- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 0-22411
SUMMIT PROPERTIES PARTNERSHIP, L.P.
(Exact name of registrant as specified in its charter)
---------------
DELAWARE 56-1857809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
212 SOUTH TRYON STREET
SUITE 500
CHARLOTTE, NORTH CAROLINA 28281
(Address of principal executive offices) (zip code)
(704) 334-9905
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check 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 [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUMMIT PROPERTIES PARTNERSHIP, L.P.
INDEX
PAGE
--
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 (Unaudited) ........ 3
Consolidated Statements of Earnings for the three months ended March 31, 1999 and 1998
(Unaudited) ............................................................................... 4
Consolidated Statement of Partners' Equity for the three months ended March 31, 1999
(Unaudited) ............................................................................... 5
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998
(Unaudited) ............................................................................... 6
Notes to Consolidated Financial Statements ................................................ 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 13
Item 3 Quantitative and Qualitative Disclosure about Market Risk ................................. 26
PART II OTHER INFORMATION
Item 2 Changes in Securities ..................................................................... 27
Item 6 Exhibits and Reports on Form 8-K .......................................................... 27
Signatures ................................................................................ 28
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMIT PROPERTIES PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
Real estate assets:
Land and land improvements ........................................... $ 177,712 $ 169,374
Buildings and improvements ........................................... 876,589 836,054
Furniture, fixtures and equipment .................................... 67,485 63,963
---------- ----------
1,121,786 1,069,391
Less: accumulated depreciation ....................................... (123,354) (115,128)
---------- ----------
Operating real estate assets ....................................... 998,432 954,263
Construction in progress ............................................. 120,778 137,145
---------- ----------
Net real estate assets ............................................. 1,119,210 1,091,408
Cash and cash equivalents ............................................. 3,473 2,837
Restricted cash ....................................................... 68,898 91,981
Deferred financing costs, net ......................................... 7,494 7,538
Other assets .......................................................... 4,378 5,303
---------- ----------
Total assets .......................................................... $1,203,453 $1,199,067
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Notes payable ........................................................ $ 741,966 $ 726,103
Accrued interest payable ............................................. 4,943 6,806
Accounts payable and accrued expenses ................................ 18,886 32,745
Distributions payable ................................................ 13,728 12,713
Security deposits and prepaid rents .................................. 4,467 4,188
---------- ----------
Total liabilities .................................................. 783,990 782,555
---------- ----------
Commitments
Partners' equity:
Partnership units issued and outstanding 32,881,933 and 32,242,074
General partner -- outstanding 328,819 and 322,421 ................... 5,814 4,895
Limited partners -- outstanding 32,553,114 and 31,919,653 ............ 413,649 411,617
---------- ----------
419,463 416,512
---------- ----------
Total liabilities and partners' equity ................................ $1,203,453 $1,199,067
========== ==========
See notes to consolidated financial statements.
3
SUMMIT PROPERTIES PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
-------------- --------------
Revenues:
Rental ............................................... $ 39,813 $ 31,450
Other property income ................................ 2,242 1,616
Interest ............................................. 1,035 98
Other income ......................................... 59 73
----------- ----------
Total revenues .................................... 43,149 33,237
----------- ----------
Expenses:
Property operating and maintenance:
Personnel .......................................... 3,074 2,429
Advertising and promotion .......................... 607 511
Utilities .......................................... 2,066 1,722
Building repairs and maintenance ................... 1,964 2,073
Real estate taxes and insurance .................... 4,478 3,469
Depreciation ....................................... 8,253 6,540
Property supervision ............................... 988 799
Other operating expenses ........................... 819 631
----------- ----------
22,249 18,174
Interest ............................................. 10,497 7,298
General and administrative ........................... 1,080 801
Loss in equity investments:
Summit Management Company .......................... 316 72
Real estate joint venture .......................... 8 --
----------- ----------
Total expenses .................................... 34,150 26,345
----------- ----------
Income before extraordinary items ..................... 8,999 6,892
Extraordinary items ................................... -- (185)
----------- ----------
Net income ............................................ 8,999 6,707
Net income allocated to general partner ............... (90) (67)
=========== ==========
Net income allocated to limited partners .............. $ 8,909 $ 6,640
=========== ==========
Per unit data:
Income before extraordinary items -- basic ........... $ 0.27 $ 0.25
=========== ==========
Income before extraordinary items -- diluted ......... $ 0.27 $ 0.24
=========== ==========
Extraordinary items -- basic and diluted ............. -- $ 0.01)
=========== ==========
Net income -- basic and diluted ...................... $ 0.27 $ 0.24
=========== ==========
Distributions declared ............................... $ 0.42 $ 0.41
=========== ==========
Weighted average units -- basic ...................... 32,763,936 28,118,113
=========== ==========
Weighted average units -- diluted .................... 32,769,514 28,147,380
=========== ==========
See notes to consolidated financial statements.
4
SUMMIT PROPERTIES PARTNERSHIP, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
GENERAL LIMITED
PARTNER PARTNER TOTAL
--------- ----------- -----------
Balance, December 31, 1998 ........................... $4,895 $ 411,617 $ 416,512
Distributions ....................................... (139) (13,776) (13,915)
Contributions from Summit Properties related to:
Proceeds from dividend and stock purchase plans ... 989 8,899 9,888
Exercise of stock options ......................... -- 1 1
Amortization of restricted stock grants ........... 1 135 136
Issuance of employee notes .......................... (22) (2,136) (2,158)
Net income .......................................... 90 8,909 8,999
------ --------- ---------
Balance, March 31, 1999 .............................. $5,814 $ 413,649 $ 419,463
====== ========= =========
See notes to consolidated financial statements.
5
SUMMIT PROPERTIES PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Net income .......................................................................... $ 8,999 $ 6,707
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary items ............................................................... -- 185
Loss on equity method investments ................................................. 324 72
Depreciation and amortization ..................................................... 8,720 6,930
Decrease (increase) in restricted cash ............................................ 625 (127)
Decrease in other assets .......................................................... 534 137
Decrease in accrued interest payable .............................................. (1,863) (1,912)
Increase (decrease) in accounts payable and accrued expenses ...................... (3,217) 1,732
Increase in security deposits and prepaid rents ................................... 279 436
--------- ---------
Net cash provided by operating activities ........................................ 14,401 14,160
--------- ---------
Cash flows from investing activities:
Construction of real estate assets, net of payables ................................. (33,483) (26,595)
Proceeds from disposal of Communities ............................................... 22,458 --
Purchase of Communities ............................................................. -- (24,494)
Capitalized interest ................................................................ (1,768) (1,134)
Recurring capital expenditures ...................................................... (1,039) (843)
Non-recurring capital expenditures, net of payables ................................. (891) (1,245)
--------- ---------
Net cash used in investing activities ............................................ (14,723) (54,311)
--------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit ....................................... (7,500) 51,359
Net borrowings on unsecured bonds ................................................... 24,749 --
Repayment of mortgage debt .......................................................... (1,277) (12,941)
Repayments of tax exempt bonds ...................................................... (360) (305)
Distributions to unitholders ........................................................ (12,911) (11,097)
Increase in employee notes .......................................................... (2,158) (902)
Contributions from Summit Properties related to:
Proceeds from dividend and stock purchase plans ................................... 9,888 15,808
Decrease in advance proceeds from direct stock purchase plan ...................... (9,474) (1,500)
Exercise of stock options ......................................................... 1 499
--------- ---------
Net cash provided by financing activities ........................................ 958 40,921
--------- ---------
Net increase in cash and cash equivalents ............................................ 636 770
Cash and cash equivalents, beginning of period ....................................... 2,837 3,563
--------- ---------
Cash and cash equivalents, end of period ............................................. $ 3,473 $ 4,333
========= =========
Supplemental disclosure of cash flow information -- Cash paid for interest, net of
capitalized interest ................................................................ $ 12,117 $ 8,900
========= =========
See notes to consolidated financial statements.
6
SUMMIT PROPERTIES PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by the
management of Summit Properties Partnership, L.P. (the "Operating Partnership")
in accordance with generally accepted accounting principles for interim
financial information and in conformity with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of operations
for the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the full year. These financial statements
should be read in conjunction with the Operating Partnership's December 31,
1998 audited financial statements and notes thereto included in the Operating
Partnership's Annual Report on Form 10-K.
The Operating Partnership conducts the business of developing, acquiring
and managing multi-family apartment communities for Summit Properties Inc.
("Summit Properties"). Summit Properties is the sole general partner and
majority owner of the Operating Partnership. Summit Properties is a
self-administered and self-managed equity real estate investment trust
("REIT").
COMPREHENSIVE INCOME -- Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" (FAS 130), presents standards for the
reporting and display of comprehensive income and its components. Besides net
income, FAS 130 requires the reporting of other comprehensive income, defined
as revenues, expenses, gains and losses that are not included in net income
under generally accepted accounting principles. The Operating Partnership has
no items of other comprehensive income in the periods presented.
DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES -- Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), presents standards for accounting for derivative
instruments. FAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Operating Partnership currently holds no
derivative instruments and, accordingly, does not expect FAS 133 to have an
effect on the Operating Partnership's financial position and results of
operations.
CHANGE IN ACCOUNTING POLICY -- Effective January 1, 1999, the Operating
Partnership's implemented prospectively a new accounting policy whereby
expenditures for carpet are capitalized and depreciated over their estimated
useful lives. Previously, carpets had been expensed. The Operating Partnership
believes that the newly adopted accounting policy is preferable as it is
consistent with the standards and practices utilized by the majority of the
Operating Partnership's peers and provides a better matching of expenses with
the related benefit of the expenditure. The change in accounting policy is
being treated as a change in accounting estimate. The effect of the change in
the accounting policy for carpet for the three months ended March 31, 1999 was
an increase to net income by $339,000 or $0.01 per basic and diluted unit.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1998
financial statements to conform to the 1999 presentation.
2. REAL ESTATE JOINT VENTURES
The Operating Partnership obtained a 25% interest in a joint venture named
Station Hill, LLC, a North Carolina limited liability company ("Station Hill"),
in exchange for the contribution of two communities in December, 1998. Station
Hill also owns five apartment communities previously owned by the Operating
Partnership which were sold to Hollow Creek, LLC on December 16, 1998 and were
concurrently contributed to Station Hill for a 75% joint venture interest. The
Operating Partnership's initial investment in Station Hill was reduced to zero
when the Operating Partnership eliminated the portion of the gain on disposal
related to the percentage of joint venture ownership interest retained. Station
Hill is accounted for on the equity method of accounting.
The Operating Partnership owns a 49% interest in each of two joint
ventures ("Construction Projects"). Each joint venture is developing an
apartment community which will be accounted for under the equity method of
accounting. The projects are both under construction and had no operations as
of March 31, 1999. The construction costs are being funded primarily through
separate loans to each joint venture from unrelated third parties equal to 100%
of the construction costs. During the construction period, in lieu of equity
contribution to each of the respective joint ventures, the Operating
Partnership has
7
2. REAL ESTATE JOINT VENTURES -- (Continued)
under certain circumstances, subsequent to demand by the third party lenders,
agreed to make contributions which would reduce the respective construction
loan by an amount not to exceed 25% of the total construction loan amount. Any
such contribution would be deemed to be all or a portion of the equity required
to be contributed by the Operating Partnership to the respective joint venture
at the end of the construction and lease up period. The Operating Partnership
has the right to purchase its joint venture partner's interest after the
projects are complete.
The following is a condensed balance sheet for each of the real estate
joint ventures at March 31, 1999 and an income statement for the three months
ended March 31, 1999 for the Station Hill joint venture only as the
Construction Projects had no operations during the period (in thousands):
STATION CONSTRUCTION
HILL PROJECTS
----------- -------------
Cash and cash equivalents ........................... $2,172 $ 18
Real estate assets other than construction in progress 90,914 --
Construction in progress ............................ -- 18,686
Other assets ........................................ 406 --
------ -------
Total assets ...................................... $93,492 $18,704
======= =======
Mortgage payable .................................... $70,028 $ --
Construction loan payable ........................... -- 15,146
Construction liabilities payable .................... -- 3,543
Other liabilities ................................... 1,060 --
Partners' capital ................................... 22,404 15
------- -------
Total liabilities and partners' capital ........... $93,492 $18,704
======= =======
Revenues ............................................ $2,915
Expenses:
Property operating ................................ 1,009
Depreciation and amortization ..................... 744
Interest .......................................... 1,174
-------
Total expenses ................................... 2,927
-------
Net loss ............................................ ($ 12)
=======
3. NOTES PAYABLE
The Operating Partnership has established a program for the sale of up to
$95 million aggregate principal amount of Medium-Term Notes due nine months or
more from the date of issuance (the "MTN Program"). On March 18, 1999, the
Operating Partnership sold $25 million of notes under the MTN Program. Such
notes are due on March 16, 2009 and bear interest at 7.59% per year. Proceeds
from the notes issued were used to reduce the Operating Partnership's unsecured
line of credit. The Operating Partnership has issued $80 million aggregate
principal amount of Medium-Term Notes ($55 million of which was issued during
1998) of the $95 million aggregate principal amount of Medium-Term Notes
registered in connection with the MTN Program.
4. RESTRICTED STOCK
During the three months ended March 31, 1999 and 1998, Summit Properties
granted 14,181 and 4,842 shares, respectively, of restricted stock to employees
of the Operating Partnership and its subsidiaries under Summit Properties' 1994
Stock Option and Incentive Plan. The market value of the restricted stock
grants awarded in 1999 and 1998 totaled $239,000 and $101,000, respectively.
Unearned compensation is being amortized to expense over the vesting period
which ranges from three to five years.
8
5. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the three months ended
March 31, 1999 and 1998 are as follows:
A. The Operating Partnership purchased Summit St. Clair on March 6, 1998
by issuing 119,000 common units of limited partnership interest in the
Operating Partnership ("Units"), assuming certain liabilities and paying cash.
The recording of the purchase is summarized as follows (in thousands):
Fixed assets ........................ $ 27,002
Current liabilities assumed ......... (94)
Value of Units issued ............... (2,414)
--------
Cash invested ....................... $ 24,494
========
B. The Operating Partnership accrued a distribution payable in the amounts
of $13.7 million and $11.7 million at March 31, 1999 and 1998, respectively.
C. Summit Properties issued 14,181 and 4,842 shares of restricted stock
valued at $239,000 and $101,000 during the three months ended March 31, 1999
and 1998, respectively, to employees of the Operating Partnership and its
subsidiaries.
6. EXTRAORDINARY ITEMS
The extraordinary items in the three months ended March 31, 1998 resulted
from the write-off of deferred financing costs in conjunction with the
replacement by the Operating Partnership of its prior credit facility with a
new credit facility as well as prepayment penalties on four mortgage notes
which were repaid during the period.
7. EARNINGS PER UNIT
The only difference between "basic" and "diluted" weighted average units
is the dilutive effect of Summit Properties' stock options outstanding (5,578
and 29,267 units added to weighted units outstanding for the three months ended
March 31, 1999 and 1998, respectively).
8. COMMITMENTS
The Operating Partnership has ten development projects currently under
construction representing a total estimated cost of $193.5 million. The
estimated cost to complete the projects is $104.4 million at March 31, 1999.
9. BUSINESS SEGMENTS
Effective December 31, 1998, the Operating Partnership adopted Financial
Accounting Standards Board (FASB) Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (FAS 131). FAS 131
establishes standards for the manner in which public enterprises report
information about operating segments in financial statements. FAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of FAS 131 did not affect
the Operating Partnership's results of operations or financial position.
The Operating Partnership reports as a single business segment with
activities related to the ownership, development, acquisition and management of
"Class A" luxury garden apartments primarily in the southeastern, southwestern
and mid-atlantic United States. The Operating Partnership uses Funds from
Operations ("FFO") as a performance measure. The Operating Partnership computes
FFO in accordance with the definition approved by the National Association of
Real Estate Investment Trusts.
9
9. BUSINESS SEGMENTS -- (Continued)
Information for the apartment communities for the three months ended March 31,
1999 and 1998 is summarized below (dollars in thousands):
1999 1998
------------------------------------------ -------------------------------------
APARTMENT CORPORATE/ APARTMENT CORPORATE/
OPERATIONS OTHER TOTAL OPERATIONS OTHER TOTAL
-------------- ------------ -------------- ------------ ----------- ------------
Revenues:
Rental and other property income ..... $ 42,055 $ -- $ 42,055 $ 33,066 $ -- $ 33,066
Interest and other income ............ -- 1,094 1,094 -- 171 171
---------- -------- ---------- -------- ------- --------
Total income ......................... 42,055 1,094 43,149 33,066 171 33,237
Operating expenses:
Property operating expenses .......... 13,996 -- 13,996 11,634 -- 11,634
Interest ............................. -- 10,497 10,497 7,298 7,298
General and administrative ........... -- 1,080 1,080 -- 801 801
Depreciation -- other ................ -- 27 27 -- 19 19
Loss on equity investment ............ 8 316 324 -- 72 72
---------- -------- ---------- -------- ------- --------
Total operating expenses ............. 14,004 11,920 25,924 11,634 8,190 19,824
Depreciation -- joint ventu ........... 183 -- 183 -- -- --
---------- -------- ---------- -------- ------- --------
Funds from Operations ................. 28,234 (10,826) 17,408 21,432 (8,019) 13,413
Depreciation -- apartments ............ (8,226) -- (8,226) (6,521) -- (6,521)
Depreciation -- joint venture ......... (183) -- (183) -- -- --
Extraordinary items ................... -- -- -- -- (185) (185)
---------- -------- ---------- -------- ------- --------
Net income ............................ $ 19,825 ($ 10,826) $ 8,999 $ 14,911 ($ 8,204) $ 6,707
========== ======== ========== ======== ======= ========
Capital investments (1) ............... $ 36,003 $ 25 $ 36,028 $ 55,861 $ 13 $ 55,874
========== ======== ========== ======== ======= ========
Assets ................................ $1,200,301 $ 3,152 $1,203,453 $871,865 $ 4,039 $875,904
========== ======== ========== ======== ======= ========
(1) Capital investments includes cost during the year of the Operating
Partnership's developments and acquisitions as well as capital
expenditures on existing properties.
10. SUBSEQUENT EVENTS
PRIVATE PLACEMENT OF PREFERRED UNITS -- On April 29, 1999, the Operating
Partnership completed a private placement of 3,400,000 of its 8.95% Series B
Cumulative Redeemable Perpetual Preferred Units (the "Series B Preferred
Units") to two institutional investors at a price of $25.00 per unit. The net
proceeds of approximately $83 million were used to repay amounts outstanding
under the Operating Partnership's unsecured line of credit. In connection with
such placement, the partnership agreement of the Operating Partnership was
amended to provide for and to describe the rights of the holders of the Series
B Preferred Units.
Distributions on the Series B Preferred Units will be cumulative from the
date of original issuance and payable quarterly on the last business day of
each of March, June, September and December of each year commencing June 30,
1999, at an annual rate of 8.95% on the $25.00 original capital contribution
per unit. Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Operating Partnership, the Series B Preferred Units will be entitled
to a preferential distribution equal to the capital account attributable to
such unit (initially $25.00 per unit), plus an amount equal to all accumulated,
accrued and unpaid distributions. With respect to payment of distributions and
amounts upon liquidation, the Series B Preferred Units will rank senior to any
junior units, including the Operating Partnership's common units of limited
partnership interest.
10
10. SUBSEQUENT EVENTS -- (Continued)
On and after April 29, 2004, the Operating Partnership may redeem the
Series B Preferred Units at its option, for cash at a redemption price equal to
the redeemed holder's capital account (initially $25.00 per unit), plus an
amount equal to all accumulated, accrued and unpaid distributions thereon to
the date of redemption which such redemption may be in whole, at any time, or
in part, at any time that all accumulated and unpaid distributions have been
paid on all Series B Preferred Units for all periods up to and including such
date of redemption. In lieu of cash, the Operating Partnership may elect to
deliver, for any Series B Preferred Unit being redeemed, one share of 8.95%
Series B Cumulative Redeemable Perpetual Preferred Share of Summit Properties
(a "Series B Preferred Share"), which share shall have, as of the date of its
issuance, a preference in an amount equal to all accumulated, accrued and
unpaid distributions on the redeemed unit to the date of its redemption. The
Series B Preferred Units are not subject to any mandatory redemption
provisions. No sinking fund will be established for the retirement or
redemption of the Series B Preferred Units.
Holders of the Series B Preferred Units have the right to exchange Series
B Preferred Units, in whole or in part (subject to certain exceptions and
limitations), for shares of Series B Preferred Shares on a one-for-one basis.
The exchange right is exercisable, in minimum amounts of 850,000 units, at the
option of the holders of the Series B Preferred Units (i) at any time on or
after April 29, 2009, (ii) at any time if full quarterly distributions shall
not have been timely made for six quarters, whether or not consecutive, or
(iii) upon the occurrence of certain specified events related to the federal
income tax treatment of the Operating Partnership or the Series B Preferred
Units for federal income tax purposes.
On April 29, 1999, Summit Properties filed Articles Supplementary to its
charter classifying and establishing the class of 3,400,000 Series B Preferred
Shares and describing such Series B Preferred Shares and the rights of the
holders thereof. Summit Properties' Board of Directors has reserved such Series
B Preferred Shares for issuance upon exchange of Series B Preferred Units. In
general, the distribution and liquidation preferences and other rights of
holders of Series B Preferred Shares and Summit Properties' right to redeem
Series B Preferred Shares are substantially similar to the related distribution
and liquidation preferences and other rights of holders of Series B Preferred
Units and the Operating Partnership's right to redeem Series B Preferred Units,
except as set forth below.
Neither the Series B Preferred Units nor the Series B Preferred Shares are
convertible into or exchangeable for any other securities, except that (i)
Series B Preferred Units may be exchanged for Series B Preferred Shares as
described above and (ii) Series B Preferred Shares may be converted
automatically into shares of Excess Stock (a separate class of stock into which
shares in excess of Summit Properties' stock ownership limit are automatically
convertible) in order to ensure that Summit Properties remains a qualified REIT
for federal income tax purposes.
Except as otherwise required by law, holders of the Series B Preferred
Units have only the following voting rights: so long as any Series B Preferred
Units remain outstanding, the Operating Partnership may not, without the
affirmative vote of the holders of at least two-thirds of the Series B
Preferred Units outstanding, (i) authorize or create, or increase the
authorized or issued amount of, any class or series of Operating Partnership
units ranking senior to the Series B Preferred Units, (ii) issue any class or
series of Operating Partnership units ranking on parity with the Series B
Preferred Units to an affiliate of the Operating Partnership ("Partnership
Affiliate"), reclassify any Operating Partnership unit held by a Partnership
Affiliate into any such parity unit, or issue any security or obligation with
the right to purchase any such parity unit to a Partnership Affiliate unless
such units are issued either (x) under terms no more favorable to such
Partnership Affiliate than those that would be offered in an arm's length
transaction to an unrelated party in the good faith determination of the Board
of Directors of Summit Properties, or (y) in connection with the issuance of a
corresponding class or series of preferred stock by Summit Properties to
parties who are not Partnership Affiliates or (iii) either (a) consolidate,
merge with or into, or transfer all or substantially all of its assets to
another party, or (b) amend, alter or repeal provisions of the Operating
Partnership's partnership agreement, in each case in a transaction or manner
that would materially and adversely affect any power, special right,
preference, privilege or voting power of the Series B Preferred Units or
holders thereof.
Holders of the Series B Preferred Shares will have substantially similar
voting rights with respect to Series B Preferred Shares and the Company as
holders of Series B Preferred Units have with respect to Series B Preferred
Units and the Operating Partnership, as well as the following voting right:
whenever (i) quarterly dividends in arrears (whether or not consecutive) on any
Series B Preferred Shares and (ii) unpaid quarterly distributions attributable
to Series B Preferred Units for which such Series B Preferred Shares were
exchanged equals or exceeds six, the holders of the Series B Preferred Shares
(voting separately as a class with all other series of stock which rank on a
parity with the Series B Preferred Shares as to distributions and rights and
upon which like voting rights have been conferred and are exercisable) will be
entitled to vote for the election of a total of two additional directors of
Summit Properties until all dividends accumulated on such Series B Shares have
been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment.
11
10. SUBSEQUENT EVENTS -- (Continued)
Summit Properties has entered into a registration rights agreement for the
benefit of any holders of the Series B Preferred Shares pursuant to which such
holders will have certain registration rights (the "Registration Rights
Agreement"). Under the Registration Rights Agreement, following the earlier of
April 29, 2009 or such date as all Series B Preferred Units are exchanged for
Series B Preferred Shares (the "Registration Date"), upon request of a
majority-in-interest of the holders of Series B Preferred Shares, Summit
Properties agreed (i) to file with the Securities and Exchange Commission (the
"SEC") a Registration Statement (the "Two-year Shelf Registration Statement")
providing for the resale of all of the Series B Preferred Shares (the
"Registrable Securities") held by such holders, (ii) to use all commercially
reasonable efforts to have such Two-year Shelf Registration Statement declared
effective by the SEC as soon as practical thereafter and (iii) to use all
commercially reasonable efforts to keep the Two-year Shelf Registration
Statement continuously effective for a period of two years or such shorter
period expiring when such Registrable Securities have been sold pursuant to
such registration statement or are to be sold in compliance with Rule 144 (as
promulgated by the SEC) without volume limitations. If, at any time, a shelf
registration statement is not effective, upon receipt of a written request
("Registration Request") from holders holding Registrable Securities having an
aggregate expected offering price of at least $10 million (or holders holding
all remaining Registrable Securities), Summit Properties agreed to use all
commercially reasonable efforts to file with the SEC, within 45 days after
receipt of such Registration Request, a registration statement ("Demand
Registration Statement") for the sale of all Registrable Securities held by the
requesting holders and keep such Demand Registration Statement continuously
effective for one year following the date such Demand Registration Statement is
declared effective or such shorter period expiring when such Registrable
Securities have been sold pursuant to such registration statement or are to be
sold in compliance with Rule 144 (as promulgated by the SEC) without volume
limitations. Summit Properties is required to file up to three Demand
Registration Statements unless, under certain circumstances it delivers Series
B Preferred Shares in lieu of cash in redemption of Series B Preferred Units,
in which case it may be required to file additional Demand Registration
Statements. Anytime Summit Properties proposes to file a registration statement
with respect to an offering solely for cash for the account of any of its
security holders of any class of equity security and a Two-year Shelf
Registration Statement has been requested but is not otherwise effective, then
Summit Properties may be required, under certain circumstances, to offer the
holders of the Registrable Securities the opportunity to include such number of
shares of Registrable Securities as each such holder may have otherwise
required in connection with a Two-year Shelf Resale Registration Statement.
Pursuant to the Registration Rights Agreement, Summit Properties has
agreed to pay all expenses of effecting the registration of the Series B
Preferred Shares (other than brokerage and underwriting commissions and taxes
of any kind, certain legal fees and other expenses incurred by the holders of
the Registrable Securities). Summit Properties also has agreed to indemnify
each holder of Registrable Securities and its officers, directors and any
person who controls any holder of Registrable Securities against certain
losses, claims, damages, liabilities and expenses arising under the securities
laws in connection with any registration statement, effected pursuant to the
Registration Rights Agreement (a "Registration Statement") subject to certain
limitations. In addition, each holder of Registrable Securities has agreed to
indemnify Summit Properties, its directors and its officers who sign the
Registration Statement, any underwriter and any person who controls Summit
Properties or such underwriter against all losses, claims, damages, liabilities
and expenses, subject to certain limitations, arising under the securities laws
insofar as such loss, claim, damage, liability or expense relates to written
information furnished to Summit Properties by such holder for use in the
Registration Statement or prospectus or an amendment or supplement thereto.
COMMON STOCK REPURCHASE PROGRAM -- On May 11, 1999 the Board of Directors
of Summit Properties authorized a common stock repurchase program pursuant to
which Summit Properties would be authorized to purchase up to $50 million of
its currently issued and outstanding common stock, par value $0.01 per share
("Common Stock"). Any repurchases will be made on the open market at prevailing
prices. This authority may be exercised from time to time and in such amounts
as market conditions warrant. The Operating Partnership will repurchase one
Unit from Summit Properties for each share of Common Stock Summit Properties
repurchases. Summit Properties currently has approximately 28.5 million shares
of Common Stock outstanding. Any purchases are intended to make appropriate
adjustments to Summit Properties' capital structure.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including without limitation statements relating
to development activities of the Operating Partnership and the implementation
of the Operating Partnership's plan to address Year 2000 issues. The Operating
Partnership intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Reform Act of 1995, and is including this statement for purposes of
complying with these safe harbor provisions. Forward-looking statements, which
are based on certain assumptions and describe future plans, strategies and
expectations of the Operating Partnership, are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project" or
similar expressions. The Operating Partnership's ability to predict results or
the actual effect of future plans or strategies is inherently uncertain.
Although the Operating Partnership believes that the expectations reflected in
such forward-looking statements are based on reasonable assumptions, the
Operating Partnership's actual results and performance of development
communities and the actual costs, progress and expenses with respect to its
plan to address Year 2000 issues could differ materially from those set forth
in the forward-looking statements. Factors which could have a material adverse
effect on the operations and future prospects of the Operating Partnership
include, but are not limited to, changes in: economic conditions generally and
the real estate market specifically, legislative/regulatory changes (including
changes to laws governing the taxation of real estate investment trusts
("REITs"), availability of capital, interest rates, construction delays due to
unavailability of materials, weather conditions or other delays, competition,
supply and demand for apartment communities in the Operating Partnership's
current and proposed market areas, expenses of or delays in the identification
and upgrade or replacement by the Operating Partnership of its non-Year 2000
compliant computer information systems and computer systems that do not relate
to information technology, but include embedded technology, the Year 2000
compliance of vendors (including vendors of the Operating Partnership's
computer information systems and such as local and regional electricity,
natural gas and telecommunications providers) or third party service providers
(including the Operating Partnership's primary bank and payroll processor),
generally accepted accounting principles, policies and guidelines applicable to
REITs, and those factors discussed in the section entitled "Development
Activity -- Certain Factors Affecting the Performance of Development
Communities" and in the section entitled "Year 2000" on page 22 of this Form
10-Q. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Summit Properties Partnership, L.P. and
the Notes thereto appearing elsewhere herein.
HISTORICAL RESULTS OF OPERATIONS
The Operating Partnership's net income is generated primarily from
operations of its apartment communities (the "Communities"). The changes in
operating results from period to period reflect changes in existing Community
performance and increases in the number of apartment homes due to development
and acquisition of new Communities. Where appropriate, comparisons are made on
a "fully stabilized Communities," "acquisition Communities," "stabilized
development Communities" and "Communities in lease-up" basis in order to adjust
for changes in the number of apartment homes. A Community is deemed to be
"stabilized" when it has attained a physical occupancy level of at least 93%. A
Community which the Operating Partnership has acquired is deemed fully
stabilized when owned by the Operating Partnership for one year or more as of
the beginning of the year. A Community which the Operating Partnership has
developed is deemed "fully stabilized" when stabilized for the two prior years
as of the beginning of the current year. A Community is deemed to be a
"stabilized development" when stabilized as of the beginning of the current
year but not the entire two prior years. All Communities information presented
is before real estate depreciation and amortization expense. Communities'
average physical occupancy presented is defined as the number of apartment
homes occupied divided by the total number of apartment homes contained in the
Communities, expressed as a percentage. Average physical occupancy has been
calculated using the average of the occupancy that existed on Sunday during
each week of the period. Average monthly rental revenue presented represents
the average monthly net rental revenue per occupied apartment home. The
Operating Partnership's methodology for calculating average physical occupancy
and average monthly rental revenue may differ from the methodology used by
other equity REITs and, accordingly, may not be comparable to such other REITs.
Effective January 1, 1999, the Operating Partnership implemented
prospectively a new accounting policy whereby expenditures for carpet are
capitalized and depreciated over their estimated useful lives. Previously,
carpets had been expensed. The Operating Partnership believes that the newly
adopted accounting policy is preferable as it is consistent with standards
13
and practices utilized by the majority of the Operating Partnership's peers and
provides a better matching of expenses with the related benefit of the
expenditure. The change in accounting policy is being treated as a change in
accounting estimate. The effect of the change in the accounting policy for
carpet for the three months ended March 31, 1999 was an increase to net income
by $339,000. Comparative property operating information for the three months
ended March 31, 1998 has been adjusted to reflect the 1999 change in accounting
policy.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
For the three months ended March 31, 1999, income before extraordinary
items increased $2.1 million to approximately $9.0 million from the three
months ended March 31, 1998.
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S PORTFOLIO OF COMMUNITIES
The operating performance of the Communities for the three months ended
March 31, 1999 and 1998 is summarized below (dollars in thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1999 1998 % CHANGE
---------- ---------- ------------
Property revenues:
Fully stabilized communities ....................... $23,958 $22,877 4.7%
Acquisition communities ............................ 9,031 335 2,595.8%
Stabilized development communities ................. 5,981 4,872 22.8%
Communities in lease-up ............................ 3,085 303 918.2%
Communities sold ................................... -- 4,679 -100.0%
------- ------- --------
Total property revenues .............................. 42,055 33,066 27.2%
======= ======= ========
Property operating and maintenance expense:
Fully stabilized communities ....................... 8,105 7,859 3.1%
Acquisition communities ............................ 3,075 90 3,316.7%
Stabilized development communities ................. 1,894 1,531 23.7%
Communities in lease-up ............................ 922 114 708.8%
Communities sold ................................... -- 1,702 -100.0%
Effect of change in accounting policy .............. -- 338 -100.0%
------- ------- --------
Total property operating and maintenance expense ..... 13,996 11,634 20.3%
======= ======= ========
Property operating income ............................ $28,059 $21,432 30.9%
======= ======= ========
Apartment homes, end of period ....................... 18,281 15,316 19.4%
======= ======= ========
A summary of the Operating Partnership's apartment homes for the three
months ended March 31, 1999 and 1998 is as follows:
1999 1998
-------- ---------
Apartment homes at January 1 ................................ 18,001 14,980
Developments which began rental operations during the period 280 --
Acquisitions ................................................ -- 336
====== ======
Apartment homes at March 31 ................................. 18,281 15,316
====== ======
14
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S FULLY STABILIZED
COMMUNITIES
The operating performance of the 43 Communities stabilized since January
1, 1997 in each of the three months ended March 31, 1999 and 1998,
respectively, are summarized below (dollars in thousands except average monthly
rental revenue):
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1999 1998 % CHANGE
------------ ------------ ---------
Property revenues:
Rental ............................................... $ 22,609 $ 21,761 3.9%
Other ................................................ 1,349 1,116 20.9%
-------- --------
Total property revenues ............................... 23,958 22,877 4.7%
======== ========
Property operating and maintenance expense:
Personnel ............................................ 1,701 1,647 3.3%
Advertising and promotion ............................ 316 313 1.0%
Utilities ............................................ 1,194 1,181 1.1%
Building repairs and maintnenace (1) ................. 1,394 1,283 8.7%
Real estate taxes and insurance ...................... 2,413 2,411 0.1%
Property supervision ................................. 591 567 4.2%
Other operating expense .............................. 496 457 8.5%
-------- --------
Total property operating and maintenance expense ...... 8,105 7,859 3.1%
-------- --------
Property operating income ............................. $ 15,853 $ 15,018 5.6%
======== ========
Average physical occupancy ............................ 93.9% 92.4% 1.5%
======== ========
Average monthly rental revenue ........................ $ 798 $ 779 2.5%
======== ========
Number of apartment homes ............................. 10,272 10,272
======== ========
- ---------
(1) Effective January 1, 1999, the Operating Partnership implemented
prospectively a new accounting policy whereby expenditures for carpets are
capitalized. Previously, carpets had been expensed. The change in
accounting policy has been treated as a change in accounting estimate and,
accordingly, 1998 has not been restated to reflect the change. However,
for comparative purposes only, building repairs and maintenance cost for
the three months ended March 31, 1998 has been adjusted in the table to
reflect the new policy. Carpet replacement costs were $300,000 and
$257,000 for the three months ended March 31, 1999 and 1998, respectively.
The increase in rental revenue from fully stabilized Communities was
primarily the result of increases in average rental rates and increased
occupancy. The higher revenues were primarily in the Operating Partnership's
Sarasota, Florida, Washington, DC and Midwest markets. The increase in property
operating and maintenance was due primarily to an increase in building repairs
and maintenance costs. As a percentage of total property revenue, property
operating and maintenance expenses decreased for the three months March 31,
1998 and 1999 from 34.4% to 33.8%, respectively.
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S ACQUISITION COMMUNITIES
Acquisition Communities consist of Summit St. Clair (acquired effective
March 1, 1998), Summit Club at Dunwoody (acquired May 22, 1998), Summit Lenox
(acquired July 8, 1998) and a portfolio of seven Communities acquired from
Ewing Industries, Inc. and its affiliates (acquired November 3, 1998).
15
The operations of these Communities for the three months ended March 31, 1999
and 1998 are summarized as follows (dollars in thousands except average monthly
rental revenue):
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
----------- ----------
Property revenues:
Rental revenues ................................... $ 8,660 $ 322
Other property revenue ............................ 371 13
------- -------
Total property revenues ............................ 9,031 335
------- -------
Property operating and maintenance expense ......... 3,075 90
------- -------
Property operating income .......................... $ 5,956 $ 245
======= =======
Average physical occupancy ......................... 93.0% 97.1%
======= =======
Average monthly rental revenue (1) ................. $ 876 $ 946
======= =======
Number of apartment homes .......................... 3,557 336
======= =======
- ---------
(1) Average 1999 monthly rental revenue for Summit St. Clair (the only
Community owned as of March 31, 1998) was $985, representing a 4.1%
increase from 1998.
The unleveraged yield on investment for the acquisition Communities,
defined as property operating income for the three months ended March 31, 1999
on an annualized basis over total acquisition cost, was 8.97%.
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S STABILIZED DEVELOPMENT
COMMUNITIES
The Operating Partnership had nine development Communities (Summit
Ballantyne I, Summit Sedgebrook I, Summit on the River, Summit Lake I, Summit
Norcroft II, Summit Stonefield, Summit Russett, Summit Fairways and Summit
Plantation II) which were stabilized during the entire three months ended March
31, 1999 but were stabilized subsequent to January 1, 1997. The operating
performance of these nine Communities for the three months ended March 31, 1999
and 1998 is summarized below (dollars in thousands except average monthly
rental revenue):
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
----------- -----------
Property revenues:
Rental revenues .................................. $ 5,639 $ 4,593
Other property revenue ........................... 342 279
------- -------
Total property revenues ............................ 5,981 4,872
------- -------
Property operating and maintenance expense ......... 1,894 1,531
------- -------
Property operating income .......................... $ 4,087 $ 3,341
======= =======
Average physical occupancy ......................... 94.1% 79.4%
------- -------
Average monthly rental revenue ..................... $ 919 $ 889
------- -------
Number of apartment homes .......................... 2,212 2,212
======= =======
The unleveraged yield on investment for the stabilized development
Communities, defined as property operating income for the three months ended
March 31, 1999 on an annualized basis over total development cost, was 10.16%.
OPERATING PERFORMANCE OF THE OPERATING PARTNERSHIP'S COMMUNITIES IN LEASE-UP
The Operating Partnership had nine Communities in lease-up during the
three months ended March 31, 1999. A Community in lease-up is defined as one
which has commenced rental operations but was not stabilized as of the
beginning of the current year.
16
A summary of the nine Communities in lease-up as of March 31, 1999 is as
follows (dollars in thousands):
TOTAL ACTUAL/ % LEASED
NUMBER OF ACTUAL/ ANTICIPATED ACTUAL/ Q1 1999 AS OF
APARTMENT ESTIMATED CONSTRUCTION ANTICIPATED AVERAGE MARCH 31,
COMMUNITY HOMES COST COMPLETION STABILIZATION OCCUPANCY 1999
- -------------------------------------------------- ----------- ----------- -------------- --------------- ----------- ----------
Summit Ballantyne II -- Charlotte, NC ............ 154 $ 10,200 Q4 1998 Q1 1999 89.98% 94.50%
Summit New Albany I -- Fairfax, VA ............... 301 23,900 Q4 1998 Q3 1999 62.60% 68.40%
Summit Fair Lakes I -- Fairfax, VA ............... 370 33,200 Q1 1999 Q2 1999 70.49% 83.80%
Summit Governor's Village -- Chapel Hill, NC ..... 242 16,800 Q1 1999 Q2 1999 64.53% 71.50%
Summit Lake II -- Raleigh, NC (1) ................ 144 10,200 Q2 1999 Q3 1999 14.08% 26.40%
Summit Doral -- Miami, FL (1) .................... 260 22,800 Q2 1999 Q3 1999 36.12% 50.40%
Summit Westwood -- Raleigh, NC (1) ............... 354 24,400 Q3 1999 Q4 1999 31.36% 39.00%
Summit Sedgebrook II -- Charlotte, NC (1) ........ 120 7,800 Q3 1999 Q1 2000 3.39% 9.20%
Summit Fair Lakes II -- Fairfax, VA (1) (2) ...... 160 14,200 Q3 1999 Q1 2000 N/A N/A
--- --------
2,105 $163,500
===== ========
- ---------
(1) The related assets of such properties are included in the Construction in
Progress category at March 31, 1999.
(2) Summit Fair Lakes II had begun leasing apartments for April, 1999 move-ins
as of March 31, 1999.
Summit Fairview (135 apartment homes) is an existing property, which is
undergoing a major renovation. The renovation includes upgrades of the interior
of the apartment units (new cabinets, fixtures and other interior upgrades) as
well as exterior painting and upgrades to the parking lots and landscaping. The
renovation will require certain apartment homes to be unavailable for rent over
the course of the renovation. The operations of Summit Fairview are included in
lease-up Communities results due to the renovation work.
OPERATING PERFORMANCE OF SUMMIT MANAGEMENT COMPANY
The operating performance of Summit Management Company (the "Management
Company") and its wholly-owned subsidiary, Summit Apartment Builders Inc. (the
"Construction Company"), for the three months ended March 31, 1999 and 1998 is
summarized below (dollars in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
--------- ---------
Revenue .............................. $1,832 $1,458
Expenses
Operating ........................... 1,927 1,324
Depreciation ........................ 73 59
Amortization ........................ 73 72
Interest ............................ 75 75
------ ------
Total expenses ...................... 2,148 1,530
------ ------
Net loss of Summit Management Company $ (316) $ (72)
====== ======
The increase in revenue for the three month period was primarily a result
of higher revenues from managing the Operating Partnership's Communities and
higher revenues from construction activity. The increase in operating expenses
was a result of increased construction activities and increased cost at the
Management Company. The increase in Management Company costs were primarily due
to increased personnel in order to better support the Operating Partnership's
growth objectives including improving the operating performance of its
stabilized Communities. In addition, personnel dedicated to information systems
increased.
Property management fees include $324,000 and $300,000 of fees from third
parties for the three months ended March 31, 1999 and 1998, respectively.
Property management fees from third parties as a percentage of total property
management revenues were 22.2% and 26.2% for the three months ended March 31,
1999 and 1998, respectively. The Operating Partnership expects third party
management revenue as a percentage of total property management revenues to
continue to decline as revenues from the Operating Partnership's Communities
continue to increase.
All of the Construction Company's revenues are from contracts with the
Operating Partnership.
17
OTHER INCOME AND EXPENSES
Interest income increased by $937,000 to $1.0 million in 1999 compared to
1998, primarily due to interest earned on proceeds from property sales placed
in escrow in accordance with like-kind exchange income tax regulations.
Interest expense, including amortization of deferred financing costs,
increased by $3.2 million for the three months ended March 31, 1999 compared
with the similar period in 1998. This increase was primarily the result of an
increase of $255.7 million in the Operating Partnership's average indebtedness
outstanding. Effective interest cost decreased by .25% (6.75% to 6.50%) for the
three months ended March 31, 1999.
Depreciation expense increased $1.7 million or 26.2% for the three months
ended March 31, 1999 compared with the similar period in 1998, primarily due to
depreciation on recently acquired or developed Communities, offset by reduction
in depreciation related to Communities sold.
General and administrative expenses increased $279,000 or 34.8% for the
three months ended March 31, 1999, primarily due to increased compensation
costs and expenses related to the Operating Partnership's overall growth. As a
percentage of revenues, general and administrative expenses were 2.5% and 2.4%
for the three months ended March 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Operating Partnership's net cash provided by operating activities
increased from $14.2 million for the three months ended March 31, 1998 to $14.4
million for the same period in 1999, primarily due to a $6.6 million increase
in property operating income and a $937,000 increase in interest income offset
by a $3.2 million increase in interest paid and a decrease in the change in
accounts payable and accrued expenses. The increase in interest income was due
to interest earned on property sales placed in escrow in accordance with
like-kind exchange income tax regulations. The increase in interest paid was
primarily due to an increase in the average indebtedness outstanding. The
decrease in accounts payable and accrued expenses was primarily due to timing
of property tax payments and the payment of certain liabilities assumed in
conjunction with the Operating Partnership's Community acquisitions during the
fourth quarter of 1998.
Net cash used in investing activities decreased from $54.3 million for the
three months ended March 31, 1998 to $14.7 million for the same period in 1999
due to a decrease in the acquisition of Communities and higher proceeds from
sale of Communities, partially offset by an increase in the construction of
Communities. Property sale proceeds in 1998 were placed in escrow in accordance
with like-kind exchange income tax regulations. Proceeds from the sale of
Communities in 1999 represents funds expended from these like-kind exchange
escrows. In the event the proceeds from these property sales are not fully
invested in qualified like-kind property during the required time period, a
special distribution may be made or company level tax may be incurred.
Net cash provided by financing activities decreased from $40.9 million for
the three months ended March 31, 1998 to $1.0 million for the same period in
1999, primarily due to a decrease in borrowings from the Operating
Partnership's credit facility, a decrease in repayment of mortgage debt, higher
distributions to unitholders, a decrease in equity proceeds from the Summit
Properties' dividend reinvestment and stock purchase plan, which are
contributed to the Operating Partnership in exchange for Units, and an increase
in issuances of notes receivable from employees offset by higher borrowings
from unsecured bonds. Financing activities during 1999 included $7.5 million in
net repayment on Operating Partnership's Unsecured Credit Facility (as
hereinafter defined) and $24.8 million in net proceeds from the borrowings on
unsecured bonds.
The ratio of earnings to fixed charges was 1.58 for the three months ended
March 31, 1999 compared to 1.68 for the three months ended March 31, 1998. The
decrease is primarily due to increased interest charges as discussed in
"Historical Results of Operations -- Other Income and Expenses" above.
The Operating Partnership's outstanding indebtedness at March 31, 1999
totaled $742.0 million. This amount includes approximately $269.5 million in
fixed rate conventional mortgages, $51.4 million of variable rate tax-exempt
bonds, $266.0 million of unsecured notes, $9.1 million of tax-exempt fixed rate
loans, and $146.0 million under the Unsecured Credit Facility (as hereinafter
defined).
The Operating Partnership repaid four mortgage notes with a balance of
$11.9 million during the first quarter of 1998. The mortgage notes had an 8%
interest rate and were repaid from the borrowings under the Operating
Partnership's credit facility.
18
The Operating Partnership expects to meet its short-term liquidity
requirements (i.e., liquidity requirements arising within 12 months) including
recurring capital expenditures relating to maintaining its existing properties,
generally through its working capital, net cash provided by operating
activities and borrowings under its line of credit. The Operating Partnership
considers its cash provided by operating activities to be adequate to meet
operating requirements and payments of Summit Properties' REIT dividend
requirements in both the short-term and the long-term. The Operating
Partnership expects to meet its long-term liquidity requirements (i.e.,
liquidity requirements arising after 12 months), such as scheduled mortgage
debt maturities, property acquisitions, financing of construction and
development activities and other non-recurring capital improvements, through
the issuance of unsecured notes and equity securities, from undistributed Funds
from Operations (see page 25), from proceeds received from the disposition of
certain properties and in connection with the acquisition of land or improved
property, and through the issuance of Units.
LINE OF CREDIT
The Operating Partnership has a syndicated unsecured line of credit (the
"Unsecured Credit Facility") in the amount of $200 million. The Unsecured
Credit Facility provides funds for new development, acquisitions and general
working capital purposes. The Unsecured Credit Facility has a three year term
with two one-year extension options and will initially bear interest at
LIBOR+90 basis points based upon the Operating Partnership's current credit
rating of BBB- by Standard & Poor's Rating Services and Baa3 by Moody's
Investors Service. The interest rate will be reduced in the event an upgrade of
the Operating Partnership's unsecured credit rating is obtained. The Unsecured
Credit Facility also provides a bid option sub-facility equal to a maximum of
fifty percent of the total facility ($100.0 million). This sub-facility
provides the Operating Partnership with the option to place borrowings in a
fixed LIBOR contract up to 180 days.
MEDIUM-TERM NOTES
The Operating Partnership has established a program for the sale of up to
$95 million aggregate principal amount of Medium-Term Notes due nine months or
more from the date of issuance (the "MTN Program"). On March 18, 1999, the
Operating Partnership sold $25 million of notes under the MTN Program. Such
notes are due on March 16, 2009 and bear interest at 7.59% per year. Proceeds
from the notes issued were used to reduce the Unsecured Credit Facility. The
Operating Partnership has issued $80 million aggregate principal amount of
Medium-Term Notes ($55 million of which was issued during 1998) of the $95
million aggregate principal amount of Medium-Term Notes registered in
connection with the MTN Program.
PRIVATE PLACEMENT OF PREFERRED UNITS
On April 29, 1999, the Operating Partnership completed a private placement
of 3,400,000 of its 8.95% Series B Cumulative Redeemable Perpetual Preferred
Units (the "Series B Preferred Units") to two institutional investors at a
price of $25.00 per unit. The net proceeds of approximately $83 million were
used to repay amounts outstanding under the Unsecured Credit Facility. In
connection with such placement, the partnership agreement of the Operating
Partnership was amended to provide for and to describe the rights of the
holders of the Series B Preferred Units.
Distributions on the Series B Preferred Units will be cumulative from the
date of original issuance and payable quarterly on the last business day of
each of March, June, September and December of each year commencing June 30,
1999, at an annual rate of 8.95% on the $25.00 original capital contribution
per unit. Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Operating Partnership, the Series B Preferred Units will be entitled
to a preferential distribution equal to the capital account attributable to
such unit (initially $25.00 per unit), plus an amount equal to all accumulated,
accrued and unpaid distributions. With respect to payment of distributions and
amounts upon liquidation, the Series B Preferred Units will rank senior to any
junior units, including the Operating Partnership's common units of limited
partnership interest.
On and after April 29, 2004, the Operating Partnership may redeem the
Series B Preferred Units at its option, for cash at a redemption price equal to
the redeemed holder's capital account (initially $25.00 per unit), plus an
amount equal to all accumulated, accrued and unpaid distributions thereon to
the date of redemption which such redemption may be in whole, at any time, or
in part, at any time that all accumulated and unpaid distributions have been
paid on all Series B Preferred Units for all periods up to and including such
date of redemption. In lieu of cash, the Operating Partnership may elect to
deliver, for any Series B Preferred Unit being redeemed, one share of 8.95%
Series B Cumulative Redeemable Perpetual Preferred Shares of Summit Properties
(a "Series B Preferred Share"), which share shall have, as of the date of its
issuance, a preference in an amount equal to all accumulated, accrued and
unpaid distributions on the redeemed unit to the date of its redemption. The
Series B Preferred Units are not subject to any mandatory redemption
provisions. No sinking fund will be established for the retirement or
redemption of the Series B Preferred Units.
19
Holders of the Series B Preferred Units have the right to exchange Series
B Preferred Units, in whole or in part (subject to certain exceptions and
limitations), for shares of Series B Preferred Shares on a one-for-one basis.
The exchange right is exercisable, in minimum amounts of 850,000 units, at the
option of the holders of the Series B Preferred Units (i) at any time on or
after April 29, 2009, (ii) at any time if full quarterly distributions shall
not have been timely made for six quarters, whether or not consecutive, or
(iii) upon the occurrence of certain specified events related to the federal
income tax treatment of the Operating Partnership or the Series B Preferred
Units for federal income tax purposes.
On April 29, 1999, Summit Properties filed Articles Supplementary to its
charter classifying and establishing the class of 3,400,000 Series B Preferred
Shares and describing such Series B Preferred Shares and the rights of the
holders thereof. Summit Properties' Board of Directors has reserved such Series
B Preferred Shares for issuance upon exchange of Series B Preferred Units. In
general, the distribution and liquidation preferences and other rights of
holders of Series B Preferred Shares and Summit Properties' right to redeem
Series B Preferred Shares are substantially similar to the related distribution
and liquidation preferences and other rights of holders of Series B Preferred
Units and the Operating Partnership's right to redeem Series B Preferred Units,
except as set forth below.
Neither the Series B Preferred Units nor the Series B Preferred Shares are
convertible into or exchangeable for any other securities, except that (i)
Series B Preferred Units may be exchanged for Series B Preferred Shares as
described above and (ii) Series B Preferred Shares may be converted
automatically into shares of Excess Stock (a separate class of stock into which
shares in excess of Summit Properties' stock ownership limit are automatically
convertible) in order to ensure that Summit Properties remains a qualified REIT
for federal income tax purposes.
Except as otherwise required by law, holders of the Series B Preferred
Units have only the following voting rights: so long as any Series B Preferred
Units remain outstanding, the Operating Partnership may not, without the
affirmative vote of the holders of at least two-thirds of the Series B
Preferred Units outstanding, (i) authorize or create, or increase the
authorized or issued amount of, any class or series of Operating Partnership
units ranking senior to the Series B Preferred Units, (ii) issue any class or
series of Operating Partnership units ranking on parity with the Series B
Preferred Units to an affiliate of the Operating Partnership ("Partnership
Affiliate"), reclassify any Operating Partnership unit held by a Partnership
Affiliate into any such parity unit, or issue any security or obligation with
the right to purchase any such parity unit to a Partnership Affiliate unless
such units are issued either (x) under terms no more favorable to such
Partnership Affiliate than those that would be offered in an arm's length
transaction to an unrelated party in the good faith determination of the Board
of Directors of Summit Properties, or (y) in connection with the issuance of a
corresponding class or series of preferred stock by Summit Properties to
parties who are not Partnership Affiliates or (iii) either (a) consolidate,
merge with or into, or transfer all or substantially all of its assets to
another party, or (b) amend, alter or repeal provisions of the Operating
Partnership's partnership agreement, in each case in a transaction or manner
that would materially and adversely affect any power, special right,
preference, privilege or voting power of the Series B Preferred Units or
holders thereof.
Holders of the Series B Preferred Shares will have substantially similar
voting rights with respect to Series B Preferred Shares and the Company as
holders of Series B Preferred Units have with respect to Series B Preferred
Units and the Operating Partnership, as well as the following voting right:
whenever (i) quarterly dividends in arrears (whether or not consecutive) on any
Series B Preferred Shares and (ii) unpaid quarterly distributions attributable
to Series B Preferred Units for which such Series B Preferred Shares were
exchanged equals or exceeds six, the holders of the Series B Preferred Shares
(voting separately as a class with all other series of stock which rank on a
parity with the Series B Preferred Shares as to distributions and rights and
upon which like voting rights have been conferred and are exercisable) will be
entitled to vote for the election of a total of two additional directors of
Summit Properties until all dividends accumulated on such Series B Shares have
been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment.
Summit Properties has entered into a registration rights agreement for the
benefit of any holders of the Series B Preferred Shares pursuant to which such
holders will have certain registration rights (the "Registration Rights
Agreement"). Under the Registration Rights Agreement, following the earlier of
April 29, 2009 or such date as all Series B Preferred Units are exchanged for
Series B Preferred Shares (the "Registration Date"), upon request of a
majority-in-interest of the holders of Series B Preferred Shares, Summit
Properties agreed (i) to file with the Securities and Exchange Commission (the
"SEC") a Registration Statement (the "Two-year Shelf Registration Statement")
providing for the resale of all of the Series B Preferred Shares (the
"Registrable Securities") held by such holders, (ii) to use all commercially
reasonable efforts to have such Two-year Shelf Registration Statement declared
effective by the SEC as soon as practical thereafter and (iii) to use all
commercially reasonable efforts to keep the Two-year Shelf Registration
Statement continuously effective for a period of two years or such shorter
period expiring when such Registrable Securities have been sold pursuant to
such registration statement or are to be sold in compliance with Rule 144 (as
promulgated by the SEC) without volume limitations. If, at any time, a shelf
registration statement is not effective, upon receipt of a written request
("Registration Request") from holders
20
holding Registrable Securities having an aggregate expected offering price of
at least $10 million (or holders holding all remaining Registrable Securities),
Summit Properties agreed to use all commercially reasonable efforts to file
with the SEC, within 45 days after receipt of such Registration Request, a
registration statement ("Demand Registration Statement") for the sale of all
Registrable Securities held by the requesting holders and keep such Demand
Registration Statement continuously effective for one year following the date
such Demand Registration Statement is declared effective or such shorter period
expiring when such Registrable Securities have been sold pursuant to such
registration statement or are to be sold in compliance with Rule 144 (as
promulgated by the SEC) without volume limitations. Summit Properties is
required to file up to three Demand Registration Statements unless, under
certain circumstances it delivers Series B Preferred Shares in lieu of cash in
redemption of Series B Preferred Units, in which case it may be required to
file additional Demand Registration Statements. Anytime Summit Properties
proposes to file a registration statement with respect to an offering solely
for cash for the account of any of its security holders of any class of equity
security and a Two-year Shelf Registration Statement has been requested but is
not otherwise effective, then Summit Properties may be required, under certain
circumstances, to offer the holders of the Registrable Securities the
opportunity to include such number of shares of Registrable Securities as each
such holder may have otherwise required in connection with a Two-year Shelf
Resale Registration Statement.
Pursuant to the Registration Rights Agreement, Summit Properties has
agreed to pay all expenses of effecting the registration of the Series B
Preferred Shares (other than brokerage and underwriting commissions and taxes
of any kind, certain legal fees and other expenses incurred by the holders of
the Registrable Securities). Summit Properties also has agreed to indemnify
each holder of Registrable Securities and its officers, directors and any
person who controls any holder of Registrable Securities against certain
losses, claims, damages, liabilities and expenses arising under the securities
laws in connection with any registration statement, effected pursuant to the
Registration Rights Agreement (a "Registration Statement") subject to certain
limitations. In addition, each holder of Registrable Securities has agreed to
indemnify Summit Properties, its directors and its officers who sign the
Registration Statement, any underwriter and any person who controls Summit
Properties or such underwriter against all losses, claims, damages, liabilities
and expenses, subject to certain limitations, arising under the securities laws
insofar as such loss, claim, damage, liability or expense relates to written
information furnished to Summit Properties by such holder for use in the
Registration Statement or prospectus or an amendment or supplement thereto.
COMMON STOCK REPURCHASE PROGRAM
On May 11, 1999, the Board of Directors of Summit Properties authorized a
common stock repurchase program pursuant to which Summit Properties would be
authorized to purchase up to $50 million of its currently issued and
outstanding common stock, par value $0.01 per share ("Common Stock"). Any
repurchases will be made on the open market at prevailing prices. This
authority may be exercised from time to time and in such amounts as market
conditions warrant. The Operating Partnership will repurchase one Unit from
Summit Properties for each share of Common Stock Summit Properties repurchases.
Summit Properties currently has approximately 28.5 million shares of Common
Stock outstanding. Any purchases are intended to make appropriate adjustments
to Summit Properties' capital structure.
PROPERTIES BEING MARKETED FOR SALE
At March 31, 1999, the Operating Partnership had six apartment Communities
for sale with a net book value of approximately $52.2 million. The Operating
Partnership does not anticipate incurring a loss on any individual apartment
Community sale. Proceeds from the sale of the Communities will be used to fund
future development. The six apartment Communities held for sale represented
approximately 5.7% of property operating income for the Operating Partnership
for the three ended March 31, 1999.
21
DEVELOPMENT ACTIVITY
The Operating Partnership's construction in progress at March 31, 1999 is
summarized as follows (dollars in thousands):
TOTAL ESTIMATED ANTICIPATED
APARTMENT ESTIMATED COST TO COST TO CONSTRUCTION
COMMUNITY HOMES COSTS DATE COMPLETE COMPLETION
- -------------------------------------------------- ----------- ----------- ----------- ----------- -------------
Summit Lake II -- Raleigh, NC (1) ................ 144 $ 10,200 $ 9,006 $ 1,194 Q2 1999
Summit Doral -- Miami, FL (1) .................... 260 22,800 18,894 3,906 Q2 1999
Summit Westwood -- Raleigh, NC (1) ............... 354 24,400 22,089 2,311 Q3 1999
Summit Fair Lakes II -- Fairfax, VA (1) .......... 160 14,200 9,649 4,551 Q3 1999
Summit Sedgebrook II -- Charlotte, NC (1) ........ 120 7,800 5,861 1,939 Q3 1999
Summit New Albany II -- Columbus, Ohio ........... 127 9,800 1,923 7,877 Q4 1999
Summit Largo -- Largo, MD ........................ 217 18,000 6,598 11,402 Q1 2000
Summit Hunter's Creek -- Orlando, FL ............. 270 18,600 4,257 14,343 Q1 2000
Summit Grandview -- Charlotte, NC ................ 266 45,500 6,059 39,441 Q2 2000
Summit Devin -- Atlanta, GA ...................... 292 22,200 4,804 17,396 Q2 2000
--- -------- -------- --------
2,210 193,500 89,140 104,360
Other development and construction costs (2) ..... -- -- 31,638 --
----- -------- -------- --------
2,210 $193,500 $120,778 $104,360
===== ======== ======== ========
- ---------
(1) These communities were in lease-up at March 31, 1999.
(2) Consists primarily of land held for development and other predevelopment
costs.
Estimated costs to complete the development Communities represent
substantially all of the Operating Partnership's material commitments for
capital expenditures.
CERTAIN FACTORS AFFECTING THE PERFORMANCE OF DEVELOPMENT COMMUNITIES
The Operating Partnership is optimistic about the operating prospects of
the Communities under construction even with the increased supply of newly
constructed apartment homes of comparable quality in many of its markets. As
with any development community, there are uncertainties and risks associated
with the development of the Communities described above. While the Operating
Partnership has prepared development budgets and has estimated completion and
stabilization target dates based on what it believes are reasonable assumptions
in light of current conditions, there can be no assurance that actual costs
will not exceed current budgets or that the Operating Partnership will not
experience construction delays due to the unavailability of materials, weather
conditions or other events.
Other development risks include the possibility of incurring additional
costs or liabilities resulting from defects in construction material and the
possibility that financing may not be available on favorable terms, or at all,
to pursue or complete development activities. Similarly, market conditions at
the time these Communities become available for leasing will affect the rental
rates that may be charged and the period of time necessary to achieve
stabilization, which could make one or more of the development Communities
unprofitable or result in achieving stabilization later than currently
anticipated. In addition, the Operating Partnership is conducting feasibility
and other pre-development work for eight Communities. The Operating Partnership
could abandon the development of any one or more of these potential Communities
in the event that it determines that market conditions do not support
development, financing is not available on favorable terms or other
circumstances prevent development. Similarly, there can be no assurance that if
the Operating Partnership does pursue one or more of these potential
Communities that it will be able to complete construction within the currently
estimated development budgets or that construction can be started at the time
currently anticipated.
YEAR 2000
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT
The Operating Partnership supports the exchange of information relating to
the Year 2000 issue and designates the following information as the Year 2000
Readiness Disclosure within the meaning of the Year 2000 Information and
Readiness Disclosure Act. Information set forth herein regarding the Year 2000
compliance of non-Operating Partnership products and services are
"republications" under the Year 2000 Information and Readiness Disclosure Act
and are based on information supplied by other companies about the products and
services they offer. The Operating Partnership has not independently
22
verified the contents of these republications and takes no responsibility for
the accuracy or completeness of information contained in such republications.
INTRODUCTION
The Securities and Exchange Commission has asked all public companies to
provide disclosure regarding their Year 2000 readiness. The term "Year 2000
issue" is a general term used to describe various problems that may result from
the improper processing by computer systems of dates after 1999. These problems
arise from the inability of some hardware and software to distinguish dates
before the year 2000 from dates in and after the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations. The
Year 2000 issue affects virtually all companies and all organizations.
The Operating Partnership's efforts to address its Year 2000 issues are
focused in the following three areas: (i) reviewing and taking any necessary
steps to attempt to correct the Operating Partnership's computer information
systems (i.e., software applications and hardware platforms), (ii) evaluating
and making any necessary modifications to other computer systems that do not
relate to information technology but include embedded technology, such as
telecommunications, security, HVAC, elevator, fire and safety systems, and
(iii) communicating with certain significant third-party service providers to
determine whether there will be any interruption in their systems that could
affect the Operating Partnership.
THE OPERATING PARTNERSHIP'S STATE OF READINESS
The Operating Partnership has developed a four phase plan to address its
Year 2000 issues (the "Year 2000 Plan"). The four phases are (i) Awareness,
(ii) Assessment, (iii) Remediation and Implementation and (iv) Testing.
AWARENESS
The Operating Partnership has made the relevant employees, including its
property managers, aware of the Year 2000 issue and collected information from
such employees regarding systems that the Operating Partnership anticipates may
be affected. Management will oversee the Operating Partnership's progress with
respect to the implementation of the Year 2000 Plan. In addition, the Year 2000
Plan has been subject to review of the Audit Committee of the Board of
Directors of Summit Properties.
ASSESSMENT
The Operating Partnership has substantially completed an assessment of its
standard computer information systems and is now taking the further necessary
steps to make its core computer information systems, in those situations in
which the Operating Partnership is required to do so, Year 2000 compliant. See
"Remediation and Implementation" below. As of April 30, 1999, the Operating
Partnership is 80% complete with its assessment of the Year 2000 compliance in
regard to the Operating Partnership's other (i.e., non-core) standard computer
information systems. Year 2000 analysis software is being used to perform this
assessment and to determine the steps needed for remediation. See "Remediation
and Implementation" below. The Operating Partnership expects this process to be
completed by June 30, 1999.
In addition, the Operating Partnership is currently evaluating and
assessing its other computer systems that do not relate to information
technology but include embedded technology, such as telecommunications,
security, HVAC, elevator, fire and safety systems, and expects that its
assessment will be completed by the second quarter of 1999. As of April 30,
1999, the assessment is 60% complete with no major deficiencies noted. The
Operating Partnership is aware that such systems contain embedded chips that
are difficult to identify and test and may require complete replacement because
they cannot be repaired. Failure of the Operating Partnership to identify or
remediate any embedded chips (either on an individual or aggregate basis) on
which significant business operations depend, such as phone systems, could have
a material adverse impact on the Operating Partnership's business, financial
condition and results of operations.
The Operating Partnership rents apartments in its Communities to
individuals and does not have a single customer or group of customers who rents
a significant number of apartments. The Operating Partnership's primary
purchases, except utilities (e.g. electricity, natural gas and
telecommunications services), are building-related products (e.g., carpets,
paint and blinds) and services (e.g., lawn care services), all of which are
available from numerous suppliers. The Operating Partnership is in the process
of attempting to obtain written verification from utility providers that they
will be Year 2000 complaint. The Operating Partnership's primary financial
service providers are its primary bank and payroll processor. The primary bank
has provided written verification to the Operating Partnership that it will be
Year 2000 compliant. The Operating Partnership implemented the payroll
processor Year 2000 upgrade in the fourth quarter of 1998. For the foregoing
reasons,
23
the Operating Partnership does not believe that there is a significant risk
related to the failure of residents, vendors or third-party goods or service
providers to prepare for the Year 2000; however, the costs and timing of
third-party Year 2000 compliance is not within the Operating Partnership's
control and no assurances can be given with respect to the cost or timing of
such efforts or the potential effects of any failure to comply.
REMEDIATION AND IMPLEMENTATION
The Operating Partnership's primary uses of software systems are its
corporate accounting and property management software. The Operating
Partnership's corporate accounting system is widely used in the real estate
industry. A version upgrade, installed in the second quarter of 1998, is
designed to be Year 2000 compliant. The Operating Partnership completed the
replacement of its current property management software in October 1998 with a
new software system that is also designed to be Year 2000 compliant. This new
software is also widely used in the real estate industry. The Operating
Partnership has received written verification from the vendors of each of the
corporate accounting and property management systems that the relevant software
is Year 2000 compliant. The Operating Partnership had previously planned both
the upgrade of the corporate accounting system and implementation of the new
property management system, and such changes would have been undertaken without
regard to Year 2000 remediation issues. Accordingly, the Operating Partnership
has not deferred any planned information or software projects due to such Year
2000 projects, and the Operating Partnership is not treating the costs of the
above-referenced changes as Year 2000-related expenses.
The remediation of non-core standard computer information systems will be
accomplished through a series of minor hardware upgrades and software patches.
The Operating Partnership expects that the implementation of these upgrades
will be completed on or before July 31, 1999.
TESTING
To attempt to confirm that its computer systems are Year 2000 compliant,
the Operating Partnership expects to perform limited testing of its computer
information systems and its other computer systems that do not relate to
information technology but include embedded technology; however, unless Year
2000 issues arise in the course of its limited testing, the Operating
Partnership will rely on the written verification received from each vendor of
its computer systems that the relevant system is Year 2000 compliant.
Nevertheless, there can be no assurance that the computer systems on which the
Operating Partnership's business relies will correctly distinguish dates before
the year 2000 from dates in and after the year 2000. Any such failures could
have a material adverse effect on the Operating Partnership's business,
financial condition and results of operations. The Operating Partnership began
testing during the fourth quarter of 1998 and expects that its testing of
accounting and property management systems will be complete by June 30, 1999.
These tests will be supplemented with additional written representations from
these key vendors.
COSTS TO ADDRESS THE OPERATING PARTNERSHIP'S YEAR 2000 ISSUES
Based on current information from its review to date, the Operating
Partnership budgeted $500,000 for the cost of repairing, updating and replacing
its standard computer information systems. Because the Operating Partnership's
Year 2000 assessment is ongoing and additional funds may be required as a
result of future findings, the Operating Partnership's current budget amounts
may increase as a result of unanticipated delays or preparedness issues. While
the Operating Partnership's efforts to address its Year 2000 issues will
involve additional costs, the Operating Partnership believes, based on
available information, that these costs will not have a material adverse effect
on its business, financial condition or results of operations. The Operating
Partnership expects to fund the costs of addressing the Year 2000 issue from
cash flows resulting from operations. While the Operating Partnership believes
that it will be Year 2000 compliant by December 31, 1999, if these efforts are
not completed on time, or if the costs associated with updating or replacing
the Operating Partnership's computer systems exceeds the Operating
Partnership's estimates, the Year 2000 issue could have a material adverse
effect on the Operating Partnership's business, financial condition and results
of operations.
RISKS PRESENTED BY YEAR 2000 ISSUES
The Operating Partnership is still in the process of evaluating potential
disruptions or complications that might result from Year 2000-related problems;
however, at this time the Operating Partnership has not identified any specific
business functions that are likely to suffer material disruption as a result of
Year-2000 related events. It is possible, however, that the Operating
Partnership may identify business functions in the future that are specifically
at risk of Year 2000 disruption. The absence of any such determination as of
the date of this report represents only the Operating Partnership's current
status of evaluating potential Year-2000 related problems and facts presently
known to the Operating Partnership, and should not be construed to mean that
there is no risk of Year-2000 related disruption. Moreover, due to the unique
and pervasive nature
24
of the Year 2000 issue, it is not possible to anticipate each of the wide
variety of Year 2000 events, particularly outside of the Operating Partnership,
that might arise in a worst case scenario which might have a material adverse
impact on the Operating Partnership's business, financial condition and results
of operations. Risks involved with not solving the Year 2000 issue include, but
are not limited to, the following: loss of local or regional electric power,
loss of telecommunications services, delays or cancellations of shipping or
transportation, general deterioration of economic conditions resulting from
Year 2000 issues, and inability of banks, vendors and other third parties with
whom the Operating Partnership does business to resolve their own Year 2000
problems.
THE OPERATING PARTNERSHIP'S CONTINGENCY PLANS
The Operating Partnership intends to develop contingency plans for
significant business risks identified by the Operating Partnership that might
result from Year-2000 related events. Because the Operating Partnership has not
yet identified any specific business function that will be materially at risk
of significant Year-2000 related disruptions, and because a full assessment of
the Operating Partnership's risk from potential Year 2000 failures is still in
process, the Operating Partnership has not yet developed detailed contingency
plans specific to Year 2000 problems. In the event that the Operating
Partnership concludes that one or more contingency plans are required,
development of such contingency plans is currently scheduled to occur no later
than June 30, 1999 or as otherwise appropriate.
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of
Governors of NAREIT in March 1995 defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sale of property, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Operating Partnership computes Funds from Operations in
accordance with the standards established by the White Paper, which may differ
from the methodology for calculating Funds from Operations utilized by other
equity REITs, and, accordingly, may not be comparable to such other REITs.
Funds Available for Distribution is defined as Funds from Operations less
capital expenditures funded by operations (recurring capital expenditures). The
Operating Partnership's methodology for calculating Funds Available for
Distribution may differ from the methodology for calculating Funds Available
for Distribution utilized by other REITs, and accordingly, may not be
comparable to other REITs. Funds from Operations and Funds Available for
Distribution do not represent amounts available for management's discretionary
use because of needed capital replacement or expansion, debt service
obligations, property acquisitions, development, dividends and distributions or
other commitments and uncertainties. Funds from Operations and Funds Available
for Distribution should not be considered as alternatives to net income
(determined in accordance with GAAP) as an indication of the Operating
Partnership's financial performance or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Operating
Partnership's liquidity, nor are they indicative of funds available to fund the
Operating Partnership's cash needs, including its ability to make
dividends/distributions. The Operating Partnership believes Funds from
Operations and Funds Available for Distribution are helpful to investors as
measures of the performance of the Operating Partnership because, along with
cash flows from operating activities, financing activities and investing
activities, they provide investors with an understanding of the ability of the
Operating Partnership to incur and service debt and make capital expenditures.
25
Funds from Operations and Funds Available for Distribution for the three
months ended March 31, 1999 and 1998 are calculated as follows (dollars in
thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
-------------- --------------
Net income ............................................ $ 8,999 $ 6,707
Extraordinary items ................................... -- 185
----------- -----------
Adjusted net income ................................ 8,999 6,892
Depreciation:
Real estate assets ................................... 8,226 6,521
Real estate joint venture ............................ 183 --
----------- -----------
Funds from Operations ................................. 17,408 13,413
Recurring capital expenditures (1) ................... (1,039) (843)
----------- -----------
Funds Available for Distribution ...................... $ 16,369 $ 12,570
=========== ===========
Non-recurring capital expenditures (1) (2) ............ $ 891 $ 763
=========== ===========
Cash Flow Provided By (Used In):
Operating Activities ............................... $ 14,401 $ 14,160
Investing Activities ............................... (14,723) (54,311)
Financing Activities ............................... 958 40,921
Weighted average units outstanding -- diluted ......... 32,769,514 28,147,380
=========== ===========
- ---------
(1) Recurring capital expenditures are expected to be funded from operations
and consist primarily of exterior painting, carpets, new appliances,
vinyl, blinds, tile, and wallpaper. In contrast, non-recurring capital
expenditures, such as major improvements, new garages and access gates,
are expected to be funded by financing activities and are therefore not
included in the calculation of Funds Available for Distribution. The
increase in recurring capital expenditures for the three months ended
March 31, 1999 compared to 1998 was primarily due to the Operating
Partnership's change in accounting policy to capitalize carpets starting
January 1, 1999. Without carpet expenditures, recurring capital
expenditures for the three months ended March 31, 1999 would have been
$700,000.
(2) Non-recurring capital expenditures include renovations in the amount of
$422,000 in 1999 and $261,000 in 1998; $166,000 and $51,000 for access
gates and security fences in 1999 and 1998, respectively; $140,000 and
$265,000 for other revenue enhancement expenditures in 1999 and 1998,
respectively and $186,000 for improvements at Summit Norcroft I completed
in conjunction with the development of Summit Norcroft II in 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There has been no material change in the Operating Partnership's market
risk since the filing of the Operating Partnership's Annual Report Form 10-K
for the year ended December 31, 1998.
26
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the three months ended March 31, 1999, the Operating Partnership
has issued Units in private placements in reliance on the exemption from
registration under section 4(2) of the Securities Act in the amounts and for
the consideration set forth below:
A. Summit Properties Inc. ("Summit Properties") has issued an aggregate of
559,154 shares of Common Stock pursuant to its Dividend Reinvestment and
Stock Purchase Plan. Summit Properties has contributed the proceeds of
these sales (approximately $9.4 million) to the Operating Partnership in
consideration of an aggregate of 559,154 Units.
B. Summit Properties has issued an aggregate of 25 shares of Common Stock
pursuant to the exercise of stock options. Summit Properties has
contributed the proceeds (approximately $413) of these options to the
Operating Partnership in consideration of an aggregate 25 Units.
C. Summit Properties has issued an aggregate of 65,729 shares of Common
Stock pursuant to its Employee Stock Purchase Plan. Summit Properties has
contributed the proceeds (approximately $1.1 million) of these sales to
the Operating Partnership in consideration of an aggregate of 65,729
Units.
D. Summit Properties has issued an aggregate of 14,181 shares of Common
Stock in connection with restricted stock awards. Each time a share of
Common Stock is issued in connection with such an award, the Operating
Partnership issues a Unit to Summit Properties; consequently, 14,181 Units
have been issued to Summit Properties.
In light of the circumstances under which such Units were issued and
information obtained by the Operating Partnership in connection with such
transactions, management of Summit Properties, in its capacity as general
partner of the Operating Partnership, believes that the Operating Partnership
may rely on such exemption.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amendment No. 14 to the Limited Partnership Agreement of the Operating Partnership (filed
herewith).
3.2 Amendment No. 15 to the Limited Partnership Agreement of the Operating Partnership (filed
herewith).
3.3 Amendment No. 16 to the Limited Partnership Agreement of the Operating Partnership (filed
herewith).
4.1 7.59% Medium-Term Note due on March 16, 2009 in principal amount of $25,000,000 issued by
Summit Properties Partnership, L.P. on March 18, 1999 (filed herewith).
10.1 Articles Supplementary to the Articles of Amendment and Restatement of Summit Properties Inc.
designating 8.95% Series B Cumulative Redeemable Perpetual Preferred Stock of Summit Properties,
dated April 29, 1999 (Incorporated by reference to Exhibit 3.1 of Summit Properties Inc. Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1999, File No. 001-12792).
12.1 Statement Regarding Calculation of Ratio of Earnings to Fixed Charges for the Three Months ended
March 31, 1999 (filed herewith).
27.1 Financial Data Schedule-Three Months ended March 31, 1999 (for SEC use only) (filed herewith).
(b) Reports on Form 8-K
None
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in capacities and on the dates
indicated. Each of the persons set forth below has signed this report as an
officer of Summit Properties Inc., in its capacity as general partner of Summit
Properties Partnership, L.P.
SUMMIT PROPERTIES PARTNERSHIP, L.P.
MAY 17, 1999 /S/ WILLIAM F. PAULSEN
---------------------------- ------------------------------------------
(DATE) WILLIAM F. PAULSEN,
CHIEF EXECUTIVE OFFICER
MAY 17, 1999 /S/ MICHAEL L. SCHWARZ
---------------------------- ------------------------------------------
(DATE) MICHAEL L. SCHWARZ, EXECUTIVE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
28
EXHIBIT INDEX
3.1 Amendment No. 14 to the Limited Partnership Agreement of the Operating Partnership (filed
herewith).
3.2 Amendment No. 15 to the Limited Partnership Agreement of the Operating Partnership (filed
herewith).
3.3 Amendment No. 16 to the Limited Partnership Agreement of the Operating Partnership (filed
herewith).
4.1 7.59% Medium-Term Note due on March 16, 2009 in principal amount of $25,000,000 issued by
Summit Properties Partnership, L.P. on March 18, 1999 (filed herewith).
10.1 Articles Supplementary to the Articles of Amendment and Restatement of Summit Properties Inc.
designating 8.95% Series B Cumulative Redeemable Perpetual Preferred Stock of Summit Properties,
dated April 29, 1999 (Incorporated by reference to Exhibit 3.1 of Summit Properties Inc. Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1999, File No. 001-12792).
12.1 Statement Regarding Calculation of Ratio of Earnings to Fixed Charges for the Three Months ended
March 31, 1999 (filed herewith).
27.1 Financial Data Schedule - Three Months ended March 31, 1999 (for SEC use only) (filed herewith).
29