UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter ended June 30, 1997 Commission File Number 0-22109
-----------------------------
EVANS WITHYCOMBE RESIDENTIAL, L.P.
(Exact name of registrant as specified in its charter)
Delaware 86-0766007
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
6991 East Camelback Road, Suite A200, Scottsdale, Arizona 85251
(Address of principal executive offices)
Registrant's telephone number, including area code: (602) 840-1040
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 NO X
----- -----
As of August 1, 1997 there were 24,894,186 partnership units outstanding.
Page 1 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
----------------------------------
<TABLE>
<CAPTION>
INDEX
-----
<S> <C> <C>
Part I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited) and
December 31, 1996 ........................................................... 3
Consolidated Statements of Income for the three and six months
ended June 30, 1997 and 1996 (Unaudited) .................................... 4
Consolidated Statement of Partners' Capital as of June 30, 1997
(Unaudited) ................................................................. 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 (Unaudited) .................................... 6
Notes to Consolidated Financial Statements .................................. 7
Item 2 Management's Discussion
and Analysis of Financial
Condition and Results of
Operations ......................................................... 14
Part II OTHER INFORMATION
- ------- -----------------
Item 6 Exhibits and Reports on Form 8-K.................................... 25
Signatures ............................................................................. 25
</TABLE>
Page 2 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Real Estate:
Land ...................................................... $ 130,490 $ 121,915
Buildings and improvements ................................ 598,421 543,839
Furniture and fixtures .................................... 31,728 29,567
Construction-in-progress .................................. 43,265 66,229
--------- ---------
803,904 761,550
Less accumulated depreciation ............................. (48,925) (38,331)
--------- ---------
754,979 723,219
Cash and cash equivalents ................................... 1,051 2,568
Restricted cash ............................................. 8,518 1,622
Accounts and notes receivable ............................... 2,174 2,702
Mortgage notes receivable ................................... 15,120 --
Deferred costs, net of accumulated amortization
of $1,555 and $1,265 at June 30, 1997 and
December 31, 1996, respectively ............................ 4,489 3,838
Other assets ................................................ 1,891 1,518
--------- ---------
Total assets ................................................ $ 788,222 $ 735,467
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage and notes payable .................................. $ 445,441 $ 436,172
Accounts payable and other liabilities ...................... 10,081 7,782
Distributions payable ....................................... 10,078 --
Accrued interest ............................................ 2,860 1,417
Accrued property taxes ...................................... 3,241 2,912
Resident security deposits .................................. 2,408 1,818
Prepaid rent ................................................ 870 585
--------- ---------
Total liabilities ........................................... 474,979 450,686
Minority interest ........................................... 801 827
Partners' capital ........................................... 312,442 283,954
--------- ---------
Total liabilities and partners' capital ..................... $ 788,222 $ 735,467
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except for number of units and per unit amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental ............................................. $ 27,713 $ 22,078 $ 54,865 $ 44,214
Third party management fees ........................ 120 664 230 951
Interest and other ................................. 1,760 1,343 3,505 3,081
------------ ------------ ------------ ------------
Total revenues ................................... 29,593 24,085 58,600 48,246
Expenses:
Repairs and maintenance ............................ 2,637 2,719 5,578 5,275
Property operating ................................. 4,237 2,865 8,437 5,548
Advertising ........................................ 542 599 956 1,032
Real estate taxes .................................. 2,079 1,615 4,198 3,264
Property management ................................ 633 824 1,540 1,708
General and administrative ......................... 253 376 673 797
Interest ........................................... 8,013 5,469 15,402 10,893
Depreciation and amortization ...................... 6,459 4,870 12,637 9,640
------------ ------------ ------------ ------------
Total expenses ....................................... 24,853 19,337 49,421 38,157
------------ ------------ ------------ ------------
Income before minority interest, gain on sale of
real estate assets and extraordinary item .......... 4,740 4,748 9,179 10,089
Gain on sale of real estate assets ................... 5,253 -- 5,253 --
Minority interest .................................... (13) (16) (30) (39)
------------ ------------ ------------ ------------
Income before extraordinary item ..................... 9,980 4,732 14,402 10,050
Extraordinary item-
loss on early extinguishment of debt ............. -- -- (1,500) --
------------ ------------ ------------ ------------
Net income ........................................... $ 9,980 $ 4,732 $ 12,902 $ 10,050
============ ============ ============ ============
Earnings per unit before extraordinary item .......... $ 0.40 $ 0.22 $ 0.59 $ 0.47
============ ============ ============ ============
Earnings per unit .................................... $ 0.40 $ 0.22 $ 0.53 $ 0.47
============ ============ ============ ============
Weighted average units outstanding ................... 24,857,210 21,700,019 24,415,225 21,320,722
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(Amounts in thousands, except for number of units and per unit amounts)
(Unaudited)
<TABLE>
<CAPTION>
Unamortized
Evans Other Employee
Withycombe Limited Restricted
Number of Residential Partners Stock
Units Inc. Capital Compensation Total
---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Partners' capital, December 31, 1996 .............. 23,044,712 $ 226,301 $ 58,118 $ (465) $ 283,954
Net income .................................... -- 10,538 2,364 -- 12,902
Distributions ($0.81 per unit) ............... -- (16,434) (3,707) -- (20,141)
Proceeds of third offering, net of underwriting
discount and offering costs of $406 ........ 1,800,000 35,415 -- -- 35,415
Conversion of units to common stock ........... -- 2,482 (2,482) -- --
Exercise of stock options ..................... 7,500 207 -- -- 207
Issuance of restricted stock .................. 36,130 744 -- (744) --
Forfeiture of restricted stock ................ (2,176) -- -- -- --
Amortization of deferred compensation ......... -- -- -- 105 105
----------- ----------- ----------- ----------- -----------
Partners' capital, June 30 1997 ................... 24,886,166 $ 259,253 $ 54,293 $ (1,104) $ 312,442
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income ................................................. $ 12,902 $ 10,050
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 13,183 9,960
Amortization of deferred comp .......................... 81 350
Gain on the sale of real estate assets ................. (5,253) --
Minority interest ...................................... 30 39
Write-off of development and acquisition costs ......... 402 39
Write-off of deferred loan costs ....................... 294 --
Decrease (increase) in assets:
Restricted cash ........................................ (6,896) (437)
Accounts and notes receivable .......................... 528 (494)
Other assets ........................................... (373) 206
(Decrease) increase in liabilities:
Accounts payable and other liabilities ................. 2,299 (883)
Accrued interest ....................................... 1,443 (64)
Accrued property taxes ................................. 329 901
Resident security deposits ............................. 590 2
Prepaid rent ........................................... 285 (12)
--------- ---------
Net cash provided by operating activities .................. 19,844 19,657
Cash flows from investing activities
Purchase of real estate assets ............................. (42,354) (60,643)
Sale of real estate assets ................................. 6,012 --
--------- ---------
Net cash used in investing activities ...................... (36,342) (60,643)
Cash flows from financing activities
Proceeds from Third Public Offering, net of expenses ....... 35,415 --
Proceeds from Second Public Offering, net of expenses ...... -- 41,107
Proceeds from exercise of options .......................... 207 160
Proceeds from mortgage notes and revolving
credit facility .......................................... 184,306 176,221
Principal payments on mortgage notes ....................... (193,355) (161,887)
Payment for loan costs ..................................... (1,473) (315)
Distributions paid ......................................... (10,063) (16,075)
Minority interest distributions ............................ (56) (71)
--------- ---------
Net cash provided by financing activities .................. 14,981 39,140
--------- ---------
Net decrease in cash and cash equivalents .................. (1,517) (1,846)
Cash and cash equivalents, beginning of period ............. 2,568 3,634
--------- ---------
Cash and cash equivalents, end of period ................... $ 1,051 $ 1,788
========= =========
Supplemental information
Cash paid during the period for interest ................... $ 13,457 $ 10,645
========= =========
Supplemental disclosure of non-cash activity
Assumption of debt related to the acquisition of
apartment communities .................................... $ 18,318 $ --
========= =========
Origination of carryback mortgage notes arising from sale of
apartment communities .................................. $ 15,120 $ --
========= =========
Issuance of stock under restricted stock incentive plan .... $ 24 $ --
========= =========
Conversion of units to common stock ........................ $ 2,482 $ 888
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
Page 6 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Amounts in thousands, except for number of units or shares and
per unit amounts)
(Unaudited)
1. Organization and Formation of the Company
Evans Withycombe Residential, L.P. (the "Operating Partnership") is one of the
largest developers and managers of upscale apartment communities in Arizona and
is expanding its operations into selected sub-markets in Southern California.
The Operating Partnership owns and manages 52 stabilized multifamily apartment
communities containing 14,723 units, of which 45 stabilized multifamily
apartment communities are located in Phoenix and Tucson, Arizona, containing a
total of 12,325 units and seven stabilized multifamily apartment communities are
located in the Southern California market containing a total of 2,398 units. The
Operating Partnership is also in the process of developing or expanding three
multifamily apartment communities comprising 720 units in its Phoenix market.
The Operating Partnership is fully integrated with expertise in development,
acquisitions, construction and management of apartment communities. The
Operating Partnership had approximately 600 employees at June 30, 1997.
The Operating Partnership was formed in June 1994 to develop, acquire, own and
manage upscale multifamily apartment communities for Evans Withycombe
Residential, Inc. On August 17, 1994, Evans Withycombe Residential, Inc. (the
"Company") completed an Initial Public Offering and engaged in various formation
transactions designed to transfer ownership of the communities and other assets
of the predecessor company to the Operating Partnership or Evans Withycombe
Finance Partnership, L.P. (the "Financing Partnership"). The Operating
Partnership owns 99.0 percent of Evans Withycombe Finance, L.P. and has a 99.0
percent economic interest in Evans Withycombe Management, Inc. (the "Management
Company"). Evans Withycombe Residential, Inc. is the sole general partner of and
owned a 81.46 percent and 77.08 percent interest in the Operating Partnership at
June 30, 1997 and 1996, respectively.
In the second quarter of 1996, the Company completed the Second Public Offering.
The net proceeds of $40,891 from the sale of 2,088,889 shares of common stock
from the Second Public Offering were used to purchase 2,088,889 units in the
Operating Partnership. The Operating Partnership used the proceeds to repay a
portion of the $150 million unsecured Revolving Credit Facility (Revolving
Credit Facility).
In the first quarter of 1997, the Company completed the Third Public Offering.
The net proceeds of $35,415 from the sale of 1,800,000 shares of common stock
from the Third Public Offering were used to purchase 1,800,000 units in the
Operating Partnership. The Operating Partnership use the proceeds to repay a
portion of the Revolving Credit Facility.
2. Basis of Presentation
The accompanying consolidated financial statements of Evans Withycombe
Residential, L.P. include the consolidated accounts of the Operating
Partnership, the Financing Partnership and the Management Company.
The accompanying unaudited consolidated financial statements have been presented
by the Operating Partnership's management in accordance with generally accepted
accounting principles for interim financial information and the rules and
regulations of the Securities and Exchange Commission (SEC). Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
significant intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting of
normally recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the six month period ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997.
Page 7 of 25
<PAGE>
2. Basis of Presentation (continued)
These consolidated financial statements should be read in conjunction with the
Operating Partnership's December 31, 1996 audited consolidated financial
statements and accompanying notes in the Evans Withycombe Residential, L.P.
Annual Report on Form 10/A.
3. Summary of Significant Accounting Policies
Real Estate Assets and Depreciation
The Operating Partnership records its real estate assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of".
SFAS No. 121 requires that long-lived assets such as real estate assets, be
reviewed whenever events or changes in circumstances indicate that the book
value of the asset may not be recoverable. If the sum of the estimated future
net cash flows (undiscounted and without interest charges) from an asset to be
held and used is less than the book value of the asset, an impairment loss must
be recognized in the amount of the difference between book value and fair value
as opposed to the difference between book value and net realizable value under
the previous accounting standard. For long-term assets like apartment
communities, the determination of whether there is an impairment loss is
dependent primarily on the Operating Partnership's estimates on occupancy, rent
and expense increases, which involves numerous assumptions and judgments as to
future events over a period of many years. At June 30, 1997 the Operating
Partnership does not hold any assets that meet the impairment criteria of SFAS
No. 121.
Costs related directly to the acquisition and improvement of real estate are
capitalized. Interest costs incurred during construction of a new property are
capitalized until completion of construction on a building-by-building basis.
Interest capitalized was $493 and $970 and $744 and $1,464, for the three and
the six months ended June 30, 1997 and 1996, respectively.
Ordinary repairs, maintenance and costs incurred in connection with resident
turnover such as unit cleaning, painting, and carpet cleaning are expensed as
incurred; major replacements and betterments are capitalized and depreciated
over their estimated useful lives. Depreciation is computed on a straight-line
basis over the expected useful lives of depreciable property, which ranges from
10 to 40 years for buildings and improvements and five to eight years for
furnishings and equipment.
The Operating Partnership reports developments and lease-up properties as
construction-in-progress until construction on the apartment community has been
completed and the apartment community has reached stabilized occupancy.
The Operating Partnership also reports land relating to construction-in-progress
as land on its balance sheet. Land associated with construction-in-progress was
$10,802 and $12,060 at June 30, 1997 and December 31, 1996, respectively.
Revenue Recognition
Rental income attributable to residential leases is recorded when due from
residents. Leases are for periods of up to one year, with rental payments due
monthly.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and cash equivalent investments with
original maturities of three months or less, primarily consisting of demand
deposits in banks.
Page 8 of 25
<PAGE>
3. Summary of Significant Accounting Policies (continued)
Restricted Cash
Restricted cash includes restricted deposits held by third party intermediaries
for the purpose of completing an IRS Section 1031 tax free exchange, sinking
fund accounts related to tax exempt bonds, property taxes and escrow accounts.
Deferred Costs
Costs incurred in obtaining long-term financing are deferred. These costs are
amortized on the effective interest method over the terms of the related debt
agreements.
Income Taxes
The Operating Partnership has made an election to be taxed as a Partnership and
accordingly, no federal or state income taxes have been provided in the
accompanying consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Earnings Per Unit
Earnings per unit has been computed by dividing net income for the three and the
six months ended June 30, 1997 and 1996, respectively, by the weighted average
number of units outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share" which is required to be adopted on December 31, 1997. At
that time, the Operating Partnership will be required to change the method
currently used to compute earnings per unit and to restate all prior periods
presented. Under the new requirements for calculating basic earnings per unit,
the dilutive effect of stock options will be excluded. The impact of SFAS No.
128 is not expected to be material.
4. Mortgage Notes Receivable
The Operating Partnership's mortgage notes receivable consist of the following:
$7.9 million mortgage note receivable at a $ 7,932
fixed interest rate of 9.5 percent, secured
by a first mortgage lien on Deer Creek
Village Apartments, matures November 1, 1997.
(Paid off on July 23, 1997.)
$7.2 million mortgage note receivable at a 7,188
fixed interest rate of 8.0 percent secured by
a first mortgage lien on The Pines
Apartments, matures November 1, 1997.
----------
$15,120
==========
Page 9 of 25
<PAGE>
5. Mortgage and Notes Payable
The Operating Partnership's mortgage notes and notes payable consists of the
following:
June 30, December 31,
1997 1996
---- ----
Mortgage note payable at a fixed interest $ - $ 5,380
rate of 8.0 percent, monthly principal and
interest payments. The unpaid principal
balance was repaid on January 9, 1997.
Mortgage note payable at a fixed interest - 4,340
rate of 8.0 percent, monthly principal and
interest payments. The unpaid principal
balance was repaid on January 9, 1997.
Mortgage note payable at a fixed interest - 8,951
rate of 8.0 percent, monthly principal and
interest payments. The unpaid principal
balance was repaid on January 9, 1997.
Mortgage note payable at a fixed interest - 6,225
rate of 8.28 percent, monthly principal and
interest payments. The unpaid principal
balance was repaid on January 31, 1997.
Mortgage note payable at a fixed interest 12,000 12,065
rate of 9.95 percent, monthly principal and
interest payments through September 15, 1997,
remaining balance due September 15, 1997. The
unpaid principal balance was repaid on July
15, 1997.
Mortgage note payable at a fixed interest 3,166 3,182
rate of 9.3 percent, monthly principal and
interest payments through September 15, 1997,
remaining balance due September 15, 1997. The
unpaid principal balance was repaid on July
15, 1997.
Mortgage note payable at fixed interest rates 18,252 -
ranging from 6.25 percent to 9.0 percent,
monthly principal and interest payments
through August 17, 2004, remaining balance
due August 17, 2004. Interest rate increases
0.25 percent annually each September. Secured
by a first mortgage lien on one apartment
community. The mortgage note can be repaid at
any time at the Operating Partnership's
option without prepayment penalty.
$50 million securitized debt at a fixed 49,250 49,509
interest rate of 7.17 percent, monthly
principal and interest payments through
January 1, 2006, remaining balance due
January 1, 2006. Secured by first mortgage
liens on 5 communities.
Securitized debt at a fixed stated interest 130,563 130,520
rate of 7.98 percent, with an effective
interest rate of 8.05 percent, monthly
interest payments only through August 1,
2001. Secured by first mortgage liens on 21
communities. The face amount of $131 million
is due August 1, 2001. The balance is net of
unamortized discount of $437 and $480 at June
30, 1997 and December 31, 1996, respectively.
$17.3 million tax exempt bonds with a 17,300 17,300
floating interest rate based on the tax
exempt note rate set by the remarketing
agent, or at the option of the Operating
Partnership can convert to a fixed rate as
determined by the remarketing agent. Secured
by a $17.5 million direct pay letter of
credit, interest payments only, matures
December 1, 2007 (Effective interest rate of
5.20 percent at June 30, 1997).
$22.6 million tax exempt bonds with a 22,650 22,650
floating interest rate based on the tax
exempt note rate set by the remarketing
agent, interest payments only. Secured by a
$22.8 million direct pay letter of credit,
matures February 1, 2016. (Effective interest
rate of 5.56 percent at June 30, 1997).
Page 10 of 25
<PAGE>
5. Mortgage and Notes Payable (continued)
June 30, December 31,
1997 1996
---- ----
$24.05 million tax exempt bonds with a $ 24,050 $ 24,050
floating interest rate based on the tax
exempt note rate set by the remarketing
agent, interest payments only. Secured by a
$24.4 million direct pay letter of credit,
matures August 1, 2005. (Effective interest
rate of 5.34 percent at June 30, 1997).
$150 million unsecured Revolving Credit 44,000 152,000
Facility with floating interest rate based on
LIBOR plus 1.15 percent or at the option of
the Operating Partnership at prime rate,
interest payments only. Matures September 24,
1999 (Effective interest rate of 7.23 percent
at June 30, 1997).
$75 million senior unsecured notes with a 74,595 -
fixed coupon rate of 7.50 percent. Semiannual
interest only payments due April 15 and
October 15 commencing October 15, 1997. Face
amount of $75 million is due April 15, 2004.
The balance is net of an unamortized discount
of $405 at June 30, 1997. The effective
interest rate inclusive of the benefit of a
treasury lock transaction is 7.18 percent.
$50 million senior unsecured notes with a 49,615 -
fixed coupon rate of 7.625 percent.
Semiannual interest only payments due April
15 and October 15 commencing October 15,
1997. Face amount of $50 million is due April
15, 2007. The balance is net of an
unamortized discount of $385 at June 30,
1997. The effective interest rate inclusive
of the benefit of a treasury lock transaction
is 7.36 percent.
-------- --------
$445,441 $436,172
======== ========
Scheduled principal payments on debt, assuming that the Operating Partnership
exercises its options to extend the maturity date on the Revolving Credit
Facility, are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Mortgage Mortgage Senior Revolving
Notes Loan Unsecured Tax-Exempt Credit
Payable Certificate Notes Bonds Facility Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 15,487 $ - $ - $ - $ - $ 15,487
1998 784 - - - - 784
1999 831 - - - 44,000 44,831
2000 882 - - - - 882
2001 500 130,563 - - - 131,063
Thereafter 64,184 - 124,210 64,000 - 252,394
------------- ------------- ------------ ------------- --------------- --------------
Total $ 82,668 $ 130,563 $ 124,210 $ 64,000 $ 44,000 $ 445,441
============= ============= ============ ============= =============== ==============
</TABLE>
On June 13, 1997, the Operating Partnership amended its existing $225 million
Revolving Credit Facility with a bank group to decrease the commitment amount
from $225 million to $150 million and decrease the interest rate from LIBOR plus
1.50 percent to LIBOR plus 1.15 percent.
The $150 million Revolving Credit Facility provides funding for working capital,
construction activities and acquisitions.
The Operating Partnership has three direct pay letters of credit of $17,500,
$22,800 and $24,400 which serve as a credit enhancement for the tax exempt
bonds. The letters of credit are secured by a first mortgage on four apartment
communities.
Page 11 of 25
<PAGE>
5. Mortgage and Notes Payable (continued)
In January 1997, the Operating Partnership extinguished the debt on four
mortgages with unpaid principal balances of approximately $25,000 with proceeds
from the Revolving Credit Facility. As a result, the Operating Partnership
incurred a loss from the early extinguishment of debt of approximately $1,500.
6. Distributions
On July 15, 1997, the Operating Partnership paid a distribution of $0.405 per
unit ($10,099) to unitholders of record as of June 30, 1997.
7. Management Fees
The Operating Partnership, through the Management Company, performs management
services for certain unaffiliated communities. Management fees received from
managed communities were $119 and $664 for the three months ended June 30, 1997
and 1996 and $230 and $951 for the six months ended June 30, 1997 and 1996,
respectively. The Second Quarter 1996 balance includes a one time non-recurring
$500 termination fee received from the sale of management contracts.
8. Stock Incentive Plan
Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Proforma information regarding net income and earnings per share is required by
SFAS No. 123 and is provided by the Company in its annual report.
Initially 1,830,000 shares of the Company's common stock were reserved for
issuance under the plan. Information with respect to stock options granted
during the six months ended June 30, 1997 is as follows:
Weighted
Average
Exercise Price
Shares Per Share
------ ---------
Options outstanding at December 31, 1996 908,850 $20.63
Exercised (7,500) 20.00
Granted 241,500 20.49
Forfeited (32,225) 20.84
--------- ------
Options outstanding at June 30, 1997 1,110,625 $20.66
========= ======
Options exercisable:
December 31, 1996 357,700 $19.98
June 30, 1997 521,125 $20.46
Options to purchase 719,375 and 901,650 shares of common stock were available
for grant under the plan at June 30, 1997 and December 31, 1996, respectively.
Page 12 of 25
<PAGE>
Executive Stock Incentive Plan
Prior to the Initial Public Offering, the Company's predecessor Evans
Withycombe, Inc. had in place an Executive Incentive Deferred Compensation Plan
(the "Executive Plan"). Pursuant to the Executive Plan, certain executives of
Evans Withycombe, Inc. (the "Participants") were granted an aggregate of 98,500
shares of restricted stock from the Company one year following the Initial
Public Offering if they remained employees of the Company during such period.
One-third of the shares vest on each of the second, third and fourth
anniversaries of the Initial Public Offering based on an offering price per
share of $20. The expense is being amortized ratably over the periods in which
the shares vest and an expense of $30 and $180 and $60 and $350 for the three
and six months ended June 30, 1997 and 1996, respectively, is included in
general and administrative expense. Information with respect to the executive
restricted stock incentive plan is as follows:
Shares
------
Restricted stock, net of forfeitures, at December 31, 1996, 74,346
Forfeited (1,174)
------
Restricted stock at June 30, 1997 73,172
======
Number of shares vested at June 30, 1997 27,600
Restricted Stock Program
The Company has awarded 45,220 shares of restricted stock to certain employees
of the Company under its 1994 Stock Incentive Plan. The restricted stock vests
ratably over periods ranging from one to seven years from the date of the award
and are based on the price of the stock at the award date which ranges from
$19.13 to $22.25. The related expense will be amortized ratably over the periods
in which the shares vest and an expense of $27 and $11 and $45 and $20, for the
three and six months ended June 30, 1997 and 1996, respectively, is included in
general and administrative expense.
The Company uses the proceeds from the exercise of stock options and the
issuance of restricted stock to acquire a similar number of units in the
Operating Partnership.
9. Minority Interest
Evans Withycombe Finance, Inc., a wholly owned subsidiary of Evans Withycombe
Residential, Inc. owns a one percent interest in the Financing Partnership at
June 30, 1997 as follows:
Dollars
-------
Balance at December 31, 1996 $827
Allocation of net income 30
Distributions paid (56)
----
Balance at June 30, 1997 $801
====
Page 13 of 25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except apartment data and number of shares
and units)
The following discussion, which is based primarily on the consolidated financial
statements of Evans Withycombe Residential, L.P. should be read in conjunction
with the consolidated financial statements appearing elsewhere in this report.
The consolidated financial statements of the Operating Partnership consist of
the Operating Partnership, the Financing Partnership, and the Management
Company.
Overview
When used in the following discussion, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected, including,
but not limited to, the actual timing of the Operating Partnership's planned
acquisitions and developments, the strength of the local economies in the
sub-markets in which the Operating Partnership operates, and the Operating
Partnership's ability to successfully manage its planned expansion into Southern
California. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Operating Partnership undertakes no obligation to publicly release any revisions
to these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Results of Operations - Consolidated Financial Statements
The results of operations for the three and the six months ended June 30, 1997
and 1996, respectively, were significantly affected by acquisitions,
developments and expansions.
Comparison of Results of Operations for the Three Months and Six Months Ended
June 30, 1997 to the Three and Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- --------------------------
June 30, June 30,
---------------------------- Percentage -------------------------- Percentage
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Rental income $27,713 $22,078 25.5% $54,865 $44,214 24.1%
Third party management
fees 120 664 (81.9) 230 951 (75.8)
Interest and other 1,760 1,343 31.0 3,505 3,081 13.8
------- ------- ----- ------- ------- -----
Total revenues 29,593 24,085 22.9 58,600 48,246 21.5
Property operating and
maintenance (1) 9,495 7,798 21.8 19,169 15,119 26.8
Property management 633 824 (23.2) 1,540 1,708 (9.8)
General and administrative 253 376 (32.7) 673 797 (15.6)
Interest 8,013 5,469 46.5 15,402 10,893 41.4
Depreciation and
amortization 6,459 4,870 32.6 12,637 9,640 31.1
------- ------- ----- ------- ------- -----
Total expenses 24,853 19,337 28.5 49,421 38,157 29.5
------- ------- ----- ------- ------- -----
Income before minority
interest, gain on sale
of real estate assets and
extraordinary item $ 4,740 $ 4,748 (0.2)% $ 9,179 $10,089 (9.0)%
======= ======= ===== ======= ======= =====
Weighted average monthly
rental revenue per unit,
net of concessions $ 682 $ 671 $ 684 $ 653
======= ======= ======= =======
Weighted average number
of apartments 15,272 12,302 15,019 12,116
======= ======= ======= =======
Economic occupancy (2) 86.5% 88.3% 87.7% 90.3%
======= ======= ======= =======
</TABLE>
Page 14 of 25
<PAGE>
(1) The Operating Partnership defines property operating and
maintenance expense as repairs and maintenance, other property
operating, advertising expense and real estate taxes.
(2) Stabilized properties only.
Rental revenues increased by $5,635 and $10,651 or 25.5 percent and 24.1 percent
for the three and six months ended June 30, 1997 as compared to the similar
period in 1996 as a result of increases in the weighted average number of
apartments and weighted average monthly revenue per occupied apartment. The
Operating Partnership believes that the increase in rental income was largely
attributable to the acquisitions and stabilization of properties developed by
the Operating Partnership in its rental markets.
Third party management fees decreased $544 and $721 or 81.9 percent and 75.8
percent due to the sale of several properties in the management portfolio in
1996 including a $500 one time termination fee for the sale of management
contracts received in the Second Quarter of 1996.
Interest and other income for the three and six months ended June 30, 1997
increased $417 and $424 or 31.0 percent and 13.8 percent as compared to the
similar period in 1996 as a result of an increase in the weighted average number
of units.
Property operating and maintenance expense increased due to the increase in the
weighted average number of apartments for the three and the six months ended
June 30, 1997 as compared to the same period in 1996, respectively.
Interest expense increased due to an increase in debt resulting from
acquisitions and the increase in weighted average number of units in the
portfolio. The Operating Partnership capitalized $493 and $971 of interest for
the three and six months ended June 30, 1997 compared to $744 and $1,464 for the
same periods in 1996 due to a decrease in construction activity. Interest costs
incurred during construction of a new property are capitalized until completion
of construction on a building-by-building basis.
"Same Store" Portfolio
The Operating Partnership defines same store portfolio as those communities that
reached stabilized occupancy prior to January 1, 1996. Same store portfolio
consists of 39 stabilized properties containing 10,551 apartment units that were
owned by the Operating Partnership for the three months and six months ended
June 30, 1997 and 1996. Same store portfolio was adjusted in the second quarter
1997 to reflect the sale of Deer Creek Village and The Pines apartment
communities.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- Percentage --------------------------- Percentage
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Rental income $ 18,504 $ 18,868 (1.9)% $ 37,518 $ 38,329 (2.1)%
Other income 1,052 819 28.4 2,124 1,910 11.2
-------- ---------- ---- -------- ---------- ----
19,556 19,687 (0.7) 39,642 40,239 (1.5)
Property operating and
maintenance 6,783 6,610 2.6 13,430 12,975 3.5
-------- ---------- ---- -------- ---------- ----
Property net operating
income $ 12,773 $ 13,077 (2.3)% $ 26,212 $ 27,264 (3.9)%
======== ========== ==== ======== ========== ====
Weighted average
monthly rental
revenue per unit,
net of concessions $ 676 $ 675 $ 676 $ 670
======== ========== ======== ==========
Economic occupancy 86.5% 88.4% 87.7% 90.3%
======== ========== ======== ==========
</TABLE>
Rental income for the three and six months ended June 30, 1997 decreased $364
and $811 as compared to the same period in 1996 as a result of a decline in the
average economic occupancy. Other income for the three and six
Page 15 of 25
<PAGE>
months ended June 30, 1997 increased as a result of higher ancillary income such
as redecoration and application fees, and lease termination fees.
Communities Stabilized Less Than Two Years
Communities stabilized less than two years consist of the development of four
new apartment communities and the expansion of four existing apartment
communities by the Operating Partnership, containing an aggregate of 1,444 new
apartment units that reached stabilized occupancy during the year ended December
31, 1996. Increases in the three and six month periods ended June 30, 1997 as
compared to the three and six month periods ended June 30, 1996 are the result
of the increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental income $ 2,935 $ 2,286 $ 5,997 $ 4,180
Other income 137 127 296 262
----------- ---------- ---------- ----------
3,072 2,413 6,293 4,442
Property operating and maintenance 955 769 1,917 1,422
----------- ---------- ---------- ----------
Property net operating income $ 2,117 $ 1,644 $ 4,376 $ 3,020
=========== ========== ========== ==========
Weighted average number of
apartments 1,444 1,180 1,444 1,027
=========== ========== ========== ==========
</TABLE>
Development and Lease Up Communities
Development and lease up communities consist of the development of five new
apartment communities and the expansion of two existing apartment communities
containing an aggregate of 1,542 apartment units that were in the
"construction," "development," or "lease up" stage during 1997 and therefore,
not considered to have achieved stabilized occupancy for all of the periods
presented. Increases in the three and the six month periods ended June 30, 1997
as compared to the three and the six month periods ended June 30, 1996 are the
result of an increase in the weighted average number of apartments.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental income $ 1,700 $ 101 $ 3,049 $ 103
Other income 133 24 254 25
----------- ---------- ---------- ----------
1,833 125 3,303 128
Property operating and maintenance 435 109 1,047 125
----------- ---------- ---------- ----------
Property net operating income $ 1,398 $ 16 $ 2,256 $ 3
=========== ========== ========== ==========
Weighted average number of
apartments in lease up 869 69 782 36
=========== ========== ========== ==========
</TABLE>
Page 16 of 25
<PAGE>
Acquisitions
Acquisitions consist of 6 properties containing 1,906 apartment units, which
have been acquired by the Operating Partnership since January 1, 1996. There was
one acquisition of an apartment community during the first six months of 1996,
Canyon Crest Views a 178 unit apartment community that was acquired on June 27,
1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental income $ 3,800 $ 18 $ 6,739 $ 18
Other income 138 - 211 -
----------- ---------- ---------- ----------
3,938 18 6,950 18
Property operating and maintenance 1,110 2 2,264 2
----------- ---------- ---------- ----------
Property net operating income $ 2,828 $ 16 $ 4,686 $ 16
=========== ========== ========== ==========
Weighted average number of
apartments 1,906 2 1,740 -
=========== ========== ========== ==========
</TABLE>
Dispositions
Dispositions consist of two properties containing 502 apartment units, which
were sold by the Operating Partnership in June 1997. There were no dispositions
of apartment communities during 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Rental income $ 774 $ 805 $ 1,562 $ 1,584
Other income 41 35 82 70
----------- ---------- ----------- ----------
815 840 1,644 1,654
Property operating and maintenance 212 308 511 595
----------- ---------- ----------- ----------
Property net operating income $ 603 $ 532 $ 1,133 $ 1,059
=========== ========== =========== ==========
Weighted average number of
apartments 502 502 502 502
=========== ========== =========== ==========
</TABLE>
Liquidity and Capital Resources
Liquidity
The Operating Partnership's net cash provided by operating activities of $19.7
million for the six months ended June 30, 1996 was comparable to $19.8 million
for the six months ended June 30, 1997 principally due to a reduction in
accounts payable and other liabilities related to the decrease in construction
activity and the net increase in net income related to the extraordinary items
of the loss from the early extinguishment of debt and the gain on the sale of
real estate assets. Net cash used in investing activities decreased from $60.6
million for the six months ended June 30, 1996 to $36.4 million for the six
months ended June 30, 1997. The decrease is the result of a reduction in
construction activity for the first six months of 1997 of $22.3 million as
compared to $46.2 million for the first six months of 1996 being offset by $16.5
million related to the acquisitions of two apartment communities, net of assumed
debt. Net cash provided by financing activities decreased from $39.1 million for
the six months ended June 30, 1996 to $15.0 million for the six months ended
June 30, 1997 due to less borrowings taking place on the Revolving Credit
Facility as a result of the reduction in construction activity.
Page 17 of 25
<PAGE>
The Operating Partnership expects to meet its short-term liquidity requirements,
including capital expenditures relating to maintaining Stabilized Communities,
generally through its net cash provided by operations and borrowings under its
credit arrangements and anticipates meeting long-term liquidity requirements,
such as scheduled debt maturities, financing of construction and development
activities and possible acquisitions through long-term unsecured borrowings,
issuance of additional equity securities of the Company or debt securities of
the Operating Partnership, or, possibly in connection with acquisitions of land
or existing properties, issuance of Units of the Operating Partnership. The
Operating Partnership believes that its net cash provided by operations will be
adequate and anticipates that it will continue to be adequate to meet both
operating requirements and payment of dividends by the Operating Partnership in
accordance with the Company's REIT requirements in both the short and the long
term.
The information in the immediately preceding paragraph is forward looking and
involves risks and uncertainties that could significantly impact the Operating
Partnership's expected liquidity requirements in the short and long term. While
it is impossible to itemize the many factors and specific events that could
affect the Operating Partnership's outlook for its liquidity requirements, such
factors would include the actual timing of the Operating Partnership's planned
development of new, and expansion of existing, communities; acquisitions of
existing apartment communities; the actual costs associated with such
developments and acquisitions; and the strength of the local economies in the
sub-markets in which the Operating Partnership operates. The Operating
Partnership is further subject to risks relating to the limited geographic area
in which it operates and its ability to successfully manage its planned
expansion into Southern California, a market in which it did not have any
operating history prior to 1995. Higher than expected costs, delays in
development of communities, a downturn in the local economies and/or the lack of
growth of such economies could reduce the Operating Partnership's revenues and
increase its expenses, resulting in a greater burden on the Operating
Partnership's liquidity than that which the Operating Partnership has described
above.
Capital Resources
At June 30, 1997, the Operating Partnership's total debt was approximately
$445.4 million and the Operating Partnership's debt to total market
capitalization (Market Equity plus Debt) was approximately 46.2 percent. The
Operating Partnership received an investment grade security rating of "BBB-"
from Standard & Poor's Corporation, "Baa3" from Moody's Investors Service, Inc.,
and " BBB-" from Fitch Investors Service, L.P. in December 1996 with respect to
prospective issuances of senior unsecured debt.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization, and each rating should be evaluated independently of any other
rating. A rating of (a) BBB- from Standard & Poor's Corporation indicates that
the obligations of the Operating Partnership are in the lower range of those
obligations that exhibit adequate protection parameters, (b) Baa3 from Moody's
Investors Service, Inc. indicates that the obligations of the Operating
Partnership are considered to be in the lower range of medium-grade obligations,
which are not considered to be highly protected or poorly secured and (c) BBB-
from Fitch Investors Service, L.P. indicates that the obligations of the
Operating Partnership are considered to be in the lower range of obligations
considered to be of investment grade and of satisfactory credit quality and that
its ability to pay interest and to repay principal is considered to be adequate.
Conventional Mortgage Loans
Conventional mortgage loans are comprised of three fixed rate loans at June 30,
1997, each of which is collateralized by a first mortgage lien on an apartment
community included in real estate assets. The mortgages are payable in monthly
installments of principal and interest and mature at various dates through
August 17, 2004. The conventional mortgage loans aggregated $33.4 million at
June 30, 1997 with interest rates ranging from 6.25 percent to 9.95 percent. In
January 1997, the Operating Partnership extinguished the debt on four mortgages
with unpaid principal balances of approximately $25.0 million with proceeds from
the Revolving Credit Facility. As a result, the Operating Partnership incurred a
loss from the early extinguishment of debt of approximately $1.5 million. On
July 15, 1997, the Operating Partnership repaid two additional mortgages with
unpaid principal balances of approximately $15.2 million with proceeds from the
Revolving Credit Facility. There were no prepayment penalties associated with
the repayment of these two mortgages.
Page 18 of 25
<PAGE>
In December 1995, the Operating Partnership entered into a ten year $50 million
fixed rate loan from an insurance company that bears interest at 7.17 percent,
with principal and interest due monthly based on a 25-year amortization schedule
beginning January 1, 1996 through January 1, 2006, and the remaining unpaid
principal balance due January 1, 2006. The loan is secured by a first deed of
trust on five apartment communities. Proceeds from the loan were used to pay
down outstanding balances on the Revolving Credit Facility. The outstanding debt
was $49.3 million at June 30, 1997. The loan is convertible to unsecured upon
the Operating Partnership achieving an investment grade rating of BBB or better.
Mortgage Loan Certificates
The Operating Partnership, through the Financing Partnership, borrowed $102.0
million under a securitized loan in August 1994. During January 1995, the
Operating Partnership borrowed the balance of $29.0 million (increasing the
total to $131.0 million). The loan is secured by the first mortgage liens on 21
Communities. The $102.0 million was issued at 99.97 percent of its face amount
and the $29.0 million was issued at 97.9375 percent of its face amount and will
mature on August 1, 2001. Although both amounts bear interest at 7.98 percent,
the $29.0 million has an effective interest rate of 8.40 percent due to the
discount. The weighted average effective interest rate of the total $131 million
loan is 8.05 percent. The bonds have been rated "AA" by Standard & Poor's.
In March 1997, the Operating Partnership substituted two apartment communities,
Sonoran and The Heritage, as collateral for the securitized loan in exchange for
releasing the liens on three apartment communities, The Pines and Deer Creek
Village, which were sold in June 1997, and La Valencia.
Senior Unsecured Notes
On April 2, 1997, the Company through the Operating Partnership completed the
sale of $75 million senior unsecured notes priced at 99.44 percent of par with a
coupon rate of 7.50 percent due April 15, 2004 and $50 million senior unsecured
notes priced at 99.21 percent of par with a coupon rate of 7.625 percent due
April 15, 2007. Proceeds to the Operating Partnership from the sale of the
notes, net of underwriter's discount and out-of-pocket costs, was approximately
$122.8 million. In anticipation of the Offering, the Operating Partnership
entered into two forward treasury lock agreements on February 25, 1997. The
treasury lock agreements were settled concurrently with the completion of the
sale of the senior unsecured notes on April 2, 1997, and the Operating
Partnership received proceeds from the settlement of the treasury lock
agreements of approximately $3 million. The Operating Partnership is amortizing
the gain on the settlement of the treasury lock transaction as a reduction in
interest expense on the notes using the effective interest rate method. The
effective interest rates on the senior unsecured notes inclusive of the benefit
from the settlement of the treasury lock transaction is 7.18 percent and 7.36
percent, respectively. The Operating Partnership used the proceeds from the sale
of the notes and settlement of the treasury lock transaction to pay down its
Revolving Credit Facility.
Tax Exempt Bonds
Tax exempt bonds were comprised of three floating rate bonds based on the tax
exempt note rate set by the respective remarketing agents (or, at the option of
the Operating Partnership at a fixed rate determined by the remarketing agents).
The bonds are secured by letters of credit which are secured by first mortgage
liens on four apartment communities. The tax exempt bonds have monthly interest
only payments and mature at various dates through 2016. The tax exempt bonds
aggregated $64 million at June 30, 1997 with interest rates ranging from 5.20
percent to 5.56 percent.
Revolving Credit Facility
On June 13, 1997, the Operating Partnership amended its existing $225 million
unsecured Revolving Credit Facility with a bank group to decrease the commitment
amount from $225 million to $150 million and decrease the interest rate from a
floating rate of London Inter Bank Offered Rate (LIBOR ) plus 150 basis points
(100 basis points equals one percent) to 115 basis points (or, at the option of
the Company, at the prime rate announced by the banks). The Revolving Credit
Facility has a term of three years which expires in September 1999, with an
option to extend for one year and provides for monthly payments of interest
only. It will be used to finance acquisitions, to fund construction and
development and renovation costs, and for working capital purposes. At June 30,
1997, there was
Page 19 of 25
<PAGE>
$44.0 million outstanding on the Revolving Credit Facility, with an effective
interest rate of 7.23 percent. The Revolving Credit Facility contains customary
representations, covenants and events of default, including a limitation which
restricts dividends to 95 percent of Funds From Operations, as defined. The
Operating Partnership does not expect that the covenants will affect its ability
to pay dividends in accordance with its current dividend policy or its ability
to maintain a REIT status.
The table below outlines the Operating Partnership's debt structure as of June
30, 1997.
<TABLE>
<CAPTION>
Outstanding Weighted Average
Balance Interest Rate
----------- ----------------
<S> <C> <C>
Fixed Rate Debt:
Mortgage Debt
Conventional................................................ $ 82,668 7.60%
Mortgage Loan Certificates.................................. 130,563 8.05
Unsecured
$75 million senior notes ................................... 74,595 7.18
$50 million senior notes ................................... 49,615 7.36
------------ -----------
Total Fixed Rate Debt................................... 337,441 7.63
Variable Rate Debt:
Tax Exempt Bonds.............................................. 64,000 5.40
Revolving Credit Facility..................................... 44,000 7.23
------------ -----------
Total Variable Rate Debt................................ 108,000 6.10
------------ -----------
Total Debt.............................................. $ 445,441 7.28%
============ ===========
</TABLE>
The Operating Partnership had 6,140 unencumbered apartment units related to the
Stabilized Communities and 720 unencumbered apartment units related to the
Communities Under Construction and in Lease-Up at June 30, 1997.
Subsequent Offerings
On May 28, 1996, the Company completed the Second Public Offering of 4,500,000
shares of its Common Stock of which 2,000,000 shares were sold by the Company
and an aggregate of 2,500,000 were sold by two institutional stockholders. On
June 25, 1996, the underwriters exercised their over-allotment option for
200,000 shares and the Company issued an additional 88,889 shares of its Common
Stock and the institutional stockholders sold an additional 111,111 shares
pursuant to a partial exercise of the over-allotment option granted to the
underwriters. Net proceeds to the Company from the Second Public Offering were
approximately $40,891,000. The Company used the proceeds from the sale of Common
Stock to purchase 2,088,889 units in the Operating Partnership. The Operating
Partnership used the proceeds to pay down its Revolving Credit Facility.
In January 1997, the Company filed a shelf registration statement with the SEC
for up to $125 million of common stock, preferred stock and warrants issuable by
the Company and $200 million of debt securities issuable by the Operating
Partnership. The registration statement, which has been declared effective by
the SEC includes $125 million of available securities under the September 1995
registration statement. These registration statements provide the Company with
the ability to issue and sell a portion of such securities from time to time.
On February 14, 1997, the Company completed the Third Public Offering of
1,800,000 shares of its Common Stock. Net proceeds to the Company from the
February 1997 Offering were approximately $35,415,000. The Company used the
proceeds from the sale of Common Stock to purchase 1,800,000 units in the
Operating Partnership. The Operating Partnership used the proceeds to pay down
its Revolving Credit Facility.
Page 20 of 25
<PAGE>
Inflation
Most of the leases at the communities are for a term of one year or less, which
may enable the Operating Partnership to seek increased rents upon renewal of
existing leases or commencement of new leases. The short-term nature of the
leases generally serves to reduce the risk to the Operating Partnership of the
adverse effects of inflation.
Funds From Operations
The Operating Partnership and industry analysts consider Funds from Operations
("FFO") to be an appropriate measure of the performance of an equity REIT
because it is predicated on cash flow analyses. The Operating Partnership
computes FFO in accordance with standards established by the National
Association of Real Estate Investment Trusts ("NAREIT"). FFO is defined as net
income (loss) determined in accordance with GAAP, excluding gains (or losses)
from debt restructuring and sales of property plus depreciation and
amortization, excluding depreciation on non-real estate assets and amortization
of deferred financing costs. Funds from Operations should not be considered as
an alternative to net income (determined in accordance with GAAP) as an
indicator of the Operating Partnership's financial performance or to cash flow
from operating activities (determined in accordance with GAAP) as a measure of
the Operating Partnership's needs. The Operating Partnership believes that in
order to facilitate a clear understanding of the consolidated historical
operating results of the Operating Partnership, FFO should be examined in
conjunction with net income, as presented in the consolidated financial
statements and elsewhere in this document.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1997 1996 1997 1996
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Income before minority interest,
gain on sale of real estate assets
and extraordinary item $ 4,740 $ 4,748 $ 9,179 $ 10,089
Depreciation and amortization, net
of corporate depreciation 6,386 4,831 12,498 9,562
Amortization of executive deferred
compensation expense 30 180 60 350
----------- ---------- ----------- ----------
Funds from Operations $ 11,156 $ 9,759 $ 21,737 $ 20,001
=========== ========== =========== ==========
</TABLE>
Number of Units
The Operating Partnership had 24,415,225 and 21,320,722 weighted average number
of units at June 30, 1997 and 1996, respectively.
Capitalization of Fixed Assets and Community Improvements.
The Operating Partnership has established a policy of capitalizing those
expenditures relating to acquiring new assets, materially enhancing the value of
an existing asset, or substantially extending the useful life of an existing
asset. All expenditures necessary to maintain a community in ordinary operating
condition are expensed as incurred.
Page 21 of 25
<PAGE>
Acquisition of assets and community expenditures are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
New community development $ 12,532 $ 15,895 $ 22,325 $ 46,171
Acquisitions - 13,018 34,800 13,018
Nonrecurring capital expenditures:
Vehicle access control gates 412 - 725 -
Computer upgrade 81 23 152 51
Recurring capital expenditures:
Community additions and
improvements 1,490 913 2,042 1,329
Corporate additions and improvements 34 - 46 -
---------- --------- --------- ---------
$ 14,549 $ 29,849 $ 60,090 $ 60,569
========== ========= ========= =========
</TABLE>
Development and Construction Activity
The apartment communities under construction and in lease-up are listed below:
<TABLE>
<CAPTION>
Actual Actual or
Average Estimated Date of Estimated Estimated
Unit Construction Construction Commence- Date of
Total Size Cost Commence- ment of Stabilized
Name City Units (Sq. Ft.) (Millions) ment Lease-Up Occupancy
- --------------------------------------------------------------------------------------------------------------
Quarter
--------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Phoenix
The Isle at Arrowhead Ranch Glendale 256 940 $ 17 2:96 4:96 4:97
The Retreat Phase I Phoenix 240 973 14 1:97 3:97 2:98
Vista Grove Mesa 224 911 14 1:97 3:97 2:98
---- ------
Total 720 $ 45
==== ======
</TABLE>
The Operating Partnership owns sites intended for the development of two
additional multifamily apartment communities and Phase II of the Retreat, which,
if completed, are expected to contain approximately 651 apartment units. There
can be no assurance that the Operating Partnership will succeed in obtaining any
necessary governmental approvals or any financing required to develop these
projects, or that the Operating Partnership will decide to develop any
particular project.
The information set forth in the table above is based upon a number of estimates
and assumptions that are inherently subject to business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Operating Partnership's control. The actual development cost, completion date
and stabilization date of any project will be dependent upon a variety of
factors beyond the control of the Operating Partnership including, for example,
labor and other personnel costs, material costs, weather conditions, government
fees and leasing rates.
Acquisition Activity
The Operating Partnership is actively pursuing and in preliminary negotiations
regarding the acquisition of additional properties in Riverside/San Bernardino
and San Diego, California, but no assurance can be given that it will continue
to pursue or consummate any acquisitions as a result of these negotiations.
Page 22 of 25
<PAGE>
Disposition Activity
During the second quarter of 1997, the Operating Partnership sold two
properties, Deer Creek Village and The Pines, containing 502 apartment units.
The aggregate sales price was approximately $22.4 million resulting in a gain
from the sale of approximately $5.2 million. The Operating Partnership received
cash of approximately $7.3 million and two carryback mortgage notes of
approximately $15.1 million. The mortgage notes are secured by a first deed of
trust on the two properties and mature in November 1997. The buyer may repay the
two mortgage notes at anytime without prepayment penalties.
Apartment Communities
The following sets forth certain information regarding the current apartment
communities at June 30, 1997. All of the communities are owned 100 percent in
fee by the Operating Partnership or the Financing Partnership.
<TABLE>
<CAPTION>
Year
Developed
Number of Developed/ or
Apartment Communities City Apartments Acquired Acquired
--------------------- ---- ---------- -------- --------
<S> <C> <C> <C> <C>
Same Store
Arizona
- -------
Phoenix:
Acacia Creek Scottsdale 508 Acquired 1995
Bayside at the Islands Gilbert 272 Developed 1988
Country Brook Chandler 276 Acq/Dev 1991/1993
Gateway Villas Phoenix 180 Developed 1995
Greenwood Village Tempe 270 Acquired 1993
Heritage Point Mesa 148 Acquired 1994
La Mariposa Mesa 222 Acquired 1990
La Valencia Mesa 361 Acquired 1990
Little Cottonwoods Tempe 379 Acq/Acq/Dev 1989/89/90
Los Arboles Chandler 232 Developed 1985
Miramonte Scottsdale 151 Developed 1983
Morningside Scottsdale 160 Acquired 1992
Mountain Park Ranch Phoenix 240 Developed 1995
Park Meadow Gilbert 156 Acquired 1992
Preserve at Squaw Peak Phoenix 108 Acquired 1991
Promontory Pointe Phoenix 304 Acquired 1988
Rancho Murietta Tempe 292 Acquired 1995
Scottsdale Courtyards Scottsdale 274 Developed 1993
Scottsdale Meadows Scottsdale 168 Developed 1984
Shadow Brook Phoenix 224 Acquired 1993
Shores at Andersen Springs Chandler 299 Developed 1989/1993
Silver Creek Phoenix 174 Acquired 1991
Sonoran Phoenix 429 Developed 1995
Sun Creek Glendale 175 Acquired 1993
Superstition Vista Mesa 316 Acquired 1995
The Enclave Tempe 204 Developed 1995
The Heritage Phoenix 204 Developed 1995
The Meadows Mesa 306 Acquired 1987
The Palms Phoenix 132 Developed 1990
Towne Square Chandler 468 Acq/Dev 1992/1995
Villa Encanto Phoenix 382 Developed 1983
Village at Lakewood Phoenix 240 Developed 1988
---------
8,254
Tucson:
Harrison Park Tucson 172 Acquired 1991
La Reserve Oro Valley 240 Developed 1988
Orange Grove Village Tucson 256 Acquired 1991
Suntree Village Oro Valley 424 Acquired 1992
The Arboretum Tucson 496 Acq/Dev 1992/1995
Village at Tanque Verde Tucson 217 Acq/Dev 1990/1994
---------
1,805
California:
The Ashton Corona Hills 492 Acquired 1995
---------
492
---------
Total Same Store 10,551
=========
</TABLE>
Page 23 of 25
<PAGE>
<TABLE>
<CAPTION>
Year
Developed
Number of Developed/ or
Apartment Communities City Apartments Acquired Acquired
--------------------- ---- ---------- -------- --------
<S> <C> <C> <C> <C>
Communities Stabilized Less than Two Years
Arizona
- -------
Phoenix:
Country Brook Expansion Phase III Chandler 120 Developed 1995/96
Ingleside Phoenix 120 Developed 1995/96
Ladera Phoenix 248 Developed 1995/96
Mirador Phoenix 316 Developed 1995/96
Park Meadow Expansion Phase II Gilbert 68 Developed 1995/96
Towne Square Expansion Phase III Chandler 116 Developed 1995/96
---------
988
Tucson:
The Legends Tucson 312 Developed 1995/96
Orange Grove Expansion Phase II Tucson 144 Developed 1995/96
---------
456
---------
Total Communities Stabilized Less than Two Years 1,444
=========
Developments and Lease-Up Properties
Arizona
- -------
Phoenix:
The Hawthorne (1) Phoenix 276 Developed 1995/96
The Retreat Phase I Glendale 240 Developed 1996/97
Vista Grove Mesa 224 Developed 1996/97
The Isle at Arrowhead Ranch (2) Glendale 256 Developed 1996
Promontory Pointe Expansion Phase II (1) Phoenix 120 Developed 1995/96
---------
1,116
Tucson:
Bear Canyon (3) Tucson 238 Developed 1995/96
Harrison Park Expansion Phase II (3) Tucson 188 Developed 1995/96
---------
426
---------
Total Developments and Lease-Up Properties 1,542
=========
Acquisitions
California
Canyon Crest Views Riverside 178 Acquired 1996
Canyon Ridge San Diego 162 Acquired 1997
Marquessa Corona Hills 336 Acquired 1997
Portofino Chino Hills 176 Acquired 1996
Parkview Terrace Club Redlands 558 Acquired 1996
Redlands Lawn & Tennis Club Redlands 496 Acquired 1996
---------
1,906
---------
Total 15,443
=========
Dispositions
Arizona
Deer Creek Village Phoenix 308 Acquired 1991
The Pines Mesa 194 Acquired 1992
-------
502
=======
</TABLE>
(1) Community reached stabilized occupancy in the first quarter 1997
(2) Community is in lease-up
(3) Community reached stabilized occupancy in the second quarter 1997
Page 24 of 25
<PAGE>
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.
(b) A Form 8-K was filed on April 2, 1997 reporting under Item 5 the filing of a
Prospectus Supplement relating to the issuance and sale of $75 million senior
unsecured notes due April 15, 2004 and $50 million senior unsecured notes due
April 15, 2007 and Item 7 exhibits relating to the sale and issuance of these
notes.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EVANS WITHYCOMBE RESIDENTIAL, L.P.
By: Evans Withycombe Residential, Inc., as
General Partner
August 11, 1997 /s/ Stephen O. Evans
- ------------------------ --------------------------------------
(Date) Stephen O. Evans,
Chairman of the Board and
Chief Executive Officer
August 11, 1997 /s/ Paul R. Fannin
- ------------------------ --------------------------------------
(Date) Paul R. Fannin,
Senior Vice President and
Chief Financial Officer
Page 25 of 25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 9,569
<SECURITIES> 0
<RECEIVABLES> 2,174
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 803,904
<DEPRECIATION> 48,925
<TOTAL-ASSETS> 788,222
<CURRENT-LIABILITIES> 0
<BONDS> 445,441
0
0
<COMMON> 0
<OTHER-SE> 312,442
<TOTAL-LIABILITY-AND-EQUITY> 788,222
<SALES> 0
<TOTAL-REVENUES> 58,600
<CGS> 0
<TOTAL-COSTS> 19,169
<OTHER-EXPENSES> 14,850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,402
<INCOME-PRETAX> 14,402
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,402
<DISCONTINUED> 0
<EXTRAORDINARY> (1,500)
<CHANGES> 0
<NET-INCOME> 12,902
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
</TABLE>
