UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-23983
APPLE RESIDENTIAL INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1816010
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At November 1, 1998, there were outstanding 26,392,228 shares of common stock,
no par value, of the registrant.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - 3
September 30, 1998 and December 31, 1997
Consolidated Statements of Operations - 4
Three months ended September 30, 1998
and September 30, 1997
Nine months ended September 30, 1998
and September 30, 1997
Consolidated Statement of Shareholders' Equity- 5
Nine months ended September 30, 1998
Consolidated Statements of Cash Flows - 6
Nine months ended September 30, 1998
and September 30, 1997
Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis 13
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities and Use of Proceeds. 18
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. 19
</TABLE>
<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.
<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
=============================== ================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock Convertible 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
=====================================================================
</TABLE>
<TABLE>
<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.
<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.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1998
(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.
<PAGE>
(2) Investment in Rental Property
The Company purchased thirteen 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:
---------------------------------------------------------------------------
Initial Date of
Description Acquisition Cost Acquisition
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
(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.
<PAGE>
The aggregate maturities of mortgage notes payable subsequent to
September 30, 1998 are as follows:
Year Amount
---- ------
1998 $ 126,473
1999 520,369
2000 543,922
2001 569,283
2002 596,599
Thereafter 22,966,538
----------
$25,323,184
===========
(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.
<PAGE>
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.
(5) Earnings Per Common Share
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/98 9/30/98 9/30/97 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>
(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.
<PAGE>
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 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.
(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.
Nine Months Nine Months
Ended 9/30/98 Ended 9/30/97
------------- -------------
Rental Income $28,292,944 $27,284,097
Net Income $8,721,374 $6,663,396
Net Income Per Share $0.39 $0.37
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 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report 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 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
included in this quarterly report 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 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.
<PAGE>
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.
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.
<PAGE>
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 Acquired 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
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.
<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
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.
<PAGE>
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.
<PAGE>
Part II, Item 2. Changes in Securities and Use of Proceeds
The following table sets forth information concerning the Company's ongoing
offering of common shares (the "Offering") and the use of proceeds from the
Offering as of September 30, 1998:
Common Shares Registered:
1,666,666.67 Common Shares $ 9 per Common Shares $ 15,000,000
23,500,000.00 Common Shares $10 per Common Shares $235,000,000
-------------
Totals: 25,166,666.67 Common Shares
-------------
Common Shares Sold:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
22,609,471.91 Common Shares $10 per Common Share $226,094,719
------------- ------------
Totals: 24,276,138.58 Common Shares $241,094,719
------------- --------------
Expenses of Issuance and Distribution of Common Shares
1. Underwriting discounts and commissions $ 24,109,472
2. Expenses of underwriters $ -
3. Direct or indirect payments to directors
or officers of the Company or their
associates, to ten percent shareholders,
or to affiliates of the Company $ -
4. Fees and expenses of third parties $ 1,116,715
-------------
Total Expenses of Issuance and Distribution of
Common Shares $ 25,226,187
Net Proceeds to the Company $ 215,868,532
1. Purchase of real estate (including repayment of
indebtedness incurred to purchase real estate) $ 159,332,433
2. Interest on indebtedness $ 484,215
3. Working capital $ 49,300,120
4. Fees to the following (all affiliates of officers of
the Company):
a. Apple Residential Advisors, Inc. $ 14,894
b. Apple Realty Group, Inc. $ 624,382
c. Cornerstone Realty Income Trust, Inc. $ 6,112,488
5. Fees and expenses of third parties:
a. Legal $ -
b. Accounting $ -
6. Other (specify ) $ -
-------------
Total of Application of Net Proceeds to the
Company $215,868,532
<PAGE>
Part II, Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27- Financial Data Schedule
(b) Reports on Form 8-K
The following table lists the reports on Form 8-K filed by the Company
during the quarter ended September 30, 1998, the items reported and the
financial statements included in such filings.
<TABLE>
<CAPTION>
Type and Date of Reports Items Reported Financial Statements Filed
<S> <C> <C>
Form 8-K/A (date of 7(a),(b),(c) Historical Statement of
Originial Report: Income and Direct Operating
May 8, 1998) Expenses of Bitter Creek
Apartments for the twelve
months ended March 31, 1998
Form 8-K/A (date of 7(a),(b),(c) Historical Statement of
Original Report: Income and Direct Operating
June 2, 1998) Expenses of Summer Tree
Apartments for the twelve
months ended May 31, 1998
Form 8-K dated 2,7 None
July 1, 1998
Form 8-K/A (date of 7(a),(b),(c) Historical Statement of
Original Report: Income and Direct Operating
July 1, 1998) Expenses of Park Village
Apartments for the twelve
months ended May 31, 1998
<PAGE>
Form 8-K 2,7(a),(b),(c),(d), Historical Statement of
dated (e),(f),(g),(h),(i) Income and Direct Operating
July 9, 1998 Expenses of Cottonwood
Crossing Apartments for the
twelve months ended May 31,
1998
Historical Statement of Income
and Direct Operating Expenses
of Pepper Square Apartments for
the twelve months ended March
31, 1998
Historical Statement of Income
and Direct Operating Expenses
of Pace's Point Apartments for
the twelve months ended March
31, 1998
Historical Statement of Income
and Direct Operating Expenses
of Hayden's Crossing Apartments
for the twelve months ended
March 31, 1998
Historical Statement of Income
and Direct Operating Expenses
of Newport Apartments for the
twelve months ended March 31,
1998
Historical Statement of Income
and Direct Operating Expenses
of Emerald Oaks Apartments for
the twelve months ended March
31, 1998
Historical Statement of
Income and Direct Operating
Expenses of Estrada Oaks
Apartments for the twelve
months ended June 30, 1998
</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: 11 -16 - 98 BY: /s/Glade M.Knight
----------- -----------------
Glade M. Knight
President
BY: /s/Stanley J.Olander
---------------------
Stanley J. Olander
Treasurer (and as such,
Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 47,090,703
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 206,662,005
<DEPRECIATION> 5,578,003
<TOTAL-ASSETS> 249,984,968
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 219,628,535
<OTHER-SE> 950,035
<TOTAL-LIABILITY-AND-EQUITY> 249,984,968
<SALES> 0
<TOTAL-REVENUES> 20,256,606
<CGS> 0
<TOTAL-COSTS> 13,785,472
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 338,297
<INCOME-PRETAX> 7,321,192
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,321,192
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,321,192
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
<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>
