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 September 30, 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 September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997 4
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II - Other Information 30
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 31
Page-3
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GABLES REALTY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Unaudited and Amounts in Thousands, Except Per Unit Amounts)
September 30, December 31,
1998 1997
------------- ------------
ASSETS:
Real estate assets:
Land ............................................................... $222,373 $ 150,894
Buildings ........................................................... 1,168,924 770,305
Furniture, fixtures and equipment ................................... 81,384 60,015
Construction in progress ............................................ 91,686 53,240
Land held for future development .................................... 65,770 21,774
--------- ---------
Real estate assets before accumulated depreciation ............... 1,630,137 1,056,228
Less: accumulated depreciation ..................................... (126,755) (98,236)
--------- ---------
Net real estate assets ............................................ 1,503,382 957,992
Cash and cash equivalents .............................................. 6,119 3,179
Restricted cash ....................................................... 7,951 4,498
Deferred charges, net .................................................. 5,933 4,194
Other assets, net ...................................................... 19,751 11,304
--------- ---------
Total assets ...................................................... $ 1,543,136 $ 981,167
========= =========
LIABILITIES AND PARTNERS' CAPITAL:
Notes payable .......................................................... $ 814,260 $ 435,362
Accrued interest payable ............................................... 3,817 1,999
Preferred distributions payable ........................................ 488 424
Real estate taxes payable .............................................. 18,336 13,568
Accounts payable and accrued expenses - construction ................... 6,891 8,505
Accounts payable and accrued expenses - operating ...................... 11,607 5,552
Security deposits ...................................................... 4,680 2,260
Other long-term liability, net ......................................... 11,535 --
--------- ---------
Total liabilities ................................................. 871,614 467,670
Limited partners' capital interest (6,656 and 4,056 common Units),
at redemption value ................................................. 168,492 110,866
Preferred partners' capital interest (180 Series Z Preferred Units),
at $25.00 liquidation preference .................................... 4,500 --
Partners' capital:
Preferred partners (4,600 Series A Preferred Units), at $25.00
liquidation preference ............................................. 115,000 115,000
General partner (326 and 260 common Units) ........................... 5,648 3,907
Limited partner (25,620 and 21,730 common Units) ..................... 377,882 283,724
--------- ---------
Total partners' capital ............................................. 498,530 402,631
--------- ---------
Total liabilities, partners' capital interest and partners' capital $ 1,543,136 $ 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 September 30,
1998 1997
-------- --------
Rental revenues ............................................. $ 54,091 $ 33,866
Other property revenues ..................................... 2,856 1,749
--------- ---------
Total property revenues ................................ 56,947 35,615
--------- ---------
Property management revenues ................................ 1,301 753
Other ....................................................... 966 525
--------- ---------
Total other revenues ................................... 2,267 1,278
--------- ---------
Total revenues ......................................... 59,214 36,893
--------- ---------
Property operating and maintenance (exclusive of items shown
separately below) ...................................... 19,652 12,176
Depreciation and amortization ............................... 11,007 6,266
Amortization of deferred financing costs .................... 280 219
Property management - owned ................................. 1,161 876
Property management - third party ........................... 847 566
General and administrative .................................. 1,764 840
Interest .................................................... 10,561 5,906
Credit enhancement fees ..................................... 444 128
--------- ---------
Total expenses ......................................... 45,716 26,977
--------- ---------
Income from operations before other items ................... 13,498 9,916
Equity in income of joint ventures .......................... 103 101
Interest income ............................................. 112 86
Loss on treasury locks ...................................... (3,627) --
--------- ---------
Income before gain on sale of real estate assets ............ 10,086 10,103
Gain on sale of real estate assets .......................... -- 491
--------- ---------
Net income .................................................. 10,086 10,594
Dividends to preferred unitholders .......................... (2,442) (1,775)
--------- ---------
Net income available to common unitholders .................. $ 7,644 $ 8,819
========= =========
Weighted average number of common Units outstanding - basic . 32,532 23,150
Weighted average number of common Units outstanding - diluted 33,072 23,308
PER COMMON UNIT INFORMATION:
Income before extraordinary loss - basic .................... $ 0.23 $ 0.38
Net income - basic .......................................... $ 0.23 $ 0.38
Income before extraordinary loss - diluted .................. $ 0.23 $ 0.38
Net income - diluted ........................................ $ 0.23 $ 0.38
<FN>
The accompanying notes are an integral part of these statements.
</FN>
Page-5
GABLES REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and Amounts in Thousands, Except Per Unit Amounts)
Nine Months Ended September 30,
1998 1997
-------- --------
Rental revenues ............................................. $ 144,526 $ 94,293
Other property revenues ..................................... 7,369 4,612
-------- ---------
Total property revenues ................................ 151,895 98,905
-------- ---------
Property management revenues ................................ 3,213 2,299
Other ....................................................... 1,772 1,662
-------- ---------
Total other revenues ................................... 4,985 3,961
-------- ---------
Total revenues ......................................... 156,880 102,866
-------- ---------
Property operating and maintenance (exclusive of items shown
separately below) ...................................... 51,751 34,707
Depreciation and amortization ............................... 28,927 17,285
Amortization of deferred financing costs .................... 787 722
Property management - owned ................................. 3,520 2,469
Property management - third party ........................... 2,328 1,733
General and administrative .................................. 4,438 2,495
Interest .................................................... 28,059 18,120
Credit enhancement fees ..................................... 1,006 385
-------- ---------
Total expenses ......................................... 120,816 77,916
-------- ---------
Income from operations before other items ................... 36,064 24,950
Equity in income of joint ventures .......................... 270 251
Interest income ............................................. 293 279
Loss on treasury locks ...................................... (5,637) --
-------- ---------
Income before gain on sale of real estate assets ............ 30,990 25,480
Gain on sale of real estate assets .......................... -- 5,349
-------- ---------
Income before extraordinary loss ............................ 30,990 30,829
Extraordinary loss .......................................... -- (712)
-------- ---------
Net income .................................................. 30,990 30,117
Dividends to preferred unitholders .......................... (7,222) (1,775)
-------- ---------
Net income available to common unitholders .................. $ 23,768 $ 28,342
======== =========
Weighted average number of common Units outstanding - basic . 29,400 22,980
Weighted average number of common Units outstanding - diluted 29,820 23,125
PER COMMON UNIT INFORMATION:
Income before extraordinary loss - basic .................... $ 0.81 $ 1.26
Extraordinary loss - basic .................................. -- ($ 0.03)
Net income - basic .......................................... $ 0.81 $ 1.23
Income before extraordinary loss - diluted .................. $ 0.81 $ 1.25
Extraordinary loss - diluted ................................ -- ($ 0.03)
Net income - diluted ........................................ $ 0.81 $ 1.22
<FN>
The accompanying notes are an integral part of these statements.
</FN>
Page-6
GABLES REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and Amounts in Thousands, Except Per Unit Amounts)
Nine Months Ended September 30,
1998 1997
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 30,990 $ 30,117
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................. 29,714 18,007
Equity in income of joint ventures ............................ (270) (251)
Gain on sale of real estate assets ............................ -- (5,349)
Long-term compensation expense ................................ 872 430
Loss on treasury locks ........................................ 5,637 --
Extraordinary loss ............................................ -- 712
Amortization of discount on long-term liability ............... 384 --
Change in operating assets and liabilities:
Restricted cash ............................................. (2,930) 2,217
Other assets ................................................ (7,987) (1,249)
Other liabilities, net ...................................... 10,531 2,291
-------- --------
Net cash provided by operating activities .............. 66,941 46,925
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and construction of real estate assets .................. (309,959) (206,744)
Net proceeds from sale of real estate assets ..................... -- 13,174
Long-term land lease payments .................................... (1,000) (1,000)
Distributions received from joint ventures ....................... 281 323
-------- --------
Net cash used in investing activities ....................... (310,678) (194,247)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common share offerings, net of issuance costs ...... 87,530 18,698
Proceeds from preferred share offerings, net of issuance costs ... -- 111,054
Proceeds from the exercise of share options ...................... 3,101 2,132
Share Builder Plan contributions ................................. 1,295 34
Payments of deferred financing costs ............................. (2,680) (315)
Treasury lock settlement payment ................................. (1,198) --
Notes payable proceeds ........................................... 439,522 183,212
Notes payable repayments ......................................... (227,527) (132,805)
Principal escrow deposits ........................................ (523) (513)
Preferred distributions paid ..................................... (7,158) (1,351)
Common distributions paid ($1.51 and $1.48 per Unit, respectively) (45,685) (33,678)
-------- --------
Net cash provided by financing activities ................... 246,677 146,468
-------- --------
Net change in cash and cash equivalents .......................... 2,940 (854)
Cash and cash equivalents, beginning of period ................... 3,179 4,385
-------- --------
Cash and cash equivalents, end of period ......................... $ 6,119 $ 3,531
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ...................................... $ 32,330 $ 21,766
Interest capitalized ........................................ 6,089 3,844
-------- --------
Cash paid for interest, net of amounts capitalized .......... $ 26,241 $ 17,922
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
Page-7
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.
The Company was a 79.6% economic owner of the Operating Partnership as of
September 30, 1998 (excluding the Company's direct or indirect ownership of 100%
of the Operating Partnership's non-convertible 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 South Florida Acquisition and the Greystone Acquisition (as defined herein).
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 September 30, 1998, Gables owned 82 completed multifamily apartment
communities comprising 23,931 apartment homes, of which 38 were developed and 44
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 six multifamily apartment communities that were under construction at
September 30, 1998 that are expected to comprise 1,999 apartment homes upon
completion. As of September 30, 1998, Gables owned parcels of land for the
future development of 15 apartment communities expected to comprise an estimated
Page-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
4,450 apartment homes. Additionally, Gables has contracts or options to acquire
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. As of September 30, 1998,
Gables was under contract to acquire one multifamily apartment community in
December, 1998 comprising 308 apartment homes. There can be no assurance that
such acquisition will close as contemplated, or that such acquisition 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. 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 IPO 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 September 30, 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.
3. PORTFOLIO ACQUISITIONS
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, and all of TCR/SF's residential construction and
development and third party management activities in South Florida
(collectively, the "South Florida Acquisition"). 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 valued at approximately $64.9 million. 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 acquisition increased the size of Gables' portfolio under management
on April 1, 1998 from approximately 28,000 to 40,000 apartment homes.
The South Florida Acquisition has been accounted for under the purchase method
of accounting in accordance with Accounting Principles Board Opinion No. 16.
Accordingly, assets acquired and liabilities assumed have been recorded at their
estimated fair values which may be subject to further modification based upon
the final determination of (i) the acquired properties' fair values and (ii) the
actual closing costs associated with the transaction. Management believes that
the final allocation of the purchase price will not differ materially from the
purchase price allocation reflected herein. The accompanying consolidated
statements of operations include the operating results of TCR/SF since April 1,
1998, the closing date of the South Florida Acquisition. The following unaudited
pro forma information for the nine months ended September 30, 1998 and 1997 has
been prepared assuming the South Florida Acquisition had been consummated on
Page-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
January 1, 1997. The unaudited pro forma information (i) includes the historical
operating results of the properties and residential construction and development
and third-party management activities acquired and (ii) does not purport to be
indicative of the results which actually would have been obtained had the South
Florida Acquisition been consummated on January 1, 1997, or which may be
attained in future periods.
Nine Months Ended September 30,
1998 1997
------ ------
Total revenues $166,908 $130,152
Income before extraordinary loss 30,440 32,026
Net income available to common unitholders 23,218 29,539
Per common Unit information:
Income before extraordinary loss - basic $ 0.77 $ 1.19
Net income - basic $ 0.77 $ 1.17
Income before extraordinary loss - diluted $ 0.77 $ 1.19
Net income - diluted $ 0.77 $ 1.16
In April, 1998, Gables acquired four multifamily apartment communities
comprising a total of 913 apartment homes located in Houston, Texas (the
"Greystone Acquisition"). In connection with such acquisition, Gables assumed
approximately $31.0 million of indebtedness, at fair value, and issued
approximately 647 Units valued at approximately $17.5 million. 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.
4. SECONDARY OFFERINGS AND ISSUANCES OF OPERATING PARTNERSHIP UNITS
Secondary Common Share Offerings
- --------------------------------
Since the IPO, the Company has issued a total of 14,831 common shares in eight
offerings generating $347,771 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 Offerings
- -------------------------
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.
On June 18, 1998, the Company issued 180 shares of 5.0% Series Z Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) (the
"Series Z Preferred Shares") in connection with the acquisition of a parcel of
land for future development. The Series Z Preferred Shares, which may be
redeemed by the Company at $25.00 per share, plus accrued and unpaid dividends,
at any time, are subject to mandatory redemption on June 18, 2018. The Series Z
Preferred Shares are not subject to any sinking fund and are not convertible
into any other securities of the Company.
Page-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
Additional Issuances of Operating Partnership Units
- ---------------------------------------------------
Since the IPO, Gables has issued an additional 3,898 Units in connection with
the South Florida Acquisition, the Greystone Acquisition and the acquisition of
operating apartment communities and parcels of land for future development.
5. EXTRAORDINARY LOSS
Extraordinary loss of $712 for the nine months ended September 30, 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.
6. EARNINGS PER UNIT
In February, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 Unit data were restated
to conform with the provisions of SFAS No. 128. 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 and
upon settlement of long-term liability. Reconciliations of income available to
common unitholders and weighted average Units used in the basic and diluted
earnings per Unit computations are detailed below.
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------- ------- ------- -------
BASIC AND DILUTED INCOME AVAILABLE TO
COMMON UNITHOLDERS (NUMERATOR):
Income before extraordinary loss - basic $7,644 $8,819 $23,768 $29,054
Amortization of discount on long-term liability 192 -- 384 --
-------- ------- -------- --------
Income before extraordinary loss - diluted $7,836 $8,819 $24,152 $29,054
======== ======= ======== ========
Net income - basic $7,644 $8,819 $23,768 $28,342
Amortization of discount on long-term liability 192 -- 384 --
-------- ------- ------- -------
Net income - diluted $7,836 $8,819 $24,152 $28,342
======== ======= ======= =======
COMMON UNITS (DENOMINATOR):
Average Units outstanding - basic 32,532 23,150 29,400 22,980
Incremental Units from assumed conversions of stock options 110 158 137 145
Incremental Units from assumed issuance of Units upon
settlement of long-term liability 430 -- 283 --
-------- ------- ------- -------
Average Units outstanding - diluted 33,072 23,308 29,820 23,125
======== ======= ======= =======
Page-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
7. 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 connection with extensions of such agreements for
which a related debt instrument was executed, Gables recorded a $785 loss for
the three months ended December 31, 1997 and a $505 loss for the nine months
ended September 30, 1998. 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. On October 1, 1998, Gables
paid $5,525 to settle a $50 million treasury lock agreement for which no related
debt instrument was executed. In connection with such unused treasury lock
agreement, Gables recorded a $393 loss for the three months ended December 31,
1997 and a $3,627 and $5,132 loss for the three and nine months ended September
30, 1998, respectively.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. SFAS
No. 133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997.
Gables has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements. However, SFAS No. 133 could increase volatility in net
income and other comprehensive income.
Page-12
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
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 AA/A multifamily apartment communities in the
Sunbelt Region. To achieve its objective, Gables employs a number of business
strategies. First, Gables adheres to a strategy of owning and operating Class
AA/A apartment communities in the belief that such communities will maintain
higher levels of occupancy and rental rates. Gables believes that such
communities, when supplemented with high quality services and amenities, attract
the affluent renter-by-choice, who is willing to pay a premium for conscientious
service and high quality communities. Accordingly, Gables' communities possess
innovative architectural designs and numerous amenities and services that Gables
believes are desirable by its target customers. Second, Gables seeks to grow
cash flow from operating communities through innovative, proactive property
management that focuses on resident satisfaction and retention, increases in
property rents and occupancy levels, and the control of operating expenses
through improved economies of scale. Third, Gables develops and acquires
high-quality apartment communities in in-fill locations and master-planned
communities near major employment centers in the Sunbelt with the objective of
achieving critical mass in the most desirable submarkets. Finally, due to the
cyclical nature of the real estate markets, Gables has adopted an investment
strategy based on strong local presence and expertise, which it believes will
allow for growth through acquisition and development (as warranted by underlying
market fundamentals) and will help ensure favorable initial and long-term
returns. Gables believes the successful execution of these operating and
investment strategies will result in growth in operating cash flow.
Gables believes it is well positioned to continue achieving its objective
because of its long-established presence as a fully integrated real estate
management, development, construction and acquisition company in its markets.
Gables believes that its established, local market presence creates a
competitive advantage in generating increased cash flow from (i) property
operations during different economic cycles and (ii) new investment
opportunities that involve site selection, market information and requests for
entitlements and zoning petitions. Gables' markets are geographically
independent, rely on diverse economic foundations and have experienced
above-average job growth.
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-13
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 23
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.
PORTFOLIO ACQUISITIONS
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 containing a total of 4,197 apartment homes, and all of
TCR/SF's residential construction and development and third party management
activities in South Florida (collectively, the "South Florida Acquisition"). 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, valued at approximately $64.9 million. The
cash portion of the purchase price was funded through borrowings under Gables'
unsecured credit facilities (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. The acquisition increased the size of Gables' portfolio under management
on April 1, 1998 from approximately 28,000 to 40,000 apartment homes.
In April, 1998, Gables acquired four multifamily apartment communities
comprising a total of 913 apartment homes located in Houston, Texas (the
"Greystone Acquisition"). In connection with such acquisition, Gables assumed
approximately $31.0 million of indebtedness, at fair value, and issued
approximately 647 Units valued at $17.5 million. 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.
SECONDARY OFFERINGS AND ISSUANCES OF OPERATING PARTNERSHIP UNITS
Secondary Common Share Offerings
- --------------------------------
Since the IPO, the Company has issued a total of 14,831 common shares in eight
offerings generating $347,771 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.
Page-14
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
Preferred Share Offerings
- -------------------------
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.
On June 18, 1998, the Company issued 180 shares of 5.0% Series Z Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) (the
"Series Z Preferred Shares") in connection with the acquisition of a parcel of
land for future development. The Series Z Preferred Shares, which may be
redeemed by the Company at $25.00 per share, plus accrued and unpaid dividends,
at any time, are subject to mandatory redemption on June 18, 2018. The Series Z
Preferred Shares are not subject to any sinking fund and are not convertible
into any other securities of the Company.
Additional Issuances of Operating Partnership Units
- ---------------------------------------------------
Since the IPO, Gables has issued an additional 3,898 Units in connection with
the South Florida Acquisition, the Greystone Acquisition and the acquisition of
operating apartment communities and parcels of land for future development.
Page - 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS OF GABLES FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1998 (THE "1998 PERIOD") TO THE THREE MONTHS ENDED SEPTEMBER 30, 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 September 30, 1998 and 1997 is summarized as follows:
Three Months Ended September 30,
----------- ---------- ---------- -----------
$ %
1998 1997 Change Change
----------- ---------- ---------- -----------
RENTAL AND OTHER REVENUE:
Same store communities (1) $33,179 $31,750 $1,429 4.5%
Communities stabilized during the 1998 Period, but not during the 1997 3,954 2,991 963 32.2%
Period (2)
Development and lease-up communities (3) 2,384 0 2,384 --
Acquired communities (4) 17,430 874 16,556 1894.3%
Sold communities (5) 0 0 0 --
---------- ---------- ---------- -----------
Total property revenues $56,947 $35,615 $21,332 59.9%
---------- ---------- ---------- -----------
PROPERTY OPERATING AND MAINTENANCE EXPENSE (EXCLUSIVE OF DEPRECIATION
AND AMORTIZATION):
Same store communities (1) $11,465 $11,082 $383 3.5%
Communities stabilized during the 1998 Period, but not during the 1997 1,313 812 501 61.7%
Period (2)
Development and lease-up communities (3) 506 0 506 --
Acquired communities (4) 6,368 282 6,086 2158.2%
Sold communities (5) 0 0 0 --
---------- ---------- ---------- -----------
Total specified expenses $19,652 $12,176 $7,476 61.4%
---------- ---------- ---------- -----------
Revenues in excess of specified expenses $37,295 $23,439 $13,856 59.1%
---------- ---------- ---------- -----------
Revenues in excess of specified expenses as a percentage of total
property revenues 65.5% 65.8% -- -0.3%
---------- ---------- ---------- -----------
<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 July 1, 1997.
(5) Communities which were sold subsequent to July 1, 1997.
</FN>
Page - 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
Total property revenues increased $21,332, or 59.9%, from $35,615 to $56,947 due
primarily to increases in the number of apartment homes resulting from the
acquisition and development 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 34.6% $672 6.1% 94.4% -0.4%
Atlanta 14 4,171 28.6% 289 3.3% 95.7% 1.5%
Dallas 7 1,659 11.4% 306 7.5% 94.8% 1.0%
Memphis 4 1,454 10.0% 99 3.5% 96.3% 0.5%
Nashville 4 1,166 8.0% -37 -1.6% 94.8% -1.2%
San Antonio 2 544 3.7% 22 1.8% 95.1% 0.1%
Austin 2 532 3.7% 78 5.7% 96.8% 2.3%
----- ------ ----- ------ ------ ------- -----
47 14,571 100.0% $1,429 4.5% 95.1% 0.5%
===== ====== ===== ====== ====== ======= =====
Communities stabilized during the 1998 Period but not during the 1997 Period:
Increase
(Decrease)
Number of in Total Occupancy
Number of Apartment Percent Property During the
Market Properties Homes of Total Revenues 1998 Period
--------- ---------- ------- ---------- -------- -----------
Atlanta 2 983 63.2% $703 96.5%
Dallas 1 300 19.3% -27 93.3%
Austin 1 273 17.5% 287 96.8%
---- ------ ------- ------- -------
4 1,556 100.0% $963 96.0%
==== ====== ======= ======= =======
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
- --------- ---------- ------- ---------- -------- -----------
Atlanta 1 386 27.4% $411 42.1%
Austin 1 256 18.2% 665 83.5%
Houston 1 256 18.2% 400 56.0%
Orlando 2 511 36.2% 908 69.7%
---- ----- ------ ------- -------
5 1,409 100.0% $2,384 62.2%
==== ===== ====== ======= =======
Page-17
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
Other revenues increased $989, or 77.4%, from $1,278 to $2,267 due to an
increase in property management revenues of $548, or 72.8%, from $753 to $1,301
resulting from a net increase of properties managed by Gables for third parties
as a result of the South Florida Acquisition, in addition to an increase in
income from certain ancillary services.
Property operating and maintenance expense (exclusive of depreciation and
amortization) increased $7,476, or 61.4%, from $12,176 to $19,652 due to an
increase in apartment homes resulting from the acquisition and development of
additional communities and an increase for same store communities of 3.5%. The
same store increase in operating expenses represents increased payroll costs,
property taxes and maintenance costs, offset in part by reduced utilities,
marketing and insurance expenses.
Depreciation and amortization expense increased $4,741, or 75.7%, from $6,266 to
$11,007 due primarily to the acquisition and development of additional
communities.
Property management expense for owned communities and third party properties on
a combined basis increased $566, or 39.3%, from $1,442 to $2,008 due primarily
to an increase of approximately 15,000 apartment homes managed from 27,000 in
the 1997 Period to 42,000 in the 1998 Period resulting primarily from the South
Florida Acquisition, in addition 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 $924, or 110.0%, from $840 to
$1,764 due primarily to (i) compensation and other costs for new positions
associated with the South Florida Acquisition, (ii) increased compensation costs
and (iii) the expensing of internal costs of indentifying and acquiring
operating apartment communities effective March 20, 1998 in accordance with the
Emerging Issues Task Force Issue No. 97-11, Accounting for Internal Costs
Relating to Real Estate Acquisitions ("EITF No. 97-11").
Interest expense increased $4,655, or 78.8%, from $5,906 to $10,561 due to an
increase in operating debt associated with the acquisition and development of
additional communities, including the debt assumed in connection with the South
Florida Acquisition and the Greystone Acquisition. 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 primarily used to
reduce indebtedness.
Loss on treasury locks of $3,627 in the 1998 Period represents the loss recorded
in connection with the settlement of a forward treasury lock agreement for which
no related debt instrument was executed. On October 1, 1998, Gables paid $5,525
to settle its seven year forward treasury lock agreement with a notional amount
of $50,000. The $3,627 loss represents the excess of the $5,525 settlement
payment over related losses recorded in prior periods.
Page - 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
Comparison of operating results of Gables for the nine months ended September
30, 1998 (the "1998 Period") to the nine months ended September 30, 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
nine months ended September 30, 1998 and 1997 is summarized as follows:
Nine Months Ended September 30,
------------ ---------- ---------- -----------
$ %
1998 1997 Change Change
------------ ---------- ---------- -----------
RENTAL AND OTHER REVENUE:
Same store communities (1) $89,359 $85,269 $4,090 4.8%
Communities stabilized during the 1998 Period, but not during the 1997 14,694 10,387 4,307 41.5%
Period (2)
Development and lease-up communities (3) 6,064 888 5,176 582.9%
Acquired communities (4) 41,778 2,186 39,592 1811.2%
Sold communities (5) 0 175 (175) -100.0%
----------- ---------- ---------- -----------
Total property revenues $151,895 $98,905 $52,990 53.6%
----------- ---------- ---------- -----------
PROPERTY OPERATING AND MAINTENANCE EXPENSE (EXCLUSIVE OF DEPRECIATION
AND AMORTIZATION):
Same store communities (1) $30,409 $30,153 $256 0.8%
Communities stabilized during the 1998 Period, but not during the 1997 5,085 3,568 1,517 42.5%
Period (2)
Development and lease-up communities (3) 1,474 222 1,252 564.0%
Acquired communities (4) 14,783 649 14,134 2177.8%
Sold communities (5) 0 115 (115) -100.0%
------------ ---------- ----------- ----------
Total specified expenses $51,751 $34,707 $17,044 49.1%
------------ ---------- ----------- ----------
Revenues in excess of specified expenses $100,144 $64,198 $35,946 56.0%
=========== ========= ========= ===========
Revenues in excess of specified expenses as a percentage of total
Property revenues 65.9% 64.9% -- 1.0%
=========== ========= ========= ===========
<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 - 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
Total property revenues increased $52,990, or 53.6%, from $98,905 to $151,895
due primarily to increases in the number of apartment homes resulting from the
acquisition and development 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% $2,412 7.5% 95.3% 0.7%
Atlanta 12 3,470 25.9% 539 2.5% 95.8% 1.3%
Dallas 7 1,659 12.4% 786 6.6% 94.7% 0.2%
Nashville 4 1,166 8.7% -92 -1.3% 95.1% -0.8%
Memphis 2 964 7.2% 221 4.3% 95.8% 1.9%
San Antonio 2 544 4.1% 89 2.6% 92.8% 0.0%
Austin 2 532 4.0% 135 3.3% 93.9% -0.4%
----- ------ ----- ------ ----- ------- -----
43 13,380 100.0% $4,090 4.8% 95.1% 0.7%
===== ====== ===== ====== ===== ======= =====
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% $3,765 94.9%
Memphis 2 490 24.1% 462 94.2%
Dallas 1 300 14.7% 80 91.2%
----- ------ ----- ------ -----
7 2,036 100.0% $4,307 94.2%
===== ====== ===== ====== =====
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 31.5% $2,654 69.9%
Orlando 2 511 30.4% 1,487 39.1%
Atlanta 1 386 22.9% 524 18.0%
Houston 1 256 15.2% 511 23.5%
----- ------ ------ ------ -------
6 1,682 100.0% $5,176 57.1%
===== ====== ====== ====== =======
Page-20
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
Other revenues increased $1,024, or 25.9%, from $3,961 to $4,985 due primarily
to an increase in property management revenues of $914, or 39.8%, from $2,299 to
$3,213 resulting from a net increase of properties managed by Gables for third
parties primarily as a result of the South Florida Acquisition, in addition to
an increase in income from certain ancillary services.
Property operating and maintenance expense (exclusive of depreciation and
amortization) increased $17,044, or 49.1%, from $34,707 to $51,751 due to a net
increase in apartment homes resulting from the acquisition and development of
additional communities and an increase in property operating and maintenance
expense for same store communities of 0.8%. The same store increase in operating
expenses represents increased payroll costs, property taxes and maintenance
costs, offset in part by reduced utilities, marketing and insurance expenses.
Depreciation and amortization expense increased $11,642, or 67.4%, from $17,285
to $28,927 due primarily to the acquisition and development of additional
communities.
Property management expense for owned communities and third party properties on
a combined basis increased $1,646, or 39.2%, from $4,202 to $5,848 due primarily
to a net increase of 10,000 apartment homes managed from 27,000 in the 1997
Period to 37,000 in the 1998 Period resulting primarily from the South Florida
Acquisition, in addition 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 $1,943, or 77.9%, from $2,495 to
$4,438 due primarily to (i) compensation and other costs for new positions
associated with the South Florida Acquisition, (ii) increased compensation costs
and (iii) the expensing of internal costs of identifying and acquiring operating
apartment communities effective March 20, 1998 in accordance with EITF No.
97-11.
Interest expense increased $9,939, or 54.9%, from $18,120 to $28,059 due to an
increase in operating debt associated with the acquisition and development of
additional communities, including the debt assumed in connection with the South
Florida Acquisition and the Greystone Acquisition. 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 primarily used to
reduce indebtedness.
Loss on treasury locks of $5,637 in the 1998 period represents a loss of (i)
$505 recorded in connection with extensions of treasury locks for which a
related debt instrument was subsequently executed and (ii) $5,132 recorded in
connection with the October 1, 1998 settlement of a treasury lock for which no
related debt instrument was executed.
Gain on sale of real estate assets of $5,349 in the 1997 Period represents the
gain generated in connection with (i) the January, 1997 sale of Club Candlewood,
a community comprised of 486 apartment homes and (ii) the July, 1997 sale of 2
acres of Gables 12-acre Gables Colonnade Phase II land parcel.
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.
Page-21
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
LIQUIDITY AND CAPITAL RESOURCES
Gables' net cash provided by operating activities increased from $46,925 for the
nine months ended September 30, 1997 to $66,941 for the nine months ended
September 30, 1998, due to (i) an increase of $23,661 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 locks and extraordinary losses and (ii) the change in other
liabilities between periods of $8,240. Such increases were offset in part by (i)
the change in restricted cash between periods of $5,147 and (ii) the change in
other assets between periods of $6,738.
Gables' net cash used in investing activities increased from $194,247 for the
nine months ended September 30, 1997 to $310,678 for the nine months ended
September 30, 1998, due primarily to increased acquisition and development
activities in 1998 when compared to 1997, and the net proceeds from the sale of
real estate assets in 1997. During the nine months ended September 30, 1998,
Gables expended approximately $174.9 million related to acquisitions of
operating apartment communities, including those acquired in the South Florida
Acquisition; $123.2 million related to development expenditures, including
related land acquisitions; approximately $5.2 million related to recurring,
non-revenue enhancing, capital expenditures for operating apartment communities;
and approximately $6.7 million related to non-recurring,
renovation/revenue-enhancing expenditures.
Gables' net cash provided by financing activities increased from $146,468 for
the nine months ended September 30, 1997 to $246,677 for the nine months ended
September 30, 1998 due to increased acquisition and development activities.
During the nine months ended September 30, 1998, Gables had net borrowings of
$212.0 million which were used in conjunction with $87.5 million of proceeds
from a common share offering primarily to fund Gables' acquisition and
development activities discussed previously. These proceeds from financing
activities were offset in part by the payment of distributions totaling
approximately $52.8 million.
In October, 1998, Gables closed (i) a $50 million offering of the Operating
Partnership's senior unsecured notes which bear interest at 6.55%, were priced
to yield 6.59% and mature in October, 2000 and (ii) a $15 million offering of
the Operating Partnership's senior unsecured notes which bear interest at 6.60%,
were priced at par and mature in October 2001 (collectively, the "October, 1998
Debt Offerings"). The net proceeds from the October, 1998 Debt Offerings were
used to reduce borrowings under Gables' Credit Facilities.
As of September 30, 1998, Gables had total indebtedness of $814,260, cash and
cash equivalents of $6,119 and principal escrow deposits reflected in restricted
cash of $2,270. Gables' indebtedness and interest rate protection agreements are
summarized on page 27 of this Form 10-Q. Gables' indebtedness has an average of
6.2 years to maturity at September 30, 1998 (on a pro forma basis for the
October, 1998 Debt Offerings). Excluding monthly principal amortization
payments, over the next five years Gables has the following scheduled debt
maturities for indebtedness outstanding at September 30, 1998 (on a pro forma
basis for the October, 1998 Debt Offerings):
1998 $ 24,683
1999 4,010
2000 53,661
2001 150,000
2002 127,322
The debt maturities in 1998 of $24,683 relate to outstanding indebtedness
borrowed on an overnight basis from a commercial bank. The debt maturities in
1999 of $4,010 relates to outstanding indebtedness under the $25 Million Credit
Facility which has unlimited one-year extension options. The debt maturities in
2001 of $150,000 include $95,000 of outstanding indebtedness under the $225
Million Credit Facility which has 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.
Page-22
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
Gables' distributions through the third 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.
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.
$225 Million Credit Facility
- ----------------------------
In March, 1996, Gables closed a $175 million unsecured revolving credit
facility. In May, 1998, the $175 million commitment level was increased to $225
million and the maturity date was extended to May, 2001 with two one-year
extension options. Gables' availability under the facility is limited to the
lesser of the total $225 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 September 30, 1998, on a pro forma basis for the October, 1998 Debt
Offerings, Gables had $95.0 million in borrowings outstanding under the facility
and, therefore, had $130.0 million of remaining capacity on the $225 million
available commitment. Borrowings currently bear interest at LIBOR plus 0.80%.
Additionally, a competitive bid option feature is in place for up to 50% of the
total commitment.
$25 Million Credit Facility
- ---------------------------
In November, 1996, Gables closed an unsecured revolving credit facility that
currently provides for up to $25 million in borrowings. This facility has an
initial term of one year and has unlimited one-year extension options. Gables
has exercised two of its one-year extension options resulting in a maturity date
for the facility of October, 1999. Borrowings currently bear interest under this
facility at LIBOR plus 0.80%. As of September 30, 1998, on a pro forma basis for
the October, 1998 Debt Offerings, Gables had $4.0 million of borrowings
outstanding under this facility.
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
Page-23
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
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.
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 September 30, 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 partners'
capital interests) as of September 30, 1998 would be $1,742,631, $1,655,630, and
$784,016, 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 abandon or fail to secure 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.
Page-24
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Completed Community in Lease-up and Development Communities at September 30,
1998
Actual or Estimated Quarter of
Number of Total Percent at September 30, 1998 -------------------------------------------------------
Apartment Budgeted ----------------------------- Construction Initial Construction Stabilized
Community Homes Cost Complete Leased Occupied Start Occupancy End Occupancy
- -------------------- ------ ------- -------- ------ -------- ------------- --------- ----------- ----------
(millions)
Completed Community in Lease-up:
- --------------------------------
HOUSTON, TX
Gables New Territory 256 $15.0 100% 71% 64% 3 Q 1997 2 Q 1998 3 Q 1998 2 Q 1999
=== =====
Development Communities:
- ------------------------
ATLANTA, GA
Gables at Sugarloaf 386 $28.0 97% 59% 56% 2 Q 1997 1 Q 1998 4 Q 1998 2 Q 1999
Gables Metropolitan I 435 49.7 7% --- --- 2 Q 1998 3 Q 1999 3 Q 2000 4 Q 2000
HOUSTON, TX
Gables Raveneaux 382 28.1 3% --- --- 3 Q 1998 2 Q 1999 2 Q 2000 3 Q 2000
DALLAS, TX
Gables San Rafael 222 16.9 12% --- --- 3 Q 1998 2 Q 1999 4 Q 1999 1 Q 2000
BOCA RATON, FL
Gables San Michele II 343 41.5 1% --- --- 3 Q 1998 2 Q 1999 3 Q 2000 4 Q 2000
ORLANDO, FL
Gables Celebration 231 26.5 68% 65% 37% 3 Q 1997 2 Q 1998 2 Q 1999 2 Q 1999
------ ------
Totals 1,999 $190.7
====== ======
<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-25
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Stabilized Apartment Communities at September 30, 1998
9/30/98 Scheduled Rent Per
Number of 9/30/98 -------------------------
Community Homes Occupancy Unit Square Foot
- --------------------- -------- --------- ------ -----------
HOUSTON, TX
Austin Colony .................. 237 97% $ 880 $ 0.90
Baybrook Village ............... 776 95% 584 0.73
Gables Bradford Place .......... 372 95% 756 0.88
Gables Bradford Pointe ......... 360 93% 660 0.86
Gables Champions ............... 404 97% 824 0.91
Gables CityPlaza ............... 246 96% 913 1.03
Gables Cityscape ............... 252 97% 934 1.10
Gables CityWalk/Waterford Square 317 98% 912 1.13
Gables Edgewater ............... 292 91% 836 0.95
Gables Meyer Park .............. 345 97% 888 1.03
Gables of First Colony ......... 324 92% 933 0.94
Gables Piney Point ............. 246 99% 961 1.04
Gables Pin Oak Green ........... 582 94% 984 0.96
Gables Pin Oak Park ............ 477 95% 1,010 0.99
Gables River Oaks .............. 228 96% 1,425 1.17
Lions Head ..................... 277 88% 757 0.90
Metropolitan Uptown (JV)........ 318 95% 1,032 1.13
Rivercrest I ................... 140 91% 744 0.88
Rivercrest II .................. 140 94% 742 0.88
Westhollow Park ................ 412 92% 668 0.74
Windmill Landing ............... 259 97% 699 0.81
------ --- ---- -----
7,004 95% 847 0.94
ATLANTA, GA
Briarcliff Gables .............. 104 99% 1,081 0.87
Buckhead Gables ................ 162 100% 811 1.07
Dunwoody Gables ................ 311 98% 805 0.86
Gables Cinnamon Ridge .......... 200 95% 670 0.70
Gables Cityscape ............... 192 97% 838 1.01
Gables Heights ................. 213 88% 1,189 0.95
Gables Northcliff .............. 82 98% 1,153 0.74
Gables Over Peachtree .......... 263 98% 1,039 1.14
Gables Vinings ................. 315 99% 921 0.86
Gables Walk .................... 310 98% 1,006 0.85
Gables Wood Arbor .............. 140 95% 693 0.76
Gables Wood Crossing ........... 268 98% 719 0.75
Gables Wood Glen ............... 380 92% 684 0.69
Gables Wood Knoll .............. 312 96% 718 0.72
Gables Mill .................... 438 97% 826 0.89
Lakes at Indian Creek .......... 603 96% 582 0.63
Rock Springs Estates ........... 295 96% 931 0.92
Roswell Gables I ............... 384 98% 870 0.80
Roswell Gables II .............. 284 98% 870 0.74
Spalding Gables ................ 252 98% 851 0.86
Wildwood Gables ................ 546 95% 863 0.76
------ --- ---- -----
6,054 96% 832 0.82
BOCA RATON, FL
Boca Place ..................... 180 92% 861 0.88
Cotton Bay ..................... 444 93% 696 0.71
Hampton Lakes .................. 300 85% 756 0.71
Hampton Place .................. 368 88% 721 0.75
Kings Colony ................... 480 95% 737 0.83
Mahogany Bay ................... 328 95% 746 0.74
Mizner on the Green ............ 246 96% 1,564 1.24
San Michele .................... 249 96% 1,390 1.04
San Remo ....................... 180 93% 1,229 0.67
Town Colony .................... 172 95% 847 0.99
Vinings at Boynton Beach ....... 252 90% 854 0.71
Vinings at Boynton Beach II .... 296 94% 899 0.74
Vinings at Hampton Village ..... 168 90% 802 0.66
Vinings at Town Place .......... 312 94% 832 1.00
Vinings at Wellington .......... 222 93%(A) 989 0.74
------ --- ---- -----
4,197 93% 893 0.82
Page-26
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Stabilized Apartment Communities at September 30, 1998
(continued from previous page)
9/30/98 Scheduled Rent Per
Number of 9/30/98 -------------------------
Community Homes Occupancy Unit Square Foot
- --------------------- -------- --------- ------ -----------
DALLAS, TX
Arborstone ....................... 536 97% $ 501 $ 0.70
Gables at Pearl Street ........... 108 95% 1,418 1.30
Gables CityPlace ................. 232 97% 1,439 1.37
Gables Green Oaks ................ 300 96% 836 0.87
Gables Mirabella ................. 126 99% 1,251 1.37
Gables Preston ................... 126 91% 1,074 0.98
Gables Spring Park ............... 188 93% 952 0.90
Gables Turtle Creek .............. 150 91% 1,326 1.32
Gables Valley Ranch .............. 319 94% 938 0.92
------ --- ----- -----
2,085 95% 948 1.01
MEMPHIS, TN
Arbors of Harbortown (JV)......... 345 98% 847 0.86
Gables Cordova ................... 464 95% 704 0.75
Gables Germantown ................ 252 98% 935 0.80
Gables Quail Ridge ............... 238 97% 917 0.77
Gables Stonebridge ............... 500 95% 695 0.79
------ --- ---- -----
1,799 96% 789 0.79
NASHVILLE, TN
Brentwood Gables ................. 254 98% 867 0.77
Gables Hendersonville ............ 364 96% 670 0.71
Gables Hickory Hollow I ......... 272 91% 619 0.68
Gables Hickory Hollow II ......... 276 91% 619 0.66
------ --- ---- -----
1,166 94% 689 0.71
AUSTIN, TX
Gables Bluffstone ................ 256 98% 1,057 1.07
Gables Central Park .............. 273 98% 1,168 1.24
Gables Great Hills ............... 276 97% 816 0.98
Gables Park Mesa ................. 148 99% 1,107 1.01
Gables Town Lake ................. 256 98% 1,195 1.28
------ --- ----- -----
1,209 98% 1,063 1.13
SAN ANTONIO, TX
Gables Colonnade I ............... 312 96% 802 0.88
Gables Wall Street ............... 232 94% 810 0.85
------ --- ---- -----
544 95% 805 0.87
ORLANDO, FL
The Commons at Little Lake Bryan I 280 100% --(B) --(B)
------ --- ---- -----
280 100% -- --
TOTALS ........................ 24,338 95% $ 858 $ 0.87
====== === ==== ======
<FN>
(A) This property was acquired April 1, 1998 and is currently in the lease-up
phase. An occupancy rate of 93% is disclosed as a stabilized net operating
income level has been guaranteed by the seller through December 31, 1998.
At September 30, 1998, the actual occupancy rate for this property was 78%.
(B) This property is leased to a single user group pursuant to a triple net
master lease. Accordingly, scheduled rent data is not reflected as it is
not comparable to the rest of Gables' portfolio.
</FN>
Page-27
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
PORTFOLIO INDEBTEDNESS AND INTEREST RATE PROTECTION AGREEMENT SUMMARIES AT
SEPTEMBER 30, 1998
Portfolio Indebtedness Summary (A)
- ----------------------------------
Percentage Interest Total Years to
Type of Indebtedness Balance of Total Rate (B) Rate (C) Maturity
- --------------------- --------- ---------- -------- -------- --------
Fixed-rate:
Secured notes $126,003 15.5% 7.80% 7.80% 9.58
Unsecured notes (D) 323,764 39.8% 7.23% 7.23% 5.04
Tax-exempt 90,730 11.1% 6.02% 6.32% 9.04
-------- ------- ------- ------- -------
Total fixed-rate $540,497 66.4% 7.16% 7.21% 6.77
-------- ------- ------- ------- -------
Tax-exempt variable-rate $150,070 18.4% 3.83% 4.82% 7.42
-------- ------- ------- ------- -------
Unsecured credit facilities $123,693 15.2% 6.32% 6.32% 2.01
-------- ------- ------- ------- -------
Total portfolio debt (E),(F) $814,260 100.0% 6.42% 6.63% 6.17
======== ======= ======= ======= =======
(A) This summary is presented on a pro forma basis as if Gables had closed its
$65 million October, 1998 Debt Offerings on September 30, 1998 and had used
the proceeds to reduce unsecured credit facilities debt.
(B) Interest Rate represents the weighted average interest rate incurred on the
indebtedness, exclusive of deferred financing cost amortization and credit
enhancement fees, as applicable.
(C) Total Rate represents the Interest Rate (B) plus credit enhancement fees,
as applicable.
(D) 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.
(E) Interest associated with construction activities is capitalized as a cost
of development and does not impact current earnings. The qualifying
construction expenditures at September 30, 1998 for purposes of interest
capitalization were $139,111.
(F) Excludes $16.4 million of tax-exempt bonds and $17.8 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% (G) 01/27/94 01/30/99
LIBOR, 30-day - "Rate Swap" $44,530 5.35% (G) 08/30/96 08/30/99 (H)
LIBOR, 30-day - "Rate Swap" $25,000 5.76% (G) 02/27/98 02/27/00 (I)
LIBOR, 30-day - "Rate Swap" $40,000 4.79% (G) 11/30/98 09/30/00
Treasury, 7-year-"Treasury Lock" $50,000 6.27% 09/22/97 10/01/98
(G) The 30-day LIBOR rate in effect at September 30, 1998 was 5.38%.
(H) 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.
(I) 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-28
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Amounts in Thousands, Except Property and Per Unit Amounts)
Year 2000 Compliance
- --------------------
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act of
1998.
The Year 2000 issue occurs when business application software or embedded
microcontrollers use two digits to specify the year, rather than four.
Therefore, on January 1, 2000, unless corrections are made, most computers with
time-sensitive software programs will recognize the year as "00" and may assume
that the year is "1900". This could result in a system failure or
miscalculations which could result in disruptions of normal business operations.
The Year 2000 issue can also affect embedded microcontrollers in non-computer
equipment such as elevators, HVAC and security systems. Gables is in the process
of assessing the impact of the Year 2000 issue on its computer systems
(hardware), software and other equipment with embedded microcontrollers
(non-IT). Gables' Year 2000 Project is divided into four phases, as described
below:
PHASE 1 - Inventory assessment: Identify all equipment that could potentially
be affected by the Year 2000 issue. Equipment is divided into three
categories: hardware, software and non-IT.
PHASE 2 - Contact vendors and third-party service providers: Contact the vendors
and third-party service providers that maintain and/or support the
equipment identified in Phase I to obtain a Year 2000 compliance
certification.
PHASE 3 - Determine scope of non-compliance: Based on vendor response and
in-house testing, assemble a list of items that will not be compliant
and prioritize the items to be either replaced or retrofitted.
PHASE 4 - Implementation, identification of alternative solutions and testing:
Replace or retrofit items that are not Year 2000 compliant, identify
and implement alternative solutions to items that cannot be replaced
or retrofitted, and perform testing thereof.
Gables' progress is described by category in the following table:
Category Status Expected Phase 4 Completion Date
- -------- -------- --------------------------------
Hardware Working on Phase 4 3/31/99
Software Working on Phases 2-4 3/31/99
Non-IT Working on Phase 2 3/31/99
Gables' costs of addressing the Year 2000 issue have not been, and are not
expected to be, material and will relate primarily to costs of upgrading older
equipment, in addition to personnel resource allocation. However, no estimates
can be made as to the potential adverse impact resulting from the failure of
third party service providers and vendors to prepare for the Year 2000 issue.
Gables has included banks and utilities in its vendor survey, as their services
are considered to be mission-critical to its business function. As with other
vendors, Gables is attempting to attain compliance certification from these
vendors to assure that there will be no business interruption to its customers
on January 1, 2000. Based on vendor response and in-house testing, Gables will
develop specific contingency plans, if necessary. In addition, Gables will
design a general contingency plan to be implemented in the event of
unanticipated equipment and systems failures. However, there can be no assurance
that such plan will be adequate or that failures or delays by third parties in
achieving Year 2000 compliance will not result in material business
interruptions, loss of revenues or other adverse effects.
The discussion above regarding Gables' Year 2000 Project 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. Gables' assessment of the impact of the Year 2000 issue may prove to
be inaccurate due to a number of factors which cannot be determined with
certainty, including the receipt of inaccurate compliance certifications from
third party vendors, inaccurate testing or assessments by Gables' personnel of
its equipment or systems, and inaccurate projections by Gables of the cost of
remediation and/or replacement of affected equipment and systems. A failure by
Gables to adequately remediate or replace affected equipment or systems due to
the factors cited above or for other reasons, a material increase in the actual
cost of such remediation or replacement, or a failure by a third party vendor to
remediate Year 2000 problems in systems that are vital to the operation of
Gables' properties or financial systems, could cause a material disruption to
its business and adversely affect its results of operations and financial
condition.
Page-29
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 FFO
and AFFO follows:
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------ ------ ------ ------
Net income available to common unitholders $7,644 $8,819 $23,768 $28,342
Extraordinary loss 0 0 0 712
Loss on treasury locks 3,627 0 5,637 0
Amortization of loss on extension of used treasury locks (46) 0 (96) 0
Gain on sale of real estate assets 0 (491) 0 (5,349)
Real estate asset depreciation:
Wholly-owned real estate assets 10,887 6,139 28,581 16,925
Joint venture real estate assets 55 56 167 167
------- ------ ------- --------
Total 10,942 6,195 28,748 17,092
------- ------ ------- --------
FUNDS FROM OPERATIONS - BASIC $22,167 $14,523 $58,057 $40,797
------- ------ ------- --------
Amortization of discount on long-term liability (a) 192 0 384 0
------- ------ ------- --------
FUNDS FROM OPERATIONS - DILUTED $22,359 $14,523 $58,441 $40,797
------- ------ ------- --------
Capital expenditures for operating apartment communities:
Carpet 1,011 528 2,163 1,300
Roofing 96 31 130 136
Exterior painting 0 168 0 224
Appliances 158 51 315 136
Other additions and improvements 921 591 2,628 1,633
------- ------ ------- --------
Total 2,186 1,369 5,236 3,429
------- ------ ------- --------
ADJUSTED FUNDS FROM OPERATIONS - DILUTED $20,173 $13,154 $53,205 $37,368
======= ====== ======= ========
AVERAGE UNITS OUTSTANDING - BASIC 32,532 23,150 29,400 22,980
======= ====== ======= ========
AVERAGE UNITS OUTSTANDING - DILUTED 33,072 23,308 29,820 23,125
======= ====== ======= ========
<FN>
(a) This obligation will be settled with Units. Such Units are excluded from
basic Units outstanding, but are included in the calculation of diluted
Units outstanding.
</FN>
Page-30
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 July 1, 1998 and ending on
September 30, 1998, in connection with such issuances of
shares by the Company during that time period, the Operating
Partnership issued an aggregate 87,855 common 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
10.1 * Forward Treasury Lock Agreement (notional amount of
$50,000,000) between Gables Realty Limited Partnership
and J.P. Morgan Securities Inc., dated as of September
22, 1997 and amended on August 19, 1998.
10.2 * Forward Treasury Lock Agreement (notional amount of
$50,000,000) between Gables Realty Limited Partnership
and J.P. Morgan Securities Inc., dated as of September
22, 1997 and amended on September 30, 1998.
10.3 * Interest Rate Swap Agreement (notional amount of
$40,000,000) between Gables Realty Limited Partnership
and Morgan Guaranty Trust Company of New York, dated as
of September 28, 1998.
27 * Financial Data Schedule
------------
* Filed herewith
(b) Reports on Form 8-K
None
Page-31
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: November 11, 1998 GABLES REALTY LIMITED PARTNERSHIP
By: Gables GP, Inc.
Its: General Partner
/s / Marvin R. Banks, Jr.
-----------------------------------
Marvin R. Banks, Jr.
Senior Vice President and Chief
Financial Officer
(Authorized Officer of the Registrant
and Principal Financial Officer)