<PAGE>
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-12269
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HOMESTEAD VILLAGE INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------------
MARYLAND
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
74-2770966
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
2100 RIVEREDGE PARKWAY 9TH FLOOR
ATLANTA, GEORGIA 30328
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(770) 303-2200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the Registrant's common stock as of
May 12, 1998 was: 38,262,996
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
NUMBER
PAGE
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<S> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets - March 31, 1998 (unaudited) and December 31, 1997............... 3
Condensed Statements of Operations (unaudited) - Three-Month Periods Ended March 31, 1998
and 1997.................................................................................. 4
Condensed Statements of Cash Flows (unaudited) - Three-Month Periods Ended March 31, 1998
and 1997.................................................................................. 5
Notes to Condensed Financial Statements (unaudited)....................................... 6
Report of Independent Public Accountants.................................................. 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
</TABLE>
2
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HOMESTEAD VILLAGE INCORPORATED
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted cash of $657).......................... $ 20,205 $ 2,974
Accounts receivable, net of allowance of $80 in 1998 and $81 in 1997................... 2,820 1,970
Other current assets................................................................... 435 732
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Total current assets.............................................................. 23,460 5,676
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Property and equipment...................................................................... 861,244 733,321
Less accumulated depreciation............................................................... 23,450 17,824
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Net investment in property and equipment.................................................... 837,794 715,497
------------ -------------
Deposits and pursuit costs, including $12,117 of funds with title companies for property
acquisitions in 1998 and $7,697 in 1997.................................................. 17,377 12,901
Deferred loan costs, net of accumulated amortization of $44,120 in 1998 and $43,297 in
1997 170 632
Trademark and intangibles, net of accumulated amortization of $2,358 in 1998 and $1,768
in 1997 43,857 44,447
Other assets ............................................................................... 5,239 4,796
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Total assets............................................................................. $ 927,897 $ 783,949
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit........................................................................ $ 71,200 $ 96,808
Development costs payable, including retainage of $14,621 in 1998 and $21,966 in
1997 35,320 34,079
Due to affiliate....................................................................... 505 133
Accrued interest payable to affiliates................................................. 9,411 2,540
Accrued real estate taxes.............................................................. 2,282 2,900
Accounts payable and other accrued expenses............................................ 9,738 8,882
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Total current liabilities......................................................... 128,456 145,342
Convertible mortgage notes payable to affiliates............................................ 306,058 301,606
Other long term liabilities................................................................. 8,070 8,070
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Total liabilities................................................................. 442,584 455,018
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value, 250,000 shares authorized, 38,232 shares
issued and outstanding in 1998 and 27,805 shares issued and outstanding
in 1997 382 278
Additional paid-in capital............................................................. 473,617 318,667
Retained earnings...................................................................... 14,786 13,098
Less shares in escrow.................................................................. (2,253) (2,253)
Less deferred compensation............................................................. (1,219) (859)
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Total shareholders' equity........................................................ 485,313 328,931
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Total liabilities and shareholders' equity........................................ $ 927,897 $ 783,949
============ =============
</TABLE>
The accompanying notes are an integral part of the condensed balance sheets.
3
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
MARCH 31,
--------------------------------------
1998 1997
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<S> <C> <C>
Revenues:
Room revenue....................................... $ 26,427 $ 10,952
Other revenue...................................... 1,361 135
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Total revenues................................ 27,788 11,087
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Operating expenses:
Property operating expenses........................ 12,253 4,816
Corporate operating expenses....................... 4,779 3,083
Depreciation and amortization...................... 6,387 1,811
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Total operating expenses...................... 23,419 9,710
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Operating income........................................ 4,369 1,377
Interest income......................................... 289 146
Interest expense, net of capitalized interest........... (2,970) --
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Earnings before income taxes............................ 1,688 1,523
Provision for income taxes.............................. -- --
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Net Earnings............................................ $ 1,688 $ 1,523
=============== ===============
Earnings per share:
Weighted average shares outstanding..................... 35,736 20,461
=============== ===============
Basic earnings per share................................ $ 0.05 $ 0.07
=============== ===============
Diluted weighted average shares outstanding............. 35,736 35,165
=============== ===============
Diluted earnings per share.............................. $ 0.05 $ 0.04
=============== ===============
</TABLE>
The accompanying notes are an integral part of
the condensed financial statements.
4
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HOMESTEAD VILLAGE INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
MARCH 31,
----------------------------
1998 1997
<S> <C> <C>
Operating activities:
Net earnings.................................................................. $ 1,688 $ 1,523
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization............................................. 6,387 1,811
Deferred compensation..................................................... 139 114
Amortization of deferred loan costs....................................... 163 --
Amortization of prepaid rent.............................................. -- 75
Change in assets and liabilities:
Increase in accounts receivable........................................... (850) (716)
Decrease (increase) in other current assets............................... 296 (116)
Decrease in accrued real estate taxes..................................... (618) (1,075)
Increase in accrued interest on convertible mortgage notes................ 6,871 2,926
Increase in accounts payable and other accrued expenses................... 857 1,348
Increase in due to affiliate.............................................. 372 197
Other .................................................................... -- (17)
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Net cash provided by operating activities............................. 15,305 6,070
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Investing activities:
Investment in properties, excluding development costs payable............. (125,571) (48,415)
Increase in deposits and pursuit costs.................................... (4,476) (6,305)
Increase in other assets.................................................. (614) (1,084)
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Net cash used in investing activities................................. (130,661) (55,804)
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Financing activities:
Proceeds from lines of credit............................................. 74,392 --
Payments on lines of credit............................................... (100,000) --
Deferred loan costs for line of credit.................................... (46) --
Proceeds from convertible mortgage notes payable.......................... 4,000 36,250
Proceeds from sale of shares, net of expenses............................. 154,241 --
Exercise of warrants for common stock..................................... -- 15,210
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Net cash provided by financing activities............................. 132,587 51,460
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Net increase in cash and cash equivalents......................................... 17,231 1,726
Cash and cash equivalents, beginning of period.................................... 2,974 7,415
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Cash and cash equivalents, end of period.......................................... $ 20,205 $ 9,141
============= =============
Noncash investing and financing transactions:
Increase in property and equipment, and development cost payable.......... $ 1,241 $ 6,723
============= =============
Increase in property and equipment from capitalization of loan costs...... $ 798 $ 42,405
============= =============
Increase in trademark and intangibles arising from release of shares in escrow.$ -- $ 5,896
============= =============
Loan costs resulting from issuance of convertible mortgage debt........... $ 314 $ 2,517
============= =============
Increase in deferred tax asset and deferred tax liability................. $ -- $ 229
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements.
5
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HOMESTEAD VILLAGE INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE 1--GENERAL
The financial statements of Homestead Village Incorporated ("Homestead") as of
March 31, 1998 and for the three-month periods ended March 31, 1998 and 1997,
are unaudited and certain information and footnote disclosures normally included
in financial statements have been omitted. While management of Homestead
believes that the disclosures presented are adequate, these interim financial
statements should be read in conjunction with the financial statements and notes
included in Homestead's 1997 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of Homestead's financial
statements for the interim periods presented. The results of operations for the
three-month periods ended March 31, 1998 and 1997 are not necessarily indicative
of the results to be expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In April 1998 the Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up
Activities" establishing accounting standards requiring the expensing of
organizational, pre-opening, and start-up costs. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. Restatement of financial
statements for earlier periods is prohibited. Upon adoption, any unamortized
organizational, pre-opening and start-up costs will be required to be written
off and charged to 1999 operations as a cumulative effect of adoption of an
accounting standard. Homestead is in the process of evaluating SOP 98-5 and will
adopt the standard in the first quarter of its 1999 fiscal year. The impact of
adoption of SOP 98-5 on Homestead's results of operation and financial position
has not been quantified.
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED)
<S> <C> <C>
Completed properties:
Land $121,199 $100,118
Buildings and improvements........... 394,327 329,045
Furniture, fixtures and equipment.... 66,047 49,773
---------------- -----------------
581,573 478,936
Properties under construction............. 214,946 213,283
Properties in planning and owned.......... 62,220 32,984
Land held for future development.......... -- 1,463
Land held for sale........................ 2,505 6,655
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Total........................... $861,244 $733,321
================ =================
</TABLE>
6
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HOMESTEAD VILLAGE INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--DEBT
LINES OF CREDIT
Homestead's secured revolving line of credit facility with Commerzbank AG
("CAG") entered into May 6, 1997 and amended August 25, 1997 provides for
borrowings of up to $100 million, subject to collateral requirements, with
borrowings bearing interest at the Eurodollar rate plus 1.9% per annum, and an
unfunded commitment fee of 0.25% if the average unfunded balance is greater than
$50 million or 0.325% if the average unfunded balance is $50 million or less. At
March 31, 1998 borrowings under the revolving line totaled $71,200,000 at a
weighted average stated interest rate of 7.58%. The line requires maintenance of
certain financial covenants, specifically, aggregate indebtedness of no more
than 65% of gross asset value, as defined, or indebtedness secured by a lien of
no more than 60% of gross asset value, as defined. Homestead must also maintain
a minimum debt service coverage ratio of earnings before interest, income taxes,
depreciation, amortization and gains or losses on sales of assets to debt
service, as defined, of no less than 1.3 to 1 and not allow stockholders equity
to be less than $204 million. The covenants also restrict payment of dividends
without lender approval. Homestead was in compliance with all such covenants as
of March 31, 1998.
On November 25, 1997, Homestead obtained a $50 million interim credit
agreement with CAG which provided for borrowings, at Homestead's option, at
either the Eurodollar rate plus 2.625% or at base rate (the higher of 1/2 of 1%
in excess of the federal funds rate or the prime rate) plus 1%. Borrowings and
all accrued interest under this agreement were repaid in January 1998 upon the
funding of the proceeds of the Rights Offering. Upon repayment of the interim
borrowings no further commitment was available under this agreement.
On April 24, 1998 Homestead renewed its existing revolving line of
credit facility with CAG for a one-year term, with an increase in total
borrowing capacity to $150 million, subject to collateral requirements.
Borrowings will bear interest at the Eurodollar rate plus 1.5% to 2.5% per
annum, depending upon the percentage leverage of borrowings outstanding to the
amount of qualifying collateral. Alternatively, borrowings will bear interest at
a base rate defined as the higher of prime rate plus a margin of 0.5% to 1.5% or
the federal funds rate plus a margin of 1% to 2%, with the margin dependent on
the percentage leverage of borrowings outstanding to the amount of qualifying
collateral. Additionally, a commitment fee of 0.375% of the average unfunded
balance will be owed. The line requires maintenance of certain financial
covenants, specifically, aggregate indebtedness of no more than 55% of gross
asset value, as defined, or indebtedness secured by a lien of no more than 50%
of gross asset value, as defined. Homestead must also maintain a minimum debt
service coverage ratio of earnings before interest, income taxes, depreciation,
amortization and gains or losses on sales of assets to cash debt service, as
defined, of no less than 1.1 to 1 for the first quarter of 1998 (which Homestead
was in compliance with), no less than 1.25 to 1 for the second quarter of 1998
and no less than 1.75 to 1 thereafter on a quarterly basis and not allow
stockholders equity to be less than $325 million. The covenants also restrict
payment of dividends without lender approval.
On April 24, 1998 Homestead also entered into a separate $50 million
one-year revolving line of credit facility of which $20 million is available for
borrowings on a secured basis and $30 million is available for borrowing on an
unsecured basis. The unsecured portion of the line is required to be
collateralized by September 30, 1998 or such unsecured borrowings must be
repaid. Borrowings will bear interest at the Eurodollar rate plus 2.75% per
annum or, alternatively, at a base rate defined as the higher of prime rate plus
1.75% or the federal funds rate plus 2.25%. Average unfunded balances bear a
commitment fee of 0.5%. Covenants are identical to those under the $150 million
credit facility.
CONVERTIBLE MORTGAGE NOTES PAYABLE
At March 31, 1998 Homestead owed convertible mortgage notes to Security
Capital Pacific Trust ("PTR"), an affiliate, of $212,545,000 and to Security
Capital Atlantic Incorporated ("ATLANTIC"), an affiliate, of $93,513,000. The
notes are collateralized by Homestead properties ($346.0 million of Homestead
properties at
7
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HOMESTEAD VILLAGE INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
historical cost mortgaged to PTR and $208.7 million of properties at historical
cost mortgaged to ATLANTIC at March 31, 1998), accrue interest at 9.0% on the
principal amount, and require interest only payments every six months on May 28
and November 28. The notes are due October 31, 2006, and are callable on or
after May 28, 2001. The mortgage notes are convertible, at the option of PTR and
ATLANTIC, into shares of Homestead common stock at a conversion ratio equal to
one share of common stock for every $11.50 of principal amount outstanding.
Deferred financing costs and the premium and discount on the respective fundings
have been fully amortized as of March 31, 1998. At March 31, 1998 Homestead had
a remaining funding commitment of $7,895,000 from PTR which has been called for
funding on May 20, 1998 and $5,119,000 from ATLANTIC which was called and funded
on April 30, 1998.
INTEREST
Homestead incurred total interest cost of $9,292,000 and $43,323,000 for
the three-month periods ended March 31, 1998 and 1997, respectively, of which
$6,322,000 and $43,323,000 were capitalized, respectively. Interest paid in cash
in the three-month periods ended March 31, 1998 and 1997 was $899,000 and none,
respectively.
NOTE 4--SHAREHOLDERS' EQUITY
RIGHTS OFFERING
On January 15, 1998, Homestead completed a Rights Offering for 10,426,840
common shares at $15 per share resulting in gross proceeds of $156,402,600. The
Rights Offering was part of Homestead's present $300,000,000 common stock shelf
registration. After costs of the offering, which included a fee of 1% of gross
proceeds to Security Capital Markets Group Incorporated, a wholly-owned
subsidiary of Security Capital, net proceeds to Homestead were approximately
$154.2 million.
Security Capital, Homestead's majority shareholder, purchased 8,429,225
shares in the Rights Offering (80.8% of the offered shares) at the same price
paid by the public. Upon completion of the Rights Offering Security Capital
owned 69.3% of Homestead's outstanding common shares.
PER SHARE DATA
On December 31, 1997 Homestead adopted Financial Accounting Standards Board
Statement No. 128, EARNINGS PER SHARE ("SFAS 128"), which requires a
presentation of basic earnings per share, calculated by dividing net earnings
available to common shareholders by weighted average common shares outstanding
and a presentation of diluted earnings per share, calculated by dividing
adjusted earnings available to common shareholders, assuming dilution, by
adjusted weighted average common shares outstanding. Adjusted earnings available
for common shareholders adds back all net interest expense from convertible
mortgage notes. Adjusted weighted average shares outstanding includes the
dilutive effect of options and warrants using the treasury stock method and the
dilutive effect of the convertible mortgage notes. In the three-month period
ended March 31, 1998 the effect of assumption of the conversion of the
convertible mortgages is anti-dilutive and thus basic earnings per share is the
most dilutive result. In the three-month period ended March 31, 1997 the
restatement of earnings per share required by SFAS 128 resulted in an increase
of $0.01 in basic earnings per share from the prior presentation and no change
in diluted earnings per share from the prior presentation.
NOTE 5--INCOME TAXES
Deferred tax assets relate primarily to: (1) the difference in the carrying
amount of deferred financing costs recognized at formation and in connection
with subsequent fundings of convertible mortgage notes payable for
8
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HOMESTEAD VILLAGE INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
financial reporting purposes and the amount recognized for tax purposes; (2) the
difference in the carrying amount of the convertible mortgage notes and other
liabilities for financial reporting purposes and the amount recognized for tax
purposes; and (3) tax net operating loss. Deferred tax liabilities relate
primarily to the difference in the carrying amount and the methods of
depreciation of certain depreciable assets for financial reporting purposes and
the amount recognized for tax purposes. A valuation allowance has been
recognized to offset the net deferred tax assets, due to uncertainty of
realization of those deferred tax assets in future years.
At March 31, 1998, Homestead had, for federal income tax reporting purposes, net
operating loss carry forwards of $26,800,000, which expire $4,200,000 in the
year 2011, $15,900,000 in the year 2012 and $6,700,000 in the year 2013.
NOTE 6--ADMINISTRATIVE SERVICES AGREEMENT
Homestead and Security Capital have an administrative services agreement
(the "Administrative Services Agreement"), pursuant to which Security Capital
provides Homestead with administrative services with respect to certain aspects
of Homestead's business. These services include, but are not limited to,
insurance administration, accounts payable administration, internal audit, cash
management, human resources, management information systems, tax and legal
administration, research, shareholder communications and investor relations. The
fees payable to Security Capital are based on identifiable costs incurred by
Security Capital on behalf of Homestead plus 20% to cover overhead. Any
arrangements under the Administrative Services Agreement for the provision of
services are required to be commercially reasonable and on terms not less
favorable than those which could be obtained from unaffiliated third parties.
Total administrative services fees for the three-month periods ended March 31,
1998 and 1997 were $899,000 and $627,000, respectively. The Administrative
Services Agreement, which expires December 31, 1998, is renewable for a one-year
term, subject to approval by a majority of the independent members of the
Homestead Board.
Homestead believes its relationship with Security Capital under this
agreement provides it with certain advantages, including access to greater
quality and depth of management personnel and resources, highly focused
research, information systems, insurance, cash management and legal support
provided at substantial economies of scale.
NOTE 7--COMMITMENTS AND CONTINGENCIES
UNFUNDED DEVELOPMENT COMMITMENTS
At March 31, 1998, Homestead had approximately $213.2 million of unfunded
commitments for developments under construction.
FINDER'S AGREEMENT
Homestead has a series of agreements with an unaffiliated person ("Finder")
who developed the Homestead Village concept and has performed certain services.
The agreements which expire February 5, 2043, provide for payments to Finder as
follows: (i) $535,000 annually with respect to the four properties for which
Finder assisted in the location, development and initial operations; (ii) an
annual amount of $7,500 per property (subject to certain conditions as defined
in the agreements) for assistance in site location with respect to the first 35
properties constructed (other than the four properties referred to in (i)
above); (iii) 20% of the net proceeds as defined per the agreements, upon the
sale of the four properties noted in (i) above to an unaffiliated third party;
and (iv) 10% of the net proceeds as defined per the agreements, upon the sale of
the additional 35 properties to an unaffiliated third party. No such sales have
occurred to date. Total payments under these agreements for the three-month
periods ended March 31, 1998 and 1997 were $184,400 and $177,000, respectively.
9
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Homestead Village Incorporated:
We have made a review of the accompanying condensed balance sheet of
Homestead Village Incorporated (a Maryland corporation) as of March 31, 1998 and
the related condensed consolidated statements of operations and cash flows for
the three-month period ended March 31, 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of obtaining an understanding of the
system for the preparation of interim financial information, applying analytical
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Homestead Village Incorporated as of December
31, 1997, and in our report dated January 30, 1998, we expressed an unqualified
opinion on that balance sheet. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 1997 is fairly stated,
in all material respects, in relation to the balance sheet from which it has
been derived.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 24, 1998
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Homestead's
1997 Form 10-K as well as the financial statements and the notes thereto in Item
1 of this report. See Homestead's 1997 Form 10-K for a discussion of various
risk factors associated with forward-looking statements made in this document.
Homestead Village(R) is a registered trademark of Homestead Village
Incorporated and all references to the term "Homestead Village" herein shall
include a reference to such registered trademark. The term "in pre-development
planning" means developments in planning and owned (land has been acquired or is
under a long-term ground lease), developments in planning and under control
(land which is under control through contingent contract or letter of intent)
with construction anticipated to commence within 12 months and developments in
planning and under contract (land which is under contract to be purchased
secured with earnest money but construction is not scheduled to start for more
than 12 months). For analysis purposes Homestead categorizes its operating
properties (which include all properties not under construction or in
pre-development planning) as "comparable," "noncomparable," or "new opening."
"Comparable" means a property open throughout both periods of comparison,
"noncomparable" means a property open for only a portion of the prior period of
comparison, and "new opening" means a property opened in the most recent period.
For additional analysis purposes Homestead also categorizes its operating
properties as either "stabilized" or "pre-stabilized." For purposes of this
report, the term "stabilized" means those properties which have been open for 24
weeks or achieved 80% occupancy as of the beginning of a period, and
"pre-stabilized" means all other operating properties.
OVERVIEW
Homestead's overall results of operations and financial position are
significantly influenced by its development activity. During the three-month
period ended March 31, 1998, Homestead started construction on 5 properties
consisting of 693 rooms and completed 11 properties consisting of 1,373 rooms.
As of March 31, 1998, Homestead has completed 82 Homestead Village properties
representing in the aggregate 11,046 rooms in 28 cities and had 44 Homestead
Village properties under construction totaling 5,943 rooms within 15 of these
cities as well as 9 additional cities. In addition, Homestead owns 8 sites and
controls through contracts 25 development sites for which it plans to initiate
construction within the next 12 months, and 10 development sites for which
earnest money is on deposit but it plans to start construction beyond the next
12 months, for a total of 169 properties in 38 cities. Rooms completed, under
construction or in pre-development planning aggregate 22,868 rooms.
Homestead's operating results are substantially influenced by (i) the
demand for and supply of extended-stay lodging in Homestead's markets and
submarkets, (ii) occupancy and average weekly rate, (iii) the effectiveness of
property level operations and (iv) the pace and cost at which Homestead can
develop additional extended-stay lodging properties. Capital and credit market
conditions which affect Homestead's cost of capital may influence future
operating results.
RESULTS OF OPERATIONS
INTERIM PERIOD COMPARISON
Net earnings increased $165,000 (10.8%) for the three-month period ended March
31, 1998 as compared to the same period in 1997. The increase is primarily
attributable to an increase in net property operating income offset by increases
in net interest expense, corporate operating expenses, and depreciation and
amortization. A discussion of the major components of net earnings follows.
11
<PAGE>
PROPERTY OPERATIONS
The following table sets forth certain information for Homestead's total
operating property portfolio for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Weekly RevPAR(1).................................... $201 $191
Average Weekly Rate(2).............................. $282 $249
Occupancy........................................... 71.1% 76.8%
Number of Operating Properties at Period End........ 82 35
Property Operating Income Margin.................... 54.9% 56.6%
</TABLE>
- ----------
(1) RevPAR is determined by dividing room revenue by the number of guest room
days available for the period and multiplying by seven.
(2) Average weekly rate is determined by dividing room revenue by the number of
guest room days occupied for the period and multiplying by seven.
Homestead's 47 property openings from the end of the first quarter of 1997
through the end of the first quarter of 1998 were the primary reason for the
reported room revenue increase of $15.5 million for the three months ended March
31, 1998 as compared to the same period in 1997. The increase in room revenue
was also due in part to an increase in the weekly RevPAR of $10 (5.2%) in the
three months ended March 31, 1998 compared to 1997.
Total property operating expenses increased from $4.8 million to $12.2
million over the same period, an increase of $7.4 million for the three months
ended March 31, 1998. The increase is due primarily to an increase in the number
of operating properties as noted above. Homestead's property openings in the
latter part of 1997 and in the first quarter 1998, which were in their lease up
phase, were the primary reason for the slight decrease in property operating
income margin to 54.9%.
HOMESTEAD PROPERTIES FULLY OPERATING THROUGHOUT CONSECUTIVE PERIODS
Homestead had 31 properties, representing 4,282 rooms, which were fully
operational throughout both 1998 and 1997 ("same store" properties). All but 8
of such properties are located in Texas. RevPAR for the three months ended March
31, 1998 for same store increased to $199 from $192 for the same period in 1997.
The RevPAR increase was due primarily to an increase in average weekly rates for
such properties during the first quarter of 1998 versus 1997 to $255 from $247,
respectively, an increase of 3.2%. The increase in RevPAR was also due in part
to a slight increase in occupancy to 78.0% from 77.5% for the first quarter of
1998 as compared to the same period in 1997. Property operating margins for same
store decreased for the first quarter to 54.9% in 1998 versus 56.2% in 1997 due
to increased local advertising costs, increased costs for new security services,
and, most significantly, one-time additional costs for the use of Homestead
personnel in returning rooms to service which had been out of service for
refurbishment.
STABILIZED PROPERTIES OPERATIONS
The 49 stabilized properties showed improved operating performance over the
29 stabilized properties for the three-month period ended March 31, 1998 as
compared to the same period in 1997 with a 14.1% increase in RevPAR to $218
(from $191 for the three-month period ended March 31, 1997) and an increase in
property operating income margin to 57.0% from 56.4%. These improvements are
attributable to a 12.2% increase in the average weekly rate and a 1.2% increase
in occupancy.
12
<PAGE>
CORPORATE OPERATING EXPENSES
Corporate operating expense increased $1.7 million for the three-month
period ended March 31, 1998 as compared to the same period in 1997. The increase
is attributed to the continued growth of the company since the first quarter of
1997 when the company was still in the process of developing a corporate
infrastructure in support of a rapidly growing entity and includes costs for
additional personnel in operations, development, marketing and finance.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $4.6 million for the three months
ended March 31, 1998 as compared to the same period in 1997. Depreciation of the
cost of properties and improvements is provided using the straight-line method
over the estimated useful lives of the assets. Depreciation expense (exclusive
of amortization) increased approximately $4.3 million for the three month period
ended March 31, 1998 as compared to the same period in 1997 due to new
properties open for the three-month period ended March 31, 1998 as compared to
the same period in 1997.
Amortization expense increased $314,000 for the three-month period ended
March 31, 1998 as compared to the same period in 1997. The increase was a result
of the amortization of the Homestead Village trademark and other intangibles.
INTEREST INCOME
Interest income of $289,000 for the three months ended March 31, 1998 was a
result of interest earned from investment of excess cash on hand.
INTEREST COST
Homestead's gross interest cost includes amortization of non-cash financing
costs arising from the issuance of warrants used to obtain the commitment for
convertible mortgage notes financing and the differential between the conversion
price under the mortgages and the merger date value of Homestead's common stock.
Exclusive of such amortized amounts Homestead's interest cost (comprised of
interest on the mortgages, amortization of premiums and discounts on the
mortgages, interest on its lines of credit borrowings, and amortization of
deferred financing costs paid to obtain the lines of credit) increased $5.9
million for the three-month period ended March 31, 1998 as compared to the same
period in 1997. The increase is due to the increase in investments in operating
and under construction properties and the corresponding increase in the
convertible mortgage notes payable and the line of credit borrowings (used to
finance the increase in investments) for the three-month period ended March 31,
1998 as compared to the same period in 1997.
Homestead's total interest cost, including the amortization of non-cash
mortgage financing costs described above, decreased $36.0 million for the
three-month period ended March 31, 1998 compared to the same period in 1997. The
decrease was due to the greater amortization of the non-cash financing costs
associated with the mortgages in 1997 versus 1998. Total interest incurred was
offset by capitalization of interest resulting in net interest expense of $3.0
million and none for the three-month periods ended March 31, 1998 and 1997,
respectively. This increase in net interest expense in 1998 over 1997 is the
result of increases in total debt relative to the amount of construction in
process.
ENVIRONMENTAL MATTERS
Homestead is not aware of, nor does it expect, any environmental
condition on its properties to have a material adverse effect upon its business,
results of operations or financial position.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998 Homestead had 44 properties under construction, 8
additional sites owned, and 25 sites under contractual control with acquisition
and construction starts expected to occur within twelve months. Homestead
intends to pursue additional sites for acquisition and development with an
expectation of 30 to 40 construction starts annually through the year 2000.
Unfunded development commitments for properties under construction as
of March 31, 1998 approximate $213 million. Expected future investment to
develop the properties owned as of March 31, 1998 is approximately $145 million.
The estimated total investment to acquire and develop the properties under
contractual control approximates $281 million.
In January 1998 Homestead completed a $156.4 million Rights Offering
under its currently effective $300 million common stock shelf registration and
realized net proceeds of approximately $154.2 million. Rights Offering proceeds
of $100 million were used to repay all borrowings under Homestead's lines of
credit and the remaining net proceeds were used for land acquisition and
development costs. Subsequent to the use of Rights Offering proceeds to repay
the lines of credit, Homestead has re-borrowed $71.2 million under its line of
credit as of March 31, 1998.
Other resources to fund Homestead's development program consist of its
remaining capacity on its revolving line of credit facilities described below,
and, to a lesser extent, approximately $13 million in undrawn mortgage
commitments from PTR and ATLANTIC, and cash from operations in excess of
operating needs. In addition, Homestead may seek to issue the remaining
approximate $144 million of common stock under its shelf registration statement
at such time, amount and price as set forth at the time of such offering.
Homestead's secured revolving line of credit facility with Commerzbank
AG ("CAG") entered into May 6, 1997 and amended August 25, 1997 provided for
borrowings of up to $100 million, subject to collateral requirements. At March
31, 1998 borrowings under the revolving line totaled $71.2 million at a weighted
average stated interest rate of 7.58%. The line required maintenance of certain
financial covenants and restricted payment of dividends without lender approval.
Homestead was in compliance with all such covenants as of March 31, 1998.
On November 25, 1997, Homestead obtained a $50 million interim credit
agreement with CAG. Borrowings and all accrued interest under this agreement
were repaid in January 1998 upon the funding of the proceeds of the Rights
Offering. Upon repayment of the interim borrowings no further commitment was
available under this agreement.
On April 24, 1998 Homestead renewed its existing revolving line of
credit facility for a one-year term, with an increase in total borrowing
capacity to $150 million, subject to collateral requirements. Borrowings will
bear interest at the Eurodollar rate plus 1.5% to 2.5% per annum, depending upon
the percentage leverage of borrowings outstanding to the amount of qualifying
collateral. Alternatively, borrowings will bear interest at a base rate defined
as the higher of prime rate plus a margin of 0.5% to 1.5% or the federal funds
rate plus a margin of 1% to 2%, with the margin dependent on the percentage
leverage of borrowings outstanding to the amount of qualifying collateral.
Additionally, a commitment fee of 0.375% of the average unfunded balance will be
owed. The line requires maintenance of certain financial covenants,
specifically, aggregate indebtedness of no more than 55% of gross asset value,
as defined, or indebtedness secured by a lien of no more than 50% of gross asset
value, as defined. Homestead must also maintain a minimum debt service coverage
ratio of earnings before interest, income taxes, depreciation, amortization and
gains or losses on sales of assets to cash debt service, as defined, of no less
than 1.1 to 1 for the first quarter of 1998 (which Homestead was in compliance
with), no less than 1.25 to 1 for the second quarter of 1998 and no less than
1.75 to 1 thereafter on a quarterly basis, and not allow stockholders equity to
be less than $325 million. The covenants also restrict payment of dividends
without lender approval.
On April 24, 1998 Homestead also entered into a separate $50 million one-year
revolving line of credit facility with CAG of which $20 million is available for
borrowings on a secured basis and $30 million is available
14
<PAGE>
for borrowing on an unsecured basis. The unsecured portion of the line is
required to be collateralized by September 30, 1998 or such unsecured borrowings
must be repaid. Borrowings will bear interest at the Eurodollar rate plus 2.75%
per annum or, alternatively, at a base rate defined as the higher of prime rate
plus 1.75% or the federal funds rate plus 2.25%. Average unfunded balances bear
a commitment fee of 0.5%. Covenants are identical to those under the $150
million credit facility.
Capital resources in addition to those described above will be needed to
fund Homestead's planned developments. Homestead may seek additional credit
facilities and may issue long-term debt and additional equity securities.
However, there is no assurance that Homestead will be able to obtain such
financing as and when required or on acceptable terms.
OPERATING ACTIVITIES
Net cash flow provided by operating activities increased by $9.2 million
for the three months ended March 31, 1998 as compared to 1997. The increases are
due primarily to the growing number of Homestead operating properties as
described under "Results of Operations" as well as improvements in operations.
INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 1998 and 1997, Homestead invested
$125.6 million and $48.4 million, respectively, in Homestead Village properties.
The amounts invested in the three months ended March 31, 1998 were financed
primarily from proceeds from borrowings under the line of credit and proceeds
from the Rights Offering. The amounts invested in the three months ended March
31, 1997 were financed primarily from the proceeds of convertible mortgage loans
from PTR and ATLANTIC and proceeds from exercise of warrants.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15 Letter regarding unaudited interim financial
information
27 Financial Data Schedules
(b) Reports on Form 8-K: The following report on Form 8-K was
filed during the last quarter
Item(s) Financial
DATE REPORTED STATEMENTS
January 8, 1998 Item 5, Item 7 No
16
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
HOMESTEAD VILLAGE INCORPORATED
/S/ ROBERT C. ALDWORTH
------------------------------
Robert C. Aldworth,
SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
/S/ ROBERT E. CLARK
------------------------------
Robert E. Clark, VICE PRESIDENT,
TREASURER AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Date: May 12, 1998
17
<PAGE>
Exhibit 15
To the Stockholders and Board of Directors of
Homestead Village Incorporated
We are aware that Homestead Village Incorporated has incorporated by reference
in its previously filed Registration Statement File No. 333-37803, Registration
Statement File No. 333-17243, Registration Statement File No. 333-17245, and
Registration Statement File No. 333-48163, its Form 10-Q for the quarter ended
March 31, 1998, which includes our report dated April 24, 1998 covering the
unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933 (the "Act"), that report is not
considered a part of the Registration Statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 24, 1998
<TABLE> <S> <C>
<ARTICLE>5
<MULTIPLIER>1
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 20,205,000 9,141,000 10,550,000 5,053,000
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<RECEIVABLES> 2,900,000 1,562,000 1,830,000 2,643,000
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<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 23,460,000 11,460,000 13,040,000 8,631,000
<PP&E> 861,244,000 318,896,000 409,557,000 546,630,000
<DEPRECIATION> 23,450,000 9,175,000 11,106,000 14,117,000
<TOTAL-ASSETS> 927,897,000 396,649,000 493,829,000 630,324,000
<CURRENT-LIABILITIES> 128,456,000 27,762,000 34,075,000 78,474,000
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<TOTAL-COSTS> 23,419,000 9,710,000 21,718,000 36,188,000
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<INTEREST-EXPENSE> 2,970,000 0 0 0
<INCOME-PRETAX> 1,688,000 1,523,000 3,618,000 5,483,000
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<FN>
NOTE: BASIC EPS FOR PERIODS ENDED MARCH 31, JUNE 30, AND SEPTEMBER 30, 1997
REFLECT RESTATEMENT IN ACCORDANCE WITH SFAS 128
</FN>
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