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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of Each Class On which registered
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<S> <C>
Shares of Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing price of the registrant's Common Stock on March 24,
1999, the aggregate market value of the Common Stock held by non-affiliates of
the registrant was $33,197,890.
At March 24, 1999, there were 38,244,546 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1999 annual
meeting of its shareholders are incorporated by reference in Part III of this
report.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Description Page
---- ----------- ----
PART I
<C> <S> <C>
Glossary........................................................... 1
1. Business........................................................... 3
Business Strategy................................................. 3
The Company....................................................... 8
Extended Stay Market.............................................. 8
Competition....................................................... 9
Seasonality....................................................... 9
Environmental Matters............................................. 9
Governmental Regulation........................................... 10
Trademarks........................................................ 10
Insurance......................................................... 10
Agreements with Security Capital and Affiliates................... 10
Employees......................................................... 12
Directors and Officers of Homestead............................... 12
2. Properties......................................................... 16
Geographic Distribution........................................... 16
Properties Portfolio.............................................. 17
3. Legal Proceedings.................................................. 24
4. Submission of Matters to a Vote of Security Holders................ 24
PART II
Market for the Registrant's Common Equity and Related Stockholder
5. Matters............................................................ 24
6. Selected Financial Data............................................ 26
Management's Discussion and Analysis of Financial Condition and
7. Results of Operations.............................................. 28
Risk Factors...................................................... 28
Overview.......................................................... 32
Results of Operations for the Years Ended December 31, 1998, 1997
and 1996........................................................... 34
Liquidity and Capital Resources................................... 37
Impact of Year 2000............................................... 39
Seasonality and Inflation......................................... 40
Environmental Matters............................................. 40
Dividends......................................................... 40
7A. Quantitative and Qualitative Disclosures About Market Risk......... 41
8. Financial Statements and Supplementary Data........................ 41
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure............................................... 42
PART III
10. Directors and Executive Officers of the Registrant................. 42
11. Executive Compensation............................................. 42
12. Security Ownership of Certain Beneficial Owners and Management..... 42
13. Certain Relationships and Related Transactions..................... 42
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 43
</TABLE>
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GLOSSARY
The following abbreviations, acronyms or defined terms used in this Form 10-
K are defined below:
<TABLE>
<CAPTION>
Abbreviation, Acronym, or Defined Term Definition/Description
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<S> <C>
AMEX....................................... American Stock Exchange
Archstone.................................. Archstone Communities Trust (formerly
Security Capital Pacific Trust), an investee
of Security Capital Group Incorporated
ATLANTIC................................... Security Capital Atlantic Incorporated, a
former investee of Security Capital, which
merged with Security Capital Pacific Trust
in July 1998
Average Weekly Rate........................ Average Weekly Rate is determined by dividing
room revenue by the number of guest room
days occupied for the period and multiplying
by seven.
Bridge Facility............................ The bank line of credit secured by a pledge
of a subscription receivable from Security
Capital
Comparables................................ Properties that have been fully operational
throughout both periods of comparison
EBDADT..................................... Earnings before depreciation, amortization
and deferred taxes
EBITDA..................................... Earnings before interest, income taxes,
depreciation and amortization
GAAP....................................... Generally Accepted Accounting Principles
Homestead.................................. Homestead Village Incorporated ("HSD" is The
New York Stock Exchange ticker symbol)
Homestead Village(R)....................... Registered trademark of Homestead Village
Incorporated and all references to Homestead
Village include references to such trademark
In planning and owned...................... Land sites owned and held for development
New Openings............................... Properties opened in the most recent period
of comparison
Noncomparables............................. Properties open for only a portion of the
prior period of comparison
NYSE....................................... New York Stock Exchange
Prestabilized.............................. All operating properties that do not meet the
criteria of Stabilized
PTR........................................ Security Capital Pacific Trust, which changed
its name to Archstone Communities Trust in
July 1998
PTR Subsidiaries........................... The subsidiaries of PTR acquired by Homestead
in the October 1996 mergers
RevPAR..................................... Weekly revenue per available room. RevPAR is
determined by dividing room revenue by the
number of guest room days available for the
period and multiplying by seven
Security Capital........................... Security Capital Group Incorporated,
Homestead's majority shareholder
Shares..................................... Homestead's shares of common stock
</TABLE>
1
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<TABLE>
<CAPTION>
Abbreviation, Acronym, or Defined Term Definition/Description
-------------------------------------- ----------------------
<S> <C>
Stabilized................................. Properties that have obtained 80% occupancy
for at least a one-week period or have been
open for 24 weeks
the Board.................................. Homestead Board of Directors
the Mergers................................ The October 17, 1996 series of merger
transactions pursuant to which each of
ATLANTIC, PTR and Security Capital
contributed all of their respective assets
relating to Homestead Village properties,
trademark and operating systems to Homestead
in exchange for shares of Homestead
Total Expected Investment.................. Total Expected Investment represents budgeted
development cost for properties under
construction and properties in planning and
owned. Properties in planning and owned
represent projects where land has been
acquired or is under long-term lease and
pre-construction planning activities are in
progress. Budgeted development cost includes
the cost of land, fees, permits, payments to
contractors, architectural and engineering
fees and interest, property taxes and
development overhead costs to be capitalized
during the development period
Working Capital Facilities................. Collectively, the two bank lines of credit
secured by suburban and urban location
properties, respectively
</TABLE>
2
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PART I
Item 1. Business
Business Strategy
Homestead Village Incorporated (NYSE: HSD) is committed to creating
shareholder value by becoming a leading operator of moderately priced,
extended stay lodging properties in selected target markets in the United
States. Homestead believes that the extended stay segment of the lodging
industry offers excellent growth opportunity because of:
. growing customer demand for extended stay accommodations,
. the limited number of properties that have been purposely built for
extended stay lodging, and
. rising consumer awareness of the extended stay product.
Homestead's strategy is to achieve significant market share in the extended
stay industry by targeting markets that demonstrate strong demographics and
providing extended stay customers with a consistently high standard of service
and value-conscious pricing.
Homestead offers a carefully designed, custom-built product targeted at the
business traveler on temporary assignment, undergoing relocation or in
training. Homestead Village properties, which have all been developed by
Homestead, are designed to offer locations with convenient access to major
employment centers and retail support services, and a residential environment
that is attractive, well landscaped and secure.
To become a leading provider of moderately priced, extended stay lodging,
Homestead's strategy is focused on:
. becoming the preferred brand of choice for extended stay corporate
travelers,
. increasing revenue per available room at the property level by matching
its product to customers' expectations, and
. improving operating property cash flow through its proprietary operating
systems.
Homestead believes that its product, locations, corporate commitment to
customer service and value-conscious pricing will help it meet its objectives.
Homestead is affiliated with Security Capital, which is the majority
shareholder of Homestead. Homestead's affiliation with Security Capital
provides it with access to proprietary real estate research and various other
services which Security Capital offers to its affiliates.
Recent Highlights
. During 1998, Homestead opened 49 properties consisting of 6,507 rooms
and as of December 31, 1998, had 120 Homestead Village properties in
operation representing in the aggregate 16,180 rooms in 37 cities. Also
as of December 31, 1998, Homestead had 16 Homestead Village properties
under construction totaling 2,040 rooms within eight of these cities as
well as one additional city and through the end of January 1999 had
opened five of these properties.
. Homestead's financial results showed an increase in earnings before
depreciation, amortization, and deferred taxes (EBDADT) to $40,945,000
for the year ended December 31, 1998 from $19,385,000 for the year ended
December 31, 1997, as a result of increased property operating income
due to new property openings in 1998 and a full year of results for the
40 openings in 1997. Homestead presents EBDADT as a measure of operating
performance which also takes into account the capital structure of the
company.
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. Homestead listed its stock on the New York Stock Exchange effective
April 1, 1998.
The tightening of capital markets for real estate operating companies and
lodging companies in 1998 has had an adverse effect on Homestead's ability to
continue its high growth program of acquisition of land sites and construction
of Homestead Village properties. In October 1998, Homestead reorganized its
development effort and recorded $7.24 million of special charges primarily
related to the severance of development personnel and abandonment of pursuits
of development sites due to the limited availability of additional funds for
development. Unless Homestead receives additional financing, Homestead will
have a slower growth rate in 1999 and therefore will have substantially fewer
development starts and openings than in prior years.
While Homestead did complete a common stock rights offering in January
1998, it primarily utilized short-term debt and cash flow from operations
during the remainder of the year to finance its land acquisition and
development program as, due to falling stock market prices for Homestead and
its sector, common equity was not seen as a viable capital raising
alternative. Homestead's maximization of borrowings under its bank line of
credit facilities secured by properties (the "Working Capital Facilities")
resulted in $157 million outstanding due April 23, 1999 (subsequently extended
to December 31, 2000) and $200 million outstanding on its line of credit
facility (the "Bridge Facility") due February 23, 1999 (subsequently extended
to April 23, 1999) at year end 1998. The Bridge Facility is secured by a
subscription receivable from Security Capital.
In addition, in third quarter 1998 Homestead extinguished $98 million of
convertible mortgage debt due October 2006. This mortgage debt was convertible
into approximately 8.5 million Shares. As part of this extinguishment,
Homestead incurred an additional $24 million of indebtedness with a resulting
mortgage note payable totaling $122 million with a due date of June 1999.
Therefore, Homestead's balance sheet at December 31, 1998 was comprised of
substantial short-term obligations.
At year end 1998, Homestead owed $479 million of short-term debt,
consisting of $357 million due on its bank lines of credit ($157 million due
on the Working Capital Facilities and $200 million due on the Bridge Facility)
and $122 million due on a mortgage note. Homestead also had 16 properties in
construction at December 31, 1998 with unfunded development commitments of
approximately $68 million. Homestead intends to finance the completion of the
properties under construction with cash on hand, $21 million borrowed under
the Working Capital Facilities in January 1999, $21 million in additional
capacity available under its Working Capital Facilities upon renewal, any
additional capacity available after payments made from the net proceeds of the
rights offering in excess of $200 million and cash flow from operations.
Subsequent to year end, Homestead has refinanced its short-term debt as
follows:
. On February 23, 1999, Homestead completed a sale and leaseback of 18
properties for $145 million. The proceeds of the sale were used to repay
the $122 million mortgage note debt which was due June 1999. As a result
of this repayment, eight properties which were used as collateral for
the $122 million mortgage note were subsequently pledged as collateral
for the Working Capital Facilities,
. On March 18, 1999, Homestead renewed its Working Capital Facilities
($200 million total capacity for the two lines) with an extension of the
maturity date to December 31, 2000, and
. On March 25, 1999, Homestead announced a rights offering for $225
million of common stock, the proceeds of which will be used to first
repay the $200 million Bridge Facility and then for purposes allowed
under the Working Capital Facilities. Security Capital will participate
in the rights offering. To the extent rights remain available Security
Capital has agreed to purchase enough Shares in the rights offering to
ensure that the proceeds of the offering are no less than $205 million,
based on current market prices and subject to final documentation. To
the extent Homestead raises proceeds of up to $200 million in the rights
offering from third parties or Security Capital which are used to repay
the Bridge Facility, Security Capital's obligation under its
subscription agreement for Homestead convertible subordinated debentures
will be reduced or terminated.
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Giving effect to the completion of the foregoing transactions, Homestead's
aggregate short-term debt would decrease from $479 million to approximately $3
million.
At year end 1998, Homestead's development program, in addition to the
properties under construction, consisted of 18 land sites owned and 16 sites
under pursuit. Development of the 18 land sites owned (which includes six sites
in urban metropolitan areas) is estimated to cost $354 million. Acquisition and
development of the 16 sites under pursuit is estimated to cost $200 million.
Homestead's ability to continue development on the land sites owned and its
ability to acquire and develop the 16 pursuit sites is dependent upon Homestead
obtaining additional financing. The Working Capital Facilities effectively
preclude further development beyond the properties currently under construction
without additional financing. Homestead is seeking financing from a variety of
sources to continue development of these sites and to acquire and develop the
additional sites under pursuit. Homestead may seek additional lines of credit,
issue debt or equity securities, or enter into joint venture or other
arrangements to provide for development of these properties. However, there is
no assurance that Homestead will be able to obtain such financing when required
or on acceptable terms and the incurrence of additional indebtedness by
Homestead would require the consent of its lenders.
To the extent that Homestead cannot secure adequate financing or complete
other development arrangements then it will have to discontinue the development
process on some or all of the land sites owned resulting in expensing of
carrying costs, such as interest and property taxes, and expensing of costs of
its internal development group, which could materially adversely affect
reported earnings. Similarly, if pursuits of some or all of the land sites are
abandoned, Homestead will incur write-offs of pursuit costs and loss of non-
refundable earnest money deposits. If discontinuance of development of land
sites is required or pursuits of land sites for acquisition are abandoned due
to financing constraints, Homestead intends to mitigate incurrence of expenses
and cash outflows by seeking to sell land sites, sell and assign rights to
acquire sites under pursuit, terminate personnel, or take other appropriate
actions all of which may result in additional losses for financial statement
purposes. In the event that Homestead is required to liquidate some of its real
estate holdings expeditiously, its ability to achieve a desirable sales price
could be adversely affected.
Commitment to Building a National Brand
Homestead's goal is to build a leading position within the extended stay
sector with a national brand noted for high-quality experience with facilities
located in markets convenient for corporate business travelers. The benefit of
brand recognition is the ability to attract and retain customers which will
result in increased shareholder value due to higher property-level performance.
Homestead believes that it can establish a dominant and long-term
recognizable national brand name and brand presence in the moderately priced,
extended stay lodging market place through a focus on:
. The corporate business traveler through a concentrated national and
local sales and marketing effort.
. Superior property locations and customer service.
. The Homestead proprietary operating system which provides a high-
quality, consistent experience for its customers through uniform
operating standards, a recruiting and training system that targets and
trains quality individuals, and a property reinvestment program that
ensures that Homestead properties remain up-to-date.
Focus on the Corporate Business Traveler
In an effort to capture the corporate business travelers' extended stay
demand, Homestead has established a sales and marketing team that targets
national and local businesses. The thirty-two sales and marketing professionals
supplement the marketing effort conducted at the local level by the general
managers of each
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property by establishing relationships with major corporate clients which are
national users of the extended stay product. Homestead's focus is on the
corporate business traveler and on establishing a relationship with major
corporate accounts which can be expanded to multiple properties and increased
room nights. Homestead believes that an emphasis on major national corporate
accounts is critical to maintaining occupancy levels that exceed market
averages.
In addition, in 1998 Homestead increased its access to its customers by
introducing a toll-free reservations number, 888-STAY-HSD, and connection to
the Global Distribution Systems used by travel professionals for making
reservations.
Homestead's six-year operating history and customer-level research provide
it with a competitive advantage of understanding the needs of the extended stay
corporate business traveler. In developing its extended stay lodging product,
Homestead relies on customer surveys, interviews and focus groups to identify
the specific needs and requirements of its customers. Understanding its
customers has allowed Homestead to design its properties and establish
operating procedures to meet and exceed the customers' needs and requirements.
Weekly room rates at Homestead Village properties appeal to value-conscious
corporate business travelers. Rates at Homestead properties typically range
between $249 and $449 for a standard room and compare favorably with average
weekly rates of over $500 for the majority of traditional extended stay hotels.
Weekly rates at Homestead properties will vary significantly depending on
specific market factors and the size of the room.
Proprietary Operating System
Homestead's proprietary operating system is focused on providing a uniform,
consistently high-quality experience to the corporate business traveler.
Homestead has developed and is continuously refining its operating system which
combines a conveniently located, well-designed guest room with friendly and
efficient guest service, and an amenity program designed to meet the specific
needs of the extended stay corporate business traveler all at an affordable
price. Homestead believes that the operating system will result in a positive
lodging experience for guests and generate a willingness to use the product
again and in multiple locations.
Homestead's operating experience has provided it with the opportunity to
standardize its operating procedures to meet the specific needs of extended
stay corporate business travelers. This standardization is aimed at both
providing a consistent guest experience and generating operating efficiencies
that are further refined as Homestead adopts "best practices" in the lodging
industry. Homestead is continuing the process of standardizing its supply
purchases, which management believes will help to generate further operating
efficiencies and reduce costs through economies of scale and volume discounts.
Homestead has invested substantially in the recruiting and training of its
personnel. Homestead currently provides training modules, which have been
purchased or developed, with topics ranging from guest services and safety to
personal selling techniques and leadership skills. Training in these areas is
conducted on a regular basis and ensures a consistent guest experience at every
property. Training design and organizational development are administered by
corporate professionals in conjunction with field trainers located within a
geographic region.
Homestead properties are designed and built to uniform plans that are driven
by the needs of the extended stay corporate business traveler. Rooms generally
contain 260 to 420 square feet of fully furnished living space, with a work
station/dining area and kitchen facilities that include a full-size
refrigerator, microwave, sink and cook-top. Timely capital expenditures as well
as its preventive maintenance program allow Homestead to maintain high-quality
and attractive rooms and properties for its customers.
Investment Strategy
Homestead believes it will be most successful by focusing specifically on
markets with a concentration of its target customers and which have high
barriers to entry such as a limited availability of quality sites and
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difficult entitlement processes. Homestead believes that over the long-term
high barriers to entry limit competition and result in sustainable cash flow
growth at the property level. Homestead's development program has targeted
markets with a high concentration of corporate customers and strong
demographic and employment growth prospects. In 1998, Homestead expanded its
development program beyond suburban sites and acquired its first development
sites located in the central business districts of New York City (three
sites), Chicago and San Francisco with the intent of developing a higher unit
count urban property. Homestead's continuance of development of these urban
sites is dependent on Homestead obtaining adequate additional financing.
Homestead's site acquisition professionals evaluate each site against a set
of 18 separate criteria where optimum standards have been established.
Homestead's properties are designed to offer excellent locations with
convenient access to major employment centers, retail and restaurant support
services and a residential environment that is attractive, well landscaped and
secure. In addition, Homestead seeks to minimize risk by entering into
contingent contracts with landowners which allow it to conduct thorough due
diligence and obtain entitlements prior to taking title to a development site.
Each investment transaction undergoes a detailed and comprehensive review
by operational and development senior management and a subsequent review by
Homestead's Investment Committee. Members of the Investment Committee include
David Dressler, Jr., Co-Chairman, Chief Investment Officer and President,
Michael Cryan, Co-Chairman and Chief Operating Officer, Robert Morse and James
Potts, each a Managing Director, Gary DeLapp and Laura Hamilton, each a Senior
Vice President. The Investment Committee process is designed to review both
the specific investment as well as to ensure its conformity with Homestead's
investment policies and goals as set by the Board. In addition, the Board
specifically approves all investments over $15 million.
The table below illustrates the growth in investment in Homestead Village
properties over the last five years of operation and the total expected
investment in Homestead properties at December 31, 1998 (amounts in
thousands). Similar rates of growth in the future cannot be assured.
<TABLE>
<CAPTION>
Total Expected Historical Cost at December 31,
Investment ---------------------------------------------
December 31, 1994
1998 1998 1997 1996 (1) 1995 (1) (1)
-------------- ---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Completed properties.... $ 945,375 $ 945,375 $478,936 $135,339 $ 77,537 $41,629
Properties in
development:
Properties under
construction......... 164,723 110,891 213,283 108,692 28,218 14,303
Properties in planning
and owned (2)........ 479,742 126,054 32,984 12,256 4,440 4,281
---------- ---------- -------- -------- -------- -------
Total............... $1,589,840 $1,182,320 $725,203 $256,287 $110,195 $60,213
========== ========== ======== ======== ======== =======
</TABLE>
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(1) Such information aggregates the Homestead Village properties development
activity prior to the Mergers described below. The increase in cost of
properties, which occurred due to the use of purchase accounting, is
reflected on the date of the Mergers.
(2) Continuance of the development process for development sites owned is
dependent on Homestead obtaining adequate additional financing.
Homestead's 49 property completions in 1998 included its first properties
in twelve markets. Homestead made its first entry into the Southwest market of
Las Vegas (one property); into the West Coast market of Sacramento (one
property); into the Southeast markets of Birmingham, Charlotte, Memphis and
Orlando (five properties); into the Northeast markets of Boston, New York
Metro and Philadelphia (eight properties); and into the Central region markets
of Cleveland, Milwaukee and St. Louis (three properties). Homestead's rooms at
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December 31, 1998, and its key operating statistics by region for the year
ended December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Occupancy Average Weekly
Geographic Region Rooms (1) Weekly Rate RevPAR (1, 2)
----------------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C>
Southwest...................... 5,418 74.3% $255 $189
West Coast..................... 2,869 75.3% $375 $283
Southeast...................... 4,165 64.1% $295 $189
Northeast...................... 2,310 65.8% $364 $240
Central........................ 1,418 65.5% $309 $202
------
Total/Averages............... 16,180 70.4% $301 $212
====== ===== ==== ====
</TABLE>
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(1) Occupancy rates and weekly RevPAR are affected by the 49 new openings in
1998 and reflect in part a pre-stabilized stage of operations.
(2) Weekly revenue per available room ("RevPAR") is computed by dividing room
revenue by the number of guest room days available for the period and
multiplying by seven.
The Company
Background
The first Homestead Village(R) property was opened in 1992 as a byproduct
of the multifamily development activities of Security Capital Pacific Trust
("PTR"), now known as Archstone Communities Trust, an investee of Security
Capital. PTR identified a customer need not ideally addressed through its
traditional multifamily apartment product or through corporate apartments
operated within an apartment context. PTR believed that a product which
offered greater flexibility of rental term, a fully furnished studio apartment
with cooking facilities and a focused array of services (such as limited maid
service, voice mail, cable or satellite television) at an affordable price
would meet the needs of a significant and growing segment of demand from those
business travelers on temporary assignment, in training or relocating.
In January 1996, Security Capital began considering ways for Security
Capital Atlantic Incorporated ("ATLANTIC"), an investee of Security Capital,
which had begun in 1995 to develop Homestead Village properties in its target
market of the Southeastern United States, PTR and Security Capital to maximize
shareholder value with respect to their Homestead Village properties and
operations. On May 21, 1996, ATLANTIC, PTR, Security Capital and Homestead
entered into a merger agreement, pursuant to which each of ATLANTIC, PTR and
Security Capital agreed to contribute, through a series of merger
transactions, all of their respective assets relating to Homestead Village
properties to Homestead in exchange for Shares. ATLANTIC and PTR agreed to
enter into funding commitment agreements to provide convertible mortgage
financing towards completion of properties in construction or in planning at
the date of the Mergers and Security Capital provided interim funding for
Homestead acquisitions prior to the closing of the Mergers, all in exchange
for warrants to purchase Shares. The closing of the Mergers occurred in
October 1996.
Extended Stay Market
Homestead believes that the extended stay market represents a unique
business opportunity and that the price/value relationship has enabled the
extended stay market to achieve higher than industry average occupancy rates
and operating margins. Demand for extended stay lodging has been stimulated by
the economic and social changes resulting from the increased volume of
corporate reorganizations and trends toward downsizing and outsourcing of
various functions, the break-up and geographic dispersion of the traditional
family and technological improvements which have allowed businesses to
relocate outside of large metropolitan areas. These
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changes have created new accommodation needs for, among others, corporate
executives and trainees, consultants, sales representatives and relocating
individuals.
Moderately priced, extended stay lodging competes on the basis of price and
value compared to the extended stay market generally, thereby providing an
economic inducement to guests who are already attracted to the extended stay
concept. In addition, moderately priced, extended stay lodging provides an
affordable, convenient and efficient lodging alternative for long-term stay
guests who would otherwise use a traditional lodging facility. Based on
published occupancy rates for other participants in the extended stay market,
Homestead believes that there is a strong demand for moderately priced,
extended stay accommodations that results in higher occupancy rates for
extended stay hotels than for comparable hotels competing in the same market.
Competition
Each Homestead Village property is, or will be, located in a developed area
that includes competing properties, including traditional hotels and corporate
apartments. The number of competitors in a particular area could have a
material adverse effect on occupancy, average weekly rates and revenue for a
Homestead Village property in that market. Competition within the extended
stay lodging market has increased substantially. In several markets where
Homestead has properties, there is intense competition for the extended stay
customer, which has already affected occupancy and RevPAR for these
properties. In addition, since the lodging industry has historically been
characterized by cyclical trends, there can be no assurance that the current
state of supply/demand fundamentals will continue into the future. Competition
within the lodging industry is based generally on convenience of location,
price, range of services and guest amenities offered and quality of customer
service. Homestead considers the reasonableness of its room rates, the
location of its properties and the services and the guest amenities provided
by it to be among the most important competitive factors in the business. A
number of other lodging chains and developers have developed or are developing
competitive extended stay properties. Homestead competes for guests and for
new development sites with certain of these established entities, which may
have greater financial resources than Homestead and better relationships with
lenders and real estate sellers. These entities may be able to accept more
risk than Homestead can prudently manage. Further, there can be no assurance
that new or existing competitors will not significantly reduce their rates or
offer greater convenience, services or amenities, or significantly expand or
improve properties in markets in which Homestead competes, thereby materially
adversely affecting Homestead's business and results of operations.
Seasonality
The lodging industry is seasonal in nature, with the second and third
quarters generally accounting for a greater proportion of annual revenues than
the first and fourth quarters. Quarterly earnings may be adversely affected by
events beyond Homestead's control such as poor weather conditions, economic
factors and other considerations affecting travel.
Environmental Matters
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment
a hazardous substance at a property owned by another may be liable for the
costs of removal or remediation of hazardous substances released into the
environment at that property. The costs of remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such substances, may adversely affect the
owner's ability to sell such real estate or to borrow using such real estate
as collateral. In connection with the ownership and operation of its
properties, Homestead is potentially liable for any such costs.
9
<PAGE>
Homestead has obtained Phase I Surveys on its existing properties and
intends to obtain Phase I Surveys prior to the purchase of any future
properties. The Phase I Surveys are intended to identify potential
environmental contamination and regulatory compliance concerns. Phase I
Surveys generally include historical reviews of the properties, reviews of
certain public records, preliminary investigations of the sites and
surrounding properties and the preparation and issuance of written reports.
Phase I Surveys generally do not include invasive procedures, such as soil
sampling or ground water analysis.
While some of these assessments have led to further investigation and
sampling, none of the environmental assessments has revealed, nor is Homestead
aware of, any environmental liability that management believes would have a
material adverse effect on Homestead's business, financial position or results
of operations. No assurance can be given, however, that these assessments and
investigations reveal all potential environmental liabilities, that no prior
owner or operator created any material environmental condition not known to
Homestead or the independent consultants or that future uses and conditions
(including, without limitation, guest actions or changes in applicable
environmental laws and regulations) will not result in the imposition of
environmental liabilities.
Governmental Regulation
A number of states regulate the licensing of hotels by requiring
registration, disclosure statements and compliance with specific standards of
conduct. Homestead believes that each of its properties has the necessary
permits and approvals to operate its respective business, and Homestead
intends to continue to obtain such permits and approvals for its new
properties. In addition, Homestead is subject to laws governing its
relationship with employees, including minimum wage requirements, overtime,
working conditions and work permit requirements. An increase in the minimum
wage rate, employee benefit costs or other costs associated with employees
could adversely affect Homestead.
Under the Americans with Disabilities Act (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. Although Homestead has attempted to
satisfy ADA requirements in the designs for its properties, no assurance can
be given that a material ADA claim will not be asserted against Homestead,
which could result in a judicial order requiring compliance, and the
expenditure of substantial sums to achieve compliance, an imposition of fines
or an award of damages to private litigants. These and other initiatives could
adversely affect Homestead as well as the lodging industry in general.
Trademarks
The Homestead Village name and logo have been registered with the United
States Patent and Trademark office.
Insurance
Homestead currently has the types and amounts of insurance coverage that it
considers appropriate for a company in its business. While management believes
that its insurance coverage is adequate, if Homestead were held liable for
amounts exceeding the limits of its insurance coverage or for claims outside
of the scope of its insurance coverage, Homestead's business, results of
operations or financial position could be materially and adversely affected.
Agreements with Security Capital and Affiliates
Administrative Services Agreement
Homestead entered into the Administrative Services Agreement with Security
Capital, pursuant to which Security Capital provides Homestead with
administrative services with respect to certain aspects of Homestead's
10
<PAGE>
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.
Any arrangements under the 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. The agreement,
which expires on December 31, 1999, is automatically renewed each year for a
one-year term, subject to approval by a majority of the independent members of
the Board. Homestead incurred fees of $4,213,000 for services provided under
the agreement during 1998.
Homestead believes its relationship with Security Capital under this
agreement provides it with certain advantages, including access to greater
quality and depth of resources in areas such as information systems,
insurance, cash management and legal support provided at substantial economies
of scale, than it could currently provide internally.
Security Capital Investor Agreement
Homestead and Security Capital have entered into an investor agreement
which, among other things, provides that, without having first consulted with
the nominee of Security Capital designated in writing, Homestead may not seek
Board approval of (i) Homestead's annual budget, (ii) incurring expenses in
any year exceeding (A) any line item in the annual budget by 20% and (B) the
total expenses set forth in the annual budget by 5%, (iii) acquisitions or
dispositions in a single transaction or group of related transactions where
the aggregate purchase price paid or received exceeds $5 million, (iv) new
contracts with a service provider (A) for investment management, property
management or leasing services, or (B) that reasonably contemplates annual
contract payments by Homestead in excess of $200,000, (v) the declaration or
payment of any dividend or other distribution, (vi) the approval of any
employee benefit plan pursuant to which shares of Homestead common stock or
securities convertible in such securities may be issued, (vii) the offer or
sale of any shares of stock of Homestead or any securities convertible into
shares of stock of Homestead (other than the sale or grant of any stock or
grants of options or exercise of options granted under any benefit option plan
approved by stockholders) and (viii) the incurrence, restructuring,
renegotiation or repayment of indebtedness for borrowed money in which the
aggregate amount involved exceeds $5 million. The Security Capital investor
agreement also provides that, so long as Security Capital owns at least 10% of
the outstanding Shares, Homestead may not increase the number of persons
serving on the Board to more than seven without the approval of Security
Capital. Security Capital also will be entitled to designate one or more
persons as nominees for directors of Homestead, as follows: (i) so long as
Security Capital owns at least 10% but less than 30% of the outstanding
Shares, it is entitled to nominate one person; and (ii) so long as Security
Capital owns at least 30% of the outstanding Shares, it is entitled to
nominate that number of persons as shall bear approximately the same ratio to
the total number of members of the Board as the number of Shares beneficially
owned by Security Capital bears to the total number of outstanding Shares,
provided that Security Capital shall be entitled to designate no more than two
persons so long as the Board consists of no more than seven members. Any
person who is employed by Security Capital or who is an employee, a 25%
shareholder or a director of any corporation of which Security Capital is a
25% shareholder (except for Homestead) shall be deemed to be a designee of
Security Capital. The nominee(s) of Security Capital may, but need not, be the
same person nominated by Archstone pursuant to the Archstone investor
agreement described below. Security Capital currently has reserved the right
to cause the nomination of two nominees to the Board.
The Security Capital investor agreement provides Security Capital with
registration rights pursuant to which, in specified circumstances, Security
Capital may request, and on not more than three occasions, registration of all
of Security Capital's Shares pursuant to Rule 415 under the Securities Act.
Security Capital presently owns 69.8% of Homestead's outstanding Shares.
Archstone Convertible Mortgages
At December 31, 1998, Homestead owed convertible mortgage notes to
Archstone in the amount of $221,333,620. The mortgage notes were funded
pursuant to an agreement entered into in conjunction with the Mergers. The
mortgage funding commitment under the agreement was to finance the development
of properties
11
<PAGE>
acquired by Homestead from Archstone in the Merger. The notes are
collateralized by Homestead properties (54 Homestead properties at $366.1
million of historical cost mortgaged to Archstone at December 31, 1998). The
notes 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 notes are
convertible, at the option of the holder, into Shares at a conversion ratio
equal to one Share for every $11.50 of principal amount outstanding. Deferred
financing costs and discount on the respective fundings have been fully
amortized. Archstone has no further funding commitment.
Archstone Investor Agreement
Archstone has entered into an investor and registration rights agreement
with Homestead pursuant to which Archstone is entitled to designate one person
for nomination to the Board, and Homestead will use its best efforts to cause
the election of such nominee, for so long as Archstone has the right to
convert in excess of $20 million in principal amount of convertible mortgage
notes. Such nominee may, but need not, be a person nominated by Security
Capital pursuant to the Security Capital Investor Agreement. In addition,
Homestead has granted to Archstone registration rights with respect to the
issuance upon conversion and the distribution of all of the Shares issuable
upon conversion of the convertible mortgage notes. Archstone may request three
registrations pursuant to Rule 415 promulgated under the Securities Act of all
Shares issued or issuable upon conversion of the convertible mortgage notes.
Such registrations, except for the fees and disbursements of counsel to
Archstone, shall be at the expense of Homestead.
Subscription Agreement
In June 1998, Homestead entered into a subscription agreement with Security
Capital whereby Security Capital agreed to purchase $200 million of
subordinated debentures from Homestead. This subscription agreement was
pledged as security for a $200 million bank line of credit facility referred
to as the Bridge Facility. If the subscription is called by Homestead or if
Homestead receives proceeds from any offering of securities, the proceeds must
be used first to repay the Bridge Facility and second to fund projects under
development which secure the other bank credit facilities. The debentures
would bear interest at a rate of 0.25% over the rate Homestead incurs under
its $50 million credit facility. Homestead may repurchase the debentures with
the proceeds of an equity offering within 90 days of issuance of the
debentures. On the 90th day following the issuance of the debentures the
debentures convert to Shares, on a per share basis, at the lowest of (i)
$13.931, (ii) the fair market value, based upon a trailing 20-day average, on
the date any debentures are issued, and (iii) the fair market value, based
upon a trailing 20-day average, on the date the debentures are converted
automatically into Shares. The subscription agreement expires the earlier of
June 30, 1999 or two weeks after termination of the $200 million credit
agreement. The subscription obligation will be reduced or terminated to the
extent Homestead issues equity securities to any third party, or to Security
Capital pursuant to a separate offering, including in connection with the
rights offering announced March 25, 1999, the proceeds of which are used to
repay the $200 million Bridge Facility. In conjunction with Security Capital's
entering into the subscription agreement, Homestead paid an arrangement fee to
Security Capital of $600,000.
Employees
As of December 31, 1998, Homestead employed approximately 1,700 employees
including 194 corporate professionals and administrative employees and 1,506
on-site personnel. Homestead's employees are not subject to any collective
bargaining agreements and management believes that its relationship with its
employees is good.
Directors and Officers of Homestead
Directors
Michael D. Cryan--47--Director, Co-Chairman and Chief Operating Officer of
Homestead since October 1996, where he has overall responsibility for
operations. From August 1986 to August 1996, Mr. Cryan was
12
<PAGE>
with ITT Sheraton Corporation, where his most recent position held was
Director, Executive Vice President and Chief Financial Officer.
David C. Dressler, Jr.--45--Director, Co-Chairman and Chief Investment
Officer of Homestead since May 1996 and President since January 1996, where he
oversees all investment and capital allocation decisions. Mr. Dressler was Co-
Chairman of Security Capital Investment Research Incorporated from March 1995
to May 1996; Managing Director of SCG Multifamily Development from January
1994 to August 1995; Managing Director of Archstone Communities Trust from May
1992 to May 1996. From April 1993 to May 1996, he served as Managing Director
of the management company responsible for the management of Security Capital
Atlantic Incorporated.
John P. Frazee, Jr.--54--Director of Homestead since May 1996. Since August
1997, Mr. Frazee has served as Director, Chairman, President and Chief
Executive Officer of the Paging Network, Inc. (a provider of wireless
messaging and wireless information services). Mr. Frazee formerly was
President and Chief Operating Officer of Sprint Corporation; prior to the
March 1993 merger of Sprint and Centel Corporation, Mr. Frazee had been the
Chairman and Chief Executive Officer of Centel since 1972. He is a Director of
Security Capital Group Incorporated, C-Span, Dean Foods Company, and Nalco
Chemical Company. He is also a Director of the Foundation for Independent
Higher Education, a Life Trustee of Rush-Presbyterian St. Luke's Medical
Center in Chicago, and an Executive Board Member of the Edwin L. Cox School of
Business at Southern Methodist University.
Manuel A. Garcia--55--Director of Homestead since April 1997. Since May
1969, Mr. Garcia has been Chief Executive Officer of Davgar Restaurants, Inc.,
the owner/operator of ten Burger King Restaurants in central Florida, five
Pebbles Restaurants, Harvey's Bistro, and Manuel's on the 18th Restaurant in
Orlando, Florida. Mr. Garcia also is a Director of The Foundation for Orange
County Public Schools and is National Director of Cities in Schools. He is a
member of the Board of the National Conference of Christians and Jews, and
Honorary Director of the Boys' Clubs and Boy Scouts of Central Florida. Mr.
Garcia is a former Director of Security Capital Atlantic Incorporated.
John C. Schweitzer--54--Director of Homestead since April 1997, and a
Trustee of Archstone Communities Trust since 1976. Since 1974, Mr. Schweitzer
has been President of Westgate Corp., and general partner of Campbell Capital,
Ltd., a real estate and investments company in Austin, Texas. Mr. Schweitzer
serves as a Director of Regency Realty Corporation, Chase Bank of Texas, and
KLRU Public Television; he is also a Trustee of Texas Christian University.
C. Ronald Blankenship--49--Advisory Director since October 1996. Mr.
Blankenship has been the Vice Chairman and Chief Operating Officer of Security
Capital since May 1998. Mr. Blankenship was Managing Director of Security
Capital from March 1991 to May 1998. Mr. Blankenship was Managing Director of
Archstone Communities Trust from March 1991 to May 1998, and Non-Executive
Chairman from June 1997 to July 1998. From June 1991 to July 1997, Mr.
Blankenship was Chairman of Archstone Communities Trust. He is an Advisory
Trustee for Archstone Communities Trust, Director of Strategic Hotel Capital
Incorporated, CarrAmerica Realty Corp. and Storage USA, Inc., and a former
Advisory Director of Security Capital Atlantic Incorporated.
Executive Officers
Michael D. Cryan--See "Directors" above.
David C. Dressler, Jr.--See "Directors" above.
Robert J. Morse--43--Managing Director of Homestead since December 1997.
Prior thereto, from February 1997 to December 1997, Mr. Morse was President,
Franchise Division, ITT Sheraton Corporation; and from September 1995 to
February 1997, Senior Vice President and Director of Operations, ITT Sheraton
North
13
<PAGE>
American Division. From May 1992 to September 1995, he was Area Manager for
the Sheraton Boston Hotel and Towers.
James C. Potts--52--Managing Director of Homestead since July 1998, where
he is responsible for development. Prior thereto, Mr. Potts was Co-Chairman
and Chief Investment Officer for Security Capital Atlantic Incorporated from
January 1996 to July 1998 and a Director of Security Capital Atlantic
Incorporated and the management company responsible for the management of
Security Capital Atlantic Incorporated from October 1993 to July 1998. Mr.
Potts was Chairman of Security Capital Atlantic Incorporated and the
management company responsible for its management from May 1994 to December
1995; from December 1992 to April 1994, he was Managing Director of the
management company responsible for the management of Archstone Communities
Trust. Mr. Potts is a former Trustee for Archstone Communities Trust.
Paul J. Burke--45--Senior Vice President of Homestead since March 1998,
where he is responsible for urban hotel operations. Prior thereto, from July
1994 to March 1998, Mr. Burke was General Manager of the Sheraton Washington
Hotel; from January 1991 to July 1994, he was General Manager of the Sheraton
New York-Sheraton Manhattan Hotel Complex.
Gary A. DeLapp--39--Senior Vice President of Homestead since December 1996,
where he is a member of the operations group. Mr. DeLapp was Vice President of
Homestead from May 1996 to November 1996, and Vice President, Homestead
Village Managers Incorporated, from February 1996 to October 1996. Prior
thereto, from July 1983 to February 1996, Mr. DeLapp was with Vista Host,
Inc., where his most recent position was partner and Senior Vice President of
Operations.
Bryan J. Flanagan--46--Senior Vice President and Chief Accounting Officer
of Homestead since January 1999, where he is responsible for financial
operations. Mr. Flanagan was Senior Vice President and Controller of Homestead
from June 1998 to December 1998. Prior thereto, from November 1996 to June
1998, he was Senior Vice President of Archstone Communities Trust; from June
1995 to November 1996, Mr. Flanagan was responsible for the financial
operations of Security Capital Group Incorporated. From September 1987 to June
1995, Mr. Flanagan was Vice President-Financial Analysis for Marriott Hotels,
Resorts and Suites.
Brian M. Fraser--35--Senior Vice President of Homestead since March 1998,
where he oversees all aspects of human resources. Mr. Fraser was Vice
President of Homestead from December 1996 to March 1998. Prior thereto, from
November 1993 to October 1996, Mr. Fraser was Human Resources Manager for
Blockbuster Entertainment.
Bradley P. Griggs--41--Senior Vice President of Homestead since December
1998, where he is responsible for overseeing all real estate development
activities in the western region. Mr. Griggs was Vice President of Homestead
from May 1996 to December 1998. Prior to joining Homestead Village Managers
Incorporated in September 1995, from 1990 to August 1995, Mr. Griggs was a
senior executive with The Fieldstone Company. Mr. Griggs is a registered
California Architect.
Laura L. Hamilton--35--Senior Vice President of Homestead since March 1998,
where she supervises Homestead's due diligence group; from May 1996 to March
1998, Vice President of Homestead; from January 1996 to October 1996, Vice
President of Homestead Village Managers Incorporated. Prior thereto, from June
1995 to January 1996, Ms. Hamilton was Vice President of Archstone Communities
Trust, where she had been a member of the due diligence group since April
1992.
Jeffry A. Jones--40--Senior Vice President of Homestead since October 1998,
where he is responsible for development of Homestead's properties located in
urban markets. Mr. Jones was a Vice President of Homestead from May 1996 to
October 1998; he was a Land Manager with Homestead Village Managers
Incorporated from February 1995 to May 1996.
Jeffrey A. Klopf--50--Senior Vice President of Homestead since May 1996 and
Secretary since January 1996; Senior Vice President and Secretary of Archstone
Communities Trust, ProLogis Trust and Security Capital
14
<PAGE>
Group Incorporated since January 1996, where he provides securities offerings
and corporate acquisition services, and oversees the provision of legal
services for affiliates of Security Capital. From January 1988 to December
1995, Mr. Klopf was a partner of Mayer, Brown & Platt, where he practiced
corporate and securities law.
John R. Patterson--47--Senior Vice President of Homestead since May 1996
where he is a member of the operations group. From June 1995 to October 1996,
Mr. Patterson was Senior Vice President of Homestead Village Managers
Incorporated. Prior thereto, from July 1993 to January 1995, Mr. Patterson was
a Senior Vice President in business development for NationsBank in Atlanta; he
was formerly Division President and partner of Trammell Crow Residential
Services Southeast.
Ken W. Pierce--41--Senior Vice President of Homestead since March 1997,
where he oversees all marketing functions. Prior thereto, from July 1982 to
February 1997, Mr. Pierce was with Holiday Inn Worldwide, where his last
position held was Vice President of Relationship Marketing.
Gregg A. Plouff--42--Senior Vice President of Homestead since March 1998,
where he is a member of the development group. From May 1996 to March 1998,
Mr. Plouff was Vice President of Homestead; from June 1995 to October 1996, he
was Vice President of Homestead Village Managers Incorporated. Prior thereto,
from March 1995 to May 1996, Mr. Plouff was Vice President of Archstone
Communities Trust; from July 1994 to March 1995, he was Vice President of the
management company responsible for management of Archstone Communities Trust;
from November 1993 to July 1994, he was a member of the acquisitions group of
Archstone Communities Trust.
Jerry D. Quinn--55--Senior Vice President of Homestead since December 1998,
where he is responsible for all new construction. Mr. Quinn was Vice President
of Homestead from December 1996 to December 1998. Prior thereto, from July
1994 to December 1996, Mr. Quinn was Vice President with Security Capital
Group Incorporated.
Mark E. Riley--40--Senior Vice President of Homestead since December 1998,
where he is responsible for national design. Mr. Riley was Vice President of
Homestead from May 1996 to December 1998; he was a Senior Development Manager
working on Homestead projects for Security Capital Group Incorporated from
September 1994 to May 1996. Prior thereto, from August 1993 to September 1994,
Mr. Riley was a Vice President with Southeast Lodges Development Company.
S. Scott Stewart--35--Senior Vice President, Regional Development Manager,
of Homestead since December 1998, where he is responsible for the suburban
development program for the eastern half of the United States. Mr. Stewart was
Vice President, Senior Development Manager of Homestead from May 1996 to
December 1998. Prior thereto, from December 1995 to May 1996, Mr. Stewart was
Vice President of Security Capital Atlantic Incorporated; from January 1995 to
December 1995, he was a Land Acquisitions Manager of Security Capital Atlantic
Incorporated; from 1993 to January 1995, Mr. Stewart was President of Potomac
Land and Development Company, a regional real estate enterprise based in the
Washington, D.C., area.
On January 12, 1999, Homestead announced the resignation of its chief
financial officer and is currently operating without a chief financial
officer.
15
<PAGE>
Item 2. Properties
Geographic Distribution
Homestead's operating properties and properties under construction are
located in 38 metropolitan areas in 25 states and the District of Columbia.
The table below describes the geographic distribution of Homestead's operating
and under construction property investments at December 31, 1998:
<TABLE>
<CAPTION>
Number of Properties Percentage of
---------------------------- Assets Based on
Under Total Expected
City Completed Construction Total Investment
---- --------- ------------ ----- ---------------
<S> <C> <C> <C> <C>
Southwest:
Albuquerque, NM.................. 2 -- 2 1%
Austin, TX....................... 4 -- 4 2%
Dallas, TX....................... 9 -- 9 4%
Denver, CO....................... 4 -- 4 3%
Houston, TX...................... 9 -- 9 4%
Las Vegas, NV.................... 1 -- 1 1%
Phoenix, AZ...................... 5 -- 5 3%
Salt Lake City, UT............... 3 -- 3 2%
San Antonio, TX.................. 3 -- 3 1%
--- --- --- ---
Subtotal....................... 40 -- 40 21%
=== === === ===
West Coast:
Los Angeles, CA.................. 2 2 4 3%
Orange County, CA................ 3 -- 3 2%
Portland, OR..................... 2 -- 2 2%
Sacramento, CA................... 1 -- 1 1%
San Diego, CA.................... 2 -- 2 2%
San Francisco (Bay Area), CA..... 7 1 8 7%
Seattle, WA...................... 4 -- 4 3%
--- --- --- ---
Subtotal........................ 21 3 24 20%
=== === === ===
Southeast:
Atlanta, GA...................... 8 -- 8 6%
Birmingham, AL................... 1 -- 1 1%
Charlotte, NC.................... 1 -- 1 1%
Jacksonville, FL................. 2 -- 2 1%
Memphis, TN...................... 1 1 2 1%
Miami/Ft. Lauderdale, FL......... 7 -- 7 6%
Nashville, TN.................... 2 -- 2 2%
Orlando, FL...................... 2 -- 2 2%
Raleigh, NC...................... 4 -- 4 3%
Tampa, FL........................ 3 -- 3 2%
--- --- --- ---
Subtotal........................ 31 1 32 25%
=== === === ===
Northeast:
Boston, MA....................... 3 -- 3 3%
New York Metro, NY............... 2 3 5 6%
Philadelphia, PA................. 3 -- 3 2%
Richmond, VA..................... 2 -- 2 2%
Washington, DC................... 7 3 10 8%
--- --- --- ---
Subtotal....................... 17 6 23 21%
=== === === ===
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Number of Properties Percentage of
---------------------------- Assets Based on
Under Total Expected
City Completed Construction Total Investment
---- --------- ------------ ----- ---------------
<S> <C> <C> <C> <C>
Central:
Chicago, IL..................... 3 2 5 4%
Cleveland, OH................... 1 1 2 2%
Detroit, MI..................... -- 2 2 2%
Kansas City, MO/KS.............. 3 -- 3 2%
Milwaukee, WI................... 1 -- 1 1%
Minneapolis, MN................. 2 -- 2 1%
St. Louis, MO................... 1 1 2 1%
--- --- --- ---
Subtotal...................... 11 6 17 13%
=== === === ===
Total......................... 120 16 136 100%
=== === === ===
</TABLE>
Properties Portfolio
The following table is as of December 31, 1998 for Homestead's 120
operating properties, 16 properties under construction and 18 properties in
planning and owned.
OPERATING PROPERTIES:
<TABLE>
<CAPTION>
Date Completed Rooms
-------------- -----
<S> <C> <C>
Southwest:
Albuquerque, New Mexico
Albuquerque/North (2).................................. March, 1996 141
Albuquerque/Midtown (2)................................ June, 1997 138
-----
Subtotal............................................. 279
-----
Austin, Texas
Austin/Arboretum (2)................................... July, 1995 133
Austin/Downtown/Townlake (5)........................... December, 1998 130
Austin/Midtown (2)..................................... February, 1996 145
Austin/Northwest (2)................................... October, 1996 132
-----
Subtotal............................................. 540
-----
Dallas, Texas
Dallas/Las Colinas (2)................................. January, 1996 149
Dallas/North (Tollway) Addison (2)..................... May, 1993 119
Dallas/North Arlington (2)............................. March, 1995 137
Dallas/North Central (2)............................... January, 1994 133
Dallas/North Richland Hills (2)........................ January, 1994 133
Dallas/Northeast (2)................................... August, 1992 131
Dallas/Northwest (2)................................... (1) 189
Dallas/South Arlington (2)............................. April, 1995 141
Fort Worth (2)......................................... January, 1996 97
-----
Subtotal............................................. 1,229
-----
Denver, Colorado
Denver/Aurora (2)...................................... April, 1996 137
Denver/Cherry Creek (2)................................ May, 1997 108
Denver/Inverness (2)................................... August, 1997 142
Denver/Tech Center (2)................................. April, 1996 159
-----
Subtotal............................................. 546
-----
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Date Completed Rooms
--------------- -----
<S> <C> <C>
Houston, Texas
Houston/Cypress Station (2)...... August, 1994 134
Houston/Galleria Area (5)........ September, 1998 136
Houston/Hobby South (2).......... April, 1994 133
Houston/Northwest (2)............ February, 1994 133
Houston/Park Ten (2)............. September, 1994 134
Houston/Sugarland (2)............ October, 1994 133
Houston/Westchase (2)............ July, 1994 133
Houston/Willowbrook (2).......... July, 1995 137
Houston/Medical Center (2)....... September, 1995 163
-----
Subtotal....................... 1,236
-----
Las Vegas, Nevada
Las Vegas Midtown................ August, 1998 123
-----
Phoenix, Arizona
Mesa (2)......................... December, 1997 122
Phoenix/Deer Valley (2).......... November, 1996 141
Phoenix/Metro (2)................ June, 1996 142
Scottsdale (2)................... August, 1995 120
Tempe (2)........................ April, 1996 149
-----
Subtotal....................... 674
-----
Salt Lake City, Utah
Salt Lake City/Ft. Union (2)..... October, 1997 132
Salt Lake City/South Valley (2).. June, 1997 138
Salt Lake City/Sugarhouse (5).... August, 1998 103
-----
Subtotal....................... 373
-----
San Antonio, Texas
San Antonio/Airport (2).......... July, 1995 153
San Antonio/Medical Center (2)... August, 1994 135
San Antonio/Six Flags Fiesta (2). August, 1995 130
-----
Subtotal....................... 418
-----
Total Southwest Region......... 5,418
=====
West Coast:
Los Angeles, California
Los Angeles International
Airport/El Segundo (2).......... December, 1997 150
Monrovia (2)..................... May, 1998 122
-----
272
-----
Orange County, California
Brea (5)........................... January, 1998 133
Cypress (5)...................... September, 1998 137
Irvine/Spectrum (2).............. October, 1997 149
-----
419
-----
Portland, Oregon
Beaverton (2).................... September, 1997 142
Lake Oswego (2).................. March, 1998 146
-----
288
-----
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Date Completed Rooms
--------------- -----
<S> <C> <C>
Sacramento, California
Sacramento/South Natomas (5)........................... November, 1998 143
-----
San Diego, California
San Diego/Mira Mesa (2)................................ August, 1998 140
San Diego/Mission Valley (2)........................... October, 1997 140
-----
280
-----
San Francisco (Bay Area), California
Milpitas (2)........................................... February, 1997 118
Mountain View (2)...................................... December, 1997 132
San Carlos (5)......................................... October, 1998 116
San Jose (2)........................................... May, 1998 152
San Mateo (2).......................................... March, 1997 136
San Ramon (2).......................................... May, 1998 147
Sunnyvale (2).......................................... March, 1997 144
-----
Subtotal............................................. 945
-----
Seattle, Washington
Bellevue (2)........................................... November, 1997 149
Seattle/Redmond (2).................................... November, 1997 162
Seattle/Southcenter (2)................................ January, 1998 93
North Seattle/Mountlake Terrace (2).................... January, 1998 118
-----
Subtotal............................................. 522
-----
Total West Coast Region.............................. 2,869
=====
Southeast:
Atlanta, Georgia
Atlanta/Cumberland (3)................................. May, 1997 137
Atlanta/Gwinnett Place (3)............................. October, 1997 130
Atlanta/Norcross (3)................................... July, 1996 137
Atlanta/North Druid Hills (3).......................... August, 1997 137
Atlanta/Northlake (5).................................. May, 1998 133
Atlanta/Perimeter (3).................................. May, 1997 133
Atlanta/Roswell (3).................................... December, 1997 141
Atlanta/Wildwood/Powers Ferry (5)...................... September, 1998 134
-----
Subtotal............................................. 1,082
-----
Birmingham, Alabama
Birmingham/Perimeter Park South (5).................... June, 1998 137
-----
Charlotte, North Carolina
Charlotte/Billy Graham Parkway/Coliseum (5)............ March, 1998 137
-----
Jacksonville, Florida
Jacksonville/Baymeadows (5)............................ March, 1998 134
Jacksonville/Southside (3)............................. July, 1997 137
-----
271
-----
Memphis, Tennessee
Memphis/Airport (5).................................... June, 1998 134
-----
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Date Completed Rooms
--------------- -----
<S> <C> <C>
Miami/Ft. Lauderdale, Florida
Boca Raton/Commerce (5)................................ December, 1998 141
Coral Springs (5)...................................... October, 1998 124
Ft. Lauderdale/Tamarac (3)............................. August, 1997 145
Miami Airport/Doral (3)................................ October, 1997 149
Miami/Blue Lagoon (5).................................. September, 1998 149
Plantation/Davie (3)................................... December, 1997 125
West Palm Beach (5).................................... December, 1998 137
-----
Subtotal............................................. 970
-----
Nashville, Tennessee
Nashville/Airport (3).................................. December, 1997 133
Nashville/Cool Springs (3)............................. April, 1998 137
-----
270
-----
Orlando, Florida
Orlando/Altamonte Springs (5).......................... September, 1998 134
Orlando/South (5)...................................... October, 1998 134
-----
268
-----
Raleigh, North Carolina
Raleigh/Crabtree Valley (3)............................ June, 1998 138
Durham (5)............................................. May, 1998 137
Raleigh/North (3)...................................... November, 1997 121
Research Triangle Park (3)............................. May, 1997 125
-----
Subtotal............................................. 521
-----
Tampa, Florida
Tampa/Brandon (3)...................................... July, 1997 141
Tampa/North Airport (3)................................ March, 1997 121
Clearwater (3)......................................... October, 1997 113
-----
Subtotal............................................. 375
-----
Total Southeast Region............................... 4,165
=====
Northeast:
Boston, Massachusetts
Boston/Burlington (5).................................. August, 1998 140
Boston/Marlborough (5)................................. August, 1998 135
Boston/Waltham (5)..................................... September, 1998 139
-----
414
-----
New York Metro, New York
Hanover/Parsipanny (5)................................. November, 1998 139
Shelton (5)............................................ December, 1998 139
-----
278
-----
Philadelphia, Pennsylvania
Horsham/Willow Grove (5)............................... July, 1998 136
King of Prussia (5).................................... August, 1998 141
Newark/Christiana (5).................................. February, 1998 140
-----
417
-----
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Date Completed Rooms
--------------- ------
<S> <C> <C>
Richmond, Virginia
Richmond/Innsbrook (3)................................ July, 1997 141
Richmond/Midlothian (5)............................... September, 1998 134
------
275
------
Washington, DC
Baltimore Washington International Airport (3)........ August, 1997 137
Dulles/Chantilly (3).................................. December, 1997 115
Dulles/Sterling (3)................................... August, 1998 133
Fair Oaks (3)......................................... December, 1997 133
Germantown (3)........................................ December, 1997 132
Merrifield (3)........................................ September, 1998 128
Reston-Sunset (3)..................................... August, 1998 148
------
Subtotal............................................ 926
------
Total Northeast Region.............................. 2,310
======
Central:
Chicago, Illinois
Chicago/Naperville (5)................................ December, 1997 136
Chicago/Schaumburg (5)................................ December, 1997 136
Chicago/Westmont (5).................................. February, 1998 140
------
Subtotal............................................ 412
------
Cleveland, Ohio
Cleveland/North Olmstead (5).......................... March, 1998 136
------
Kansas City, Missouri/Kansas
Kansas City/Country Club Plaza........................ March, 1998 99
Kansas City/Overland Park (5)......................... April, 1998 131
Kansas City/Shawnee Mission (2)....................... April, 1997 140
------
370
------
Milwaukee, Wisconsin
Milwaukee/Brookfield (5).............................. July, 1998 137
------
Minneapolis, Minnesota
Minneapolis/Eagan (5)................................. December, 1997 130
Minneapolis/Eden Prarie (5)........................... January, 1998 97
------
227
------
St. Louis, Missouri...................................
St. Louis Airport (5)................................. June, 1998 136
------
Total Central Region................................ 1,418
======
Total Rooms--Operating Properties................. 16,180
======
</TABLE>
PROPERTIES UNDER CONSTRUCTION:
<TABLE>
<CAPTION>
Rooms
-----
<S> <C>
West Coast:
Los Angeles, California:
Glendale (5)........................................................... 86
Torrance (5) (opened January 1999)..................................... 139
---
225
---
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Rooms
-----
<S> <C>
San Francisco (Bay Area), California:
Fremont (5) (opened January 1999)...................................... 121
-----
Total West Coast Region.............................................. 346
=====
Southeast:
Memphis, Tennessee:
Memphis/Poplar (5) (opened January 1999)............................... 134
-----
Total Southeast Region............................................... 134
=====
Northeast:
New York Metro, New York:
Meadowlands (5)........................................................ 140
Norwalk, CT (5)........................................................ 140
Woodbridge (5) (opened January 1999)................................... 140
-----
Subtotal............................................................. 420
-----
Washington, DC:
Alexandria (5) (opened January 1999)................................... 130
Gaithersburg (5)....................................................... 134
Tysons Corner (5)...................................................... 106
-----
Subtotal............................................................. 370
-----
Total Northeast Region............................................... 790
=====
Central:
Chicago, Illinois:
Vernon Hills (5)....................................................... 125
Oakbrook (5)........................................................... 136
-----
261
-----
Cleveland, Ohio:
Beachwood (5).......................................................... 142
-----
Detroit, Michigan:
Auburn Hills (5)....................................................... 134
Southfeld (5).......................................................... 134
-----
268
-----
St. Louis, Missouri:
Westport (5)........................................................... 99
-----
Total Central Region................................................. 770
=====
Total Rooms--Properties Under Construction........................... 2,040
=====
Properties in Planning and Owned:
Southwest:
Denver, Colorado
Colorado Springs (5)................................................... 88
-----
Total Southwest Region............................................... 88
=====
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Rooms
-----
<S> <C>
West Coast:
Los Angeles, California
Burbank (5)............................................................ 118
Calabasas (5).......................................................... 139
Ontario (5)............................................................ 127
Pasadena (5)........................................................... 97
Warner Center (5)...................................................... 142
-----
623
-----
San Diego, California
Rancho Bernardo (5).................................................... 132
-----
San Francisco (Bay Area), California
S. San Francisco (5)................................................... 110
San Francisco Fin. Dist. - Embarcadero Center.......................... 191
Walnut Creek (5)....................................................... 131
-----
432
-----
Total West Coast Region.............................................. 1,187
=====
Southeast:
Nashville, Tennessee
West End (5)........................................................... 126
-----
Total Southeast Region............................................... 126
=====
Northeast:
Boston, Massachusetts
Boston Tremont (4)..................................................... 198
-----
New York, New York
New York Bryant Park (40th St) (4)..................................... 305
New York Grand Central (45th St) (4)................................... 229
New York Madison Avenue (55th St) (4).................................. 199
-----
733
-----
Total Northeast Region............................................... 931
=====
Central:
Chicago, Illinois
East Ontario-Downtown Chicago (4)...................................... 242
Riverwoods (5)......................................................... 130
-----
372
-----
Minneapolis, Minnesota
Plymouth............................................................... 118
-----
Total Central Region................................................. 490
=====
Total Properties In Planning and Owned............................... 2,822
=====
</TABLE>
- --------
(1) Phase I (132 rooms) was developed in 1992 and Phase II (57 rooms) was
developed in 1995.
(2) Subject to deeds of trust securing convertible mortgage notes due to
Archstone of $221,333,620 at December 31, 1998.
(3) Pledged as collateral under a mortgage loan of $122,028,471 at December
31, 1998. On February 23, 1999, 18 of these properties were sold and
leased back and the other 8 properties were released from the lien under
the $122 million mortgage loan.
23
<PAGE>
(4) Pledged as collateral under a revolving bank line of credit agreement with
total borrowings of $29,000,000 at December 31, 1998.
(5) Pledged as collateral under a revolving bank line of credit agreement with
total borrowings of $128,080,000 at December 31, 1998.
Additionally, at December 31, 1998, Homestead had properties in planning
and under control for the development of 2,136 rooms at 16 sites for a total
estimated expected investment of approximately $200 million. Homestead has an
exclusive right (through contingent contract or letter of intent) during a
contractually agreed-upon time period to acquire land for development, subject
to removal of contingencies during the due diligence process, but does not
presently own the land. There can be no assurance that such land will be
acquired and such acquisition will be dependent on Homestead obtaining
adequate financing. The room and total expected investment information is
based on management's best estimates.
If additional financing is not obtained to continue development of land
sites, Homestead may seek to sell certain properties in planning and owned. No
assurance can be given that any sales will occur or, if such sales occur, that
the proceeds of such sale will be sufficient to cover Homestead's costs.
Homestead may seek joint venture partners for certain properties in planning
and owned. No assurance can be given that any joint venture will be
consummated or that the terms thereof will be favorable to Homestead.
Item 3. Legal Proceedings
Homestead is not a party to any litigation or claims, other than routine
matters arising out of the ordinary course of business that are incidental to
the development process and operation of the business of Homestead. Homestead
does not believe that the results of all claims and litigation, individually
or in the aggregate, will have a material adverse effect on its business,
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market Information
Homestead's Shares have been listed on the NYSE under the symbol "HSD"
since April 1, 1998. Prior to that time the Shares were listed on the AMEX
under the same symbol. The table below indicates the range of the high and low
sales prices of the Shares as reported in the NYSE and AMEX Composite Tape for
the periods indicated.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
1997
First Quarter............................................. $20 7/8 $16 5/8
Second Quarter............................................ $18 1/2 $15 7/8
Third Quarter............................................. $20 1/8 $16
Fourth Quarter............................................ $18 1/4 $13 11/16
1998
First Quarter............................................. $15 3/4 $13 9/16
Second Quarter............................................ $16 $11
Third Quarter............................................. $13 13/16 $ 6 1/4
Fourth Quarter............................................ $ 8 3/16 $ 3 3/8
1999
First Quarter (through March 24, 1999).................... $ 4 3/4 $ 2 3/4
</TABLE>
At March 24, 1999, there were approximately 1,800 holders of record of the
Shares.
24
<PAGE>
Dividend Policy
The declaration and payment of dividends by Homestead are subject to the
discretion of the Board. Any determination as to the payment of dividends will
depend upon the results of operations, capital requirements and financial
condition of Homestead and such other factors as the Board deems relevant. The
Board intends to follow a policy of retaining earnings to finance Homestead's
growth and for general corporate purposes and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. In addition, Homestead's
line of credit arrangements restrict payment of dividends without lender
approval.
25
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected financial data relating to the
historical financial condition and results of operations of Homestead for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994. On October 17, 1996,
Homestead acquired the PTR Subsidiaries relating to Homestead Village
properties in the Mergers. Prior to October 17, 1996, Homestead had no
significant activities, thus substantially all 1996 results of operations
through the date of the Mergers and all of the summary selected financial
information in 1995 and prior years represents that of the PTR Subsidiaries.
The following selected financial data is qualified in its entirety by, and
should be read in conjunction with, "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
financial statements and related notes thereto included in Item 14 to this
report. Amounts provided in the table are in thousands, except share data and
statistical data.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Operations Summary:
Revenues:
Room revenue.............. $ 139,681 $ 58,397 $ 33,071 $ 18,337 $ 7,827
Other revenue............. 5,771 1,469 492 366 165
---------- -------- -------- -------- -------
Total revenues.......... 145,452 59,866 33,563 18,703 7,992
---------- -------- -------- -------- -------
Operating expenses:
Property operating
expenses (1)............. 63,339 25,089 16,166 9,229 4,252
Corporate operating
expenses................. 22,280 15,238 4,112 1,322 512
Special charges (2)....... 7,240 -- -- -- --
Depreciation and
amortization............. 34,244 12,130 4,443 2,343 845
---------- -------- -------- -------- -------
Total operating
expenses............... 127,103 52,457 24,721 12,894 5,609
---------- -------- -------- -------- -------
Operating income............ 18,349 7,409 8,842 5,809 2,383
Interest income............. 952 552 211 -- --
Interest expense, net of
capitalized interest....... (23,190) (2,190) (5,971) (2,958) (1,409)
---------- -------- -------- -------- -------
Earnings (loss) before
extraordinary item......... (3,889) 5,771 3,082 2,851 974
Extraordinary item - loss on
early extinguishment of
debt....................... (25,344) -- -- -- --
---------- -------- -------- -------- -------
Net earnings (loss)......... $ (29,233) $ 5,771 $ 3,082 $ 2,851 $ 974
========== ======== ======== ======== =======
Share Data:(3)
Weighted average shares
outstanding................ 37,639 23,578 N/A N/A N/A
Diluted weighted average
shares outstanding......... 37,639 43,502 N/A N/A N/A
Pro forma weighted average
shares outstanding......... N/A N/A 11,392 N/A N/A
Basic earnings (loss) per
share...................... $ (0.78) $ 0.24 N/A N/A N/A
Diluted earnings (loss) per
share...................... $ (0.78) $ 0.18 N/A N/A N/A
Pro forma earnings per
share...................... N/A N/A $ 0.27 N/A N/A
Financial Position:
Property and equipment, net. $1,137,869 $715,497 $255,608 $105,002 $59,099
Total assets................ $1,218,391 $783,949 $322,968 $108,965 $60,866
Lines of credit............. $ 357,080 $ 96,808 $ -- $ -- $ --
Mortgage note payable....... $ 122,028 $ -- $ -- $ -- $ --
Convertible mortgage notes
payable.................... $ 221,334 $301,606 $101,309 $ -- $ --
Other debt to affiliate..... $ -- $ -- $ -- $ 80,144 $45,131
Shareholders' equity........ $ 458,025 $328,931 $204,003 $ 22,971 $12,068
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Other Data:
EBDADT(4)................ $ 40,945 $ 19,385 $ 10,787 $ 5,194 $ 1,819
EBITDA(5)................ $ 52,593 $ 19,539 $ 13,285 $ 8,152 $ 3,228
Cash provided by (used
in):
Operating activities... $ 41,741 $ 25,976 $ 12,261 $ 6,019 $ 2,381
Investing activities... $(459,292) $(398,721) $(115,453) $(48,116) $(35,474)
Financing activities... $ 426,721 $ 368,304 $ 108,711 $ 43,065 $ 33,832
Statistical Data (for all
operating properties):
Occupancy................ 70.4% 74.7% 78.8% 76.6% 75.9%
Average weekly rate(6)... $ 301 $ 253 $ 222 $ 212 $ 186
Weekly RevPAR(7)......... $ 212 $ 189 $ 175 $ 162 $ 141
Property operating income
margin(8)............... 56.1% 57.8% 51.9% 50.7% 46.7%
</TABLE>
- --------
(1) Property operating expenses consist of all expenses directly related to
the operation of the properties and do not include an allocation of
corporate operating expenses. Property operating expenses include
primarily salaries and wages, utilities, insurance, maintenance and supply
costs and property taxes. Prior to the Mergers on October 17, 1996,
Homestead had an agreement with a subsidiary of Security Capital for
management of its properties and paid a fee based on a percentage of
revenues.
(2) Consists primarily of expense for Homestead's reorganization of its
internal development department and abandonment of pursuits to acquire
development sites.
(3) Prior to the Mergers, the assets of Homestead were owned by subsidiaries
of PTR and were managed by subsidiaries of Security Capital. The shares
and equity interests of these entities differed substantially from the
shares, warrants and convertible mortgage notes outstanding after the
Mergers. Therefore, management does not believe that historical earnings
per share data for 1996 is meaningful. Pro forma earnings per share assume
issuance of shares for acquisition of the PTR Subsidiaries as of the
beginning of 1996 and shares issued to Security Capital and ATLANTIC were
outstanding since the Mergers closing date. See "Item 1. Business--The
Company." Pro forma earnings per share for 1996 have also been restated
using the methodology of Statement No. 128 which resulted in a $0.04
increase from prior pro forma earnings per share.
For the year ended December 31, 1999 diluted weighted average shares
outstanding are the same as basic weighted average shares outstanding as
convertible debt is not assumed to be converted and exercise of options is
not assumed as the effects are anti-dilutive in a period of loss.
(4) EBDADT means earnings before depreciation, amortization and deferred
taxes. EBDADT for Homestead is total revenues, plus interest income, less
property operating expenses, corporate overhead, non-real property
depreciation, interest expense (other than convertible debt interest
expenses) and current tax expense. EBDADT is presented on a diluted basis
which assumes conversion of the convertible mortgage notes, thus interest
expense associated with the convertible notes is not deducted in arriving
at diluted EBDADT. EBDADT does not represent cash generated from operating
activities in accordance with GAAP, is not to be considered as an
alternative to net earnings or any other GAAP measurement of operating
performance and is not necessarily indicative of cash available to fund
all cash needs. Homestead has included EBDADT herein because Homestead
believes that it is one measure used by certain investors to determine
operating cash flow. EBDADT, as calculated above, may not be comparable to
other similarly titled measures of other companies.
(5) EBITDA means earnings before interest, income taxes, depreciation and
amortization. EBITDA does not represent cash generated from operating
activities in accordance with GAAP, is not to be considered as an
alternative to net earnings or any other GAAP measurement of operating
performance and is not necessarily indicative of cash available to fund
all cash needs. Homestead has included EBITDA herein because Homestead
believes that it is one measure used by certain investors to determine
operating cash flow. EBITDA, as calculated above, may not be comparable to
other similarly titled measures of other companies.
27
<PAGE>
(6) Average weekly rate is determined by dividing room revenue by the number
of guest room days occupied for the period and multiplying by seven.
(7) Weekly revenue per available room ("RevPAR") is determined by dividing
room revenue by the number of guest room days available for the period and
multiplying by seven.
(8) Property Operating Income Margin is property operating income (property
revenues less property operating expenses) divided by property revenues.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with "Item 6.
Selected Financial Data" and all of the financial statements and related notes
thereto appearing in Item 14 to this Form 10-K. Historical results and
percentage relationships set forth in "Item 6. Selected Financial Data" and
the Financial Statements of Homestead may not be indicative of future
operations of Homestead.
For analysis purposes Homestead categorizes its operating properties 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 obtained 80% occupancy for a one-
week period or have been opened for 24 weeks and "pre-stabilized" means all
other operating properties.
The statements contained in this report that are not historical facts are
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. These forward-looking statements are based on current
expectations, estimates and projections about the industry and markets in
which Homestead operates, management's beliefs and assumptions made by
management. Words such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions which are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements. Among the important factors
that could cause Homestead's actual results to differ materially from those
expressed in the forward-looking statements are (i) changes in general
economic conditions in its target markets that could adversely affect demand
for Homestead's properties, (ii) the effects of increased or unexpected
competition with respect to one or more properties, (iii) Homestead's ability
to open new properties on schedule which may be affected by factors outside
the control of Homestead, (iv) availability to Homestead of debt or equity
financing or other arrangements to allow development of land owned and
acquisition and development of sites under pursuit, (v) the matters described
under "--Risks Factors" and (vi) changes in financial markets and interest
rates that could adversely affect Homestead's cost of capital and its ability
to meet its financing needs and obligations.
Risk Factors
Homestead will require substantial additional capital
Homestead will continue to require a substantial amount of additional
capital to finance its short-term obligations and future growth. Costs to fund
commitments on properties under construction at December 31, 1998 is
approximately $68 million. Additional expected funding required for properties
in planning and owned is approximately $354 million, and the expected funding
required to acquire and develop properties under pursuit is approximately $200
million. As a result, Homestead anticipates seeking to raise substantial
additional amounts of capital throughout 1999. Homestead may seek additional
credit facilities and may seek to issue long-term debt and additional equity
securities or enter into joint venture or other arrangements. Homestead is
currently restricted by the terms and covenants of its bank lines of credit in
the type and amount of additional indebtedness
28
<PAGE>
it may incur. No assurance can be given regarding the availability or terms of
such financing. Any future debt financings or issuances of preferred shares by
Homestead will be senior to the rights of the holders of common shares, and
any future issuances of common or preferred shares may result in the dilution
of the then existing shareholders' proportionate equity interest in Homestead.
If Homestead cannot secure adequate funding or complete other development
arrangements then it may have to discontinue the development process on some
or all of the land sites owned resulting in expensing of carrying costs, such
as interest and property taxes, and expensing of costs of its internal
development group, which could materially adversely affect reported earnings.
Similarly, if pursuits of some or all of the land sites are abandoned
Homestead may incur write-offs of pursuit costs and loss of non-refundable
earnest money deposits. If discontinuance of development of land sites is
required or pursuits of land sites for acquisition are abandoned due to
financing constraints, then Homestead intends to mitigate incurrence of
expenses and cash outflows by seeking to sell land sites, sell and assign
rights to acquire sites under pursuit, terminate personnel, or take other
appropriate actions all of which may result in additional losses for financial
statement purposes. In the event that Homestead is required to liquidate some
of its real estate holdings expeditiously, its ability to achieve a desirable
sales price could be adversely affected.
Homestead is subject to a substantial amount of indebtedness
At December 31, 1998, Homestead's total indebtedness was approximately $709
million. Homestead will be required to seek refinancing for all or a portion
of that debt or to obtain additional financing, if it is at any time unable to
generate sufficient cash flow from operations to service its debt or satisfy
other covenants under its loan agreements, which include limitations on the
amount of additional indebtedness that Homestead can incur. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained on terms that are favorable or acceptable to
Homestead. The amount of Homestead's indebtedness may also make Homestead more
vulnerable to economic downturns and may limit its ability to withstand
adverse changes or to capitalize on business opportunities.
Additionally, substantially all of Homestead's properties have been pledged
as collateral to secure the payment of Homestead's indebtedness. If Homestead
were to default in the payment of any of the secured indebtedness, Homestead
could lose the properties securing such debt. The loss of such properties
could have a material adverse effect on Homestead's financial condition and
results of operations.
Significant influence of principal shareholder may impact Homestead
management and operations
As of December 31, 1998, Security Capital owned approximately 69.8% of the
issued and outstanding common shares of Homestead and, therefore controls
approximately 69.8% of the vote on matters submitted for shareholder action,
including the election of directors. Pursuant to an investor agreement with
Homestead, Security Capital currently has the right to nominate up to two
directors of Homestead. Additionally, so long as Archstone owns $20 million
principal amount of convertible mortgage notes, it is entitled to nominate one
person as a director of Homestead. The directors so elected are in a position
to exercise significant influence over the affairs of Homestead if they were
to act together in the future. John C. Schweitzer, a director of Homestead, is
deemed to be a nominee of Archstone and Security Capital under the investor
agreement. Further, John P. Frazee, a director of Homestead, is a member of
the Security Capital board of directors.
For so long as Security Capital beneficially owns at least 10% of
Homestead's outstanding common shares, Security Capital has the right to
approve, among other significant matters:
(1) Homestead's annual operating budget and substantial deviations
therefrom;
(2) acquisitions or dispositions in a single transaction or group of
related transactions where the purchase price exceeds $5 million;
(3) property management arrangements;
(4) the declaration or payment of any dividend or other distribution;
29
<PAGE>
(5) the offer or sale of any shares of stock of Homestead or any
securities convertible into shares of stock of Homestead;
(6) the incurrence, restructuring, renegotiation or repayment of
indebtedness which exceeds $5 million; and
(7) the increase of the number of directors to more than seven.
Accordingly, due to the foregoing, for so long as it continues to
beneficially own at least 10% of Homestead's outstanding common shares,
Security Capital will retain significant influence over the affairs of
Homestead which may result in decisions that do not fully represent the
interests of all shareholders of Homestead.
Homestead has entered into a subscription agreement with Security Capital
whereby Security Capital has agreed to purchase $200 million of subordinated
debentures from Homestead. This subscription was pledged as security for a
$200 million bank line of credit facility referred to as the Bridge Facility.
If the subscription is called by Homestead or Homestead receives proceeds from
any offering of securities, the proceeds must be used to first repay the
Bridge Facility and second to fund projects under development which secure the
Working Capital Facilities. The debentures would bear interest at a rate of
0.25% over the rate Homestead incurs under its $50 million credit facility
(which became a $30 million facility on March 18, 1999). Homestead may
repurchase the debentures with the proceeds of an equity offering within 90
days of issuance of the debentures. On the 90th day following the issuance of
the debentures the debentures convert to common shares, on a per share basis,
at the lowest of (i) $13.931, (ii) the fair market value, based upon a trading
20-day average, on the date any debentures are issued, and (iii) the fair
market value, based upon a 20-day trading average, on the date the debentures
are converted automatically in Shares. The subscription agreement expires the
earlier of June 30, 1999 or two weeks after termination of the $200 million
credit agreement. The subscription obligation is reduced or terminated to the
extent Homestead issues equity securities to any third party, or to Security
Capital pursuant to a separate offering, including in connection with the
rights offering announced March 25, 1999, and the proceeds are used to repay
this credit facility. If the subscription is called by Homestead and if the
debentures are converted to common stock Security Capital would own
approximate 85% of the outstanding common shares of Homestead. No assurance
can be given that Security Capital will provide further financial
accommodation for Homestead. In conjunction with Security Capital's entering
into the subscription agreement, Homestead paid an arrangement fee to Security
Capital of $600,000.
Seasonal fluctuations in the lodging industry may affect Homestead's
operating results
The lodging industry is seasonal in nature, with the second and third
quarters generally accounting for a greater proportion of annual revenues than
the first and fourth quarters. Quarterly earnings may be adversely affected by
events beyond Homestead's control such as poor weather conditions, economic
factors and other considerations affecting travel.
Competition and overdevelopment could adversely affect Homestead's operations
Each Homestead Village property is, or will be, located in a developed area
that includes competing properties. The number of competitors in a particular
area could have a material adverse effect on occupancy, average weekly rates
and weekly revenue per available room. Competition within the extended stay
lodging market has increased substantially. In several markets where Homestead
has properties, there is intense competition for the extended stay customer
which has already affected occupancy and weekly revenue per available room for
these properties. In addition, since the lodging industry has historically
been characterized by cyclical trends, there can be no assurance that the
current state of supply/demand fundamentals will continue into the future.
Competition within the lodging industry is based generally on convenience of
location, price, range of services and guest amenities offered and quality of
customer service. Homestead considers the reasonableness of room rates, the
location of properties and the services and the guest amenities provided to be
among the most important competitive factors in the business. A number of
other lodging chains and developers have developed or are developing extended
stay properties. In particular, some of these entities have targeted the
moderately priced segment of the extended stay market in which Homestead
competes. Homestead competes for guests and for new development sites with
certain of these established entities which may have greater financial
resources than Homestead and better relationships with lenders and real estate
sellers. These entities may be able
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to accept more risk than Homestead can prudently manage. Further, there can be
no assurance that new or existing competitors will not significantly reduce
their rates or offer greater convenience, services or amenities or
significantly expand or improve properties in markets in which Homestead
competes, thereby materially adversely affecting Homestead's business and
results of operations.
Homestead's historical growth rate may strain its resources
Homestead has experienced rapid growth in its revenues, number of
properties and employees, and the scope of its operations. This growth has
resulted in new and increased responsibilities for management personnel, as
well as added demands on Homestead's operating and financial systems.
Homestead's growth depends on the efforts of key management personnel and
Homestead's ability to attract or develop new management personnel and to
integrate these new employees into its overall operations. If Homestead is
unable to manage growth effectively, Homestead's business and results of
operations could be materially and adversely affected.
The value of Homestead's real estate is dependent on numerous factors
Real property investments are subject to varying degrees of risk. Real
estate values are affected by a number of factors, including:
(1)changes in the general economic climate;
(2)local conditions, such as an oversupply of space or a reduction in
demand for real estate in an area;
(3)the quality and philosophy of management;
(4)competition from other available space;
(5)the ability of the owner to provide adequate maintenance and insurance;
(6)the ability of the owner to control variable operating costs;
(7)government regulations;
(8)interest rate levels;
(9)the availability of financing; and
(10)potential liability under, and changes in, environmental, zoning, tax
and other laws.
Homestead's development activities may be unsuccessful
Subject to the availability of financing, Homestead intends to continue to
pursue development activities as opportunities arise and, as a result, will be
subject to risks associated with any such development activities. These risks
include:
(1) the risk that development opportunities explored by Homestead may be
abandoned;
(2) the risk that construction costs of a project may exceed original
estimates, possibly making the project less profitable than originally
estimated;
(3) limited cash flow during the construction period;
(4) the risk that occupancy percentages and rates at a completed project
will not be sufficient to make the project profitable; and
(5) the risk that government and other approvals may not be obtained.
In case of an unsuccessful development project, Homestead's loss could exceed
its investment in the project.
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Illiquidity of real estate investments
Equity real estate investments are relatively illiquid and therefore may
tend to limit the ability of Homestead to react promptly to changes in
economic or other conditions. In addition, significant expenditures associated
with equity real estate investments, such as mortgage payments, real estate
taxes and maintenance costs, are generally not reduced when circumstances
cause a reduction in income from the investments. Further, various agreements
to which Homestead is a party, including the terms of Homestead's outstanding
indebtedness, place limitations on the ability of Homestead to sell its
properties. Thus, Homestead's ability to sell assets at any time to change its
asset base may be restricted. Further, if additional financing is not obtained
to continue development of land sites owned Homestead may seek to sell certain
properties in planning and owned. No assurance can be given that any sales
will occur or, if such sales occur, that the proceeds of such sale will be
sufficient to cover Homestead's costs. Homestead may seek joint venture
partners for certain properties in planning and owned. No assurance can be
given that any joint venture will be consummated or that the terms thereof
will be favorable to Homestead.
Uninsured losses may adversely affect Homestead
Some types of losses, such as from hurricanes may be uninsurable, or the
cost of insuring against such losses may not be economically justifiable. If
an uninsured loss occurs, Homestead could lose both the invested capital in
and anticipated revenues from the facility, but would still be obligated to
repay any recourse mortgage indebtedness on the facility.
Homestead could be subject to potential environmental liability
Under various federal, state and local laws, ordinances and regulations,
a current or previous owner, developer or operator of real estate may be
liable for the costs of removal or remediation of hazardous or toxic
substances at, on, under or in its property. The costs of removal or
remediation of such substances could be substantial. Such laws often impose
liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous substances. The
presence of such substances on Homestead's properties may adversely affect its
ability to sell such properties or to borrow using such properties as
collateral and may also have an adverse affect on Homestead's ability to pay
distributions to its shareholders.
Costs of compliance with laws may affect Homestead's financial condition
Homestead's facilities are subject to various federal, state and local
regulatory requirements, such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. There can be no assurance that these requirements will not
be changed or that new requirements will not be imposed, a result that could
require significant unanticipated expenditures by Homestead and could have an
adverse effect on Homestead's financial condition and results of operations.
Overview
General
Since the first Homestead Village property was opened in 1992 and through
December 31, 1998 Homestead has completed development of 120 Homestead Village
properties consisting of 16,180 rooms in 37 cities. As of December 31, 1998,
Homestead had 16 properties under construction totaling 2,040 rooms within
eight of these cities as well as one additional city. In addition, as of
December 31, 1998, Homestead owned 18 development sites and controlled through
contracts 16 development sites.
Homestead's development program resulted in opening 49 properties in 1998,
40 in 1997 and 11 in 1996. This development program and the financing
activities required to support it have had a significant impact on Homestead's
operations for the years ended 1998, 1997 and 1996 and on Homestead's
financial position as of December 31, 1998 and 1997.
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The tightening of capital markets for real estate operating companies and
lodging companies in 1998 has had an adverse effect on Homestead's ability to
continue its development program. Additionally, due to the limited
availability of other financing, Homestead primarily utilized short-term bank
line of credit borrowings in 1998 to finance development costs. The year end
1998 outstanding bank line borrowings combined with other short-term debt
gives Homestead total short-term obligations of $479 million at December 31,
1998. Subsequent to year end, Homestead has repaid $122 million of such debt
with proceeds of a sale-leaseback and obtained an extension of the bank lines
under which $157 million was outstanding at year end 1998. While the actions
taken subsequent to year end are expected to strengthen Homestead's balance
sheet, Homestead will need substantial additional financing to repay
indebtedness as it matures, develop land sites owned and acquire and develop
sites under pursuit.
Homestead's property investments from the date of the Mergers (see
"Background--1996 Mergers" below) through December 31, 1998 have been funded
primarily by $234 million from borrowings from Archstone, $98.8 million in
exercises of warrants; $357.1 million net borrowings under its bank lines of
credit; and $154.2 million from a January 1998 common stock rights offering.
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 access to and cost of capital may
influence future operating results.
Background--1996 Mergers
Prior to October 17, 1996 the operating assets of Homestead were held
primarily by the PTR Subsidiaries and one operating property, opened in mid-
1996, was held by a subsidiary of ATLANTIC. Onsite property management was
performed by a subsidiary of Security Capital and other entity management
services were performed under management agreements with subsidiaries of
Security Capital. Neither PTR nor ATLANTIC had any employees. All persons
performing services related to Homestead Village properties prior to the
Mergers were employees of the management subsidiaries of Security Capital.
Upon the closing of the Mergers, all of the PTR and ATLANTIC Homestead
Village properties became assets of Homestead. Additionally, with the
acquisition of certain Security Capital subsidiaries, all onsite property
management and overall corporate management became an internal function of
Homestead whereby Homestead directly incurs the costs of all property level,
land acquisition, due diligence, development and corporate personnel.
In comparing 1998 and 1997 operating results to 1996, in addition to the
change in 1996 to internal management, the 1996 operating results of Homestead
reported in the accompanying financial statements are affected by certain
matters of financial presentation for the Mergers. The merger with the PTR
Subsidiaries was accounted for as a combination of entities under common
control in a manner similar to a pooling of interests, thus the historical
financial results of the PTR Subsidiaries are presented for all periods prior
to October 17, 1996 and, as the activities of Homestead prior to the Mergers
were not significant, the accompanying financial statements consist
predominantly of the activities of the PTR Subsidiaries prior to the merger
closing date. The merger of the subsidiaries of ATLANTIC was accounted for as
a purchase, thus the operating revenues and operating expenses of its one
property opened in mid-1996 are not included in the accompanying financial
statements until the date of the Mergers. Additionally, the development
activities of the subsidiaries of ATLANTIC are not reflected in the
accompanying financial statements until the merger closing date and
thereafter. The merger of the subsidiaries of Security Capital was also
accounted for as a purchase, thus the incurrence of the costs of personnel for
property and corporate management are effective in the accompanying financial
statements after the merger closing date.
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<PAGE>
Development Activity
Homestead's property development program has had a significant impact on
its financial performance during 1998, 1997 and 1996. The following table
summarizes Homestead's development activity for 1998, 1997 and 1996 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996(1)
-------- -------- --------
<S> <C> <C> <C>
Properties Under Construction:
Starts During Period
Properties................................... 15 49 42
Rooms........................................ 1,928 6,504 5,650
Completions During Period:
Properties................................... 49 40 11
Rooms........................................ 6,507 5,391 1,532
Under Construction At Year End:
Properties................................... 16 50 41
Rooms (2).................................... 2,040 6,622 5,509
Total expected investment.................... $164,723 $417,274 $264,931
Completed Properties:
Properties................................... 120 71 31
Rooms (2).................................... 16,180 9,675 4,297
Total investment, at historical cost......... $945,375 $478,936 $135,339
</TABLE>
- --------
(1) The table summarizes the investment activity for all Homestead Village
properties regardless of the form of ownership of such properties prior to
the Mergers.
(2) Rooms data for 1998 reflects the most recent adjustments to configurations
as of December 31, 1998.
Recent Operating Results
Homestead expects that its results for the first quarter of 1999 will be
below management's 1999 plan. Lower than expected occupancy rates in several
of its markets has led to lower than expected revenues for properties in those
markets. Lower than expected increases in occupancy rates for newly opened
properties in the Northeast and Midwest, caused in part by adverse weather
conditions, also are expected to impact revenues. These lower than expected
results could affect Homestead's results of operations for the first quarter
of 1999.
Results of Operations for the Years Ended December 31, 1998, 1997 and 1996
Net earnings (loss) for the years ended December 31, 1998, 1997 and 1996
were ($29.2) million, $5.8 million, and $3.1 million, respectively. The net
loss in 1998 includes (i) a third quarter loss on extinguishment of debt of
$25.3 million recorded as an extraordinary item and (ii) incurrence of special
charges of $7.24 million, primarily relating to Homestead's reorganization of
its internal development department and abandonment of certain pursuits,
recorded in fourth quarter (see "--Investing and Financing Activities under
Liquidity and Capital Resources" below). A discussion of other major
components of net earnings or loss follows.
Property Operations
The following table sets forth operating performance information for the
years ended December 31, 1998, 1997 and 1996. The information is for
Homestead's total operating property portfolio. (Performance of the one
operating property acquired from ATLANTIC has been included from its opening
date of July 1, 1996 versus its
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date of acquisition in the Mergers. Inclusion of such property has an
insignificant effect on the performance data presented.)
<TABLE>
<CAPTION>
% %
Change Change
(1998 (1997
1998 over 1997) 1997 over 1996) 1996
---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C>
Weekly RevPAR........... $212 12.2% $189 8.0% $175
Average Weekly Rate..... $301 19.0% $253 13.9% $222
Occupancy............... 70.4% (5.8%) 74.7% (5.2%) 78.8%
Property Operating
Income Margin.......... 56.1% (2.9%) 57.8% 11.4% 51.9%
</TABLE>
Homestead's new property openings were the primary reason for room revenue
increases of $81.3 million (139.2%) in 1998 over 1997 and $25.3 million
(76.6%) in 1997 over 1996. Properties open for their first full year in 1998
and 1997 were the next most significant reason for room revenue increases. The
increase in room revenue was also due to increases in the average weekly rate
of $47.86 in 1998 and $30.84 in 1997. The average weekly rate increase in 1998
was partially offset by lower overall occupancy in 1998 versus 1997. The
occupancy decrease in 1998 versus 1997 is attributable to the effect of
competition in markets described below for "same store" properties for 1998.
Total property operating expenses increased $38.3 million (152.5%) in 1998
over 1997 and $8.9 million (55.2%) in 1997 over 1996, primarily due to the
increase in the number of operating properties as noted above.
Homestead Properties Fully Operating Throughout Consecutive Periods
Homestead had 31 properties which were operating throughout both 1998 and
1997 ("same store properties"). RevPAR for 1998 decreased to $192 from $193 in
1997. The RevPAR decrease was due primarily to an occupancy decrease from
79.7% to 76.4%. Average weekly rate increases of $9.54 offset most of the
occupancy effect to result in the approximate $1 RevPAR decrease. The decrease
in occupancy is attributed to competition in markets primarily in the
Southwest and an increase in Homestead's average weekly rates.
Homestead had 20 properties that were fully operational throughout both
1997 and 1996. All but one of such properties are located in Texas. RevPAR
increased 6.1% in 1997 to $188 due to an average weekly rate growth of 8.2%,
offset somewhat by a 2.0% decrease in occupancy to 78.7%. The 1997 decline in
occupancy was considered the direct result of implementing strategic pricing.
Stabilized Properties Operations
RevPAR for the 89 stabilized properties in 1998 increased to $218 from $200
for the 39 stabilized properties in 1997 an increase of 9.0%. These
improvements are primarily attributable to a 17.9% increase in average weekly
rate offset in part by a decrease in occupancy to 73.6% from 79.5%. The
decrease in occupancy is attributable to competition in markets primarily
located in the Southwest and an increase in Homestead's average weekly rates.
RevPAR for the 39 stabilized properties in 1997 increased to $200 from $176
for the 29 stabilized properties in 1996, an increase of 13.9%. These
improvements are primarily attributable to a 13.4% increase in average weekly
rate (occupancy was essentially unchanged), and operating efficiencies for
Homestead's total portfolio.
Corporate Operating Expenses
Corporate operating expense increased $7.0 million in 1998 over 1997 and
$11.1 million in 1997 over 1996. The increase in 1998 over 1997 is attributed
to the continued growth of the company since the first half of 1997 when
Homestead 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, marketing and finance. The comparisons for 1997
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<PAGE>
over 1996 are affected by the fact that 1997 corporate expenses reflect a post
merger operating basis while 1996 operations consist only of the corporate
costs and management fee allocations from PTR to the PTR Subsidiaries through
the date of the Mergers. The increase in 1997 relates to the change in
corporate structure from external management to internal management and
additional corporate costs associated with the continued growth of the
company. This change in structure involves costs associated with operating as
a public company, recruiting, relocation and personnel expenses and other
costs to create a corporate infrastructure, offset in part by capitalizing
costs related to information technology, and the acquisition, development or
improvement of real estate.
Depreciation and Amortization
Depreciation and amortization increased $22.1 million (182.3%) in 1998 over
1997 and $7.7 million (173.0%) in 1997 over 1996. 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 $21.3 million (202.0%) in 1998 over 1997
and $6.3 million (147.6%) in 1997 over 1996 due to the increased number of
properties operating for each year.
Amortization expense increased $843,000 (52.8%) in 1998 over 1997 and $1.4
million (760.8%) in 1997 over 1996. Amortization of the trademarks and other
intangibles is calculated on a straight-line basis over a period of 20 years.
The increase in amortization is due to amortization of increases in the total
recorded cost of the Homestead Village trademark and other intangible assets.
Interest Income
Interest income of $952,000, $552,000 and $211,000 for 1998, 1997 and 1996,
respectively, resulted from investment of excess cash on hand. Nearly all of
the 1996 amount was earned after the Mergers.
Interest Cost
Homestead's gross interest cost includes amortization of non-cash financing
costs arising from the issuance of the warrants to obtain the commitment for
convertible mortgage notes financing and the differential between the
conversion price of the mortgage notes and the merger date value of Shares.
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, amortization of
deferred financing costs paid to obtain the lines of credit and interest on
the other debt to an affiliate) increased $15.9 million in 1998 over 1997 and
$10.9 million in 1997 over 1996. The increases are due to the increase in
investments in operating and under construction properties and the
corresponding increases in the notes payable and the lines of credit increases
used to finance the increases in investments.
Homestead's total interest cost, including the amortization of non-cash
mortgage financing costs described above, decreased $23.4 million in 1998 over
1997 and increased $61.6 million in 1997 over 1996. The 1998 decrease was due
to the greater amortization of the non-cash financing costs associated with
the mortgages in 1997 versus 1998. The 1997 increase was predominantly due to
amortization of the non-cash financing costs associated with the mortgages.
Total interest incurred was offset by capitalization of interest resulting
in a net interest expense of $23.2 million, $2.2 million and $6.0 million for
1998, 1997 and 1996, respectively. The net interest expense increase of $21.0
million in 1998 over 1997 is the result of increases in total debt and related
interest expense, relative to the amount of construction in progress during
the year, which results in a proportionate decrease in the amounts of interest
capitalized. Homestead's increased development activity in 1997 was the reason
for capitalization of nearly all interest cost incurred, resulting in a
decrease in net interest expense in 1997 of $3.8 million over 1996. Homestead
expects that a decrease in its 1999 development activity will result in a
decrease in the amount of capitalizable interest costs which will have a
negative impact on Homestead's earnings.
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<PAGE>
Liquidity and Capital Resources
Investing and Financing Activities
During the years ended December 31, 1998, 1997, and 1996, Homestead
invested $461.8 million, $388.1 million, and $113.5 million, respectively, in
Homestead Village properties and completed development of 49, 40 and 11
properties in each of these years, respectively. Financing of the investments
in 1998 was accomplished primarily by a January 1998 rights offering of common
stock, proceeds from bank lines of credit, cash flow from operations and the
final funding of the convertible mortgage notes commitments. The investments
were financed in 1997 and 1996 primarily by exercise of warrants to purchase
common stock issued in the Mergers, proceeds of the convertible mortgage note
funding commitments, proceeds from the lines of credit (beginning in 1997),
and intercompany debt prior to the Mergers in 1996.
The tightening of capital markets for real estate operating companies and
lodging companies in 1998 has had an adverse effect on Homestead's ability to
continue its high growth program of acquisition of land sites and construction
of Homestead Village properties. In October 1998, Homestead reorganized its
development effort and recorded $7.24 million of special charges primarily
related to the severance of development personnel and abandonment of certain
pursuits of development sites due the limited availability of additional funds
for development. Unless Homestead receives additional financing, Homestead
anticipates a slower growth rate in 1999 and therefore will have substantially
fewer development starts and openings than in prior years.
While Homestead completed a common stock rights offering in January 1998,
it primarily utilized short-term debt and cash flow from operations during the
remainder of the year to finance its land acquisition and development program
as, due to falling stock market prices for Homestead and its sector, common
equity was not seen as a viable capital raising alternative. Homestead's
maximization of borrowings under its Working Capital Facilities resulted in
$157 million outstanding due April 23, 1999 (subsequently extended to December
31, 2000) and $200 million outstanding on its Bridge Facility due February 23,
1999 (subsequently extended to April 23, 1999) at year end 1998.
In addition, in third quarter 1998 Homestead extinguished $98 million of
convertible mortgage debt due October 2006. This mortgage debt was convertible
into approximately 8.5 million Shares. As part of this extinguishment,
Homestead incurred an additional $24 million of indebtedness with a resulting
mortgage note payable totaling $122 million with a due date of June 1999.
Therefore, Homestead's balance sheet at December 31, 1998 was comprised of
substantial short-term obligations.
At year end 1998, Homestead owed $479 million of short-term debt,
consisting of $357 million due on its bank lines of credit ($157 million due
on the Working Capital Facilities and $200 million due on the Bridge Facility)
and $122 million due on a mortgage note. Homestead also had 16 properties in
construction at December 31, 1998 with unfunded development commitments of
approximately $68 million. Homestead intends to finance the completion of the
properties under construction with cash on hand, $21 million borrowed under
the Working Capital Facilities in January 1999, $21 million additional
capacity available under its Working Capital Facilities upon renewal, any
additional capacity available after payments made from the proceeds of the
rights offering in excess of $200 million and cash flow from operations.
Subsequent to year end, Homestead refinanced its short-term debt as
follows:
. On February 23, 1999, Homestead completed a sale and lease-back of 18 of
the 26 properties collaterizing the $122 million mortgage note.
Hospitality Properties Trust (NYSE: HPT) purchased the properties for
$145 million. Proceeds of the sale were used to repay the $122 million
debt which was due June 1999. Homestead will continue to operate the
properties under a long-term lease through 2015 with options to renew
through 2045 and pay minimum rent of approximately $16 million per year
which rent may increase based on payment of percentage rents beginning
July 2000 based on increases in revenues over a base period. Homestead
also posted a security deposit equal to one year's rent. As a result of
payment of the $122 million mortgage note, eight properties which were
used as collateral for the mortgage note were subsequently pledged as
collateral for its Working Capital Facilities, described below, to draw
approximately $21 million in additional borrowings under the line.
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<PAGE>
. On March 18, 1999, Homestead renewed its Working Capital Facilities with
an extension of the maturity date to December 31, 2000.
. On March 25, 1999, Homestead announced a rights offering for $225
million of common stock, the proceeds of which will be used to first
repay the $200 million Bridge Facility and then for purposes allowed
under the Working Capital Facilitites. Security Capital will participate
in the rights offering. To the extent rights remain available Security
Capital has agreed to purchase enough Shares in the rights offering to
ensure that the proceeds of the offering are no less than $205 million,
based on current market prices and subject to final documentation. To
the extent Homestead raises proceeds of up to $200 million in the rights
offering from third parties or Security Capital which are used to repay
the Bridge Facility, Security Capital's obligation under its
subscription agreement for Homestead convertible subordinated debentures
will be reduced or terminated.
In addition to the extension noted above, Homestead's Working Capital
Facilities were amended. The line secured by suburban properties has been
increased to $170 million total borrowing capacity from $150 million and the
sliding interest terms amended to be 2.0% to 3.0% over LIBOR and 1% to 2% over
prime or 1.5% to 2.5% over the federal funds rate. Future additional
collateral will be limited to suburban properties which are construction
complete and stabilized. The line secured by urban properties has been
decreased to $30 million total borrowing capacity from $50 million and the
interest terms amended to 3.0% over LIBOR and 2.0% over prime or 2.5% over the
federal funds rate.
The renewed and amended Working Capital Facilities require maintenance of
the following financial covenants effective with first quarter 1999:
. limiting total liabilities of no more than 55% of gross asset value, as
defined;
. limiting total indebtedness of no more than 50% of gross asset value, as
defined;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to interest expense ranging
from 1.25 to 1.0 to 1.90 to 1.0;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to debt service and preferred
stock dividends ranging from 1.0 to 1.0 to 1.25 to 1.0;
. maintaining various ratios of net property operating income to implied
debt service, as defined, ranging from 1.4 to 1.0 to 2.25 to 1.0;
. maintaining a minimum tangible net worth, as defined, of no less than 85%
of the year end 1998 amount, as defined, adjusted for net proceeds of
equity offerings; and
. maintaining positive net sources and uses of funds.
In addition, under the renewed and amended Working Capital Facilities
distributions or dividends on equity are prohibited; total cost, as defined,
of projects in development cannot exceed 25% of gross asset value, as defined,
in 1999 or 15% in 2000; Homestead's business activities will be limited to
development, ownership and operation of extended stay hotels; and no other
additional indebtedness other than non-recourse indebtedness may be incurred.
In addition to properties under construction at December 31, 1998,
Homestead also owned 18 development sites and had an additional 16 sites under
contractual control. Costs to develop the sites owned are estimated at $354
million. Costs to acquire and develop the sites under contractual control are
estimated at $200 million.
Capital resources in addition to those described above will be needed to
fund future developments, land acquisitions, and to repay or refinance
existing debt upon its maturity. Homestead may, subject to lender consent,
seek additional credit facilities and may seek to issue additional debt or
equity securities under its existing shelf registration statement, or
otherwise. However, there is no assurance that Homestead will be able to
obtain such financing when required or on acceptable terms. If Homestead
cannot secure adequate funding or complete other development arrangements then
it may have to discontinue the development process on some or all of the land
sites owned resulting in expensing of carrying costs, such as interest and
property taxes, and expensing of costs
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<PAGE>
of its internal development group, which could materially adversely affect
reported earnings. Similarly, if pursuits of some or all of the land sites are
abandoned Homestead may incur write-offs of pursuit costs and loss of non-
refundable earnest money deposits. If discontinuance of development of land
sites is required or pursuits of land sites for acquisition are abandoned due
to financing constraints, then Homestead intends to mitigate incurrence of
expenses and cash outflows by seeking to sell land sites, sell and assign
rights to acquire sites under pursuit, terminate personnel, or take other
appropriate actions, all of which may result in additional losses for financial
statement purposes.
Operating Activities
Net cash flow provided by operating activities increased by $15.0 million
(57.9%) for the year ended December 31, 1998 as compared to 1997 and $13.7
million (111.9%) for 1997 as compared to 1996. These increases are due
primarily to the growing number of Homestead operating properties as described
under "--Results of Operations for the Years ended December 31, 1998, 1997,
1996" as well as improvements in operations.
Impact of Year 2000
The Year 2000 issue has arisen as many existing computer programs and chip-
based embedded technology systems use only the last two digits to refer to a
year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications
could fail or create erroneous results. Homestead has adopted a Year 2000
compliance program in an attempt to minimize or prevent the number and
seriousness of any disruptions that may occur as a result of the Year 2000
issue. Homestead's compliance program includes an assessment of its hardware
and software computer systems ("information technology" systems) and embedded
systems ("non-information technology" systems such as lighting, security, fire,
card keys, phones, irrigation, elevators, and heating, ventilation, and air
conditioning systems), as well as an assessment of the Year 2000 issues
relating to third parties with which Homestead has a material relationship or
whose systems are material to the operations of Homestead's properties.
Homestead's computer hardware, operating systems, general accounting,
property management systems and principal desktop software applications are
Year 2000 compliant as certified by the various vendors. Homestead is currently
testing these information technology systems, and expects to complete the
testing phase by April 1, 1999. Based on initial testing, management does not
anticipate any Year 2000 issues that will materially impact operations or
operating results.
Homestead's property management system database software is non-compliant.
However, the property management system software vendor has stated that the
property management system does not use the date routines associated with the
underlying database software. Validation will be completed by April 1, 1999. If
the property management system does not pass the validation tests, an upgrade
will be necessary. The cost to complete the upgrade, if it is necessary to
upgrade, would approximate $250,000 and it is expected the upgrade would be
completed by end of the third quarter 1999.
Homestead's critical non-information technology systems have been
inventoried and are being assessed for Year 2000 compliance by contacting the
vendors of the systems. All non-information technology systems are expected to
be in compliance by the end of the second quarter 1999.
Homestead has surveyed its financial institutions and major vendors to
determine the extent to which Homestead is vulnerable to third parties' failure
to resolve their Year 2000 issues. Homestead will be able to more adequately
assess its third party risk when responses are received from the majority of
the entities contacted.
Management believes its planning efforts are adequate to address the Year
2000 issue and that its risks are primarily those that it cannot directly
control, including the readiness of its major vendors and financial
institutions. Homestead's most reasonably likely worst case scenario is the
failure on the part of these entities to become Year 2000 compliant which could
result in disruption in the Homestead's cash receipt and disbursement
functions, utilities and the failure of reservation systems. There can be no
guarantee, however, that the systems
39
<PAGE>
of unrelated entities upon which the Homestead's operations rely will be
corrected on a timely basis and will not have a material adverse effect on the
company.
Homestead does not have a formal contingency plan or a timetable for
implementing one. Contingency plans will be established, if they are deemed
necessary, after Homestead has adequately assessed the impact on operations
should third parties fail to properly respond to their Year 2000 issues.
Homestead's historical costs for addressing the Year 2000 issue are not
material and management does not anticipate that its future costs associated
with the Year 2000 issue will be material. Third-party costs and software
upgrades or replacements for Year 2000 issues are not expected to exceed
$500,000. Homestead does not separately track the internal costs incurred for
Year 2000 compliance issues. Such costs are principally the related payroll
costs of its information technology group. Although the cost of recently
replacing Homestead's key information technology systems was substantial, the
replacements were made to improve operational efficiency and were not
accelerated due to the Year 2000 issue. Homestead has not delayed any material
projects as a result of the Year 2000 issue. Funds expended to address the
Year 2000 issue have been made from operating cash flow.
There can be no assurances that Year 2000 remediation by Homestead or third
parties will be properly and timely completed, and failure to do so could have
a material adverse effect on Homestead, its business and its financial
condition. Homestead cannot predict the actual effects to it of the Year 2000
problem, which depends on numerous uncertainties such as: (i) whether
significant third parties properly and timely address the Year 2000 issue and
(ii) whether broad-based or systemic economic failures may occur. Failures
could include disruptions in passenger transportation or transportation
systems generally, loss of utility and/or telecommunications services, the
loss or disruption of hotel reservations made on centralized reservation
systems and errors or failures in financial transactions or payment processing
systems such as credit cards. Due to the general uncertainty inherent in the
Year 2000 problem and the company's dependence on third parties, Homestead is
unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on the company. Homestead's Year 2000
compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 issue and management believes that the
possibility of significant interruptions of normal operations should be
reduced.
Seasonality and Inflation
Based upon the operating history of Homestead properties, management
believes that occupancy and revenues may be lower than normal during the
months of December and January due to the holiday season. Because many of
Homestead's expenses do not fluctuate with occupancy, such declines in
occupancy and revenues may cause fluctuations or decreases in Homestead's
earnings during these periods.
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenue or operating results of
Homestead in 1998. There can be no assurance, however, that inflation will not
affect future operating or construction costs.
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.
Dividends
The Board intends to follow a policy of retaining earnings to finance
Homestead's growth and for general corporate purposes and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. In addition,
Homestead's line of credit arrangements restrict payment of dividends without
lender approval.
40
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Homestead's exposure to market risk for changes in interest rates relates
primarily to its lines of credit facilities and variable rate mortgage note
debt. Homestead has no involvement with derivative financial instruments.
The table below provides information about Homestead's financial
instruments that are sensitive to changes in interest rates, including
estimated fair values for Homestead's interest rate sensitive liabilities as
of December 31, 1998. As the table incorporates only those exposures that
exist as of December 31, 1998, it does not consider exposures which could
arise after that date. Moreover, because there were no firm commitments to
actually sell the obligations at fair value as of December 31, 1998, the
information presented has limited predictive value. As a result, Homestead's
ultimate realized gain or loss with respect to interest rate fluctuations will
depend on the exposures that arise during a future period and prevailing
interest rates. Dollar amounts in the following table are in thousands.
<TABLE>
<CAPTION>
Expected Maturity/Principal Repayment
Nominal December 31,
Interest --------------------------------------- Total Fair
Rate 1999 2000 2001 2002 2003 Thereafter Balance Value(3)
-------- -------- ---- ---- ---- ---- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive
Liabilities:
Lines of Credit
Facilities--variable
rates (1)............. 7.30% $357,080 $-- $-- $-- $-- $ -- $357,080 $357,080
Convertible Mortgage
Notes--fixed rate..... 9.00% $ -- $-- $-- $-- $-- $221,334 $221,334 $218,363
Mortgage Note Payable--
variable rate (2)..... 7.875% $122,028 $-- $-- $-- $-- $ -- $122,028 $122,028
Other Long-Term
Obligation--fixed
rate.................. 9.74% $ 12 $ 13 $ 14 $ 16 $ 17 $ 8,003 $ 8,075 $ 8,064
</TABLE>
- --------
(1) On March 18, 1999, Homestead obtained an extension and amendment of its
Working Capital Facilities ($157,080 outstanding in the above amounts) to
a December 31, 2000 due date. The Working Capital Facilities interest
terms were amended resulting in the borrowings under the lines, based on
the present borrowings to collateral leverage ratio, bearing interest at
3% over LIBOR.
The $200 million of borrowings outstanding under the Bridge Facility
presently bear interest at 1.25% over LIBOR. On March 25, 1999 Homestead
announced a rights offering of common stock, the proceeds of which will be
used to repay the Bridge Facility and reduce the amounts outstanding under
the Working Capital Facilities.
(2) The $122 million mortgage note scheduled to mature June 1999 was repaid
with the proceeds of a sale lease-back transaction on February 23, 1999.
The note bore interest at LIBOR plus 2.25% at December 31, 1998.
(3) The estimated fair value of obligations extending beyond a one-year
maturity as of December 31, 1998 were calculated by discounting the stream
of cash payments of each obligation using a rate which, in management's
judgement, represents an interest rate obtainable by Homestead as of
December 31, 1998 on a similar instrument.
Item 8. Financial Statements and Supplementary Data
Homestead's Balance Sheet as of December 31, 1998 and 1997, and its
Statements of Operations, Shareholders' Equity and Cash Flows for the years
then ended, together with the report of Arthur Andersen LLP, independent
auditors, are included under Item 14 of this report and are incorporated
herein by reference. Homestead's Statements of Operations, Shareholders'
Equity and Cash Flows for the year ended December 31, 1996, together with the
report of Ernst & Young LLP, independent auditors, are included under Item 14
of this report and are incorporated herein by reference. Selected quarterly
financial data is presented in Note 9 of Notes to Financial Statements.
41
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Matters
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information regarding the executive officers of Homestead, see "Item 1.
Business--Directors and Officers of Homestead." The information regarding the
directors of Homestead is incorporated herein by reference to the description
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in Homestead's definitive proxy statement for
its 1999 annual meeting of shareholders (the "1999 Proxy Statement").
Item 11. Executive Compensation
Incorporated herein by reference to the description under the captions
"Director Compensation" and "Executive Compensation" in the 1999 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the description under the caption
"Principal Shareholders" in the 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the description under the caption
"Certain Relationships and Transactions" in the 1999 Proxy Statement.
42
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to Financial Statements on page 44 of this report
All other schedules have been omitted since the required information is
presented in the financial statements and the related notes or is not
applicable.
3. Exhibits:
See Index to Exhibits, which is incorporated herein by reference.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
during the last quarter of the period covered by this report
None filed in last quarter of period covered by this report.
(c) Exhibits:
The Exhibits required by Item 601 of Regulation S-K are listed in
the Index to Exhibits, which is incorporated herein by reference.
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Public Accountants.................................. 45
Balance Sheets as of December 31, 1998 and 1997............................ 47
Statements of Operations for the Years Ended December 31, 1998, 1997 and
1996...................................................................... 48
Statements of Shareholders' Equity for the Years Ended December 31, 1998,
1997 and 1996............................................................. 49
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996...................................................................... 50
Notes to Financial Statements.............................................. 51
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Homestead Village Incorporated
We have audited the accompanying consolidated balance sheets of Homestead
Village Incorporated and subsidiaries, a Maryland corporation, as of December
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
Homestead Village Incorporated's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Homestead Village
Incorporated and subsidiaries as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
February 4, 1999
45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Homestead Village Incorporated
We have audited the accompanying statements of operations, shareholders'
equity and cash flows of Homestead Village Incorporated for the year ended
December 31, 1996. The financial statements are the responsibility of
Homestead Village Incorporated's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Homestead Village Incorporated for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
February 24, 1997
46
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
BALANCE SHEETS
(In thousands, except per share amount)
<TABLE>
<CAPTION>
December 31,
--------------------
ASSETS 1998 1997
------ ---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted cash of
$167 in 1998 and $657 in 1997)........................ $ 12,144 $ 2,974
Accounts receivable, net of allowance of $269 in 1998
and $81 in 1997....................................... 5,910 1,970
Funds held in escrow................................... 1,701 --
Other current assets................................... 1,132 732
---------- --------
Total current assets................................. 20,887 5,676
---------- --------
Property and equipment................................... 1,186,652 733,321
Less accumulated depreciation........................... (48,783) (17,824)
---------- --------
Net investment in property and equipment................. 1,137,869 715,497
---------- --------
Deposits and pursuit costs, including $3,399 of funds
with title companies for property acquisitions in 1998
and $7,697 in 1997...................................... 7,830 12,901
Deferred loan costs, net of accumulated amortization of
$34,002 in 1998 and $43,297 in 1997..................... 1,063 632
Trademark and intangibles, net of accumulated
amortization of $4,190 in 1998 and $1,768 in 1997....... 44,279 44,447
Other assets............................................. 6,463 4,796
---------- --------
Total assets......................................... $1,218,391 $783,949
========== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Lines of credit........................................ $ 357,080 $ 96,808
Mortgage note payable.................................. 122,028 --
Development costs payable, including retainage of
$16,558 in 1998 and $21,966 in 1997................... 24,330 34,079
Accounts payable and other accrued expenses............ 19,632 8,882
Due to affiliate....................................... 335 133
Accrued interest payable to affiliates................. 1,882 2,540
Accrued real estate taxes.............................. 5,681 2,900
---------- --------
Total current liabilities............................ 530,968 145,342
Convertible mortgage notes payable to affiliates......... 221,334 301,606
Other long term liabilities.............................. 8,064 8,070
---------- --------
Total liabilities.................................... 760,366 455,018
---------- --------
Commitments and contingencies (Note 12)
Shareholders' equity:
Common stock, $.01 par value, 249,823 shares
authorized, 38,255 shares issued and outstanding in
1998 and 27,805 shares issued and outstanding in 1997. 383 278
Preferred stock, 177 shares authorized, none issued.... -- --
Additional paid-in capital............................. 474,337 318,667
(Accumulated deficit) retained earnings................ (16,135) 13,098
Less shares in escrow.................................. -- (2,253)
Less deferred compensation............................. (560) (859)
---------- --------
Total shareholders' equity........................... 458,025 328,931
---------- --------
Total liabilities and shareholders' equity........... $1,218,391 $783,949
========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Room revenue..................................... $139,681 $58,397 $33,071
Other revenue.................................... 5,771 1,469 492
-------- ------- -------
Total.......................................... 145,452 59,866 33,563
-------- ------- -------
Operating expenses:
Property operating expenses...................... 63,339 25,089 16,166
Corporate operating expenses..................... 22,280 15,238 4,112
Special charges (Note 3)......................... 7,240 -- --
Depreciation and amortization.................... 34,244 12,130 4,443
-------- ------- -------
Total operating expenses....................... 127,103 52,457 24,721
-------- ------- -------
Operating income................................... 18,349 7,409 8,842
Interest income.................................... 952 552 211
Interest expense, net of capitalized interest...... (23,190) (2,190) (5,971)
-------- ------- -------
Earnings (loss) before income taxes and
extraordinary item................................ (3,889) 5,771 3,082
Provision for income taxes......................... -- -- --
-------- ------- -------
Earnings (loss) before extraordinary item.......... (3,889) 5,771 3,082
Extraordinary item--loss on early extinguishment of
debt.............................................. (25,344) -- --
-------- ------- -------
Net earnings (loss)................................ $(29,233) $ 5,771 $ 3,082
======== ======= =======
Basic weighted average shares outstanding.......... 37,639 23,578
======== =======
Diluted weighted average shares outstanding........ 37,639 43,502
======== =======
Net earnings (loss) per share:
Basic earnings (loss) before extraordinary item.. $ (0.11) $ 0.24
Extraordinary item-loss on early extinguishment
of debt......................................... (0.67) --
-------- -------
Basic earnings (loss) per share.................. $ (0.78) $ 0.24
======== =======
Diluted earnings (loss) before extraordinary
item............................................ $ (0.11) $ 0.18
Extraordinary item-loss on early extinguishment
of debt......................................... (0.67) --
-------- -------
Diluted earnings (loss) per share................ $ (0.78) $ 0.18
======== =======
Pro forma net earnings per share (Note 1):
Pro forma weighted average shares outstanding.... 11,392
=======
Pro forma earnings per common share.............. $ 0.27
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except shares data)
<TABLE>
<CAPTION>
Common Stock Retained
----------------- Additional Earnings Shares
Number Par Paid-in (Accumulated in Deferred Total
of Shares Value Capital Deficit) Escrow Compensation Equity
---------- ----- ---------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... -- $-- $ 18,726 $ 4,245 $ -- $ -- $ 22,971
Capital distributions,
net................... -- -- (1,201) -- -- -- (1,201)
Sale of common stock... 1,000 -- 1 -- -- 1
Sale of restricted
common stock to
officers, less notes
receivable from
officers.............. 185,170 2 1,350 -- -- -- 1,352
Deferred compensation
for issuance of
options and sale of
restricted stock...... -- -- 1,511 -- -- (1,511) --
Amortization of
deferred compensation. -- -- -- -- -- 115 115
Common shares issued
for mergers, net of
expenses.............. 17,748,735 177 101,468 -- (26,477) -- 75,168
Conversion of mortgage
notes and interest
payable............... -- -- 16,917 -- -- -- 16,917
Conversion of other
debt to affiliate..... -- -- 35,660 -- -- -- 35,660
Issuance of warrants... -- -- 23,100 -- -- -- 23,100
Equity associated with
assumption and
issuance of
convertible mortgage
notes................. -- -- 7,934 -- -- -- 7,934
Issuance of common
stock for exercise of
warrants.............. 1,754,225 18 17,524 -- -- -- 17,542
Recognition of deferred
tax asset............. -- -- 1,362 -- -- -- 1,362
Net earnings........... -- -- -- 3,082 -- -- 3,082
---------- ---- -------- -------- ------- ------ --------
Balances at December 31,
1996................... 19,689,130 197 224,352 7,327 (26,477) (1,396) 204,003
Repurchase of
restricted common
stock................. (12,600) -- (126) -- -- -- (126)
Amortization of
deferred compensation. -- -- -- -- -- 459 459
Deferred compensation
adjustment for
forfeitures........... -- -- (78) -- -- 78 --
Release of shares from
escrow................ -- -- -- -- 24,224 -- 24,224
Other issuance of
common stock.......... 750 -- 14 -- -- -- 14
Issuance of common
stock for exercise of
warrants.............. 8,127,626 81 81,195 -- -- -- 81,276
Financing costs for
issuance of
convertible mortgage
notes................. -- -- 13,310 -- -- -- 13,310
Net earnings........... -- -- -- 5,771 -- -- 5,771
---------- ---- -------- -------- ------- ------ --------
Balances at December 31,
1997................... 27,804,906 278 318,667 13,098 (2,253) (859) 328,931
Sale of common stock--
rights offering....... 10,426,840 104 154,137 -- -- -- 154,241
Sale of restricted
stock to officer...... 31,250 1 499 -- -- (500) --
Repurchase of
restricted common
stock................. (8,450) -- (85) -- -- -- (85)
Amortization of
deferred compensation. -- -- -- -- -- 667 667
Deferred compensation
adjustment for
forfeitures........... -- -- (132) -- -- 132 --
Release of shares from
escrow................ -- -- -- -- 2,253 -- 2,253
Financing costs for
issuance of
convertible mortgage
notes................. -- -- 1,251 -- -- -- 1,251
Net loss............... -- -- -- (29,233) -- -- (29,233)
---------- ---- -------- -------- ------- ------ --------
Balances at December 31,
1998................... 38,254,546 $383 $474,337 $(16,135) $ -- $ (560) $458,025
========== ==== ======== ======== ======= ====== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings (loss)........................... $(29,233) $ 5,771 $ 3,082
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Extraordinary item - loss on early
extinguishment of debt..................... 25,344 -- --
Depreciation and amortization............... 34,244 12,130 4,443
Deferred compensation....................... 667 459 115
Amortization of prepaid rent................ -- 250 50
Amortization of deferred loan costs......... 3,685 632 1,720
Change in assets and liabilities, excluding
the effects of mergers accounted for by the
purchase method in 1996:
Increase in accounts receivable, net of
change in allowance........................ (3,940) (1,160) (357)
Increase in funds held in escrow............ (1,701) -- --
Increase in other current assets............ (400) (246) (104)
Increase in accounts payable and other
accrued expenses........................... 10,750 5,701 1,212
Increase in accrued real estate taxes....... 2,781 835 1,010
Increase (decrease) in accrued interest on
convertible mortgage notes................. (658) 1,687 853
Increase (decrease) in due to affiliate..... 202 (83) 216
Other....................................... -- -- 21
-------- --------- ---------
Net cash provided by operating activities. 41,741 25,976 12,261
-------- --------- ---------
Investing activities:
Investment in properties, excluding
development costs payable.................... (461,831) (388,103) (113,461)
Decrease (increase) in deposits and pursuit
costs........................................ 5,071 (7,366) (791)
Capital distribution, net..................... -- -- (1,201)
Increase in other assets...................... (2,532) (3,252) --
-------- --------- ---------
Net cash used in investing activities..... (459,292) (398,721) (115,453)
-------- --------- ---------
Financing activities:
Proceeds from lines of credit................. 390,272 96,808 --
Payments on lines of credit................... (130,000) -- --
Deferred loan costs for lines of credit....... (3,370) (1,404) --
Proceeds from convertible mortgage notes
payable...................................... 17,013 191,750 25,242
Payment of convertible mortgage notes
payable...................................... (98,028) -- --
Payment to extinguish debt.................... (25,344) -- --
Proceeds from mortgage note payable........... 122,028 -- --
Proceeds from sale of shares, net of
expenses..................................... 154,241 -- 1,353
Repurchase of restricted common stock......... (85) (126) --
Exercise of warrants for common stock......... -- 81,276 17,524
Payments on other long-term liabilities....... (6) -- --
Proceeds from note payable to affiliate....... -- -- 6,118
Payment of notes payable to affiliate......... -- -- (6,492)
Proceeds from merger.......................... -- -- 16,564
Proceeds from other debt to affiliate......... -- -- 48,402
-------- --------- ---------
Net cash provided by financing activities. 426,721 368,304 108,711
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 9,170 (4,441) 5,519
Cash and cash equivalents, beginning of year... 2,974 7,415 1,896
-------- --------- ---------
Cash and cash equivalents, end of year......... $ 12,144 $ 2,974 $ 7,415
======== ========= =========
Noncash investing and financing transactions:
Loan costs resulting from issuance of
warrants and convertible mortgage debt....... $ 1,251 $ 13,310 $ 30,734
======== ========= =========
Increase in property and equipment, and
increase (decrease) in development cost
payable...................................... $ (9,750) $ 22,752 $ 4,347
======== ========= =========
Increase in property and equipment, and other
long term liabilities........................ $ -- $ 8,070 $ --
======== ========= =========
Increase in trademark and intangibles arising
from release of shares in escrow............. $ 2,253 $ 24,224 $ --
======== ========= =========
Increase in property and equipment from
capitalization of loan costs................. $ 1,249 $ 51,703 $ 1,850
======== ========= =========
Increase in net assets acquired by issuance
of common stock in merger.................... $ -- $ -- $ 58,920
======== ========= =========
Conversion of other debt to affiliate to
equity....................................... $ -- $ -- $ 35,660
======== ========= =========
Conversion of other debt to affiliate to
convertible mortgage notes payable........... $ -- $ -- $ 92,789
======== ========= =========
Conversion of convertible mortgage debt to
equity....................................... $ -- $ -- $ 16,917
======== ========= =========
Deferred tax assets arising through equity.... $ -- $ -- $ 1,362
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
Note 1--Description of Business and Summary of Significant Accounting Policies
Business and Organization
Homestead Village Incorporated, a Maryland corporation formed January 26,
1996 ("Homestead"), operates moderately priced, extended stay lodging
properties under the Homestead Village trademark in selected target markets in
the United States. Homestead's extended stay lodging rooms are designed to
appeal primarily to the corporate business traveler. Homestead and its
predecessor entities, which have purpose-built all Homestead Village
properties, have targeted infill locations proximate to major business centers
and convenient to services desired by its customers. As of December 31, 1998,
Homestead had developed 120 properties in 37 cities representing a total of
16,180 rooms and had an additional 16 properties under construction totaling
2,040 rooms within eight of these cities as well as one additional city.
Security Capital Group Incorporated ("Security Capital") owns 69.8% of
Homestead's outstanding common stock as of December 31, 1998. Homestead has
received significant financing from Security Capital through Security
Capital's exercise of Homestead warrants from the date of the Mergers
(described below) through October 1997 (the expiration date of the warrants),
Security Capital's participation in the January 1998 common stock rights
offering, and the use of a subscription receivable from Security Capital as
collateral for a $200 million line of credit facility. Additionally, two
investees of Security Capital have provided significant financing to Homestead
through funding of convertible mortgage notes payable since the date of the
Mergers through second quarter 1998. Security Capital also provides certain
services to Homestead under an agreement for administrative services as
described in Note 7.
1996 Mergers
On October 17, 1996 Homestead acquired, through a series of merger
transactions (the "Mergers"), the Homestead Village trademark and operating
systems necessary to develop and operate the properties from Security Capital
and extended stay lodging assets operating or to be operated under the
Homestead Village trademark from two investees of Security Capital, Security
Capital Pacific Trust ("PTR") and Security Capital Atlantic Incorporated
("ATLANTIC"). The acquisition of the trademark, operating system and
properties was through the merger of various wholly-owned subsidiaries of
Security Capital, PTR and ATLANTIC in exchange for common stock of Homestead.
The acquisition of the Security Capital subsidiaries was accounted for as a
purchase and, accordingly, the results of the Security Capital subsidiaries
have been included in Homestead's results only for periods subsequent to
October 17, 1996.
The merger of the net assets of PTR's Homestead Village Group subsidiaries
(the "PTR Subsidiaries") consisting of 54 properties (or the rights to acquire
such properties), was accounted for as a combination of entities under common
control in a manner similar to a "pooling of interests." Accordingly, the
historical results of operations for the PTR Subsidiaries were combined with
Homestead for all of 1996 and prior years, with historical financial position
and results of operations prior to 1996 consisting solely of that of the PTR
Subsidiaries. Homestead's activities from its formation in January 1996 until
the closing date of the Mergers were not significant.
The acquisition of the ATLANTIC subsidiaries, consisting of 26 properties
(or the rights to acquire such properties), was accounted for as a purchase
and, accordingly, the results of the ATLANTIC subsidiaries have been included
in Homestead's results only for periods subsequent to October 17, 1996.
51
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
PTR and ATLANTIC agreed to provide convertible mortgage funding commitments
(see Note 4) and Security Capital provided interim financing to Homestead
prior to the Mergers and the lease of office space for one year subsequent to
the Mergers, all in exchange for warrants to purchase Homestead common stock
(see Note 5).
Unaudited pro forma results of operations of Homestead, assuming the
purchase acquisitions of the ATLANTIC and Security Capital subsidiaries had
occurred as of the beginning of 1996, would have resulted in total revenues
for 1996 of $33,987,000 and a net loss of $472,000. Such unaudited pro forma
results give effect to certain adjustments, including development overhead
costs, additional costs of operating as a public company (such as additional
salaries and benefits, legal, accounting and other professional fees),
trademark amortization, interest expense and amortization of deferred
financing costs.
The unaudited pro forma results of operations are not necessarily
indicative of what the actual results of operations would have been had the
1996 acquisitions occurred on January 1, 1996, nor do they purport to present
the results of operations of future periods.
Principles of Financial Presentation
The accompanying financial statements include the accounts of Homestead and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles require 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 periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Homestead considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
New Accounting Rules
In April 1998 Statement of Position 98-5 "Reporting on the Costs of Start-
Up Activities" ("SOP 98-5") was issued which requires that costs associated
with organizational, pre-opening, and start-up activities be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. Through the end of 1998, Homestead capitalized costs associated with
pre-opening and start-up activities and amortized such costs over a two-year
period. Homestead has adopted SOP 98-5 beginning with its 1999 fiscal year and
will write off unamortized organizational, pre-opening and startup costs
approximating $14 million as a cumulative effect of adoption of an accounting
standard in first quarter 1999. No financial statement amounts will be
restated on adoption of the new standard.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" was issued, establishing standards for the
reporting of comprehensive income and its components. The new rules, which are
effective for fiscal years beginning after December 31, 1997, do not change
the reporting of items included within net earnings such as income from
continuing operations, extraordinary items and cumulative effects of changes
in accounting principle. Other comprehensive income items are required to be
reported in the statement of shareholders' equity and include foreign currency
items, minimum pension liability adjustments,
52
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
and unrealized gains and losses on certain investments in debt and equity
securities. Homestead had no other comprehensive income items to be reported
in the accompanying statements of shareholders' equity.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued,
establishing standards for the accounting and reporting for derivative
instruments. The new rules, which become effective January 1, 2000, are not
expected to have a material impact on Homestead's financial position or
results of operations. Homestead has not entered into any derivative financial
instrument transactions.
Property and Equipment and Depreciation
Property and equipment are stated at cost. Incremental costs directly
related to the acquisition, development or improvement of real estate,
including interest and salaries and related costs for site acquisition and
supervision of construction, are capitalized. Maintenance and repairs are
charged to operations as incurred; major renewals and improvements are
capitalized. Costs incurred in connection with the pursuit of successful site
acquisitions are capitalized, while costs associated with unsuccessful site
acquisitions are expensed at the time the pursuit is abandoned.
Depreciation is computed by the straight-line method principally over the
following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................... 20-40 years
Furniture, fixtures and equipment............................. 3-10 years
</TABLE>
Pre-opening and start-up costs incurred related to the opening of new
properties through December 31, 1998 were capitalized and have been amortized
by the straight-line method over two years.
Long-Lived Assets and Long-Lived Assets To Be Disposed Of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of
("SFAS 121"), requires that long-lived assets to be held and used by an entity
be reviewed for impairment whenever the carrying amount of an asset may not be
recoverable. SFAS 121 also requires that certain long-lived assets to be
disposed of be reported at the lower of carrying amount or fair value less
cost to sell. Homestead reviews its long-lived assets for impairment on a
quarterly basis. Based on the provisions of SFAS 121, Homestead determined
that no impairment provision of the carrying cost of its properties or other
long-lived assets is necessary at December 31, 1998.
Trademarks and Intangibles
In the Mergers, Homestead acquired the Homestead Village trademark and
certain operating systems for the development and operation of Homestead
Village properties from Security Capital. These intangible assets were valued
at $48.5 million. Homestead's issuance of shares for the acquisition of the
Security Capital subsidiaries in the Mergers were issued in part directly to
Security Capital and in part to an escrow agent in proportion to the actual
funding commitments fulfilled by PTR and ATLANTIC. The amount initially
recorded as an asset by Homestead of $22 million represented the pro rata
portion of the actual funding provided by PTR and ATLANTIC as of the date of
the Mergers to the total expected funding to be provided under their funding
commitment agreements. As shares were released from escrow in proportion to
additional fundings received, additional intangible assets have been recorded.
All remaining escrowed shares were released in 1998. Homestead is amortizing
the intangible assets on the straight-line basis over a period of 20 years.
53
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred Costs
Homestead has incurred certain costs in obtaining its lines of credit. The
deferred financing costs related to the lines of credit have been deferred and
are being amortized over the terms of the respective lines of credit. Deferred
financing costs recorded in conjunction with the issuance of the warrants in
the Mergers and fundings under the convertible mortgage funding commitments
have been fully amortized.
Interest
The following summarizes Homestead's interest expense (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Lines of credit facilities................... $16,929 $ 2,137 $ --
Convertible mortgage notes................... 26,293 69,791 8,747
Mortgage note payable........................ 4,394 -- --
Convertible debentures....................... 157 -- --
Due to affiliate............................. -- -- 1,589
Other........................................ 732 9 --
------- -------- -------
Total interest cost........................ 48,505 71,937 10,336
Capitalized interest......................... (25,315) (69,747) (4,365)
------- -------- -------
Net interest expense....................... $23,190 $ 2,190 $ 5,971
======= ======== =======
Amortization of deferred financing costs
included in interest cost................... $ 2,994 $ 50,923 $ 261
======= ======== =======
</TABLE>
During 1998, 1997 and 1996, the total interest paid in cash was
$41,873,000, $18,134,000 and $5,721,000, respectively.
Income Taxes
Income taxes for Homestead are determined using the liability method in
which deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities used for financial reporting
purposes and income tax reporting purposes calculated using the income tax
rates, under existing legislation, expected to be in effect at the date such
temporary differences are expected to reverse.
Revenue Recognition
Room revenue and other income are recognized when earned, utilizing the
accrual method of accounting. A provision for possible bad debts is made when
collection of receivables is considered doubtful.
Per Share Data
Basic earnings per share is calculated by dividing net earnings available
to common shareholders by weighted average common shares outstanding. Diluted
earnings per share is 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 debt. Adjusted weighted average
shares outstanding includes the dilutive effect of options and warrants using
the treasury stock method and the dilutive effect of convertible debt.
54
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerators and denominators used to calculate basic
and diluted earnings (loss) per share follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net earnings (loss) attributable to common shares
before extraordinary item............................. $(3,889) $ 5,771
Net convertible mortgage interest...................... -- 1,922
------- -------
Adjusted earnings (loss) before extraordinary item..... $(3,889) $ 7,693
======= =======
Weighted average shares outstanding--basic............. 37,639 23,578
Incremental options and warrants....................... -- 2,000
Conversion of convertible mortgage notes............... -- 17,924
------- -------
Adjusted weighted average shares outstanding--diluted.. 37,639 43,502
======= =======
Net earnings (loss) per share before extraordinary
item:
Basic................................................ $ (0.11) $ 0.24
======= =======
Diluted.............................................. $ (0.11) $ 0.18
======= =======
</TABLE>
For the year ended December 31, 1998 convertible debt is not assumed to be
converted and exercise of options is not assumed as the effects are anti-
dilutive in a period of loss.
Historical earnings per share data is not presented for the year ended
December 31, 1996. Prior to the Mergers on October 17, 1996 the operating
assets of Homestead were owned by subsidiaries of PTR and ATLANTIC and were
managed under contract by subsidiaries of Security Capital. The outstanding
shares and equity interests of these entities differed substantially from the
common shares, warrants and convertible mortgages outstanding after the
mergers. Therefore, management does not believe historical earnings per share
is meaningful. Pro forma earnings per share for 1996, restated for the
adoption of SFAS 128, has been calculated by dividing net earnings by pro
forma weighted average shares outstanding assuming shares issued to PTR were
outstanding since the beginning of the year and shares issued to Security
Capital and ATLANTIC were outstanding since the merger date.
Note 2--Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
Completed properties: ---------- --------
<S> <C> <C>
Land.............................................. $ 191,694 $100,118
Buildings and improvements........................ 645,235 329,045
Furniture, fixtures and equipment................. 108,446 49,773
---------- --------
945,375 478,936
Properties under construction....................... 110,891 213,283
Properties in planning and owned.................... 126,054 32,984
Land held for future development.................... -- 1,463
Land held for sale.................................. 4,332 6,655
---------- --------
Total............................................. $1,186,652 $733,321
========== ========
</TABLE>
55
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3--Special Charges
In fourth quarter 1998, in light of the difficult environment in capital
markets for real estate operating companies and lodging companies and the
resulting limited availability of new financing for additional commitments for
developments, Homestead reorganized its internal development department and
terminated approximately 40 full-time persons. In conjunction with the
severance of development personnel and changed expectations to pursue
development of certain sites under contract for acquisition, Homestead
recorded a special charge primarily for severance of personnel and abandonment
of pursuits totaling $7.24 million. As a result of these expenses, Homestead
sought, and received, an amendment of its bank lines of credit covenants for
fourth quarter 1998.
Through December 31, 1998 approximately $1.6 million of severance costs
have been paid and charged against the liability and $5.4 million of abandoned
pursuit costs have been expensed. The remaining liability is for payment of
remaining severance obligations. No other adjustments have been made to the
accrued liability.
Note 4--Debt
Lines of Credit
At December 31, 1998 Homestead had a bank revolving line of credit facility
which provided for total borrowing capacity of $150 million, subject to
collateral requirements. Borrowings outstanding at December 31, 1998 totaled
$128.1 million secured by 65 properties located in suburban metropolitan areas
with historical cost of $475.2 million. Borrowings bear interest at the
Eurodollar rate (5.63% at December 31, 1998) plus 1.5% to 2.5% per annum,
depending upon the percentage leverage of borrowings outstanding to the amount
of qualifying collateral. Alternatively, borrowings bear interest at a base
rate defined as the higher of prime rate (7.75% at December 31, 1998) 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. Average unfunded balances bear a
commitment fee of 0.375% per annum.
At December 31, 1998 Homestead also had a separate $50 million bank
revolving line of credit facility of which $29 million was outstanding based
upon collateral limitations. The line is secured by 5 land sites with
historical cost of $82.0 intended for development of Homestead Villages in
urban central business districts of major cities. Borrowings 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% per annum.
The two lines above (together the "Working Capital Facilities") had due
dates of April 23, 1999, but subsequent to year end were extended, see Note
13.
On June 15, 1998 Homestead established an additional $200 million bank line
of credit facility (the "Bridge Facility") which bears interest at the
Eurodollar rate plus 1.25% or at a base rate of prime plus 0.25%. The average
unfunded balance bears a commitment fee of 0.25% per annum. Borrowings
outstanding at December 31, 1998 totaled $200 million. Homestead obtained a
subscription agreement from Security Capital for $200 million of Homestead
subordinated debentures to secure this obligation. The line, as amended, is
due April 23, 1999. If the subscription is called by Homestead or Homestead
receives proceeds from any offering of securities, the proceeds must be used
to first repay the Bridge Facility and Working Capital Facilities and second
to fund projects under development which secure the Working Capital
Facilities. The debentures would bear interest at a rate of 0.25% over the
rate Homestead incurs under the $50 million Working Capital Facility.
Homestead may repurchase the debentures with the proceeds of an equity
offering within 90 days of issuance of the debentures. On the 90th day
following the issuance of the debentures the debentures convert to Homestead
common stock, on a per share basis, at the lowest of (i) $13.931, (ii) the
fair market value, based upon a trailing 20-day average, on the date any
debentures are issued, and (iii) the fair market value, based upon a trailing
20-day average, on the date the debentures are automatically converted into
shares of common stock.
56
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
the 90th day after issuance. The subscription agreement expires the earlier of
June 30, 1999 or two weeks after termination of the $200 million credit
agreement. The subscription obligation will be reduced or terminated to the
extent Homestead issues equity securities to any third party, or to Security
Capital pursuant to a separate offering and the proceeds are used to repay the
$200 million Bridge Facility and any remaining proceeds are used to fund
projects under development which secure the Working Capital Facilities. In
conjunction with Security Capital's entering into the subscription agreement,
Homestead paid an arrangement fee to Security Capital of $600,000.
Homestead's weighted average stated interest rate was 7.30% and 7.87% on
borrowings outstanding as of December 31, 1998 and 1997, respectively.
The Working Capital Facilities and the Bridge Facility, as amended
effective December 31, 1998 (see Note 3--Special Charges), require maintenance
of certain financial covenants, specifically, aggregate indebtedness of no
more than 60% 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 cash debt service, as defined, of no less than 0.70 to 1 for the
fourth quarter of 1998, and, excluding the $200 million facility, no less than
1.0 to 1.0, and not allow stockholders equity to be less than $325 million.
Additionally, Homestead will not enter into any commitment for purchases of
land or construction of projects if such obligations exceed the available
borrowing capacity under all of the lines and internally generated excess
funds. The covenants also restrict payment of dividends without lender
approval. Homestead was in compliance with all such covenants, as amended, as
of December 31, 1998.
Convertible Mortgage Notes Payable
At December 31, 1998 Homestead owed convertible mortgage notes to Archstone
Communities Trust ("Archstone"), formerly PTR, of $221.3 million. The notes
are collateralized by Homestead properties (54 Homestead properties at $366.1
million of historical cost). The notes 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 notes are convertible, at the option of the holder,
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. In the
Mergers, Homestead obtained funding commitments from PTR and ATLANTIC which
provided for aggregate fundings of $198.8 million and $111.1 million,
respectively. Homestead called for fundings under the agreements to pay
development costs of the Homestead Village properties acquired from PTR and
ATLANTIC in the Mergers. The final amounts under both funding commitments were
received by Homestead in second quarter 1998. Face amounts of the final total
obligations were $221.3 million due to PTR and $98.0 million due to ATLANTIC.
Deferred financing costs and the discount, in the case of PTR, and the
premium, in the case of ATLANTIC, on the respective fundings have been fully
amortized. The convertible mortgage notes payable to ATLANTIC were
extinguished in third quarter 1998 as described below.
Mortgage Note
On July 6, 1998, Homestead entered into a mortgage loan purchase agreement
with ATLANTIC and Merrill Lynch Mortgage Capital Inc. ("MLMC") whereby the $98
million of Homestead convertible mortgage notes held by ATLANTIC were modified
to, among other things, eliminate their convertibility feature in exchange for
a payment of $21.4 million from Homestead to ATLANTIC. The amount paid to
ATLANTIC was based on trailing market prices of Homestead common stock at the
time the agreement was entered into, which exceeded the conversion price of
the convertible mortgage notes at that date. Homestead funded the payment with
the
57
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
proceeds received from the sale of $24 million of 7.5% convertible
subordinated debentures. Also pursuant to the mortgage loan purchase agreement
ATLANTIC sold the amended notes to MLMC for $98 million. On August 7, 1998,
Homestead converted the $98 million of mortgage notes and the $24 million of
7.5% convertible subordinated debentures into a $122 million mortgage of a
newly formed special purpose subsidiary of Homestead. The note is
collateralized by 26 Homestead properties (totaling $227.4 million of
historical cost at December 31, 1998) which were formerly collateral for the
ATLANTIC mortgage notes. The $122 million mortgage note matures June 30, 1999
and provides for interest only monthly payments of LIBOR plus 1.70% through
September 30, 1998, LIBOR plus 2.0% through November 30, 1998, and LIBOR plus
2.25% thereafter.
The transaction resulted in an early extinguishment of debt measured as the
difference between the $98 million carrying amount of the original mortgage
notes to ATLANTIC and the amount paid to extinguish the debt, including
transaction costs. Such loss on extinguishment of debt and transaction costs
amounted to $25.3 million and was recorded as an extraordinary item in the
third quarter 1998. The elimination of the conversion option attached to the
mortgage notes reduced Homestead's contingently issuable shares of common
stock by approximately 8.5 million shares.
See Note 13 regarding a sale of properties securing the mortgage note
subsequent to year end and repayment the $122 million note and all accrued
interest.
Note 5--Shareholders' Equity
Shelf Registration
In November 1998, Homestead filed a shelf registration statement with the
Securities and Exchange Commission for up to $356,402,600 of any combination
of preferred stock, debt securities and securities warrants, and up to a total
of $500,000,000 including common stock from Homestead's previous shelf
registration. The securities issuable under the registration, which was
declared effective November 23, 1998, may be offered from time to time, at
amounts, at prices and on terms to be set forth at the time of the offerings.
Common Stock Rights Offering
On January 15, 1998, Homestead completed a rights offering consisting of
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 November 1997
$300,000,000 common stock shelf registration. After costs of the offering,
which include 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 purchased
8,429,225 shares in the rights offering (80.8% of the offered shares) at the
same price paid by the public.
Stock Based Compensation Plans
In 1996, Homestead established two stock compensation plans, the 1996 Long-
Term Incentive Plan (the "Incentive Plan") and the 1996 Outside Directors
Plans (the "Outside Directors Plan"). Homestead elected to account for these
plans under Accounting Principle Board Opinion No. 25 Accounting for Stock
Issued to Employees, under which compensation costs are recognized as equal to
the difference between the fair value of the Homestead stock at the date of
grant or sale and the exercise or sale price. Total stock-based compensation
expense related to these plans for 1998, 1997 and 1996 is $346,000, $158,000
and $115,000, respectively, which is included in corporate operating expenses
in the accompanying statements of operations.
Had compensation cost for the grants of stock options been determined
consistent with Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), Homestead's net
earnings of $3,082,000 for the year ended December 31, 1996 would have been
reduced to
58
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
$3,014,000 and pro forma earnings per share to $0.26. The pro forma effect of
SFAS 123 for 1998 and 1997 is summarized as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Net earnings (loss) before extraordinary item:
As reported............................................ $(3,889) $5,771
======= ======
Pro forma.............................................. $(5,445) $5,392
======= ======
Basic earnings (loss) per share:
As reported............................................ $ (0.11) $ 0.24
======= ======
Pro forma.............................................. $ (0.14) $ 0.23
======= ======
Diluted earnings (loss) per share:
As reported............................................ $ (0.11) $ 0.18
======= ======
Pro forma.............................................. $ (0.14) $ 0.17
======= ======
</TABLE>
Homestead may grant up to 4,000,000 shares of stock to its full time
employees under the Incentive Plan and up to 100,000 shares of stock under the
Outside Directors Plan. At December 31, 1998, 107,307 and 84,000 shares,
respectively, were available for future grant under the Incentive Plan and
Outside Directors Plan. The Incentive Plan options granted vest over four to
five years and the Outside Directors Plan options vest upon grant. A summary
of the status of Homestead's two fixed stock compensation plans as of December
31, 1998, 1997 and 1996 and changes during those years is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Incentive Plan & Outside Directors Plan Shares Price Shares Price Shares Price
--------------------------------------- --------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year.................. 2,721,561 $15.39 584,000 $11.18 -- $ --
Granted................. 1,791,482 $ 6.88 2,180,061 $16.42 584,000 $11.18
Exercised............... -- $ -- -- $ -- -- $ --
Forfeited............... (811,670) $15.13 (42,500) $10.71 -- $ --
--------- --------- -------
Outstanding at end of
year..................... 3,701,373 $11.33 2,721,561 $15.39 584,000 $11.18
========= ========= =======
Exercisable at end of
year..................... 54,250 $12.19 10,000 $14.35 4,000 $10.00
========= ========= =======
</TABLE>
The weighted average fair value of options granted in the years ended
December 31, 1998, 1997 and 1996 were $3.42, $6.12, and $6.58, respectively.
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Option Remaining Average Option Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$4.28................... 1,274,837 10.0 $ 4.28 --
$ 5.16 to $10.97........ 382,500 8.1 $ 9.86 34,250 $10.00
$13.03 to $16.00........ 390,452 9.0 $14.17 14,000 $15.37
$16.19 to $18.19........ 1,653,584 8.8 $16.44 6,000 $17.25
--------- ------
Totals.................. 3,701,373 9.1 $11.33 54,250 $12.19
========= ======
</TABLE>
59
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant on the date of grant was estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998, 1997 and 1996, respectively;
risk-free interest rates of 4.66%, 5.76% and 6.23%; no expected dividend
yields; expected lives of 4.5, 5.0 and 5.5 years; expected volatility of 53%,
30% and 37%.
Warrants
Homestead issued a total of 10,000,000 warrants on the date of the Mergers
which entitled the holders to buy one share of Homestead common stock at the
exercise price of $10 per share. Warrants were issued to PTR and ATLANTIC in
exchange for entering into the funding commitment agreements (See Note 4).
Security Capital received 817,694 Homestead warrants in exchange for providing
financing to Homestead during the time between the execution of the merger
agreement and the closing date and for the use of office facilities for one
year.
The fair value of the warrants exceeded the exercise price at the date of
issuance. The difference between the fair value of the Homestead stock at the
date of issuance and the warrant exercise price of $10 for the warrants issued
to PTR and ATLANTIC has been recorded as interest cost. The value attributable
to the interim financing provided by Security Capital to Homestead of
$1,589,000 has been charged to interest expense in 1996. The value of the use
of office facilities for one year was determined by management to be $300,000
and was charged to corporate operating expense over a period of one year ended
October 1997.
After the initial issuance of warrants to PTR, ATLANTIC and Security
Capital, both PTR and ATLANTIC distributed the warrants to their shareholders
which resulted in Security Capital holding a total of 4,730,022 warrants after
the distribution. Homestead had the right under the investor agreement entered
into with Security Capital at the merger closing to request Security Capital
to exercise its warrants in minimum increments of $5,000,000. Security Capital
also acquired additional warrants in open market purchases. Upon expiration of
the warrants on October 29, 1997 Security Capital had exercised 8,121,628
warrants resulting in total proceeds of $81,216,000. Third party holders
exercised 1,760,273 warrants resulting in total proceeds of $17,603,000
through October 29, 1997. A total of 118,099 warrants expired unexercised.
Rights Agreement
On May 16, 1996, the Homestead Board of Directors declared and paid a
dividend of one purchase right as defined per the Rights Agreement for each
share of Homestead common stock outstanding to the holders of Homestead common
stock of record on that date. The shares of Homestead common stock issued
after May 16, 1996 and before the expiration of the purchase rights (May 16,
2006), will also be entitled to one purchase right for each share issued. Each
purchase right entitles the holder to purchase one-hundredth of a
participating preferred share of Homestead at $50, subject to adjustment as
defined in the agreement. The Board of Directors of Homestead through
Homestead's Restated Charter is authorized to issue one or more series and to
determine the number of preferred shares of each series and the rights of each
series. The purchase rights will be exercisable only after a person or group
of affiliated persons (other than Security Capital or Archstone) acquires 20%
or more of the outstanding shares of common stock or offers to acquire 25% or
more.
Note 6--Income Taxes
At December 31, 1998, Homestead had, for federal income tax reporting
purposes, net operating loss carryforwards of approximately $86,000,000, which
expire $4,200,000 in the year 2011, $24,800,000 in the year 2017 and
$57,000,000 in the year 2018.
60
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Significant components of Homestead's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred tax assets:
Deferred financing costs............................. $ 17,322 $12,708
Mortgages and other liabilities...................... 6,274 2,886
Net operating loss................................... 29,144 6,819
-------- -------
$ 52,740 $22,413
Deferred tax liabilities:
Depreciable assets................................... (23,078) (6,877)
-------- -------
Valuation allowance.................................... (29,662) (15,536)
-------- -------
Net noncurrent deferred tax asset...................... $ -- $ --
======== =======
</TABLE>
Deferred tax assets related 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
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 the uncertainty of
the ultimate realization of those deferred tax assets in future years.
Additional paid-in capital has been credited for deferred tax assets arising
from equity transactions.
Prior to the Mergers on October 17, 1996, the PTR Subsidiaries were
qualified subsidiaries of PTR, a real estate investment trust, and
accordingly, were not subject to income tax. Additionally, prior the Mergers,
Homestead was a wholly-owned subsidiary of Security Capital. For income tax
reporting purposes, the net income or loss of the PTR Subsidiaries and
Homestead for the period January 1, 1996 through October 16, 1996 was included
in consolidated tax returns for PTR and Security Capital, respectively.
The difference between the provision for income taxes and the amounts
computed by applying the statutory federal income tax rate to net income
(loss) before income taxes and extraordinary item are (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Statutory rate applied to income (loss) before
income taxes.................................. $(1,322) $1,962 $1,048
Effect of PTR income included in other tax
returns....................................... -- -- (1,441)
Effect of Homestead losses included in other
tax returns................................... -- -- 36
Effect of permanent differences................ 1,065 616 107
------- ------ ------
(257) 2,578 (250)
Provision of valuation allowance............... 257 (2,578) 250
------- ------ ------
Income tax expense............................. $ -- $ -- $ --
======= ====== ======
</TABLE>
Note 7--Related Party Transactions
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
61
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. 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 1998,
1997 and 1996 were $4,213,000, $2,320,000 and $375,000, respectively. The
Administrative Services Agreement, which expires December 31, 1999, 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 resources, in areas such as research, information
systems, insurance, cash management and legal support provided at substantial
economies of scale.
REIT and Property Management Agreements
Prior to the Mergers in 1996 the PTR Subsidiaries acquired, developed and
operated the Homestead Village properties through management contracts with
Security Capital Pacific Incorporated (the "PTR REIT Manager") and SCG Realty
Services Incorporated (the "PTR Property Manager"), both subsidiaries of
Security Capital.
The PTR REIT Manager provided both strategic and day-to-day management
services to the PTR subsidiaries including research, asset management, capital
market services and legal and accounting services. In exchange, the REIT
management contract required the PTR subsidiaries to pay a stipulated REIT
management fee of 16% of cash flow as defined. Such fees included in corporate
operating expenses were $1,412,000 for the year ended December 31, 1996.
Additionally, the PTR Subsidiaries reimbursed the PTR REIT Manager for travel
and out-of-pocket costs incurred.
The PTR Property Manager provided services to the PTR Subsidiaries which
were necessary for the operation of its Homestead Village extended stay
lodging business. The property management agreement provided for fees of
between 5% and 7% of gross revenues. Such property management fees included in
property operating expenses amounted to $1,737,000 for the year ended December
31, 1996.
Interim Financing Agreement
During the period from May 21, 1996 (the date of the Mergers agreement) to
October 17, 1996 (the closing date of the Mergers), Security Capital agreed to
lend Homestead up to $10 million for working capital and other purposes. The
note payable to Security Capital was an unsecured demand note with an interest
rate at prime plus 0.25% per annum. Homestead borrowed approximately $6.2
million under this arrangement, including interest advanced under the note,
which was repaid at the closing date of the Mergers.
Note 8--Fair Value of Financial Instruments
The following disclosures of estimated fair value of financial instruments
were determined by Homestead based on available market information and
valuation methodologies believed to be appropriate for these purposes.
Considerable judgement and a high degree of subjectivity are involved in
developing these estimates and accordingly they are not necessarily indicative
of amounts that Homestead could realize upon disposition.
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying values of
Homestead's financial instruments, which include cash and cash equivalents,
accounts receivable, other assets, development costs
62
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
payable, accounts payable and accrued expenses approximate fair value as of
December 31, 1998 and 1997 because of the short maturity of these instruments.
Similarly, the carrying value of lines of credit balances and the carrying
value of the mortgage note payable approximate fair value at the balance sheet
dates due to their short-term maturities and since the interest rates
fluctuate based on published market rates.
At December 31, 1998, the estimated fair value and the actual carrying
value of the Homestead convertible mortgage notes payables were $218.4 million
and $221.3 million, respectively. Also at December 31, 1998 the estimated fair
value and the actual carrying value of the other long-term liabilities were
$8,064,000 and $8,075,000, respectively.
Note 9--Savings Plans
Homestead has a savings plan which qualifies under Section 401(k) of the
Internal Revenue Code. The plan allows eligible employees to contribute up to
20% of their pretax salary, subject to the Internal Revenue Services annual
deferral limit ($10,000 in 1998). Beginning in 1997, Homestead matched half of
the first 6% of the employee's contribution. The matching contribution is
invested in shares of Homestead common stock and vests over an employee's
initial five-year period of service. In 1998 and 1997 Homestead's matching
contribution totaled $397,000 and $223,000, respectively.
The Board also established and approved the adoption of the Nonqualified
Savings Plan ("NSP") to provide benefits for a select group of management or
highly compensated employees, effective January 1, 1998. The purpose of the
NSP is to allow the employee the opportunity to defer the receipt and income
taxation of a portion of compensation in excess of the amount permitted under
the 401(k) Plan. Under the NSP, these employees may defer up to 35% of their
annual salary and 100% of their annual target bonus. Under the NSP and in
coordination with the 401(k) Plan, Homestead will match half of the first 6%
of the employee's annual compensation since highly compensated employees were
limited to a 3% contribution in the 401(k) Plan in 1998. The matching
contribution vests in the same manner as the 401(k) Plan.
Note 10--Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data (in thousands, except per share amounts)
for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
March 31 June 30 September 30 December 31 Total
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1998:
Revenues.............. $27,788 $34,067 $ 40,203 $ 43,394 $145,452
======= ======= ======== ======== ========
Earnings (loss) before
extraordinary item... $ 1,688 $ 3,375 $ 1,854 $(10,806) $ (3,889)
Extraordinary item.... $ -- $ -- $(25,344) $ -- $(25,344)
------- ------- -------- -------- --------
Net earnings (loss)... $ 1,688 $ 3,375 $(23,490) $(10,806) $(29,233)
======= ======= ======== ======== ========
Basic earnings (loss)
per share............ $ 0.05 $ 0.09 $ (0.61) $ (0.28) $ (0.78)
======= ======= ======== ======== ========
Diluted earnings
(loss) per share..... $ 0.05 $ 0.09 $ (0.61) $ (0.28) $ (0.78)
======= ======= ======== ======== ========
<CAPTION>
Three Months Ended
-----------------------------------------
March 31 June 30 September 30 December 31 Total
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1997:
Revenues.............. $11,087 $13,956 $ 16,206 $ 18,617 $ 59,866
======= ======= ======== ======== ========
Net earnings.......... $ 1,523 $ 2,095 $ 1,865 $ 288 $ 5,771
======= ======= ======== ======== ========
Basic earnings per
share................ $ 0.07 $ 0.10 $ 0.07 $ 0.01 $ 0.24
======= ======= ======== ======== ========
Diluted earnings per
share................ $ 0.04 $ 0.05 $ 0.04 $ 0.04 $ 0.18
======= ======= ======== ======== ========
</TABLE>
63
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 11--Segment Reporting
During 1998, Homestead adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which established standards for the way
that public business enterprises report information about operating segments
in audited financial statements, as well as related disclosures about product
and services, geographic areas and major customers.
Homestead defines each of its properties as individual operating segments
that have similar economic characteristics and, therefore, have been
aggregated into one reportable segment, that being the development and
operation of extended stay properties in its target markets in the United
States. Homestead's chief operating decision maker relies on the net property
operating income generated from its properties for purposes of making
decisions about allocating resources and assessing segment performance.
Reportable segment information is as follows: (i) revenues derived from
external customers, (ii) a reconciliation of net property operating income
derived from external customers to Homestead's earnings (loss) before
extraordinary items, and (iii) a reconciliation of assets to Homestead's total
assets, for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
-------- ---------- --------
<S> <C> <C> <C>
Extended stay segment revenues........... $145,452 $ 59,866 $ 33,563
======== ========== ========
Extended stay segment net property
operating income........................ $ 82,113 $ 34,777 $ 17,397
Reconciling items:
Interest income........................ 952 552 211
Depreciation and amortization.......... (34,244) (12,130) (4,443)
Interest expense, net of capitalized
interest.............................. (23,190) (2,190) (5,971)
Corporate operating expenses........... (22,280) (15,238) (4,112)
Special charges........................ (7,240) -- --
-------- ---------- --------
Earnings (loss) before extraordinary
item.................................... $ (3,889) $ 5,771 $ 3,082
======== ========== ========
<CAPTION>
December 31,
--------------------
1998 1997
---------- --------
<S> <C> <C> <C>
Extended stay segment assets...................... $1,145,311 $718,693
Reconciling items:
Cash and cash equivalents....................... 11,942 2,896
Deferred loan costs, net of accumulated
amortization................................... 1,063 632
Trademark and intangibles, net of accumulated
amortization................................... 44,279 44,447
Deposits and pursuit costs...................... 7,830 12,901
Other assets.................................... 7,966 4,380
---------- --------
Total assets...................................... $1,218,391 $783,949
========== ========
</TABLE>
Note 12--Commitments and Contingencies
Legal Proceedings
Homestead is not a party to any litigation or claims, other than routine
matters arising out of the ordinary course of business that are incidental to
the development process and operation of the business of Homestead.
64
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Homestead does not believe that the results of all claims and litigation,
individually or in the aggregate, will have a material adverse effect on its
business, financial position or results of operation.
Unfunded Development Commitments
At December 31, 1998, Homestead had approximately $68 million of unfunded
commitments for developments under construction. Homestead anticipates
completing development of properties under construction utilizing the Working
Capital Facilities, cash on hand, and cash flow from operations.
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 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 notes in (i) above to an unaffiliated third
party; and (iv) 10% of the net proceeds as defined per the agreement, upon the
sale of the additional 35 properties to an unaffiliated third party. No such
sales have occurred to date. Total payments under this agreement for 1998,
1997 and 1996 were $787,000, $734,000, and $662,000, respectively.
Note 13--Subsequent Events (Unaudited)
Sale and Leaseback of Properties
On February 23, 1999, Homestead completed the sale and leaseback of 18
Homestead Village properties with Hospitality Properties Trust (NYSE: HPT) for
a sales price of $145 million. Homestead will continue to operate the
properties under a long-term lease through December 2015 and pay minimum rent
of approximately $16 million per year. Homestead posted a security deposit
equal to one year's rent. The properties sold were among the 26 properties
pledged as collateral for the $122 million of mortgage note maturing in June
1999.
The lease is considered a capital lease for financial reporting purposes
and thus the present value of the minimum lease payments will be recorded as
an asset, to be amortized over the lease term, and an obligation, which will
be reduced over the term of the lease by allocating rent payments between
interest expense and reduction of the lease obligation. The lease also
provides for two extension periods of 15 years each at the option of
Homestead, requires payment of percentage rents beginning July 2000 based on
increases in revenues over a base period, and requires a percentage of
revenues be paid to a reserve to be used for capital expenditures.
Extension of Working Capital Facilities
On March 18, 1999 Homestead executed an agreement with its bank lenders to
renew and amend the Working Capital Facilities to December 31, 2000. The line
secured by suburban properties has been increased to $170 million total
borrowing capacity from $150 million and the sliding interest terms amended to
be 2.0% to 3.0% over LIBOR and 1% to 2% over prime or 1.5% to 2.5% over the
federal funds rate. Future additional collateral will be limited to suburban
properties which are construction complete and stabilized. The line secured by
urban properties has been decreased to $30 million total borrowing capacity
from $50 million and the interest terms amended to 3.0% over LIBOR and 2.0%
over prime or 2.5% over the federal funds rate.
65
<PAGE>
HOMESTEAD VILLAGE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
The renewed and amended Working Capital Facilities require maintenance of
the following financial covenants effective with first quarter 1999:
. limiting total liabilities of no more than 55% of gross asset value, as
defined;
. limiting total indebtedness of no more than 50% of gross asset value, as
defined;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to interest expense ranging
from 1.25 to 1.0 to 1.90 to 1.0;
. maintaining various ratios of earnings before interest, taxes,
depreciation and amortization, as defined, to debt service and preferred
stock dividends ranging from 1.0 to 1.0 to 1.25 to 1.0;
. maintaining various ratios of net property operating income to implied
debt service, as defined, ranging from 1.4 to 1.0 to 2.25 to 1.0;
. maintaining a minimum tangible net worth, as defined, of no less than 85%
of the year end 1998 amount, as defined, adjusted for net proceeds of
equity offerings; and
. maintaining positive net sources and uses of funds.
In addition, under the renewed and amended Working Capital Facilities
distributions or dividends on equity are prohibited; total cost, as defined,
of projects in development cannot exceed 25% of gross asset value, as defined,
in 1999 or 15% in 2000; Homestead's business activities will be limited to
development, ownership and operation of extended stay hotels; and no other
additional indebtedness other than non-recourse indebtedness may be incurred.
Common Stock Rights Offering
On March 25, 1999, Homestead announced a rights offering for $225 million
of common shares, the proceeds of which will be used to first repay the $200
million Bridge Facility and then for purposes allowed under the Working
Capital Facilities. Security Capital will participate in the rights offering.
To the extent rights remain available Security Capital has agreed to purchase
enough shares of common stock to ensure that the proceeds of the offering are
no less than $205 million, based on current market prices and subject to final
documentation. To the extent Homestead raises proceeds of up to $200 million
in the rights offering from third parties or Security Capital which are used
to repay the Bridge Facility, Security Capital's obligation under its
subscription agreement for Homestead convertible subordinated debentures will
be reduced or terminated.
66
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Homestead Village
Incorporated, a Maryland corporation, and the undersigned Directors and
officers of Homestead Village Incorporated, hereby constitutes and appoints
David C. Dressler, Jr., Michael D. Cryan, Bryan J. Flanagan, Jeffrey A. Klopf,
and Mark W. Pearson its or his true and lawful attorney-in-fact and agents,
for it or him and in its or his name, place and stead, in any and all
capacities, with full power to act alone, to sign any and all amendments to
this report, and to file each such amendment to this report, with all exhibits
thereto, and any and all documents in connection therewith, with the
Securities and Exchange Commission, hereby granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
any and all acts and things requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as it or he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them may lawfully do or cause to be done by virtue
hereof.
67
<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/ David C. Dressler, Jr.
By:
----------------------------------
David C. Dressler, Jr
Co-Chairman, President and
Chief Investment Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David C. Dressler, Jr. Co-Chairman, President, March 26, 1999
____________________________________ Chief Investment Officer
David C. Dressler, Jr. and Director
/s/ Michael D. Cryan Co-Chairman, Chief Operating March 26, 1999
____________________________________ Officer and Director
Michael D. Cryan
/s/ Bryan J. Flanagan Senior Vice President and March 26, 1999
____________________________________ Chief Accounting Officer
Bryan J. Flanagan (Principal Financial
Officer and Principal
Accounting Officer)
/s/ John P. Frazee, Jr. Director March 26, 1999
____________________________________
John P. Frazee, Jr.
/s/ Manual A. Garcia Director March 26, 1999
____________________________________
Manual A. Garcia
/s/ John C. Schweitzer Director March 26, 1999
____________________________________
John C. Schweitzer
</TABLE>
68
<PAGE>
INDEX TO EXHIBITS
Certain of the following documents are filed herewith. Certain other of the
following documents have been previously filed with the Securities and Exchange
Commission and, pursuant to Rule 12b-32, are incorporated herein by reference.
<TABLE>
<C> <S>
4.1 Restated Homestead Charter (incorporated by reference to Exhibit
3.1 to Homestead's Form S-4 Registration Statement (File No.
333-4455, the "Homestead S-4"))
4.2 Amended and Restated Bylaws of Homestead (incorporated by
reference to Exhibit 3.2 to the Homestead S-4)
4.3 Rights Agreement, dated as of May 16, 1996, between Homestead
and The First National Bank of Boston, as Rights Agent,
including form of rights certificate (incorporated by reference
to Exhibit 4.2 to the Homestead S-4)
4.4 Amended and Restated Promissory Note by PTR Homestead Village
Incorporated in favor of Security Capital Pacific Trust ("PTR")
(incorporated by reference to Exhibit 4.3 to the Homestead Form
10-Q for the quarter ended September 30, 1996 (File No. 1-12269,
the "Homestead Form 10-Q"))
4.5 Amended and Restated Promissory Note by PTR Homestead Village
Limited Partnership in favor or PTR (incorporated by reference
to Exhibit 4.4 to the Homestead Form 10-Q)
4.6 Form of stock certificate for shares of common stock of
Homestead (incorporated by reference to Exhibit 4.8 to the
Homestead Form S-4)
10.1 Protection of Business Agreement, dated as of October 17, 1996,
by and among ATLANTIC, PTR, Security Capital Group Incorporated
("Security Capital") and Homestead (incorporated by reference to
Exhibit 10.1 to the Homestead Form 10-Q)
10.2 Investor Agreement, dated as of October 17, 1996, by and between
Homestead and Security Capital (incorporated by reference to
Exhibit 10.2 to the Homestead Form 10-Q)
10.3 Guaranty of Completion and Payment, dated as of October 17,
1996, from Homestead to PTR (incorporated by reference to
Exhibit 10.5 to the Homestead Form 10-Q)
10.4 Guaranty of Completion and Payment, dated as of October 17,
1996, from Homestead to ATLANTIC (incorporated by reference to
Exhibit 10.10 to the Homestead Form 10-Q)
10.5 Investor and Registration Rights Agreement, dated as of October
17, 1996, between Homestead and PTR (incorporated by reference
to Exhibit 10.8 to the Homestead Form 10-Q)
10.6 Escrow Agreement, dated as of October 17, 1996, among Homestead,
Security Capital and State Street Bank and Trust Company, as
escrow agent (incorporated by reference to Exhibit 10.9 to the
Homestead Form 10-Q)
10.7 Administrative Services Agreement, dated as of October 17, 1996,
by and between Homestead and SCGroup Incorporated (incorporated
by reference to Exhibit 10.11 to the Homestead Form 10-Q)
10.8 Homestead Village Incorporated 1996 Long-Term Incentive Plan
(incorporated by reference to Exhibit 4 to Homestead's Form S-8
Registration Statement (File No. 333-17243)
10.9 Homestead Village Incorporated 1996 Outside Directors Plan
(incorporated by reference to Exhibit 4 to Homestead's Form S-8
Registration Form S-8 Registration Statement (File No. 333-
17245)
10.10 Form of Indemnification Agreement entered into between Homestead
and each of its directors
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.11 $50,000,000 Credit Agreement among Homestead Village
Incorporated, the Lenders named therein, and Commerzbank AG, New
York Branch, as Agent for the Lenders dated as of May 6, 1997
(incorporated by reference to Exhibit 10.1 to Homestead's Form
10-Q for the quarter ended March 31, 1997 (File No. 1-12269))
10.12 First Amendment to Credit Agreement and other Loan Documents
among Homestead Village Incorporated, the Lenders named therein,
and Commerzbank AG, New York Branch, as Agent for the Lenders
dated as of August 25, 1997 (incorporated by reference to
Exhibit 10.1 to Homestead's Form 10-Q for the quarter ended
September 30, 1997 (File No. 1-12269))
10.13 Second Amendment to Credit Agreement and Other Loan Documents
Among Homestead Village Incorporated, the Lenders Named Therein,
and Commerzbank AG, New York Branch, as Agent for the Lenders
dated as of April 24, 1998 (incorporated by reference to exhibit
10.1 to Homestead's Form 10-Q for the quarter ended June 30,
1998)
10.14 $50,000,000 Credit Agreement Among Homestead Village
Incorporated, the Lenders Named Therein, and Commerzbank AG, New
York Branch, as Agent to the Lenders dated as of April 24, 1998
(incorporated by reference to exhibit 10.2 to Homestead's Form
10-Q for the quarter ended June 30, 1998)
10.15 $200,000,000 Credit Agreement Among Homestead Village
Incorporated, the Lenders Named Therein, and Commerzbank AG, New
York Branch, as Agent for the Lenders dated as of June 15, 1998
(incorporated by reference to exhibit 10.3 to Homestead's Form
10-Q for the quarter ended June 30, 1998)
10.16 Subscription Agreement Between Security Capital Group
Incorporated and Homestead Village Incorporated (incorporated by
reference to exhibit 10.4 to Homestead's Form 10-Q for the
quarter ended June 30, 1998)
10.17 Form of Homestead Village Incorporated Convertible Subordinated
Debenture Due December 31, 1999 (incorporated by reference to
exhibit 10.5 to Homestead's Form 10-Q for the quarter ended June
30, 1998)
10.18 Agreement of Merger by and among Homestead Village Limited
Partnership, and certain of its affiliates and HPT HSD
Properties Trust dated as of February 4, 1999 (incorporated by
reference to Exhibit 2.1 to Homestead's Form 8-K dated March 9,
1999)
10.19 Agreement to Lease by and between HPT HSD Properties Trust and
Homestead Village Incorporated dated as of February 4, 1999
(incorporated by reference to Exhibit 99.1 to Homestead's Form
8-K dated March 9, 1999)
10.20 Lease Agreement by and between HPT HSD Properties Trust, as
Landlord, and HVI (2) Incorporated, as Tenant, dated as of
February 23, 1999 (incorporated by reference to Exhibit 99.2 to
Homestead's Form 8-K dated March 9, 1999)
10.21 Guaranty Agreement by Homestead Village Incorporated for the
benefit of HPT HSD Properties Trust and Hospitality Properties
Trust dated as of February 23, 1999 (incorporated by reference
to Exhibit 99.3 to Homestead's Form 8-K dated March 9, 1999)
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Atlanta, Georgia
23.2 Consent of Ernst & Young LLP, Dallas, Texas
24 Power of Attorney (included on page 67)
27 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 12
HOMESTEAD VILLAGE INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998(1) 1997(1) 1996(1) 1995 1994(1)
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Earnings (loss) from continuing
operations............................ $(3,889) $ 5,771 $ 3,082 $2,851 $ 974
Add: Interest expense, net............. 23,190 2,190 5,971 2,958 1,409
------- ------- ------- ------ ------
Earnings as adjusted................... 19,301 7,961 9,053 5,809 2,383
------- ------- ------- ------ ------
Fixed charges:
Interest expense..................... 23,190 2,190 5,971 2,958 1,409
Capitalized interest................. 25,315 69,747 4,365 2,143 1,039
------- ------- ------- ------ ------
Total fixed charges................ $48,505 $71,937 $10,336 $5,101 $2,448
------- ------- ------- ------ ------
Ratio of earnings to fixed charges..... 0.40 0.11 0.88 1.14 0.97
======= ======= ======= ====== ======
</TABLE>
- --------
(1) Earnings for these periods (years ended December 31, 1998, 1997, 1996 and
1994) were inadequate to cover fixed charges by $29,204,000, $63,976,000,
$1,283,000 and $65,000, respectively.
For purpose of computing these ratios, "earnings" consist of earnings from
operations plus fixed charges other than capitalized interest. "Fixed charges"
consist of interest on borrowed funds (including capitalized interest) and
amortization of debt discount and expense.
<PAGE>
Exhibit 21
HOMESTEAD VILLAGE INCORPORATED
List of Subsidiaries of the Registrant
<TABLE>
<S> <C>
Homestead Village Management Incorporated............................. Delaware
Homestead Village Limited Partnership................................. Delaware
Atlantic Homestead Village (1) Incorporated........................... Maryland
Atlantic Homestead Village (2) Incorporated........................... Maryland
Atlantic Homestead Village Limited Partnership (a partnership owned by
Atlantic Homestead Village (1) Incorporated and by Atlantic Homestead
Village (2) Incorporated)............................................ Delaware
PTR Homestead Village (1) Incorporated................................ Maryland
PTR Homestead Village (2) Incorporated................................ Maryland
PTR Homestead Village Limited Partnership (a partnership owned by PTR
Homestead Village (1) Incorporated and by PTR Homestead Village (2)
Incorporated)........................................................ Delaware
Homestead Alabama Incorporated........................................ Alabama
Missouri Homestead Village Incorporated............................... Maryland
K.C. Homestead Village Redevelopment Corporation...................... Missouri
BTW Incorporated...................................................... Delaware
BTW II Incorporated................................................... Delaware
BTW III Incorporated.................................................. Delaware
BTW Limited Partnership............................................... Delaware
HVI Incorporated...................................................... Delaware
HVI Trust............................................................. Maryland
HVI (2) Incorporated.................................................. Delaware
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statements (File Nos. 333-37803, 333-67039, 333-17243, 333-17245
and 333-48163).
Arthur Andersen llp
Atlanta, Georgia
March 26, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-37803 and No. 333-67039) of Homestead Village Incorporated
and in the related Prospectus and the Registration Statements (Form S-8 Nos.
333-17243, 333-17245 and 333-48163) pertaining to the Homestead Village
Incorporated 1996 Long-Term Incentive Plan, the Homestead Village Incorporated
1996 Outside Directors Plan and the Homestead Village Incorporated 401(K)
Savings Plan of our report dated February 24, 1997, with respect to the
financial statements of Homestead Village Incorporated for the year ended
December 31, 1996 included in its Annual Report (Form 10-K) for the year ended
December 31, 1998.
Ernst & Young llp
March 24, 1999
Dallas, Texas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,144,000
<SECURITIES> 0
<RECEIVABLES> 6,179,000
<ALLOWANCES> 269,000
<INVENTORY> 0
<CURRENT-ASSETS> 20,887,000
<PP&E> 1,186,652,000
<DEPRECIATION> 48,783,000
<TOTAL-ASSETS> 1,218,391,000
<CURRENT-LIABILITIES> 530,968,000
<BONDS> 0
0
0
<COMMON> 383,000
<OTHER-SE> 457,642,000
<TOTAL-LIABILITY-AND-EQUITY> 1,218,391,000
<SALES> 0
<TOTAL-REVENUES> 145,452,000
<CGS> 0
<TOTAL-COSTS> 127,103,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,190,000
<INCOME-PRETAX> (3,889,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,889,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (25,344,000)
<CHANGES> 0
<NET-INCOME> (29,233,000)
<EPS-PRIMARY> (.78)
<EPS-DILUTED> (.78)
</TABLE>
