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 June 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 August 1, 1997, there were outstanding 7,086,665 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 - June 30, 1997 3
and December 31, 1996
Statements of Operations - 4
Three months ended June 30, 1997
Six months ended June 30, 1997
Statement of Shareholders' Equity- 5
Six months ended June 30, 1997
Statement of Cash Flows - 6
Six months ended June 30, 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
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------- ----------
<S> <C>
ASSETS
Investment in Rental Property
Land ............................................................ $ 10,338,514 --
Building ........................................................ 56,431,640 --
Property improvements ........................................... 1,167,914 --
Furniture and fixtures .......................................... 87,385 --
------------ ------------
68,025,453 --
Less accumulated depreciation ................................... (443,341) --
------------ ------------
67,582,112 --
------------ ------------
Cash and cash equivalents ....................................... 932,613 100
Prepaid expenses ................................................ 144,540 --
Other assets .................................................... 201,521 --
------------ ------------
1,278,674 100
------------ ------------
Total Assets .................................................... $ 68,860,786 $ 100
============ ============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Short-term notes payable ........................................ $ 10,000,000 --
Accounts payable ................................................ 276,966 --
Accrued expenses ................................................ 819,170 --
Rents received in advance ....................................... 3,772 --
Tenant security deposits ........................................ 334,029 --
------------ ------------
11,433,938 --
Shareholders' equity
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 6,538,267 shares
and 10 shares, respectively .................................. 56,720,606 100
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 ........................... 706,242 --
------------ ------------
57,426,848 100
------------ ------------
Total Liabilities and Shareholders' Equity ...................... $68,860,786 $ 100
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1997 1997
-------------------- --------------------
<S> <C>
REVENUE:
Rental income ................................ $2,826,712 $3,982,478
EXPENSES:
Utility expenses ....................... 312,314 410,852
Repairs and maintenance ................ 204,696 264,296
Taxes and insurance .................... 472,857 578,955
Property management .................... 135,790 196,453
Advertising ............................ 72,528 106,003
General and administrative ............. 121,815 199,317
Amortization expense ................... 8,484 16,960
Depreciation of rental property ........ 305,652 443,341
Other operating expenses ............... 221,378 323,782
-------------------- --------------------
Total expenses ......... 1,855,514 2,539,959
-------------------- --------------------
Income before interest income (expense) ........................ 971,198 1,442,519
Interest income ............................................. 4,607 88,541
Interest expense ............................................ (144,336) (144,336)
-------------------- --------------------
Net income ..................................................... $831,469 $1,386,724
==================== ====================
Net income per share ........................................... $0.15 $0.31
==================== ====================
Weighted average number of shares outstanding .................. 5,458,096 4,430,927
==================== ====================
Distributions per share ........................................ - $ 0.20
==================== ====================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Convertible Class B Stock
Net of Net
receivable income Total
Number Number from principal greater than Shareholders'
of Shares Amount of Shares shareholder distributions Equity
--------------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1996 ................ 10 $ 100 200,000 $ 0 $ -- $ 100
Net proceeds from the sale of shares ........ 6,076,001 52,560,209 -- -- -- 52,560,209
Net income .................................. -- -- -- -- $1,386,724 1,386,724
Cash distributions paid to
shareholders ($.20 per share) .......... -- -- -- -- (680,482) (680,482)
Shares issued to Cornerstone
Realty Income Trust, Inc. ............. 417,778 3,760,000 -- -- -- 3,760,000
Shares issued through Additional Share Option 44,478 400,297 -- -- -- 400,297
----------------------------------------------------------------------------------
Balance at June 30, 1997 .................... 6,538,267 $ 56,720,606 $ 200,000 $ 0 $706,242 $57,426,848
==================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
----------
<S> <C>
Cash flows from operating activities:
Net income .................................................... $1,386,724
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 460,301
Changes in operating assets and liabilities:
Prepaid expenses .......................................... (144,540)
Other assets .............................................. (218,481)
Accounts payable .......................................... 276,966
Accrued expenses .......................................... 819,170
Rent received in advance .................................. 3,772
Tenant security deposits .................................. 334,029
-----------
Net cash provided by operating activities 2,917,942
Cash flows from investing activities:
Acquisitions of rental property ............................... (66,770,154)
Capital improvements .......................................... (1,255,299)
-----------
Net cash used in investing activities .... (68,025,453)
Cash flows from financing activities:
Proceeds from short-term borrowings ........................... 26,540,000
Repayments of short-term borrowings ........................... (16,540,000)
Net proceeds from issuance of shares .......................... 56,720,606
Cash distributions paid to shareholders ....................... (680,482)
-----------
Net cash provided by financing activities 66,040,124
Increase in cash and cash equivalents ... 932,613
Cash and cash equivalents, beginning of year ..................... --
-----------
Cash and cash equivalents,
end of period ............ $ 932,613
===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
Notes to Financial Statements (Unaudited)
June 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 six months ended June 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 six month
period ended June 30, 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 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 June 30, 1997
the interest rate on the unsecured line of credit was 7.6875%.
The outstanding balance on the line of credit was $10 million on June 30,
1997.
In July 1997, the Company repaid $3,500,000 of the line of credit with
proceeds from the additional sale of shares.
(3) Common Stock
The Company received gross proceeds of $59,538,116 ($52,960,506 net of
selling commissions and other offering expenses) from the sale of
6,120,479 shares for the six months ended June 30, 1997. The Company
provides an Additional Share Option to the shareholders to reinvest
distributions in the purchase of additional shares of the Company which
is included in the gross and net proceeds from the sale of shares above.
As of June 30, 1997, $444,775 (net proceeds of $400,297) has been
reinvested.
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.
(4) Related Parties
<PAGE>
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.
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 June 30, 1997, Cornerstone had earned
approximately $902,706 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 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 quarterly 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.
(5) Subsequent Events
During July 1997, the Company distributed to its shareholders
approximately $1,044,048 (20.1 cents per share) of which approximately
$674,537 was reinvested in the purchase of additional shares through the
Additional Share Option. The Company also closed the sale to investors of
480,955 shares at $10 per share representing net proceeds to the Company
of $4,328,598.
<PAGE>
During August 1997, the Company purchased River Hill Apartments, a
192-unit apartment community for $7,275,000 and Chaparosa Apartments, a
170-unit apartment community for $5,825,000 using the line of credit.
Both apartment communities are located in Irving, TX.
(6) Acquisitions (unaudited)
The following unaudited pro forma information for the six months ended
June 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.
Six Months
Ended
6/30/97
-------
Rental Income $6,776,178
Net Income $2,431,865
Net Income Per Share $ .37
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 and Paces Cove
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
six months ended June 30, 1997. During the six months ended June 30,
1997, the Company closed the sale to investors of 6,120,479 shares
representing gross proceeds to the Company of $59,538,116 and net
proceeds after payment of selling commissions and other costs of
$52,960,506. The Company capitalized $1,255,299 of improvements to its
various properties as of June 30, 1997. It is anticipated that some
$2,000,000 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 the quarter ended June 30, 1997, the Company made two
acquisitions of residential rental property as follows:
<TABLE>
<CAPTION>
Property Name Date Acquired Units Purchase Price Location
------------- ------------- ----- -------------- --------
<S> <C>
The Arbors Apartments April 1997 210 $7,748,907 Bedford, TX
Paces Cove Apartments June 1997 328 $9,277,355 Dallas, TX
</TABLE>
During the six months ended June 30, 1997, the Company borrowed
$26,540,000 against the line of credit in conjunction with property
acquisitions and repaid $16,540,000 of the balance. The balance on the
line of credit as of June 30, 1997 was $10,000,000. In July 1997, the
Company repaid $3,500,000 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 $932,613 at June 30, 1997.
While the Company is always assessing potential acquisitions, no
material commitments existed on August 10, 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.
The Company's capital resources are expected to grow with the continued
sale of its shares and through operations.
<PAGE>
Results of Operations
As operations of the Company began in January 1997, a comparison of the
three months or six months ended June 30, 1997 and 1996 is not
possible. The Company's property operations for the six months ended
June 30, 1997 reflect the operations of the Company's nine acquisitions
from their respective acquisition dates. Rental income for the three
and six months ended June 30, 1997 was $3,982,478 and $2,826,712,
respectively.
The economic occupancy levels for the Company's properties averaged 94%
at the end of the three and six months ended June 30, 1997. Overall,
the average rental rates for the portfolio was $540 per month for the
six months ended June 30, 1997 and $520 for the three months ended June
30, 1997.
The Company's other source of income is the investment of its cash and
cash reserves. Interest income for the three and six months ended June
30, 1997 was $88,541 and $4,607, respectively.
Total expenses for the six months ended June 30, 1997 was $2,539,959
and $1,855,514 for the three months ended June 30, 1997. The operating
expense ratio (the ratio of rental expenses, excluding general and
administrative, amortization and depreciation expense, to rental
income) was 47% for the six months ended June 30, 1997 versus 50% for
the three months ended June 30, 1997. General and administrative
expenses totaled 5% of total rental income for the six months ended
June 30, 1997 and 4% for the three months ended June 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 six months ended
June 30, 1997 was $443,341 and $305,652 for the three months ended June
30, 1997.
The Company does not believe that inflation had any significant impact
on the operation of the Company during the six months ended June 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 June 30, 1997, the items reported and the financial
statements included in such filings.
<TABLE>
Type and Date of Reports Items Reported Financial Statements Filed
- ------------------------ -------------- ----------------------------
<S> <C>
Form 8-K dated 2 None
March 31, 1997
Form 8-K dated 2 None
April 25, 1997
Form 8-K/A (date of Original 7(a),(b) and (c) Historical Statement of Income and
Report January 28, 1997) Direct Operating Expenses of Eagle
Crest Apartments for the twelve months
ended December 31, 1996.
Historical Statement of Income and
Direct Operating Expenses of Brookfield
Apartments for the twelve months ended
December 31, 1996.
Historical Statement of Income and
Direct Operating Expenses of Tahoe
Apartments for the twelve months ended
December 31, 1996.
Form 8-K/A (date of Original 7 (a) Historical Statement of Income and
Report: February 21, 1997) Direct Operating Expenses of Mill
Crossing Apartments for the twelve
months ended January 31, 1997.
Form 8-K/A (date of Original 7 (a), (b) and (c) Historical Statement of Income and
March 31, 1997) Direct Operating Expenses of Polo
Run Apartments for the twelve months
ended February 28, 1997.
Historical Statement of Income and
Direct Operating Expenses of Wildwood
Apartments for the twelve months ended
February 28, 1997.
Historical Statement of Income and
Direct Operating Expenses of Toscana
Apartments for the twelve months ended
February 28, 1997.
Form 8-K/A (date of Original 7 (a) Historical Statement of Income and
Report: April 25, 1997) Direct Operating Expenses of The
Arbors Apartments for the twelve months
ended February 28, 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)
DATE: 8-14-97 BY: /s/ Stanley J. Olander
------- ---------------------------------------
Stanley J. Olander
Vice President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 932,613
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 68,025,453
<DEPRECIATION> 443,341
<TOTAL-ASSETS> 68,860,786
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 56,720,606
<OTHER-SE> 706,242
<TOTAL-LIABILITY-AND-EQUITY> 68,860,786
<SALES> 0
<TOTAL-REVENUES> 3,982,478
<CGS> 0
<TOTAL-COSTS> 2,539,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144,336
<INCOME-PRETAX> 1,386,724
<INCOME-TAX> 0<F2>
<INCOME-CONTINUING> 1,386,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,386,724
<EPS-PRIMARY> 0.28
<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>
