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, 1999
( ) 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 former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 30
Part II - Other Information 31
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 32
Page 3
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
GABLES REALTY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Unit Amounts)
September 30, December 31,
1999 1998
------------- ------------
ASSETS: (Unaudited)
Real estate assets:
Land........................................................ $ 222,582 $ 229,960
Buildings................................................... 1,179,817 1,218,782
Furniture, fixtures and equipment........................... 91,119 87,238
Construction in progress.................................... 22,049 79,829
Land held for future development............................ 53,155 66,152
----------- ------------
Real estate assets before accumulated depreciation....... 1,568,722 1,681,961
Less: accumulated depreciation............................. (164,781) (138,239)
----------- ------------
Net real estate asset..................................... 1,403,941 1,543,722
Cash and cash equivalents...................................... 11,052 7,054
Restricted cash................................................ 10,682 8,017
Deferred financing costs, net.................................. 4,267 4,696
Investment in joint ventures................................... 20,070 161
Other assets, net.............................................. 29,061 22,667
------------ -----------
Total assets..............................................$ 1,479,073 $ 1,586,317
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable.................................................. $ 738,950 $ 812,788
Accrued interest payable....................................... 5,361 6,045
Preferred dividends payable.................................... 905 737
Real estate taxes payable...................................... 19,786 16,224
Accounts payable and accrued expenses - construction........... 3,064 8,402
Accounts payable and accrued expenses - operating.............. 9,631 7,094
Security deposits.............................................. 4,456 4,725
Other liability, net........................................... 10,528 11,729
------------ ------------
Total liabilities......................................... 792,681 867,744
Limited partners' common capital interest (6,220 common Units)
at redemption value.......................................... 145,196 157,663
Preferred partners' capital interest (180 Series Z Preferred
Units) at $25.00 liquidation preference...................... 4,500 4,500
Partners' Capital:
General partner (320 and 327 common Units)................... 5,446 5,725
Limited partner (25,492 and 25,975 common Units)............. 366,250 385,685
Preferred partners (4,600 Series A Preferred Units and
2,000 Series B Preferred Units)at $25.00 liquidation
preference................................................. 165,000 165,000
------------ ------------
Total partners' capital................................ 536,696 556,410
------------ ------------
Total liabilities and shareholders' equity................$ 1,479,073 $ 1,586,317
============ ============
<FN>
The accompanying notes are an integral part of these consolidated 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- ---------- ----------
Rental revenues................................................ $ 56,155 $ 54,091 $ 166,923 $ 144,526
Other property revenues........................................ 3,295 2,856 9,354 7,369
--------- --------- ---------- ----------
Total property revenues................................... 59,450 56,947 176,277 151,895
--------- --------- ---------- ----------
Property management revenues................................... 1,231 1,301 3,784 3,213
Development revenues, net...................................... 760 --- 1,989 ---
Other.......................................................... 1,141 966 1,892 1,772
--------- --------- ---------- ----------
Total other revenues...................................... 3,132 2,267 7,665 4,985
--------- --------- ---------- ----------
Total revenues............................................ 62,582 59,214 183,942 156,880
--------- --------- ---------- ----------
Property operating and maintenance (exclusive of items shown
separately below)......................................... 20,288 19,652 59,919 51,751
Real estate asset depreciation and amortization................ 11,721 10,887 35,251 28,581
Corporate asset depreciation and amortization.................. 151 120 403 346
Amortization of deferred financing costs....................... 235 280 696 787
Property management - owned.................................... 1,370 1,161 3,788 3,520
Property management - third/related party...................... 993 847 2,771 2,328
General and administrative..................................... 1,474 1,764 4,794 4,438
Severance costs................................................ --- --- 2,000 ---
Interest....................................................... 10,770 10,561 32,029 28,059
Credit enhancement fees........................................ 475 444 1,352 1,006
--------- --------- ---------- ----------
Total expenses............................................ 47,477 45,716 143,003 120,816
--------- --------- ---------- ----------
Equity in income of joint ventures............................. 120 103 302 270
Interest income................................................ 158 112 497 293
Loss on treasury locks......................................... --- (3,627) --- (5,637)
--------- --------- ---------- ----------
Income before gain on sale of real estate assets............... 15,383 10,086 41,738 30,990
Gain on sale of real estate assets............................. 4,019 --- 4,685 ---
--------- --------- ---------- ----------
Net Income..................................................... 19,402 10,086 46,423 30,990
Distributions to preferred unitholders......................... (3,520) (2,442) (10,561) (7,222)
--------- --------- ---------- ----------
Net income available to common unitholders.................... $ 15,882 $ 7,644 $ 35,862 $ 23,768
========= ========= ========== ==========
Weighted average number of common Units outstanding - basic... 32,296 32,532 32,533 29,400
Weighted average number of common Units outstanding - diluted. 32,341 33,072 32,575 29,820
Per Common Unit Information:
Net income - basic............................................. $ 0.49 $ 0.23 $ 1.10 $ 0.81
Net income - diluted........................................... $ 0.49 $ 0.23 $ 1.10 $ 0.81
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
Page 5
GABLES REALTY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and Amounts in Thousands, Except Per Unit Amounts)
Nine Months Ended September 30,
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 46,423 $ 30,990
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................... 36,350 29,714
Equity in income of joint ventures.............................. (302) (270)
Gain on sale of real estate assets.............................. (4,685) ---
Long-term compensation expense.................................. 893 872
Loss on treasury locks.......................................... --- 5,637
Amortization of discount on long-term liability................. 520 384
Operating distributions received from joint ventures............ 303 281
Change in operating assets and liabilities:
Restricted cash............................................... (2,143) (2,930)
Other assets.................................................. (3,953) (7,987)
Other liabilities, net........................................ 5,290 10,531
--------- ---------
Net cash provided by operating activities................ 78,696 67,222
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and construction of real estate assets................. (57,162) (309,959)
Long-term land lease payments...................................... --- (1,000)
Net proceeds from sale of real estate assets....................... 81,505 ---
Investment in joint venture........................................ (4,696) ---
Proceeds from contribution of real estate assets to joint venture.. 60,347 ---
--------- ---------
Net cash provided by (used in) investing activities........... 79,994 (310,959)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions related to common share offerings,
net of issuance costs............................................ --- 87,530
Capital contributions related to the exercise of share options..... 502 3,101
Capital contributions related to dividend investment plan.......... 6,675 1,295
Unit redemptions and unit redemptions related to treasury
share purchases.................................................. (26,504) ---
Payments of deferred financing costs............................... (415) (2,680)
Treasury lock settlement payment................................... --- (1,198)
Notes payable proceeds............................................. 17,426 439,522
Notes payable repayments........................................... (91,264) (227,527)
Principal escrow deposits.......................................... (522) (523)
Preferred distributions paid....................................... (10,393) (7,158)
Common distributions paid ($1.55 and $1.51 per Unit, respectively). (50,197) (45,685)
--------- ---------
Net cash (used in) provided by financing activities........... (154,692) 246,677
--------- ---------
Net change in cash and cash equivalents............................ 3,998 2,940
Cash and cash equivalents, beginning of period..................... 7,054 3,179
--------- ---------
Cash and cash equivalents, end of period........................... $ 11,052 $ 6,119
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest........................................ $ 38,696 $ 32,330
Interest capitalized.......................................... 5,983 6,089
--------- ---------
Cash paid for interest, net of amounts capitalized............ $ 32,713 $ 26,241
========= =========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
Gables Realty Limited Partnership (the "Operating Partnership" or "Gables")
is the entity through which Gables Residential Trust (the "Company"), a real
estate investment trust (a "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
expand the multifamily apartment community management, development, construction
and acquisition operations of its privately owned predecessor organization. The
Company completed its initial public offering on January 26, 1994 (the "IPO").
Gables engages in the multifamily apartment community management, development,
construction and acquisition businesses, including the provision of related
brokerage and corporate rental housing services. 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 "Management Companies").
The Company was an 80.6% economic owner of the common equity of the
Operating Partnership as of September 30, 1999. 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. Generally, 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
IPO, the South Florida Acquisition and the Greystone Acquisition (as defined
herein). The Operating Partnership is obligated to redeem each common unit of
limited partnership interest ("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 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. 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, 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 common or preferred
units, as applicable, 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, 1999, Gables owned 80 completed multifamily apartment
communities comprising 23,690 apartment homes, of which 38 were developed and 42
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 two multifamily apartment communities under construction at September
30, 1999 that are expected to comprise 763 apartment homes upon completion and
an indirect 20% interest in seven apartment communities under construction at
September 30, 1999 that are expected to comprise 2,181 apartment homes upon
completion. As of September 30, 1999, Gables owned parcels of land for the
future development of 14 apartment communities expected to comprise an estimated
3,111 apartment homes. There can be no assurance that Gables will develop such
land. 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.
Page 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
2. COMMON AND PREFERRED EQUITY ACTIVITY
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 generally used
(i) to reduce outstanding indebtedness under interim financing vehicles utilized
to fund Gables' development and acquisition activities (the "Interim Financing
Vehicles") 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 $111.0 million were used to reduce outstanding indebtedness under
the Interim Financing Vehicles. 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.
Issuances of Common Operating Partnership Units
- -----------------------------------------------
Since the IPO, the Operating Partnership has issued a total of 3,917 Units
in connection with the South Florida Acquisition, the Greystone Acquisition and
the acquisition of other operating apartment communities and a parcel of land
for future development.
Issuance of Preferred Operating Partnership Units
- -------------------------------------------------
On November 12, 1998, the Operating Partnership issued 2,000 of its 8.625%
Series B Preferred Units (the "Series B Preferred Units") to an institutional
investor. The net proceeds from this issuance of approximately $48.7 million
were used to reduce outstanding indebtedness under the Interim Financing
Vehicles. The Series B Preferred Units may be redeemed by the Company at its
option after November 14, 2003 and are exchangeable by the holder into 8.625%
Series B Cumulative Redeemable Preferred Shares of the Company on a one-for-one
basis. This exchange right is generally not exercisable until after November 14,
2008. The Series B Preferred Units have no stated maturity, sinking fund or
mandatory redemption.
Common Equity Repurchase Program
- --------------------------------
Gables has announced a common equity repurchase program pursuant to which
the Company is authorized to purchase up to $100 million of its outstanding
common shares or Units. The Company plans to repurchase shares from time to time
in open market and privately negotiated transactions, depending on market prices
and other conditions, using proceeds from sales of selected assets. Whenever the
Company repurchases common shares from shareholders, the Operating Partnership
is required to redeem from the Company an equivalent number of Units on the same
terms and for the same aggregate price. After redemption, the Units so redeemed
by the Operating Partnership are no longer deemed outstanding. Units may also be
redeemed for cash upon their presentation for redemption by unitholders. As of
September 30, 1999, Gables had redeemed 1,123 Units for $26,504, including 895
Units redeemed from the Company.
Page 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
3. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Gables Realty Limited
Partnership include the consolidated accounts of Gables Realty Limited
Partnership and its subsidiaries (including the Management Companies). Gables
consolidates the financial statements of all entities in which it has a
controlling financial interest as that term is defined under generally accepted
accounting principles ("GAAP") through either majority voting interest or
contractual agreements. 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 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,
1999 are not necessarily indicative of the results that may be expected for the
full year. These financial statements should be read in conjunction with the
financial statements of Gables Realty Limited Partnership included in the Gables
Realty Limited Partnership 10-K for the year ended December 31, 1998.
4. RECENT PORTFOLIO ACQUISITIONS AND JOINT VENTURE
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. In
addition, $10.7 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. 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 has been prepared
assuming the South Florida Acquisition had been consummated on January 1, 1998.
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, 1998, or which may be attained in
future periods.
Nine Months Ended September 30,
1999 1998
---- ----
Total revenues $183,942 $166,908
Net income available to common unitholders 35,862 23,218
Per common Unit information:
Net income - basic $1.10 $0.77
Net income - diluted $1.10 $0.77
Page 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
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 665 Units valued at approximately $18.0 million. In addition,
Gables has accrued approximately $0.5 million as of September 30, 1999 for a
portion of the purchase price that was deferred by Gables, the payment of which
is contingent upon 1999 economic performance. Gables will issue a number of
Units equal in value to the amount due, once determined.
On March 26, 1999, Gables entered into a joint venture agreement with an
affiliate of J.P. Morgan Investment Management Inc. ("J.P. Morgan"). The
business purpose of the venture is to develop, own and operate seven multifamily
apartment communities, located in four of Gables' nine markets, which are
expected to comprise 2,181 apartment homes. As of March 25, 1999, Gables (i) had
commenced construction of four of the communities, (ii) owned the land for the
future development of two of the communities and (iii) owned the acquisition
right for the land for the future development of one of the communities. The
capital budget for the development of the seven communities is approximately
$213 million and is anticipated to be funded with 50% debt and 50% equity. The
equity component will be funded 80% by J.P. Morgan and 20% by Gables. Gables'
portion of the equity will be funded through a contribution of cash and
property. On March 26, 1999, Gables contributed its interests in the seven
development communities to the joint venture in return for (i) cash of $60,347
and (ii) an initial capital account in the joint venture of $15,214. Gables
serves as the managing member of the venture and has responsibility for all day-
to-day operating issues. Gables also serves as the property manager and the
general contractor for construction activities.
5. EARNINGS PER UNIT
Basic earnings per Unit are computed based on net income available to
common unitholders and the weighted average number of common Units outstanding.
Diluted earnings per Unit reflect the assumed issuance of common Units under
share option and incentive plans and upon settlement of long-term disability, as
applicable. The numerator and denominator used for both basic and diluted
earnings per Unit computations are as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
BASIC AND DILUTED INCOME AVAILABLE TO
COMMON UNITHOLDERS (NUMERATOR):
Net income - basic $15,882 $7,644 $35,862 $23,768
Amortization of discount on long-term liability --- 192 --- 384
-------- ------- -------- --------
Net income - diluted $15,882 $7,836 $35,862 $24,152
======== ======= ======== ========
COMMON UNITS (DENOMINATOR):
Average Units outstanding - basic 32,296 32,532 32,533 29,400
Incremental Units from assumed conversions of stock options 45 110 42 137
Issuance of Units upon settlement of long-term liability --- 430 --- 283
-------- ------- -------- --------
Average Units outstanding - diluted 32,341 33,072 32,575 29,820
======== ======= ======== ========
Page 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
6. RECENT ACCOUNTING PRONOUNCEMENTS
Gables adopted SFAS No. 130, "Reporting Comprehensive Income," during 1998.
SFAS No. 130 established standards for reporting and disclosing comprehensive
income (defined as revenues, expenses, gains and losses that under GAAP are not
included in net income) and its components. As of September 30, 1999, Gables had
no items of other comprehensive income.
In June, 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued establishing 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 statement of operations, 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 Gables
beginning January 1, 2001. The impact of SFAS No. 133 on Gables' financial
statements will depend on the extent, type and effectiveness of Gables' hedging
activities. SFAS No. 133 could increase volatility in net income and other
comprehensive income.
7. INTEREST RATE PROTECTION AGREEMENTS
In the ordinary course of business, Gables is exposed to interest rate
risks. Gables' senior management periodically seeks input from third party
consultants regarding market interest rate and credit risk in order to evaluate
its interest rate exposure. In certain situations, Gables may utilize derivative
financial instruments in the form of rate caps, rate swaps or rate locks to
hedge interest rate exposure by modifying the interest rate characteristics of
related balance sheet instruments and prospective financing transactions. Gables
does not utilize such instruments for trading or speculative purposes.
Derivatives used as hedges must be effective at reducing the risk associated
with the exposure being hedged, correlate in nominal amount, rate, and term with
the balance sheet instrument being hedged, and must be designated as a hedge at
the inception of the derivative contract.
Lump sum payments made or received at the inception or settlement of
derivative instruments designated as hedges are capitalized and amortized as an
adjustment to interest expense over the life of the associated balance sheet
instrument. Monthly amounts paid or received under rate cap and rate swap hedge
agreements are recognized as adjustments to interest expense as incurred. In the
event that circumstances arise indicating that an existing derivative instrument
no longer meets the hedge criteria described above, the derivative is marked to
market in the statement of operations.
In anticipation of a projected seven-year debt offering, Gables entered
into two forward treasury lock agreements in late 1997. The timing and amount of
the projected debt offering was modified several times as a result of
unanticipated capital transactions, including the South Florida Acquisition. The
treasury lock agreements were extended to align with the projected timing of the
debt offering. The treasury lock agreement in place in September, 1998 was
terminated due to certain economic conditions affecting the unsecured debt
market. For the three and nine months ended September 30, 1998, Gables
recognized mark to market losses of $3,627 and $5,637, respectively, upon the
expiration of the original and extended terms of the treasury lock agreements
since the required hedge criteria no longer existed at those dates.
8. SEGMENT REPORTING
Gables adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," during 1998. SFAS No. 131 established standards for
reporting financial and descriptive information about operating segments in
annual financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Gables' chief operating
decision maker is its senior management group.
Page 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
Gables owns, operates and develops multifamily apartment communities in
nine major markets located in Texas, Georgia, Florida and Tennessee. Such
apartment communities generate rental revenue and other income through the
leasing of apartment homes to a diverse base of residents. Gables evaluates the
performance of each of its apartment communities on an individual basis.
However, because each of the apartment communities has similar economic
characteristics, residents, and products and services, the apartment communities
have been aggregated into one reportable segment. This segment comprised 95% and
96% of Gables' total revenues for the three and nine month periods ended
September 30, 1999, respectively.
The primary financial measure for Gables' reportable business segment is
net operating income ("NOI"), which represents total property revenues less
property operating and maintenance expenses (as reflected in the accompanying
statements of operations). Accordingly, NOI excludes certain expenses included
in the determination of net income. Current year NOI is compared to prior year
NOI and current year budgeted NOI as a measure of financial performance. The NOI
yield or return on total capitalized costs is an additional measure of financial
performance. NOI from apartment communities totaled $39,162 and $37,295 for the
three months ended September 30, 1999 and 1998, respectively, and $116,358 and
$100,144 for the nine months ended September 30, 1999 and 1998, respectively.
All other segment measurements are disclosed in Gables' consolidated financial
statements.
Gables also provides management, brokerage, corporate apartment home and
development and construction services to third parties. These operations on an
individual and aggregate basis do not meet the quantitative thresholds for
segment reporting per SFAS No. 131.
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 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) 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 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
profitable 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 which should maintain high 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
to 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
help ensure favorable initial and long-term returns. Gables believes the
successful execution of these operating and investment strategies will result in
operating cash flow growth.
Page 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
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, to reduce indebtedness or, in certain
circumstances with appropriate approval from the board of trustees, to
repurchase outstanding common equity. 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.
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.
RECENT 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, $10.7
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 665 Units valued at $18.0 million.
COMMON AND PREFERRED EQUITY ACTIVITY
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 generally used
(i) to reduce outstanding indebtedness under interim financing vehicles utilized
to fund Gables' development and acquisition activities (the "Interim Financing
Vehicles") and (ii) for general working capital purposes, including funding of
future development and acquisition activities.
Page 13
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 used to reduce outstanding indebtedness under
the Interim Financing Vehicles. 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.
Issuances of Common Operating Partnership Units
- -----------------------------------------------
Since the IPO, the Operating Partnership has issued a total of 3,917 Units
in connection with the South Florida Acquisition, the Greystone Acquisition and
the acquisition of other operating apartment communities and a parcel of land
for future development.
Issuance of Preferred Operating Partnership Units
- -------------------------------------------------
On November 12, 1998, the Operating Partnership issued 2,000 of its 8.625%
Series B Preferred Units (the "Series B Preferred Units") to an institutional
investor. The net proceeds from this issuance of approximately $48.7 million
were used to reduce outstanding indebtedness under the Interim Financing
Vehicles. The Series B Preferred Units may be redeemed by the Company at its
option after November 14, 2003 and are exchangeable by the holder into 8.625%
Series B Cumulative Redeemable Preferred Shares of the Company on a one-for-one
basis. This exchange right is generally not exercisable until after November 14,
2008. The Series B Preferred Units have no stated maturity, sinking fund, or
mandatory redemption.
Common Equity Repurchase Program
- --------------------------------
Gables has announced a common equity repurchase program pursuant to which
the Company is authorized to purchase up to $100 million of its outstanding
common shares or Units. The Company plans to repurchase shares from time to time
in open market and privately negotiated transactions, depending on market prices
and other conditions, using proceeds from sales of selected assets. Whenever the
Company repurchases common shares from shareholders, the Operating Partnership
is required to redeem from the Company an equivalent number of Units on the same
terms and for the same aggregate price. After redemption, the Units so redeemed
by the Operating Partnership are no longer deemed outstanding. Units may also be
redeemed for cash upon their presentation for redemption by unitholders. As of
September 30, 1999, Gables had redeemed 1,123 Units for $26,504, including 895
Units redeemed from the Company
Shelf Registration Statement
- ----------------------------
On December 3, 1998, the Company and the Operating Partnership filed a
shelf registration statement with the Securities and Exchange Commission to add
an additional $500 million of equity capacity and an additional $300 million of
debt capacity. Gables believes it is prudent to maintain shelf registration
capacity in order to facilitate future capital raising activities.
Page 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
OTHER FINANCING ACTIVITY
Property Sales
- --------------
During the first quarter of 1999, Gables sold an apartment community
located in Atlanta comprising 213 apartment homes. During the third quarter of
1999, Gables sold two apartment communities located in Atlanta comprising 463
apartment homes and two apartment communities located in Memphis comprising 490
apartment homes. The net proceeds from these sales totaled $81.5 million and
were used to pay down outstanding borrowings under the Interim Financing
Vehicles and to purchase common shares and Units under the Company's equity
repurchase program.
Joint Venture with J.P. Morgan
- ------------------------------
On March 26, 1999, Gables entered into a joint venture agreement with an
affiliate of J.P. Morgan Investment Management Inc. ("J.P. Morgan"). The
business purpose of the venture is to develop, own and operate seven multifamily
apartment communities, located in four of Gables' nine markets, which are
expected to comprise 2,181 apartment homes. As of March 25, 1999, Gables (i) had
commenced construction of four of the communities, (ii) owned the land for the
future development of two of the communities and (iii) owned the acquisition
right for the land for the future development of one of the communities. The
capital budget for the development of the seven communities is approximately
$213 million and is anticipated to be funded with 50% debt and 50% equity. The
equity component will be funded 80% by J.P. Morgan and 20% by Gables. Gables'
portion of the equity will be funded through a contribution of cash and
property. On March 26, 1999, Gables contributed its interests in the seven
development communities to the joint venture in return for (i) cash of $60,347
and (ii) an initial capital account in the joint venture of $15,214. Gables
serves as the managing member of the venture and has responsibility for all day-
to-day operating issues. Gables also serves as the property manager and the
general contractor for construction activities.
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, 1999 (THE "1999 PERIOD") TO THE THREE MONTHS ENDED SEPTEMBER 30,
1998 (THE "1998 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, 1999 and 1998 is summarized as follows:
Three Months Ended September 30,
------------------------------------
$ %
1999 1998 Change Change
--------- --------- -------- --------
RENTAL AND OTHER REVENUE:
Same store communities (1) $48,316 $46,980 $1,336 2.8%
Communities stabilized during the 1999 Period,
but not during the 1998 Period (2) 3,793 2,382 1,411 59.2%
Development and lease-up communities (3) --- --- --- ---
Acquired communities (4) 5,461 4,687 774 16.5%
Sold communities (5) 1,880 2,898 -1,018 -35.1%
-------- -------- ------- --------
Total property revenues $59,450 $56,947 $2,503 4.4%
-------- -------- ------- --------
PROPERTY OPERATING AND MAINTENANCE EXPENSE
(EXCLUSIVE OF DEPRECIATION AND AMORTIZATION):
Same store communities (1) $16,666 $16,430 $236 1.4%
Communities stabilized during the 1999 Period,
but not during the 1998 Period (2) 963 480 483 100.6%
Development and lease-up communities (3) --- --- --- ---
Acquired communities (4) 1,937 1,570 367 23.4%
Sold communities (5) 722 1,172 -450 -38.4%
-------- -------- ------- -------
Total specified expenses $20,288 $19,652 $636 3.2%
-------- -------- ------- -------
Revenues in excess of specified expenses $39,162 $37,295 $1,867 5.0%
======== ======== ======= =======
Revenues in excess of specified expenses as a percentage
of total property revenues 65.9% 65.5% --- 0.4%
======== ======== ======= =======
<FN>
(1) Communities which were owned and fully stabilized throughout both the 1999 Period and 1998 Period ("same store").
(2) Communities which were stabilized during all of the 1999 Period, but were not stabilized during all of the 1998 Period.
(3) Communities in the development and/or lease-up phase which were not fully stabilized during all or any of the 1999 Period.
(4) Communities which were acquired or in renovation subsequent to July 1, 1998.
(5) Communities which were sold subsequent to July 1, 1998.
</FN>
Page 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
Total property revenues increased $2,503, or 4.4%, from $56,947 to $59,450
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"). This
increase in property revenues has been offset in part by the sale of five
apartment communities in 1999; however, two of the five sales did not occur
until September 30, 1999. Below is additional data regarding the increases in
total property revenues for two of the five community categories presented in
the preceding table:
Same store communities:
Percent
Increase Increase
Percent of Increase (Decrease) (Decrease)
Number of Total Occupancy (Decrease) in Total in Total
Number of Apartment Apartment During the in Property Property
Market Communities Homes Homes 1999 Period Occupancy Revenues Revenues
- ------ ----------- --------- ---------- ----------- ---------- ---------- ----------
Atlanta 18 5,378 26.7% 95.0% -0.7% $551 4.5%
Houston 15 5,633 27.9% 95.7% 1.2% -4 0.0%
South Florida 12 3,430 17.0% 96.5% 4.8% 596 7.6%
Dallas 9 2,085 10.4% 94.4% -0.4% 75 1.4%
Nashville 4 1,166 5.8% 93.4% -1.4% -11 -0.5%
Austin 4 953 4.7% 95.4% -0.9% 141 5.0%
Memphis 2 964 4.8% 94.6% -1.0% 27 1.5%
San Antonio 2 544 2.7% 90.1% -5.0% -39 -3.1%
-- ------ ------ ----- ----- ------ -----
66 20,153 100.0% 95.2% 0.7% $1,336 2.8%
== ====== ====== ===== ===== ====== =====
Communities stabilized during the 1999 Period, but not during the 1998 Period:
Percent of Increase
Number of Total in Total Occupancy
Number of Apartment Apartment Property During the
Market Communities Homes Homes Revenues 1999 Period
- ------ ----------- --------- ---------- -------- -----------
Orlando 2 511 36.2% $443 93.4%
Atlanta 1 386 27.4% 571 97.8%
Houston 1 256 18.2% 241 96.0%
Austin 1 256 18.2% 156 96.8%
--- ----- ------ ------ -----
5 1,409 100.0% $1,411 95.6%
=== ===== ====== ====== =====
Other revenues increased $865, or 38.2%, from $2,267 to $3,132 due
primarily to development revenues, net of $760 in the 1999 Period.
Property operating and maintenance expense (exclusive of depreciation and
amortization) increased $636, or 3.2%, from $19,652 to $20,288, due to an
increase in apartment homes resulting from the acquisition and development of
additional communities and an increase for same store communities of 1.4%. This
increase in property operating and maintenance expense has been offset in part
by the sale of five apartment communities in 1999; however, two of the five
sales did not occur until September 30, 1999.
Real estate depreciation and amortization expense increased $834, or 7.7%,
from $10,887 to $11,721 due primarily to the acquisition and development of
additional communities. This increase in real estate depreciation and
amortization expense is partially offset by the sale of the apartment
communities noted above.
Property management expense for owned communities and third party
properties on a combined basis increased $355, or 17.7%, from $2,008 to $2,363
due primarily to (i)increased staffing and support related to Gables' strategic
initiatives for enhanced management information systems and (ii) inflationary
increases in expenses. 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.
Page 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
General and administrative expense decreased $290, or 16.4%, from $1,764 to
$1,474, due primarily to decreases in abandoned real estate pursuit costs and
internal acquisition costs incurred by the Company related to 1998 acquisitions.
Interest expense increased $209, or 2.0%, from $10,561 to $10,770 as a
result of an increase in operating debt associated with the acquisition and
development of additional communities. This increase in interest expense has
been offset in part by the offerings and property sales Gables consummated
between periods, of which a portion of the proceeds has been used to reduce
indebtedness.
Loss on treasury locks of $3,627 in the 1998 Period represents mark to
market losses recorded upon the expiration of the terms of treasury lock
agreements that were (i) entered into in anticipation of a projected debt
offering, (ii) subsequently extended in connection with modifications in the
projected timing of the debt offering and (iii) terminated due to economic
conditions affecting the unsecured debt market.
Gain on sale of real estate assets of $4,019 in the 1999 Period relates to
the sale of two apartment communities located in Atlanta comprising 463
apartment homes and two apartment communities located in Memphis comprising 490
apartment homes.
Page 18
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 NINE MONTHS ENDED
SEPTEMBER 30, 1999 (THE "1999 PERIOD") TO THE NINE MONTHS ENDED SEPTEMBER 30,
1998 (THE "1998 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, 1999 and 1998 is summarized as follows:
Nine Months Ended September 30,
-------------------------------
1999 1998 $ Change % Change
-------- ---------- --------- ---------
RENTAL AND OTHER REVENUE:
Same store communities (1) $114,928 $113,026 $1,902 1.7%
Communities stabilized during the 1999 Period,
but not during the 1998 Period (2) 6,663 4,577 2,086 45.6%
Development and lease-up communities (3) 6,295 1,488 4,807 323.1%
Acquired communities (4) 41,483 25,193 16,290 64.7%
Sold communities (5) 6,908 7,611 -703 -9.2%
--------- --------- -------- ---------
Total property revenues $176,277 $151,895 $24,382 16.1%
--------- --------- -------- ---------
PROPERTY OPERATING AND MAINTENANCE EXPENSE
(EXCLUSIVE OF DEPRECIATION AND AMORTIZATION):
Same store communities (1) $38,652 $38,401 $251 0.7%
Communities stabilized during the 1999 Period,
but not during the 1998 Period (2) 1,515 1,047 468 44.7%
Development and lease-up communities (3) 2,148 349 1,799 515.5%
Acquired communities (4) 14,998 8,940 6,058 67.8%
Sold communities (5) 2,606 3,014 -408 -13.5%
--------- --------- -------- ---------
Total specified expenses $59,919 $51,751 $8,168 15.8%
--------- --------- -------- ---------
Revenues in excess of specified expenses $116,358 $100,144 $16,214 16.2%
======== ======== ======= =========
Revenues in excess of specified expenses
as a percentage of total property revenues 66.0% 65.9% --- 0.1%
======== ======== ======= =========
<FN>
(1) Communities which were owned and fully stabilized throughout both the 1999 Period and 1998 Period ("same store").
(2) Communities which were stabilized during all of the 1999 Period, but were not stabilized during all of the 1998 Period.
(3) Communities in the development and/or lease-up phase which were not fully stabilized during all or any of the 1999 Period.
(4) Communities which were acquired subsequent to January 1, 1998, including the 15 communities acquired in April, 1998 in
South Florida.
(5) Communities which were sold subsequent to January 1, 1998.
</FN>
Page 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
Total property revenues increased $24,382, or 16.1%, from $151,895 to
$176,277 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"). This increase in property revenues has been offset in part by the sale
of five apartment communities in 1999; however, two of the five sales did not
occur until September 30, 1999. Below is additional data regarding the increases
in total property revenues for three of the five community categories presented
in the preceding table:
Increase Increase
Percent of Increase (Decrease) (Decrease)
Number of Total Occupancy (Decrease) in Total in Total
Number of Apartment Apartment During the in Property Property
Market Communities Homes Homes 1999 Period Occupancy Revenues Revenues
- ------ ----------- --------- ---------- ----------- ---------- --------- ---------
Atlanta 17 5,165 31.8% 95.1% -0.4% $1,618 4.4%
Houston 15 5,633 34.7% 93.6% -1.6% -48 -0.1%
Dallas 9 2,085 12.8% 92.8% -1.7% 258 1.6%
Nashville 4 1,166 7.2% 91.6% -3.6% -198 -2.9%
Austin 3 680 4.2% 94.0% 0.5% 336 6.1%
Memphis 2 964 5.9% 92.2% -3.6% 5 0.1%
San Antonio 2 544 3.4% 88.4% -4.5% -69 -2.0%
---- -------- -------- ------- ------- -------- -------
52 16,237 100.0% 93.7% -1.4% $1,902 1.7%
==== ======== ======== ======= ======= ======== =======
Communities stabilized during the 1999 Period but not during the 1998 Period:
Percent of Increase
Number of Total in Total Occupancy
Number of Apartment Apartment Property During the
Market Communities Homes Homes Revenues 1999 Period
- ------ ----------- --------- ---------- -------- -----------
Austin 2 529 65.4% $1,353 90.8%
Orlando 1 280 34.6% 733 100.0%
----------- --------- ---------- -------- -----------
3 809 100.0% $2,086 93.1%
=========== ========= ========== ======== ===========
Development and lease-up communities:
Percent of Increase
Number of Total in Total Occupancy
Number of Apartment Apartment Property During the
Market Communities Homes Homes Revenues 1999 Period
- ------ ----------- --------- ---------- -------- -----------
Atlanta 1 386 44.2% $2,116 87.0%
Houston 1 256 29.3% 1,203 86.3%
Orlando 1 231 26.5% 1,488 74.1%
----------- --------- ---------- -------- -----------
3 873 100.0% $4,807 82.5%
=========== ========= ========== ======== ===========
Other revenues increased $2,680, or 53.8%, from $4,985 to $7,665 due
primarily to (i) an increase in property management revenues of $571, or 17.8%,
from $3,213 to $3,784, resulting from a net increase of properties managed by
Gables for third parties as a result of the South Florida Acquisition and (ii)
development revenues, net of $1,989 in the 1999 Period.
Page 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
Property operating and maintenance expense (exclusive of depreciation and
amortization) increased $8,168, or 15.8%, from $51,751 to $59,919 due to an
increase in apartment homes resulting from the acquisition and development of
additional communities and an increase for same store communities of 1.7%. This
increase in property operating and maintenance expense has been offset in part
by the sale of five apartment communities in 1999.
Real estate depreciation and amortization expense increased $6,670, or
23.3%, from $28,581 to $35,251 due primarily to the acquisition and development
of additional communities. This increase in real estate depreciation and
amortization expense is partially offset by the sale of the five apartment
communities noted above.
Property management expense for owned communities and third party
properties on a combined basis increased $711, or 12.2%, from $5,848 to $6,559
due primarily to (i) an increase of approximately 5,000 apartment homes managed
from 37,000 in the 1998 Period to 42,000 in the 1999 Period, resulting primarily
from the South Florida Acquisition, (ii) increased staffing and support related
to Gables' strategic initiatives for enhanced management information systems,
and (iii) inflationary increases in expenses. 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 $356, or 8.0%, from $4,438 to
$4,794 due primarily to (i) compensation and other costs for new positions
associated with the South Florida Acquisition and (ii) increased compensation
costs. This increase in general and administrative expense has been offset in
part by decreases in abandoned real estate pursuit costs and internal
acquisition costs incurred by the Company related to 1998 acquisitions.
Severance costs of $2,000 in the 1999 Period represent charges associated
with organizational changes resulting from management succession directives,
including the resignation of the previous chief operating officer.
Interest expense increased $3,970, or 14.2%, from $28,059 to $32,029 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 Greystone Acquisition. These increases in interest
expense have been offset in part as a result of the offerings and property sales
Gables consummated between periods, of which a portion of the proceeds has been
used to reduce indebtedness.
Loss on treasury locks of $5,637 in the 1998 Period represents mark to
market losses recorded upon the expiration of the terms of treasury lock
agreements that were (i) entered into in anticipation of a projected debt
offering, (ii) subsequently extended in connection with modifications in the
projected timing of the debt offering and (iii) terminated due to economic
conditions affecting the unsecured debt market.
Gain on sale of real estate assets of $4,685 in the 1999 Period relates to
the sale of three apartment communities in Atlanta comprising 676 apartment
homes and two apartment communities located in Memphis comprising 490 apartment
homes.
LIQUIDITY AND CAPITAL RESOURCES
Gables' net cash provided by operating activities increased from $67,222
for the nine months ended September 30, 1998 to $78,696 for the nine months
ended September 30, 1999 due to (i) an increase of $11,894 in income (a) before
certain non-cash or non-operating items, including depreciation, amortization,
equity in income of joint ventures, gain on sale of real estate assets,
long-term compensation expense and loss on treasury locks, and (b) after
operating distributions received from joint ventures, (ii) the change in other
assets between periods of $4,034 and (iii) the change in restricted cash between
periods of $787. Such increases were offset in part by the change in other
liabilities between periods of $5,241.
Page 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
For the nine months ended September 30, 1999, Gables had $79,994 of net
cash provided by investing activities compared to $310,959 of net cash used in
investing activities for the nine months ended September 30, 1998. During the
nine months ended September 30, 1999, Gables received cash of (i) $60.3 million
in connection with the contribution of its interests in certain development
communities to the joint venture with J.P. Morgan and (ii) $81.5 million in
connection with the sale of five operating apartment communities. During the
nine months ended September 30, 1999, Gables expended approximately $44.1
million related to development expenditures, including related land
acquisitions, approximately $4.7 million related to its investment in the J.P.
Morgan joint venture, approximately $7.5 million related to recurring,
non-revenue enhancing, capital expenditures for operating apartment communities,
and approximately $5.6 million related to non-recurring, renovation/
revenue-enhancing expenditures.
For the nine months ended September 30, 1999, Gables had $154,692 of net
cash used in financing activities compared to $246,677 of net cash provided by
financing activities for the nine months ended September 30, 1998. During the
nine months ended September 30, 1999, Gables had net repayments of borrowings of
approximately $73.8 million, net payments of distributions totaling
approximately $53.9 million, and payments for treasury share purchases and Unit
redemptions totaling approximately $26.5 million. The repayments of borrowings
were funded by the net cash provided by investing activities.
Gables elected to be taxed as a REIT under Section 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its taxable year
ended December 31, 1994. REITs are subject to a number of organizational and
operational requirements, including a requirement that they currently distribute
95% of their ordinary taxable income. Provided Gables maintains its
qualification as a REIT, the Company generally will not be subject to Federal
income tax on distributed net income.
As of September 30, 1999, Gables had total indebtedness of $738,950, cash
and cash equivalents of $11,052, and principal escrow deposits reflected in
restricted cash of $2,805. Gables' indebtedness has an average of 5.62 years to
maturity at September 30, 1999. Excluding monthly principal amortization
payments, over the next five years Gables has the following scheduled debt
maturities for indebtedness outstanding at September 30, 1999:
1999 $ 11,492
2000 53,521
2001 55,000
2002 122,392
2003 62,676
The debt maturities in 2002 include $40,000 of outstanding indebtedness
under Gables' $225 million Credit Facility which has two one-year extension
options. The debt maturities in 2003 include $44,930 of tax-exempt bond
indebtedness credit-enhanced through a letter of credit facility which has
unlimited one-year extension options. Three of the underlying bond issues mature
in December, 2007 and the fourth underlying bond issue matures in August, 2024.
Gables' distributions through the third quarter of 1999 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, the issuance of debt
securities or equity securities, private equity investments in the form of joint
ventures or through the disposition of assets which, in management's evaluation,
may no longer meet Gables' investment requirements.
Page 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
$225 Million Credit Facility
- ----------------------------
Gables has a $225 million unsecured revolving credit facility. In May, 1999
the facility was amended and the maturity date was extended to May, 2002, with
two one-year extension options. In addition, the interest rate on Gables'
current syndicated borrowings was increased from LIBOR plus 0.80% to LIBOR plus
0.95%. 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, 1999, Gables had $40.0 million in borrowings outstanding under the
facility and, therefore, had $185.0 million of remaining capacity on the $225
million available commitment. Additionally, a competitive bid option feature is
in place for up to 50% of the total commitment.
$25 Million Credit Facility
- ---------------------------
Gables has an unsecured revolving credit facility that provides for up to
$25 million in borrowings. This facility has an initial term of one year and
unlimited one-year extension options. Gables has exercised three of its one-year
extension options, resulting in a current maturity date for the facility of
October, 2000. Borrowings currently bear interest under this facility at LIBOR
plus 0.95%. As of September 30, 1999, Gables had no 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 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 generally
accepted accounting principles ("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, 1999 is $112,494,
exclusive of the effect of depreciation. Accordingly, on a pro forma basis, the
real estate assets before accumulated depreciation, total assets, and total
partners' capital (including limited and preferred partners' capital interest)
as of September 30, 1999 would be $1,681,216, $1,591,567 and $798,886,
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.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 6 to Consolidated Financial Statements.
Page 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
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.
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.
Page 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Unit Amounts)
- ---------------------------------------------------------------------------
Gables' progress is described by category in the following table:
CATEGORY STATUS PHASE 4 COMPLETION DATE
-------- ------ -----------------------
Hardware Complete 3/31/99
Software Complete 3/31/99
Non-IT Complete 6/30/99
Gables' costs of addressing the Year 2000 issue have not been, and are not
expected to be, material and 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 has
developed specific contingency plans where necessary. In addition, Gables has
general contingency plans in place 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 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
DEVELOPMENT COMMUNITIES AT SEPTEMBER 30, 1999
Number of Total Actual or Estimated Quarter of
Apartment Budgeted Percent at September 30, 1999 Construction Initial Construction Stabilized
Community Homes Cost Complete Leased Occupied Start Occupancy End Occupancy
- --------- --------- ---------- ---------- -------- ---------- ------------ --------- ------------ ----------
(millions) (1)
WHOLLY-OWNED DEVELOPMENT COMMUNITIES:
Orlando, FL
- -----------
Gables Chatham Square 448 $37 6% --- --- 2Q 1999 2Q 2000 3Q 2001 3Q 2001
Gables North Village 315 40 1% --- --- 2Q 1999 4Q 2000 1Q 2002 1Q 2002
--- ---
WHOLLY-OWNED TOTALS 763 $77
--- ---
CO-INVESTMENT DEVELOPMENT COMMUNITIES (2), (3):
Atlanta, GA
- -----------
Gables Metropolitan I 435 $49 84% 33% 18% 2Q 1998 3Q 1999 2Q 2000 4Q 2000
Houston, TX
- -----------
Gables Raveneaux 382 28 86% 49% 27% 3Q 1998 2Q 1999 1Q 2000 3Q 2000
Dallas, TX
- ----------
Gables San Raphael 222 17 99% 51% 43% 3Q 1998 2Q 1999 4Q 1999 1Q 2000
Gables State Thomas I 290 33 24% --- --- 2Q 1999 2Q 2000 1Q 2001 3Q 2001
Boca Raton, FL
- --------------
Gables Grande Isle 320 23 18% --- --- 2Q 1999 1Q 2000 4Q 2000 1Q 2001
Gables Palma Vista 189 23 60% 2% --- 1Q 1999 4Q 1999 2Q 2000 4Q 2000
Gables San Michele II 343 40 78% 40% 33% 3Q 1998 2Q 1999 2Q 2000 4Q 2000
----- ----
CO-INVESTMENT TOTALS 2,181 $213 (3)
----- ----
DEVELOPMENT TOTALS 2,944 $290
===== ====
<FN>
(1) Stabilized occupancy is defined as the earlier to occur of (i) 93% occupancy or (ii) one year after completion of construction.
(2) These communities were contributed into a joint venture in March, 1999.
(3) Construction loan proceeds are expected to fund 50% of the total budgeted costs. The remaining costs will be funded by capital
contributions to the venture from the venture partner and Gables in a funding ratio of 80% and 20%, respectively.
</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.
Page 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
STABILIZED APARTMENT COMMUNITIES AT SEPTEMBER 30, 1999
September 30, 1999 Scheduled Rent Per
Number of September 30, 1999 -------------------------------------
Community Homes Occupancy Unit Square Foot
- --------- ---------- ------------------ -------- -------------
Houston, TX
- -----------
Austin Colony 237 98% $ 836 $0.85
Baybrook Village 776 97% 547 0.68
Gables Bradford Place 372 96% 770 0.89
Gables Bradford Pointe 360 95% 669 0.87
Gables Champions 404 96% 762 0.84
Gables CityPlaza 246 100% 862 0.97
Gables Cityscape 252 97% 874 1.02
Gables CityWalk/Waterford Square 317 97% 870 1.08
Gables Edgewater 292 99% 782 0.89
Gables Meyer Park 345 99% 844 0.98
Gables New Territory 256 98% 837 0.92
Gables of First Colony 324 98% 875 0.88
Gables Piney Point 246 97% 869 0.94
Gables Pin Oak Green 582 97% 971 0.95
Gables Pin Oak Park 477 97% 1,006 0.99
Gables River Oaks 228 99% 1,409 1.16
Lions Head 277 96% 679 0.80
Metropolitan Uptown (JV) 318 98% 1,032 1.13
Rivercrest I 140 96% 696 0.83
Rivercrest II 140 98% 684 0.81
Westhollow Park 412 97% 668 0.74
Windmill Landing 259 98% 705 0.81
-------- -------- --------- --------
7,260 97% 817 0.90
Atlanta, GA
- -----------
Briarcliff Gables 104 98% 1,142 0.92
Buckhead Gables 162 98% 839 1.11
Dunwoody Gables 311 96% 846 0.91
Gables Cityscape 192 98% 876 1.06
Gables Mill 438 97% 831 0.90
Gables Northcliff 82 99% 1,219 0.78
Gables Sugarloaf 386 98% 868 0.87
Gables Vinings 315 95% 1,001 0.94
Gables Walk 310 95% 1,058 0.89
Gables Wood Arbor 140 98% 725 0.80
Gables Wood Crossing 268 92% 765 0.80
Gables Wood Glen 380 95% 720 0.73
Gables Wood Knoll 312 96% 737 0.74
Lakes at Indian Creek 603 96% 635 0.69
Rock Springs Estates 295 97% 936 0.93
Roswell Gables I 384 96% 893 0.82
Roswell Gables II 284 96% 893 0.76
Spalding Gables 252 99% 889 0.90
Wildwood Gables 546 93% 870 0.77
-------- -------- --------- --------
5,764 96% 849 0.83
South FL
- --------
Boca Place 180 96% 833 0.85
Cotton Bay 444 93% 708 0.72
Hampton Lakes 300 94% 747 0.70
Hampton Place 368 94% 713 0.74
Kings Colony 480 99% 760 0.86
Mahogany Bay 328 96% 760 0.75
Page 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
STABILIZED APARTMENT COMMUNITIES AT SEPTEMBER 30, 1999
(continued from previous page)
September 30, 1999 Scheduled Rent Per
Number of September 30, 1999 -------------------------------------
Community Homes Occupancy Unit Square Foot
- --------- ---------- ------------------ -------- -------------
South FL (continued)
- --------
Mizner on the Green 246 96% $1,562 $1.23
San Michele 249 95% 1,397 1.05
San Remo 180 96% 1,229 0.67
Town Colony 172 97% 832 0.97
Vinings at Boynton Beach I 252 95% 889 0.74
Vinings at Boynton Beach II 296 95% 903 0.75
Vinings at Hampton Village 168 96% 797 0.66
Vinings at Town Place 312 96% 803 0.96
Vinings at Wellington 222 95% 1,009 0.75
-------- -------- --------- --------
4,197 95% 896 0.82
Dallas, TX
- ----------
Arborstone 536 94% 532 0.74
Gables at Pearl Street 108 98% 1,438 1.32
Gables CityPlace 232 97% 1,401 1.33
Gables Green Oaks 300 99% 833 0.87
Gables Mirabella 126 99% 1,270 1.39
Gables Preston 126 94% 1,067 0.97
Gables Spring Park 188 95% 967 0.92
Gables Turtle Creek 150 95% 1,287 1.28
Gables Valley Ranch 319 96% 962 0.94
-------- -------- --------- --------
2,085 96% 955 1.02
Memphis, TN
- -----------
Arbors of Harbortown (JV) 345 95% 858 0.87
Gables Cordova 464 95% 645 0.69
Gables Stonebridge 500 99% 651 0.74
-------- -------- --------- --------
1,309 97% 703 0.76
Austin, TX
- ----------
Gables at the Terrace 308 97% 1,081 1.14
Gables Bluffstone 256 99% 1,097 1.11
Gables Central Park 273 97% 1,207 1.28
Gables Great Hills 276 99% 851 1.03
Gables Park Mesa 148 100% 1,139 1.04
Gables Town Lake 256 99% 1,212 1.30
-------- -------- --------- --------
1,517 98% 1,092 1.16
Nashville, TN
- -------------
Brentwood Gables 254 96% 850 0.75
Gables Hendersonville 364 91% 669 0.71
Gables Hickory Hollow I 272 96% 643 0.71
Gables Hickory Hollow II 276 96% 643 0.68
-------- -------- --------- --------
1,166 95% 696 0.71
San Antonio, TX
- ---------------
Gables Colonnade I 312 90% 801 0.88
Gables Wall Street 232 96% 810 0.85
-------- -------- --------- --------
544 92% 804 0.87
Orlando, FL
- -----------
Gables Celebration 231 94% 1,236 1.07
The Commons at Little Lake Bryan I 280 100% ---- (A) ---- (A)
-------- -------- --------- --------
511 97% 1,236 1.07
-------- -------- --------- --------
TOTALS 24,353 96% $859 $0.88
======== ======== ========= ========
<FN>
(A) 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 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
PORTFOLIO INDEBTEDNESS AND INTEREST RATE PROTECTION AGREEMENT SUMMARIES
AT SEPTEMBER 30, 1999
(Dollars in thousands)
PORTFOLIO INDEBTEDNESS SUMMARY
Percentage Interest Total Years to
Type of Indebtedness Balance of Total Rate (A) Rate (B) Maturity
- -------------------- ------- ---------- -------- -------- --------
Fixed-rate:
Secured notes $124,134 16.8% 7.80% 7.80% 8.50
Unsecured notes 322,709 43.7% 7.20% 7.20% 3.95
Tax-exempt 90,545 12.2% 5.90% 6.31% 7.92
---------- -------- -------- -------- -------
Total fixed-rate $537,388 72.7% 7.12% 7.19% 5.67
---------- -------- -------- -------- -------
Tax-exempt variable-rate $150,070 20.3% 3.80% 4.79% 6.69
---------- -------- -------- -------- -------
Unsecured credit facilities $51,492 7.0% 6.04% 6.04% 2.01
---------- -------- -------- -------- -------
Total portfolio debt (C), (D) $738,950 100.0% 6.37% 6.62% 5.62
========== ============ ======== ======== =======
<FN>
(A) Interest Rate represents the weighted average interest rate incurred on the indebtedness, exclusive of
deferred financing cost amortization and credit enhancement fees, as applicable.
(B) Total Rate represents the Interest Rate (A) plus credit enhancement fees, as applicable.
(C) 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, 1999 for purposes of interest
capitalization were $87,629.
(D) Excludes (i) $16.4 million of tax-exempt bonds and $17.7 million of outstanding conventional indebtedness
related to joint ventures in which Gables owns a 25% interest and (ii) $43.2 million of construction loan
indebtedness related to a joint venture in which Gables owns a 20% interest.
</FN>
INTEREST RATE PROTECTION AGREEMENT SUMMARY
Notional Effective Termination
Description of Agreement Amount Rate Date Date
- ------------------------ -------- ---- --------- -----------
LIBOR, 30-day - "Rate Swap" $25,000 5.76(E) 02/27/98 02/27/00 (F)
LIBOR, 30-day - "Rate Swap" $40,000 4.79(E) 11/30/98 09/29/00
(E) The 30-day LIBOR rate in effect at September 30, 1999 was 5.38%.
(F) 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 29
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. In addition, extraordinary or unusual items, along with significant
non-recurring events that materially distort the comparative measure of FFO, are
typically disregarded in its calculation. 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 recurring, non-revenue enhancing capital expenditures. FFO and AFFO should
not be considered alternatives to net income as indicators of Gables' operating
performance or 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,
1999 1998 1999 1998
---- ---- ---- ----
Net income available to common unitholders $15,882 $7,644 $35,862 $23,768
Non-recurring severance costs (a) --- --- 2,000 ---
Non-recurring loss on treasury locks (b) --- 3,627 --- 5,637
Amortization of loss on extension of used treasury locks -46 -46 -138 -96
Gain on sale of real estate assets -4,019 --- -4,685 ---
Real estate asset depreciation:
Wholly-owned real estate assets 11,721 10,887 35,251 28,581
Joint venture real estate assets 113 55 238 167
------- ------- ------- -------
Total 11,834 10,942 35,489 28,748
------- ------- ------- -------
Funds from operations - basic $23,651 $22,167 $68,528 $58,057
Amortization of discount on long-term liability (c) 165 192 521 384
------- ------- ------- -------
Funds from operations - diluted $23,816 $22,359 $69,049 $58,441
------- ------- ------- -------
Capital expenditures for operating apartment communities:
Carpet $1,361 $1,011 $3,217 $2,163
Roofing 24 96 55 130
Exterior painting 44 --- 63 ---
Appliances 134 158 346 315
Other additions and improvements 1,106 921 3,817 2,628
------- ------- ------- -------
Total 2,669 2,186 7,498 5,236
------- ------- ------- -------
Adjusted funds from operations - diluted $21,147 $20,173 $61,551 $53,205
======= ======= ======= =======
Average Units outstanding - basic 32,296 32,532 32,533 29,400
======= ======= ======= =======
Average Units outstanding - diluted (c) 32,786 33,072 33,045 29,820
======= ======= ======= =======
Page 30
<FN>
(a) Severance costs of $2,000 for the nine months ended September 30, 1999
represent charges associated with organizational changes resulting from
management succession directives, including the resignation of the previous
chief operating officer. The NAREIT definition of FFO disregards
significant non-recurring events that materially distort the comparative
measurement of FFO over time. Gables believes that such organizational
changes that resulted in the charge are unusual and non- recurring in
nature. Gables also believes that other organizational changes could arise
in the future that could result in similar charges. Gables believes these
severance costs materially distort the comparative measurement of FFO and,
therefore, have been disregarded in the calculation of FFO pursuant to the
NAREIT definition of FFO.
(b) Loss on treasury locks of $3,627 and $5,637 for the three and nine months
ended September 30, 1998, respectively, represents mark to market losses
recorded upon the expiration of the terms of treasury lock agreements that
were (i) entered into in anticipation of a projected debt offering, (ii)
subsequently extended in connection with modifications in the projected
timing of the debt offering as a result of unanticipated capital
transactions, including the South Florida Acquisition and (iii) terminated
due to economic conditions affecting the unsecured debt market. The NAREIT
definition of FFO disregards significant non-recurring events that
materially distort the comparative measurement of FFO over time. While
Gables may utilize derivative financial instruments such as rate locks to
hedge interest rate exposure by modifying the interest rate characteristics
of prospective financing transactions, it believes the specific series of
events and circumstances that resulted in the loss of hedge accounting for
these treasury locks is unusual and non-recurring in nature. Gables also
believes that different events and circumstances could arise in the future
that could result in similar losses. Gables believes these losses
materially distort the comparative measurement of FFO and, therefore, have
been disregarded in the calculation of FFO pursuant to the NAREIT
definition of FFO.
(c) This obligation will be settled with Units. Such Units are excluded from
basic shares and Units outstanding, but are included in the calculation of
diluted shares and Units outstanding.
</FN>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gables' capital structure includes the use of variable rate and fixed rate
indebtedness. As such, Gables is exposed to the impact of changes in interest
rates. Gables' senior management periodically seeks input from third party
consultants regarding market interest rate and credit risk in order to evaluate
its interest rate exposure. In certain situations, Gables may utilize derivative
financial instruments in the form of rate caps, rate swaps or rate locks to
hedge interest rate exposure by modifying the interest rate characteristics of
related balance sheet instruments and prospective financing transactions. Gables
does not utilize such instruments for trading or speculative purposes.
Gables typically refinances maturing debt instruments at then-existing
market interest rates and terms which may be more or less than the interest
rates and terms on the maturing debt.
Refer to the Operating Partnership's Annual Report on Form 10-K for the
year ended December 31, 1998 for detailed disclosure about quantitative and
qualitative disclosures about market risk. Quantitative and qualitative
disclosures about market risk have not materially changed since December 31,
1998.
Page 31
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, 1999 and ending
September 30, 1999, in connection with such issuances of
shares by the Company during that time period, the Operating
Partnership issued an aggregate 95,318 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
27.1* Financial Data Schedule Financial Data Schedule
----------------
* Filed herewith
(b) Reports on Form 8-K
None
Page 32
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.
GABLES REALTY LIMITED PARTNERSHIP
By: Gables GP, Inc.
Its: General Partner
Date: November 10, 1999 /s/ Marvin R. Banks, Jr.
-----------------------
Marvin R. Banks, Jr.
Senior Vice President and
Chief Financial Officer
(Authorized Officer of the Registrant)
Date: November 10, 1999 /s/ Dawn H. Severt
------------------
Dawn H. Severt
Vice President and
Chief Accounting Officer