UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 333-10635
APPLE RESIDENTIAL INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1816010
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At November 1, 1997, there were outstanding 10,023,044 shares of common stock,
no par value, of the registrant.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1997
and December 31, 1996 3
Statements of Operations -
Three months ended September 30, 1997
Nine months ended September 30, 1997 4
Statement of Shareholders' Equity-
Nine months ended September 30, 1997 5
Statement of Cash Flows -
Nine months ended September 30, 1997 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 11
of Financial Condition and Results of
Operations
</TABLE>
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities (not applicable).
Item 3. Defaults Upon Senior Securities
(not applicable).
Item 4. Submission of Matters to a Vote of
Security Holders (not applicable).
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K
13
<PAGE>
BALANCE SHEETS (UNAUDITED)
APPLE RESIDENTIAL INCOME TRUST, INC.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------------- -------------------
<S> <C>
ASSETS
Investment in Rental Property
Land $13,504,976 -
Building 67,365,012 -
Property improvements 1,683,878 -
Furniture and fixtures 489,322 -
-------------------- -------------------
83,043,188 -
Less accumulated depreciation (1,086,111) -
-------------------- -------------------
81,957,077 -
Cash and cash equivalents 1,350,305 100
Prepaid expenses 161,391 -
Other assets 561,464 -
-------------------- -------------------
2,073,160 100
-------------------- -------------------
$84,030,237 $100
==================== ===================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable $5,132,702 -
Accounts payable 411,069 -
Accrued expenses 1,647,832 -
Rents received in advance 25,969 -
Tenant security deposits 371,794 -
-------------------- -------------------
7,589,366 -
Shareholders' equity
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 8,676,784 shares
and 10 shares, respectively 76,005,921 100
Class B convertible stock, no par value. Authorized
200,000 shares: issued and outstanding 200.000 20,000 20,000
Receivable from principal shareholder (20,000) (20,000)
Net income greater than distributions 434,950 -
-------------------- -------------------
76,440,871 100
-------------------- -------------------
$84,030,237 $100
==================== ===================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1997
--------------------- ----------------------
<S> <C>
REVENUE:
Rental income $3,789,266 $7,771,744
EXPENSES:
Utility expenses 385,718 796,570
Repairs and maintenance 317,500 581,796
Taxes and insurance 597,227 1,176,182
Property management 207,026 403,479
Advertising 88,782 194,785
General and administrative 192,520 391,837
Amortization 8,484 25,444
Depreciation of rental property 642,770 1,086,111
Other operating expenses 278,735 602,517
--------------------- ----------------------
Total expenses 2,718,762 5,258,721
--------------------- ----------------------
Income before other income (expense) 1,070,504 2,513,023
Interest and investment income 19,043 107,584
Interest expense (232,818) (377,154)
--------------------- ----------------------
Net income $856,729 $2,243,453
===================== ======================
Net income per share $0.12 $0.44
===================== ======================
Weighted average number of shares outstanding 7,135,536 5,053,423
===================== ======================
</TABLE>
See accompanying notes to financial statements.
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
APPLE RESIDENTIAL INCOME TRUST, INC.
<TABLE>
<CAPTION>
Common Stock
Number
of Shares Amount
---------------------------------------
<S> <C>
Balance at December 31, 1996 10 $100
Net proceeds from the sale of shares 8,147,064 71,238,441
Net income - -
Cash distributions declared to shareholders ($.401 per share) - -
Shares issued to Cornerstone Realty Income Trust, Inc. 417,778 3,760,000
Shares issued through Additional Share Option 111,932 1,007,380
---------------------------------------
Balance at September 30, 1997 8,676,784 $76,005,921
=======================================
</TABLE>
<TABLE>
<CAPTION>
Convertible Class B Stock
Net of Net
receivable income Total
Number from principal greater than Shareholders'
of Shares shareholder distributions Equity
----------------------------------------------------------------
<S> <C>
Balance at December 31, 1996 200,000 $0 $0 $ 100
Net proceeds from the sale of shares - - - 71,238,441
Net income - - 2,243,453 2,243,453
Cash distributions declared to shareholders ($.401 per share) - - (1,808,503) (1,808,503)
Shares issued to Cornerstone Realty Income Trust, Inc. - - - 3,760,000
Shares issued through Additional Share Option - - - 1,007,380
----------------------------------------------------------------
Balance at September 30, 1997 200,000 $0 $434,950 76,440,871
================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997
-------------------
<S> <C>
Cash flow from operating activities:
Net income $2,243,453
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,111,555
Changes in operating assets and liabilities:
Prepaid expenses (161,391)
Other assets (586,908)
Accounts payable 411,069
Accrued expenses 1,647,832
Rent received in advance 25,969
Tenant security deposits 371,794
-------------------
Net cash provided by operating activities 5,063,373
Cash flow from investing activities:
Acquisitions of rental property (80,869,988)
Capital improvements (2,173,200)
-------------------
Net cash used in investing activities (83,043,188)
Cash flow from financing activities:
Proceeds from short-term borrowings 39,640,000
Repayments of short-term borrowings (34,507,298)
Net proceeds from issuance of shares 76,005,821
Increase (decrease) in commissions payable to underwriters -
Cash distributions paid to shareholders (1,808,503)
-------------------
Net cash provided by financing activities 79,330,020
Increase in cash and cash equivalents 1,350,205
Cash and cash equivalents, beginning of year 100
-------------------
Cash and cash equivalents,
end of period $1,350,305
===================
</TABLE>
See accompanying notes to financial statements
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
Notes to Financial Statements (Unaudited)
September 30, 1997
(1) General Information and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
required by generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. These financial statements should be
read in conjunction with the Company's December 31, 1996 Annual Report on
Form 10-K.
The Company was formed in August, 1996. Operations commenced in January,
1997.
During the first quarter of 1997, the Financial Accounting Standards
Board issued a new statement on the calculation of earnings per share
which is effective beginning in the 4th quarter of 1997 and early
adoption is prohibited. Under the new statement, primary and fully
dilutive earnings per share are replaced with basic and diluted earnings
per share. The Company's basic earnings per share for the nine month
period ended September 30, 1997 according to the new statements would not
change from the reported amounts.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of
an Enterprise and Related Information." The Company will adopt SFAS No.
131 in 1998. SFAS No. 131 will not have any impact on the financial
results or financial condition of the Company, but will result in certain
in required disclosures of segment reporting.
Cash and Cash Equivalents:
Cash equivalents include highly liquid investments with original
maturities of three months or less. The fair market value of cash and
cash equivalents approximates their carrying value.
Investment in Rental Property
The Company records impairment losses on rental property used in the
operations if indicators of impairment are present and the undiscounted
cash flows estimated to be generated by the respective properties are
less than their carrying amount. Impairment losses are measured as the
difference between the asset's fair value and its carrying value.
The investment in rental property is recorded at depreciated cost and
includes real estate brokerage commissions paid to an affiliated company
Apple Realty Group for purchase prior to March 1, 1997, and Cornerstone
Realty Income Trust, Inc. after March 1, 1997.
<PAGE>
Income Recognition
Rental, interest and other income are recorded on an accrual basis. The
Company's properties are leased under operating leases that, typically,
have terms that do not exceed one year.
Advertising Costs
Costs incurred for the production and distribution of advertising are
expensed as incurred.
Income Per Share
Net income per share is computed based upon the weighted average number
of shares outstanding during the year. Potentially dilutive securities
are not included since their inclusion would not materially dilute net
income per share.
(2) Notes Payable
On March 1, 1997, the Company entered into an agreement with a commercial
bank for an unsecured revolving line of credit of $10 million. The line
of credit expires on March 31, 1998. During August, 1997, the Company
increased its unsecured line of credit to $20 million. Borrowings under
the agreement are evidenced by an unsecured promissory note and bear
interest at one-month LIBOR plus 200 basis points. As of September 30,
1997 the interest rate on the unsecured line of credit was 7.6875% and
the outstanding balance was approximately $5.1 million. In October 1997,
the Company repaid the full outstanding balance of the line of credit
with proceeds from the additional sale of shares.
(3) Related Parties
Prior to March 1, 1997, the Company had contracted with Apple Residential
Management Group, Inc. (The "Management Company") to manage the acquired
properties, Apple Residential Advisors, Inc. (The "Advisor") to advise
and provide the Company with day to day management, and Apple Realty
Group, Inc. to acquire and dispose of real estate assets held by the
Company. The Company paid the Management Company a management fee equal
to 5% of rental income plus reimbursement of certain expenses in the
amount of $61,135. The Company paid the Advisor a fee equal to .1% to
.25% of total contributions received by the Company in the amount of
$13,585. The Company paid Apple Realty Group, Inc. a fee of 2% of the
purchase price of the acquired properties in the amount of $624,863.
Effective March 1, 1997, with the approval of the Company, Cornerstone
Realty Income Trust Inc. ("Cornerstone"), for which Glade M. Knight
(Chief Executive Officer and Chairman of the Board of the Company)
entered into subcontract agreements with the Management Company and
Advisor whereby Cornerstone will provide advisory and property management
services to the Company in exchange for fees and expense reimbursement
per the same terms described above.
<PAGE>
Effective March 1, 1997, with the consent of the Company, Cornerstone
acquired all the assets of Apple Realty Group, Inc. The sole material
asset of the company was the acquisition/disposition agreement with the
Company. Cornerstone paid $350,000 in cash and issued 150,000 common
shares in exchange for the assignment of the rights to the
acquisition/disposition agreement. Cornerstone will be entitled to a real
estate commission equal to 2% of the gross purchase price of the
Company's properties. As of September 30, 1997, Cornerstone had earned
approximately $1,476,041 for all of the subcontracted and acquired
services.
During the first quarter of 1997, the Company granted Cornerstone a
continuing right to acquire up to 9.8% of the common shares of the
Company at the market price, net of selling commissions. Cornerstone
committed to purchase shares of the Company at $9 per share for
approximately $3.76 million which represented approximately 9.5% of the
total common shares of the Company outstanding as of March 1, 1997. In
April 1997, Cornerstone purchased 417,777 common shares of the Company.
Cornerstone intends to make periodic evaluations with the approval of its
board of directors to purchase additional common shares of the Company as
of the end of each calendar quarter in order to maintain its ownership of
approximately 9.5% of the outstanding common shares of the Company, if
such additional purchases are deemed by the Cornerstone board of
directors to be in the best interests of Cornerstone and its
shareholders.
(4) Subsequent Events
During October 1997, the Company distributed to its shareholders
approximately $1,356,204 (20.2 cents per share) of which approximately
$855,613 was reinvested in the purchase of additional shares through the
Additional Share Option. The Company also closed the sale to investors of
1,346,262 shares at $10 per share representing net proceeds to the
Company of $12,116,361.
(5) Acquisitions (unaudited)
<PAGE>
The following unaudited pro forma information for the nine months ended
September 30, 1997 is presented as if (a) the Company had owned the
properties referred to below on January 1, 1997, (b) the Company had
qualified as a REIT, distributed at least 95% of its taxable income and,
therefore incurred no federal income tax expense during the period, and
(c) the Company had used proceeds from its best efforts offering to
acquire the properties. The Company had no operations prior to December
31, 1996. The pro forma information does not purport to represent what
the Company's results of operations would actually have been if such
transactions, in fact, had occurred on January 1, 1997, nor does it
purport to represent the results of operations for future periods.
<PAGE>
Nine Months
Ended
9/30/97
Rental Income $12,259,452
Net Income $ 3,615,983
Net Income Per Share $ .45
The pro forma information reflects adjustments for the actual rental
income and rental expenses of Brookfield, Eagle Crest, Tahoe, Mill
Crossing, Toscana, Polo Run, Wildwood, The Arbors , Paces Cove,
Chaparosa and River Hill Apartments for the periods in 1997 prior to
their acquisitions by the Company. Net income has been adjusted as
follows: (1) property management and advisory expenses have been
adjusted based on the Company's contractual arrangements of 5% of
revenues from rental income plus reimbursement of certain monthly
expenses estimated to be $2.50 per unit; (2) advisory expenses have
been adjusted based on the Company's contractual arrangement of .25%
annual gross proceeds of common stock raised; and (3) depreciation has
been adjusted based on the Company's allocation of purchase price to
buildings over an estimated useful life of 27.5 years.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
There was a significant change in the Company's liquidity during the
nine months ended September 30, 1997. During the nine months ended
September 30, 1997, the Company closed the sale to investors of
8,258,996 shares representing gross proceeds to the Company of
$80,923,281 and net proceeds after payment of selling commissions and
other costs of $72,245,821. The Company capitalized $2,173,200 of
improvements to its various properties as of September 30, 1997. It is
anticipated that some $3,000,000 additional capital improvements will
be completed during the next year on the current portfolio. The source
to fund these improvements is from equity raised and set aside
specifically for the improvements and from the expected sale of
additional shares.
During 1997, the Company made ten acquisitions of residential rental
property as follows:
<TABLE>
<CAPTION>
Property Name Date Acquired Units Purchase Price Location
------------- ------------- ----- -------------- --------
<S> <C>
Brookfield Apartments January 1997 223 $5,458,485 Dallas, TX
Eagle Crest Apartments January 1997 484 $15,650,000 Irving, TX
Tahoe Apartments January 1997 240 $5,690,560 Arlington, TX
Mill Crossing Apartments February 1997 184 $4,544,121 Arlington, TX
Wildwood Apartments March 1997 120 $3,963,519 Euless, TX
Toscana Apartments March 1997 192 $5,854,531 Dallas, TX
Polo Run Apartments March 1997 224 $5,854,531 Arlington, TX
The Arbors Apartments April 1997 210 $7,748,907 Bedford, TX
Paces Cove Apartments June 1997 328 $9,277,355 Dallas, TX
Chaparosa Apartments August 1997 170 $5,825,000 Irving, TX
River Hill Apartments August 1997 192 $7,275,000 Irving, TX
</TABLE>
During the nine months ended September 30, 1997, the Company borrowed
$39,640,000 against the line of credit in conjunction with property
acquisitions and repaid $34,507,298 of the balance. The balance on the
line of credit as of September 30, 1997 was $5,132,702. In October
1997, the Company repaid this outstanding balance. This is consistent
with the Company's long term business objective to hold its properties
on an unleveraged basis.
Cash and cash equivalents totaled $1,350,305 at September 30, 1997.
While the Company is always assessing potential acquisitions, no
material commitments existed on November 1, 1997 for the purchase of
additional properties. The Company's only on-going commitment for
capital expenditures is to the renovation of its existing portfolio.
Equity funds have been raised in conjunction with the acquisition of
properties to fund capital expenditures for currently held properties.
In addition, the Company will acquire new properties as funds are
available.
<PAGE>
The Company has short-term cash flow needs to conduct the operation of
its properties. The rental income generated from the properties
supplies sufficient cash to provide for the payment of these operating
expenses.
The Company's capital resources are expected to grow with the continued
sale of its shares and through operations.
Results of Operations
As operations of the Company began in January 1997, a comparison of the
three months or nine months ended September 30, 1997 and 1996 is not
possible. The Company's property operations for the nine months ended
September 30, 1997 reflect the operations of the Company's eleven
acquisitions from their respective acquisition dates. Rental income for
the three and nine months ended September 30, 1997 was $3,789,266 and
$7,771,744, respectively.
The economic occupancy levels for the Company's properties averaged 92%
at the end of the three months and 93% for the nine months ended
September 30, 1997. Overall, the average rental rates for the portfolio
was $525 per month for the nine months ended September 30, 1997 and
$539 for the three months ended September 30, 1997.
The Company's other source of income is the investment of its cash and
cash reserves. Interest income for the three and nine months ended
September 30, 1997 was $19,043 and $107,584, respectively.
Total expenses for the nine months ended September 30, 1997 was
$5,258,721 and $2,718,762 for the three months ended September 30,
1997. The operating expense ratio (the ratio of rental expenses,
excluding general and administrative, amortization and depreciation
expense, to rental income) was 48% for the nine months ended September
30, 1997 versus 49% for the three months ended September 30, 1997.
General and administrative expenses totaled 5% of total rental income
for the three and nine months ended September 30, 1997. This percentage
is expected to decrease as the Company's asset base and rental income
grow. These expenses represent the administrative expenses of the
Company as distinguished from the operations of the Company's
properties. Depreciation expense for the nine months ended September
30, 1997 was $1,086,111 and $642,770 for the three months ended
September 30, 1997.
The Company does not believe that inflation had any significant impact
on the operation of the Company during the nine months ended September
30, 1997. Future inflation, if any, would likely cause increased
operating expenses, but the Company believes that increases in expenses
would be offset by increases in rental income. Inflation may also cause
capital appreciation of the Company's properties over time, as rental
rates and replacement costs increase.
<PAGE>
Part II, Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
The following table lists the reports on Form 8-K filed by the Company
during the quarter ended September 30, 1997, the items reported and the
financial statements included in such filings.
<TABLE>
<CAPTION>
Type and Date of Reports Items Reported Financial Statements Filed
- ------------------------- -------------- ----------------------------
<S> <C>
Form 8-K dated 2 None
June 24, 1997
Form 8-K dated 2 None
August 6, 1997
Form 8-K/A (date of Original Report: 7(a),(b) and (c) Historical Statement of Income and
June 24, 1997) Direct Operating Expenses of Paces's
Cove Apartments for the twelve months
ended May 31, 1997.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Apple Residential Income Trust, Inc.
(Registrant)
BY: /s/ Glade M. Knight
---------------------------------
Glade M. Knight
President
DATE: 11-11-97 BY: /s/ Stanley J. Olander
-----------------------------------
Stanley J. Olander
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,350,305
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 83,043,188
<DEPRECIATION> 1,086,111
<TOTAL-ASSETS> 84,030,237
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 76,005,921
<OTHER-SE> 434,950
<TOTAL-LIABILITY-AND-EQUITY> 84,030,237
<SALES> 0<F2>
<TOTAL-REVENUES> 7,771,744
<CGS> 0
<TOTAL-COSTS> 5,258,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 377,154
<INCOME-PRETAX> 2,243,453
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,243,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,243,453
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0
<FN>
<F1>Current Assets and Current Liabilities are not separated to conform
with industry standards.
<F2>Income is from rental income. There are no Sales or Cost of Goods
Sold.
</FN>
</TABLE>
