SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number: 000-22683
GABLES REALTY LIMITED PARTNERSHIP
(Exact name of Registrant as specified in its Charter)
DELAWARE 58-2077966
(State of Incorporation) (I.R.S. Employer Identification No.)
2859 Paces Ferry Road, Suite 1450
Atlanta, Georgia 30339
(Address of principal executive offices, including zip code)
(770) 436 - 4600
(Registrant's telephone number, including area code)
N/A
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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.
(1) (X) YES ( ) NO
(2) (X) YES ( ) NO
Page-2
GABLES REALTY LIMITED PARTNERSHIP
FORM 10 - Q INDEX
Part I - Financial Information Page
Item 1: Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II - Other Information 24
Item 1: Legal Proceedings
Item 2: Changes in Securities
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
Signature 26
Page-3
PART 1. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
GABLES REALTY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Unaudited and Amounts in Thousands, Except Per Unit Amounts)
March 31, December 31,
1998 1997
---- ----
ASSETS:
Real estate assets:
Land ....................................................................... $150,894 $ 150,894
Buildings ................................................................... 772,078 770,305
Furniture, fixtures and equipment ........................................... 61,526 60,015
Construction in progress .................................................... 74,594 53,240
Land held for future development ............................................ 27,816 21,774
--------- ---------
Real estate assets before accumulated depreciation ....................... 1,086,908 1,056,228
Less: accumulated depreciation ............................................. (105,699) (98,236)
--------- ---------
Net real estate assets .................................................... 981,209 957,992
Cash and cash equivalents ...................................................... 5,924 3,179
Restricted cash ................................................................ 3,862 4,498
Deferred charges, net .......................................................... 4,615 4,194
Other assets, net .............................................................. 14,725 11,304
--------- ---------
Total assets .............................................................. $ 1,010,335 $ 981,167
========= =========
LIABILITIES AND PARTNERS' CAPITAL:
Notes payable .................................................................. $ 479,117 $ 435,362
Accrued interest payable ....................................................... 2,182 1,999
Preferred distributions payable ............................................... 424 424
Real estate taxes payable ...................................................... 5,018 13,568
Accounts payable and accrued expenses - construction ........................... 7,612 8,505
Accounts payable and accrued expenses - operating .............................. 5,303 5,552
Security deposits .............................................................. 2,276 2,260
--------- ---------
Total liabilities ......................................................... 501,932 467,670
--------- ---------
Limited partners' capital interest (4,053 and 4,056 common Units),
at redemption value ......................................................... 107,849 110,866
--------- ---------
Commitments and contingencies
Partners' capital:
Preferred partners (4,600 and 4,600 preferred Units), at $25.00
liquidation preference ..................................................... 115,000 115,000
General partner (261 and 260 common Units) ................................... 3,877 3,907
Limited partner (21,812 and 21,730 common Units) ............................. 281,677 283,724
--------- ---------
Total partners' capital ..................................................... 400,554 402,631
--------- ---------
Total liabilities, limited partners' capital interest and partner's capital $ 1,010,335 $ 981,167
========= =========
<FN>
The accompanying notes are an integral part of these balance sheets.
</FN>
Page-4
GABLES REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and Amounts in Thousands, Except Per Unit Amounts)
Three Months Ended March 31,
1998 1997
------ ------
Rental revenues .................................................... $ 38,561 $ 29,483
Other property revenues ............................................ 1,789 1,338
--------- ---------
Total property revenues ....................................... 40,350 30,821
--------- ---------
Property management revenues ....................................... 667 799
Other .............................................................. 473 612
--------- ---------
Total other revenues .......................................... 1,140 1,411
--------- ---------
Total revenues ................................................ 41,490 32,232
--------- ---------
Property operating and maintenance (exclusive of items shown
separately below) ............................................. 13,630 11,058
Depreciation and amortization ...................................... 7,596 5,337
Amortization of deferred financing costs ........................... 222 281
Property management - owned ........................................ 1,076 828
Property management - third party .................................. 578 640
General and administrative ......................................... 1,060 881
Interest ........................................................... 6,335 5,815
Credit enhancement fees ............................................ 121 128
Loss on treasury lock extension .................................... 1,811 --
--------- ---------
Total expenses ................................................ 32,429 24,968
--------- ---------
Income before equity in income of joint ventures and interest income 9,061 7,264
Equity in income of joint ventures ................................. 75 66
Interest income .................................................... 62 122
--------- ---------
Income before gain on sale of real estate assets ................... 9,198 7,452
Gain on sale of real estate assets ................................. -- 4,858
--------- ---------
Income before extraordinary loss ................................... 9,198 12,310
Extraordinary loss ................................................. -- (712)
--------- ---------
Net income ......................................................... 9,198 11,598
Dividends to preferred unitholders ................................. (2,386) --
--------- ---------
Net income available to common unitholders ......................... $ 6,812 $ 11,598
========= =========
Weighted average number of common Units outstanding - basic ........ 26,077 22,856
Weighted average number of common Units outstanding - diluted ...... 26,227 23,016
Per Common Unit Information:
Income before extraordinary loss - basic ........................... $ 0.26 $ 0.54
Extraordinary loss - basic ......................................... -- ($ 0.03)
Net income - basic ................................................. $ 0.26 $ 0.51
Income before extraordinary loss - diluted ......................... $ 0.26 $ 0.53
Extraordinary loss - diluted ....................................... -- ($ 0.03)
Net income - diluted ............................................... $ 0.26 $ 0.50
<FN>
The accompanying notes are an integral part of these statements.
</FN>
Page-5
GABLES REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and Amounts in Thousands, Except Per Unit Amounts)
Three Months Ended March 31,
1998 1997
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income ....................................................... $ 9,198 $ 11,598
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................. 7,818 5,618
Equity in income of joint ventures ............................ (75) (66)
Gain on sale of real estate assets ............................ -- (4,858)
Long-term compensation expense ................................ 255 144
Loss on treasury lock extension ............................... 1,811 --
Extraordinary loss ............................................ -- 712
Change in operating assets and liabilities:
Restricted cash ............................................. 810 2,416
Other assets ................................................ (2,588) 457
Other liabilities, net ...................................... (10,361) (7,339)
-------- -------
Net cash provided by operating activities .............. 6,868 8,682
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Purchase and construction of real estate assets .................. (31,233) (23,748)
Net proceeds from sale of real estate assets ..................... -- 12,333
Long-term land lease payments .................................... (1,000) --
Distributions received from joint ventures ....................... 99 63
-------- -------
Net cash used in investing activities ....................... (32,134) (11,352)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from the exercise of share options ...................... 552 249
Share Builder Plan contributions ................................. 18 11
Payments of deferred financing costs ............................. (692) (20)
Notes payable proceeds ........................................... 147,500 29,237
Notes payable repayments ......................................... (103,745) (16,945)
Principal escrow deposits ........................................ (174) (171)
Preferred distributions paid ..................................... (2,386) --
Common distributions paid ($0.50 and $0.49 per Unit, respectively) (13,062) (11,194)
-------- -------
Net cash provided by financing activities ................... 28,011 1,167
-------- -------
Net change in cash and cash equivalents .......................... 2,745 (1,503)
Cash and cash equivalents, beginning of period ................... 3,179 4,385
-------- -------
Cash and cash equivalents, end of period ......................... $ 5,924 $ 2,882
======== =======
Supplemental disclosure of cash flow information:
Cash paid for interest ...................................... $ 7,697 $ 7,019
Interest capitalized ........................................ 1,545 1,275
-------- -------
Cash paid for interest, net of amounts capitalized .......... $ 6,152 $ 5,744
======== =======
<FN>
The accompanying notes are an integral part of these statements.
</FN>
Page-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------------------
1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
Gables Realty Limited Partnership (the "Operating Partnership") is the entity
through which Gables Residential Trust (the "Company"), a self-administered and
self-managed real estate investment trust ("REIT"), conducts substantially all
of its business and owns (either directly or through subsidiaries) substantially
all of its assets. In 1993, the Company was formed under Maryland law and the
Operating Partnership was organized as a Delaware limited partnership to
continue and to expand the multifamily apartment community management,
development, construction and acquisition operations of its privately owned
predecessor organization. The term "Gables Residential Group" or "Group" as used
herein refers to the privately owned predecessor organization prior to the
Company's initial public offering in January, 1994 (the "Initial Offering" or
"IPO") and the concurrent completion of the various transactions that occurred
simultaneously therewith (the "Formation Transactions"). The term "Operating
Partnership" or "Gables" as used herein means Gables Realty Limited Partnership
and its subsidiaries on a consolidated basis, or, where the context so requires,
Gables Realty Limited Partnership only. The Operating Partnership's third party
management businesses are conducted through two subsidiaries, Central Apartment
Management, Inc., a Texas corporation, and East Apartment Management, Inc., a
Georgia corporation (each, a "Management Company").
The Company was an 84.5% economic owner of the Operating Partnership as of March
31, 1998 (excluding the Company's direct or indirect ownership of 100% of the
Operating Partnership's Series A Preferred Units). The Company controls the
Operating Partnership through Gables GP, Inc. ("GGPI"), a wholly-owned
subsidiary of the Company and the sole general partner of the Operating
Partnership (this structure is commonly referred to as an umbrella partnership
REIT or "UPREIT"). The board of directors of GGPI, the members of which are the
same as the members of the Board of Trustees of the Company, manages the affairs
of the Operating Partnership by directing the affairs of GGPI. The Company's
limited partner and indirect general partner interests in the Operating
Partnership entitle it to share in cash distributions from, and in the profits
and losses of, the Operating Partnership in proportion to its ownership interest
therein and entitle the Company to vote on all matters requiring a vote of the
limited partners.
The other limited partners of the Operating Partnership are persons who
contributed their direct or indirect interests in certain properties to the
Operating Partnership primarily in connection with the Formation Transactions.
The Operating Partnership is obligated to redeem each unit of limited
partnership ("Unit") held by a person other than the Company, at the request of
the holder thereof, for cash equal to the fair market value of a share of the
Company's common shares of beneficial interest, par value $.01 per share, at the
time of such redemption, provided that the Company at its option may elect to
acquire any such Unit presented for redemption for one common share or cash. The
Company presently anticipates that it will elect to issue its common shares to
acquire Units presented for redemption, rather than paying cash. Such limited
partners' redemption rights are reflected in "limited partners' capital
interest" in the accompanying consolidated balance sheets at the cash redemption
amount at the balance sheet date. With each such redemption the Company's
percentage ownership interest in the Operating Partnership will increase. In
addition, whenever the Company issues common shares or preferred shares of
beneficial interest, par value $.01 per share, the Company is obligated to
contribute any net proceeds therefrom to the Operating Partnership and the
Operating Partnership is obligated to issue an equivalent number of Units to the
Company.
Distributions to holders of Units are made to enable distributions to be made to
the Company's shareholders under its dividend policy. Federal income tax laws
require the Company, as a REIT, to distribute 95% of its ordinary taxable
income. The Operating Partnership makes distributions to the Company to enable
it to satisfy this requirement.
As of March 31, 1998, Gables owned 59 completed multifamily apartment
communities comprising 17,816 apartment homes, of which 35 were developed and 24
were acquired by Gables, and an indirect 25% general partner interest in two
apartment communities developed by Gables comprising 663 apartment homes. Gables
also owned five multifamily apartment communities that were under construction
at March 31, 1998 that are expected to comprise 1,409 apartment homes upon
completion. As of March 31, 1998, Gables owned parcels of land for the future
development of eight apartment communities expected to comprise an estimated
1,992 apartment homes. Additionally, Gables has contracts or options to acquire
Page-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------------------
additional parcels of land. There can be no assurance that Gables will acquire
these land parcels, however it is Gables' intent to develop an apartment
community on each such land parcel, if purchased.
On April 1, 1998, Gables acquired the properties and operations of Trammell Crow
Residential South Florida ("TCR/SF"), which consisted of 15 multifamily
apartment communities (the "South Florida Communities") containing a total of
4,197 apartment homes (assuming completion of two South Florida Communities
currently under construction), and all of TCR/SF's residential construction and
development and third party management activities in South Florida
(collectively, the "South Florida Transaction"). In consideration for such
properties and operations, Gables (i) paid $155.0 million in cash, (ii) assumed
approximately $135.9 million of tax-exempt debt and (iii) issued approximately
2,348 Units. In addition, up to $12.5 million of the purchase price was deferred
by Gables until January 1, 2000, at which time Gables will issue a number of
Units equal in value to such deferred amount. The South Florida Communities are
located in Palm Beach County, Broward County and Dade County and encompass the
metropolitan areas of Palm Beach, Ft. Lauderdale and Miami, respectively.
In April, 1998, Gables acquired four multifamily apartment communities
comprising a total of 913 apartment homes located in Houston, Texas (the
"Greystone Transaction"). In connection with such acquisition, Gables assumed
approximately $28.2 million of indebtedness and issued approximately 647 Units.
In addition, up to $2.0 million of the purchase price was deferred by Gables for
up to two years from the April, 1998 closing date, at which time Gables will
issue a number of Units, based on the prior two years' economic performance,
equal in value to such deferred amount.
As of April 30, 1998, Gables had contracts to acquire three multifamily
apartment communities comprising a total of 599 apartment homes. There can be no
assurance that such acquisitions will close as contemplated, or that such
acquisitions will be consummated at all. Gables is pursuing other acquisition
opportunities in the ordinary course of business which have not yet been, or may
never be, put under contract.
2. SECONDARY OFFERINGS AND ISSUANCES OF OPERATING PARTNERSHIP UNITS
Secondary Common Share Offerings
- --------------------------------
Since the IPO, the Company has issued a total of 11,521 common shares in seven
offerings generating $260,241 in net proceeds which were contributed to the
Operating Partnership in exchange for an equal number of common Units and were
generally used (i) to reduce outstanding indebtedness under interim financing
vehicles utilized to fund Gables' development and acquisition activities and
(ii) for general working capital purposes including funding of future
development and acquisition activities.
Preferred Share Offering
- ------------------------
On July 24, 1997, the Company issued 4,600 shares of 8.30% Series A Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) (the
"Series A Preferred Shares"). The net proceeds from this offering of
approximately $111 million were contributed to the Operating Partnership in
exchange for an equal number of preferred Units with similar economic rights and
preferences and Gables used the net proceeds to reduce outstanding indebtedness
under the interim financing vehicles discussed above. The Series A Preferred
Shares, which may be redeemed by the Company at $25.00 per share, plus accrued
and unpaid dividends, on or after July 24, 2002, have no stated maturity,
sinking fund or mandatory redemption and are not convertible into any other
securities of the Company.
Page-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------------------
Additional Issuances of Operating Partnership Units
- ---------------------------------------------------
On December 5, 1995, Gables acquired a parcel of land for the development of an
apartment community, financed in part through the issuance of 111 Units. On July
26, 1996, Gables acquired an apartment community comprising 500 apartment homes,
financed in part through the issuance of 244 Units. On August 21, 1997, Gables
acquired an apartment community comprising 82 apartment homes, financed in part
through the issuance of 95 Units. On October 17, 1997, Gables acquired an
apartment community comprising 295 apartment homes, financed in part through the
issuance of 453 Units. On April 1, 1998, Gables issued 2,348 Units in connection
with the South Florida Transaction. On April 14 and 22, 1998, Gables issued 535
and 112 Units, respectively, in connection with the Greystone Transaction.
3. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
accounts of Gables Realty Limited Partnership and its subsidiaries. As a result
of the structure of the business combination, certain partners and owners of the
entities in Gables Residential Group received common shares of the Company
and/or Units in the Operating Partnership. Purchase accounting was applied to
the acquisition of all non-controlled interests. The acquisition of all other
interests was accounted for as a reorganization of entities under common control
and, accordingly, was reflected at historical cost in a manner similar to that
in pooling of interests accounting. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying interim unaudited financial statements have been prepared by
Gables' management in accordance with generally accepted accounting principles
("GAAP") for interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normally recurring adjustments) considered necessary for a fair
presentation for these interim periods have been included. The results of
operations for the interim period ended March 31, 1998 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 financial statements
of Gables Realty Limited Partnership, included in the Gables Realty Limited
Partnership Form 10-K for the year ended December 31, 1997.
4. EXTRAORDINARY LOSS
Extraordinary loss of $712 for the three months ended March 31, 1997 represents
(i) the write-off of unamortized deferred financing costs and prepaid credit
enhancement fees associated with the defeasance of the tax-exempt bond financing
encumbering the Club Candlewood property that was sold in January, 1997 and (ii)
the write-off of unamortized deferred financing costs associated with the
February 28, 1997 retirement of a conventional mortgage note payable that was
scheduled to mature on September 1, 1997.
5. EARNINGS PER UNIT
Basic earnings per Unit are computed based on net income available to common
unitholders and the weighted average number of common Units outstanding. Diluted
earnings per Unit reflect the assumed issuance of common Units under share
option and incentive plans. In February, 1997, the FASB issued SFAS No. 128,
"Earnings Per Share," which specifies the computation, presentation and
disclosure requirements for earnings per share. Gables adopted SFAS No. 128 for
the year ended December 31, 1997. All prior period earnings per share data were
restated to conform with the provisions of SFAS No. 128. The per Unit amounts
reported under SFAS No. 128 are not materially different from those calculated
and presented under APB Opinion No. 15.
Page-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------------------
The numerator and denominator used for both basic and diluted earnings per Unit
computations are as follows:
Three Months Ended March 31,
1998 1997
------- -------
BASIC AND DILUTED INCOME AVAILABLE TO
COMMON UNITHOLDERS (NUMERATOR):
Income before extraordinary loss $6,812 $12,310
Net income $6,812 $11,598
COMMON UNITS (DENOMINATOR):
Average Units outstanding - basic 26,077 22,856
Incremental Units from assumed
conversions of stock options 150 160
------ ------
Average Units outstanding-diluted 26,227 23,016
====== ======
6. INTEREST RATE PROTECTION AGREEMENTS
Gables uses interest rate protection agreements in the form of "rate caps" and
"rate swaps" to manage its exposure to interest rate changes. These agreements
are considered hedges of Gables' borrowings. Upfront amounts paid to purchase
rate cap agreements are capitalized and amortized over the terms of the related
agreements and are written off upon the expiration thereof. Such amortization is
included in amortization of deferred financing costs in the accompanying
statements of operations. Monthly amounts paid or received under rate cap and
rate swap agreements are recognized as adjustments to interest expense.
In certain situations, Gables uses forward treasury lock agreements to mitigate
the potential effects of changes in interest rates for prospective transactions.
Cash payments made or received upon settlement of such hedge agreements are
deferred and amortized as an adjustment to interest expense over the life of the
related debt instrument. In the first quarter of 1998, Gables amended two such
agreements to extend the termination date. In connection with such extension,
Gables recorded a $1,811 loss in accordance with GAAP. The market rate in effect
on the date of extension is used as the "locked-in" rate for purposes of
recording interest expense over the life of the debt instrument the treasury
lock hedged.
Page-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
The Operating Partnership is the entity through which the Company, a
self-administered and self-managed real estate investment trust (a "REIT")
focused within the multifamily industry in the Southwestern and Southeastern
region of the United States (the "Sunbelt" or "Sunbelt Region"), conducts
substantially all of its business and owns (either directly or through
subsidiaries) substantially all of its assets. Gables' operating performance
relies predominantly on net operating income from its apartment communities.
Gables' net operating income is influenced by operating expenses and rental
revenues, which are affected by the supply and demand dynamics within Gables'
markets. Gables' performance is also affected by the general availability and
cost of capital and by its ability to develop and to acquire additional
apartment communities with returns in excess of its blended cost of equity and
debt capital.
The Company's objective is to increase shareowner value by being a dominant
owner and operator of Class A multifamily communities in the Sunbelt Region. To
achieve its objective, Gables employs a number of strategies including operating
high quality, well-located assets in a diverse set of select Sunbelt markets
which have similar demographic characteristics such as diverse economies with
projected job growth. Gables' primary target customer is the more affluent
renter-by-choice, which requires a focus on customer service through highly
trained associates and the maintenance of Gables' assets to a high standard.
Gables intends to grow cash flow from operating communities through innovative,
proactive property management that focuses on resident satisfaction and
retention, increases in rents and occupancy levels, and the control of operating
expenses through improved economies of scale. Due to the cyclical nature of the
real estate markets, Gables has adopted an investment strategy based on strong
local presence and expertise which will allow for growth in assets through both
acquisition and development as warranted by underlying market fundamentals, and
that will provide for both favorable initial returns and long-term growth
prospects. Gables believes the successful execution of these operating and
investment strategies will result in consistent high quality growth in operating
cash flow.
Gables believes that it is well positioned to achieve its objective as a result
of its long-established presence as a fully integrated real estate management,
development, construction and acquisition company in each of Gables' core
markets for the past fifteen years. Gables believes that this long-term, local
market presence gives it a competitive advantage with regard to its ability to
generate increased cash flow from property operations during different economic
cycles and to new investment opportunities that involve site selection, market
information and requests for entitlements and zoning petitions. The core markets
are geographically independent, rely on diverse economic foundations and have
experienced job growth substantially above national averages. Gables recently
entered the Orlando and South Florida markets which have the common growth
characteristics of the core markets.
Portfolio wide occupancy levels have remained high and portfolio wide rental
rates have continued to increase during each of the last several years. Gables
expects portfolio wide rental expenses to increase at a rate slightly ahead of
inflation, but less than the increase in property revenues, for the coming
twelve months. In certain situations, management's evaluation of the growth
prospects for a specific asset may result in a determination to dispose of the
asset. In this event, management would intend to sell the asset and utilize the
net proceeds from any such sale to invest in new assets which are expected to
have better growth prospects or to reduce indebtedness. Gables maintains
staffing levels sufficient to meet the existing construction, acquisition, and
leasing activities. If market conditions warrant, management would anticipate
adjusting staffing levels to mitigate a negative impact on results of
operations.
Page-11
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------------------
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the accompanying consolidated
financial statements and the notes thereto. This Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results or developments could differ materially from those
projected in such statements as a result of certain factors set forth in the
section entitled "Certain Factors Affecting Future Operating Results" on Page 22
of this Form 10-Q and elsewhere in this report.
Gables Realty Limited Partnership and Initial Public Offering of Gables
- --------------------------------------------------------------------------------
Residential Trust
-----------------
Gables Realty Limited Partnership (the "Operating Partnership"), a Delaware
limited partnership, was formed in 1993 to conduct the multifamily apartment
community management, development, construction and acquisition operations for
Gables Residential Trust (the "Company"). On January 26, 1994, the Company
completed its initial public offering (the "IPO") and, in connection therewith,
sold 9,430,000 common shares at a price to the public of $22.50 per common
share. The net proceeds from such sale totaled approximately $190 million, a
portion of which was used by the Company to acquire an economic and voting
interest in the Operating Partnership, which was formed to succeed to
substantially all of the interests of its privately owned predecessor
organization. The Company, a self-administered and self-managed REIT, became the
majority owner of the Operating Partnership upon the completion of the IPO. The
term "Operating Partnership" or "Gables" as used herein means Gables Realty
Limited Partnership and its subsidiaries on a consolidated basis or, where the
context so requires, Gables Realty Limited Partnership only.
Secondary Offerings and Issuances of Operating Partnership Units
- -----------------------------------------------------------------
Secondary Common Share Offerings
- --------------------------------
Since the IPO, the Company has issued a total of 11,521 common shares in seven
offerings generating $260,241 in net proceeds. Such proceeds were contributed to
the Operating Partnership in exchange for an equal number of Units of limited
partnership interest in the Operating Partnership ("Units") and were generally
used (i) to reduce outstanding indebtedness under interim financing vehicles
utilized to fund Gables' development and acquisition activities and (ii) for
general working capital purposes including funding of future development and
acquisition activities.
Preferred Share Offering
- ------------------------
On July 24, 1997, the Company issued 4,600 shares of 8.30% Series A Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) (the
"Series A Preferred Shares"). The net proceeds from this offering of
approximately $111 million were contributed to the Operating Partnership in
exchange for an equal number of preferred Units with similar economic rights and
preferences and Gables used the net proceeds to reduce outstanding indebtedness
under the interim financing vehicles discussed above. The Series A Preferred
Shares, which may be redeemed by the Company at $25.00 per share, plus accrued
and unpaid dividends, on or after July 24, 2002, have no stated maturity,
sinking fund or mandatory redemption and are not convertible into any other
securities of the Company.
Additional Issuances of Operating Partnership Units
- ---------------------------------------------------
On December 5, 1995, Gables acquired a parcel of land for the development of an
apartment community, financed in part through the issuance of 111 Units. On July
26, 1996, Gables acquired an apartment community comprising 500 apartment homes,
financed in part through the issuance of 244 Units. On August 21, 1997, Gables
acquired an apartment community comprising 82 apartment homes, financed in part
through the issuance of 95 Units. On October 17, 1997, Gables acquired an
Page-12
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------------------
apartment community comprising 295 apartment homes, financed in part through the
issuance of 453 Units. On April 1, 1998, Gables issued 2,348 Units in connection
with the acquisition of the properties and operations of Trammell Crow
Residential South Florida ("TCR/SF") consisting of 15 apartment communities
comprising 4,197 apartment homes and all of TCR/SF's residential construction
and development and third party management activities in South Florida. On April
14 and 22, 1998, Gables issued 535 and 112 Units, respectively, in connection
with the acquisition of four apartment communities comprising 913 apartment
homes.
Results of Operations
- ---------------------
COMPARISON OF OPERATING RESULTS OF GABLES FOR THE THREE MONTHS ENDED MARCH 31,
1998 (THE "1998 PERIOD") TO THE THREE MONTHS ENDED MARCH 31, 1997 (THE "1997
PERIOD").
Gables' net income is generated primarily from the operation of its apartment
communities. For purposes of evaluating comparative operating performance,
Gables categorizes its operating communities based on the period each community
reaches stabilized occupancy. A community is considered by Gables to have
achieved stabilized occupancy on the earlier to occur of (i) attainment of 93%
physical occupancy or (ii) one year after completion of construction. The
operating performance for all of Gables' apartment communities combined for the
three months ended March 31, 1998 and 1997 is summarized as follows:
Three Months Ended March 31,
----------- ---------- ---------- -----------
$ %
1998 1997 Change Change
----------- ---------- ---------- -----------
RENTAL AND OTHER REVENUE:
Same store communities (1) $29,287 $27,879 $1,408 5.1%
Communities stabilized during the 1998 Period, but not during the 1997 4,812 2,713 2,099 77.4%
Period (2)
Development and lease-up communities (3) 831 54 777 1438.9%
Acquired communities (4) 5,420 0 5,420 ----
Sold communities (5) 0 175 (175) -100.0%
--------- ---------- ---------- -----------
Total property revenues $40,350 $30,821 $9,529 30.9%
--------- ---------- ---------- -----------
PROPERTY OPERATING AND MAINTENANCE EXPENSE (EXCLUSIVE OF DEPRECIATION
AND AMORTIZATION):
Same store communities (1) $9,835 $9,907 ($72) -0.7%
Communities stabilized during the 1998 Period, but not during the 1997 1,650 1,027 623 60.7%
Period (2)
Development and lease-up communities (3) 265 9 256 2844.4%
Acquired communities (4) 1,880 0 1,880 ----
Sold communities (5) 0 115 (115) -100.0%
--------- ---------- ---------- -----------
Total specified expenses $13,630 $11,058 $2,572 23.3%
--------- ---------- ---------- -----------
Revenues in excess of specified expenses $26,720 $19,763 $6,957 35.2%
--------- ---------- ---------- -----------
Revenues in excess of specified expenses as a percentage of total
property revenues 66.2% 64.1% --- 2.1%
--------- ---------- ---------- -----------
<FN>
(1) Communities which were owned and fully stabilized throughout both the 1998
Period and 1997 Period.
(2) Communities which were completed and fully stabilized during all of the
1998 Period, but were not completed and fully stabilized during all of the
1997 Period.
(3) Communities in the development/lease-up phase which were not fully
stabilized during all or any of the 1998 Period.
(4) Communities which were acquired subsequent to January 1, 1997.
(5) Communities which were sold subsequent to January 1, 1997.
</FN>
Page-13
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------------------
Total property revenues increased $9,529, or 30.9%, from $30,821 to $40,350 due
primarily to increases in the number of apartment homes resulting from the
development and acquisition of additional communities and to increases in rental
rates on communities stabilized throughout both periods ("same store"). Below is
additional information regarding the increases in total property revenues for
three of the five community categories presented in the preceding table:
Same store communities:
Percent
Increase Increase
(Decrease) (Decrease) Increase
Number of in Total in Total Occupancy (Decrease)
Number of Apartment Percent Property Property During the in
Market Properties Homes of Total Revenues Revenues 1998 Period Occupancy
-------- ----------- ---------- ---------- ---------- ---------- ----------- ---------
Houston 14 5,045 37.7% $841 8.0% 95.6% 1.0%
Atlanta 12 3,470 25.9% 171 2.4% 95.4% 2.4%
Dallas 7 1,659 12.4% 281 7.2% 94.5% 0.4%
Nashville 4 1,166 8.7% -32 -1.4% 95.6% -0.6%
Memphis 2 964 7.2% 99 6.0% 95.3% 4.6%
San Antonio 2 544 4.1% 25 2.2% 91.8% -0.7%
Austin 2 532 4.0% 23 1.8% 91.8% -1.1%
----- ------ ------ ------ ------ -------- -------
43 13,380 100.0% $1,408 5.1% 95.1% 1.2%
===== ====== ====== ====== ====== ======== =======
Communities stabilized during the 1998 Period but not during the 1997 Period:
Increase
Number of in Total Occupancy
Number of Apartment Percent Property During the
Market Properties Homes of Total Revenues 1998 Period
- -------- ----------- --------- --------- --------- ------------
Atlanta 4 1,246 61.2% $1,675 93.6%
Memphis 2 490 24.1% 310 91.4%
Dallas 1 300 14.7% 114 93.7%
--- ------ ------ ------ -----
7 2,036 100.0% $2,099 93.1%
=== ====== ====== ====== =====
Development and lease-up communities:
Increase
Number of in Total Occupancy
Number of Apartment Percent Property During the
Market Properties Homes of Total Revenues 1998 Period
- -------- ------------ --------- -------- -------- -----------
Austin 2 529 57.8% $772 51.6%
Atlanta 1 386 42.2% 5 0.3%
--- ---- ------ ---- ------
3 915 100.0% $777 32.2%
=== ==== ====== ==== ======
Other revenues decreased $271, or 19.2%, from $1,411 to $1,140 due primarily to
a decrease in property management revenues of $132, or 16.5%, from $799 to $667
resulting from a net decrease of properties managed by Gables for third parties
primarily due to these properties being sold by the owners.
Page-14
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------------------
Property operating and maintenance expense (exclusive of depreciation and
amortization) increased $2,572, or 23.3%, from $11,058 to $13,630 due to an
increase in apartment homes resulting from the development and acquisition of
additional communities. Such increase was offset in part by a decrease in
property operating and maintenance expense for same store communities of 0.7%.
The same store decrease in operating expenses represents reduced utilities and
marketing expenses, offset in part by increased payroll costs and property
taxes.
Depreciation and amortization expense increased $2,259, or 42.3%, from $5,337 to
$7,596 due primarily to the completion of newly developed communities and
acquisition of other communities.
Property management expense for owned communities and third party properties on
a combined basis increased $186, or 12.7%, from $1,468 to $1,654 due primarily
to inflationary increases in expenses, and certain non-recurring expense savings
in the 1997 Period. Gables allocates property management expenses to both owned
communities and third party properties based on the proportionate share of total
apartment homes and units managed.
General and administrative expense increased $179, or 20.3%, from $881 to $1,060
due primarily to (i) increases in certain costs associated with increases in
Gables' size, (ii) increased compensation costs and (iii) inflationary increases
in expenses.
Interest expense increased $520, or 8.9%, from $5,815 to $6,335 due to an
increase in operating debt associated with newly developed or acquired
communities in addition to communities currently in the lease-up phase. These
increases in interest expense have been offset in part as a result of the
offerings the Company has consummated between periods, the proceeds of which
have been contributed to the Operating Partnership and primarily used to reduce
indebtedness.
Loss on treasury lock extension of $1,811 in the 1998 Period represents the loss
recorded, in accordance with generally accepted accounting principles ("GAAP"),
in connection with the amendment of two forward treasury lock agreements to
extend the termination date. The market rate in effect on the date of extension
is used as the "locked-in rate" for purposes of recording interest expense over
the life of the debt instrument the treasury lock hedged.
Gain on sale of real estate assets of $4,858 in the 1997 Period represents the
gain generated in connection with the January, 1997 sale of Club Candlewood, a
community comprised of 486 apartment homes.
Extraordinary loss of $712 in the 1997 Period represents (i) the write-off of
unamortized deferred financing costs and prepaid credit enhancement fees
associated with the defeasance of the tax-exempt bond financing encumbering the
Club Candlewood property that was sold in January, 1997 and (ii) the write-off
of unamortized deferred financing costs associated with the February 28, 1997
retirement of a conventional mortgage note payable that was scheduled to mature
on September 1, 1997.
Net income available to common unitholders decreased $4,786, or 41.3%, from
$11,598 to $6,812 primarily due to the reasons discussed above.
Liquidity and Capital Resources
- -------------------------------
Gables' net cash provided by operating activities decreased from $8,682 for the
three months ended March 31, 1997 to $6,868 for the three months ended March 31,
1998, due to (i) the change in restricted cash between periods of $1,606, (ii)
the change in other assets between periods of $3,045, and (iii) the change in
other liabilities between periods of $3,022. Such decreases were offset in part
by an increase of $5,859 in income before certain non-cash items including
depreciation, amortization, equity in income of joint ventures, gain on sale of
real estate assets, long-term compensation expense, loss on treasury lock
extension and extraordinary losses.
Page-15
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- -------------------------------------------------------------
Gables' net cash used in investing activities increased from $11,352 for the
three months ended March 31, 1997 to $32,134 for the three months ended March
31, 1998, due primarily to increased development and acquisition activities in
1998 when compared to 1997, and the net proceeds from the sale of real estate
assets in 1997. During the three months ended March 31, 1998, Gables expended
approximately $28.8 million related to development expenditures, including
related land acquisitions; approximately $1.1 million related to capital
expenditures for operating apartment communities; and approximately $2.2 million
related to renovation expenditures.
Gables' net cash provided by financing activities increased from $1,167 for the
three months ended March 31, 1997 to $28,011 for the three months ended March
31, 1998. During the three months ended March 31, 1998, Gables had net
borrowings of $43.8 million which were used primarily to fund Gables'
development and acquisition activities discussed previously. These proceeds from
financing activities were offset in part by the payment of dividends and
distributions totaling approximately $13.1 million.
In March, 1998, Gables closed a $100.0 million offering of the Operating
Partnership's senior unsecured notes and used the net proceeds of approximately
$98.8 million to reduce borrowings under its Credit Facilities. The notes bear
interest at 6.80%, were priced to yield 6.85% and mature in March, 2005.
As of March 31, 1998, Gables had total indebtedness of $479,117, cash and cash
equivalents of $5,924 and principal escrow deposits reflected in restricted cash
of $1,921. Gables' indebtedness includes $95,810 in conventional fixed-rate
mortgage notes payable secured by individual properties, $258,382 in unsecured
fixed-rate indebtedness, $104,925 in tax-exempt bond indebtedness and $20,000 in
borrowings outstanding under its Credit Facilities. Gables' indebtedness has an
average of 7.1 years to maturity at March 31, 1998. Excluding monthly principal
amortization payments, over the next five years Gables has the following
scheduled debt maturities for indebtedness outstanding at March 31, 1998:
1998 $ 0
1999 0
2000 20,000
2001 40,000
2002 127,322
The debt maturities in 2000 of $20,000 relate to outstanding indebtedness under
the $175 Million Credit Facility. In May, 1998, the maturity date of such
facility was extended to May, 2001 with two one-year extension options. The debt
maturities in 2002 include $44,930 of tax-exempt bond indebtedness
credit-enhanced through a letter of credit facility which has unlimited one-year
extension options.
Gables' distributions through the first quarter of 1998 have been paid from cash
provided by operating activities. Gables anticipates that distributions will
continue to be paid on a quarterly basis from cash provided by operating
activities.
Gables has met and expects to continue to meet its short-term liquidity
requirements generally through net cash provided by operations. Gables' net cash
provided by operations has been adequate and Gables believes that it will
continue to be adequate to meet both operating requirements and payment of
dividends in accordance with REIT requirements. The budgeted expenditures for
improvements and renovations to the communities, in addition to monthly
principal amortization payments, are also expected to be funded from net cash
provided by operations. Gables anticipates construction and development
activities and land purchases will be initially funded primarily through
borrowings under its Credit Facilities described below.
Page-16
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- -------------------------------------------------------------
Gables expects to meet certain of its long-term liquidity requirements, such as
scheduled debt maturities, repayment of short-term financing of construction and
development activities and possible property acquisitions, through long- term
secured and unsecured borrowings and the issuance of debt securities or
additional equity securities or through the disposition of assets which, in
management's evaluation, may no longer meet Gables' investment requirements.
$175 Million Credit Facility
- ----------------------------
In March, 1996, Gables closed a $175 million unsecured revolving credit
facility. Gables' availability under the facility is limited to the lesser of
the total $175 million commitment or the borrowing base. The borrowing base
available under the facility is based on the value of Gables' unencumbered real
estate assets as compared to the amount of Gables' unsecured indebtedness. As of
March 31, 1998, Gables had $20 million in borrowings outstanding under the
facility and, therefore, had $155 million of remaining capacity on the $175
million available commitment. Borrowings bore interest at LIBOR plus 1.50%
(reduced from 1.65% in November, 1996) through April, 1997. In April, 1997,
Gables' borrowing costs under the facility were reduced to LIBOR plus 1.10% in
connection with the attainment of senior unsecured debt ratings of BBB from
Standard and Poor's and Baa2 from Moody's Investors Service (the "Credit
Ratings"). In August, 1997, Gables' borrowing costs were renegotiated and were
reduced to LIBOR plus 0.80%. Additionally, a competitive bid option was added
for up to 50% of the total commitment. In May, 1998, the $175 million commitment
level was increased to $225 million and the maturity date of the facility was
extended to May, 2001 with two one-year extension options.
$20 Million Credit Facility
- ---------------------------
In November, 1996, Gables closed an unsecured revolving credit facility that
currently provides for up to $20 million in borrowings. This facility has an
initial term of one year and has unlimited one-year extension options. Gables
has exercised the first of its one-year extension options resulting in a
maturity date for the facility of October, 1998. Borrowings bore interest under
this facility at LIBOR plus 1.50% through April, 1997. In April, 1997, Gables'
borrowing costs were reduced to LIBOR plus 1.10% in connection with the
attainment of the Credit Ratings. In August, 1997, Gables' borrowing costs were
renegotiated and were reduced to LIBOR plus 0.80%. As of March 31, 1998, Gables
had no borrowings outstanding under this facility. In May, 1998, the $20 million
commitment was increased to $25 million.
Restrictive Covenants
- ---------------------
Certain of Gables' debt agreements contain customary representations, covenants
and events of default, including covenants which restrict the ability of the
Operating Partnership to make distributions in excess of stated amounts, which
in turn restricts the discretion of the Company to declare and pay dividends. In
general, during any fiscal year the Operating Partnership may only distribute up
to 95% of the Operating Partnership's consolidated income available for
distribution (as defined in the related agreement) exclusive of distributions of
capital gains for such year. The applicable debt agreements contain exceptions
to these limitations to allow the Operating Partnership to make any
distributions necessary to allow the Company to maintain its status as a REIT.
Gables does not anticipate that this provision will adversely effect the ability
of the Operating Partnership to make distributions or the Company to declare
dividends, as currently anticipated.
Acquisitions - South Florida
- ----------------------------
On April 1, 1998, Gables acquired the properties and operations of Trammell Crow
Residential South Florida ("TCR/SF"), which consisted of 15 multifamily
apartment communities (the "South Florida Communities") containing a total of
4,197 apartment homes (assuming completion of two South Florida Communities
currently under construction), and all of TCR/SF's residential construction and
development and third party management activities in South Florida. In
consideration for such properties and operations, Gables (i) paid $155.0 million
Page-17
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- -------------------------------------------------------------
in cash, (ii) assumed approximately $135.9 million of tax-exempt debt and (iii)
issued approximately 2,348 Units. The cash portion of the purchase price was
funded through borrowings under the Credit Facilities. In addition, up to $12.5
million of the purchase price was deferred by Gables until January 1, 2000, at
which time Gables will issue a number of Units equal in value to such deferred
amount.
Acquisitions - Houston
- ----------------------
In April, 1998, Gables acquired four multifamily apartment communities located
in Houston, comprising a total of 913 apartment homes. In connection with such
acquisition, Gables assumed approximately $28.2 million of indebtedness and
issued approximately 647 Units. In addition, up to $2.0 million of the purchase
price was deferred by Gables for up to two years from the April, 1998 closing
date, at which time Gables will issue a number of Units, based on the prior two
years' economic performance, equal in value to such deferred amount.
Page-18
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
DEVELOPMENT COMMUNITIES AT MARCH 31, 1998
Certain information regarding Gables' communities under development at March 31,
1998 is presented below.
Actual or Estimated Quarter of
Number of Total Percent at March 31, 1998 ---------------------------------------------------------
Apartment Budgeted ------------------------- Construction Initial Construction Stabilized
Community Name Homes Cost Complete Leased Occupied Start Occupancy End Occupancy
- ------------------- ------- ---- -------- ------ -------- ------- --------- ----------- ------------
(millions)
ATLANTA, GA
Gables at Sugarloaf 386 $28.7 59% 8% 3% 2 Q 1997 1 Q 1998 1 Q 1999 2 Q 1999
AUSTIN, TX
Gables Bluffstone 256 20.5 96% 29% 22% 1 Q 1997 4 Q 1997 2 Q 1998 1 Q 1999
HOUSTON, TX
Gables New Territory 256 15.2 70% 10% --- 3 Q 1997 2 Q 1998 4 Q 1998 2 Q 1999
ORLANDO, FL
The Commons at
Little Lake Bryan I 280 21.7 79% 100% 28% 2 Q 1997 1 Q 1998 3 Q 1998 3 Q 1998
Gables Celebration 231 23.4 38% 37% --- 3 Q 1997 2 Q 1998 4 Q 1998 4 Q 1998
------- ------
Totals 1,409 $109.5
======= ======
<FN>
The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934, as amended. The projections and estimates contained in the table above are
forward-looking statements. These forward-looking statements involve risks and
uncertainties and actual results may differ materially from those projected in
such statements. Risks associated with Gables' development, construction, and
lease-up activities, which could impact the forward-looking statements made,
include: development opportunities may be abandoned; construction costs of a
community may exceed original estimates, possibly making the community
uneconomical; and construction and lease-up may not be completed on schedule,
resulting in increased debt service and construction costs.
Total budgeted cost includes all capitalized costs incurred and projected to be
incurred to develop the respective community presented in accordance with
generally accepted accounting principles, including land acquisition costs,
construction costs, real estate taxes, interest and loan fees, permits,
professional fees, allocated development overhead, and other regulatory fees.
Stabilized occupancy is defined as the earlier to occur of (i) 93% physical
occupancy or (ii) one year after completion of construction.
</FN>
Page-19
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
STABILIZED APARTMENT COMMUNITIES AT MARCH 31, 1998
Number of March 31, 1998 Scheduled Rent Per
Apartment March 31, 1998 ---------------------------------
Community Name Homes Occupancy Unit Square Foot
- -------------- ----- --------- ---- -----------
Houston, TX
- -----------
Baybrook Village 776 99% $570 $0.71
Gables Bradford Place 372 96% 735 0.85
Gables Bradford Pointe 360 96% 638 0.83
Gables Champions 404 96% 798 0.88
Gables CityPlaza 246 98% 876 0.99
Gables Cityscape 252 98% 902 1.06
Gables CityWalk/Waterford Sq. 317 98% 891 1.10
Gables Edgewater 292 94% 818 0.93
Gables Meyer Park 345 97% 852 0.99
Gables of First Colony 324 92% 925 0.93
Gables Piney Point 246 96% 916 0.99
Gables Pin Oak Green 582 97% 944 0.93
Gables Pin Oak Park 477 96% 975 0.96
Gables River Oaks 228 97% 1,367 1.12
Metropolitan Uptown (JV) 318 97% 1,010 1.11
Rivercrest 140 99% 716 0.85
Westhollow Park 412 96% 608 0.68
-------- ------- ------ ------
6,091 97% 829 0.92
Atlanta, GA
- -----------
Briarcliff Gables 104 98% 1,081 0.87
Buckhead Gables 162 98% 783 1.03
Dunwoody Gables 311 97% 798 0.85
Gables Cinnamon Ridge 200 97% 649 0.68
Gables Cityscape 192 97% 805 0.97
Gables Northcliff 82 100% 1,113 0.71
Gables Over Peachtree 263 91% 1,009 1.11
Gables Vinings 315 98% 955 0.89
Gables Walk 310 95% 985 0.83
Gables Wood Arbor 140 97% 685 0.75
Gables Wood Crossing 268 97% 714 0.75
Gables Wood Glen 380 96% 677 0.68
Gables Wood Knoll 312 98% 679 0.68
Gables Mill 438 95% 804 0.87
Lakes at Indian Creek 603 95% 563 0.62
Rock Springs Estates 295 97% 879 0.87
Roswell Gables I 384 94% 818 0.75
Roswell Gables II 284 94% 818 0.69
Spalding Gables 252 94% 844 0.85
Wildwood Gables 546 97% 840 0.74
----- ----- ---- ------
5,841 96% 798 0.79
Dallas, TX
- ----------
Arborstone 536 94% 482 0.67
Gables at Pearl Street 108 98% 1,411 1.30
Gables CityPlace 232 95% 1,365 1.30
Gables Green Oaks 300 92% 832 0.87
Gables Mirabella 126 99% 1,214 1.33
Gables Preston 126 94% 1,063 0.97
Gables Spring Park 188 88% 952 0.90
Gables Turtle Creek 150 97% 1,203 1.20
Gables Valley Ranch 319 96% 933 0.91
----- ----- ----- ------
2,085 94% 922 0.98
Page-20
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
STABILIZED APARTMENT COMMUNITIES AT MARCH 31, 1998
(continued from previous page)
Number of March 31, 1998 Scheduled Rent Per
Apartment March 31, 1998 ---------------------------------
Community Name Homes Occupancy Unit Square Foot
- -------------- ----- --------- ---- -----------
Memphis, TN
- -----------
Arbors of Harbortown (JV) 345 95% $840 $0.85
Gables Cordova 464 96% 675 0.72
Gables Germantown 252 94% 906 0.78
Gables Quail Ridge 238 92% 794 0.67
Gables Stonebridge 500 96% 634 0.72
----- ----- ----- ------
1,799 95% 744 0.75
Nashville, TN
- -------------
Brentwood Gables 254 96% 856 0.76
Gables Hendersonville 364 96% 638 0.68
Gables Hickory Hollow I 272 97% 616 0.68
Gables Hickory Hollow II 276 97% 616 0.65
----- ----- ----- ------
1,166 97% 675 0.69
Austin, TX
- ----------
Gables Central Park 273 91% 1,087 1.15
Gables Great Hills 276 93% 793 0.96
Gables Park Mesa 148 95% 1,092 1.00
Gables Town Lake 256 97% 1,092 1.17
----- ----- ----- ------
953 94% 1,004 1.08
San Antonio, TX
- ---------------
Gables Colonnade I 312 93% 786 0.86
Gables Wall Street 232 90% 800 0.84
----- ----- ----- ------
544 92% 792 0.85
TOTALS 18,479 96% $819 $0.86
====== ===== ===== ======
Page-21
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands)
- -----------------------
Portfolio Indebtedness Summary and Interest Rate Protection Agreement Summary
A summary of Gables' portfolio indebtedness and interest rate protection
agreements as of March 31, 1998 follows:
PORTFOLIO INDEBTEDNESS SUMMARY
Percentage Interest Total Years to
Type of Indebtedness Balance of Total Rate (A) Rate (B) Maturity
- -------------------- ------- -------- -------- -------- --------
Fixed-rate:
Secured notes $95,810 20.0% 8.14% 8.14% 9.58
Unsecured notes (C) 258,382 53.9% 7.40% 7.40% 6.20
Tax-exempt 59,995 12.5% 6.50% 6.62% 10.38
-------- ------- ------- ------ ------
Total fixed-rate $414,187 86.4% 7.44% 7.46% 7.59
-------- ------- ------- ------ ------
Tax-exempt variable-rate $44,930 9.4% 3.65% 4.60% 4.42
-------- ------- ------- ------ ------
Unsecured credit facilities $20,000 4.2% 6.19% 6.19% 2.00
-------- ------- ------- ------ ------
Total portfolio debt(D),(E) $479,117 100.0% 7.03% 7.14% 7.06
======== ======= ======= ====== ======
(A) Interest Rate represents the weighted average interest rate incurred on the
indebtedness, exclusive of deferred financing cost amortization and credit
enhancement fees, as applicable.
(B) Total Rate represents the Interest Rate (A) plus credit enhancement fees,
as applicable.
(C) Unsecured conventional fixed-rate debt includes $40,000 of financing which
bears interest at LIBOR plus a spread of 0.80%. Such financing is
effectively fixed at an all-in rate of 6.15% after the application of
$40,000 of the $44,530 interest rate cap and swap arrangements described
below.
(D) Interest associated with construction activities is capitalized as a cost
of development and does not impact current earnings. The qualifying
construction expenditures at March 31, 1998 for purposes of interest
capitalization were $93,351.
(E) Excludes $16.4 million of tax-exempt bonds and $17.9 million of outstanding
conventional indebtedness related to joint ventures in which Gables owns a
25% interest.
INTEREST RATE PROTECTION AGREEMENT SUMMARY
Notional Strike/Swap/ Effective Termination
Description of Agreement Amount Lock Price Date Date
- ------------------------ ------ ---------- ---- ----
LIBOR, 30-day - "Rate Cap" $44,530 6.25% (F) 01/27/94 01/30/99
LIBOR, 30-day - "Rate Swap" $44,530 5.35% (F) 08/30/96 08/30/99(G)
LIBOR, 30-day - "Rate Swap" $25,000 5.76% (F) 02/27/98 02/27/00(H)
Treasury, 7-year-"Treasury Lock" $50,000 6.18% 09/22/97 05/28/98
(F) The 30-day LIBOR rate in effect at March 31, 1998 was 5.69%.
(G) This is a knock-out swap agreement which fixes Gables' underlying 30-day
LIBOR rate at 5.35%. The swap terminates upon the earlier to occur of (i)
the termination date or (ii) a rate reset date on which the 30-day LIBOR
rate is 6.26% or higher.
(H) This is a knock-out swap agreement which fixes Gables' underlying 30-day
LIBOR rate at 5.76%. The swap terminates upon the earlier to occur of (i)
the termination date or (ii) a rate reset date on which the 30-day LIBOR
rate is 6.70% or higher.
Page-22
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------
Book Value of Assets and Partners' Capital
- ------------------------------------------
The application of historical cost accounting in accordance with GAAP for
Gables' UPREIT structure results in an understatement of total assets and
partners' capital compared to the amounts that would be recorded via the
application of purchase accounting in accordance with GAAP had Gables not been
organized as an UPREIT. Management believes it is imperative to understand this
difference when evaluating the book value of assets and partners' capital. The
understatement of basis related to this difference in organizational structure
at March 31, 1998 is $112,494, exclusive of the effect of depreciation.
Accordingly, on a pro forma basis, the real estate assets before accumulated
depreciation, total assets and total partners' capital (including limited
partners' capital interest at redemption value) as of March 31, 1998 would be
$1,199,402, $1,122,829, and $620,897, respectively, if such $112,494 value were
reflected.
Inflation
- ---------
Substantially all of Gables' leases at the communities are for a term of one
year or less, which may enable Gables to seek increased rents upon renewal of
existing leases or commencement of new leases in times of rising prices. The
short-term nature of these leases generally serves to lessen the impact of cost
increases arising from inflation.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
This Report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "believe," "expect,"
"anticipate," "intend," "estimate," "assume" and other similar expressions which
are predictions of or indicate future events and trends and which do not relate
solely to historical matters identify forward-looking statements. Reliance
should not be placed on forward-looking statements because they involve known
and unknown risks, uncertainties and other factors, which are in some cases
beyond the control of Gables and may cause the actual results, performance or
achievements of Gables to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements.
Factors that might cause such a difference include, but are not limited to, the
following: Gables may fail to secure or abandon development opportunities;
construction costs of a community may exceed original estimates; construction
and lease-up may not be completed on schedule, resulting in increased debt
service expense and construction costs and reduced rental revenues; occupancy
rates and market rents may be adversely affected by local economic and market
conditions which are beyond management's control; financing may not be
available, or may not be available on favorable terms; Gables' cash flow may be
insufficient to meet required payments of principal and interest; and existing
indebtedness may mature in an unfavorable credit environment, preventing such
indebtedness from being refinanced, or, if financed, causing such refinancing to
occur on terms that are not as favorable as the terms of existing indebtedness.
Other Matters
- -------------
Gables has assessed the impact of the year 2000 issue on its computer systems
and is in the process of remediating the affected hardware and software. The
year 2000 issue is the result of many computer programs recognizing a date
ending with "00" as the year 1900 rather than the year 2000, causing potential
system failures or miscalculations which could result in disruptions of normal
business operations. Gables' primary financial and operating systems are
supplied by third party suppliers and its hardware and software systems are
either currently year 2000 compliant or will be compliant well in advance of
January 1, 2000. Gables' costs of addressing the year 2000 issue are not
expected to be material and will relate primarily to costs of existing
information system personnel.
Page-23
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- --------------------------------------------------------------
SUPPLEMENTAL DISCUSSION - Funds From Operations and Adjusted Funds From
Operations
Gables considers funds from operations ("FFO") to be a useful performance
measure of the operating performance of an equity REIT because, together with
net income and cash flows, FFO provides investors with an additional basis to
evaluate the ability of a REIT to incur and service debt and to fund
acquisitions and other capital expenditures. Gables believes that in order to
facilitate a clear understanding of its operating results, FFO should be
examined in conjunction with net income as presented in the financial statements
and data included elsewhere in this report. Gables computes FFO in accordance
with standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO as defined by NAREIT represents net income (loss)
determined in accordance with GAAP, excluding gains or losses from sales of
assets or debt restructuring, plus certain non-cash items, primarily real estate
depreciation, and after adjustments for unconsolidated partnerships and joint
ventures. FFO presented herein is not necessarily comparable to FFO presented by
other real estate companies due to the fact that not all real estate companies
use the same definition. However, Gables' FFO is comparable to the FFO of real
estate companies that use the NAREIT definition. Adjusted funds from operations
("AFFO") is defined as FFO less capital expenditures funded by operations. FFO
and AFFO should not be considered as alternatives to net income as indicators of
Gables' operating performance or as alternatives to cash flows as measures of
liquidity. FFO does not measure whether cash flow is sufficient to fund all of
Gables' cash needs including principal amortization, capital expenditures, and
distributions to shareholders and unitholders. Additionally, FFO does not
represent cash flows from operating, investing or financing activities as
defined by GAAP. Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
for a discussion of Gables' cash needs and cash flows. A reconciliation of funds
from operations and adjusted funds from operations follows:
Three months ended March 31,
1998 1997
---- ----
Net income available to common unitholders $6,812 $11,598
Extraordinary loss 0 712
Loss on treasury lock extension (1) 1,811 0
Amortization of loss on treasury lock extension (1) (4) 0
Gain on sale of real estate assets 0 (4,858)
Real estate asset depreciation:
Wholly-owned real estate assets 7,484 5,233
Joint venture real estate assets 56 55
------- --------
Total 7,540 5,288
------- --------
FUNDS FROM OPERATIONS $16,159 $12,740
------- --------
Capital expenditures for operating apartment communities:
Carpet 443 371
Roofing 16 24
Exterior painting 0 0
Appliances 48 47
Other additions and improvements 617 473
-------- --------
Total 1,124 915
-------- --------
ADJUSTED FUNDS FROM OPERATIONS $15,035 $11,825
======== ========
(1) Gables recorded a loss upon extension of its forward treasury lock
agreements. The loss recognized for GAAP purposes in connection with such
extension is added back for FFO purposes as Gables intends to account for
such amount for FFO purposes as a finance cost which will be amortized over
the life of the debt transaction for which the treasury lock hedged.
Page-24
Part II - Other Information
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
Each time the Company issues shares of beneficial interest, it
contributes the proceeds of such issuance to the Operating
Partnership in return for a like number of Units with rights and
preferences analogous to the shares issued. During the period
commencing on January 1, 1998 and ending on March 31, 1998, in
connection with such issuances of shares by the Company during
that time period, the Operating Partnership issued an aggregate
78,505 Units to the Company. Such Units were issued in reliance
on an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Indenture, dated as of March 23, 1998, between the Operating
Partnership and First Union National Bank. (1)
4.2 Supplemental Indenture No. 1, dated March 23, 1998, between
the Operating Partnership and First Union National Bank,
including a form of the 6.80% Senior Note due 2005. (1)
4.3 The Operating Partnership 6.80% Senior Note due 2005. (1)
10.1 Contribution Agreement with an effective date of March 16,
1998 between the Company, the Operating Partnership and
specified representatives of Trammell Crow Residential
("TCR") executed in connection with the April 1, 1998
acquisition of 15 multifamily apartment communities and
TCR's residential construction and development and third
party management activities in South Florida. (2)
27 * Financial Data Schedule.
--------------
* Filed herewith
(1) Incorporated herein by reference to the Operating
Partnership's Current Report on Form 8-K dated March 23,
1998.
(2) Incorporated herein by reference to the Operating
Partnership's Current Report on Form 8-K dated March 16,
1998.
Page-25
(b) Reports on Form 8-K
(i) A Form 8-K dated March 16, 1998 was filed with the
Securities and Exchange Commission with the
Contribution Agreement between the Company, the
Operating Partnership and specified representatives of
TCR executed in connection with Gables' April 1, 1998
acquisition of 15 multifamily apartment communities and
TCR's residential construction and development and
third party management activities in South Florida.
(ii) A Form 8-K dated March 23, 1998 was filed with the
Securities and Exchange Commission with the
underwriting agreement, indenture and other related
items executed in connection with the Operating
Partnership's issuance of $100 million of 6.8% Senior
Unsecured Notes due March 2005.
Page-26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1998 GABLES REALTY LIMITED PARTNERSHIP
By: Gables GP, Inc.
Its: General Partner
/s/ Marvin R. Banks, Jr.
--------------------------------
Marvin R. Banks, Jr.
Vice President and Chief
Financial Officer
(Authorized Officer of the Registrant
and Principal Financial Officer)