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 March 31, 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 33-10635
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)
(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 May 1, 1997, there were outstanding 5,647,570 shares of common stock, no par
value, of the registrant.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
FORM 10-Q
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1997
and December 31, 1996 3
Statement of Operations - 4
Three months ended March 31, 1997
Statements of Shareholders' Equity- 5
Three months ended March 31, 1997
Statements of Cash Flows - 6
Three months ended March 31, 1997
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 11
of Financial Condition and Results of
Operations
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
2
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- -------------
<S> <C>
ASSETS
Investment in rental property
Land $ 8,686,051 -
Building 40,821,725 -
Property improvements 130,343 -
Furniture and fixtures 80,257 -
-------------- -------------
49,718,376 $0
Less accumulated depreciation (137,689) -
-------------- -------------
49,580,687 0
-------------- -------------
Cash and cash equivalents 1,383,740 100
Prepaid expenses 132,486 -
Other assets 738,614 -
-------------- -------------
2,254,840 100
-------------- -------------
Total Assets $51,835,527 $100
============== =============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable $10,000,000 -
Accounts payable 508,843 -
Accrued expenses 643,364 -
Rents received in advance 19,241 -
Tenant security deposits 214,087 -
-------------- -------------
11,385,535 $0
Shareholders' equity
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 4,643,249 shares
and 10 shares 39,893,737 100
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 556,255 -
-------------- -------------
40,449,992 100
-------------- -------------
Total Liabilities and Shareholders' Equity $51,835,527 $100
============== =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
Three Months
Ended
March 31,
1997
------------
REVENUE:
Rental income $1,155,766
EXPENSES:
Utilities 98,538
Repairs and maintenance 59,600
Taxes and insurance 106,098
Property management fee 60,663
Advertising 33,475
Other operating expenses 92,970
General and administrative 77,502
Depreciation of real estate 137,689
Amortization 8,476
Other 9,434
-----------
Total expenses 684,445
-----------
Income before interest income 471,321
Interest income 84,934
-----------
Net income $556,255
===========
Net income per share $0.16
===========
Weighted average number of shares outstanding 3,403,759
===========
See accompanying notes to financial statements.
4
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Convertible Class B Stock
Net of
receivable Total
Number Number from principal Net Shareholders'
of shares Amount of Shares shareholder Income Equity
---------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1996 10 $100 200,000 $0 $0 $100
Net proceeds from the sale of shares 4,643,239 39,893,637 - - - 39,893,637
Net income - - - - $422,036 422,036
---------------------------------------------------------------------------------
Balance at March 31, 1997 4,643,249 $39,893,737 200,000 $0 $422,036 $40,315,773
==================================================================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1997
-----------
<S> <C>
Cash flow from operating activities:
Net income $556,255
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 146,165
Changes in operating assets and liabilities:
Prepaid expenses (132,486)
Other assets (747,090)
Accounts payable 508,843
Accrued expenses 643,364
Rent received in advance 19,241
Tenant security deposits 214,087
-----------
Net cash provided by operating activities 1,208,379
Cash flow from investing activities:
Acquisitions of rental property (49,507,776)
Capital improvements (210,600)
-----------
Net cash used in investing activities (49,718,376)
Cash flow from financing activities:
Proceeds from short-term borrowings 10,000,000
Net proceeds from issuance of shares 39,893,637
-----------
Net cash provided by financing activities 49,893,637
Increase in cash and cash equivalents 1,383,640
Cash and cash equivalents, beginning of year 100
-----------
Cash and cash equivalents,
end of period $1,383,740
===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
Notes to Financial Statements (Unaudited)
March 31, 1997
(1) General Information and Summary of Significant Accounting Policy
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 months ended March 31, 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
three month period ended March 31, 1997 according to the new statements
would not change from the reported amounts.
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 approximate 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 the lower of
depreciated cost or fair value and includes real estate brokerage
commissions paid to Apple Realty Group, a related party, for purchase
prior to March 1, 1997, and Cornerstone Realty Income Trust, Inc. after
March 1, 1997.
7
<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 to obtain an unsecured revolving line of credit of $10
million. The line of credit expires on March 31, 1998. Borrowings under
the agreement are evidenced by an unsecured promissory note and bears
interest at one-month LIBOR plus 200 basis points. As of March 31, 1997
the interest rate on the unsecured line of credit was 7.6875%.
The Company borrowed $10,000,000 on March 31, 1997 in conjunction with
property acquisitions against the line of credit. In April 1997, the
Company repaid $8,500,000 with proceeds from the additional sale of
shares..
(3) Common Stock
The Company received gross proceeds of $44,765,718 ($39,893,637) net of
selling commissions and other offering expenses from the sale of
4,643,239 shares for the three months ended March 31, 1997. As of March
31, 1997, David Lerner Associates, Inc. has earned a total of
$4,476,572 in connection with the offering of the Company's shares. The
Company provides an Additional Share Option to the shareholders to
reinvest distributions in the purchase of additional shares of the
Company. As of March 31, 1997, no funds had been reinvested.
No distributions were made during the quarter ended March 31, 1997.
(4) Related Parties
Prior to February 28, 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
8
<PAGE>
fee equal to 5% of rental income plus reimbursement of certain expenses
in the amount of $61,135. The Company paid the Advisors 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.
During March 1, 1997, with the approval of the Company, Cornerstone
Realty Income Trust Inc. ("Cornerstone"), for which Mr. Knight also
serves as Chief Executive Officer and Chairman of the Board, 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.
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 March 31, 1997, Cornerstone had earned
approximately $102,242 (net of expenses) for all of the subcontracted
and acquired services.
During the quarter, the Company granted Cornerstone a continuing right
to own 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 for approximately $3.8 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
quarterly evaluations with the approval of their 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.
(5) Subsequent Events
In April, 1997, the Company distributed to its shareholders
approximately $680,821 (20 cents per share) of which approximately
$445,114 was reinvested in the purchase of additional shares through
the Additional Share Option. In April 1997, the Company closed the sale
to investors of 542,066 shares at $10 per share representing net
proceeds to the Company of $4,878,599.
In April, 1997, the Company purchased The Arbors at Forest Ridge a
210-unit apartment community located in Bedford, Texas for $7,748,907.
(6) Acquisitions (unaudited)
The following unaudited pro forma information for the three months
ended March 31, 1997 is presented as if (a) the Company had owned the
properties listed 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
9
<PAGE>
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.
Three Months
Ended
3/31/97
Rental Income $1,231,461
Net Income $ 566,772
Net Income Per Share $.16
The pro forma information reflects adjustments for the actual rental
income and rental expenses of Brookfield, Eagle Crest, Tahoe and Mill
Crossing Apartments for 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.
10
<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
quarter ended March 31, 1997. During the quarter, the Company closed
the sale to investors of 4,643,239 shares (1,666,667 at $9 per share
and 2,976,572 at $10 per share) representing gross proceeds to the
Company of $44,765,718 and net proceeds after payment of selling
commissions and other costs of $39,893,637. The Company capitalized
$210,600 of improvements to its various properties during the quarter.
It is anticipated that some $1,874,000 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 the quarter ended March 31, 1997, the Company made seven
acquisitions of residential rental properties as follows:
Property Name Date Acquired Units Purchase Price Location
- ------------- ------------- ----- -------------- --------
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 $ 6,858,974 Arlington, TX
The balance on the line of credit as of March 31, 1997 was $10,000,000.
In April 1997, the Company repaid $8,500,000 of the balance and expects
to repay the balance within sixty days. This is consistent with the
Company's long term business objective to hold its properties on an
unleveraged basis.
Cash and cash equivalents totaled $1,383,740 at March 31, 1997.
While the Company is always assessing potential acquisitions, no
material commitments existed on May 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.
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.
11
<PAGE>
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
quarter ended March 31, 1997 and 1996 would not be meaningful. The
Company's property operations for the three months ended March 31, 1997
reflect the operations of the Company's seven acquisitions from their
respective acquisition dates. For the three months ended March 31,
1997, rental income was $1,155,766.
The economic occupancy levels for the Company's properties averaged 92%
at the end of the three months ended March 31, 1997. Overall, average
rental rates for the portfolio was $516 per month for the three months
ended March 31, 1997.
The Company's other source of income is the investment of its cash and
cash reserves. Interest income for the three months ended March 31,
1997 was $84,934.
Total expenses for the first three months was $684,445 in 1997. The
operating expense ratio (the ratio of rental expenses, excluding
general and administrative, amortization and depreciation expense, to
rental income) was 40% for the three months ended March 31, 1997.
General and administrative expenses totaled 7% of total rental income
for the three months ended March 31, 1997. This percentage is expected
to further 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 quarter ended March 31, 1997 was $137,689.
The Company does not believe that inflation had any significant impact
on the operation of the Company during the three months ended March 31,
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.
12
<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 March 31, 1997, the items reported and the
financial statements included in such filings.
Type and Date
of Reports Items Reported Financial Statements Filed
---------- -------------- --------------------------
Form 8-K dated 2, 7(e) None
January 28, 1997
Form 8-K dated 2,7(c) None
February 21, 1997
13
<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)
DATE: 5/15/97 BY: /s/ Stanley J. Olander
-------------------------- ----------------------
Stanley J. Olander
Vice President and Treasurer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,383,740
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 49,718,376
<DEPRECIATION> 137,689
<TOTAL-ASSETS> 51,835,527<F1>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 39,893,737
<OTHER-SE> 556,255
<TOTAL-LIABILITY-AND-EQUITY> 51,835,527<F1>
<SALES> 0
<TOTAL-REVENUES> 1,155,766<F2>
<CGS> 0
<TOTAL-COSTS> 684,445
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,934
<INCOME-PRETAX> 556,255
<INCOME-TAX> 0
<INCOME-CONTINUING> 556,255
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 556,255
<EPS-PRIMARY> 0.16
<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>
