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 September 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:
88,161,626 shares of common stock outstanding as of November 5, 1997
UNITED DOMINION, REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
(Unaudited)
September 30, December 31,
1997 1996
------------------- -----------------
Assets
Real estate owned:
Real estate held for investment (Note 3) $ 2,217,063 $ 2,007,612
Less: accumulated depreciation 200,538 173,291
-------------- ------------
2,016,525 1,834,321
Real estate under development 33,628 37,855
Real estate held for disposition 131,576 39,556
Cash and cash equivalents 5,383 13,452
Other assets 65,639 41,720
-------------- ------------
Total assets $ 2,252,751 $ 1,966,904
============== ============
Liabilities and shareholders' equity
Notes payable-secured (Note 4) $ 412,624 $ 376,560
Notes payable-unsecured (Note 5) 687,521 668,275
Distributions payable to common shareholders 22,261 19,699
Accounts payable, accrued expenses and other liabilities 62,361 49,962
-------------- ------------
Total liabilities 1,184,767 1,114,496
Minority interest of unitholders in operating partnership 10,482 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
88,161,626 shares issued and outstanding (81,982,551 in 1996) 88,162 81,983
Additional paid-in capital 893,701 814,795
Notes receivable from officer-shareholders (9,168) (5,926)
Distributions in excess of net income (170,193) (147,529)
Unrealized gain on securities available-for-sale -- 2,056
-------------- ------------
Total shareholders' equity 1,057,502 850,379
============== ============
Total liabilities and shareholders' equity $ 2,252,751 $ 1,966,904
============== ============
2
See accompanying notes.
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -----------------------------------
1997 1996 1997 1996
------- -------- ------- -----
Revenues
Rental income $ 98,816 $ 63,083 $ 284,182 $ 175,119
Interest and other non-property income 479 402 867 1,197
--------- --------- --------- -----------
99,295 63,485 285,049 176,316
Expenses
Rental expenses:
Utilities 6,166 4,425 18,290 12,810
Repairs and maintenance 14,528 10,711 40,707 29,847
Real estate taxes 8,107 4,509 23,014 12,698
Property management 3,080 1,444 9,154 4,192
Other rental expenses 10,762 6,400 30,051 16,852
Real estate depreciation 19,740 12,346 55,029 33,711
Interest 19,346 13,530 58,265 35,413
General and administrative 1,619 1,260 5,271 4,192
Other depreciation and amortization 494 356 1,339 917
Impairment loss on real estate owned (Note 3) 1,400 -- 1,400 290
--------- --------- --------- ----------
85,242 54,981 242,520 150,922
Income before gains on sales of investments and
minority interest of unitholders in operating partnership 14,053 8,504 42,529 25,394
Gains on sales of investments 9,309 1,339 12,682 2,176
Minority interest of unitholders in operating partnership (53) (25) (112) (26)
--------- -------- --------- ---------
Net income 23,309 9,818 55,099 27,544
Dividends to preferred shareholders 5,653 2,428 11,692 7,284
--------- --------- --------- ----------
Net income available to common shareholders $ 17,656 $ 7,390 $ 43,407 $ 20,260
========= ========= ========= ==========
Net income per common share $ 0.20 $ 0.13 $ 0.50 $ 0.36
========= ========= ========= ===========
Distributions declared per common share $ .2525 $ .24 $ 0.7575 $ 0.72
========= ========= ========= ===========
Weighted average number of common shares outstanding 87,853 57,793 86,602 56,978
See accompanying notes.
3
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, 1997 1996
- ---------------------------------------------------------------- ------------ ------------
Operating Activities
Net income $ 55,099 $ 27,544
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 56,368 34,628
Minority interest of unitholders in operating partnership 112 26
Impairment loss on real estate owned 1,400 290
Gains on sales of investments (12,682) (2,176)
Amortization of deferred financing costs 1,306 898
Changes in operating assets and liabilities:
Increase in operating liabilities 9,837 12,720
Increase in operating assets (349) (1,330)
------------ ------------
Net cash provided by operating activities 111,091 72,600
Investing Activities
Acquisition of real estate, net of debt and liabilities assumed (206,205) (165,927)
Capital expenditures (70,722) (35,509)
Development of real estate assets (37,369) (7,593)
Net proceeds from sales of investments 27,044 18,730
Proceeds from interest rate hedge transaction 1,538 --
Other 2,143 (6)
------------ ------------
Net cash used in investing activities (283,571) (190,305)
Financing Activities
Net proceeds from the issuance of common stock 59,884 23,925
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 26,685 7,975
Gross proceeds from the issuance of unsecured notes payable 125,000 152,962
Net proceeds from the issuance of secured notes payable -- 5,925
Net borrowings (repayments) of short-term bank borrowings (43,250) 30,800
Distributions paid to preferred shareholders (10,617) (7,284)
Distributions paid to common shareholders (63,511) (39,879)
Distributions paid to minority interest unitholders (102) --
Scheduled mortgage principal payments (4,573) (1,881)
Mortgage financing proceeds released from construction funds -- 2,666
Payments on unsecured notes (63,414) (50,697)
Non-scheduled payments on secured notes payable (4,350) --
Payment of financing costs (2,616) (1,908)
------------ ------------
Net cash provided by financing activities 164,411 122,604
Net increase (decrease) in cash and cash equivalents (8,069) 4,899
Cash and cash equivalents, beginning of period 13,452 2,904
------------ ------------
Cash and cash equivalents, end of period $ 5,383 $ 7,803
============ ============
Supplemental Information
Interest paid during the period $ 55,279 $ 33,699
Secured debt assumed through the acquisition of properties 48,380 129,875
Issuance of common stock in connection with acquisitions -- 22,678
Issuance of unsecured notes payable in connection with acquisitions -- 25,000
Issuance of operating partnership units 8,442 2,006
See accompanying notes.
4
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(In thousands, except share and per share amounts)
(unaudited)
Common Stock, $1 Par Value Preferred Stock
--------------------------------------------------- Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 81,982,551 $81,983 4,200,000 $105,000 $814,795
Common stock issued in public offering 4,000,000 4,000 - - 55,420
Preferred stock-Series B issued in public offering - - 6,000,000 150,000 (4,962)
Exercise of common stock options 48,197 48 - - 507
Common stock purchased by officers, net of repayments 230,000 230 - - 3,149
Common stock issued through dividend reinvestment and
stock purchase plan 1,900,346 1,900 - - 24,785
Common stock issued through employee stock purchase plan 532 1 - - 7
Net income - - - - -
Preferred stock-Series A distributions declared ($1.73 per share) - - - - -
Preferred stock-Series B distributions declared ($.56 per share) - - - - -
Common stock distributions declared ($.7575 per share) - - - - -
Realized gain on securities available-for-sale - - - - -
--------------- ---------- ----------- ----------- -------------
Balance at September 30, 1997 88,161,626 $88,162 10,200,000 $255,000 $893,701
=============== ========== =========== =========== =============
Unrealized
Gain on
Receivable Distributions Securities Total
from Officer in Excess of Available- Shareholders'
Shareholders Net Income for-Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 ($5,926) ($147,529) $2,056 $850,379
Common stock issued in public offering - - - 59,420
Preferred stock-Series B issued in public offering - - - 145,038
Exercise of common stock options - - - 555
Common stock purchased by officers, net of repayments (3,242) - - 137
Common stock issued through dividend reinvestment and
stock purchase plan - - - 26,685
Common stock issued through employee stock purchase plan - - - 8
Net income - 55,099 - 55,099
Preferred stock-Series A distributions declared ($1.73 per share) - (7,284) - (7,284)
Preferred stock-Series B distributions declared ($.56 per share) - (4,408) - (4,408)
Common stock distributions declared ($.7575 per share) - (66,071) - (66,071)
Realized gain on securities available-for-sale - - (2,056) (2,056)
--------------- -------------- ------------ -------------
Balance at September 30, 1997 ($9,168) ($170,193) $0 $1,057,502
=============== ============== ============ =============
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 subsidiaries, including United
Dominion Realty, L.P., its Operating Partnership, (collectively, the "Company").
As of September 30, 1997, United Dominion Realty Trust, Inc. and its
wholly-owned subsidiaries had a 92% interest in the Operating Partnership. 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 September 30, 1997
and results of operations for the interim periods ended September 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:
September 30, December 31,
Dollars in thousands 1997 1996
- -----------------------------------------------------------------------------------
Land and land improvements $ 384,706 $ 353,092
Buildings and improvements 1,694,997 1,537,387
Furniture, fixtures and equipment 131,436 115,308
Construction in progress 5,924 1,825
-------------- ---------------
Real estate held for investment $ 2,217,063 $ 2,007,612
========== ===========
Long-lived investments held and used are periodically evaluated for impairment
and provisions for possible losses are made if required. During the third
quarter of 1997, the Company recognized a provision for possible loss of $1.4
million relating to two apartment communities included in real estate held for
investment. At September 30, 1997, the Company's real estate held for investment
is carried at cost less valuation allowance, which is not in excess of fair
market value.
4. Notes payable - secured
Notes payable-secured, which encumber $899.2 million or 37% of the Company's
real estate owned, at cost, ($1.5 billion or 63% of the Company's real estate
owned, at cost, is unencumbered) consist of the following at September 30, 1997:
Principal Weighted Average Weighted Average No.Communities
Dollars in thousands Balance Interest Rate Years to Maturity Encumbered
- ---------------------------------------------------------------------------------------------------------------------
Fixed-Rate Mortgage Notes $ 136,330 8.3% 3.4 22
Fixed-Rate Tax-Exempt Notes 127,822 7.0% 19.8 18
Fixed-Rate REMIC Financings 89,304 7.4% 3.2 25
Fixed-Rate Secured Notes (a) 45,000 7.3% 1.9 6
----------------------------------------------------------------------------------
Total Fixed-Rate Notes 398,456 7.6% 8.6 71
Variable-Rate Secured Notes 11,968 6.3% 2.0 2
Variable-Rate Tax-Exempt Notes 2,200 5.4% 5.2 1
----------------------------------------------------------------------------------
Total Variable-Rate Notes 14,168 6.2% 2.3 3
----------------------------------------------------------------------------------
Total Notes Payable - secured $ 412,624 7.5% 8.3 74
===================================================================================
(a) Variable-rate secured notes payable which have been effectively swapped
to a fixed-rate at September 30, 1997 consist of a $39 million
variable-rate secured senior credit facility which encumbers six
apartment communities and a $6 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-
6
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%.
5. Notes payable - unsecured
A summary of notes payable - unsecured is as follows:
September 30, December 31,
Dollars in thousands 1997 1996
----------------- ----------------------
Commercial Banks
Borrowings outstanding under
revolving credit facilities and
other bank debt $ 82,000 (a) $125,250
Insurance Companies--Senior Unsecured Notes
7.98% due March, 1998-2003 44,571 (b) 52,000
8.72% due November, 1997-1998 (c) 4,000 4,000
--------- ---------
48,571 56,000
Other (d) 6,950 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 Notes Payable - Unsecured $687,521 $668,275
======== ========
(a) The weighted average balance outstanding for the three months
ended September 30, 1997 was $68.4 million and carried a weighted
average daily interest rate of 6.1%. The weighted average balance
outstanding for the nine months ended September 30, 1997 was $95.4
million and carried a weighted average daily interest rate of
6.1%. The weighted average interest rate at September 30, 1997 was
6.1%.
(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 $6.5 million and $5.6 million at September 30, 1997 and
December 31, 1996, respectively, of deferred gains 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 SFAS No. 128 "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 nine month periods ended
September 30, 1997 and 1996 according to the new statements would not change
from the reported amounts.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129
"Disclosure Information about Capital Structure" (Statement 129) which is
effective for fiscal years beginning after December 15, 1997. Statement 129
established standards for disclosing information about an entity's capital
structure. The Company believes that its disclosures already comply with the
requirements of Statement 129.
7
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" (Statement 130) and SFAS No. 131 "Disclosure
about Segments of an Enterprise and Related Information" (Statement 131) which
are effective for fiscal years beginning after December 15, 1997. The Company
will adopt Statement 130 and Statement 131 with the fiscal year beginning
January 1, 1998. Statement 130 and Statement 131 do not have a material impact
on the financial results or financial condition of the Company, but will result
in certain changes in required disclosures. Management is evaluating the
additional disclosure requirements for the Company upon the implementation of
Statement 130 and Statement 131.
8
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company considers portions of the information contained in this Item 2. 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 engaged in the ownership, acquisition, development and management
of primarily middle income apartment communities across the Sunbelt. The
Company's investment strategy focuses on acquiring apartment communities in 23
targeted major markets where it can add value. The Company 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 following table summarizes the Company's apartment
market information by market:
Three Months Ended Nine Months Ended
As of September 30, 1997 September 30, 1997 September 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*
- ---------------------------------------------------- ------------------------------------------------------
Dallas, TX 22 8,257 14% 94.1% $ 551 93.6% $ 544
Columbia, SC 12 3,534 6% 92.6% 502 91.3% 500
Richmond, VA 11 3,518 6% 93.7% 561 91.8% 552
Raleigh, NC 12 3,484 6% 95.1% 636 95.4% 630
Tampa, FL 12 3,209 5% 92.8% 579 93.4% 572
Orlando, FL 10 3,076 5% 95.9% 578 95.5% 571
Charlotte, NC 13 3,009 5% 87.9% 579 86.7% 573
Houston, TX 7 2,847 5% 94.3% 469 93.1% 466
Eastern NC 10 2,530 4% 95.5% 560 95.1% 554
Greensboro, NC 9 2,242 4% 84.0% 548 83.9% 545
Nashville, TN 8 2,116 3% 91.4% 589 91.5% 584
San Antonio, TX 5 1,983 3% 91.8% 619 92.3% 615
Atlanta, GA 7 1,822 3% 90.8% 591 89.5% 588
Baltimore, MD 8 1,746 3% 92.9% 655 92.4% 650
Greenville, SC 8 1,718 3% 88.1% 518 86.6% 515
Hampton Roads, VA 7 1,628 3% 93.9% 545 90.6% 540
Washington, DC 6 1,483 2% 87.8% 687 87.0% 682
Jacksonville, FL 3 1,157 2% 85.9% 598 86.2% 596
Ft. Lauderdale, FL 4 960 2% 93.3% 791 94.0% 786
Memphis, TN 4 935 2% 89.3% 519 90.0% 513
Fayetteville, NC 3 884 1% 90.6% 559 88.3% 556
Austin, TX 3 867 1% 88.1% 533 89.2% 532
Eastern Shore, MD 4 784 1% 98.5% 632 97.3% 624
Phoenix, AZ 3 728 1% 91.2% 645 90.8% 644
Little Rock, AK 2 512 1% 94.5% 573 93.5% 569
Other Florida 7 1,646 3% 91.3% 552 95.8% 547
Other Virginia 6 1,036 2% 92.1% 558 94.0% 550
Other Texas 3 824 1% 93.7% 506 88.6% 509
Other Georgia 2 468 1% 88.8% 638 82.7% 638
Other South
Carolina 2 408 1% 91.2% 413 91.6% 409
Nevada 1 384 1% 88.0% 641 91.1% 635
Delaware 2 368 -- 96.0% 605 96.1% 600
Oklahoma 1 316 -- 92.6% 454 92.3% 452
Alabama 1 242 -- 85.6% 514 83.7% 511
New Mexico 1 210 -- 95.6% 550 85.9% 567
Other North
Carolina 1 168 -- 95.9% 574 89.7% 573
---------------------------------------------------------------------------------------
Total 220 61,099 100% 92.2% $ 574 91.6% $570
=======================================================================================
9
* 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.
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 nine months ended
September 30, 1997, the Company's cash flow from operating activities exceeded
cash distributions paid to preferred and common shareholders and operating
partnership unitholders by approximately $36.9 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 nine months ended September 30, 1997, the Company's cash flow from
operating activities increased approximately $38.5 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 and unitholders in the Operating Partnership.
Investing Activities
During the nine months ended September 30, 1997, net cash used for investing
activities was approximately $283.6 million compared to approximately $190.3
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. During 1997, the Company significantly
increased both its development activity and upgrade program which was
implemented at its older communities.
Acquisitions
The Company expects to purchase between 8,000 and 11,000 apartment homes at an
aggregate purchase price between $350 million and $450 million during 1997. The
Company seeks to acquire apartment communities that can provide returns on
investment in excess of the Company's cost of capital. These acquisitions
typically are projected to provide first year weighted average returns on
investment of approximately 9-9 1/2% with the prospect for future cash flow
growth and appreciation.
During the first nine months of 1997, the Company acquired 22 apartment
communities containing 6,802 apartment homes at a total cost of approximately
$266.8 million, including closing costs. Twenty of the apartment communities
acquired were located in the Company's major markets. The apartment communities
acquired were as follows:
10
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 (a) 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 (a) 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 (c) 100 1997 4,765 47,700
05/09/97 Green Oaks I/Houston, TX (d) 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 (d) 272 1985 9,680 35,600
07/01/97 Lotus Landing/Orlando, FL 260 1985 10,725 41,300
07/01/97 Lakeside/Daytona Beach, FL 210 1985 8,744 41,600
07/01/97 Mallards of Brandywine/Deland, FL 168 1985 6,117 36,400
07/01/97 Forest Creek/Largo, FL 104 1984 2,582 24,800
07/01/97 Orange Oaks/Tampa, FL 192 1986 7,832 40,800
09/26/97 Greenhouse Patio/Houston, TX (a) (b) 580 1985 18,814 32,400
09/26/97 Braesridge/Houston, TX (a) (b) 545 1982 14,010 25,700
09/26/97 Breakers/Houston, TX 272 1985 6,825 25,100
09/29/97 Waterside at Ironbridge/Richmond, VA (a) 265 1987 15,082 56,900
------------------------------------------------
1997 Total/Weighted Average 6,802 1986 $266,784 $ 39,200
==================================================
(a) In connection with the acquisition of five apartment
communities, the Company assumed four mortgage notes payable
and one tax-exempt note payable aggregating $48.4 million with
a weighted average interest rate of approximately 8.3%.
(b) In connection with the acquisition of two apartment
communities, the Company issued approximately 572,000 units in
the Operating Partnership with an aggregate value of $8.4
million.
(c) Northwinds II is the second phase of an apartment community
acquired by the Company in August 1996.
(d) These two properties are operated as one apartment community
named Green Oaks Apartments.
Real estate under development
Consistent with the Company's acquisition strategy, development activity is
focused primarily in its major markets. Development capability allows the
Company to continually upgrade its apartment portfolio. During the first nine
months of 1997, the Company invested approximately $37.4 million in development
projects at nine apartment communities, including two new apartment communities
and seven additional phases to existing apartment communities. The Company
expects to spend in excess of $50 million on development activity during 1997.
At September 30, 1997, the Company had 916 apartment homes under development as
outlined below (dollars in thousands, except cost per home):
Development Estimated Estimated
No. Apt. Completed Costs Development Cost Expected
Property Location Homes Apt. Homes to Date Cost Per Home Completion Date
- ----------------------------------------------------------------------------------------------------------------------------------
New Apartment Communities
Dominion Franklin Nashville, TN 360 -- $ 4,673 $23,236 $ 64,500 4Q98
Additional Phases
England Run II Fredericksburg, VA 168 48 8,819 10,897 64,900 4Q97
Oak Forest II Dallas, TX 260 164 10,179 13,375 51,400 1Q98
Steeplechase II Greensboro, NC 176 20 7,470 11,784 67,000 4Q97
Greenway Park II Phoenix, AZ 20 16 858 1,282 64,100 4Q97
Mill Creek II Wilmington, NC 180 -- 1,629 12,108 67,300 3Q98
----------------------------------------------------------------------------------------
804 248 28,955 49,446 61,500
-------------------------------------------------------------------------
1,164 248 $33,628 $ 72,682 $ 62,400
=========================================================================
11
During 1997, the Company completed the following development projects (dollars
in thousands, except cost per home):
Development Estimated
No. Apt. Costs Development Cost Date of % Leased
Property Location Homes to Date Cost Per Home Completion at 9/30/97
- ---------------------------------------------------------------------------------------------------------------------------
New Apartment Communities
Providence Court Charlotte, NC 420 $ 29,715 $ 30,324 $ 72,200 3Q97 68%
Additional Phases
Brantley Pines II Ft. Myers, FL 96 6,827 6,755 70,400 2Q97 100%
Oak Park II Dallas, TX 80 4,358 4,581 57,300 1Q97 100%
------------------------------------------------------
176 11,185 11,336 64,400
------------------------------------------------------
596 $ 40,900 $ 41,660 $ 69,900
======================================================
During the third quarter, full lease-up at Brantley Pines was achieved.
In late September, construction on the 420 home Providence Court community in
Charlotte, North Carolina was completed. This community is currently in the
lease-up process. These additions did not have a material impact on the
Company's financial results for the three or nine months ended September 30,
1997.
Capital Expenditures
During the nine months ended September 30, 1997, the Company spent approximately
$70.7 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. The Company acquires two types of apartment communities, both of
which typically require capital expenditures: (i) near class A properties built
since 1980 where the investment (purchase price plus planned improvements)
represent a significant discount to replacement cost and (ii) well located,
older properties that can be upgraded and repositioned for the longer term. In
addition to the Company's capital expenditures on acquisitions, a significant
portion of 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,
several initiatives are underway that either allow the Company to increase rents
by more than the inflationary rate or allow the Company to pass expenses along
to residents, including: (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 during 1997 are
expected to exceed 1996 levels as a result of the upgrade program and
initiatives discussed above.
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
The Company continually undertakes portfolio review analyses with the objective
of identifying properties that do not meet the Company's long-term investment
objectives due to size, location, age, quality and future investment potential.
Generally, this will result in the disposition of many of the Company's older
apartment communities. The Company may sell approximately 20% of its apartment
portfolio although specific properties have not been identified as sales
candidates. These sales will allow the Company to reduce the age of its existing
portfolio which should result in lower operating expense and capital expenditure
growth associated with the older properties. Management has determined that
packaging properties in portfolios is more efficient and provides the greatest
opportunities for disposition. The Company intends to sell approximately $50-$70
million of properties each quarter through fiscal year 1998.
12
Real estate held for disposition included in the Consolidated Balance Sheet in
the aggregate amount of $131.6 million, net of accumulated depreciation and
valuation allowance includes: (i) 15 apartment communities containing 4,725
apartment homes aggregating $119.0 million, (ii) two shopping centers
aggregating $8.6 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 $4.0 million and $13.7 million for the three and nine months ended
September 30, 1997, respectively. The Company expects to dispose of these
properties within the next twelve months.
During 1997, the Company transferred 19 apartment communities aggregating $135.5
million, net of accumulated depreciation and valuation allowance, from real
estate held for investment to real estate held for disposition. Seven properties
were subsequently sold, six in a portfolio transaction during the third quarter.
In August 1997, the Company executed a contingent contract to sell six apartment
communities in a portfolio transaction, all of which are encumbered by
tax-exempt notes payable. In October 1997, the Company executed a letter of
intent to sell five apartment communities in a portfolio transaction. There is
no assurance that either of these portfolio transactions will be consummated.
The Company does not anticipate any losses from the sales of any of these
properties.
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 aggregate
$1.3 million gain on the sales. One of these dispositions was structured to
qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code,
so the related capital gain will be 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. Cash proceeds of
$34.1 million were held in escrow pending subsequent apartment acquisitions by
the Company in order to complete like-kind exchange transactions. For financial
reporting purposes, the Company recognized an approximate $9.3 million gain on
the sale. Since the transaction was structured to qualify as a like-kind
exchange under Section 1031 of the Internal Revenue Code, the related capital
gains will be deferred for federal income tax purposes. In addition, the company
sold an 80 home apartment community in September 1997 for $1.7 million in a
like-kind exchange transaction.
On October 23, 1997, the Company sold two apartment communities containing 464
apartment homes with a weighted average age of 24 years for an aggregate sales
price of approximately $11.1 million and received net proceeds of approximately
$10.9 million. For financial reporting purposes, no significant gain will be
recognized on these sales.
13
Financing Activities
Financial Structure
The following table outlines the Company's financial structure at September 30,
1997: (dollars in thousands)
Balance at Weighted Average Capitalization
September 30, 1997 Interest Rate Percentage
------------------- ------------------ --------------
Fixed Rate Secured Debt $ 398,456 7.6% 14.8%
Fixed Rate Unsecured Debt 605,521 7.5% 22.5%
---------------- ------
1,003,977 7.5% 37.3%
Variable Rate Secured Debt 14,168 6.2% 0.5%
Variable Rate Unsecured Debt 82,000 6.1% 3.1%
----------------- ------
96,168 6.1% 3.6%
----------------- ------
Total Debt 1,100,145 7.4% 40.9%
Preferred stock at market 269,400 8.9%* 10.0%
Common stock at market ($15 per share) 1,322,424 49.1%
----------------- --------
Equity capitalization at market 1,591,824 59.1%
----------------- --------
Total market capitalization (debt & equity) $ 2,691,969 100.0%
================= ========
*Represents the weighted average dividend rate.
Net cash provided by financing activities during the nine months ended September
30, 1997 was approximately $164.4 million compared to $122.6 million for the
same period last year, reflecting the higher debt and equity financing
activities that were needed to fund higher acquisitions, development and capital
improvements during the first nine months of 1997.
Cash provided by financing activities
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 $26.7 million under its Dividend
Reinvestment and Stock Purchase Plan (the "Plan") during the nine months ended
September 30, 1997 which included approximately $19.3 million in optional cash
investments and $7.4 million of reinvested dividends. The Company expects to
generate approximately $40 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 rate 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.
Cash used in financing activities
During the first nine months of 1997, the Company paid $74.1 million in
distributions to common and preferred shareholders and unitholders in the
Operating Partnership.
The Company repaid a $56.0 million unsecured note payable on January 3, 1997
which was assumed in connection with the South West Property Trust Inc.
acquisition on December 31, 1996. In addition, the Company repaid a $7.4 million
principal installment on an unsecured notes payable in March 1997.
14
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 nine months ended September 30, 1997 and
1996.
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
On August 4, 1997, the Company closed on a new $200 million three year unsecured
revolving credit facility, a $50 million one year unsecured line of credit and a
$15 million uncommitted 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.
At September 30, 1997, the Company had the following credit facilities (dollars
in thousands):
Three Months Ended September 30, 1997 Nine Months Ended September 30, 1997
-------------------------------------- -------------------------------------
Weighted Average Weighted Average
Amount of Amount Weighted Average Amount Weighted Average
Credit Facility Facility Outstanding Interest Rate Outstanding Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Revolving credit-3 Yr. $ 200,000 $ 42,670 6.1% $14,223 6.1%
Line of credit 50,000 -- -- -- --
Uncommitted line 15,000 2,457 6.2% 819 6.2%
Revolving credit** N/A 23,284 6.1% 80,335 6.1%
-------------------------------------------------------------------------------------------------------
$ 265,000 $ 68,411 6.1% $ 95,377 6.1%
======================================================================================================
** Represents the Company's unsecured revolving credit facilities with
four commercial banks which were terminated on August 4, 1997 upon the
execution of the $200 million three year unsecured revolving credit
facility.
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.
15
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.
For the three months ended September 30, 1997, FFO increased 60.3% to $29.5
million, compared with $18.4 million for the same period last year. For the nine
months ended September 30, 1997, FFO increased 67.6% to $87.3 million, compared
with $52.1 million for the same period last year. The increase in FFO was
principally due to the increased net rental income from the Company's 29,220
non-mature apartment homes in 92 apartment communities acquired and developed
subsequent to January 1, 1996.
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) (In thousands)
------------------------------------ ---------------------------------
1997 1996 % Change 1997 1996 % Change
------------------------------------ ---------------------------------
Calculation of funds from operations:
Income before gains on sales of
investments and minority interest of
unitholders in operating partnership $ 14,053 $ 8,504 65.3% $ 42,529 $ 25,394 67.5%
Adjustments:
Real estate depreciation 19,740 12,346 59.9% 55,029 33,711 63.2%
Dividends to preferred shareholders (5,653) (2,428) 132.8% (11,692) (7,284) 60.5%
Impairment loss on real estate
owned 1,400 -- -- 1,400 290 --
---------------------------------------- ---------------------------------
Funds from operations $ 29,540 $ 18,422 60.3% $ 87,266 $ 52,111 67.6%
======================================== =====================================
Weighted average number of common
and common equivalent shares
outstanding 88,014 57,930 51.9% 86,747 57,026 52.1%
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 nine months ended September 30, 1997, the Company reported
increases over the same period last year in rental income, income before gains
on sales of investments and minority interest of unitholders in operating
partnership and net income. For the nine months ended September 30, 1997, net
income available to common shareholders increased $23.1 million, with a
corresponding increase of $.14 per share compared to the same period last year.
For the three months ended September 30, 1997, net income available to common
shareholders increased $10.3 million, with a corresponding increase of $.07 per
share compared to the same period last year . The large per share increases over
last year are primarily attributable to gains recognized on the sales of
investments. Net income available to common shareholders for the three and nine
months ended September 30, 1997 includes aggregate gains on the sales of
investments of $9.3 million ($.11 per share) and $12.7 million ($.15 per share),
respectively. In addition, since the beginning of 1996, the Company acquired and
developed a total of 29,220 apartment homes in 92 apartment communities
(including 14,320 completed apartment homes in 44 apartment communities acquired
in the South West Merger) and sold 14 apartment communities containing 2,758
apartment homes, representing a net 76% 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. However, these
increases were moderated in part due to the Company's financing activities
during 1997. During the first nine months of 1997, the Company financed its
acquisition and development programs primarily with common and preferred equity
and the proceeds from property sales rather than debt which was used to finance
much of the 1996 acquisition and development programs.
16
All Apartment Communities
The operating performance for the Company's 220 apartment communities containing
61,099 completed apartment homes (and 2,758 apartment homes in 14 apartment
communities sold since January 1, 1996) for the three and nine months ended
September 30, 1997 and 166 apartment communities containing 41,204 apartment
homes for the three and nine months ended September 30, 1996, respectively, is
summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) (In thousands)
----------------------------------- ---------------------------------
1997 1996 % Change 1997 1996 % Change
----------------------------------- ---------------------------------
Rental income $ 98,313 $ 62,002 58.6% $ 282,176 $ 170,700 65.3%
Rental expenses (42,494) (26,993) 57.4% (120,629) (74,534) 61.8%
Real estate depreciation (19,740) (12,346) 59.9% (55,029) (33,616) 63.7%
----------------------------------- ---------------------------------
Net rental income (1) $ 36,079 $ 22,663 59.2% $ 106,518 $ 62,550 70.3%
=================================== =================================
Weighted average number
of apartment homes 60,204 38,697 55.6% 57,803 36,193 59.7%
Economic occupancy (2) 92.2% 93.4% (1.2%) 91.6% 93.2% (1.6%)
Average monthly rents $ 574 $ 554 3.6% $ 570 $ 549 3.8%
(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 29,220 apartment homes since January
1, 1996 (the Company also sold 14 apartment communities containing 2,758
apartment homes during this same period), the weighted average number of
apartment homes increased 59.7% to 57,803 for the nine months ended September
30, 1997 and 55.6% to 60,204 for the three months ended September 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 nine months ended
September 30, 1997.
Mature Apartment Communities
The operating performance for the Company's 128 mature apartment communities
containing 31,879 apartment homes for the three and nine months ended September
30, 1997 and 1996 is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) (In thousands)
1997 1996 % Change 1997 1996 % Change
-------------------------------------------- -----------------------------------
Rental income $ 52,910 $ 51,097 3.5% $155,929 $ 150,573 3.6%
Rental expenses (22,642) (22,545) 0.4% (67,227) (65,860) 2.1%
Real estate depreciation (11,047) (10,639) 3.8% (31,760) (31,016) 2.4%
------------------------------------------ ----------------------------------
Net rental income $ 19,221 $ 17,913 7.3% $ 56,942 $ 53,697 6.0%
=========================================== ===================================
Economic occupancy 93.1% 93.3% (0.3%) 92.4% 93.2% (0.8%)
Average monthly rents $ 574 $ 554 3.7% $ 569 $ 547 3.9%
For the nine months ended September 30, 1997, the Company's mature communities
provided approximately 55% of the Company's apartment rental income and 53% of
its net rental income. During the first nine months of 1997, the Company's
mature apartment communities continued to generate good rent growth and double
digit growth of other income. Compared to the same period last year, total
rental income from these apartment homes grew 3.6%, or approximately $5.4
million, reflecting an increase in average monthly rents of 3.9% to $569 per
month. In addition, other income, primarily fee income, increased approximately
$1.1 million or 20.3%. The rental rate increase was offset by a 0.8% decline in
economic occupancy to 92.4%, which resulted primarily from a decrease in
physical occupancy of 0.7%. The economic occupancy declined due to the weakening
of certain major southeastern markets
17
during the last half of 1996 including Columbia and Greenville, South Carolina,
Washington DC, Jacksonville, Florida, Richmond and Hampton Roads, Virginia and
Atlanta, Georgia. 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. Overall, economic occupancy
bottomed out in January 1997 at 90.7% and has grown steadily during the
remainder of the year to 93.0% for September 1997, an improvement of 2.3% during
the year. The increase in occupancy has been accomplished without sacrificing
rent growth which was enhanced by the Company's upgrade program. For the quarter
ended September 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 $2.0 million or 3.7% to $574. Other income increased
approximately $304,000 or 15.3%, over the same period last year while economic
occupancy declined 0.3% to 93.1%. The Company expects to maintain rent growth in
the 3.5% to 4% range and economic occupancy in the 93% range during the
remainder of 1997.
For the nine months ended September 30, 1997, rental expenses at these
communities increased 2.1%, or $1.4 million, resulting in an improvement in the
operating margin of 0.6% to 56.9%. The 2.1% increase in operating expenses is
attributable to higher personnel costs, marketing and advertising costs and the
Company's cost of self-management. Personnel costs increased 8.0% or
approximately $1.1 million primarily due to the fact that the Company was
understaffed at some of its properties during much of 1996. Marketing and
advertising costs increased 43.4% or approximately $794,000 over the same period
last year as a direct result of softening in certain major markets as discussed
above. The cost of self-management increased 37.8% or approximately $1.4 million
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. These additions allow the Company to compete
more effectively in the real estate industry. However, these rental expense
increases were offset by decreases in repairs and maintenance expense and
utility expense. Repairs and maintenance expense decreased 11.5% or
approximately $1.4 million primarily as a result of less exterior painting,
extraordinary repairs and mechanical repairs. In addition, the Company has taken
advantage of economies of scale due to its increased size and centralized
purchasing during the 1997 period. Utility expense decreased primarily as a
result of submetering water and sewer to residents where local and state
regulations allow the cost to be passed to the resident. For the quarter ended
September 30, 1997, rental expenses increased only $47,000 or 0.2% 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 nine months ended September 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 nine months ended September 30, 1997
for the Company's 92 non-mature apartment communities which include: (i) 7,590
apartment homes acquired during 1996, net of one resold, and a 253 home
community acquired in 1995 and not stabilized due to significant rehabilitation,
(ii) 13,671 apartment homes acquired on December 31, 1996 in connection with the
South West Merger, net of one resold, (iii) 6,802 apartment homes acquired since
January 1, 1997, (iv) 2,758 apartment homes sold since January 1, 1996 and (v)
the 739 apartment homes developed since January 1, 1996 is summarized as follows
(dollars in thousands):
Three Months Ended September 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 $ 12,839 $ 7,941 $ 21,934 $ -- $ 10,630 $ 2,964 $ 45,403 $ 10,905
Rental expenses (5,392) (2,944) (9,726) -- (4,734) (1,504) (19,852) (4,448)
Real estate depreciation (3,415) (1,584) (3,518) -- (1,760) (123) (8,693) (1,707)
------------------------- ------------- -------------------- --------------------
Net rental income $ 4,032 $ 3,413 $ 8,690 $ -- $ 4,136 $ 1,337 $ 16,858 $ 4,750
========================= ============== ==================== ====================
18
Nine Months Ended September 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 $ 37,906 $ 11,219 $ 64,828 $-- $ 23,513 $ 8,907 $ 126,247 $ 20,126
Rental expenses (15,479) (4,211) (27,699) -- (10,224) (4,461) (53,402) (8,672)
Real estate depreciation (8,947) (2,257) (10,960) -- (3,362) (344) (23,269) (2,601)
------------------------ -------------- -------------------- ------------------
Net rental income $ 13,480 $ 4,751 $ 26,169 $-- $ 9,927 $ 4,102 $ 49,576 $ 8,853
========================= ============= ==================== ==================
For the nine months ended September 30, 1997, the Company's non-mature apartment
communities provided approximately 45% of the Company's apartment rental income
and 47% 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 nine
months ended September 30, 1997, average economic occupancy was 90.7% and the
operating margin was 57.7% for the non-mature apartment communities. For the
quarter ended September 30, 1997, average economic occupancy was 91.2% and the
operating margin was 56.3%.
1996 Acquisitions (excluding the South West Merger)
The 29 apartment communities containing 7,590 apartment homes that were acquired
during 1996, net of one apartment community containing 122 apartment homes
resold 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 nine months ended September 30, 1997. For the first nine
months of 1997, these apartment communities had economic occupancy of 89.3% and
an operating margin of 59.2%. For the quarter ended September 30, 1997, these
apartment communities had economic occupancy of 90.3% and an operating margin of
58.0%. The first year return on investment for these communities was projected
at 9.5%, however, the actual return on investment for the nine months ended
September 30, 1997, on an average investment of approximately $324 million, was
approximately 9.0% (excluding one community 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 August 1996 when the Company
acquired these properties and has subsequently fallen during the first nine
months of 1997 reflecting an oversupply of apartment product in this market. The
Company believes this market is a good long-term market.
South West Property Trust Inc. (SWP)
The acquisition of the 43 apartment communities containing 13,791 apartment
homes included in the SWP Merger on December 31, 1996, net of one apartment
community containing 544 apartment homes resold, provided the largest increases
in rental income, rental expenses and depreciation expense for the Company's
entire apartment portfolio for the three and nine months ended September 30,
1997. The first year return on investment for the SWP Portfolio was projected to
be 9.5% which approximates the 9.4% return on investment posted during the first
nine months of 1997. For the nine months ended September 30, 1997, these
apartment communities had economic occupancy of 92.5% and an operating margin of
57.3%. For the quarter ended September 30, 1997, these apartment communities had
economic occupancy of 93.3% and an operating margin of 55.7%.
1997 Acquisitions, Development and Sales
Included in this category are the following: (i) the 22 apartment communities
containing 6,802 apartment homes and the second phase of an existing apartment
community containing 100 apartment homes acquired by the Company during the
first nine months of 1997 which are projected to have a first year return on
investment of approximately 9.6%, (ii) the 739 apartment homes developed since
January 1, 1996 and (iii) the 14 apartment communities containing 2,758
apartment homes sold since January 1, 1996. Excluding the third quarter
acquisitions, the third quarter return on investment for the 1997 acquisitions
on an average investment of $220.8 million was 9.1%. These communities provided
approximately 8.3% and 9.3% of the Company's rental income and net rental
income, respectively, for the nine months ended September 30, 1997. For the
quarter ended September 30, 1997, these properties provided 10.8% and 11.5% of
the Company's rental income and net rental income, respectively.
19
Commercial Properties
Rental income and rental expenses from commercial properties decreased $365,000
and $124,000, respectively during the three months ended September 30, 1997,
compared to the same period last year. For the nine month period, rental income,
rental expenses and depreciation expense decreased $1.8 million, $647,000 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 $5.8 million and $22.9 million for the three and nine
months ended September 30, 1997 over the same periods last year. The weighted
average amount of debt employed during the first nine months of 1997 was higher
than it was in 1996 ($1.1 billion in 1997 versus $619.1 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 quarter ended September 30, 1997, the weighted average debt outstanding
was higher than the same period last year ($1.1 billion in 1997 versus $763.9
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 7.4% in 1997. For the three and nine months ended September 30, 1997, total
interest capitalized was $851,000 and $2.1 million, respectively.
General and Administrative
During the three and nine months ended September 30, 1997, general and
administrative expenses increased by $359,000 and $1.1 million over the same
periods last year. In 1997, the Company incurred increases in most of its
general and administrative expense categories which are directly attributable to
the increased size of the Company. The largest increases occurred in payroll and
payroll related expenses and investor relations expense. General and
administrative expense as a percentage of rental revenues decreased .4% from
2.0% during the third quarter of 1996 period to 1.6% during the third quarter of
1997 primarily due to economies of scale. During the third quarter of 1997,
general and administrative expenses grew approximately 28% while rental income
grew by approximately 57% over the same period last year. For the nine month
period ended September 30, 1997, general and administrative expense as a
percentage of rental revenues decreased .5% from 2.4% to 1.9%. During this same
period, general and administrative expenses grew by approximately 26% while
rental income grew by 63%.
Gains on Sales of Investments
During the nine months ended September 30, 1997, the Company recognized gains on
the sales of investments aggregating $12.7 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 and third quarter sales of ten apartment communities containing
2,106 apartment homes and one shopping center for an aggregate sales price of
$57.5 million on which the Company recognized aggregate gains for financial
reporting purposes of $10.6 million.
Dividends to Preferred Shareholders
Dividends to preferred shareholders totaled $5.7 million and $11.7 million for
the three and nine month periods ended September 30, 1997 compared to $2.4
million and $7.3 million for the same periods last year. The increase 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.
20
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". The Form 8-K was subsequently
amended by Form 8-K/A No. 1 which was filed with the Securities
and Exchange Commission on September 15, 1997. This Form 8-K/A
included the statements of rental operations of twelve properties
which included Lakeside Apartments, Mallards of Brandywine
Apartments, Orange Oaks Apartments, Forest Creek Apartments, Lotus
Landing Apartments, Stoneybrooke Apartments, Trinity Place
Apartments, Tradewinds Apartments, Anderson Mill Oaks Apartments,
Post Oak Ridge Apartments, Pineloch Apartments and Seahawk Apartments.
A Form 8-K dated October 21, 1997, was filed with the Securities and
Exchange Commission on November 5, 1997. The filing reported the
acquisition by the Company of properties, of which, the aggregate
number of properties acquired exceeded the majority of properties which
were audited.
21
EXHIBIT INDEX
Item 6 (a)
The exhibits listed below are filed as part of this quarter ly report.
References under the caption "Location" to exhibits, forms, or other filings
indicate that the form or other filing has been filed, that the inde xed exhibit
and the exhibit referred to are the same and that the exhibit referr ed 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 Filed herewith.
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
22
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
4(ii)(g) Three Year Credit Agreement dated Filed herewith.
As of August 4, 1997, between the
Company, United Dominion Realty, L.P.,
And other subsidiaries and affiliates
Of the Company, the Lenders named
Therein and NationsBank, N.A., as
Administrative Agent
4(ii)(h) 364 day Credit Agreement dated Filed herewith.
as of August 4, 1997, between the
Company, United Dominion Realty, L.P.,
And other subsidiaries and affiliates
Of the Company, the Lenders named
Therein and NationsBank, N.A., as
Administrative Agent
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.
23
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 Filed herewith.
of Limited Partnership of
United Dominion Realty, L.P.
Dated as of August 30, 1997.
12 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges
27 Financial Data Schedule Filed electronically with the Securities and
Exchange Commission.
24
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: November 14, 1997 /s/ James Dolphin
- ----------------------- -----------------
James Dolphin
Executive Vice President and Chief
Financial Officer
Date: November 14, 1997 /s/ Jerry A. Davis
- ----------------------- ------------------
Jerry A. Davis
Vice-President , Corporate Controller and
Principal Accounting Officer
25