%. The Company expects to maintain rent growth in
the 4% range and economic occupancy in the 92% range during the remainder of
1997.
For the six months ended June 30, 1997, rental expenses at these communities
increased 3.1%, or $1.4 million, resulting in an improvement in the operating
expense ratio (the ratio of rental expenses to rental income) of .2% to 43.6%.
The 3.1% increase in operating expenses is attributable to higher real estate
taxes, marketing and advertising, personnel and the Company's cost of
self-management. Real estate taxes increased approximately $201,000 or 2.7% over
the same period last year as the Company has experienced continuing pressure on
this expense item over the past year due to tax reassessments in certain
markets. Marketing and advertising costs increased 46.5% or approximately
$580,000 over the same period last year as a direct result of softening in
certain major markets. Personnel costs increased 5.3% or approximately $519,000
primarily due to the fact that the Company was understaffed at some of its
properties during much of 1996. The cost of self-management increased 36.0% or
approximately $912,000 as the Company invested heavily in its personnel and
technological infrastructure during 1997 in response to the significant growth
the Company has experienced during the past year. In addition, incentive
compensation earned by the site associates increased due to the better
performance compared to budget achieved by these communities compared to the
same period last year. These rental expense increases were somewhat offset by a
decrease in repairs and maintenance expense of 4.5% or approximately $549,000
primarily as a result of less exterior painting, extraordinary repairs and
mechanical repairs during the 1997 period. For the quarter ended June 30, 1997,
rental expenses increased $696,000 or 3.0% over the same period last year for
the same reasons discussed above. The Company's objective is to maintain rental
expense growth below the 2% range during the remainder of 1997.
For the three and six months ended June 30, 1997, depreciation expense increased
partly as a result of the upgrade and improvement process in place at the
Company's mature apartment communities discussed under "Capital Expenditures" in
Liquidity and Capital Resources.
Non-Mature Communities
The operating performance for the three and six months ended June 30, 1997 for
the Company's 86 non-mature apartment communities which includes: (i) the 30
apartment communities containing 7,712 apartment homes acquired during 1996 and
a 253 home community acquired in 1995 and not stabilized due to significant
rehabilitation, (ii) the 44 apartment communities containing 14,215 apartment
homes acquired on December 31, 1996 in connection with the South West Merger
(excluding 105 newly developed apartment homes), (iii) the 12 apartment
communities containing 4,106 apartment homes and the second phase of an
apartment community acquired in 1996 containing 100 apartment homes acquired
since January 1, 1997, (iv) the seven apartment communities containing 1,474
apartment homes sold since January 1, 1996 and (v) the 586 apartment homes
developed since January 1, 1996 is summarized as follows (dollars in thousands):
Three Months Ended June 30, 1997 and 1996:
1997 Acquisitions and
Former 1997 and 1996
1996 Acquisitions South West Development & Sales Total Non-Mature
1997 1996 1997 1996 1997 1996 1997 1996
------------------- -------------------- -------------------- ---------------------
Rental income $ 12,613 $ 2,503 $ 21,644 $ -- $ 6,608 $ 1,153 $ 40,865 $ 3,656
Rental expenses (5,137) (992) (9,411) -- (2,526) (540) (17,074) (1,532)
Real estate depreciation (2,527) (517) (3,316) -- (1,534) -- (7,377) (517)
------------------- -------------------- -------------------- ---------------------
Net rental income $ 4,949 $ 994 $ 8,917 $ -- $ 2,548 $ 613 $ 16,414 $ 1,607
=================== ==================== ==================== =====================
16
Six Months Ended June 30, 1997 and 1996:
1997 Acquisitions
Former 1997 and 1996
1996 Acquisitions South West Development & Sales Total Non-Mature
1997 1996 1997 1996 1997 1996 1997 1996
-------------------- -------------------- ------------------- ---------------------
Rental income $ 25,067 $ 3,278 $ 42,894 $ -- $ 9,059 $ 2,316 $ 77,020 $ 5,594
Rental expenses (10,085) (1,259) (17,954) -- (3,473) (1,078) (31,512) (2,337)
Real estate depreciation (5,269) (859) (7,423) -- (1,898) (31) (14,590) (890)
-------------------- -------------------- ------------------- ---------------------
Net rental income $ 9,713 $ 1,160 $ 17,517 $ -- $ 3,688 $ 1,207 $ 30,918 $ 2,367
==================== ==================== =================== =====================
For the six months ended June 30, 1997, the Company's non-mature apartment
communities provided approximately 42% of the Company's apartment rental income
and 44% of its net rental income. Rental income, rental expenses and real estate
depreciation increased from 1996 to 1997 directly as a result of the increase in
the weighted average number of apartment homes owned during 1997. For the 26,719
apartments homes in the 86 non-mature communities acquired and developed and the
1,474 apartment homes in seven communities sold since January 1, 1996, average
economic occupancy was 90.2% and the operating expense ratio was 40.9% during
the first six months of 1997. For the quarter ended June 30, 1997, average
economic occupancy was 90.8% and the operating expense ratio was 41.8%
1996 Acquisitions
The 30 apartment communities containing 7,712 apartment homes that were acquired
during 1996 (excluding the South West Merger) and a 253 home community acquired
in 1995 and not stabilized due to significant rehabilitation provided a
significant increase in rental income, rental expenses and depreciation expense
for the Company's apartment portfolio for the three and six months ended June
30, 1997. For the first six months of 1997, these apartment communities had
economic occupancy of 88.8% and an operating expense ratio of 40.2%. For the
quarter ended June 30, 1997, these apartment communities had economic occupancy
of 89.3% and an operating expense ratio of 40.7%. The first year return on
investment for these communities was projected at 9.5%, however, the actual
return on investment for the six months ended June 30, 1997, on an average
investment of approximately $306 million, was 9.2% (excluding two communities
under renovation). This was primarily due to the under-performance of nine
apartment communities that were acquired in August 1996, as part of a portfolio
transaction which had a concentration of communities in the
Greensboro/Winston-Salem, North Carolina market. Occupancy levels in this region
peaked in the 93% to 94% range in August 1996 when the Company acquired these
properties and has fallen to approximately 84.7% for the first six months of
1997 reflecting an oversupply of apartment product in this market.
South West Property Trust Inc. (SWP)
The acquisition of the 44 apartment communities containing 14,215 completed
apartment homes included in the SWP Merger on December 31, 1996, provided the
largest increases in rental income, rental expenses and depreciation expenses
for the Company's entire apartment portfolio for the three and six months ended
June 30, 1997. For the six months ended June 30, 1997, these apartment
communities had economic occupancy of 92.1% and an operating expense ratio of
41.9%. The first year return on investment for the SWP Portfolio was projected
to be 9.5% which approximates the 9.6% return on investment posted during the
first six months of of 1997. Included in the SWP communities are 12,361
stabilized apartment communities (those acquired, developed and stabilized prior
to January 1, 1996) which experienced rent growth of 4.9% over the amounts
reported last year by SWP, an average economic occupancy of 92.1% and an
operating expense ratio of 44.1%. For the quarter ended June 30, 1997, these
apartment communities had economic occupancy of 92.4% and an operating expense
ratio of 43.5%.
1997 Acquisitions, Development and Sales
Included in this category are the following: (i) the twelve apartment
communities containing 4,106 apartment homes and the second phase of an existing
apartment community containing 100 apartment homes acquired by the Company
during the first six months of 1997 which are projected to have a first year
return on investment of approximately 9.73%, (ii) the 586 apartment homes
developed since January 1, 1996 and (iii) the seven apartment communities
containing 1,474 apartment sold since January 1, 1996. These communities did not
have a material impact on the Company's results of operations for the three and
six month periods ended June 30, 1997.
17
Commercial Properties
Rental income and rental expenses from commercial properties decreased $621,000
and $248,000, respectively during the three months ended June 30, 1997, compared
to the same period last year. For the six month period, rental income, rental
expenses and depreciation expense decreased $1.4 million, $523,000 and $94,000
compared to the same period last year. These decreases were directly
attributable to the sale of five shopping centers and one industrial park since
the beginning of 1996.
Interest Expense
Interest expense increased $8.5 million and $17.0 million for the three and six
months ended June 30, 1997 over the same periods last year. The weighted average
amount of debt employed during the first six months of 1997 was higher than it
was in 1996 ($1.1 billion in 1997 versus $563.3 million in 1996). The weighted
average interest rate on this debt was slightly lower than it was during the
same period last year, decreasing from 7.6% in 1996 to 7.5%. For the quarter
ended June 30, 1997, the weighted average debt outstanding was higher than the
same period last year ($1.1 billion in 1997 versus $600.1 million in 1996). The
weighted average interest rate on this debt was slightly lower than it was
during the same period last year, decreasing from 7.6% in 1996 to 7.5% in 1997.
For the three and six months ended June 30, 1997, total interest capitalized was
$721,000 and $1.2 million, respectively.
General and Administrative
During the three and six months ended June 30, 1997, general and administrative
expenses increased by $271,000 and $721,000 over the same periods last year. In
1997, the Company incurred increases in most of its general and administrative
expense categories which is directly attributable to the increased size of the
Company. The largest increases occurred in payroll and payroll related expenses
and investor relations expense which are directly attributable to the increased
size of the Company. General and administrative expense as a percentage of
rental revenues decreased .8% from 2.7% during the second quarter of 1996 period
to 1.9% during the second quarter of 1997 primarily due to economies of scale.
During the second quarter of 1997, general and administrative expenses grew
approximately 17% while rental income grew by approximately 67% over the same
period last year. For the six month period ended June 30, 1997, general and
administrative expense as a percentage of rental revenues decreased .6% from
2.6% to 2.0%. During this same period, general and administrative expenses grew
by approximately 25% while rental income grew by 65%.
Gains on Sales of Investments
During the six months ended June 30, 1997, the Company recognized gains on the
sales of investments aggregating $3.4 million as a result of the following
transactions: (i) the first quarter sale of the Company's investment in the
preferred stock of First Washington Realty Trust, Inc. obtained as partial
consideration in the 1995 sale of four commercial properties on which the
Company recognized a gain for financial reporting purposes of $2.1 million and
(ii) the second quarter sale of three apartment communities containing 844
apartment homes and one shopping center for an aggregate sales price of $20.8
million on which the Company recognized aggregate gains for financial reporting
purposes of $1.3 million.
Dividends to Preferred Shareholders
Dividends to preferred shareholders totaled $3.6 million and $6.0 million for
the three and six month periods ended June 30, 1997 compared to $2.4 million and
$4.9 million for the same periods last year. The increases in dividends to
preferred shareholders is a result of the issuance of six million shares of
Series B 8.60% Cumulative Redeemable Preferred Stock on May 29, 1997.
Inflation
The Company believes that the direct effects of inflation on the Company's
operations have been inconsequential.
18
PART II
Item 1. LEGAL PROCEEDINGS
Neither the Company nor any of its apartment communities is presently
subject to any material litigation nor, to the Company's knowledge, is any
litigation threatened against the Company or any of the communities, other than
routine actions arising in the ordinary course of business, some of which are
expected to be covered by liability insurance and all of which collectively are
not expected to have a material adverse effect on the business or financial
condition or results of operations of the Company.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULT UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying index to exhibits are filed as
part of this quarterly report.
(b) A Form 8-K dated July 1, 1997 was filed with the Securities and Exchange
Commission on July 15, 1997. The filing reported the acquisition by the
Company of properties which were in the aggregate were "significant".
19
EXHIBIT INDEX
Item 6 (a)
.
The exhibits listed below are filed as part of this quarterly report.
References under the caption "Location" to exhibits, forms, or other filings
indicate that the form or other filing has been filed, that the indexed exhibit
and the exhibit referred to are the same and that the exhibit referred to is
incorporated by reference.
Exhibit Description Location
- ------- --------------------------------------- ---------------------------------------------------
2(b) Definitive Agreement and Plan of Exhibit 2(b) to the Company's Form S-4 Registration
Merger dated as of October 1, 1996, Statement (Registration No. 333-13745) filed with
the between the Company, United Sub, Commission on October 9, 1996.
Inc. and South West Property Trust Inc.
3(a) Restated Articles of Incorporation Exhibit 4(i)(c) to the Company's Form S-3
Registration Statement (Registration No. 33-64275)
3(a)(i) Amendment of Restated Articles of Exhibit 6(a)(4) to the Company's Form 8-A
Incorporation Registration Statements dated April 19, 1990 and
April 24, 1995.
3(a)(ii) Amendment of Restated Articles of Exhibit 1(c) to the Company's Form 8-A
Incorporation Registration Statements dated June 11, 1997.
3(b) Restated By-Laws Exhibit 3(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1997.
4(i)(a) Specimen Common Stock Exhibit 4(i) to the Company's Annual Report
Certificate on Form 10-K for the year ended December
31, 1993.
4(i)(b) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A
of 9 1/4% Series A Cumulative Registration Statement dated April 24, 1995.
Redeemable Preferred Stock
4(i)(c) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A
of 8.60% Series B Cumulative Registration Statement dated June 11, 1997.
Redeemable Preferred Stock
4(ii)(a) Loan Agreement dated as of Exhibit 6(c)(i) to the Company's Form 8-A
November 7, 1991, between the Registration Statement dated April 19, 1990.
Company and Aid Association for
Lutherans
4(ii)(e) Note Purchase Agreement dated Exhibit 6(c)(5) to the Company's Form 8-A
as of February 15, 1993, between Registration Statement dated April 19, 1990.
the Company and CIGNA Property
and Casualty Insurance Company,
Connecticut General Life Insurance
Company, Connecticut General Life
20
Insurance Company, on behalf of
one or more separate accounts,
Insurance Company of North
America, Principal Mutual Life
Insurance Company and Aid
Association for Lutherans
4(ii)(f) Credit Agreement dated as of Exhibit 6 (c)(6) to the Company's
December 15, 1994 between the Form 8-A Registration Statement
Company and First Union National Bank dated April 19, 1990.
of Virginia
10(i) Employment Agreement between Exhibit 10(v)(i) to the Company's Annual Report on
the Company and John P. McCann Form 10-K for the year ended December 31, 1982.
dated October 29, 1982
10(ii) Employment Agreement between Exhibit 10(v)(ii) to the Company's Annual Report on
the Company and James Dolphin Form 10-K for the year ended December 31, 1982.
dated October 29, 1982.
10(iii) Employment Agreement between Exhibit 10(iii) to the Company's Annual
The Company and Barry M. Kornblau Report on Form 10-K for the year ended
dated February 1, 1991. December 31, 1990.
10(iv) Employment Agreement between Exhibit 10(iv) to the Company's Annual.
the Company and John S. Schneider Report on Form 10-K for the year ended
dated December 14, 1996. December 31, 1996.
10(v) Employment Agreement between Exhibit 10(v) to the Company's Annual.
the Company and Robert F. Sherman report on Form 10-K for the year ended
dated December 19, 1996. December 31, 1996.
10(vi) Employment Agreement between Exhibit 10(vi) to the Company's Annual
the Company and David L. Johnston Report on Form 10-K for the year ended
dated December 19, 1996. December 31, 1996.
10(vii) 1985 Stock Option Plan, Exhibit 10(vii) to the Company's Quarterly
as amended. Report on Form 10-Q for the quarter ended
March 31, 1997.
10(viii) 1991 Stock Purchase and Loan Plan, Exhibit 10(vii) to the Company's Quarterly
as amended. Report on Form 10-Q for the quarter ended
March 31, 1997.
10(ix) Amended and Restated Agreement Exhibit 10(vi) to the Company's Annual Report on
of Limited Partnership of Form 10-K for the year ended December 31, 1995.
United Dominion Realty, L.P.
Dated as of December 31, 1995.
21
10(x) Underwriting Agreement with respect Filed herewith.
To 8.60% Series B Cumulative
Redeemable Preferred Stock
12 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Quarterly Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
United Dominion Realty Trust, Inc.
(registrant)
Date: August 14, 1997 /s/ James Dolphin
- --------------------- -----------------
James Dolphin
Executive Vice President and Chief
Financial Officer
Date: August 14, 1997 /s/ Jerry A. Davis
- --------------------- ------------------
Jerry A. Davis
Vice-President , Corporate Controller
and Principal Accounting Officer
23