<PAGE> 1
================================================================================
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 QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13951
------------------------
LEXFORD RESIDENTIAL TRUST
(Exact Name of Registrant as Specified in its Charter)
Maryland 31-4427382
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6954 AMERICANA PARKWAY
COLUMBUS, OHIO 43068
(Address of Principal Executive Offices including Zip Code)
(614) 759-1566
(Registrant's Telephone Number, including Area Code)
-----------------------------
Indicate by check X whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of May 13, 1999, there were 9,554,028 common shares of beneficial interest
issued and outstanding.
Exhibit Index on page 26
================================================================================
<PAGE> 2
<TABLE>
LEXFORD RESIDENTIAL TRUST
INDEX
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998 (Audited) 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statement of Shareholders' Equity
for the Three Months Ended March 31, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (Unaudited) 6 - 7
Notes to Consolidated Financial Statements 8 - 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16 - 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
<PAGE> 3
<TABLE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 (UNAUDITED) AND
DECEMBER 31, 1998 (AUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Rental Properties (Note 2)
Land $ 59,732 $ 59,732
Buildings, Improvements and Fixtures 546,656 544,897
-------- --------
Accumulated Depreciation (34,386) (28,564)
-------- --------
572,002 576,065
Investments in and Advances to Unconsolidated Partnerships,
net of an allowance of $1,615 at March 31, 1999 and
December 31, 1998 (Note 1) 10,813 11,173
Cash 785 495
Accounts Receivable, Residents, Affiliates, Officers and Other
(net of an allowance of $729 and $550 at March 31, 1999 and
December 31, 1998, respectively) (Note 4) 1,370 1,920
Furniture, Fixtures and Other, Net 2,141 2,108
Funds Held in Escrow (Note 1) 22,560 22,747
Intangible Assets (Note 1) 6,744 6,891
Prepaids and Other (Note 1) 6,933 7,523
-------- --------
$623,348 $628,922
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and Revolving/Term Debt
Mortgages (Note 3) $492,591 $494,556
Revolving/Term Debt 30,645 33,186
-------- --------
523,236 527,742
-------- --------
Accounts Payable 1,204 1,389
Accrued Interest, Real Estate and Other Taxes 11,267 10,315
Other Accrued Expenses 4,313 6,196
Other Liabilities 8,431 7,451
Dividends Payable 4,132 4,122
Deferred Compensation (Note 1) 13,143 12,525
-------- --------
Total Liabilities 565,726 569,740
-------- --------
Shareholders' Equity (Note 1):
Preferred Shares, $.01 par value, 5,000,000 Shares
Authorized, None Issued -- --
Common Shares, $.01 par value, 50,000,000 Shares Authorized
9,554,028 and 9,530,013 Shares Issued and Outstanding at March
31, 1999 and December 31, 1998, respectively 96 95
Additional Paid-in Capital 66,213 65,833
Retained Earnings 6,053 7,482
Less Cost of Treasury Shares (Note 1) (14,740) (14,228)
-------- --------
57,622 59,182
-------- --------
$623,348 $628,922
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
<TABLE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Revenues:
Rental and Other Property Revenues $37,463 $25,694
Fee Based 1,051 2,398
Income from Unconsolidated Partnerships 445 1,106
------- -------
38,959 29,198
------- -------
Expenses:
Property Operating and Maintenance 11,219 8,306
Real Estate Taxes and Insurance 3,164 2,085
Property Management 2,767 3,923
Administration 1,235 1,515
Non-recurring Costs (Note 1) -- 1,808
Interest-Mortgages 10,574 7,887
Interest-Revolving/Term Debt 550 161
Depreciation and Amortization 6,258 4,190
Loss on Sale of Third Party Management Business (Note 1) -- 6,300
------- -------
35,767 36,175
------- -------
Income/(Loss) Before Gain on Disposal of Assets, Extraordinary
Gain and Cumulative Effect of Change in Accounting Principle 3,192 (6,977)
Gain on Disposal of Assets-Net 22 89
------- -------
Income/(Loss) Before Extraordinary Gain and
Cumulative Effect of Change in Accounting Principle 3,214 (6,888)
Extraordinary Gain (Note 3) 189 --
Cumulative Effect of Change in Accounting Principle (Note 1) (700) --
======= =======
Net Income/(Loss) $ 2,703 $(6,888)
======= =======
Basic Earnings Per Share:
Income/(Loss) Before Extraordinary Gain and
Cumulative Effect of Change in Accounting Principle $ 0.34 $ (0.80)
Extraordinary Gain 0.02 --
Cumulative Effect of Change in Accounting Principle (0.07) --
======= =======
Net Income/(Loss) $ 0.29 $ (0.80)
======= =======
Diluted Earnings Per Share:
Income/(Loss) Before Extraordinary Gain and
Cumulative Effect of Change in Accounting Principle $ 0.33 $ (0.80)
Extraordinary Gain 0.02 --
Cumulative Effect of Change in Accounting Principle (0.07) --
======= =======
Net Income/(Loss) $ 0.28 $ (0.80)
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
<TABLE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED
MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
Common Shares Additional Less Cost of
--------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Shares Total
------ ------ ---------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 9,530 $95 $65,833 $ 7,482 $(14,228) $59,182
----- --- ------- ------- -------- -------
Exercise of options under non-
qualified stock option plan 5 -- 30 30
Trustees restricted stock plan
shares 2 -- 35 (27) 8
Rabbi Trust dividends and other
investments in shares, net of withdrawals (169) (169)
1999 share compensation issued
to Rabbi Trust 17 1 315 (316) --
Dividends to common shareholders (4,132) (4,132)
Net Income for the period 2,703 2,703
----- --- ------- ------- -------- -------
Balance, March 31, 1999 9,554 $96 $66,213 $ 6,053 $(14,740) $57,622
===== === ======= ======= ======== =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
<TABLE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
Three Months Ended March 31,
1999 1998
------- --------
<S> <C> <C>
Cash Flows from Operating activities:
Net Income/(Loss) $ 2,703 $ (6,888)
------- --------
Adjustments to reconcile Net Income/(Loss) to Net Cash
provided by Operating activities:
Depreciation 5,969 3,625
Amortization 289 565
Loss on Sale of Third Party Management Business -- 6,300
Provision for Losses on Accounts Receivable 426 676
Gain on Disposal of Assets - net (22) (89)
Extraordinary Gain (189) --
Cumulative Effect of Change in Accounting Principle 700 --
Non-Cash Share Compensation 489 1,163
Changes in Operating Assets and Liabilities:
Investments in and Advances to Unconsolidated Partnerships 156 2,710
Accounts Receivable and Other Assets 188 (218)
Accounts Payable and Other Liabilities (91) 956
------- --------
Net Cash provided by Operating activities 10,618 8,800
------- --------
Cash Flows from Investing activities:
Proceeds from Sale of Assets 22 117
Net Repayment from (Advances to) Unconsolidated Partnerships 204 (119)
Investments in Unconsolidated Partnerships and Other -- (3,409)
Purchase of Unconsolidated Partnerships, Net of Cash Acquired -- (10,585)
Capitalized Refinancing Costs (130) --
Capital Expenditures - Other (172) (312)
Capital Expenditures - Real Estate (1,767) (1,402)
------- --------
Net Cash (used in) Investing activities (1,843) (15,710)
------- --------
Cash Flows from Financing activities
Proceeds from the exercise of Stock Options 30 12
Proceeds from Revolving Debt - Net -- 14,740
Principal Payments on Revolving/Term Debt and Other (2,541) (341)
Proceeds from Mortgage Debt 2,787 --
Payments on Mortgages - principal amortization (1,969) (1,546)
Payments on Mortgages - lump sum (2,671) (287)
Dividends Paid (4,121) --
------- --------
Net Cash provided by/(used in) Financing activities (8,485) 12,578
------- --------
Increase in Cash 290 5,668
Cash at Beginning of Period 495 2,569
======= ========
Cash at End of Period $ 785 $ 8,237
======= ========
Supplemental Disclosure of Cash Flow Information
Cash Payments for Interest $10,974 $ 7,991
======= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first quarter of 1998, the Company acquired the entire ownership
interest in 287 Unconsolidated Partnerships owning 287 apartment communities.
Such acquisitions resulted in the following increases (decreases) to the
Company's balance sheet (SEE NOTE 2):
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Non-Cash Effects
- ----------------
Investments in and Advances to Unconsolidated Partnerships $(44,218)
Land and Building $367,771
Accounts Receivable and Other Assets $ 16,966
Mortgages $316,857
Accounts Payable and Other Liabilities $ 13,077
Cash Effects
- ------------
Cash Paid to Former Partner(s) $(16,962)
Net Cash Acquired 6,377
--------
$(10,585)
========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE> 8
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
Lexford Residential Trust, a Maryland real estate investment trust,
together with its wholly owned and controlled partnerships, limited liability
companies and corporate subsidiaries (the "Company" or "Lexford"), is a fully
integrated, self-managed real estate investment trust ("REIT") which owns,
manages and invests in direct or indirect ownership interests in multifamily
apartment communities. The consolidated financial statements include the
accounts of Lexford Residential Trust and its wholly owned subsidiaries and
partnerships. The Company, for consolidated financial statement purposes,
includes corporations, limited partnerships and other legal entities which own
multifamily apartment communities (the "Rental Properties") in which the
Company, in turn, owns 100% equity interest. The Company also holds equity
ownership as well as significant economic interests (i.e. mortgage loans and
management contracts entitling the Company to a substantial portion of an
apartment community's net cash flow) in multifamily apartment communities in its
capacity as a partner and property manager, respectively, in various limited
partnerships (the "Unconsolidated Partnerships"). The Rental Properties and the
Unconsolidated Partnerships are collectively referred to as the "Properties."
The accounts of the Unconsolidated Partnerships are not included within the
Company's consolidated financial statements but are accounted for under the
equity method. All significant intercompany balances and transactions have been
eliminated in consolidation. The accompanying consolidated financial statements,
except for the Consolidated Balance Sheet as of December 31, 1998, are unaudited
and have been prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and in accordance with the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. The consolidated financial statements, the notes hereto and the
capitalized terms included herein should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
The Properties contain 36,333 apartment units located at 401 geographic
sites. At March 31, 1999, the Company owned the entire equity interest in 432
Rental Properties and a partial equity, together with a significant economic,
interest in 79 Unconsolidated Partnerships. The difference in the number of
geographic sites results from separate legal entities owning apartment
communities constructed on contiguous parcels. As a result of the Company's
successful efforts in acquiring the entire equity interest in a number of former
Unconsolidated Partnerships (see Note 2), the Company is combining such legal
entities owning contiguous apartment communities as and when mortgage debt
secured by such apartment communities are refinanced with a single lender.
The Company has one reportable segment which is the ownership and
operation of residential apartment communities. The majority of the Properties
are located in the midwest and southeast United States, with the heaviest
concentrations in Florida, Ohio, Georgia, Indiana, Michigan and Kentucky. The
concentrations of Properties within these states is as follows: Ohio (136
Properties), Florida (126 Properties), Georgia (73 Properties), Indiana (70
Properties), Kentucky (33 Properties) and Michigan (25 Properties). The Company
is not dependent for its revenues on any particular Property or resident and the
loss of any Property would not be material to the Company's financial position.
The Company's largest Property accounts for only 1% of the Company's total
revenues. The distribution of the Properties also minimizes the Company's
exposure to local economic conditions. The typical Property is comprised of
multiple single story buildings with studio, one and two bedroom apartments.
8
<PAGE> 9
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
The interim consolidated financial statements have been prepared in
accordance with the Company's customary accounting practices. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
Business Overview
- -----------------
The Company is a fully integrated REIT which owns, manages and
opportunistically acquires apartment communities. The Company's Properties
generally consist of relatively smaller apartment communities, averaging
approximately 90 units per site.
The Company's primary mission is to become the leading multifamily REIT
operating in the value-conscious segment. The Company defines value-conscious
renters as those who prefer clean, attractive living accommodations without
unnecessary amenities at rental rates below the median rent in the relevant
housing market. The Company seeks to serve this segment by maintaining
competitively priced rental structures, as represented by its typical monthly
rent that currently ranges from $300 to $630 per apartment unit.
In addition, the Company provides ancillary services to the residents at
both the Rental Properties and Unconsolidated Partnerships, including renter's
insurance and telecommunication services. The Company also enters into group
buying, volume discount contracts with major vendors as agent for the Properties
enabling the Properties to purchase items at a discounted price and, in the case
of laundry equipment, receive a rebate based on resident usage.
Sale of Third Party Management Business
- ---------------------------------------
In the first quarter of 1998 the Company was also engaged in providing
management services to third party owners of multifamily apartment communities
(the "Third Party Management Business"). Because of Internal Revenue Code
limitations on the nature and amount of non-qualified REIT income, the Company
contributed the majority of its assets related to the Third Party Management
Business to a newly formed corporation, Lexford Property Management, Inc.
("LPM"), in exchange for all of the preferred stock of such corporation on
February 20, 1998. Effective as of April 1, 1998, the Company sold all its
preferred equity interest in the Third Party Management Business. Due to the
reclassification of the Third Party Management Business as Held for Sale in the
first quarter of 1998, the Company recorded a $1.3 million reserve for
sale/disposal costs associated with this sale, a $3.0 million charge for the
release of 300,000 contingent shares and a $2.0 million charge related to an
adjustment to the value of goodwill associated with the original acquisition of
the Third Party Management business. The above charges totaling $6.3 million
were classified as Loss on Sale of Third Party Management Business. The Company
received a promissory note in the principal amount of $1.8 million payable over
a ten year period which bears interest at 6% per annum until April 1, 2000 and
11% per annum thereafter, in exchange for all of the outstanding preferred stock
of LPM. The Company has retained certain key personnel dedicated to the
Company's property management activities, its proprietary interest in property
management training programs and systems, and the rights to the name "Lexford".
9
<PAGE> 10
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
Fresh Start Accounting
- ----------------------
The Company adopted a method of accounting referred to as fresh start
("Fresh Start") reporting as of September 11, 1992 (the "Effective Date") as a
result of the Company's judicial plan of reorganization (the "Plan of
Reorganization") of Cardinal Industries, Inc., the Company's predecessor. The
Company prepared financial statements on the basis that a new reporting entity
was created with assets and liabilities recorded at their estimated fair values
as of the Effective Date. At the Effective Date, to the extent the non-recourse
debt secured by certain assets owned by the Company exceeded the estimated fair
value of the respective Rental Property, the Company reduced the contractual
amount of the related non-recourse mortgage debt by the amount of the deficiency
(the "Mortgage Deficiency"). The contractual mortgage balance net of any
applicable Mortgage Deficiency, is referred to as the "Carrying Value" of the
mortgage (SEE NOTE 3).
Funds Held in Escrow
- --------------------
Funds Held in Escrow at March 31, 1999 includes funds of $21.7 million
escrowed by Rental Properties for improvements and deferred maintenance, real
estate taxes, insurance, resident security deposits and other funds held by
mortgage lenders.
Intangible Assets
- -----------------
Intangible Assets at March 31, 1999 is comprised of approximately $2.9
million of management contracts and approximately $465,200 of goodwill related
to the trade name, training programs and property management systems retained
from the Third Party Management Business. The management contracts and goodwill
are net of amortization of approximately $758,100. In addition, Intangible
Assets includes deferred financing costs of $3.4 million at March 31, 1999. The
deferred financing costs relate to mortgage refinancings on the Rental
Properties and are amortized over the terms of the respective loans.
Prepaids and Other Assets
- -------------------------
Prepaids and Other assets at March 31, 1999 includes $3.7 million of
deferred offering costs related to the Company's Form S-3 "shelf" registration
statement filed with the SEC and a $1.8 million note receivable related to the
sale of the Third Party Management Business. In addition, Prepaids and Other
assets consists of approximately $773,300 of prepaid rent, insurance and real
estate taxes, and approximately $662,000 of utility deposits and other prepaid
expenses.
10
<PAGE> 11
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
Investments in and Advances to Unconsolidated Partnerships
- ----------------------------------------------------------
Investments in and Advances to Unconsolidated Partnerships represent the
Company's general partners' interest in and advances to Unconsolidated
Partnerships. The carrying value represents the allocation of the estimated fair
value of the underlying real estate assets as of the Effective Date or, if
later, date of purchase or investment. The contractual amounts of the
receivables are significantly more than the recorded carrying values. The
Company accounts for its investments on the equity method. The Company's share
of net loss of the Unconsolidated Partnerships amounted to approximately
$109,500 for the first three months of 1999, and is included in Income from
Unconsolidated Partnerships in the Consolidated Statements of Income.
In the first quarter of 1998, the Company invested $3.4 million in a
joint venture with a developer for the construction of an apartment community,
consisting of 276 units. Such investment is accounted for under the equity
method. The investment is included in Investments in and Advances to
Unconsolidated Partnerships at March 31, 1999. The community commenced leasing
at the end of the first quarter of 1999.
Accounting Change - Start up costs
- ----------------------------------
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, Reporting the Costs of Start-up
Activities. The SOP is effective beginning on January 1, 1999, and requires that
start-up costs capitalized prior to January 1, 1999 be written-off and requires
that start-up costs be expensed as incurred. The definition of start-up costs
under the SOP includes organizational costs. Historically, the Company
capitalized and then amortized these costs over five years. The unamortized
balance of organizational costs, approximately $700,000 (as of December 31,
1998), was written off as the Cumulative Effect of Change in Accounting
Principle as of January 1, 1999.
Provision for Income Taxes
- --------------------------
The Company intends to elect to be taxed as a REIT under sections 856
through 860 of the Internal Revenue Code, commencing with its taxable year
beginning January 1, 1998. As a REIT, the Company generally will not be subject
to Federal Income Tax on income it distributes to shareholders as long as it
distributes at least 95% of its REIT taxable income and satisfies a number of
organizational, ownership and operational requirements. In addition, primarily
due to its organization as a Maryland real estate investment trust, the Company
believes it will not be subject to state income taxes in jurisdictions where the
Properties are located. Therefore, the Consolidated Statements of Income for the
three months ended March 31, 1999 and 1998 do not include a provision for
Federal or state income taxes.
11
<PAGE> 12
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
Non-recurring Costs
- -------------------
Non-recurring Costs were approximately $1.8 million for the three months
ended March 31, 1998. Approximately $1.6 million of the charge related to the
retirement plan ("Trustee Retirement Plan") for four Trustees who retired April
15, 1998. Each retiring Trustee received a package consisting of the right to
receive a cash payment of $225,000 (the "Retirement Payment"), vesting of all
non-vested common share awards and the opportunity to continue participation in
the Company's Executive Deferred Compensation Plan and the Executive Deferred
Compensation Rabbi Trust (the "Rabbi Trust") for up to five years. The retiring
Trustees were also afforded the opportunity to defer receipt of all or any
portion of the Retirement Payment and direct that the deferred portion be
contributed to the Rabbi Trust and invested in the Company's common shares for
their benefit. In connection with their participation in the Trustee Retirement
Plan, two of the retiring Trustees elected to defer receipt of a total of
$400,000 of Retirement Payments in such manner. The majority of the remaining
$200,000 of Non-recurring Costs in 1998 relates to severance costs associated
with terminated employees.
Rabbi Trust
- -----------
The Company established the Rabbi Trust in 1996 to permit executive
officers and trustees to defer taxes on awards of Company shares. The Rabbi
Trust is currently restricted to holding Company shares or cash equivalents. In
1998, the Emerging Issues Task Force of the Financial Accounting Standards Board
("EITF") reached a consensus on Issue No. 97-14, Accounting for Deferred
Compensation Arrangements. The EITF concluded that the deferred compensation
liability and the securities issued to fund deferred compensation must be
consolidated by the Company and carried on the Company's balance sheet. Further,
the Company's common shares held in the Rabbi Trust should be accounted for as
treasury shares by the Company. The Company applied EITF No. 97-14 commencing
with the first quarter of 1998.
12
<PAGE> 13
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
Earnings Per Share
- ------------------
The following table shows the amounts used in computing basic and
diluted earnings per share as well as weighted average numbers of shares
outstanding and the effect on income of restricted common shares and stock
option dilutive potential (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------ -------
<S> <C> <C>
Numerator for Basic and Diluted Earnings
Per Share
Net Income/(Loss) $2,703 $(6,888)
====== =======
Denominator
Denominator for Basic Earnings per Share
Weighted Average Shares 9,478 8,589
------ -------
Effect of Dilutive Securities
Stock options (1) 42 --
Time Vesting Restricted Share Awards 14 58
------ -------
Dilutive Potential Common Shares 56 58
------ -------
Denominator for Diluted Earnings per Share
Adjusted Weighted Average Shares 9,534 8,647
====== =======
Basic Earnings Per Share:
Net Income/(Loss) $ 0.29 $ (0.80)
====== =======
Diluted Earnings Per Share:
Net Income/(Loss) $ 0.28 $ (0.80)
====== =======
</TABLE>
(1) Stock Options for 257,258 shares were excluded from diluted earnings
per share for the three months ended March 31, 1998 because including
the shares would be anti-dilutive as a result of the net loss the
Company recognized for the first three months of 1998.
NOTE 2 PROPERTY ACQUISITIONS
In conjunction with its determination to elect REIT status, the Company
initiated a consolidation plan, the purpose of which was to minimize third party
equity interests in the Unconsolidated Partnerships owning apartment communities
(the "Consolidation Plan"). In the first quarter of 1998, the Company had
acquired the entire equity ownership interest in 287 former Unconsolidated
Partnerships. The acquisition of the 287 former Unconsolidated Partnerships was
effective as of January 31, 1998. Effective as of April 1, 1998, the Company
acquired the entire ownership interest in an additional 37 Unconsolidated
Partnerships that owned 39 Properties, which were accounted for under the equity
method in the first quarter of 1998. The acquired former Unconsolidated
Partnerships are now classified as Rental Properties.
13
<PAGE> 14
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 MORTGAGE DEBT
As of the Effective Date, the mortgages on 13 Rental Properties were
restated to estimated fair value (the "Carrying Value") because the Fresh Start
value of the respective Rental Property was less than the outstanding principal
amount of its mortgage. The difference between the Carrying Value of each such
mortgage and the full unpaid principal amount thereof is characterized as a
"Mortgage Deficiency" for Fresh Start purposes. Interest expense is recorded
based on the Carrying Value of the mortgage using the effective interest rate
method. Mortgages which have been originated or assumed following the Effective
Date (including non-recourse mortgages on the 326 Properties acquired pursuant
to the Consolidation Plan) are recorded as liabilities on the Consolidated
Balance Sheets in their full principal amount. Typically, each Rental Property
is secured by a separate mortgage loan. The mortgage loans on a portfolio of 26
Rental Properties contain cross collateral and cross default provisions; and
another portfolio of 25 Rental Properties are cross collateralized and cross
defaulted within their respective states, with no more than eight Rental
Properties in one state. However, all but three of the mortgage loans secured by
the Rental Properties are non-recourse to the Company.
The outstanding mortgage debt on the Rental Properties, including the
mortgage debt assumed in relation to the acquisition of the 324 former
Unconsolidated Partnerships at March 31, 1999 and December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Contractual Mortgage Payable $498,647 $500,688
Mortgage Deficiency (6,056) (6,132)
-------- --------
$492,591 $494,556
======== ========
</TABLE>
Approximately $360 million, or 69%, of the combined contractual mortgage
debt and the Company's credit facility is prepayable at March 31, 1999. Any
prepayment of mortgage debt at the contractual value in excess of its carrying
value will result in an extraordinary charge equal to the amount of Mortgage
Deficiency associated with such debt.
In January 1999 the Company completed the refinancing of the mortgage
debt on three Rental Properties. Mortgage indebtedness on the three Rental
Properties with a contractual and carrying value of $2.8 million, was refinanced
with mortgages bearing a fixed rate of interest of 7.6%, with 25 year
amortization and ten year maturities. An extraordinary gain of approximately
$189,000 was recognized as a result of the refinancing due to debt discounts
received from the prior lenders.
14
<PAGE> 15
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 RELATED PARTY TRANSACTIONS
The Company manages all but one of the Properties owned by the
Unconsolidated Partnerships. The Company earned fee based revenues from the
Unconsolidated Partnerships of approximately $694,800 and $1.5 million for the
three months ended March 31, 1999 and 1998, respectively. The Company also
earned a majority of its Income from Unconsolidated Partnerships in the form of
interest on receivables (including second mortgages). Approximately $167,000 and
$233,000 of the Company's Accounts Receivable (net of allowances) were due from
the Unconsolidated Partnerships as of March 31, 1999 and December 31, 1998,
respectively.
The Company received net principal repayment of advances from
Unconsolidated Partnerships of approximately $204,000 in the first three months
of 1999 as compared to approximately $119,000 of advances made to Unconsolidated
Partnerships in the first three months of 1998. These principal repayments were
credited to Investments in and Advances to Unconsolidated Partnerships (SEE NOTE
1 -- "INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED PARTNERSHIPS").
15
<PAGE> 16
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
INTRODUCTION
The following discussion explains material changes in the Company's
results of operations, comparing the three months ended March 31, 1999 and 1998,
and significant developments and discernible trends affecting the Company's
financial condition since the end of 1998. As a result of the Company's
consolidation of 324 former Unconsolidated Partnerships in January and April
1998 (the "Acquired Properties") and the sale of the Third Party Management
Business, the operating results for the three months ended March 31, 1998 are
not comparable to the same period in 1999. Accordingly, operating results for
the second quarter of 1999 and future periods should be comparable to operating
results for the second quarter of 1998 and subsequent periods. The following
discussion should be read in conjunction with the historical financial
statements of the Company.
RESULTS OF OPERATIONS
Rental and Other Property Revenues are derived from the Rental
Properties which own and operate apartment communities. Rental and Other
Property Revenues increased approximately $11.8 million, or 45.8%, for the three
months ended March 31, 1999 as compared to the same period in 1998. The majority
of the increase is related to the acquisition of the Acquired Properties. On a
comparable pro forma basis (432 Rental Properties in operation for both
periods), the average monthly rent collected per occupied unit during the three
month period increased from $432 in 1998 to $445 in 1999.
Fee Based Revenues are comprised of revenues generated from property
management services and partnership administration services provided to
Unconsolidated Partnerships and (third party owners for the first quarter of
1998). The revenues principally relate to property management and accounting
services provided to the Unconsolidated Partnerships and third party property
owners (SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). The Company
also provides ancillary services to the residents of the Rental Properties and
Unconsolidated Partnerships, including renter's insurance and telecommunication
services. The following are the major components of Fee Based Revenues for the
three months ended March 31, 1999 as compared to the same period in 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Property Management Services:
Unconsolidated Partnerships $ 676 $1,429
Third Party -- 601
Ancillary Services 325 226
Partnership Administration and Other Fees 50 142
------ ------
Total Fee Based Revenues $1,051 $2,398
====== ======
</TABLE>
Fee Based Revenues decreased approximately $1.3 million, or 56.2%, for the three
months ended March 31, 1999 as compared to the same period in 1998. The decrease
for the three month period was primarily due to the elimination of Fee Based
Revenues related to 287 of the Acquired Properties following their acquisition
on January 31, 1998. In addition, the sale of the Third Party Management
Business resulted in a net decrease in third party management fees of
approximately $601,000 for the three months ended
16
<PAGE> 17
March 31, 1999 as compared to the same period in 1998. Ancillary Services
revenues increased approximately $98,500 for the three months ended March 31,
1999 as compared to the same period in 1998. The increase was primarily due to a
new ancillary revenue stream pursuant to certain arrangements whereby select
telecommunication companies become the exclusive or preferred provider of
telephone and cable television services at designated Properties. The Company
believes that it may realize additional revenue through these relationships in
the future by providing the residents with convenient access to quality
telecommunication services at affordable price levels.
Income from Unconsolidated Partnerships decreased approximately $661,200
or 59.8%, for the three months ended March 31, 1999 as compared to the same
period in 1998. This income is primarily derived from the interest collected or
accrued on the recorded value of Investments in and Advances to Unconsolidated
Partnerships (SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). The
decrease in Income from Unconsolidated Partnerships was due to the elimination
of interest income from the Acquired Properties, following their acquisition on
January 31, 1998, and the corresponding reclassification of recorded values of
$47.3 million from Investments in and Advances to Unconsolidated Partnerships to
Rental Properties (SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
Property Operating and Maintenance expense increased approximately $2.9
million, or 35.1%, for the three months ended March 31, 1999 as compared to the
same period in 1998. The majority of the increase is related to the acquisition
of the Acquired Properties. Property Operating and Maintenance expense for the
432 Rental Properties in operation for both periods remained relatively constant
for the three months ended March 31, 1999 as compared to the same period in
1998.
Real Estate Taxes and Insurance expense increased approximately $1.1
million, or 51.7%, for the three months ended March 31, 1999 as compared to the
same period in 1998. The increase was due to the acquisition of the Acquired
Properties. Real Estate Taxes and Insurance expense from the 432 Rental
Properties in operation for both periods increased approximately $92,000 or
3.0%, for the three months ended March 31, 1999 as compared to the same period
in 1998. The increase was primarily due to normal increases in real estate
taxes.
Property Management expense decreased approximately $1.2 million, or
29.5%, for the three months ended March 31, 1999 as compared to the same period
in 1998. Property Management expense decreased primarily due to the sale of the
Third Party Management Business effective April 1, 1998 (SEE NOTE 1 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS). Property Management expense, on a pro forma
basis excluding the Third Party Management Business, decreased approximately
$277,000 for the three months ended March 31, 1999 as compared to the same
period in 1998. This decrease was due to a reduction in salary expense related
to the termination of 23 positions through a cost saving initiative implemented
by the Company in late 1998. The Company records Property Management expense for
all Properties under management, including all Unconsolidated Partnerships and
Rental Properties.
Administration expense decreased approximately $279,500, or 18.5%, for
the three months ended March 31, 1999 as compared to the same period in 1998.
The decrease in administration expense was due to the relocation costs incurred
in the first quarter of 1998 related to hiring the Company's General Counsel, as
well as a decrease in trustee fees and Board meeting expenses resulting from the
retirement of four Trustees in April 1998 and consequent reduction in the size
of the Board.
Non-recurring Costs were approximately $1.8 million for the three months
ended March 31, 1998. Approximately $1.6 million of the charge related to the
retirement plan for four Trustees who retired April 15, 1998. Each retiring
Trustee received a package consisting of the right to receive a cash
17
<PAGE> 18
payment of $225,000 (the "Retirement Payment"), vesting of all non-vested common
share awards and the opportunity to continue participation in the Company's
Deferred Compensation Plan and Rabbi Trust for up to five years. The retiring
Trustees were also afforded the opportunity to defer receipt of all or any
portion of the Retirement Payment and direct that the deferred portion be
contributed to the Rabbi Trust and invested in the Company's common shares for
their benefit. In connection with their participation in the Trustee Retirement
Plan, two of the retiring Trustees elected to defer receipt of a total of
$400,000 of Retirement Payments in such manner. The majority of the remaining
$200,000 of Non-recurring Costs relates to severance costs associated with
terminated employees.
Interest expense for mortgages on the Rental Properties increased
approximately $2.7 million for the three months ended March 31, 1999 as compared
to the same period in 1998. The majority of the increase was due to the
acquisition of the Acquired Properties. On a comparable unit basis, Interest
Expense from the 432 Rental Properties in operation for both periods decreased
approximately $473,300, or 4.3% for the three months ended March 31, 1999 as
compared to the same period in 1998. The decrease was primarily due to mortgage
refinancing transactions completed in December 1998 and January 1999. Interest
expense on the Company's revolving and term credit line increased approximately
$388,800 for the three months ended March 31, 1999 as compared to the same
period in 1998. This increase was due to the higher average principal balance
outstanding which resulted primarily from costs incurred with the acquisition of
the Acquired Properties.
Depreciation and Amortization expense increased approximately $2.1
million for the three months ended March 31, 1999 as compared to the same period
in 1998. The increase is primarily due to the acquisition of the Acquired
Properties and the Company's portfolio modernization program resulting in $14.3
million in capital expenditures during 1998.
Loss on Sale of Third Party Management Business was $6.3 million for the
three months ended March 31, 1998. Due to the non-qualifying REIT income
generated by the Third Party Management Business, the Company determined to
divest this business and therefore classified this business as Held for Sale in
the first quarter of 1998 and closed the sale of the business effective as of
April 1, 1998 (SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
Gain on Disposal of Assets decreased approximately $67,500 for the three
months ended March 31, 1999 as compared to the same period in 1998. This income
is derived from the disposition of miscellaneous assets and is not expected to
be a recurring, long term source of revenue.
Income /(Loss) Before Extraordinary Gain and Cumulative Effect of Change
in Accounting Principle was income of $3.2 million, or $.33 per share, for the
three months ended March 31, 1999 as compared to a loss of $6.9 million, or $.80
per share, for the same period in 1998. The Company recognized an extraordinary
gain of approximately $189,000 for the first quarter of 1999 from debt discounts
received from prior lenders on the refinancing of the mortgage debt on three
Rental Properties in January 1999 (SEE NOTE 3 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS). The cumulative effect of change in accounting principle of
approximately $700,000 is due to Statement of Position ("SOP") 98-5, Reporting
the Costs of Start-up Activities that the American Institute of Certified Public
Accountants made effective beginning January 1, 1999 (SEE NOTE 1 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS).
18
<PAGE> 19
Funds from Operations
Funds from Operations ("Funds from Operations" or "FFO") is calculated
in accordance with the White Paper on FFO approved by the Board of Governors of
the National Association of Real Estate Investment Trusts ("NAREIT") in March
1995 (net income (loss) in accordance with GAAP, excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and after similar adjustments for unconsolidated partnerships and joint
ventures)), further adjusted by the Company to eliminate expenses attributable
to certain non-cash share awards and compensation, Loss on Sale of Third Party
Management Business, Real Estate Impairment loss and certain non-recurring
expenditures. In addition to cash flows and net income, management considers FFO
to be an additional measure of the performance of an equity REIT because,
together with net income and cash flows, FFO provides investors with an
additional basis to evaluate the ability of an entity to fund acquisitions and
other capital expenditures and to make distributions to shareholders. However,
FFO does not measure whether cash flow is sufficient to fund all of an entity's
cash needs including principal amortization, capital improvements and
distributions to shareholders. FFO does not represent cash actually made
available to investors during any particular period. FFO also does not represent
cash flows provided by (used in) operating, investing or financing activities as
determined in accordance with GAAP. FFO should not be considered as an
alternative to net income as an indicator of the Company's operating performance
or to cash flows as a measure of liquidity. Further, FFO as disclosed by other
REITs may not be comparable to FFO per the Company's calculation. FFO for the
three months ended March 31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------ -------
<S> <C> <C>
Net Income/(Loss) $2,703 $(6,888)
Real Estate Depreciation
Rental Properties 5,830 3,473
Unconsolidated Partnerships 240 --
Gain on Disposal of Assets (22) (89)
Non-Cash Share Compensation 454 511
Non-Recurring Items -- 1,808
Loss on Sale of Third Party Management Business -- 6,300
Reserve for Non-Operating Receivables -- 400
Amortization of Land Lease and Goodwill -- 388
Extraordinary Item (189) --
Cumulative Effect of Change in Accounting Principle 700 --
------ -------
Funds From Operations $9,716 $ 5,903
====== =======
</TABLE>
FFO increased approximately $3.8 million, or 64.6% for the three months
ended March 31, 1999 as compared to the same period in 1998. The increase in FFO
was principally due to the Acquired Properties. Accordingly, management does not
consider a comparison of FFO for the three months ended March 31, 1999 to the
same period in 1998 to be meaningful.
19
<PAGE> 20
Same Store Property Operating Results
The following table summarizes the unaudited combined operating results,
excluding management and other fees charged by the Company, of the 494
Properties the Company has managed and owned or maintained an ownership interest
in at all times during the three months ended March 31, 1999 and 1998 (the "494
Property Same Store Portfolio") (SEE "RENTAL AND OTHER PROPERTY REVENUES"):
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1999 1998
------- -------
<S> <C> <C>
Statistical Information
- -----------------------
Average Economic Occupancy 92.4% 91.6%
Average Physical Occupancy 93.6% 93.3%
Average Rent/Unit/Month $ 452 $ 441
Average Rent Collected Per Occupied/Unit/Month $ 446 $ 433
Financial Information (in thousands)
- ------------------------------------
Revenues
Rental Income $41,064 $39,698
Other Property Income 1,668 1,954
------- -------
Total Revenues 42,732 41,652
------- -------
Expenses
Property Operating and Maintenance 11,878 11,700
Real Estate Taxes and Insurance 3,608 3,504
------- -------
Operating Expenses 15,486 15,204
------- -------
Net Operating Income 27,246 26,448
------- -------
Interest - Mortgages 11,931 12,083
Major Maintenance and Replacements 628 650
Other 269 551
------- -------
Non Operating Expenses 12,828 13,284
------- -------
Income after certain expenses $14,418 $13,164
======= =======
Capital Expenditures $ 2,240 $ 2,320
======= =======
</TABLE>
Rental Revenues increased 3.4% for the three months ended March 31, 1999 as
compared to the same period in 1998. Other Property Income declined 14.6%
primarily as a result of a decrease in interest income. Prior to the completion
of the Consolidation Plan, the Company accrued interest income on operating cash
held in separate deposit accounts by the former Unconsolidated Partnerships.
Subsequent to the Consolidation Plan, the Company no longer holds such cash in
separate accounts, but rather has applied operating cash generated by the
Acquired Properties to reduce the outstanding balance of the Company's revolving
credit facility, thereby reducing the Company's corporate interest expense.
Operating Expenses increased only 1.9% despite an approximately $281,000
increase in snow removal costs in the northern regions as compared to the prior
year. This increase was partially offset by a decrease in maintenance parts and
supplies and general administration expenses. The property-level net operating
income before major maintenance and replacements ("NOI") for the three months
ended March 31, 1999 increased 3.0% over the same period in 1998. Excluding the
impact of the decline in interest income, NOI increased 4.1% over the prior
year.
20
<PAGE> 21
Same Store Property Operating Results - By Region
The Company's 494 Property Same Store Portfolio (formerly organized in
four geographic regions) was realigned into three geographic regions effective
January 1, 1999. The Northeast region is comprised of northern and central Ohio,
Indiana, Michigan, Pennsylvania, and West Virginia; the Atlantic region is
primarily central Georgia, Virginia and Alabama; and the Southeast region is
Florida and southern Georgia. The Company has full and partial equity interests,
respectively, in two Properties comprised of 116 units that are not managed by
the Company and are not included in the following regional information.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----- -----
<S> <C> <C>
Northeast Region (14,731 units)
- -------------------------------
Average Economic Occupancy 92.4% 91.9%
Average Physical Occupancy 93.3% 93.1%
Average Rent/Unit/Month $ 447 $ 437
Average Rent Collected per Occupied/Unit/Month $ 442 $ 431
Atlantic Region (8,548 units)
- -----------------------------
Average Economic Occupancy 92.2% 92.0%
Average Physical Occupancy 93.8% 93.5%
Average Rent/Unit/Month $ 462 $ 448
Average Rent Collected per Occupied/Unit/Month $ 454 $ 441
Southeast Region (9,501 units)
- ------------------------------
Average Economic Occupancy 92.6% 91.0%
Average Physical Occupancy 93.9% 93.5%
Average Rent/Unit/Month $ 451 $ 439
Average Rent Collected per Occupied/Unit/Month $ 445 $ 427
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
- ---------
The following discussion regarding liquidity and capital resources
should be read in conjunction with the Company's Consolidated Balance Sheets as
of March 31, 1999 and December 31, 1998 and the Consolidated Statements of Cash
Flows for the three months ended March 31, 1999 and 1998.
The Company anticipates that cash flow from its operations and
borrowings available under the Company's credit facility should be adequate to
meet the foreseeable capital and liquidity requirements of the Company.
The principal sources of liquidity for the Company are cash flow from
its operations and borrowings available under the Company's credit facility. The
Company's Net Cash Provided by Operating Activities increased approximately $1.8
million for the three months ended March 31, 1999, as compared to the same
period in 1998. The increase was due primarily to operating cash flows from the
Acquired Properties combined with expense reductions implemented in 1998.
21
<PAGE> 22
Other factors impacting the Company's cash flow in 1999 as compared to
the same period in 1998 are discussed in "Results of Operations."
Shelf Registration
- ------------------
On May 21, 1998, the Company announced that it had postponed the
securities offering it had planned due to the current market conditions for REIT
equity securities. The Company had planned a public offering of 11 million
common shares of beneficial interest. On June 2, 1998, the Company filed a shelf
registration statement with the SEC for the potential offering of up to 12.65
million common shares of beneficial interest. The Company intends to undertake
an offering under this shelf registration depending upon market conditions and
capital requirements. The costs associated with the proposed offering have been
deferred pending potential share issuance under the shelf registration.
Credit Facility
- ---------------
On September 30, 1998, the Company entered into the Second Amended and
Restated Loan and Security Agreement with The Provident Bank (the "Bank"). The
amended revolving credit facility ("Facility"), is for $40 million and
represents an increase to, and replacement of all former revolving credit
facilities with the Bank. The scheduled term of the Facility expires March 30,
2000, although the Company may elect from time to time to convert all or any
portion of the principal amount outstanding under the Facility into a five year
term loan. Revolving loans outstanding under the Facility bear interest at a
variable interest rate equal to the Bank's prime rate of interest (7.75% at
March 31, 1999) minus 1%. As of March 31, 1999 the outstanding balance under the
Facility was $27.6 million. In addition, the Company is indebted to the Bank
under a term loan, which matures in March 2001, has a 7.25% fixed interest rate
with monthly installments of principal and interest of $139,435. As of March 31,
1999, the unpaid principal balance outstanding under the term loan was
approximately $3.0 million.
Financing Arrangements for the Properties
- -----------------------------------------
In the first quarter of 1999 the Company completed the refinancing of the
mortgage debt on three Rental Properties. Mortgage indebtedness on the three
Rental Properties with a contractual and carrying value of $2.8 million was
refinanced with mortgages bearing a fixed rate of interest of 7.6%, with 25 year
amortization and ten year maturity. An extraordinary gain of approximately
$189,000 was recognized as a result of debt discounts received from the prior
lenders.
In April 1999, the Company completed the refinancing of mortgage loans
on 24 Rental Properties. In connection with the refinancing, the Company
combined eight former Rental Properties on contiguous sites into four Rental
Properties. Mortgage indebtedness on the 24 Rental Properties with a contractual
balance of $31.9 million and a Carrying Value of $31.2 million was refinanced
with mortgages aggregating $39.4 million in principal amount bearing a fixed
rate of interest of 7.37%, with 25 year principal amortization and ten year
maturities. The new mortgage loans are non-recourse to the Company; however,
mortgage loans on seven Rental Properties located in Florida are cross
collateralized and cross defaulted. This transaction generated $6.5 million in
proceeds (in excess of the payoff amounts and transaction costs) which were
applied to the Company's revolving credit facility. In the second quarter of
1999 the Company will recognize an extraordinary loss of approximately $300,000
as a result of mortgages repaid from refinance proceeds at the contractual
balance which exceeded the Carrying Value of the mortgages as well as prepayment
penalties. The transaction will result in lower interest
22
<PAGE> 23
expense and enhance cash flow due to the lower interest rate and the overall
debt service requirements (SEE NOTES 1 AND 3 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS).
Capital Expenditures
- --------------------
The Company's non-real estate capital expenditures, including computer
hardware and software and leasehold improvements, for the three months ended
March 31, 1999 amounted to approximately $172,000 funded from cash flow and
borrowings under the Company's credit facility.
The Company's Major Maintenance and Replacement costs for the three
months ended March 31, 1999 amounted to approximately $2.4 million for the
Rental Properties. Of this total, about $1.8 million was capitalized, and
approximately $568,000 of Major Maintenance and Replacement costs were expensed.
These expenditures were funded from cash flow, maintenance escrow funds and
borrowings under the Company's credit facility. The Company anticipates spending
approximately $11.0 million on major maintenance and replacement items for the
Rental Properties in 1999 inclusive of both capitalized and expensed amounts.
Year 2000
- ---------
The "Year 2000" problem is due to the fact that many computer systems
only use the last two digits to refer to a year. Therefore the computer systems
do not properly recognize a year that begins with "20" instead of "19". If not
corrected, computer applications could fail or provide erroneous results.
Prior to 1998, as part of the Company's normal cycle of enhancing and
upgrading hardware and implementing new software, Year 2000 compliance concerns
were addressed. As new equipment and software was acquired and installed,
testing and warranties as to Year 2000 compliance were obtained. Furthermore, in
1998, due to the magnitude of the Year 2000 issue, a formal project team and
plan was developed to review, and, where appropriate, identify and test all
systems to ensure Year 2000 compliance for all critical systems utilized by the
Company. The Year 2000 plan will also assess the risks the Company may have
related to lenders', vendors' and service suppliers' failures to remediate their
own Year 2000 issues. The Company anticipates completing Year 2000 projects by
July 1999, which is in advance of any anticipated impact on its operating
systems. The Company is currently surveying all critical lenders, vendors and
service suppliers as to their Year 2000 readiness. Contingency plans for Year
2000 failures for internal information technology and embedded microchip systems
and devices as well as external vendors and service suppliers will be completed
by September 1999.
23
<PAGE> 24
The following is the status of the Company's Year 2000 compliance as of
March 31, 1999. Systems of a critical nature have either been remedied or a
formal plan for resolution is in place. The following table summarizes the
status and plans for resolution for these systems. Areas are ordered by level of
risk (C = critical, H = high, M = medium, L = low) and compliance status.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
CATEGORY PLATFORM/APPLICATION RISK STATUS ACTION PLAN COMPLIANCE
DATE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HARDWARE AS/400 C Compliant
Telephone Systems M Compliant
PCs M Compliant
Servers M Compliant
- -------------------------------------------------------------------------------------------------------------
OPERATING AS/400 -OS/400 C Compliant
SYSTEMS
Network - Novell 4.1 C Non-Compliant Upgrade Software June 1999
Servers - Microsoft N/T C Non-Compliant Upgrade Software June 1999
Servers - Citrix C Compliant
- -------------------------------------------------------------------------------------------------------------
SOFTWARE AS/400 - (General Ledger, C Compliant
MIDRANGE Accounts Payable)
AS/400 - (Rent Receivables) C Non-Compliant Project in-progress to July 1999
upgrade. Formal Plan.
AS/400 - (Fixed Assets) C Compliant
AS/400 - In-house (Investment L N/A Replaced with Year 2000
Management) compliant external tax
service
- -------------------------------------------------------------------------------------------------------------
SOFTWARE Server - (Payroll) C Compliant
PCS
- -------------------------------------------------------------------------------------------------------------
PLANT Building Security C Compliant
Air Conditioning M Compliant
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The costs associated with the Year 2000 compliance issue is currently
estimated in the range of $200,000 to $300,000 to address internal Year 2000
issues. As of March 31, 1999, the Company has incurred approximately $50,000 of
costs specifically related to the Year 2000 issue. Potential costs that may be
incurred due to external vendors and service provider Year 2000 failure can not
be determined at this time, although the Company has no reason to believe that
such costs will be material. The Company will fund Year 2000 costs from cash
flow from operations or its credit facility which the Company believes will be
adequate to fund the Year 2000 costs.
The success of the Company's business is not closely tied to the
operations of any one manufacturer, vendor or supplier with the exception of
utilities and lenders as a group. Utilities and lenders could impact the
operations of the Company if they encountered significant Year 2000 problems.
The Company is in the process of contacting the utilities and lenders to
determine their status regarding Year 2000. The Company has been working with
its working capital lender in testing system interfaces for Year 2000
compliance. Although the portfolio of Properties is spread across several
utilities there is a significant concentration of Properties in Ohio and Florida
such that if the Year 2000 problem interrupted utility service to these
Properties it would have a significant impact on the financial condition and
results of operations of the Company. If any other manufacturers, vendors or
service providers, cease to conduct business due to Year 2000 related problems,
the Company expects to be able to contract with alternative providers without
any material adverse effect on the Company's financial condition or results of
operations.
Because of the Company's broad resident base, its business success is
not closely tied to the collection of rents from any particular resident.
Accordingly, management believes that there should not be a material adverse
effect on the Company's financial condition and the results of operations if
24
<PAGE> 25
residents became unable to pay rent due to Year 2000 related problems
encountered by residents' employers or banking institutions.
The Company anticipates completing all Year 2000 projects prior to any
anticipated impact on its operating systems and business operations. This
assumption is based on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
third party software and reliance on vendor and service provider assurances of
compliance with Year 2000 issues and other factors. There can no assurance that
these estimates will be achieved and actual results could differ materially from
those anticipated.
Quarterly Dividend
- ------------------
The Company declared a quarterly dividend of $0.4325 per share for the
quarter ending March 31, 1999. A dividend of approximately $4.1 million was paid
on April 15, 1999 to shareholders of record on March 31, 1999. This dividend is
equal to an annualized dividend rate of $1.73 per share. The Company has
instituted a policy of paying a quarterly dividend approximately 15 days after
the close of each calendar quarter. The Company's distribution policy is subject
to modification by the Company's Board of Trustees.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its annual meeting of shareholders on April 28, 1999.
At the meeting, the Company's shareholders elected H. Jeffrey Schwartz
and Stanley R. Fimberg as Class I Trustees to serve three year terms
through the Company's 2002 Annual Shareholders Meeting. The continuing
Trustees are Joseph E. Madigan, Glenn C. Pollack, John B. Bartling and
Robert J. Weiler.
The votes cast for and withheld for each Trustee nominee were as
follows:
Stanley R. Fimberg received 7,421,164 for and 100,992 withheld votes
with no abstentions; and H. Jeffrey Schwartz received 7,417,989 for and
104,167 withheld votes with no abstentions.
25
<PAGE> 26
Item 5. Other Information
-----------------
This Form 10-Q contains certain forward-looking statements regarding
prospects for (i) proposed mortgage loan refinancing transactions and capital
improvements to Properties, contingent, in all cases, upon available financing,
successful implementation and availability and achievement of projected returns
on investment, (ii) potential ancillary services revenues from the provision of
telecommunication services to residents at the Properties, (iii) the Company's
quarterly dividends and its distribution policy, (iv) the Company's foreseeable
capital and liquidity requirements and sources, and (v) its successful
resolution of all internal and external Year 2000 compliance issues in a timely
manner and within an estimated range of costs. The forward-looking statements
represent management's good faith evaluations based, among other things, upon
existing market, financial and economic conditions, the availability and ability
to satisfy anticipated conditions precedent to proposed financing arrangements,
the physical condition of the Rental Properties and cost and timing estimates as
well as third party assurances of Year 2000 compliance. There can be no
assurance that the forward-looking statements will prove to be correct. Any
differences in actual results or developments may be material.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIAL PAGE
NO.
<S> <C> <C>
11.1 Statement re: computation of Per Share See Note 1 of Notes to Consolidated
Earnings Financial Statements
27 Financial Data Schedule Filed as an Exhibit to this Form 10-Q
</TABLE>
(b) Reports on Form 8-K: The Company did not file any reports on Form
8-K during the first quarter of 1999.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEXFORD RESIDENTIAL TRUST
(Registrant)
Dated: May 14, 1999 By: /s/ John B. Bartling
----------------------------------------------------
John B. Bartling
President and Chief Executive Officer
Dated: May 14, 1999 By: /s/ Mark D. Thompson
----------------------------------------------------
Mark D. Thompson
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
Dated: May 14, 1999 By: /s/ Ronald P. Koegler
----------------------------------------------------
Ronald P. Koegler
Senior Vice President and Controller
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 785
<SECURITIES> 0
<RECEIVABLES> 2,099
<ALLOWANCES> 729
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 606,388
<DEPRECIATION> 34,386
<TOTAL-ASSETS> 623,348
<CURRENT-LIABILITIES> 0
<BONDS> 523,236
0
0
<COMMON> 96
<OTHER-SE> 57,526
<TOTAL-LIABILITY-AND-EQUITY> 623,348
<SALES> 22
<TOTAL-REVENUES> 38,959
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,124
<INCOME-PRETAX> 3,214
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,214
<DISCONTINUED> 0
<EXTRAORDINARY> 189
<CHANGES> (700)
<NET-INCOME> 2,703
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
<FN>
THE REGISTRANT HAS A NON-CLASSIFIED BALANCE SHEET
</FN>
</TABLE>
