1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission file number 1-12452
AVALON PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
--------------------
Maryland 06-1379111
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 River Road
Wilton, Connecticut 06897
(Address of principal executive offices) - (Zip Code)
(203) 761-6500
(Registrant's telephone number, including area code)
--------------------
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
Indicate the number of shares outstanding of each issuer's classes of common
stock as of the latest practicable date:
38,453,318 shares outstanding as of August 8, 1997.
===============================================================================
2
AVALON PROPERTIES, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements Page
----
Condensed Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996...............................................................1
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 1997 and 1996........................................................2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996........................................................3
Notes to Condensed Consolidated Financial Statements................................4
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................9
PART II OTHER INFORMATION
Item 1 Legal Proceedings..................................................................23
Item 2 Changes in Securities..............................................................23
Item 3 Defaults upon Senior Securities....................................................23
Item 4 Submission of Matters to a Vote of Stockholders....................................23
Item 5 Other Information..................................................................23
Item 6 Exhibits and Reports on Form 8-K...................................................24
Signatures.........................................................................25
3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVALON PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)
ASSETS 6-30-97 12-31-96
-------------- --------------
Real estate
Land $ 200,956 $ 169,079
Buildings and improvements 923,310 754,545
Furniture, fixtures and equipment 31,891 27,455
-------------- --------------
1,156,157 951,079
Less: accumulated depreciation (57,543) (44,547)
-------------- --------------
1,098,614 906,532
Construction in progress (including land) 102,427 130,827
-------------- --------------
TOTAL REAL ESTATE, NET 1,201,041 1,037,359
Cash and cash equivalents 2,752 14,241
Cash in escrow 3,916 3,945
Resident security deposits 7,425 5,995
Investments in joint ventures 2,988 2,573
Deferred financing and other costs, net 7,455 7,702
Deferred development costs, prepaid expenses and other assets 14,246 10,956
-------------- --------------
TOTAL ASSETS $ 1,239,823 $ 1,082,771
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term notes payable $ 24,145 $ 24,335
Unsecured Facilities 71,500 --
Unsecured senior notes, 7-3/8% due 2002, net of unamortized discount 99,880 99,869
Notes payable 198,125 186,402
Payables for construction 14,967 12,613
Accrued expenses and other liabilities 11,125 10,580
Accrued interest payable 4,890 4,342
Resident security deposits 8,684 6,642
-------------- --------------
TOTAL LIABILITIES 433,316 344,783
-------------- --------------
Minority interest of unitholders in consolidated operating partnership 700 --
Stockholders' equity
Preferred Stock, $.01 par value; 20,000,000 shares authorized;
4,455,000 shares of 9% Series A Cumulative Redeemable Preferred Stock
issued and outstanding (Aggregate liquidation preference of $111,375) 45 45
4,300,000 shares of 8.96% Series B Cumulative Redeemable Preferred Stock
issued and outstanding (Aggregate liquidation preference of $107,500) 43 43
Common Stock, $.01 par value; 80,000,000 shares authorized;
36,285,568 and 33,391,992 shares issued and outstanding at June 30, 1997
and December 31, 1996, respectively 363 334
Additional paid-in capital 829,604 752,159
Deferred compensation (3,976) (1,699)
Distributions in excess of accumulated earnings (20,272) (12,894)
-------------- --------------
STOCKHOLDERS' EQUITY 805,807 737,988
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,239,823 $ 1,082,771
============== ==============
See accompanying notes to condensed consolidated financial statements.
1
4
AVALON PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
Three months ended Six months ended
---------------------- -----------------------
6-30-97 6-30-96 6-30-97 6-30-96
--------- ---------- ---------- ----------
Revenue:
Rental income $40,375 $29,329 $77,526 $56,922
Management fees 244 394 499 796
Other income 153 108 273 221
--------- ---------- ---------- ----------
Total revenue 40,772 29,831 78,298 57,939
--------- ---------- ---------- ----------
Expenses:
Operating expenses 14,505 11,234 27,761 22,168
Interest expense 3,922 1,663 7,639 4,246
Depreciation and amortization 6,968 5,045 13,527 9,699
General and administrative expenses 1,090 887 2,199 1,850
--------- ---------- ---------- ----------
Total expenses 26,485 18,829 51,126 37,963
--------- ---------- ---------- ----------
Equity in income of joint ventures 1,304 150 2,346 316
Interest income 220 208 495 446
Minority interest 48 135 142 299
--------- ---------- ---------- ----------
Net income before extraordinary item 15,859 11,495 30,155 21,037
Extraordinary item -- -- (1,183) --
--------- ---------- ---------- ----------
Net income 15,859 11,495 28,972 21,037
Dividends attributable to preferred stock (4,914) (2,516) (9,828) (3,602)
--------- ---------- ---------- ----------
Net income available to common stockholders $10,945 $ 8,979 $19,144 $17,435
========= ========== ========== ==========
Net income per weighted average
common share outstanding (Note 2) $ 0.31 $ 0.29 $ 0.55 $ 0.57
========= ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
2
5
AVALON PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six months ended
-------------------------------
6-30-97 6-30-96
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,972 $ 21,037
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 13,527 9,699
Equity in income of joint ventures (128) 79
Amortization of deferred compensation 485 187
Extraordinary item 1,183 --
Decrease (increase) in resident security deposits,
net of related liability 612 (72)
Decrease (increase) in cash in escrow 29 (105)
Increase in prepaid expenses and other assets (3,290) (1,485)
Increase in accrued expenses, other liabilities
and accrued interest payable 1,325 1,965
------------- -------------
Total adjustments 13,743 10,268
------------- -------------
Net cash provided by operating activities 42,715 31,305
------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Investment in joint venture (287) (455)
Increase in construction payables 2,354 2,007
Purchase and development of real estate (175,823) (124,711)
------------- -------------
Net cash used in investing activities (173,756) (123,159)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 73,825 46,399
Issuance of preferred stock, net -- 107,581
Dividends paid (36,350) (25,038)
Borrowings on notes payable 12,088 --
Repayments of notes payable (642) (6,340)
Borrowings under Unsecured Facilities 161,000 101,000
Repayments of Unsecured Facilities (89,500) (120,500)
Borrowings under construction loans -- 31
Repayments of construction loans -- (10,508)
Payments of deferred financing costs (869) (459)
------------- -------------
Net cash provided by financing activities 119,552 92,166
------------- -------------
Net (decrease) increase in cash (11,489) 312
Cash and cash equivalents, beginning of period 14,241 1,801
------------- -------------
Cash and cash equivalents, end of period $ 2,752 $ 2,113
============= =============
Cash paid during period for interest, net of amount capitalized $ 6,692 $ 3,415
============= =============
See accompanying notes to condensed consolidated financial statements.
3
6
AVALON PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
1. Organization of the Company and Recent Developments
Avalon Properties, Inc. (the "Company") is a
self-administered and self-managed Real Estate Investment Trust
("REIT"), as defined under the Internal Revenue Code of 1986 (as
amended) and was incorporated under the General Corporation Law of
Maryland on August 24, 1993. The Company is engaged principally in the
development, construction, acquisition and operation of residential
apartment communities in the Northeast and Mid-Atlantic regions of the
United States. Additionally, the Company provides management services
for communities owned by unrelated parties.
On April 7, 1997, pricing on the Company's supplemental
unsecured credit facility (the "Supplemental Unsecured Facility") was
reduced to .80% over LIBOR. Also, on May 30, 1997, the Supplemental
Unsecured Facility was amended and restated to provide for an increase
in capacity to $50,000, an extension of the expiration date to March
31, 2000 and the introduction of a competitive bid option.
On April 15, 1997, the Company purchased the remaining nine
acres of land relating to the development of Avalon at Cameron Court
in Alexandria, Virginia for $5,714.
On April 17, 1997, the Company completed a direct placement
of 2,740,000 shares of its Common Stock to an institutional investor
under its existing shelf registration statement at a purchase price of
$27.375 per share. Net cash proceeds of approximately $73,500 were
used to retire indebtedness under the Company's unsecured credit
facilities.
On April 18, 1997, the Company purchased the remaining 1.7
acres of land relating to the Avalon Willow development in Mamaroneck,
New York for $2,300. This land is adjacent to a 2.3 acre parcel
purchased in December 1996. Construction of a 227 apartment home
community (Avalon Willow) on the combined four acre site commenced in
the second quarter of 1997.
On April 28, 1997, the Company completed the loan closing
related to the tax-exempt financing for the Avalon Fields apartment
community. The Community Development Administration of Maryland issued
$12,088 of thirty-year fixed-rate bonds at an all-in rate of 7.57%.
The net cash proceeds from the loan closing (approximately $11,565)
were used to repay amounts outstanding under the Company's unsecured
credit facilities.
On May 16, 1997, the Company acquired Avalon at Center Place,
a 225 apartment home, high- rise apartment community located in
Providence, Rhode Island for $26,000. This nine-story apartment
community contains approximately 21,000 square feet of commercial
space on the first floor with residential apartment homes on the upper
eight floors. This community was managed by the Company prior to its
acquisition and is subject to a 149 year land lease.
On June 27, 1997, the Company acquired Avalon at Providence
Park, a 140 apartment home, garden-style community located in Fairfax
City, Virginia for $10,750.
4
7
2. Summary of Significant Accounting Policies
Principles of Consolidation of the Company
The accompanying condensed consolidated financial statements
include the accounts of the Company and its wholly owned partnerships
and subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Real Estate
Buildings and improvements are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives
of 40 years. The Company's policy is to annually assess any impairment
in value by making a comparison of the current and projected operating
cash flows of each of its communities over its remaining useful life,
on an undiscounted basis, to the carrying amount of each community.
Such carrying amounts would be adjusted, if necessary, to reflect an
impairment in the value of the assets. The cost of buildings and
improvements include capitalized interest, property taxes and
insurance incurred during the construction period. Furniture and
fixtures are stated at cost and depreciated over their estimated
useful lives of seven years. Expenditures for maintenance and repairs
are charged to operations as incurred. Significant renovations or
betterments that exceed $15 and extend the economic useful life of an
asset are capitalized and depreciated over seven years.
Deferred Financing and Development Costs
Deferred financing costs include fees and costs incurred to
obtain financings and are amortized on a straight-line basis over the
shorter of the term of the loan or the related credit enhancement
facility, if applicable. Fees and other incremental costs incurred in
developing new communities are capitalized as deferred development
costs and are included in the cost of the community when construction
commences. The accompanying condensed consolidated financial
statements include a charge to expense for unrecoverable deferred
development costs related to pre-development communities that may not
proceed to development.
Net Income per Common Share
Net income per common share for the three months ended June
30, 1997 and 1996 is based upon 35,791,985 and 30,715,884 weighted
average shares of common stock outstanding, respectively. Net income
per common share for the six months ended June 30, 1997 and 1996 is
based upon 34,635,347 and 30,481,694 weighted average shares of common
stock outstanding, respectively.
Interim Financial Statements
These condensed consolidated financial statements are
unaudited and were prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. However, in the opinion of
management, all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the financial
statements have been included. The operating results for these periods
are not necessarily indicative of the operating results that may be
attained for a full fiscal year. The accompanying condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
Recently Issued Accounting Pronouncements
During 1997, the Financial Accounting Standard Board issued
Statements of Financial Accounting Standards No. 128 "Earnings Per
Share" ("SFAS 128"), No. 129 "Disclosure of Information About Capital
Structure" ("SFAS 129") and No. 130 "Reporting Comprehensive Income"
("SFAS 130").
5
8
SFAS 128 simplifies existing computational guidelines,
revises disclosure requirements and increases the comparability of
earnings per share data. This statement is effective for financial
statements for periods ending after December 15, 1997 and requires
restatement of all prior period earnings per share data presented.
SFAS 129 establishes standards for disclosing information about an
entity's capital structure such as information about securities,
liquidation preference of preferred stock and redeemable stock. SFAS
130 specifies the presentation and disclosure requirement for
reporting comprehensive income which includes those items which have
been formerly reported as a component of shareholders' equity.
The impact of adoption of SFAS 128, SFAS 129 and SFAS 130 on
the Company's financial results is not expected to be significant.
3. Senior Participating Mortgage Note
The Company's ownership of the senior participating mortgage
note related to the Town Arbor Partnership ("Avalon Arbor") has been
accounted for as an investment in real estate. Minority interest
represents the excess of the interest income at the pay rate on the
mortgage loan over the cash flow from operations generated by the
community. This excess is funded from payments drawn from an escrow
account established from contributions by the minority partners. At
June 30, 1997, the partnership had $3,026 of cash from these
contributions available to fund interest payments. The note bears
interest at 10.2%. Upon acquisition, the note was restructured to
provide for a 9% pay rate. The difference between the stated interest
and the pay rate is deferred interest and is added to the principal.
The loan also provides for contingent interest of 50% of gross
revenues, as defined, and is payable prior to any payments to the
partners. No contingent interest has been paid through June 30, 1997.
The note entitles the holder to a 50% net residual value of the
property at maturity or upon prior disposition of the property. The
note may be prepaid subject to stipulated penalties.
4. Unsecured Facilities
The Company's unsecured credit facility (the "Unsecured
Facility") is provided by a consortium of six banks that provides for
$175,000 in short-term credit and is subject to an annual facility fee
of $263. The Unsecured Facility expires on March 31, 2000. As of June
30, 1997, approximately $15,536 of available capacity was used to
provide letters of credit and $64,500 was borrowed under the facility.
Accordingly, the balance that remains available at June 30, 1997 to be
drawn under the Unsecured Facility is $94,964. The Unsecured Facility
bears interest based upon a LIBOR, Prime or CD rate election at the
Company's option. The current pricing is LIBOR plus .80%, except that
up to $75,000 can be competitively bid at lower pricing if market
conditions allow. Pricing may be adjusted higher or lower depending on
the Company's senior unsecured debt ratings.
The Company's Supplemental Unsecured Facility (together with
the Unsecured Facility, the "Unsecured Facilities") is provided by
First Union National Bank in the amount of $50,000 and is subject to
an annual facility fee of $75. The Supplemental Unsecured Facility
expires on March 31, 2000 and bears a current interest rate of LIBOR
plus .80%. At June 30, 1997, $2,167 of available capacity was used to
provide letters of credit and $7,000 was borrowed under the
Supplemental Unsecured Facility. Accordingly, the balance that remains
available at June 30, 1997 to be drawn under the Supplemental
Unsecured Facility is $40,833.
The weighted average effective interest rates (excluding the
cost of facility fees and unused line of credit fees) on borrowings
under the Unsecured Facilities for the six months ended June 30, 1997
and 1996 were 6.5% and 8.5%, respectively. Including the cost of
facility fees and unused fees, the weighted average effective interest
rates on borrowings under the Unsecured Facilities for the six months
ended June 30, 1997 and 1996 were 7.0% and 8.6%, respectively.
6
9
5. Stockholders' Equity
The following summarizes the changes in stockholders' equity
for the six months ended June 30, 1997:
Distributions
Additional in excess of
Preferred Common paid-in Deferred accumulated
Stock Stock capital compensation earnings Total
---------- --------- ------------ --------------- -------------- ----------
Stockholders' equity, 12-31-96 $ 88 $ 334 $ 752,159 $ (1,699) $ (12,894) $ 737,988
Net income -- -- -- -- 28,972 28,972
Dividends declared -- -- -- -- (36,350) (36,350)
Issuance of Restricted Common
Stock -- 1 3,648 -- -- 3,649
Deferred compensation,
net of amortization -- -- -- (2,277) -- (2,277)
Issuance of Common Stock -- 28 73,797 -- -- 73,825
---------- --------- ------------ --------------- -------------- ----------
Stockholders' equity, 6-30-97 $ 88 $ 363 $ 829,604 $ (3,976) $ (20,272) $ 805,807
========== ========= ============ =============== ============== ==========
6. Investments in Joint Ventures
At June 30, 1997 and December 31, 1996, investments in joint
ventures consist of a 50% general partnership interest in Falkland
Partners, a 49% equity interest in Avalon Run, an 86.5% effective
equity interest in Town Close Associates (the New Canaan Development
Right) and 100% of the operating income from the anticipated Avalon
Grove joint venture (a Development Community). The following is a
combined summary of the financial position of these joint ventures for
the periods presented:
6-30-97 12-31-96
----------- -----------
Assets:
Real estate, net $ 98,220 $92,835
Other assets 6,838 5,029
----------- -----------
Total assets $105,058 $97,864
=========== ===========
Liabilities and partners' equity:
Mortgage notes payable $ 26,000 $26,000
Other liabilities 3,716 3,786
Partners' equity 75,342 68,078
----------- -----------
Total liabilities and partners' equity $105,058 $97,864
=========== ===========
At June 30, 1996, the investments in joint ventures include a
50% general partnership interest in Falkland Partners, a 49% equity
interest in Avalon Run and an 86.5% effective equity interest in Town
Close Associates. The following is a combined summary of the operating
results of these joint ventures for the periods presented:
7
10
Three months ended Six months ended
------------------------------ ----------------------------
6-30-97 6-30-96 6-30-97 6-30-96
------------- ------------- ------------ -------------
Rental income $ 3,916 $ 2,329 $ 7,289 $ 4,671
Other income 12 14 24 28
Operating expenses (1,280) (908) (2,408) (1,895)
Mortgage interest expense (243) (225) (439) (424)
Depreciation and amortization (685) (413) (1,256) (820)
------------- ------------- ------------ -------------
Net income $ 1,720 $ 797 $ 3,210 $ 1,560
============= ============= ============ =============
7. Extraordinary Item
In March 1997, the unamortized deferred financing costs
associated with the early retirement of the Company's $165,000
unsecured credit facility were written off.
8. Subsequent Events
On July 1, 1997, the Company completed a public offering of
2,163,000 shares of common stock at a purchase price of $28.0625 per
share. The net cash proceeds from the offering of approximately
$57,671 were used primarily to repay amounts outstanding under the
Unsecured Facilities.
On July 18, 1997, the Company sold a garden-style apartment
community, Avalon Farm, located in Frederick, Maryland, to a single
buyer for a total sales price of $17,047. The net proceeds from the
sale of approximately $16,500 will be used for reinvestment in a new
acquisition community. The Company expects to record an accounting
gain of $570 from the sale and will structure the sale as a section
1031 like-kind exchange under the Internal Revenue Code to defer the
recognition of the taxable gain.
8
11
PART I FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"). The words "believe," "expect,"
"anticipate," "intend," "estimate," "assume" and other similar expressions
which are predictions of or indicate future events and trends and which do not
relate to historical matters identify forward-looking statements. In addition,
information concerning construction, occupancy and completion of Development
Communities and Development Rights (as hereinafter defined) and related cost
and EBITDA estimates, are forward-looking statements. Reliance should not be
placed on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which are in some cases beyond the
control of the Company and may cause the actual results, performance or
achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements.
Certain factors that might cause such differences include, but are not
limited to, the following: The Company may abandon development opportunities;
construction costs of a community may exceed original estimates; construction
and lease-up may not be completed on schedule, resulting in increased debt
service expense and construction costs and reduced rental revenues; occupancy
rates and market rents may be adversely affected by local economic and market
conditions which are beyond management's control; financing may not be
available on favorable terms; the Company's cash flow may be insufficient to
meet required payments of principal and interest; and existing indebtedness may
not be able to be refinanced or the terms of such refinancing may not be as
favorable as the terms of existing indebtedness.
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto included
elsewhere herein.
RECENT DEVELOPMENTS
Acquisitions of Existing Communities. On May 16, 1997, the Company
acquired Avalon at Center Place, a 225 apartment home, high-rise apartment
community located in Providence, Rhode Island for $26,000,000. This nine-story
apartment community contains approximately 21,000 square feet of commercial
space on the first floor with residential apartment homes on the upper eight
floors. This community was managed by the Company prior to its acquisition and
is subject to a 149 year land lease.
On June 27, 1997, the Company acquired Avalon at Providence Park, a
140 apartment home, garden-style community located in Fairfax City, Virginia
for $10,750,000.
Sale of Existing Community. On July, 18 1997, the Company sold a
garden-style apartment community, Avalon Farm, located in Frederick, Maryland,
to a single buyer for a total sales price of $17,047,000. The net proceeds of
approximately $16,500,000 from the sale will be used for reinvestment in a new
acquisition community. The Company expects to record an accounting gain of
$570,000 from the sale and will structure the sale as a ss.1031 like-kind
exchange under the Internal Revenue Code to defer the recognition of the
taxable gain.
Land Acquisitions for New Development. On April 18, 1997, the Company
purchased the remaining 1.7 acres of land relating to the Avalon Willow
community in Mamaroneck, New York for $2,300,000. This land is adjacent to a
2.3 acre parcel purchased in December 1996. Construction of a 227 apartment
home community (Avalon Willow) on the combined four acre site commenced in the
second quarter of 1997.
Financing Activities. On April 7, 1997, pricing on the Company's
supplemental unsecured credit facility (the "Supplemental Unsecured Facility"
and together with the unsecured credit facility, the "Unsecured Facilities")
was reduced to .80% over LIBOR. Also, on May 30, 1997, the Supplemental
Unsecured Facility was amended and restated to provide for an increase in
capacity to $50,000,000, an extension of the expiration date to March 31, 2000
and the introduction of a competitive bid option.
9
12
On April 17, 1997, the Company completed a direct placement of
2,740,000 shares of its Common Stock to an institutional investor under its
existing shelf registration statement at a purchase price of $27.375 per share.
Net cash proceeds of approximately $73,500,000 were used to retire indebtedness
under the Company's Unsecured Facilities.
On April 28, 1997, the Company completed the loan closing related to
the tax-exempt financing for the Avalon Fields apartment community. The
Community Development Administration of Maryland issued $12,088,000 of
thirty-year fixed-rate bonds at an all-in rate of 7.57%. The net cash proceeds
from the loan closing (approximately $11,565,000) were used to repay amounts
outstanding under the Company's Unsecured Facilities.
On July 1, 1997, the Company completed a public offering of 2,163,000
shares of common stock at a purchase price of $28.0625 per share. The net cash
proceeds from the offering of approximately $57,671,000 were used primarily to
repay amounts outstanding under the Unsecured Facilities.
GENERAL
The Company's operations consist of the development, construction,
acquisition and operation of apartment communities in the Mid-Atlantic and
Northeast regions of the United States. At June 30, 1997, the Company held a
fee simple ownership in 46 completed and operating communities (one of which,
Avalon at Center Place, is subject to a 149 year land lease), a general
partnership interest in two other communities (a 50% interest in Falkland Chase
and a 49% interest in Avalon Run), a 99% general partner interest in a
partnership structured as a "DownREIT" (Avalon at Ballston - Vermont/Quincy)
and a 100% interest in a senior participating mortgage note secured by another
community (Avalon Arbor) which is accounted for as an investment in real
estate. The Company also has a fee simple ownership interest in 10 Development
Communities. One of the 10 Development Communities is subject to an agreement
to form a joint venture.
The Company's real estate holdings consist exclusively of apartment
communities in various stages of the development cycle and can be divided into
three categories:
"Current Communities" are apartment communities where construction is
complete and the community has either reached stabilized occupancy or
is in the initial lease-up process. A "Stabilized Community" is a
Current Community that has completed its initial lease-up and has
attained a physical occupancy level of 94% or has been completed for
one year, whichever occurs earlier. An "Established Community" is a
Current Community that has been a Stabilized Community with stabilized
operating costs during the current and the beginning of the previous
calendar year such that its year-to-date operating results are
comparable between periods.
"Development Communities" are communities that are under construction
and may be partially complete and operating and for which a final
certificate of occupancy has not been received.
"Development Rights" are development opportunities in the very
earliest phase of the development process for which the Company has an
option to acquire land or owns land to develop a new community and
where related pre-development costs have been incurred and capitalized
in pursuit of these new developments.
10
13
RESULTS OF OPERATIONS
The changes in operating results from period-to-period are primarily
the result of increases in the number of apartment homes owned due to the
development and acquisition of additional communities. Where appropriate,
comparisons are made on a weighted average basis for the number of occupied
apartment homes in order to adjust for such changes in the number of apartment
homes. For Stabilized Communities (excluding communities owned by joint
ventures), all occupied apartment homes are included in the calculation of
weighted average occupied apartment homes for each reporting period. For
communities in the initial lease-up phase, only apartment homes of communities
that are completed and occupied are included in the weighted average number of
occupied apartment homes calculation for each reporting period.
The analysis that follows compares the operating results of the
Company for the six months ended June 30, 1997 and 1996.
Net income increased $4,364,000 (38.0%) to $15,859,000 for the three
months ended June 30, 1997 compared to $11,495,000 for the comparable period of
the preceding year. Net income increased $7,935,000 (37.7%) to $28,972,000 for
the six months ended June 30, 1997 compared to $21,037,000 for the comparable
period of the preceding year. The primary reasons for these increases are
additional operating income from communities developed or acquired during 1997
and 1996, as well as growth in operating income from existing communities.
Rental income increased $11,046,000 (37.7%) to $40,375,000 for the
three months ended June 30, 1997 compared to $29,329,000 for the comparable
period of the preceding year. Rental income increased $20,604,000 (36.2%) to
$77,526,000 for the six months ended June 30, 1997 compared to $56,922,000 for
the comparable period of the preceding year. Of the increase for the six month
period, $19,037,000 was due to newly completed or acquired communities and
$1,567,000 was due to rental rate growth from Established Communities that were
owned or completed throughout the period.
Overall Portfolio - The $20,604,000 increase in rental income for the
six month period is primarily due to increases in the weighted average
number of occupied apartment homes as well as an increase in the
weighted average monthly rental income per occupied apartment home.
The weighted average number of occupied apartment homes increased from
10,312 apartment homes for the six months ended June 30, 1996 to
12,331 apartment homes for the six months ended June 30, 1997 as a
result of the development and acquisition of new communities. For the
three months ended June 30, 1997, the weighted average monthly revenue
per occupied apartment home increased $40 (4.5%) to $931 compared to
$891 for the comparable period of the preceding year. For the six
months ended June 30, 1997, the weighted average monthly revenue per
occupied apartment home increased $40 (4.5%) to $924 compared to $884
for the comparable period of the preceding year.
Established Communities - For the three months ended June 30, 1997,
the weighted average monthly revenue per occupied apartment home
increased $28 (3.2%) to $916 compared to $888 for the comparable
period of the preceding year. The average economic occupancy remained
unchanged at 96.5%. For the six months ended June 30, 1997, the
weighted average monthly revenue per occupied apartment home increased
$28 (3.2%) to $909 compared to $881 for the comparable period of the
preceding year. The average economic occupancy remained unchanged at
96.0%. Accordingly, rental revenue from Established Communities
increased $788,000 (3.2%) and $1,567,000 (3.2%) for the three and six
month period ended June 30, 1997, respectively, compared to the
comparable periods of the preceding year.
Management fees decreased $150,000 (38.1%) to $244,000 for the three
months ended June 30, 1997 compared to $394,000 for the comparable period of
the preceding year. These fees decreased $297,000 (37.3%) to $499,000 for the
six months ended June 30, 1997 compared to $796,000 for the comparable period
of the preceding year. These decreases are primarily due to a decline in the
number of apartment homes managed for third-party owners during 1997. These
declines are due to the sale and the cancellation of management contracts
11
14
of some third-party communities in 1996 as well as the acquisition of one
Current Community in the second quarter of 1996 and another Current Community
in the second quarter of 1997 that were managed by the Company for third-party
owners prior to their acquisitions.
Operating expenses increased $3,271,000 (29.1%) to $14,505,000 for the
three months ended June 30, 1997 compared to $11,234,000 for the comparable
period of the preceding year. These expenses increased $5,593,000 (25.2%) to
$27,761,000 for the six months ended June 30, 1997 compared to $22,168,000 for
the comparable period of the preceding year.
Overall Portfolio - The $5,593,000 increase for the six month period
is primarily due to the acquisition of new communities, as well as the
completion of Development Communities whereby maintenance, property
taxes, insurance and other costs are expensed as communities move from
the initial construction and lease-up phase to the stabilized
operating phase.
Established Communities - Operating expenses increased $93,000 (1.1%)
to $8,318,000 for the three months ended June 30, 1997 compared to
$8,225,000 for the comparable period of the preceding year. Operating
expenses increased $53,000 (.3%) to $16,538,000 for the six months
ended June 30, 1997 compared to $16,485,000 for the comparable period
of the preceding year. These increases were concentrated in the
marketing and insurance categories, offset by lower snow removal costs
as a result of the mild weather conditions throughout the Northeast
and Mid-Atlantic regions during the first quarter of 1997 as compared
to the severe winter weather experienced during the first quarter of
1996.
Interest expense increased $2,259,000 (135.8%) to $3,922,000 for the
three months ended June 30, 1997 compared to $1,663,000 for the comparable
period of the preceding year. Interest expense increased $3,393,000 (79.9%) to
$7,639,000 for the six months ended June 30, 1997 compared to $4,246,000 for
the comparable period of the preceding year. These increases are primarily
attributable to higher outstanding balances under the Company's Unsecured
Facilities in 1997 compared to 1996. In addition, the Company assumed
approximately $29,900,000 of conventional debt resulting from the acquisitions
of two communities in 1996 and completed the loan closings related to the
tax-exempt financing for the Avalon West and Avalon Fields communities in
December 1996 and April 1997, respectively. These increases were offset by
lower interest and credit enhancement costs in connection with the completion
of the tax-exempt, credit enhancement facility with the Federal National
Mortgage Association ("Fannie Mae") in the third quarter of 1996 and lower
pricing under the Unsecured Facilities.
Depreciation and amortization increased $1,923,000 (38.1%) to
$6,968,000 for the three months ended June 30, 1997 compared to $5,045,000 for
the comparable period of the preceding year. Depreciation and amortization
increased $3,828,000 (39.5%) to $13,527,000 for the six months ended June 30,
1997 compared to $9,699,000 for the comparable period of the preceding year.
These increases reflect additional depreciation expense for recently acquired
and developed communities, offset by lower amortization expense of deferred
financing costs due to the completion of the new credit enhancement facility
with Fannie Mae.
General and administrative expenses increased $203,000 (22.9%) to
$1,090,000 for the three months ended June 30, 1997 compared to $887,000 for
the comparable period of the preceding year. These expenses increased $349,000
(18.9%) to $2,199,000 for the six months ended June 30, 1997 compared to
$1,850,000 for the comparable period of the preceding year. These increases are
primarily due to higher telecommunication costs and staff additions related to
the implementation of the company-wide systems enhancement program, as well as
higher compensation expense under the restricted stock grant program. General
and administrative expenses as a percentage of total revenue, however,
decreased .4% to 2.8% for the six months ended June 30, 1997 compared to 3.2%
for the comparable period of the preceding year.
Equity in income of joint ventures increased $1,154,000 to $1,304,000
for the three months ended June 30, 1997 compared to $150,000 for the
comparable period of the preceding year. This income increased $2,030,000 to
$2,346,000 for the six months ended June 30, 1997 compared to $316,000 for the
comparable period of the preceding year. These increases are principally the
result of the non-recurring income from the
12
15
anticipated Avalon Grove joint venture in which the Company is allocated 100% of
the income prior to the formation of the joint venture.
Interest income increased $12,000 (5.8%) to $220,000 for the three
months ended June 30, 1997 compared to $208,000 for the comparable period of
the preceding year. Interest income increased $49,000 (11.0%) to $495,000 for
the six months ended June 30, 1997 compared to $446,000 for the comparable
period of the preceding year. These increases are primarily due to higher
average escrowed cash balances in 1997 compared to 1996.
Extraordinary item totaled $1,183,000 for the six months ended June
30, 1997 and reflects the write-off of unamortized deferred financing costs
associated with the early retirement of the $165 million unsecured credit
facility.
FUNDS FROM OPERATIONS
Management generally considers Funds from Operations ("FFO") to be an
appropriate measure of the operating performance of the Company. The Company
believes that in order to facilitate a clear understanding of the operating
results of the Company, FFO should be examined in conjunction with net income
as presented in the condensed consolidated financial statements included
elsewhere in this report. FFO is determined in accordance with a resolution
adopted by the Board of Governors of the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT"), and is defined as net income (loss)
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sale of property, plus
depreciation of real estate assets and after adjustments for unconsolidated
partnerships and joint ventures.
ANALYSIS OF FUNDS FROM OPERATIONS ($ in 000's)
----------------------------------------------
Three months ended Six months ended
----------------------------- --------------------------------
6-30-97 6-30-96 6-30-97 6-30-96
------------- -------------- -------------- -------------
NET INCOME $ 15,859 $ 11,495 $ 28,972 $ 21,037
Depreciation (real estate related) 6,550 4,426 12,688 8,464
Joint venture adjustment 89 80 170 159
Extraordinary item -- -- 1,183 --
Preferred stock dividends (4,914) (2,516) (9,828) (3,602)
------------- -------------- -------------- -------------
FUNDS FROM OPERATIONS $ 17,584 $ 13,485 $ 33,185 $ 26,058
============= ============== ============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING 35,791,985 30,715,884 34,635,347 30,481,694
============= ============== ============== =============
OTHER CAPITALIZED EXPENDITURES AND OTHER INFORMATION
Capital expenditures:
Community level (1) $ 841 $ 481 $ 1,280 $ 834
Corporate level (2) $ 210 $ 1,081 $ 473 $ 1,591
Loan principal amortization payments $ 321 $ 112 $ 642 $ 236
Capitalized deferred financing costs (3) $ 788 $ 345 $ 869 $ 459
-------------------
Footnotes to Analysis of Funds from Operations
(1) The Company expenses all recurring non-revenue generating community
expenditures, including carpet and appliance replacements. See
"Capitalization of Fixed Assets and Community Improvements."
(2) Represents the cost of new office equipment and computer costs related to
the implementation of a company-wide systems enhancement plan.
(3) Substantially all of the deferred financing costs incurred for the six
months ended June 30, 1997 relate to the costs incurred on the closing of
the Avalon Fields tax-exempt bonds and the closing of new the $175 million
unsecured credit facility.
13
16
CAPITALIZATION OF FIXED ASSETS AND COMMUNITY IMPROVEMENTS
The Company maintains a policy with respect to capital expenditures
that generally provides that only non-recurring expenditures are capitalized.
Improvements and upgrades are capitalized only if the item exceeds $15,000,
extends the useful life of the asset and is not related to making an apartment
home ready for the next resident. Under this policy, virtually all capitalized
costs are non-recurring, as recurring make ready costs are expensed as
incurred, including costs of carpet and appliance replacements, floor
coverings, interior painting and other redecorating costs. Purchases of
personal property (such as computers and furniture) are capitalized only if the
item is a new addition (i.e., not a replacement) and only if the item exceeds
$2,500. The application of these policies for the six months ended June 30,
1997 resulted in non-revenue, generating capitalized expenditures for
Stabilized Communities of approximately $96 per apartment home. For the six
months ended June 30, 1997, the Company charged to maintenance expense,
including carpet and appliance replacements, a total of approximately
$5,811,000 for Stabilized Communities or $437 per apartment home. Management
anticipates that capitalized costs per apartment home will gradually rise as
the Company's portfolio of communities matures. The table on the following page
is a summary of expenditures for both recurring maintenance costs (expensed)
and community upgrades (capitalized) for the six months ended June 30, 1997.
14
17
EXPENDITURES FOR COMMUNITY AND CORPORATE UPGRADES (CAPITALIZED) AND COMMUNITY
MAINTENANCE (EXPENSED)
(Dollars in thousands, excepts per home data)
YTD 1997 Capitalized Costs
---------------------------------------
Acquisitions, Non-Revenue YTD 1997
Construction Generating Caps Maintenance Expensed
Number Balance at Balance at and Revenue -------------------- ---------------------
Community of Homes 12-31-96 (1) 6-30-97 (1) Generating Costs Total Per Home Total Per Home
- --------------------------- -------- ------------ ------------ ---------------- --------- ---------- -------- ----------
STABILIZED
Avalon Watch 512 $ 28,340 $ 28,406 $ -- $ 66 $ 129 $ 203 $ 396
Avalon Pavilions 932 56,523 56,545 -- 22 24 276 296
Avalon Glen 238 30,077 30,100 -- 23 97 121 508
Avalon Walk I 430 34,505 34,524 2 17 40 138 321
Avalon Walk II 334 23,597 23,666 -- 69 207 114 341
Avalon View 288 17,773 17,773 -- -- -- 198 688
Avalon Park 372 19,717 19,815 -- 98 263 207 556
Avalon at Ballston -
Washington Towers 344 36,797 36,887 -- 90 262 155 451
Avalon Farm 306 17,332 17,368 -- 36 118 140 458
Avalon at Gayton 328 9,830 9,887 -- 57 174 155 473
Avalon at Hampton I 186 3,702 3,725 3 20 108 92 495
Avalon at Hampton II 231 8,144 8,185 -- 41 177 103 446
Avalon at Dulles 236 11,599 11,626 -- 27 114 140 593
Avalon Knoll 300 7,905 7,939 14 20 67 159 530
Avalon Lea 296 16,101 16,130 -- 29 98 153 517
Avalon at Fairway Hills I 192 9,368 9,396 -- 28 146 94 490
Avalon Ridge 432 25,030 25,148 12 106 245 210 486
Avalon at Symphony Glen 174 8,079 8,115 2 34 195 100 575
Avalon at Park Center 492 37,337 37,368 -- 31 63 201 409
4100 Mass. Avenue 308 34,879 34,897 15 3 10 177 575
Avalon Woods 268 8,235 8,319 -- 84 313 92 343
Avalon at Carter Lake 259 11,502 11,560 -- 58 224 157 606
Avalon Pointe 140 7,748 7,780 -- 32 229 87 621
Avalon Landing 158 9,261 9,282 -- 21 133 106 671
Avalon Birches 312 13,419 13,458 -- 39 125 107 343
Avalon at Lake Arbor 209 11,900 11,902 -- 2 10 141 675
Avalon at Decoverly 368 30,978 31,047 1 68 185 139 378
Avalon Summit 245 16,152 16,286 128 6 24 112 457
Avalon Towers 109 15,826 15,877 -- 51 468 103 945
Longwood Towers 250 16,620 16,623 -- 3 12 191 764
Avalon Fields 192 14,262 14,298 -- 36 188 73 380
Avalon West 120 10,624 10,649 12 13 108 56 467
Avalon Chase 360 23,615 23,626 -- 11 31 189 525
Avalon Pines 174 8,578 8,582 -- 4 23 52 299
Avalon at Fairway Hills II 527 33,807 33,831 17 7 13 223 423
Avalon at Boulders 284 16,038 16,057 -- 19 67 130 458
AutumnWoods 420 30,474 30,498 19 5 12 149 355
Avalon Run East 206 16,002 16,021 19 -- -- 47 228
Avalon Station 223 11,838 11,940 98 4 18 81 363
Avalon Cove 504 85,831 89,539 3,708 -- -- 104 206
Avalon Crossing 132 13,387 13,710 323 -- -- 59 447
Avalon Springs 102 -- 15,493 15,493 -- -- 27 265
Avalon at Ballston -
Vermont/Quincy (2) 454 -- 46,702 46,702 -- -- 223 491
Avalon at Center Place (2) 225 -- 26,426 26,426 -- -- 26 116
Avalon at Providence Park (2) 140 -- 11,139 11,139 -- -- 1 7
-------- ------------ ------------ ---------------- --------- ---------- -------- ----------
13,312 842,732 948,145 104,133 1,280 96 5,811 437
-------- ------------ ------------ ---------------- --------- ---------- -------- ----------
NEW DEVELOPMENTS 3,362 174,188 239,394 65,206 -- -- 80 N/A
OTHER
Avalon at Lexington 198 14,117 14,325 208(3) -- -- 98 495
Longwood Towers - Renovation -- 6,829 11,796 4,967(4) -- -- -- --
Avalon Green 105 12,294 12,397 103 -- -- 93 886
Avalon Arbor (5) 302 27,822 28,130 -- 308 N/A 167 553
Corporate Level Expenditures -- 3,924 4,397 -- 473 N/A -- --
-------- ------------ ------------ ---------------- --------- ---------- -------- ----------
Grand Total 17,279(6) $1,081,906 $1,258,584 N/A $2,061 N/A $6,249 N/A
======== ============ ============ ================ ========= ========== ======== ==========
- ------------------------
(1) Costs are presented in accordance with generally accepted accounting
principles ("GAAP") and exclude the step-up in basis attributed to
continuing investors.
(2) Acquired in 1997.
(3) Payment of contingent land cost to land seller based on operating results.
This is the complete and final contingent payment due under the land
purchase agreement.
(4) Represents renovation costs incurred.
(5) Ownership through ownership of the Avalon Arbor mortgage note. See Note 3
to the unaudited condensed consolidated financial statements. Increases in
capitalized value relate primarily to accrued interest and do not reflect
capitalized community upgrades.
(6) Excludes Falkland Chase and Avalon Run, 876 apartment homes owned by joint
ventures in which the Company holds a 50% interest and 49% interest,
respectively.
15
18
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. A primary source of liquidity to the Company is cash flows
from operations. Operating cash flows have historically been determined by the
number of apartment homes, rental rates and the Company's expenses with respect
to such apartment homes. Cash flows used in investing activities and provided
by financing activities have historically been dependent on the number of
apartment homes under active development and construction or that were acquired
during any given period.
Cash and cash equivalents increased $639,000 from $2,113,000 at June
30, 1996 to $2,752,000 at June 30, 1997 due to an increase in operating cash
flow and an increase in financing activities, offset by an increase in cash
used by investing activities (mainly attributable to an increase in the number
of newly developed and acquired communities).
Net cash provided by operating activities increased by
$11,410,000 from $31,305,000 at June 30, 1996 to $42,715,000 at June
30, 1997 primarily due to an increase in operating income from newly
developed and acquired communities and Established Communities.
Cash used in investing activities increased by $50,597,000
from $123,159,000 at June 30, 1996 to $173,756,000 at June 30, 1997
primarily due to an increase in the number of apartment homes under
development from an average of 2,664 in the first six months of 1996
to 3,362 in the first six months of 1997.
Net cash provided by financing activities increased by
$27,386,000 from $92,166,000 at June 30, 1996 to $119,552,000 at June
30, 1997 primarily due to the increased borrowings under the Unsecured
Facilities, offset by an increase in dividends paid.
The Company regularly reviews short-term liquidity needs and the
adequacy of Funds from Operations and other expected liquidity sources to meet
these needs. The Company's primary short-term liquidity needs are to fund
normal recurring operating expenses, debt service payments and the minimum
dividend payment required to maintain the Company's REIT qualification under
the Internal Revenue Code. Management anticipates that these needs will be
fully funded from cash flows provided by operating activities. Normal recurring
expenditures for maintenance and repairs (including carpet and appliance
replacements) are funded from the operating cash flows of Stabilized
Communities and are expensed as incurred. Major upgrades or community
improvements are capitalized and depreciated over the expected economic useful
life of the item only if the expenditure exceeds $15,000 per occurrence and
only if the expenditure extends the economic useful life of the community.
Purchases of personal property (such as computers and furniture) are
capitalized only if the item is a new addition (i.e., not a replacement) and
only if the item exceeds $2,500. The application of these policies for the six
month period ended June 30, 1997 resulted in non-revenue, generating
capitalized expenditures for Stabilized Communities of $96 per apartment home.
Permanent mortgage indebtedness will require balloon payments coming
due over the years 1997 to 2002, including $24,145,000 in November 1997 and
$100,000,000 in 2002. Additionally, an aggregate of $44,655,000 principal
amount of bonds will require remarketing or have credit enhancements that will
mature in the fourth quarter of 1997. Certain of these payments may be
accelerated upon the termination of credit enhancements if such credit
enhancements are not renewed or replaced. The Company believes that it will be
able to successfully remarket these bonds and obtain renewal or replacement
credit enhancements. Since Management anticipates that only a small portion of
the principal of such indebtedness will be repaid prior to maturity and the
Company may not have funds on hand sufficient to repay such indebtedness, it
may be necessary for the Company to refinance this debt. Such refinancing could
be accomplished through additional debt financing, which may be collateralized
by mortgages on individual communities or groups of communities, by
uncollateralized private or public debt offerings or by additional equity
offerings. There can be no assurance that such additional debt financing or
debt offerings will be available on terms satisfactory to the Company.
Capital Resources. To sustain the Company's active development and
acquisitions program, continuous access to the capital markets is required.
Management intends to match the long-term nature of its real estate
16
19
assets with long-term cost effective capital. The Company has demonstrated
regular and continuous access to the capital markets since its initial public
offering, raising approximately $774.2 million and over $487.9 million in the
last 18 months. Management follows a focused strategy to help ensure
uninterrupted access to capital. This strategy includes:
1. Hire, train and retain associates with a strong resident service focus,
which should lead to higher rents, lower turnover and reduced operating
costs;
2. Manage, acquire and develop institutional quality communities with in-fill
locations that should provide consistent, sustained earnings growth;
3. Operate in markets with growing demand (as measured by household formation
and job growth) and high barriers to entry. These characteristics combine
to provide a favorable supply-demand balance, which the Company believes
will create a favorable environment for future rental rate growth while
protecting existing and new communities from new supply. This strategy is
expected to result in a high level of quality to the revenue stream;
4. Maintain a conservative capital structure largely comprised of equity and
with modest, cost-effective leverage. Secured debt will generally be
avoided and used primarily to secure low cost, tax-exempt debt. Such a
structure should promote an environment for ratings upgrades that can lead
to a lower cost of capital;
5. Timely, accurate and detailed disclosures to the investment community; and
6. Conservative accounting practices that provide a high level of quality to
reported earnings.
Management believes that these strategies provide a disciplined
approach to capital access that is expected to ensure that capital resources
are available to fund portfolio growth.
The following is a discussion of specific capital transactions,
arrangements and agreements that are important to the capital resources of the
Company.
Unsecured Facilities
On March 31, 1997, the Company obtained a new Unsecured Facility for
$175,000,000. This new facility replaced the previous $165,000,000 unsecured
credit facility. The new Unsecured Facility is provided by a consortium of six
banks and is subject to an annual facility fee of $262,500. The Unsecured
Facility expires in March 2000. Borrowings under the new facility bear an
interest rate of .80% over LIBOR. A competitive bid option is available for up
to $75 million which may result in lower pricing if market conditions allow. At
June 30, 1997, $64,500,000 was borrowed, $15,536,000 was used to provide
letters of credit and $94,964,000 was available for borrowing under the
Unsecured Facility. The Company will use borrowings under the Unsecured
Facility for capital expenditures, acquisitions of developed or undeveloped
communities, construction, development and renovation costs, credit enhancement
for tax-exempt bonds and for working capital purposes.
The Company's Supplemental Unsecured Facility is provided by First
Union National Bank in the amount of $50,000,000 and is subject to an annual
facility fee of $75,000. The Supplemental Unsecured Facility expires in March
2000 and bears an interest rate of LIBOR plus .80%. At June 30, 1997,
$2,167,000 of available capacity was used to provide letters of credit and
$7,000,000 was borrowed under the Supplemental Unsecured Facility. Accordingly,
the balance that remains available at June 30, 1997 to be drawn under the
Supplemental Unsecured Facility is $40,833,000. See Financing Commitments on
the following page for modifications to the Supplemental Credit Facility.
Interest Rate Protection Agreements
The Company is not a party to any long-term interest rate agreements.
The Company intends, however, to evaluate the need for long-term interest rate
protection agreements as interest rate market conditions dictate and has
engaged a consultant to assist in managing the Company's interest rate risks
and exposure.
17
20
Financing Commitments/Transactions Completed
On April 7, 1997, pricing on the Company's Supplemental Unsecured
Facility was reduced to .80% over LIBOR. Also, on May 30, 1997, the
Supplemental Unsecured Facility was amended and restated to provide for an
increase in capacity to $50,000,000, an extension of the expiration date to
March 31, 2000 and the introduction of a competitive bid option.
On April 17, 1997, the Company completed a direct placement of
2,740,000 shares of its Common Stock to an institutional investor under its
existing shelf registration statement at a purchase price of $27.375 per share.
Net cash proceeds of approximately $73,500,000 were used to retire indebtedness
under the Company's Unsecured Facilities.
On April 28, 1997, the Company completed the loan closing related to
the tax-exempt financing on the Avalon Fields community. The Community
Development Administration of Maryland issued approximately $12,100,000 of
thirty-year fixed-rate bonds at an all-in rate of 7.57%. The net cash proceeds
from the loan closing (approximately $11,600,000 million) were used to repay
amounts outstanding under the Company's Unsecured Facilities.
On July 1, 1997, the Company completed a public offering of 2,163,000
shares of common stock at a purchase price of $28.0625 per share. The net cash
proceeds from the offering of approximately $57,671,000 were used primarily to
repay amounts outstanding under the Unsecured Facilities.
Future Financing Needs
Substantially all of the capital expenditures to complete the
communities currently under construction will be funded from the Unsecured
Facilities and/or issuance of debt or equity securities. Except for Longwood
Towers, the Company has no present plans for any major capital improvements to
any of the Current Communities. The renovation of Longwood Towers is being
funded by advances under the Unsecured Facilities, operating cash flow or other
financing sources over the next year. Management expects to continue to fund
deferred development costs related to future developments from Funds from
Operations and advances under the Unsecured Facilities. The Company believes
that these sources of capital are adequate to take each of the proposed
communities to the point in the development cycle where construction can
commence.
Management anticipates that available borrowing capacity under the
Unsecured Facilities and Funds from Operations will be adequate to meet future
expenditures required to commence construction of each of the Development
Rights. In addition, the Company currently anticipates funding construction of
some (but not all) of the Development Rights under the expected remaining
capacity of the Unsecured Facilities. However, before the construction of a
Development Right commences, the Company intends, if necessary, to issue
additional equity or debt securities, arrange additional capacity under the
Unsecured Facilities or future credit facilities or obtain additional
construction loan commitments not currently in place to ensure that adequate
liquidity sources are in place to fund the construction of a Development Right,
although no assurance can be given in this regard.
The table on the following page summarizes debt maturities for the
next five years (excluding the Unsecured Facilities):
18
21
AVALON PROPERTIES, INC.
DEBT MATURITY SCHEDULE
(Dollars in thousands)
Balance Outstanding at
---------------------------
All-in Maturity
Community Interest Rate Date 12-31-96 06-30-97
- --------------------------------------------- -------------- ------------ ------------ -------------
Tax-Exempt Bonds:
Fixed Rate
* Avalon Lea (Custodial Receipts) (1) 5.71% Nov-07 $ 16,782 $ 16,814
* Avalon Ridge (Custodial Receipts) (1) 5.69% Nov-07 26,724 26,779
* Avalon at Dulles 7.04% Jul-24 12,360 12,360
* Avalon at Hampton II 7.04% Jul-24 11,550 11,550
* Avalon at Symphony Glen 7.06% Jul-24 9,780 9,780
* Avalon View 7.55% Aug-24 19,487 19,415
* Avalon at Lexington 6.56% Feb-25 15,284 15,179
* Avalon Knoll 6.95% Jun-26 14,070 13,995
* Avalon Landing 6.85% Jun-26 6,969 6,931
* Avalon West 7.73% Dec-36 8,771 8,749
* Avalon Fields 7.57% May-27 -- 12,079
--------- ---------
141,777 153,631
Variable Rate
* Avalon at Fairway Hills I Jun-26 11,500 11,500
* Avalon at Hampton I Jun-26 8,060 8,060
* Avalon Pointe Jun-26 6,387 6,387
--------- ---------
25,947 25,947
Conventional Loans:
Fixed Rate
* AutumnWoods 9.25% Nov-97 24,335 24,145
Unsecured Senior Notes 7.375% Sep-02 99,869 99,880
* Avalon Pines 8.00% Dec-03 5,529 5,490
* Avalon Walk II 8.93% Nov-04 13,149 13,057
--------- ---------
142,882 142,572
Variable Rate-None -- --
--------- ---------
Total notes payable - excluding Unsecured Facilities $310,606 $322,150
========= =========
Total Maturities
---------------------------------------------------------------
Balance
Community of 1997 1998 1999 2000 2001 Thereafter
- ---------------------------------------------- ----------- ------- -------- --------- -------- -----------
Tax-Exempt Bonds:
Fixed Rate
* Avalon Lea (Custodial Receipts) (1) $ -- $ -- $ -- $ -- $ -- $ 16,814
* Avalon Ridge (Custodial Receipts) (1) -- -- -- -- -- 26,779
* Avalon at Dulles -- -- -- -- -- 12,360
* Avalon at Hampton II -- -- -- -- -- 11,550
* Avalon at Symphony Glen -- -- -- -- -- 9,780
* Avalon View 101 230 290 330 350 18,114
* Avalon at Lexington 108 226 240 255 271 14,079
* Avalon Knoll 77 163 175 187 200 13,193
* Avalon Landing 39 83 89 95 101 6,524
* Avalon West 22 46 50 53 57 8,521
* Avalon Fields 70 127 137 147 157 11,441
-------- ------ ------- ------- ------- ---------
417 875 981 1,067 1,136 149,155
Variable Rate
* Avalon at Fairway Hills I -- -- -- -- -- 11,500
* Avalon at Hampton I -- -- -- -- -- 8,060
* Avalon Pointe -- -- -- -- -- 6,387
-------- ------ ------- ------- ------- ---------
-- -- -- -- -- 25,947
Conventional Loans:
Fixed Rate
* AutumnWoods 24,145 -- -- -- -- --
Unsecured Senior Notes -- -- -- -- -- 99,880
* Avalon Pines 56 103 112 121 131 4,967
* Avalon Walk II 93 202 221 241 264 12,036
-------- ------ ------- ------- ------- ---------
24,294 305 333 362 395 116,883
Variable Rate-None -- -- -- -- -- --
-------- ------ ------- ------- ------- ---------
Total notes payable - excluding Unsecured Facilities $24,711 $1,180 $1,314 $1,429 $1,531 $291,985
======== ====== ======= ======= ======= =========
(1) Subject to remarketing November 1, 1997.
* Indicates loan is collateralized by the community.
19
22
BUSINESS CONDITIONS; INFLATION
The Company's principal markets are characterized by high barriers to
entry and restrictive zoning and it often takes years to obtain entitlements to
build an apartment community. For this reason, little new rental product has
been added in recent years. For the markets north of Maryland, Management is
not aware of any significant level of planned apartment construction starts.
For the Washington, D.C. metropolitan area, permitting activity has increased,
with 8,000 apartment homes in planning for delivery over the next 36-month
period. Estimated absorption during this period totals 9,000 apartment homes,
which would create a supply-demand balance that would be favorable for owners
of multifamily apartment communities.
At June 30, 1997, Management had positioned the Company's portfolio of
Established Communities, excluding communities owned by joint ventures, to a
physical occupancy level of 97.2% and achieved an average economic occupancy of
96.0% for the six months ended June 30, 1997. Average economic occupancy for
the portfolio for the six months ended June 30, 1996 was 96.0%. This continued
high occupancy was achieved through aggressive marketing efforts combined with
limited and targeted pricing adjustments. This positioning has resulted in
overall growth in rental revenue from Established Communities between periods.
It is Management's strategy to maximize total rental revenue through management
of rental rates and occupancy levels. If market and economic conditions change,
Management may adopt a strategy of maximizing rental rates, which could lead to
lower occupancy levels, if Management believes that this strategy will maximize
rental revenue. Given the currently high occupancy level of the portfolio,
Management anticipates that, for the foreseeable future, any rental revenue and
net income gains from currently owned and Established Communities would be
achieved primarily through higher rental rates and enhanced operating cost
leverage provided by high occupancy, rather than through continued occupancy
gains.
Substantially all of the leases at the Current Communities are for a
term of one year or less, which may enable the Company to realize increased
rents upon renewal of existing leases or commencement of new leases. Such
short-term leases generally minimize the risk to the Company of the adverse
effects of inflation, although as a general rule these leases permit residents
to leave at the end of the lease term without penalty. The Company's current
policy is to permit residents to terminate leases upon 60-days written notice
and payment of one month's rent as compensation for early termination.
Short-term leases combined with relatively consistent demand allow rents, and
therefore cash flow from the Company's portfolio of apartments, to provide an
attractive inflation hedge.
DEVELOPMENT COMMUNITIES
At June 30, 1997, 10 Development Communities were under construction.
The total capitalized cost of these Development Communities, when completed, is
currently expected to be approximately $373.0 million. The Company intends to
periodically update the projections in the table on the following page to the
extent Management believes there may be or has been a material change in these
projections on an aggregate basis. There can be no assurance that the Company
will complete the Development Communities, that the Company's budgeted costs,
leasing, start dates, completion dates, occupancy or estimates of "EBITDA as %
of Total Budgeted Cost" will be realized or that future developments will
realize comparable returns.
In accordance with GAAP, the Company capitalizes interest expense
during construction until each building obtains a certificate of occupancy,
thereafter, interest for each completed building is expensed. Capitalized
interest for the three months ended June 30, 1997 and 1996 totaled $2,505,000
and $3,482,000, respectively. Capitalized interest for the six months ended
June 30, 1997 and 1996 totaled $5,016,000 and $6,314,000, respectively.
The following page presents a summary of Development Communities:
20
23
DEVELOPMENT COMMUNITIES SUMMARY
NUMBER OF BUDGETED ESTIMATED ESTIMATED EBITDA AS %
APARTMENT COST CONSTRUCTION INITIAL COMPLETION STABILIZATION OF TOTAL
HOMES ($ MILLIONS) START OCCUPANCY DATE DATE(1) BUDGETED COST(2)
----------- -------------- ------------- ----------- ------------ ------------- ----------------
Conventionally Financed
- -----------------------
Avalon Gates
Trumbull, CT 340 $ 35.0 Q3 1994 Q2 1996 Q3 1997 Q4 1997 9.8%
Avalon Grove (3)
Stamford, CT 402 52.5 Q1 1995 Q3 1996 Q3 1997 Q4 1997 12.2%
Avalon Commons
Smithtown, NY 312 31.8 Q1 1996 Q1 1997 Q3 1997 Q4 1997 10.2%
Avalon Crescent
Tysons Corner, VA 558 57.3 Q1 1996 Q4 1996 Q4 1997 Q1 1998 10.8%
Avalon Gardens
Nanuet, NY 504 53.1 Q3 1996 Q3 1997 Q4 1998 Q1 1999 10.8%
Avalon Court
Melville, NY 154 17.8 Q4 1996 Q2 1997 Q1 1998 Q2 1998 10.7%
Avalon at Fair Lakes
Fairfax, VA 234 23.2 Q1 1997 Q1 1998 Q3 1998 Q4 1998 10.0%
Avalon at Faxon Park
Quincy, MA 171 15.8 Q1 1997 Q1 1998 Q3 1998 Q1 1999 11.0%
Avalon Willow
Mamaroneck, NY 227 41.8 Q2 1997 Q3 1998 Q1 1999 Q2 1999 9.2%
Avalon at Cameron Court
Alexandria, VA 460 44.7 Q2 1997 Q1 1998 Q4 1998 Q1 1999 10.3%
------------ ------------- ----------------
3,362 $ 373.0 10.6%
============ ============= ================
------------
(1) Stabilized occupancy is defined as the first full quarter of 94% or
greater occupancy.
(2) Projected EBITDA represents gross potential earnings projected to be
achieved based on current rents prevailing in the respective community's
local market (without adjustment for potential growth factors) and before
interest, income taxes, depreciation, amortization and extraordinary
items, minus (a) economic vacancy and (b) projected stabilized operating
expenses. Total budgeted cost includes all capitalized costs projected to
be incurred to develop the respective Development Community, including
land acquisition costs, construction costs, real estate taxes, capitalized
interest and loan fees, permits, professional fees, allocated development
overhead and other regulatory fees.
(3) Currently anticipated to be held by a joint venture.
21
24
DEVELOPMENT RIGHTS
The Company is considering the development of 18 new apartment
communities. The status of these Development Rights range from land owned or
under contract for which design and architectural planning has just commenced
to land under contract or owned by the Company with completed site plans and
drawings where construction can commence almost immediately. There can be no
assurance that the Company will succeed in obtaining zoning and other necessary
governmental approvals or the financing required to develop these communities,
or that the Company will decide to develop any particular community. Further,
there can be no assurance that construction of any particular community will be
undertaken or, if undertaken, will begin at the expected times assumed in the
financial projections or be completed at the total budgeted cost. Although
there is no assurance that all or any of these communities will proceed to
development, the successful completion of all of these communities would
ultimately add approximately 5,114 institutional-quality apartment homes to the
Company's portfolio. At June 30, 1997, the cumulative capitalized costs
incurred in pursuit of the 18 Development Rights were approximately $13.6
million, including the capitalized cost of $6.4 million related to the purchase
of land in New Canaan, Connecticut. Many of these apartment homes will offer
features like those offered by the communities currently owned by the Company.
The 18 Development Rights that the Company is currently pursuing are summarized
below.
DEVELOPMENT RIGHTS SUMMARY
TOTAL
ESTIMATED BUDGETED
NUMBER OF COST
LOCATION HOMES ($ MILLIONS)
------------------------ ----------- --------------
1. Freehold, NJ 452 $ 38.0
2. New Canaan, CT(1) 104 24.4
3. Greenburgh - II, NY 500 71.2
4. Greenburgh - III, NY 266 41.8
5. Darien, CT 172 21.0
6. Fort Lee, NJ 351 53.7
7. Peabody, MA 434 35.9
8. Hull, MA 162 14.8
9. Jersey City - II, NJ 268 48.3
10. New Rochelle, NY 375 57.3
11. Melville - II, NY 356 36.3
12. Wilmington, MA 204 19.3
13. Gaithersburg - II, MD 96 8.9
14. Bronxville, NY (1) 110 20.1
15. Parsippany, NJ 460 63.2
16. Danbury, CT 268 24.4
17. Yonkers, NY 256 33.7
18. Florham Park, NJ 280 37.9
----------- --------------
Total 5,114 $ 650.2
=========== ==============
(1) Currently anticipated that the land seller will retain a minority limited
partnership interest.
22
25
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1996, Procida Construction Corporation, the original
contractor selected to build Avalon Cove, notified the Company that it was not
able to complete the contract within the guaranteed maximum price and
subsequently defaulted on its contractual obligations. In April 1996, the
Company filed a demand for arbitration with the American Arbitration
Association in New York against Procida Construction Corporation to recover any
excess over the original guaranteed maximum price contract and instituted suit
in the U.S. District Court to compel arbitration. Procida Construction has
since filed Chapter 11 Bankruptcy, and consequently no assurance can be
provided that collection efforts will be successful. Procida Construction has
an unspecified claim against Avalon Properties, Inc. arising out of its
termination. Management believes this claim is without merit. However, should
Procida Construction prevail, Management believes that the cost of this claim
would not have a material adverse impact on the financial condition or results
of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
The Annual Meeting of Stockholders of Avalon Properties, Inc. was held
on May 6, 1997, at which meeting each of the five Directors then serving and
previously nominated for election as a Director and a new nominee for election
as a Director were elected to serve until the 1998 Annual Meeting of
Stockholders and until their respective successors shall be duly elected and
qualified. Of 33,534,789 shares outstanding and eligible to vote at the Annual
Meeting of Stockholders, 28,468,202 shares were present in person or by proxy.
Of the votes cast, 28,446,055 were cast in favor of the reelection of Richard
L. Michaux and authority was withheld as to 22,147 shares; 28,446,546 votes
were cast in favor of the reelection of Charles H. Berman and authority was
withheld as to 21,656 shares; 28,451,755 votes were cast in favor of the
reelection of Michael A. Futterman and authority was withheld as to 16,447
shares; 28,451,755 votes were cast in favor of the reelection of Christopher B.
Leinberger and authority was withheld as to 16,447 shares; 28,451,755 votes
were cast in favor of the election of Richard W. Miller and authority was
withheld as to 16,447 shares; and 28,452,246 votes were cast in favor of the
reelection of Allen D. Schuster and authority was withheld as to 15,956 shares.
Certain amendments to the Avalon Properties, Inc. 1995 Amended and
Restated Equity Incentive Plan were approved by the Company's stockholders at
the Annual Meeting of Stockholders by the affirmative vote of 21,196,063
shares; 4,994,238 shares were voted against, 2,254,488 shares were broker no
votes and 23,413 shares abstained from voting.
ITEM 5. OTHER INFORMATION
On April 17, 1997, the Company completed a direct placement of
2,740,000 shares of its Common Stock to an institutional investor under its
existing shelf registration statement at a purchase price of $27.375 per share.
Net cash proceeds of approximately $73,500,000 were used to retire indebtedness
under the Company's Unsecured Facilities.
On July 1, 1997, the Company completed a public offering of 2,163,000
shares of common stock at a purchase price of $28.0625 per share. The net cash
proceeds from the offering of approximately $57,671,000 were used primarily to
repay amounts outstanding under the Company's Unsecured Facilities.
23
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Description
10.14 Amended and Restated Revolving Credit
Agreement dated as of May 30, 1997
27.1 Financial Data Schedule
b) No reports of Form 8-K have been filed by the Company for the
period covered by this report.
24
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AVALON PROPERTIES, INC.
Date: August 12, 1997 By /s/ RICHARD L. MICHAUX
--------------------------------------------
Richard L. Michaux, Chairman of the Board,
Chief Executive Officer and
Director (Principal Executive Officer)
Date: August 12, 1997 By /s/ THOMAS J. SARGEANT
--------------------------------------------
Thomas J. Sargeant, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
25