<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Period Ended JUNE 30, 2000.
-------------
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: 0-22569
(Irvine Apartment Communities, L.P.)
-------
1-13721 (IAC Capital Trust)
-------
IRVINE APARTMENT COMMUNITIES, L.P.
IAC CAPITAL TRUST
--------------------------------------------------------------------------------
(Exact Name of Registrants as Specified in Their Charters)
Delaware 33-0587829
Delaware 91-6452946
------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
550 Newport Center Drive, Suite 300, Newport Beach, California 92660
--------------------------------------------------------------------------------
(Address of principal executive offices)
(949) 720-5500
(Registrants' 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 registrants (1) have 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 time as
required), and (2) have been subject to such filing requirements for the past 90
days.
Irvine Apartment Communities, L.P.: Yes X No
--- ---
IAC Capital Trust: Yes X No
--- ---
Indicate the number of units outstanding of each of the issuer's
classes of common partnership units, as of the latest practical date. Irvine
Apartment Communities, L.P.: units of common partnership interest - 45,202,828
units as of August 14, 2000.
================================================================================
<PAGE> 2
IRVINE APARTMENT COMMUNITIES, L.P.
IAC CAPITAL TRUST
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements - Irvine Apartment Communities, L.P.
- Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 1
- Consolidated Statements of Operations for the three and six months
ended June 30, 2000 and 1999 2
- Consolidated Statements of Changes in Partners' Capital for the
six months ended June 30, 2000 and 1999 3
- Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 4
Financial Statements - IAC Capital Trust
- Balance Sheets as of June 30, 2000 and December 31, 1999 5
- Statements of Operations and Equity for the three and six months
ended June 30, 2000 and 1999 6
- Statements of Cash Flows for the six months ended June 30, 2000
and 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<PAGE> 3
Irvine Apartment Communities, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 2000 1999
===============================================================================================
<S> <C> <C>
ASSETS (unaudited)
Real estate assets, at cost
Land $ 421,247 $ 417,196
Buildings and improvements 1,748,293 1,709,377
-----------------------------------------------------------------------------------------------
2,169,540 2,126,573
Accumulated depreciation (351,426) (325,229)
-----------------------------------------------------------------------------------------------
1,818,114 1,801,344
Under development, including land 186,313 161,435
-----------------------------------------------------------------------------------------------
2,004,427 1,962,779
Cash and cash equivalents 23,942 13,834
Restricted cash 2,075 1,944
Deferred financing costs, net 12,268 11,732
Other assets 27,926 36,235
-----------------------------------------------------------------------------------------------
$ 2,070,638 $ 2,026,524
===============================================================================================
LIABILITIES
Mortgages and notes payable $ 903,633 $ 864,602
Accounts payable and accrued liabilities 49,510 45,554
Advance from affiliate 34,000
Security deposits 11,716 10,598
-----------------------------------------------------------------------------------------------
998,859 920,754
REDEEMABLE PREFERRED INTERESTS
Redeemable Series A preferred limited partner units,
6,000 preferred partnership units outstanding 144,180 144,149
Redeemable Series B preferred limited partner units,
2,000 preferred partnership units outstanding 48,707 48,700
-----------------------------------------------------------------------------------------------
192,887 192,849
-----------------------------------------------------------------------------------------------
PARTNERS' CAPITAL
General partner, 20,176 common partnership units at
June 30, 2000 and December 31, 1999 667,128 682,315
Common limited partners, 25,027 common partnership units
at June 30, 2000 and December 31, 1999 211,764 230,606
-----------------------------------------------------------------------------------------------
878,892 912,921
-----------------------------------------------------------------------------------------------
$ 2,070,638 $ 2,026,524
===============================================================================================
</TABLE>
See accompanying notes.
Page 1
<PAGE> 4
Irvine Apartment Communities, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
(unaudited, in thousands) 2000 1999 2000 1999
==========================================================================================================
<S> <C> <C> <C> <C>
REVENUES
Rental income $134,227 $117,914 $68,701 $59,894
Other income 4,483 3,333 2,434 1,704
Interest income 2,068 312 970 183
----------------------------------------------------------------------------------------------------------
140,778 121,559 72,105 61,781
----------------------------------------------------------------------------------------------------------
EXPENSES
Property expenses 33,064 25,770 17,677 13,396
Real estate taxes 10,971 9,290 5,456 4,720
Interest expense, net 25,265 15,170 12,994 7,769
Depreciation and amortization 29,419 19,335 16,273 10,121
General and administrative 3,913 8,941 1,747 4,593
----------------------------------------------------------------------------------------------------------
102,632 78,506 54,147 40,599
----------------------------------------------------------------------------------------------------------
INCOME BEFORE REDEEMABLE PREFERRED INTERESTS 38,146 43,053 17,958 21,182
Redeemable preferred interests 8,375 8,375 4,187 4,187
----------------------------------------------------------------------------------------------------------
NET INCOME $ 29,771 $ 34,678 $13,771 $16,995
==========================================================================================================
ALLOCATION OF NET INCOME:
General Partner $ 13,289 $ 15,478 $ 6,147 $ 7,587
Common Limited Partners $ 16,482 $ 19,200 $ 7,624 $ 9,408
==========================================================================================================
</TABLE>
See accompanying notes.
Page 2
<PAGE> 5
Irvine Apartment Communities, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Irvine Apartment
Irvine Apartment Communities, Inc.
(unaudited, in thousands) Communities LLC (predecessor) Limited Partners Total
===========================================================================================================================
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL
Balance at January 1, 1999 $ 195,858 $ 185,821 $ 381,679
Net income $ 1,321 14,157 19,200 34,678
Contributions 394 394
Distributions (7,768) (9,636) (17,404)
Merger Transaction 680,182 (202,641) 34,210 511,751
---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 681,503 $ -- $ 229,595 $ 911,098
===========================================================================================================================
Balance at January 1, 2000 $ 682,315 $ 230,606 $ 912,921
Net income 13,289 16,482 29,771
Distributions (28,476) (35,324) (63,800)
---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 667,128 $ 211,764 $ 878,892
===========================================================================================================================
</TABLE>
See accompanying notes.
Page 3
<PAGE> 6
Irvine Apartment Communities, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(unaudited, in thousands) 2000 1999
============================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,771 $ 34,678
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred financing costs 1,061 927
Depreciation and amortization 29,419 19,335
Redeemable preferred interest 8,375 8,375
Increase (decrease) in cash attributable to changes in
operating assets and liabilities:
Restricted cash (131) (174)
Other assets 5,124 (1,858)
Accounts payable and accrued liabilities 4,439 1,885
Security deposits 1,118 832
--------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 79,176 64,000
--------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets (1,149) (3,231)
Capital investments in real estate assets (67,146) (73,486)
--------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (68,295) (76,717)
--------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under unsecured line of credit 64,000
Payments on unsecured line of credit (64,000)
Proceeds from mortgages and notes payable 78,500
Payments on mortgages and notes payable (39,501) (1,988)
Advance from affiliate 34,000 46,000
Additions to deferred financing costs (1,597) (69)
Distributions to redeemable preferred limited partner
unit holders (8,375) (8,375)
Distributions to partners (63,800) (17,404)
--------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (773) 18,164
--------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,108 5,447
Cash and Cash Equivalents at Beginning of Period 13,834 4,888
--------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,942 $ 10,335
============================================================================================
Supplemental Disclosure of Cash Flow Information
Interest paid, net of amounts capitalized $ 24,232 $ 14,240
============================================================================================
</TABLE>
See accompanying notes.
Page 4
<PAGE> 7
IAC Capital Trust
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(dollars in thousands) 2000 1999
=========================================================================================================
<S> <C> <C>
(unaudited)
Assets
Cash $ 5 $ 5
Investment in Subsidiary 150,000 150,000
---------------------------------------------------------------------------------------------------------
$150,005 $150,005
=========================================================================================================
LIABILITIES AND EQUITY
Redeemable Preferred Securities, 25,000,000 securities authorized
Redeemable Series A Preferred Securities, 6,900,000 securities
authorized, 6,000,000 securities issued and outstanding $150,000 $150,000
Equity
Common Securities, 20,000 securities authorized, 200 securities
issued and outstanding 5 5
---------------------------------------------------------------------------------------------------------
$150,005 $150,005
=========================================================================================================
</TABLE>
See accompanying notes.
Page 5
<PAGE> 8
IAC Capital Trust
Statements of Operations and Equity
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
(unaudited, in thousands) 2000 1999 2000 1999
=====================================================================================================
<S> <C> <C> <C> <C>
Revenue
Income from investment in subsidiary $6,188 $6,188 $3,094 $3,094
-----------------------------------------------------------------------------------------------------
INCOME BEFORE REDEEMABLE PREFERRED INTEREST 6,188 6,188 3,094 3,094
Redeemable preferred interest 6,188 6,188 3,094 3,094
-----------------------------------------------------------------------------------------------------
NET INCOME $ 0 $ 0 $ 0 $ 0
=====================================================================================================
Equity - beginning of period $ 5 $ 5
Net income 0 0
-----------------------------------------------------------------------------------------------------
EQUITY - END OF PERIOD $ 5 $ 5
=====================================================================================================
</TABLE>
See accompanying notes.
Page 6
<PAGE> 9
IAC Capital Trust
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(unaudited, in thousands) 2000 1999
===============================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 0 $ 0
Adjustments to reconcile net income to net cash
provided by operating activities:
Redeemable preferred interest 6,188 6,188
-------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,188 6,188
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to preferred securities holders (6,188) (6,188)
-------------------------------------------------------------------------------
Net Cash Used in Financing Activities (6,188) (6,188)
-------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 0 0
Cash and Cash Equivalents at Beginning of Period 5 5
-------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5 $ 5
===============================================================================
</TABLE>
See accompanying notes.
Page 7
<PAGE> 10
IRVINE APARTMENT COMMUNITIES, L.P.
IAC CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION
Irvine Apartment Communities, L.P. (the "Partnership"), a Delaware limited
partnership, was formed on November 15, 1993. In connection with an initial
public offering of common shares on December 8, 1993, Irvine Apartment
Communities, Inc. ("IAC, Inc.") obtained a general partnership interest in and
became the sole managing general partner of the Partnership. The Irvine Company
transferred 42 apartment communities and a 99% interest in a limited partnership
which owns one apartment community to the Partnership. On June 7, 1999, IAC,
Inc. was merged with and into TIC Acquisition LLC (the "Acquiror"), a Delaware
limited liability company indirectly wholly owned by The Irvine Company (the
"Merger"), with the Acquiror remaining as the surviving entity and renamed
Irvine Apartment Communities LLC ("IACLLC"). As a result of the Merger and a
related transaction in which The Irvine Company acquired an additional 74,523
common limited partnership units, The Irvine Company beneficially owns and
controls all of the outstanding common limited partnership units in the
Partnership and IACLLC became the sole general partner of the Partnership. The
Partnership's management and operating decisions are under the unilateral
control of IACLLC. All management powers over the business and affairs of the
Partnership are vested exclusively in IACLLC. At June 30, 2000, IACLLC had a
44.6% general partnership interest and The Irvine Company had a 55.4% common
limited partnership interest in the Partnership.
The Partnership owns, operates and develops apartment communities in Orange
County, California and, since 1997, other locations in California. The
Partnership has created market positions in Northern California, San Diego
County and Santa Monica which possess rental demographic and economic growth
prospects similar to those on the Irvine Ranch. As of June 30, 2000, the
Partnership owned 65 apartment communities representing 17,517 operating
apartment units and 1,964 units under construction or development. In March
1998, the Partnership and Western National Property Management ("WNPM")
announced the formation of a strategic alliance that, in April 1998, assumed all
property management responsibilities for the Partnership's Southern California
portfolio. Effective January 1, 1999, the property management responsibilities
of the new entity, Irvine Apartment Management Company ("IAMC"), were expanded
to include the Partnership's entire portfolio. As of June 30, 2000, IAMC is
owned 75% by the Partnership and 25% by WNPM.
IAC Capital Trust (the "Trust"), a Delaware business trust, was formed on
October 31, 1997. The Trust is a limited purpose financing vehicle established
by the Partnership. The Trust exists for the sole purpose of issuing redeemable
preferred securities and investing the proceeds thereof in preferred limited
partner units of the Partnership.
NOTE 2 - BASIS OF PRESENTATION
The accompanying financial statements of the Partnership include the
consolidated accounts of its financially controlled subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
The Trust's investment in subsidiary relates to the redeemable Series A
preferred limited partner units in the Partnership. The Trust has less than a
controlling interest in the Partnership and accounts for its investment using
the equity method.
Page 8
<PAGE> 11
The Partnership operates and develops apartment communities in California which
generate rental and other income through the leasing of apartment units to a
diverse base of renters. The Partnership separately evaluates the performance of
each of its apartment communities. However, because each of the apartment
communities has similar economic characteristics, facilities, services and
tenants, the apartment communities have been aggregated into a single dominant
apartment communities segment.
The Partnership evaluates performance and allocates resources primarily based on
the net operating income ("NOI") of individual apartment communities. NOI is
defined by the Partnership as rental and other income less property expenses and
real estate taxes. Accordingly, NOI excludes certain expenses included in the
determination of net income. NOI from apartment communities totaled $94,675,000
and $86,187,000 for the six months ended June 30, 2000 and 1999, respectively,
and $48,002,000 and $43,482,000 for the three months ended June 30, 2000 and
1999, respectively. All other segment measurements are included in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 1999.
Profits and losses of the Partnership are generally allocated to the general
partner and to the common limited partners based on their respective ownership
interests in the Partnership. The holders of the Series A redeemable preferred
limited partner units and redeemable preferred securities are entitled to
distributions/dividends at an annual rate of 8 1/4% of the stated value per
unit/security. The stated value of each unit/security is $25. The holders of the
Series B redeemable preferred limited partner units are entitled to
distributions at an annual rate of 8 3/4% of the stated value per unit. The
stated value of each unit is $25.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of June 30, 2000 and December 31, 1999, and the revenues and
expenses for the three and six months ended June 30, 2000 and 1999. Actual
results could differ from those estimates.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. All such adjustments are of a normal, recurring nature. Operating
results for the three and six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. These financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in the
Partnership's and the Trust's Annual Report on Form 10-K for the year ended
December 31, 1999.
Certain amounts in the 1999 financial statements have been reclassified to
conform with financial statement presentations in 2000.
Page 9
<PAGE> 12
NOTE 3 - MORTGAGES AND NOTES PAYABLE
Tax-Exempt Mortgage Bond Financings: In September 1999, the Partnership
completed a $32 million offering of tax-exempt mortgage bond financings (the
"Bonds") for the construction of a 201-unit apartment community (the "Project")
at the Partnership's Park Place property (the Park Place property is now known
as Villa Siena). As of June 30, 2000, the Partnership has received proceeds of
$20.8 million that represents land, transaction and development costs related to
the Project. The remaining $11.2 million of proceeds (included as a receivable
in other assets) is held by a trustee and will be funded for construction of the
Project as costs are incurred.
Conventional Mortgage Financing: In February 2000, the Partnership obtained
$78.5 million of conventional mortgage financing from a financial institution.
The mortgage financing is secured by two of the Partnership's apartment
communities. The financing is due in monthly installments of principal and
interest, bears interest at a fixed rate of 7.29% and matures in November 2010.
Proceeds from the financing are being used to fund the construction of new
apartment communities.
During the second quarter of 2000, the Partnership repaid the conventional
mortgages securing the Promontory Point and San Paulo apartment communities.
On July 31, 2000, the Partnership obtained $26 million of conventional mortgage
financing from a financial institution. The mortgage financing is secured by one
of the Partnership's apartment communities. The financing is due in monthly
installments, bears interest at a fixed rate of 7.5% and matures in August 2012.
Proceeds from the financing will be used for general construction purposes.
Unsecured Line of Credit: The Partnership has a $125 million unsecured revolving
credit facility that was amended in June 1999. The amended credit facility
currently bears interest at LIBOR plus 0.65% or prime and matures in June 2001.
The interest rates under the credit facility are adjusted up or down based on
credit ratings on the Partnership's senior unsecured long-term indebtedness. The
Partnership may also enter into letters of credit under the facility. Borrowings
under the credit facility, which are guaranteed by the general partner, are
available to finance the Partnership's ongoing rental property development and
for general working capital needs. The general partner and the Partnership must
comply with certain affirmative and negative covenants, including limitations on
distributions, and the maintenance of certain net worth, cash flow and financial
ratios. At June 30, 2000, the general partner and the Partnership were in
compliance with all of these covenants. At June 30, 2000, the general partner
had letters of credit outstanding under the facility totaling $51.5 million
related mostly to a land and building purchase and the issuance of the
tax-exempt mortgage bonds. The letters of credit reduce the remaining amount
available under the line of credit. As of June 30, 2000, there was no
outstanding balance under the line of credit and $73.5 million was available.
Page 10
<PAGE> 13
NOTE 4 - PARTNERS' CAPITAL
RECONCILIATION OF COMMON PARTNERSHIP UNITS OUTSTANDING
<TABLE>
<CAPTION>
(in thousands, except percentages) Six Months Ended June 30, 2000
================================================================================================
IACLLC The Irvine Company Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning and end of period 20,176 25,027 45,203
------------------------------------------------------------------------------------------------
Ownership interest at end of period 44.6% 55.4% 100%
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(in thousands, except percentages) Six Months Ended June 30, 1999
--------------------------------------------------------------------------------------------------------------------
The Irvine Company
andcertainofits
IACLLC IAC,Inc. affiliates Other Total
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning of period 20,164 24,952 75 45,191
Stock awards issued and options exercised 12 12
Merger Transaction 20,176 (20,176) 75 (75)
--------------------------------------------------------------------------------------------------------------------
Balance at end of period 20,176 25,027 45,203
--------------------------------------------------------------------------------------------------------------------
Ownership interest at end of period 44.6% 55.4% 100%
====================================================================================================================
</TABLE>
NOTE 5 - MINORITY REDEEMABLE PREFERRED INTERESTS
In January 1998, the Trust issued 6.0 million of 8 1/4% Series A Preferred
Securities. The proceeds of $150 million were used to purchase an equivalent
amount of 8 1/4% Series A Preferred Limited Partner Units in the Partnership.
The Partnership used the $150 million of proceeds, net of costs and offering
expenses, all of which were paid by the Partnership, to repay the outstanding
balance on the Partnership's unsecured credit facility and to fund development.
In November 1998, the Partnership issued 2.0 million of 8 3/4% Series B
Preferred Limited Partner Units. The Partnership used the net proceeds to reduce
the outstanding balance on its unsecured line of credit.
NOTE 6 - CERTAIN TRANSACTIONS WITH RELATED PARTIES
Included in general and administrative expenses are charges from The Irvine
Company pursuant to an administrative services agreement covering services for
risk management, income taxes, human resources and other services totaling
$26,000 and $99,000 for the six months ended June 30, 2000 and 1999,
respectively, and $13,000 and $27,000 for the three months ended June 30, 2000
and 1999, respectively. The Irvine Company and the Partnership jointly purchase
employee health care insurance and property and casualty insurance. The
Partnership incurred rent totaling $278,000 and $290,000 for the six months
ended June 30, 2000 and 1999, respectively, and $130,000 and $140,000 for the
three months ended June 30, 2000 and 1999, respectively, related to leases with
The Irvine Company that expire at the end of 2003. IAMC incurred rent totaling
$132,000 and $95,000 for the six months ended June 30, 2000 and 1999,
respectively, and $77,000 and $51,000 for the three months ended June 30, 2000
and 1999, respectively, related to a lease with The Irvine Company.
Page 11
<PAGE> 14
The Partnership reimburses IACLLC for substantially all of its costs incurred in
operating the Partnership, including the compensation of each of the employees
of IACLLC who perform services for the Partnership. The aggregate amount paid by
the Partnership to IACLLC for such costs was $1.8 million and $7.0 million for
the three and six months ending June 30, 2000, respectively, and $535,000 for
the period June 7, 1999 (date of Merger) through June 30, 1999. The aggregate
amount incurred by the Partnership for such costs were $3.5 million and $6.0
million for the three and six months ending June 30, 2000, respectively, and
$849,000 for the period ending June 7, 1999 through June 30, 1999.
Included in other assets at June 30, 2000 is approximately $5.9 million due from
The Irvine Company. The amount represents a receivable of the Partnership for
general and administrative costs and development costs incurred by the
Partnership on behalf of The Irvine Company.
As of June 30, 2000, The Irvine Company had advanced to the Partnership $34
million for construction purposes. Advances to and from The Irvine Company
currently accrue interest at 5.75%. For the three and six months ended June 30,
2000, the Partnership incurred net interest expense of approximately $36,000 and
$168,000, respectively, from The Irvine Company. For the period June 7, 1999
through June 30, 1999, the Partnership incurred interest expense of
approximately $147,000 related to advances from The Irvine Company.
Prior to the Merger, one of IAC, Inc.'s directors was president and chief
executive officer of a bank which participates in the Partnership's credit
facility and acts as trustee for the unsecured notes payable. Based on the
bank's percentage participation in the credit facility, the amount of interest
and fees paid to the bank totaled $93,000 and $122,000 for the three and six
months ended June 30, 1999, respectively.
Page 12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion compares the activities of the Partnership for the
three and six month periods ended June 30, 2000 (unaudited) with the activities
of the Partnership for the three and six month periods ended June 30, 1999
(unaudited). The Trust is a limited purpose financing vehicle established by the
Partnership and exists for the sole purpose of issuing preferred securities and
investing the proceeds thereof in preferred limited partnership units of the
Partnership.
The following discussion should be read in conjunction with all the financial
statements appearing elsewhere in this report, as well as the information
presented in the Partnership's and the Trust's Annual Report on Form 10-K for
the year ended December 31, 1999.
Certain information set forth below is forward looking and involves various
risks and uncertainties. Such information is based upon a number of estimates
and assumptions that inherently are subject to business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Partnership's control.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
The Partnership's income after payment of redeemable preferred interests was
$13.8 million for the three months ended June 30, 2000, down from $17.0 million
for the same period of 1999. The Partnership's net income decreased in 2000 due
to the increase in depreciation and amortization expense due to additional
depreciation related to the step-up in basis recorded in conjunction with the
Merger and the addition of newly delivered rental units. The decrease was also
due to the increase in interest expense related to the additional conventional
mortgage and tax-exempt mortgage bond financings obtained in 2000 and 1999. The
decrease was offset, in part, by contributions of newly delivered rental units
from its development program and properties that stabilized during 1999 and
2000, as well as an increase in rental rates and physical occupancy within its
stabilized portfolio during 2000.
REVENUE AND EXPENSE DATA
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
(dollars in thousands) 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Number of stabilized communities 60 57
Number of operating units at end of period 17,517 16,878
Consolidated Information:
Operating revenues $71,135 $61,598
Property expenses $17,677 $13,396
Real estate taxes $ 5,456 $ 4,720
-------------------------------------------------------------------------------------------
</TABLE>
OPERATING REVENUES (rental and other income) increased by 15.5% to $71.1 million
in the second quarter of 2000, up from $61.6 million in the same period of 1999.
Operating revenues rose in 2000 because of higher rental rates, higher physical
occupancy and a larger average number of rental units in service, primarily as a
result of new development.
PROPERTY EXPENSES increased by 32.0% to $17.7 million in the second quarter of
2000, up from $13.4 million in the same period of 1999. The 2000 increase
reflects incremental expenses from newly delivered rental units and communities
stabilized during 1999 and 2000. To improve operating efficiency and reduce
operating costs, the Partnership formed IAMC in April 1998 to manage the
Partnership's properties. The personnel and office costs of IAMC are included in
property expenses.
Page 13
<PAGE> 16
REAL ESTATE TAXES totaled $5.5 million in the second quarter of 2000 and $4.7
million in the same period of 1999. Real estate taxes increased in the second
quarter of 2000 due primarily to the addition of new rental units.
NET INTEREST EXPENSE increased to $13.0 million in the second quarter of 2000
compared to $7.8 million in the same period of 1999. Total interest incurred was
$14.5 million in the second quarter of 2000 and $12.1 million in the same period
of 1999. Total interest incurred increased due to the impact of the
Partnership's additional conventional mortgage and tax-exempt mortgage bond
financings in 2000 and 1999, partially offset by the repayment of the unsecured
term loan in 1999 and no borrowings on the unsecured line of credit during the
quarter. Capitalized interest totaled $1.5 million in the second quarter of 2000
and $4.3 million in the same period of 1999. The decrease in capitalized
interest in the second quarter of 2000 was due to the decrease in the average
qualifying asset balance for projects under development. The Partnership
capitalizes interest on projects actively under development using qualifying
asset balances and applicable weighted average interest rates.
DEPRECIATION AND AMORTIZATION EXPENSE increased to $16.3 million in the second
quarter of 2000, up from $10.1 million in the same period of 1999. The increase
in 2000 was mostly due to the additional depreciation related to the step-up in
basis recorded in conjunction with the Merger and the completion and delivery of
newly developed rental units.
GENERAL AND ADMINISTRATIVE EXPENSE decreased to $1.7 million in the second
quarter of 2000, down from $4.6 million in the same period of 1999. The decrease
in 2000 was the result of additional costs incurred in the second quarter of
1999 associated with the Merger and the write-off of certain abandoned costs in
the second quarter of 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
The Partnership's income after payment of redeemable preferred interests was
$29.8 million for the six months ended June 30, 2000, down from $34.7 million
for the same period of 1999. The Partnership's net income decreased in 2000 due
to the increase in depreciation and amortization expense due to additional
depreciation related to the step-up in basis recorded in conjunction with the
Merger and the addition of newly delivered rental units. The decrease was also
due to the increase in interest expense related to the additional conventional
mortgage and tax-exempt mortgage bond financings obtained in 2000 and 1999. The
decrease was offset, in part, by contributions of newly delivered rental units
from its development program and properties that stabilized during 1999 and
2000, as well as an increase in rental rates and physical occupancy within its
stabilized portfolio during 2000.
REVENUE AND EXPENSE DATA
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
(dollars in thousands) 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Number of stabilized communities 60 57
Number of operating units at end of period 17,517 16,878
Consolidated Information:
Operating revenues $138,710 $121,247
Property expenses $ 33,064 $ 25,770
Real estate taxes $ 10,971 $ 9,290
--------------------------------------------------------------------------------------------
</TABLE>
OPERATING REVENUES (rental and other income) increased by 14.4% to $138.7
million in the first half of 2000, up from $121.2 million in the same period of
1999. Operating revenues rose in 2000 because of higher rental rates, higher
Page 14
<PAGE> 17
physical occupancy and a larger average number of rental units in service,
primarily as a result of new development.
PROPERTY EXPENSES increased by 28.3% to $33.1 million in the first half of 2000,
up from $25.8 million in the same period of 1999. The 2000 increase reflects
incremental expenses from newly delivered rental units and communities
stabilized during 1999 and 2000.
REAL ESTATE TAXES totaled $11.0 million in the first half of 2000 and $9.3
million in the same period of 1999. Real estate taxes increased in the first
half of 2000 due primarily to the addition of new rental units.
NET INTEREST EXPENSE increased to $25.3 million in the first half of 2000
compared to $15.2 million in the same period of 1999. Total interest incurred
was $28.6 million in the first half of 2000 and $23.6 million in the same period
of 1999. The increase in interest incurred in the first half of 2000 was
primarily due to the impact of the Partnership's additional conventional
mortgage and tax-exempt mortgage bond financings in 2000 and 1999, partially
offset by the repayment of the unsecured term loan in 1999 and no borrowings on
the unsecured line of credit during the first half of 2000. Capitalized interest
totaled $3.3 million in the first half of 2000 and $8.4 million in the same
period of 1999. The decrease in capitalized interest in the first half of 2000
was due to the decrease in the average qualifying asset balance for projects
under development. The Partnership capitalizes interest on projects actively
under development using qualifying asset balances and applicable weighted
average interest rates.
DEPRECIATION AND AMORTIZATION EXPENSE increased to $29.4 million in the first
half of 2000, up from $19.3 million in the same period of 1999. The increase in
2000 was mostly due to the additional depreciation related to the step-up in
basis recorded in conjunction with the Merger and the completion and delivery of
newly developed rental units.
GENERAL AND ADMINISTRATIVE EXPENSE decreased to $3.9 million in the first half
of 2000, down from $8.9 million in the same period of 1999. The decrease in 2000
was the result of additional costs incurred associated with the Merger and the
write-off of certain abandoned costs, both in the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership believes that cash provided by operations will be adequate to
meet both operating requirements and payment of distributions by the Partnership
to the preferred limited partners in both the short and long term.
LIQUIDITY: The Partnership expects to meet its short-term and long-term
liquidity requirements, such as construction costs and scheduled debt
maturities, through the refinancing of long-term debt or borrowings from
financial institutions. The Partnership's $125 million unsecured revolving
credit facility currently bears interest at LIBOR plus 0.65% or prime and
matures in June 2001. The interest rates under the credit facility are adjusted
up or down based on the credit ratings on the Partnership's senior unsecured
long-term indebtedness. Availability under the credit facility was $73.5 million
at June 30, 2000.
DEBT: The Partnership's conventional debt bears interest at fixed interest
rates. Interest rates on conventional mortgage debt were reduced to then-current
market rates at the time of IAC, Inc.'s December 1993 initial public offering
through interest rate buy-down agreements that are scheduled to expire at
various dates prior to loan maturity that range from 2000 to 2008. The weighted
average effective interest rate on the Partnership's debt, including the
non-cash charges of amortization of deferred financing costs, was 6.35% at June
30, 2000. In February 2000, the Partnership obtained $78.5 million of
conventional mortgage financing at a fixed rate of 7.29% maturing in November
2010. Proceeds from the financing are being used to fund the construction of new
apartment communities.
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<PAGE> 18
DEBT STRUCTURE AT JUNE 30, 2000
<TABLE>
<CAPTION>
Debt Weighted Average
(dollars in thousands) Balance Interest Rate
-------------------------------------------------------------------------------------
<S> <C> <C>
Fixed rate debt
Conventional mortgage financings $350,891 7.15%
Mortgage notes payable to The Irvine Company 48,100 5.75%
Tax-exempt assessment district debt 5,269 6.29%
Unsecured tax-exempt bond financings 334,190 4.93%
Unsecured notes payable 99,374 7.10%
-------------------------------------------------------------------------------------
Total fixed rate debt 837,824 6.17%
-------------------------------------------------------------------------------------
Variable rate debt
Tax-exempt mortgage bond financings 50,038 5.44%
Tax-exempt assessment district debt 15,771 6.06%
-------------------------------------------------------------------------------------
Total variable rate debt 65,809 5.59%
-------------------------------------------------------------------------------------
Total debt $903,633 6.13%
=====================================================================================
</TABLE>
OPERATING ACTIVITIES: Cash provided by operating activities was $79.2 million
and $64.0 million in the first half of 2000 and 1999, respectively. Cash
provided by operating activities increased in the first half of 2000 compared to
the same period in 1999 due to higher revenues from newly developed apartment
units, as well as an increase in revenues within the Partnership's stabilized
portfolio achieved through higher rental rates and occupancy. The increase is
partially offset by the increase in interest expense related to the
Partnership's additional conventional mortgage and tax-exempt mortgage bond
financings obtained in 2000 and 1999.
INVESTING ACTIVITIES: Cash used in investing activities was $68.3 million and
$76.7 million in the first half of 2000 and 1999, respectively. The decrease
reflects decreased development activity in the first half of 2000 as compared to
1999.
FINANCING ACTIVITIES: Cash used in financing activities was approximately
$800,000 in the first half of 2000 while cash provided by financing activities
was $18.2 million in the first half of 1999. In 2000, the Partnership received
$78.5 million from a conventional mortgage financing and $34 million from an
advance from affiliate. The proceeds from the financing and advance are being
used to fund construction of new apartment communities. The Partnership repaid
certain conventional mortgages in the first half of 2000 totaling $39.5 million.
The Partnership (and the Trust) made distributions of $6.2 million to holders of
the Trust's Series A Preferred Securities in the first half of 2000 and 1999. In
addition, the Partnership made distributions of $2.2 million to holders of the
Partnership's Series B Preferred Limited Partner interests in the first half of
2000 and 1999. Additionally, the Partnership paid $63.8 million in distributions
to its partners in the first half of 2000 compared to $17.4 million in the first
half of 1999.
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<PAGE> 19
CAPITAL EXPENDITURES
Capital expenditures consist of capital improvements and investments in real
estate assets. Capital improvements to operating real estate assets totaled $1.1
million and $3.2 million in the first half of 2000 and 1999, respectively.
Capital investments in real estate assets totaled $67.1 million and $73.5
million in the first half of 2000 and 1999, respectively. These investments
consisted of new development and capital replacements.
CAPITAL IMPROVEMENTS: The Partnership has a policy of capitalizing expenditures
related to new assets, the material enhancement of the value of an existing
asset, or the substantial extension of an existing asset's useful life.
CAPITAL REPLACEMENTS: Capital replacements consist of special programs to
upgrade and enhance a community to achieve higher rental rates. Expenditures for
capital replacements totaled $2.7 million in the first half of 2000. These
expenditures were made at five properties: Promontory Point, Turtle Rock Vista,
Rancho San Joaquin, Park West and Woodbridge Willows.
CAPITAL INVESTMENTS IN NEW DEVELOPMENT: Currently, the Partnership has four
apartment communities under development or construction that are expected to
require total expenditures of approximately $459 million, of which $178 million
had been incurred as of June 30, 2000. Funding for these developments is
expected to come from borrowings from financial institutions, including the
Partnership's $125 million unsecured revolving credit facility (of which $73.5
million was available as of June 30, 2000), and refinancing of long-term debt.
The Partnership has no plans for future development beyond the remaining four
apartment communities currently under development.
CONSTRUCTION INFORMATION
<TABLE>
<CAPTION>
Total
Commencement Estimated Costs
Apartment Community Location Units of Construction (in millions)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
On Irvine Ranch:
Villa Siena (Park Place) Irvine 1,226 2/99 $287
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Off Irvine Ranch:
La Jolla Palms LaJolla 232 5/98 53
Franklin Street RedwoodCity 206 61
Cherry Orchard Apartments Sunnyvale 300 9/99 58
-------------------------------------------------------------------------------------------------------------------
738 172
-------------------------------------------------------------------------------------------------------------------
Total 1,964 $459
===================================================================================================================
</TABLE>
The estimated costs of apartment communities that are in development are only
estimates. Actual results will depend on numerous factors, many of which are
beyond the control of the Partnership. These include the extent and timing of
economic growth in the Partnership's rental markets; future trends in the
pricing of construction materials and labor; product design changes; entitlement
decisions by local government authorities; weather patterns; changes in interest
rate levels; and other changes in capital markets. No assurance can be given
that the estimates set forth in the foregoing table will not vary substantially
from actual results.
Page 17
<PAGE> 20
IRVINE RANCH MASTER PLAN
The Irvine Company is a real estate investment and community development firm
engaged in the long-term development of the Irvine Ranch. The urbanization of
the Irvine Ranch began in the 1960s with the adoption of the pioneering
comprehensive Master Plan for future community development which originally
constituted a large map of the Irvine Ranch and a series of supporting maps
detailing land uses. Subsequently, The Irvine Company worked closely with the
various local jurisdictions which govern the Irvine Ranch to adopt general plans
for the future development of their jurisdictions. The Irvine Company's overall
Master Plan was refined to accord with the approved general plans and the
residential, commercial, industrial, environmental and aesthetic balance desired
by each jurisdiction. As a result, today the Irvine Ranch Master Plan is a
compilation of the various interlocking general plans described above. The
Irvine Company continuously engages in planning activities and the Master Plan
refinement process is ongoing. The Irvine Company works closely with local
government representatives, community residents and other civic and
environmental groups to obtain the necessary local support and entitlement for
its developments. The goal of the Master Plan was and remains to create
innovative urban and suburban environments through the well-planned, coordinated
development of residential communities and employment centers (which include
major business and retail centers, and research and development and industrial
parks) as well as civic, cultural, recreational, educational and other
supportive facilities, all with an emphasis on improving the quality of life and
achieving long-term balanced regional economic growth.
The success of the Irvine Ranch as a master-planned development is, in the large
part, attributable to the early creation of a broad employment base. The Irvine
Company has emphasized the promotion of job creation on the Irvine Ranch and has
been involved in creating four major employment centers on the Irvine Ranch,
each easily accessible by apartment residents and the surrounding area. The
Irvine Company has been the sole developer of the Irvine Spectrum, a 5,000-acre
research, technology and employment center which houses more than 2,500
companies and approximately 50,000 employees and includes 26 million square feet
of retail, manufacturing, research and development and office space. The Irvine
Business Complex, which surrounds the John Wayne airport, houses over 100,000
employees and includes more than 24 million square feet of office and other
commercial space and over 14 million square feet of industrial space. Newport
Center contains over 2.5 million square feet of office space, a 1.3 million
square-foot regional mall (Fashion Island), a tennis club and two country clubs.
In addition, The Irvine Company donated land to the University of California at
Irvine, a 1,470-acre campus which currently has more than 19,200 students and
8,300 employees. The proximity of the Irvine Ranch properties to these
employment centers makes them attractive residential locations.
IMPACT OF INFLATION
The Partnership's business is affected by general economic conditions, including
the impact of inflation and interest rates. Substantially all of the
Partnership's leases allow, at time of renewal, for adjustments in the rent
payable thereunder, and thus may enable the Partnership to seek increases in
rents. Substantially all leases are for a period of one year or less. The
short-term nature of these leases generally serves to minimize the risk to the
Partnership of the adverse effects of inflation. For construction, the
Partnership enters into various contracts for the development and construction
of new apartment communities. These are fixed-fee contracts and thus partially
insulate the Partnership from inflationary risk.
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<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Refer to the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1999 for detailed disclosure about quantitative and
qualitative disclosures about market risk. Quantitative and qualitative
disclosures about market risk have not materially changed since December 31,
1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. 27.1: Financial Data Schedule for Irvine Apartment
Communities, L.P.
Exhibit No. 27.2: Financial Data Schedule for IAC Capital Trust.
(b) During the second quarter of 2000, the Partnership and the Trust
filed no current reports on Form 8-K.
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<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
IRVINE APARTMENT COMMUNITIES, L.P.
By: Irvine Apartment Communities LLC
its sole general partner
Date: August 14, 2000 By: /s/ Michael D. McKee
---------------------------------
Michael D. McKee
Vice Chairman,
Chief Financial Officer and
Secretary
IAC CAPITAL TRUST
Date: August 14, 2000 By: /s/ David A. Patty
---------------------------------
David A. Patty
Regular Trustee
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<PAGE> 23
EXHIBIT INDEX
EXHIBIT
INDEX DESCRIPTION
------- -----------
27.1 Financial Data Schedule for Irvine Apartment
Communities, L.P.
27.2 Financial Data Schedule for IAC Capital Trust.
