FILED PURSUANT TO RULE 424(B)(3); FILE
NO. 333-64029; STICKER SUPPLEMENT TO
SUPPLEMENT NO. 1 DATED NOVEMBER 10,
1998; SUPPLEMENT NO. 1 DATED NOVEMBER
10, 1998 TO BE USED WITH PROSPECTUS
DATED OCTOBER 16, 1998
SUMMARY OF SUPPLEMENT NO. 1 TO PROSPECTUS
(SEE THE SUPPLEMENT FOR ADDITIONAL INFORMATION):
Supplement No. 1 dated November 10, 1998:
(1) Reports on the acquisition by the Company of two additional apartment
complexes.
(2) Contains unaudited financial statements of the Company for the nine
months ended September 30, 1998 and the related management's
discussion and analysis of financial condition and results of
operations.
As of November 10, 1998, the Company had closed the sale to investors under
the Prospectus of 1,183,773 Shares at $10 per Share, representing aggregate
gross proceeds to the Company of $11,837,734 and proceeds net of selling
commissions and marketing expenses of $10,653,961. The Company endeavors
continually to invest proceeds in the acquisition of additional suitable
apartment communities as promptly as practicable after the receipt of such
proceeds. As of November 20, 1998, approximately $26 million of the proceeds of
all Common Share offerings available for investment in properties had not been
so invested.
Apple Residential Management Group, Inc. and its affiliates have received
and are expected to continue to receive fees and expense reimbursements in
connection with the Company's acquisitions and the management of the properties
and the Company. In connection with the two property acquisitions described in
this Supplement, Apple Residential Management Group, Inc. received property
acquisition fees totaling $348,000.
<PAGE>
FILED PURSUANT TO RULE 424(B)(3); FILE
NO. 333-64029; SUPPLEMENT NO. 1 DATED
NOVEMBER 10, 1998 TO BE USED WITH
PROSPECTUS DATED OCTOBER 16, 1998
SUPPLEMENT NO. 1 DATED NOVEMBER 10, 1998
TO PROSPECTUS DATED OCTOBER 16, 1998
APPLE RESIDENTIAL INCOME TRUST, INC.
The following information supplements the Prospectus of Apple Residential
Income Trust, Inc. dated October 16, 1998 (the "Prospectus") and should be
considered part of such Prospectus. Prospective investors should carefully
review both the Prospectus and this Supplement. Capitalized terms that are used
but not defined in this Supplement have the meanings given to them in the
Prospectus.
STATUS OF THE OFFERING
As of November 10, 1998, the Company had closed the sale to investors under
the Prospectus of 1,183,773 Shares, representing gross proceeds to the Company
of $11,837,734, and proceeds net of selling commissions and marketing expenses
of $10,653,961.
PROPERTY ACQUISITIONS
On October 28, 1998, the Company purchased the Burney Oaks Apartments in
Arlington, Texas, and on October 29, 1998, the Company purchased the Brandywine
Park Apartments in Richardson, Texas. Additional information on these properties
is provided below.
BURNEY OAKS APARTMENTS
ARLINGTON, TEXAS
On October 28, 1998, Apple REIT Limited Partnership purchased the Burney
Oaks Apartments located at 2502 Burney Oaks Lane in Arlington, Texas (the
"Property").
The Property comprises 240 apartment units. The purchase price for the
Property was $9,300,000. The seller was JMB Institutional Apartment Limited
Partnership-II, an Illinois limited partnership, which is not affiliated with
the Company, Apple Residential Management Group, Inc. (the "Advisor") or their
affiliates. The purchase price was paid entirely in cash using proceeds from the
sale of Shares. Title to the Property was conveyed to the Company by limited
warranty deed.
LOCATION. The Property is located on Burney Oaks Lane off of Highway 360 in
Arlington, Texas. The Property is located within the greater Dallas/Fort Worth
Metropolitan Statistical Area, or as it is called locally, "The Metroplex." For
information on The Metroplex, see under "Brookfield Apartments" on page 39 of
the Prospectus, and for information on Arlington, see under "Aspen Hill
Apartments" on page 44 of the Prospectus.
The immediate area surrounding the Property consists of other multi-family
and single-family housing, and commercial and retail development. The Property
is near businesses, restaurants, schools and churches and is readily accessible
from Highways 360 and 183. The Property is an approximately 20-minute drive from
Dallas/Fort Worth International Airport, an approximately 30-minute drive from
the Dallas Central Business District, and an approximately 15-minute drive from
the Fort Worth Central Business District.
DESCRIPTION OF THE PROPERTY. The Property consists of 240 garden-style
apartment units in 12 two- and three-story buildings on approximately 9.6 acres
of land. The Property was constructed in 1985.
The Property offers 10 different unit types. The unit mix and rents being
charged new tenants as of October 1998 are as follows:
S-1
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ----------------------------------------- ------------ --------
<S> <C> <C> <C>
96 One bedroom, one bathroom 620 $ 515
8 One bedroom, one bathroom w/desk 710 575
24 One bedroom, one bathroom w/fireplace 710 580
32 One bedroom, one bathroom w/sunroom 800 620
4 Two bedrooms, two bathrooms w/desk 965 705
16 Two bedrooms, two bathrooms w/fireplace 965 710
4 Two bedrooms, two bathrooms w/desk 1,000 725
16 Two bedrooms, two bathrooms w/fireplace 1,000 730
20 Two bedrooms, two bathrooms w/sunroom 1,050 740
20 Two bedrooms, two bathrooms w/sunroom 1,120 750
</TABLE>
The apartments provide a total of approximately 190,500 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$180,000 for repairs and improvements to the Property, to include clubhouse
renovations, exterior painting and interior upgrades.
The following information is provided by the seller. Physical occupancy at
the Property averaged approximately 95% in 1993, 94% in 1994, 94% in 1995, 93%
in 1996, 95% in 1997 and 93% during the first nine months of 1998. Leases at the
Property are generally for terms of one year or less. Average rental rates for
the past five years have generally increased. As an example, a one-bedroom, one
bathroom apartment unit (800 square feet) rented for $450 in 1993, $475 in 1994,
$505 in 1995, $545 in 1996 and $545 in 1997. The average effective annual rental
per square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $6.67,
$7.04, $7.48, $8.07, and $8.07, respectively.
The Property has an outdoor swimming pool, a fitness center, two saunas, a
heated Jacuzzi and controlled access. There is a clubhouse with a leasing
office. There are 228 covered parking spaces and additional paved uncovered
parking.
The buildings are wood frame construction with exteriors of a combination
of brick veneer, painted wood and stucco on concrete slab foundations. Roofs are
pitched and covered with asphalt shingles on plywood sheathing.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. Each unit has a washer and dryer, a pantry, a linen closet and
miniblinds. A total of 96 units have a fireplace and 24 units have a built-in
desk. The owner of the Property pays for cold water, sewer service, trash
removal and gas for hot water. The residents pay for their electricity usage,
which includes cooking, lighting, heating and air-conditioning.
There are at least seven apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 95% on October 31, 1998.
As of October 28, 1998, the Property was approximately 94% occupied. The
tenants are a mix of white-collar and blue-collar workers, students and retired
persons.
S-2
<PAGE>
The following table sets forth the 1998 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
- --------------------------- ------------- ------------- ----------------
<S> <C> <C> <C>
County of Tarrant ......... $6,948,993 $ 2.10152 $ 146,034.20
City of Arlington ......... 6,948,993 0.63800 44,334.58
-------------
Total .................... $ 190,368.78
</TABLE>
The basis of the depreciable residential real property portion of the
Property (currently estimated at about $8,283,095) will be depreciated over 27.5
years on a straight-line basis. The basis of the personal property portion will
be depreciated in accordance with the modified accelerated cost recovery system
of the Internal Revenue Code of 1986, as amended (the "Code"). Amounts to be
spent by the Company on repairs and improvements will be treated for tax
purposes as permitted by the Code based on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Residential Management Group, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $186,000.
Apple Residential Management Group, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
BRANDYWINE PARK APARTMENTS
RICHARDSON, TEXAS
On October 29, 1998, Apple REIT Limited Partnership purchased the
Brandywine Park Apartments located at 1111 Abrams Road in Richardson, Texas (the
"Property").
The Property comprises 196 apartment units. The purchase price for the
Property was $8,100,000. The seller was Abrams One Properties Limited
Partnership, a Texas limited partnership, which is not affiliated with the
Company, the Advisor or their affiliates. The purchase price was paid entirely
in cash using proceeds from the sale of Shares. Title to the Property was
conveyed to the Company by limited warranty deed.
LOCATION. The Property is located on Abrams Road on the north side of
Interstate 635 (L.B.J. Freeway) and east of U. S. Highway 75 (Central
Expressway) in Richardson, outside of Dallas, Texas. The Property is located
within The Metroplex. For information on The Metroplex, see under "Brookfield
Apartments" on page 39 of the Prospectus.
The immediate area surrounding the Property consists of other multi-family
and single-family housing, and commercial and retail development. The Property
is located less than a mile from a multi-billion-dollar Texas Instruments
facility. The Property is also located immediately adjacent to Richland
Community College, a two-year college. The Property is located near restaurants,
businesses, schools and churches and is readily accessible from Interstate 635
and Highway 75. The Property is an approximately 20-minute drive from
Dallas/Fort Worth International Airport and an approximately 15-minute drive
from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 196 garden-style
apartment units in 17 two-story buildings on approximately 11 acres of land. The
Property was constructed in 1978.
S-3
<PAGE>
The Property offers three different unit types. The unit mix and rents
being charged new tenants as of October 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------- ------------ --------
<S> <C> <C> <C>
80 One bedroom, one bathroom 700 $ 530
60 Two bedrooms, two bathrooms 1,067 740
56 Three bedrooms, two bathrooms 1,392 870
</TABLE>
The apartments provide a total of approximately 200,000 square feet of net
rentable area.
The Company believes the Property has generally been well maintained and is
in good condition for a property of its age. However, the Company has budgeted
approximately $1,078,000 for repairs and improvements to the Property, including
clubhouse renovations, siding replacement, exterior painting, pool renovations,
foundation corrections and interior upgrades.
The following information is provided by the seller. Physical occupancy at
the Property averaged approximately 96% in 1996 , 97% in 1997 and 97% during the
first nine months of 1998. Occupancy rates for earlier periods are not
available. Leases at the Property are generally for terms of one year or less.
Average rental rates for the past five years have generally increased. As an
example, a three-bedroom, two-bathroom apartment rented for $700 in 1993, $710
in 1994, $710 in 1995, $735 in 1996 and $750 in 1997. The average effective
annual rental per square foot at the Property for 1993, 1994, 1995, 1996 and
1997 was $6.50, $6.60, $6.60, $6.83, and $6.97, respectively.
The Property has an outdoor swimming pool, a playground and a picnic are.
There is also a clubhouse with a leasing office. There are 196 covered parking
spaces and additional paved uncovered parking.
The buildings are wood frame construction with a combination of brick
veneer and painted wood siding exteriors on concrete slab foundations. Roofs are
pitched and covered with asphalt shingles on plywood sheathing.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. All units have a washer and dryer, a wood-burning fireplace,
ten-foot ceilings, ceiling fans, mini and vertical blinds and assigned covered
parking. The owner of the Property pays for cold water, sewer service, trash
removal and gas for hot water. The tenants pay for their electricity service,
which includes cooking, lighting, heating and air-conditioning.
There are at least four apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 94% on October 31, 1998.
As of October 26, 1998, the Property was approximately 98% occupied. The
tenants are a mix of white-collar and blue-collar workers and retired persons.
The following table sets forth the 1998 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
- ---------------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
County of Dallas ........... $6,073,780 $ 0.43307 $ 26,303.96
City of Richardson ......... 6,073,780 0.44385 26,958.47
Richardson I.S.D. .......... 6,073,780 1.62570 98,741.44
------------
Total ..................... $ 152,003.88
</TABLE>
S-4
<PAGE>
The basis of the depreciable residential real property portion of the
Property (currently estimated at about $6,161,411) will be depreciated over 27.5
years on a straight-line basis. The basis of the personal property portion will
be depreciated in accordance with the modified accelerated cost recovery system
of the Code. Amounts to be spent by the Company on repairs and improvements will
be treated for tax purposes as permitted by the Code based on the nature of the
expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Residential Management Group, Inc. a property
acquisition fee equal to 2% of the purchase price of the property, or $162,000.
Apple Residential Management Group, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
CERTAIN RELATIONSHIPS WITH CORNERSTONE REALTY INCOME TRUST
Cornerstone Realty Income Trust, Inc. ("Cornerstone") has been providing
property management, advisory and real estate brokerage services to the Company.
The property management and advisory services have been provided by Cornerstone
under subcontracts from Apple Residential Management Group, Inc. ("ARMG") and
Apple Residential Advisors, Inc. ("ARA"), the entities that originally
contracted with the Company for the providing of such services. As to the real
estate brokerage services, Cornerstone previously purchased the assets of Apple
Realty Group, Inc. ("ARG") -- consisting principally of the real estate
brokerage agreement -- and thereby succeeded to ARG in providing such services
to the Company.
Effective at the close of business on September 30, 1998, the subcontract
agreements described above were terminated, and ARA assigned to ARMG its rights
and responsibilities under the advisory agreement. Thus, as of October 1, 1998,
the property management and advisory services to the Company are now performed
by ARMG using employees leased from Cornerstone. Effective October 1, 1998,
Cornerstone sold to ARMG its rights in the real estate brokerage agreement.
Beginning on such date ARMG will provide the services and be entitled to the
compensation under the real estate brokerage agreement. ARMG will lease
employees necessary to provide such services from Cornerstone.
It is not expected that the restructuring of the relationships under which
the Company receives property management, advisory and real estate brokerage
services will have any material effect on the Company since in substance
Cornerstone will continue to provide such services to the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is based upon the unaudited financial statements
of the Company as of September 30, 1998 and the financial statements of the
Company as of December 31, 1997. The information should be read in conjunction
with the Company's financial statements and notes thereto included elsewhere in
the Prospectus and this Supplement No. 1. The Company is operated and has
elected to be treated as a REIT for federal income tax purposes.
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1993, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements include, without limitation, statements concerning anticipated
improvements in financial operations from completed and planned property
renovations. Such statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from the results of operations or
plans expressed or implied by such forward-looking statements. Such factors
include, among other things, unanticipated adverse business developments
affecting the Company or the
S-5
<PAGE>
properties, as the case may be, adverse changes in the real estate markets and
general and local economies and business conditions, and Year 2000 compliance
issues. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore there can be no assurance that
such statements will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the results or conditions described in such
statements or the objectives and plans of the Company will be achieved.
RESULTS OF OPERATIONS
Income and occupancy
Substantially all of the Company's income is from the rental operation of
apartment communities. The Company's rental income for the nine months ended
September 30, 1998 reflects the operations from the properties acquired before
1998 and from the 13 properties acquired in 1998 from their respective
acquisition dates. Rental income for the first nine months increased to
$20,256,606 in 1998 from $7,766,740 in 1997. For the third quarter of 1998
rental income increased to $9,221,478 from $3,788,306 in 1997. The increase in
rental income is primarily due to the 1997 acquisition operations, as well as
the incremental effect of the 1998 acquisition operations.
Rental income is expected to continue to increase from the impact of
planned improvements which are being made in an effort to improve the
properties' marketability, economic occupancies, and rental rates.
Overall economic occupancy for the Company's properties was 93% for the
nine months ended September 30, 1998 and 1997. For the third quarter of 1998 and
1997, economic occupancy averaged 94% and 93%, respectively. Overall, the
average rental rates for the portfolio increased 19% to $561 per month from $469
per month for the nine months ended September 30, 1998 and 1997, respectively.
For the third quarter of 1998 and 1997 average rental rates increased 4% to $564
from $540 per month, respectively. The increase is primarily due to rental
increases combined with increases in average rental rates of properties
acquired.
The Company's other source of income is the investment of its cash and cash
reserves. Interest income for the nine months ended September 30, 1998 and 1997
was $1,188,355 and $107,584, respectively. For the third quarter of 1998 and
1997, interest income was $366,559 and $19,043, respectively. The increases are
due to the Company's investment balance held in liquid money market investments
pending use for acquisitions. The investment rate was 5% at September 30, 1998.
It is anticipated the interest income will decrease with the use of cash to fund
future acquisitions.
Expenses
Total expenses for the first nine months of 1998 increased to $13,785,472
from $5,218,461 in 1997. For the third quarter of 1998, total expenses increased
to $6,390,838 from $2,699,214 for the same period in 1997. The increases are due
largely to the increase in the number of apartments. The operating expense ratio
(the ratio of rental expenses, excluding general and administrative,
amortization and depreciation expense, to rental income) was 47% and 48% for the
nine months ended September 30, 1998 and 1997, respectively. For the third
quarter of 1998 and 1997, the operating expense ratio was 49%. The decreases are
primarily due to a full period of operation of the 1997 acquisitions and
increased efficiencies associated with economies of scale.
General and administrative expenses totaled 2.9% of total rental income for
the nine months ended September 30, 1998 and 4.6% for the same period in 1997.
For the third quarter of 1998 and 1997, general and administrative expense
totaled 2.4% and 4.6%, respectively, of total income. 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 month period ended September 30 has
increased to $3,680,000 in 1998 from $1,086,111 in 1997. For the third quarter
of 1998 depreciation expense was $1,600,000 in 1998 and $780,459 for 1997. The
increase is directly attributable to the acquisition of additional apartment
communities in 1998 and 1997.
S-6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
There was a significant change in the Company's liquidity during the nine
months ended September 30, 1998, as the Company continued to acquire properties.
During the nine months ended September 30, 1998, the Company closed the sale to
investors of 12,322,098 Shares representing gross proceeds to the Company of
$123,220,986 and net proceeds after payment of brokerage fees and other
offering-related costs of $110,538,076.
Using proceeds from the sale of Common Shares and assumption of mortgage
loans, the Company acquired 3,150 apartment homes in thirteen residential rental
communities during first nine months of 1998. The following is information on
these thirteen acquisitions:
<TABLE>
<CAPTION>
APARTMENT
PROPERTY NAME DATE ACQUIRE HOMES PURCHASE PRICE LOCATION
- ----------------------------- --------------- ---------- ---------------- ------------------
<S> <C> <C> <C> <C>
Main Park ................... February 1998 192 $ 8,000,000 Duncanville, TX
Timberglen .................. February 1998 304 12,000,000 Dallas, TX
Copper Ridge ................ March 1998 200 4,525,000 Fort Worth, TX
Silver Brook ................ May 1998 472 13,505,000 Grand Prairie, TX
Summer Tree ................. June 1998 232 5,700,000 Dallas, TX
Park Village ................ July 1998 238 7,000,000 Bedford, TX
Cottonwood Crossing ......... July 1998 200 5,700,000 Arlington, TX
Pepper Square ............... July 1998 144 5,205,000 Dallas, TX
Pace's Point ................ July 1998 300 11,405,000 Lewisville, TX
Hayden's Crossing ........... July 1998 170 4,705,000 Grand Praire, TX
Emerald Oaks ................ July 1998 250 10,930,000 Grapevine, TX
Newport ..................... July 1998 200 6,330,000 Austin, TX
Estrada Oaks ................ July 1998 248 9,350,000 Irving, TX
</TABLE>
Mortgage payable
During July 1998, the Company assumed $24.1 million in mortgage loans in
connection with the acquisition of five properties. The total of the mortgage
loans at September 30, 1998 was approximately $25.3 million (see Note 3 to the
consolidated financial statements).
Cash and cash equivalents
Cash and cash equivalents totaled $47,090,703 at September 30, 1998. During
the first nine months of 1998, the Company distributed $8,541,324 to its
shareholders, of which $5,231,567 was reinvested in additional shares through
the Additional Share Option. The reinvested funds netted the Company $4,708,410
after payment of brokerage fees. During the nine months of 1998, the Company
distributed $252,326 to Cornerstone on Common Shares that had been purchased by
Cornerstone.
Capital requirements
The Company has an ongoing capital expenditure commitment to fund its
renovation program for recently acquired properties. In addition, the Company is
always assessing potential acquisitions and intends to acquire additional
properties during 1998. During October 1998, the Company purchased two
properties for approximately $17.4 million. The properties were purchased using
proceeds from the offering. As of November 1, 1998, no material commitments
existed for the purchase of additional properties. The potential sources to fund
the improvements and any additional acquisitions include additional equity and
cash reserves. The Company may also seek to obtain and utilize an unsecured line
of credit to facilitate acquisitions, if deemed appropriate by management.
The Company capitalized $7.3 million of improvements to its various
properties during the first nine months of 1998. It is anticipated that some $5
million in additional capital improvements will be completed during the next
year on the current portfolio, which are expected to be funded through cash
reserves and dividend reinvestment.
S-7
<PAGE>
The Company has short-term cash flow needs in order 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
and distributions.
Capital resources are expected to grow with the future sale of its Common
Shares and the cash flow from operations. During 1998, approximately 52% of
1998's distributions, $4,455,708 (net of brokerage commissions), were reinvested
in additional Common Shares. In general, the Company's liquidity and capital
resources are expected to be adequate to meet its cash requirements in 1998.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000.
The Company has completed an assessment of its programs and determined that
it will require upgrading portions of its software so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter, as
well as upgrading certain computer hardware. The Company is actively engaged in
upgrading the computer systems. The Company's accounting, property management,
human resource, and payroll applications are classified as year 2000 compliant
by their respective software vendors once upgraded, but have not been tested by
the Company. As the software is upgraded, the Company will begin testing their
compliancy which will be included in the overall system testing which is
scheduled to be completed in the second quarter of 1999. To the extent such
vendors are unable to perform services due to their year 2000 related issues,
the Company will seek other similar vendors who are capable of providing
services.
The Company is also exposed to the risk that one or more of its vendors or
service providers could experience year 2000 problems that impact the ability of
such vendor or service provider to provide goods and services. Though this is
not considered as significant a risk with respect to the suppliers of goods, due
to the availability of alternative suppliers, the disruption of certain
services, such as utilities, could, depending upon the extent of the disruption,
have a material adverse impact on the Company's operations. To date, the Company
is not aware of any vendor or service provider year 2000 issue that management
believes would have a material adverse impact on the Company's operations.
However, the Company has no means of ensuring that its vendors or service
providers will be year 2000 ready. The inability of vendors or service providers
to complete their year 2000 resolution process in a timely fashion could have an
adverse impact on the Company. The effect on non-compliance by vendors or
service providers is not determinable at this time.
The Company utilizes microprocessors which are imbedded in systems which
are part of the Company's operations. In particular, year 2000 problems in the
HVAC, telephone, security or other such systems at the properties could disrupt
operations at the affected properties. The Company anticipates that its
assessment will be complete by the end of 1998. At this point, based on the
status of its assessment the Company does not believe a material number of these
systems will be non-compliant. Additionally, many of these systems, which
operate automatically, can be operated manually and consequently in the event
these systems experience a failure as a result of the year 2000 problem, the
disruption caused by such failure should not be material the Company's
operations.
There should be no additional cost to the Company for the software and
computer hardware upgrades to become year 2000 compliant. The software upgrades
are included in the annual maintenance fee paid by the Company to the vendors
and the computer hardware upgrades are included in the ordinary course
regardless of the year 2000 issue. Substantially all of those costs have been
expensed as incurred in 1998 and the remaining will be expensed as incurred
during the first quarter of 1999.
Management believes it is devoting the resources necessary to achieve year
2000 readiness in a timely manner.
S-8
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
COMPANY INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets -- September 30, 1998 and December 31, 1997 ............... F-2
Consolidated Statements of Operations -- Three Months ended September 30, 1998
and September 30, 1997 and Nine Months Ended September 30, 1998 and September
30, 1997 ............................................................................ F-3
Consolidated Statement of Shareholders' Equity -- Nine Months ended September
30, 1998 ............................................................................ F-3
Consolidated Statements of Cash Flows -- Nine Months ended September 30, 1998
and September 30, 1997 .............................................................. F-4
Notes to Consolidated Financial Statements ............................................ F-5
</TABLE>
F-1
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ---------------
<S> <C> <C>
ASSETS
Investment in Rental Property
Land ............................................................. $ 35,291,836 $ 15,396,823
Buildings and property improvements .............................. 169,230,344 73,113,886
Furniture and fixtures ........................................... 2,139,825 1,123,639
------------ ------------
206,662,005 89,634,348
Less accumulated depreciation .................................... (5,578,003) (1,898,003)
------------ ------------
201,084,002 87,736,345
Cash and cash equivalents ........................................ 47,090,703 24,162,572
Prepaid expenses ................................................. 142,156 142,581
Other assets ..................................................... 1,668,108 444,022
------------ ------------
Total Assets ................................................... $249,984,969 $112,485,520
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable ........................................... $ 25,323,184 $ --
Accounts payable ................................................. 763,854 536,324
Accrued expenses ................................................. 4,334,180 2,143,888
Rents received in advance ........................................ 46,966 70,051
Tenant security deposits ......................................... 838,286 394,702
------------ ------------
Total Liabilities .............................................. 31,306,470 3,144,965
Shareholders' equity
Common stock, no par value, authorized 50,000,000 shares; issued and outstanding
24,693,927 shares and 12,371,829 shares,
respectively ..................................................... 219,628,535 109,090,459
Class B convertible stock, no par value, authorized 200,000 shares;
issued and outstanding 200,000 shares ............................ 20,000 20,000
Receivable from officer-shareholder ............................... -- (20,000)
Net income greater (less) than distributions ...................... (970,036) 250,096
------------ ------------
Total Shareholders' Equity ..................................... 218,678,499 109,340,555
------------ ------------
Total Liabilities and Shareholders' Equity ..................... $249,984,969 $112,485,520
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Rental income .................................. $ 9,221,478 $ 3,788,306 $ 20,256,606 $ 7,766,740
EXPENSES:
Property and maintenance ....................... 2,684,070 1,069,775 5,555,743 2,170,664
Taxes and insurance ............................ 1,370,123 597,227 2,832,675 1,176,182
Property management ............................ 503,250 207,026 1,109,495 403,479
General and administrative ..................... 221,820 173,932 579,015 356,581
Amortization expense ........................... 11,576 8,484 28,544 25,444
Depreciation of rental property ................ 1,600,000 642,770 3,680,000 1,086,111
----------- ----------- ------------ -----------
Total expenses ................................ 6,390,839 2,699,214 13,785,472 5,218,461
----------- ----------- ------------ -----------
Income before interest income (expense) ......... 2,830,639 1,089,092 6,471,134 2,548,279
Interest income ................................ 366,559 19,043 1,188,355 107,584
Interest expense ............................... (312,466) (251,406) (338,297) (412,410)
----------- ----------- ------------ -----------
Net income ...................................... $ 2,884,732 $ 856,729 $ 7,321,192 $ 2,243,453
=========== =========== ============ ===========
Basic and diluted earnings per common
share .......................................... $ 0.13 $ 0.12 $ 0.41 $ 0.44
=========== =========== ============ ===========
Distributions per common share .................. $ 0.20 $ 0.20 $ 0.61 $ 0.41
=========== =========== ============ ===========
</TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE
COMMON STOCK CLASS B STOCK
---------------------------- ----------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
------------ --------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ..... 12,371,829 $109,090,459 200,000 $20,000
Net proceeds from the sale of
shares .......................... 11,798,941 105,829,666 -- --
Net income ....................... -- -- -- --
Cash distributions declared to
shareholders ($.61 per share).... -- -- -- --
Payment from officer-
shareholder ..................... -- -- -- --
Shares issued through Additional
Share Option .................... 523,157 4,708,410 -- --
---------- ------------ ------- -------
Balance at September 30, 1998 .... 24,693,927 $219,628,535 200,000 $20,000
========== ============ ======= =======
<CAPTION>
RECEIVABLE NET INCOME TOTAL
FROM OFFICER- GREATER THAN SHAREHOLDERS'
SHAREHOLDER DISTRIBUTIONS EQUITY
-------------- -------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1997 ..... ($ 20,000) $ 250,096 $109,340,555
Net proceeds from the sale of
shares .......................... -- -- 105,829,666
Net income ....................... -- 7,321,192 7,321,192
Cash distributions declared to
shareholders ($.61 per share).... -- (8,541,324) (8,541,324)
Payment from officer-
shareholder ..................... 20,000 -- 20,000
Shares issued through Additional
Share Option .................... -- -- 4,708,410
-------- ------------ ------------
Balance at September 30, 1998 .... -- $ (970,036) $218,678,499
======== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flow from operating activities:
Net income .......................................................... $ 7,321,192 $ 2,243,453
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ..................................... 3,708,544 1,111,555
Amortization of deferred financing costs .......................... 25,831 35,256
Changes in operating assets and liabilities:
Prepaid expenses ................................................. 425 (161,391)
Other assets ..................................................... (1,278,461) (622,164)
Accounts payable ................................................. 227,530 411,069
Accrued expenses ................................................. 1,332,860 1,274,860
Rent received in advance ......................................... (23,085) 25,969
Tenant security deposits ......................................... (44,088) 3,705
------------- -------------
Net cash provided by operating activities ...................... 11,270,748 4,322,312
Cash flow from investing activities:
Acquisitions of rental property, net of liabilities assumed ......... (83,018,732) (80,128,927)
Capital improvements ................................................ (7,340,637) (2,173,200)
------------- -------------
Net cash used in investing activities .......................... (90,359,369) (82,302,127)
Cash flow from financing activities:
Proceeds from short-term borrowings ................................. -- 39,640,000
Repayments of short-term borrowings ................................. -- (34,507,298)
Payment from officer-shareholder .................................... 20,000 --
Net proceeds from issuance of shares ................................ 110,538,076 76,005,821
Cash distributions paid to shareholders ............................. (8,541,324) (1,808,503)
------------- -------------
Net cash provided by financing activities ...................... 102,016,752 79,330,020
Increase in cash and cash equivalents .......................... 22,928,131 1,350,205
Cash and cash equivalents, beginning of year ......................... 24,162,572 100
------------- -------------
Cash and cash equivalents, end of period ............................. $ 47,090,703 $ 1,350,305
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 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, 1998 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1998. These financial statements
should be read in conjunction with the Company's December 31, 1997 Annual Report
on Form 10-K.
All earnings per share amounts for all periods have been presented and
where appropriate, restated to conform to the Statement 128 requirements.
Certain previously reported amounts have been reclassified to conform with
the current financial statement presentation.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. The Company does not currently have any items of comprehensive income
requiring separate reporting and disclosure.
The Company commenced operations in January 1997.
NOTE 2 -- INVESTMENT IN RENTAL PROPERTY
The Company purchased 13 properties located in the Dallas/Fort Worth area
of Texas for $104,355,000 during the nine months ended September 30, 1998. The
following is a summary of rental property acquired during the nine months ended
September 30, 1998:
<TABLE>
<CAPTION>
INITIAL
ACQUISITION DATE OF
DESCRIPTION COST ACQUISITION
- ---------------------------------------------- ------------- ---------------
<S> <C> <C>
Main Park .................................... $ 8,000,000 February, 1998
Timberglen ................................... $12,000,000 February, 1998
Copper Ridge ................................. $ 4,525,000 March, 1998
Silver Brook (formerly Bitter Creek) ......... $13,505,000 May, 1998
Summer Tree .................................. $ 5,700,000 June, 1998
Park Village ................................. $ 7,000,000 July, 1998
Cottonwood Crossing .......................... $ 5,700,000 July, 1998
Pepper Square ................................ $ 5,205,000 July, 1998
Pace's Point ................................. $11,405,000 July, 1998
Hayden's Crossing ............................ $ 4,705,000 July, 1998
Emerald Oaks ................................. $10,930,000 July, 1998
Newport ...................................... $ 6,330,000 July, 1998
Estrada Oaks ................................. $ 9,350,000 July, 1998
</TABLE>
F-5
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3 -- MORTGAGE NOTES PAYABLE
In connection with the acquisitions of five properties in July 1998, the
Company assumed five mortgage notes with a principal amount of $24,159,019 and a
fair value of $25,418,421. These mortgage notes have been recorded at fair
value. The difference between the fair value and principal is being amortized as
an adjustment to interest expense over the term of the respective notes. At
September 30, 1998, the balance of the mortgage notes payable was $25,323,184.
Mortgage notes payable are due in monthly installments, including principal and
interest. Scheduled maturities are at various dates through December, 2005. The
weighted average interest rate on the mortgage notes was 7.56 % at September 30,
1998. Interest paid by the Company in 1998 was $312,466.
The aggregate maturities of mortgage notes payable subsequent to September
30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ----------------------- --------------
<S> <C>
1998 ................ $ 126,473
1999 ................ 520,369
2000 ................ 543,922
2001 ................ 569,283
2002 ................ 596,599
Thereafter .......... 22,966,538
-----------
$25,323,184
===========
</TABLE>
NOTE 4 -- 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 $52,375. The Company paid the
Advisor a fee equal to .25% of total contributions received by the Company in
the amount of $14,894. The Company paid Apple Realty Group, Inc. a fee of 2% of
the purchase price of the acquired properties in the amount of $624,382.
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) also serves as Chief
Executive Officer and Chairman, entered into subcontract agreements with the
Management Company and Advisor whereby Cornerstone agreed to provide advisory
and property management services to the Company in exchange for fees and expense
reimbursement per the same terms described above. For the nine months ended
September 30, 1998, the Company paid Cornerstone $1,466,199 under the agreements
and $126,000 for certain reimbursable items.
During 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 (valued at $11 per common
share for a total of $1,650,000) in exchange for the assignment of the rights to
the acquisition/disposition agreement. Cornerstone is entitled, under the terms
of the acquisition/disposition agreement, to a real estate commission equal to
2% of the gross purchase price of the Company's properties plus reimbursement of
certain expenses to the extent proceeds from the Company's equity offering are
used to purchase the property. For the nine months ended September 30, 1998, the
Company paid Cornerstone approximately $2,087,101 under the agreement and
$32,500 for expense reimbursement.
F-6
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
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, extending through the end of the
Company's initial public offering of its shares. In April 1997, Cornerstone
purchased 417,778 common shares of the Company at $9 per share for approximately
$3.76 million. Cornerstone owns approximately 2% of the total common shares of
the Company outstanding as of September 30, 1998. Cornerstone intends to make
periodic evaluations of the advisability of purchasing additional common shares
of the Company and may make such purchases, if such purchases are deemed by the
Cornerstone board of directors to be in the best interests of Cornerstone and
its shareholders.
NOTE 5 -- EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED 9/30/98 ENDED 9/30/98 ENDED 9/30/97 ENDED 9/30/97
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net Income .............................. $2,884,732 $7,321,192 $856,729 $2,243,453
Numerator for basic and diluted
earnings .............................. $2,884,732 $7,321,192 $856,729 $2,243,453
Denominator:
Denominator for basic Earnings per
share-weighted-average shares ......... 21,758,927 17,823,314 7,135,536 5,053,423
Effect of dilutive securities: Stock
options ................................. -- -- -- --
---------- ---------- --------- ----------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions .......... 21,758,927 17,823,314 7,135,536 5,053,423
---------- ---------- --------- ----------
Basic and diluted earnings per
Common share ............................ $ 0.13 $ 0.41 $ 0.12 $ 0.44
---------- ---------- --------- ----------
</TABLE>
NOTE 6 -- SUBSEQUENT EVENTS
During October 1998, the Company distributed to its shareholders
approximately $4,411,454 (20.6 cents per share) of which approximately
$2,677,060 was reinvested in the purchase of additional shares through the
Additional Share Option. During October 1998, the Company also closed the sale
to investors of 1,430,596 shares at $10 per share representing net proceeds to
the Company after payment of brokerage fees of $12,875,360.
On October 28, 1998, the Company acquired Burney Oaks Apartments, a
240-unit apartment community located in Arlington, Texas for $9,300,000. On
October 29, 1998, the Company acquired Brandywine Park Apartments, a 196-unit
apartment community located Richardson, Texas for $8,100,000. Both properties
were purchased with proceeds from the offering.
Cornerstone has been providing property management and advisory services to
the Company through subcontract agreements (see Note 4). Effective on the close
of business on September 30, 1998, the subcontract agreements were terminated
and Apple Residential Advisors, Inc. ("ARA") assigned to Apple Residential
Management Group, Inc. ("ARMG") its rights and responsibilities under the
advisory agreement. Thus, as of October 1, 1998, the property management and
advisory services to the Company are now being performed by ARMG using employees
leased from Cornerstone.
Cornerstone has been providing real estate brokerage services to the
Company under the acquisition/disposition contract it acquired when Cornerstone
acquired all of the assets of Apple Realty Group, Inc. (see Note 4). Effective
October 1, 1998, Cornerstone sold to ARMG its rights in the real
F-7
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
estate brokerage agreement. Beginning on such date ARMG will provide the
services and be entitled to the compensation under the real estate brokerage
agreement. ARMG will lease employees necessary to provide such services from
Cornerstone.
Effective October 1998, the Company extended its best efforts offering for
an additional $50 million.
On September 17, 1998, the Company's Board of Directors approved the grant
to Glade M. Knight of options to purchase Common Shares (the "Award Agreement").
This grant was made apart from the Incentive Plan. The final terms of the Award
Agreement have not yet been approved by the Company's Compensation Committee,
but it is expected that the Award Agreement will provide Mr. Knight options to
purchase 355,111 Common Shares (the "Award Options"). The Award Options will be
issued in five equal parts, if, as and when there is sold in the Company's
additional $50 million offering $10 million, $20 million, $30 million, $40
million and $50 million, respectively (each a break point), in Shares. If the
Offering is terminated at any point other than one of the break points, there
will be issued at the time of termination a pro rata portion of the Award
Options.
The exercise price of the Award Options will be $10 per Common Share
acquired. However, if a "Triggering Event" occurs, the exercise price will be
$1.00 per Common Share for the following 180 days. A Triggering Event means the
occurrence of either of the following events: (1) substantially all of the
Company's assets, stock or business is sold or otherwise transferred or (2) the
Advisory Agreement between the Company and ARA is terminated or not renewed, and
the Company ceases to use ARMG to provide substantially all of its property
management services.
If a Triggering Event occurs, and the holder of the Award Options either
elects not to, or fails to, exercise any exercisable Award Options, then the
Company will pay to the holder the difference between the exercise price and the
value of the Common Shares that would be obtained upon exercise. If the exercise
or the receipt of payment in lieu of such exercise subjects the holder to an
additional penalty tax under the Internal Revenue Code, the Company will pay to
the holder an additional amount to offset the penalty tax.
NOTE 7 -- ACQUISITIONS
The following unaudited pro forma information for the nine months ended
September 30, 1998 and 1997 assumes the property acquisitions made during the
first nine months of 1998 and all of 1997 were made by the Company on January 1
of the respective year and is presented as if (a) 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 (b) the Company had used
proceeds from its best efforts offering to acquire the properties. 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 of the respective year, nor does it purport to represent the
results of operations for future periods.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED 9/30/98 ENDED 9/30/97
--------------- ----------------
<S> <C> <C>
Rental Income ................ $ 28,292,944 $ 27,284,097
Net Income ................... $ 8,721,374 $ 6,663,396
Net Income Per Share ......... $ 0.39 $ 0.37
</TABLE>
The pro forma information reflects adjustments for the actual rental income
and rental expenses of the 13 acquisitions made in 1998 and the 12 acquisitions
made in 1997 for the respective periods in 1998 and 1997 prior to their
acquisition 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
F-8
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
contractual arrangement of .25% of annual gross proceeds of common stock raised;
(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; (4) weighted
average number of shares has been adjusted assuming the properties were acquired
with net proceeds from the Company's "best efforts" offering of $10 per share
(net $8.70 per share); and (5) interest expense related to the assumption of the
mortgage debt.
F-9
