<PAGE> 1
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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 JUNE 30, 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 August 12, 1999, there were 9,559,228 common shares of beneficial interest
issued and outstanding.
Exhibit Index on page 27
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<PAGE> 2
LEXFORD RESIDENTIAL TRUST
INDEX
<TABLE>
<CAPTION>
Part I - FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998 (Audited) 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1999 and 1998 (Unaudited) 4
Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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 - 26
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
</TABLE>
<PAGE> 3
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 (UNAUDITED) AND
DECEMBER 31, 1998 (AUDITED)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Rental Properties (Note 2)
Land $ 59,732 $ 59,732
Buildings, Improvements and Fixtures 548,321 544,897
--------- ---------
608,053 604,629
Accumulated Depreciation (40,283) (28,564)
--------- ---------
567,770 576,065
Investments in and Advances to Unconsolidated Partnerships, net of an
allowance of $1,615 at June 30, 1999 and December 31, 1998 (Note 1) 10,417 11,173
Cash 498 495
Accounts Receivable, Residents, Affiliates, Officers and Other, net of an allowance
of $1,005 and $550 at June 30, 1999 and December 31, 1998, respectively (Note 4) 1,609 1,920
Furniture, Fixtures and Other, Net 2,178 2,108
Funds Held in Escrow (Note 1) 22,146 22,747
Intangible Assets (Note 1) 7,508 6,891
Prepaids and Other (Note 1) 6,462 7,523
--------- ---------
$ 618,588 $ 628,922
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and Revolving/Term Debt
Mortgages (Note 3) $ 498,527 $ 494,556
Revolving/Term Debt 22,122 33,186
--------- ---------
520,649 527,742
--------- ---------
Accounts Payable 1,313 1,389
Accrued Interest, Real Estate and Other Taxes 11,226 10,315
Other Accrued Expenses 4,021 6,196
Other Liabilities 7,638 7,451
Dividends Payable 4,132 4,122
Deferred Compensation (Note 1) 12,831 12,525
--------- ---------
Total Liabilities 561,810 569,740
--------- ---------
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, 9,554,228
and 9,530,013 Shares Issued and Outstanding at June 30, 1999 and
December 31, 1998, respectively 96 95
Additional Paid-in Capital 66,215 65,833
Retained Earnings 4,650 7,482
Less Cost of Treasury Shares (Note 1) (14,183) (14,228)
--------- ---------
56,778 59,182
--------- ---------
$ 618,588 $ 628,922
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental and Other Property Revenues $ 38,174 $ 37,094 $ 75,637 $ 62,788
Fee Based 1,042 829 2,093 3,161
Income from Unconsolidated Partnerships 325 463 770 1,636
-------- -------- -------- --------
39,541 38,386 78,500 67,585
-------- -------- -------- --------
Expenses:
Property Operating and Maintenance 11,860 11,807 23,079 20,113
Real Estate Taxes and Insurance 3,231 3,013 6,395 5,098
Property Management 2,605 2,838 5,372 6,762
Administration 1,266 1,536 2,501 3,050
Performance Equity Plan (Note 1) -- 829 -- 829
Non-recurring Costs (Note 1) -- -- -- 1,808
Interest-Mortgages 10,802 11,222 21,376 19,109
Interest- Revolving/Term Debt 447 419 997 581
Depreciation and Amortization 6,368 5,815 12,626 10,005
Loss on Sale of Third Party Management Business (Note 1) -- -- -- 6,300
-------- -------- -------- --------
36,579 37,479 72,346 73,655
-------- -------- -------- --------
Income/(Loss) Before Gain on Disposal of Assets, Extraordinary
Loss and Cumulative Effect of Change in Accounting Principle 2,962 907 6,154 (6,070)
Gain on Disposal of Assets - Net 204 161 226 250
-------- -------- -------- --------
Income/(Loss) Before Extraordinary Loss and Cumulative Effect
of Change in Accounting Principle 3,166 1,068 6,380 (5,820)
Extraordinary Loss (Note 3) (437) -- (248) --
Cumulative Effect of Change in Accounting Principle (Note 1) -- -- (700) --
-------- -------- -------- --------
Net Income/(Loss) $ 2,729 $ 1,068 $ 5,432 $ (5,820)
======== ======== ======== ========
Basic Earnings Per Share:
Income/(Loss) Before Extraordinary Loss and Cumulative
Effect of Change in Accounting Principle $ 0.33 $ 0.12 $ 0.67 $ (0.66)
Extraordinary Loss (0.04) -- (0.03) --
Cumulative Effect of Change in Accounting Principle -- -- (0.07) --
-------- -------- -------- --------
Net Income/(Loss) $ 0.29 $ 0.12 $ 0.57 $ (0.66)
======== ======== ======== ========
Diluted Earnings Per Share:
Income/(Loss) Before Extraordinary Loss and Cumulative
Effect of Change in Accounting Principle $ 0.33 $ 0.11 $ 0.67 $ (0.66)
Extraordinary Loss (0.04) -- (0.03) --
Cumulative Effect of Change in Accounting Principle -- -- (0.07) --
-------- -------- -------- --------
Net Income/(Loss) $ 0.29 $ 0.11 $ 0.57 $ (0.66)
======== ======== ======== ========
-------- -------- -------- --------
Dividends Declared Per Common Share $ 0.4325 $ -- $ 0.865 $ --
======== ======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(In Thousands)
<TABLE>
<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 32 32
Trustees restricted stock plan shares 2 35 (27) 8
Rabbi Trust dividends and other
investments in shares (280) (280)
Withdrawals from Rabbi Trust 668 668
1999 share compensation issued
to Rabbi Trust 17 1 315 (316) --
Dividends to common shareholders (8,264) (8,264)
Net Income for the period 5,432 5,432
----- -------- -------- -------- -------- --------
Balance, June 30, 1999 9,554 $ 96 $ 66,215 $ 4,650 $(14,183) $ 56,778
===== ======== ======== ======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating activities:
Net Income/(Loss) $ 5,432 $ (5,820)
-------- --------
Adjustments to reconcile Net Income/(Loss) to Net Cash
provided by Operating Activities:
Depreciation 12,030 9,167
Amortization 596 838
Loss on Sale of Third Party Management Business -- 6,300
Provision for Losses on Accounts Receivable 832 1,087
Gain on Disposal of Assets - net (226) (250)
Extraordinary Loss 248 --
Cumulative Effect of Change in Accounting Principle 700 --
Non-Cash Share Compensation 712 1,558
Changes in Operating Assets and Liabilities:
Investments in and Advances to Unconsolidated Partnerships 513 542
Accounts Receivable and Other Assets 415 (305)
Accounts Payable and Other Liabilities (1,025) 200
-------- --------
Net Cash provided by Operating activities 20,227 13,317
-------- --------
Cash Flows from Investing activities:
Proceeds from Sale of Assets 226 278
Net Repayment of Advances to Unconsolidated Partnerships 243 29
Investments in Unconsolidated Partnerships and Other -- (3,412)
Purchase of Unconsolidated Partnerships, Net of Cash Acquired -- (25,506)
Capitalized Refinancing Costs (1,187) --
Capital Expenditures - Other (372) (609)
Capital Expenditures - Real Estate (3,434) (3,859)
-------- --------
Net Cash (used in) Investing activities (4,524) (33,079)
-------- --------
Cash Flows from Financing activities:
Proceeds from the exercise of Stock Options 32 765
Proceeds from Revolving Debt - net -- 21,236
Principal Payments on Revolving/Term Debt and Other (11,064) (687)
Proceeds from Mortgage Debt 42,194 --
Payments on Mortgages - principal amortization (3,917) (3,610)
Payments on Mortgages - lump sum (34,691) (365)
Dividends Paid (8,254) --
-------- --------
Net Cash provided by/(used in) Financing activities (15,700) 17,339
-------- --------
Increase/(Decrease) in Cash 3 (2,423)
Cash at Beginning of Period 495 2,569
-------- --------
Cash at End of Period $ 498 $ 146
======== ========
Supplemental Disclosure of Cash Flow Information
Cash Payments for Interest $ 22,230 $ 19,385
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first half of 1998, the Company acquired the entire ownership
interest in 324 Unconsolidated Partnerships owning 326 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 $ (47,335)
Land and Building $ 430,981
Accounts Receivable and Other Assets $ 19,409
Mortgages $ 362,610
Accounts Payable and Other Liabilities $ 14,939
Cash Effects:
Cash Paid to Former Partner(s) $ (33,902)
Net Cash Acquired 8,396
---------
$ (25,506)
=========
</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,
accounts receivable 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 36,609 apartment units located at 402 geographic
sites. The Company's site and unit count increased in the second quarter of 1999
due to the opening of a newly developed 276 unit apartment community owned by an
Unconsolidated Partnership. (See "Investments in and Advances to Unconsolidated
Partnerships"). At June 30, 1999, the Company owned the entire equity interest
in 428 Rental Properties and a partial equity, together, in most instances, with
a significant economic, interest in 80 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 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
8
<PAGE> 9
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
to the Company's financial position. The Company's largest Property accounts for
only 1% of the Company's total revenues. The geographic diversity 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.
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
six month period ended June 30, 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 91 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 rent based on resident usage.
Merger Agreement
On June 30, 1999, the Company entered into a definitive merger
agreement with Equity Residential Properties Trust ("EQR") that would result in
the tax-free merger of the Company into EQR. EQR and Lexford filed a preliminary
registration/joint proxy statement with the SEC on July 23, 1999. The definitive
proxy will be mailed to EQR and Lexford shareholders on or about August 27,
1999. The merger agreement, which is subject to shareholder approval of Lexford
and EQR shareholders, provides for Lexford shareholders to receive 0.463 of an
EQR common share for each Lexford common share upon completion of the merger.
The obligations of EQR and Lexford to consummate the merger are subject to the
satisfaction or waiver of certain conditions as set forth in the merger
agreement. EQR and the Company have called special shareholder meetings to be
held September 30, 1999 to submit the merger agreement to their respective
shareholders. The merger agreement provides that it may be terminated in a
number of circumstances at any time prior to the effectiveness of the merger,
whether before or after the approval of the merger by the shareholders of EQR
and Lexford. The merger agreement provides for a break up fee of $8 million
payable by Lexford if the merger agreement is terminated by either EQR or
Lexford under specified circumstances at a time when Lexford is in receipt of an
alternative acquisition proposal and if, within one year after the termination,
Lexford is acquired or sells substantially all of its assets. In addition, if
the merger agreement is terminated
9
<PAGE> 10
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
for specified reasons, EQR or Lexford would be required to pay the other party
an expense fee of up to $4 million.
Subsequent to the dividend paid by the Company on July 15, 1999, the
merger agreement provides that, prior to the merger, the amount per share of
each subsequent quarterly dividend declared by the Company will not exceed an
amount equal to the dividend on a common share of EQR for such quarter
multiplied by 0.463.
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 its proprietary interest in property management
training programs and systems, and the rights to the name "Lexford".
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).
10
<PAGE> 11
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
Funds Held in Escrow
Funds Held in Escrow at June 30, 1999 includes funds of $21.9 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 June 30, 1999 is comprised of approximately $2.7
million of management contracts and approximately $449,000 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 $924,200. In addition, Intangible
Assets includes deferred financing costs of $4.3 million at June 30, 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 June 30, 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 $656,000 of prepaid rent, insurance and real
estate taxes, and approximately $292,600 of utility deposits and other prepaid
expenses.
Investments in and Advances to Unconsolidated Partnerships
Investments in and Advances to Unconsolidated Partnerships represent
the Company's general partners' interests 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.
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 in
the Dallas, Texas area, consisting of 276 units. The community commenced leasing
at the end of the first quarter of 1999 and is now reflected in the Company's
reported totals of Unconsolidated Partnerships, Properties, geographic sites and
apartment units.
The Company accounts for its investments on the equity method. The
Company's share of net loss of the Unconsolidated Partnerships amounted to
approximately $324,500 for the first six months of 1999, and is included in
Income from Unconsolidated Partnerships in the Consolidated Statements of
Income.
11
<PAGE> 12
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
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 and six months ended June 30, 1999 and 1998 do not include a provision for
Federal or state income taxes.
Non-recurring Costs
Non-recurring Costs were approximately $1.8 million for the six months
ended June 30, 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.
12
<PAGE> 13
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
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.
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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator for Basic and Diluted Earnings Per Share
Net Income/(Loss) $ 2,729 $ 1,068 $ 5,432 $(5,820)
=========== ========== =========== ===========
Denominator
Denominator for Basic Earnings per Share
Weighted Average Shares 9,484 9,065 9,481 8,819
----------- ---------- ----------- -----------
Effect of Dilutive Securities
Stock options (1) 43 166 43 -
Time Vesting Restricted Share Awards 14 35 14 50
----------- ---------- ----------- -----------
Dilutive Potential Common Shares 57 201 57 50
----------- ---------- ----------- -----------
Denominator for Diluted Earnings per Share
Adjusted Weighted Average Shares 9,541 9,266 9,538 8,869
=========== ========== =========== ===========
Basic Earnings Per Share:
Net Income/(Loss) $ 0.29 $ 0.12 $ 0.57 $ (0.66)
=========== ========== =========== ===========
Diluted Earnings Per Share:
Net Income/(Loss) $ 0.29 $ 0.11 $ 0.57 $ (0.66)
=========== ========== =========== ===========
</TABLE>
(1) Stock Options for 166,196 shares were excluded from diluted earnings
per share for the six months ended June 30, 1998 because including the
shares would be anti-dilutive as a result of the net loss the Company
recognized for the six months ended June 30, 1998.
13
<PAGE> 14
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 32
Rental Properties are cross collateralized and cross defaulted within their
respective states, with no more than eight loans separately cross
collateralized. 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
non-recourse mortgage debt consolidated in relation to the acquisition of the
324 former Unconsolidated Partnerships at June 30, 1999 and December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Contractual Mortgage Payable $ 503,816 $ 500,688
Mortgage Deficiency (5,289) (6,132)
--------- ---------
$ 498,527 $ 494,556
========= =========
</TABLE>
Approximately $318 million, or 61%, of the combined contractual
mortgage debt and the Company's credit facility is prepayable at June 30, 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.
14
<PAGE> 15
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 MORTGAGE DEBT (continued)
In the first six months of 1999 the Company completed the refinancing
of the mortgage debt on 27 Rental Properties. Mortgage indebtedness on the 27
Rental Properties with a contractual amount of $35.1 million and a carrying
value of $34.4 million, was refinanced with mortgages amounting to $42.2 million
bearing a fixed rate of interest of 7.37% to 7.6%, with 25 year 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. These transactions 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. An extraordinary gain of
approximately $189,000 was recognized in the first quarter of 1999 as a result
of the refinancing due to debt discounts received from the prior lenders. An
extraordinary loss of approximately $437,000 was recognized in the second
quarter of 1999 as a result of approximately $496,000 of prepayment premiums
paid to former lenders combined with the write-off of approximately $705,000 of
Mortgage Deficiencies related to mortgages repaid at the contractual amount.
These losses were partially offset by approximately $764,000 of debt discounts
obtained from the former lenders.
NOTE 4 RELATED PARTY TRANSACTIONS
The Company manages all but two of the Properties owned by the
Unconsolidated Partnerships. The Company earned fee based revenues from the
Unconsolidated Partnerships of approximately $697,000 and $515,000 for the three
months ended June 30, 1999 and 1998, respectively and $1.4 million and $2.3
million for the six months ended June 30, 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
$235,000 and $233,000 of the Company's Accounts Receivable (net of allowances)
were due from the Unconsolidated Partnerships as of June 30, 1999 and December
31, 1998, respectively.
The Company received net principal repayment of advances from
Unconsolidated Partnerships of approximately $243,000 in the first six months of
1999 as compared to approximately $29,000 in the first six 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 and six months ended June 30, 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 six months ended June 30,
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 $1.1 million, or 2.9%, for the three
months ended June 30, 1999, and approximately $12.8 million, or 20.5%, for the
six months ended June 30, 1999, as compared to the same periods in 1998. The
increase for the three month period is attributable to an increase in average
monthly rent collected per occupied unit from $435 in 1998 to $448 in 1999. The
majority of the increase for the six month period is related to the acquisition
of the Acquired Properties. On a comparable pro forma basis (428 Rental
Properties in operation for both periods), the average monthly rent collected
per occupied unit during the six 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 and six months ended June 30, 1999 as compared to the same periods in 1998
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Property Management Services:
Unconsolidated Partnerships $ 656 $549 $1,332 $1,911
Third Party -- -- -- 601
Ancillary Services 335 231 660 457
Partnership Administration and Other Fees 51 49 101 192
------ ---- ------ ------
Total Fee Based Revenues $1,042 $829 $2,093 $3,161
====== ==== ====== ======
</TABLE>
16
<PAGE> 17
Fee Based Revenues increased approximately $213,000, or 25.7%, for the three
months ended June 30, 1999, and decreased approximately $1.1 million, or 33.8%,
for the six months ended June 30 1999, as compared to the same periods in 1998.
The increase for the three month period was primarily due to an increase in
management fees from 14 Unconsolidated Partnerships and an increase in Ancillary
Services revenue. The decrease for the six month period was primarily due to the
elimination of Fee Based Revenues related to the Acquired Properties following
their acquisition on January 31, and April 1, 1998 and the sale of the Third
Party Management Business resulting in a net decrease in third party management
fees of approximately $601,000. In addition, Ancillary Services revenues
increased approximately $104,000 and $203,000 for the three and six months ended
June 30 1999, respectively, as compared to the same periods in 1998. The
increase was primarily due to a new ancillary revenue stream from the Company's
appointment of select telecommunication companies as the exclusive or preferred
provider of telephone and cable television services to residents at designated
Properties.
Income from Unconsolidated Partnerships decreased approximately
$138,000, or 29.8%, for the three months ended June 30, 1999, and approximately
$866,000, or 52.9%, for the six months ended June 30, 1999, as compared to the
same periods 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 and the Company's share of net income or loss from
the Unconsolidated Partnerships as set forth in the following table:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest Income $ 540 $425 $ 1,094 $1,595
Company's share of income/(loss) from
Unconsolidated Partnerships (215) 38 (324) 41
----- ---- ------- ------
Total Income from Unconsolidated Partnerships $ 325 $463 $ 770 $1,636
===== ==== ======= ======
</TABLE>
The increase in interest income for the three month period is due to the
improved property performance and the decrease for the six month period was due
to the elimination of interest income from the Acquired Properties, following
their acquisition on January 31, 1998 and April 1, 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). The significant change in the
Company's share of net income/(loss) from Unconsolidated Partnerships is
attributable to an apartment community that commenced operations at the end of
the first quarter of 1999.
Property Operating and Maintenance expense remained relatively constant
for the three months ended June 30, 1999, and increased approximately $3.0
million, or 14.7%, for the six months ended June 30, 1999, as compared to the
same periods in 1998. The majority of the increase for the six month period is
related to the acquisition of the Acquired Properties. Property Operating and
Maintenance expense for the 428 Rental Properties in operation for both periods
remained relatively constant for the six months ended June 30, 1999 as compared
to the same period in 1998.
Real Estate Taxes and Insurance expense increased approximately
$218,000, or 7.2%, for the three months ended June 30, 1999, and $1.3 million,
or 25.4%, for the six months ended June 30, 1999, as compared to the same
periods in 1998. The increase for the three month period was primarily due to
year to date adjustments related to normal increases in assessed values and
millage rates and the increase for the six month period was due to the
acquisition of the Acquired Properties.
17
<PAGE> 18
Property Management expense decreased approximately $233,000, or 8.2%,
for the three months ended June 30, 1999, and $1.4 million, or 20.5%, for the
six months ended June 30, 1999, as compared to the same periods in 1998. The
decrease for both periods was primarily 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 decrease for the six month period
is also related to the sale of the Third Party Management Business effective
April 1, 1998 (SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - "SALE
OF THIRD PARTY MANAGEMENT BUSINESS"). The Company records Property Management
expense for all Properties under management, including all Unconsolidated
Partnerships and Rental Properties.
Administration expense decreased approximately $270,000, or 17.6%, for
the three months ended June 30, 1999, and approximately $549,000, or 18.0%, for
the six months ended June 30, 1999, as compared to the same periods 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 six months
ended June 30, 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 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 majority of the
remaining $200,000 of Non-recurring Costs relates to severance costs associated
with terminated employees.
Performance Equity Plan expense was $829,000 for the six months ended
June 30, 1998 and represents the non-cash charge recorded based upon the vesting
of the remaining shares available under the 1997 Performance Equity Plan which
was approved by the Company's shareholders at the 1997 annual meeting.
Interest expense for mortgages on the Rental Properties decreased
approximately $420,000 for the three months ended June 30, 1999 and increased
$2.3 million for the six months ended June 30, 1999, as compared to the same
periods in 1998. The decrease for the three month period was primarily due to
mortgage refinancing transactions completed in December 1998 and the first half
of 1999, which resulted in lower interest rates. The majority of the increase
for the six month period was due to the acquisition of the Acquired Properties.
Interest expense on the Company's revolving and term credit line increased
approximately $28,000 for the three months ended June 30, 1999 and approximately
$416,000 for the six months ended June 30, 1999 as compared to the same periods
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. In April 1999, $6.5 million generated from mortgage
refinancings on the Properties was applied to the Company's revolving credit
facility (SEE "LIQUIDITY AND CAPITAL RESOURCES - FINANCING ARRANGEMENTS FOR THE
PROPERTIES").
Depreciation and Amortization expense increased approximately $553,000
for the three months ended June 30, 1999 and $2.6 million for the six months
ended June 30, 1999, as compared to the same periods 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 six months ended June 30, 1998. Due to the non-qualifying REIT income
generated by the Third Party Management
18
<PAGE> 19
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 - "SALE OF THIRD PARTY MANAGEMENT
BUSINESS").
Gain on Disposal of Assets increased approximately $43,000 for the
three months ended June 30, 1999 and decreased approximately $24,000 for the six
months ended June 30, 1999, as compared to the same periods 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 Loss and Cumulative Effect of Change
in Accounting Principle was income of $3.2 million, or $.33 per share, and $6.4
million, or $.67 per share, for the three and six months ended June 30, 1999,
respectively, as compared to income of $1.1 million, or $.11 per share, and a
loss of $5.8 million, or $.66 per share, for the same periods in 1998. The
Company recognized an extraordinary loss of approximately $437,000 and $248,000
for the three and six months ended June 30, 1999, respectively. The loss was
related to the refinancing of mortgage loans on 24 Rental Properties (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 -
"ACCOUNTING CHANGE - START UP COSTS").
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 and six months ended June 30, 1999 and 1998 is as follows (in thousands):
19
<PAGE> 20
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------------ ---------------------------
<S> <C> <C> <C> <C>
Net Income/(Loss) $ 2,729 $ 1,068 $ 5,432 $ (5,820)
------- ------- -------- --------
Real Estate Depreciation
Rental Properties 5,899 5,388 11,729 8,861
Unconsolidated Partnerships 218 -- 458 --
Gain on Disposal of Assets (204) (161) (226) (250)
Non-Cash Share Compensation 258 1,225 712 1,736
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 437 -- 248 --
Effect of Change in Accounting Principle -- -- 700 --
------- ------- -------- --------
Funds From Operations $ 9,337 $ 7,520 $ 19,053 $ 13,423
======= ======= ======== ========
</TABLE>
FFO increased approximately $1.8 million, or 24.2%, and $5.6 million, or 41.9%,
for the three and six months ended June 30, 1999, respectively, as compared to
the same periods in 1998. The increase in FFO for the three months ended June
30, 1999 was principally due to improved performance of the Rental Properties
combined with expense savings in Property Management and Administration
expenses. The increase in FFO for the six months ended June 30, 1999 was
principally due to the Acquired Properties. Accordingly, management does not
consider a comparison of FFO for the six months ended June 30, 1999 to the same
period in 1998 to be meaningful.
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 490
Properties the Company has managed and owned or maintained an ownership interest
in at all times during the three and six months ended June 30, 1999 and 1998
(the "490 Property Same Store Portfolio") (SEE "RENTAL AND OTHER PROPERTY
REVENUES"):
20
<PAGE> 21
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statistical Information
- -----------------------
Average Economic Occupancy 93.1% 92.5% 92.7% 92.1%
Average Physical Occupancy 94.7% 93.9% 94.2% 93.6%
Average Rent/Unit/Month $ 457 $ 443 $ 455 $ 442
Average Rent Collected Per
Occupied/Unit/Month $ 449 $ 436 $ 448 $ 434
Financial Information (in thousands)
- ------------------------------------
Revenues
Rental Income $41,849 $ 40,281 $82,913 $79,979
Other Property Income 1,691 1,936 3,360 3,890
------- -------- ------- -------
Total Revenues 43,540 42,217 86,273 83,869
------- -------- ------- -------
Expenses
Property Operating and Maintenance 12,698 12,821 24,577 24,521
Real Estate Taxes and Insurance 3,690 3,510 7,298 7,014
------- -------- ------- -------
Operating Expenses 16,388 16,331 31,875 31,535
------- -------- ------- -------
Net Operating Income 27,152 25,886 54,398 52,334
------- -------- ------- -------
Interest - Mortgages 12,366 12,541 24,297 25,007
Major Maintenance and Replacements 662 611 1,291 1,261
Other 129 (30) 301 969
------- -------- ------- -------
Non Operating Expenses 13,157 13,122 25,889 27,237
------- -------- ------- -------
Income after certain expenses $13,995 $ 12,764 $28,509 $25,097
======= ======== ======= =======
Capital Expenditures $ 2,063 $ 2,717 $ 4,304 $ 5,037
======= ======== ======= =======
</TABLE>
Rental Revenues increased 3.9% and 3.7% for the three and six months ended June
30, 1999, respectively, as compared to the same periods in 1998. Other Property
Income declined 12.7% and 13.6% for the three and six months ended June 30,
1999, respectively, 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 less than 1% for the
three months ended June 30, 1999 and increased only 1% for the six months ended
June 30, 1999 as compared to the same periods in 1998. The slight increase in
expenses for the three months ended June 30, 1999 related to reduced exterior
landscaping and maintenance costs off set by an increase in utility costs. These
same expense trends impacted the expenses for the six months ended June 30, 1999
but the year to date expenses reflect an approximately $281,000 increase in snow
removal costs in the northern regions as compared to the prior year. The
property-level net operating income before major maintenance and replacements
("NOI") for the three and six months ended June 30, 1999 increased 4.9% and
3.9%, respectively, over the same periods in 1998. Excluding the impact of the
decline in interest income, NOI increased 5.6% and 4.9% for the three and six
months ended June 30, 1999, respectively, over the same periods in 1998.
21
<PAGE> 22
Same Store Property Operating Results - By Region
The Company's 490 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, Kentucky, 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 Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Northeast Region (14,731 units)
- -----------------------------------------------
Average Economic Occupancy 93.0% 93.2% 92.7% 92.5%
Average Physical Occupancy 94.6% 94.1% 94.0% 93.6%
Average Rent/Unit/Month $ 452 $ 439 $ 449 $ 438
Average Rent Collected per $ 444 $ 435 $ 443 $ 433
Occupied/Unit/Month
Atlantic Region (8,548 units)
- -----------------------------------------------
Average Economic Occupancy 93.0% 91.9% 92.6% 91.9%
Average Physical Occupancy 94.8% 94.0% 94.3% 93.7%
Average Rent/Unit/Month $ 467 $ 451 $ 465 $ 450
Average Rent Collected per $ 458 $ 441 $ 456 $ 441
Occupied/Unit/Month
Southeast Region (9,501 units)
- -----------------------------------------------
Average Economic Occupancy 93.3% 91.9% 92.9% 91.4%
Average Physical Occupancy 94.9% 93.6% 94.4% 93.5%
Average Rent/Unit/Month $ 457 $ 441 $ 454 $ 440
Average Rent Collected per $ 449 $ 433 $ 447 $ 430
Occupied/Unit/Month
</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 June 30, 1999 and December 31, 1998 and the Consolidated Statements of Cash
Flows for the six months ended June 30, 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 $6.9
million for the six months ended June 30, 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.
22
<PAGE> 23
Other factors impacting the Company's cash flow in 1999 as compared to
the same period in 1998 are discussed in "Results of Operations."
Merger Agreement
On June 30, 1999, the Company entered into a definitive merger
agreement with Equity Residential Properties Trust ("EQR") that would result in
the tax-free merger of the Company into EQR. The merger agreement, which is
subject to shareholder approval of Lexford and EQR shareholders, provides for
Lexford shareholders to receive 0.463 of an EQR common share for each Lexford
common share upon completion of the merger. The management and the Board of
Trustees of Lexford unanimously approved and recommend that the Lexford
shareholders vote for the merger. The obligations of EQR and Lexford to
consummate the merger are subject to the satisfaction or waiver of certain
conditions as set forth in the merger agreement. The merger agreement provides
that it may be terminated in a number of circumstances at any time prior to the
effectiveness of the merger, whether before or after the approval of the merger
by the shareholders of EQR and Lexford (SEE NOTE 1 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - "MERGER AGREEMENT").
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. If the merger is not consummated,
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 (8.00% at July
1, 1999) minus 1%. As of June 30, 1999 the outstanding balance under the
Facility was $19.5 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 June 30,
1999, the unpaid principal balance outstanding under the term loan was
approximately $2.6 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 maturities. An extraordinary gain of approximately
$189,000 was recognized as a result of debt discounts received from the prior
lenders.
23
<PAGE> 24
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 $32.3 million and a Carrying Value of $31.6 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 Facility. In the second quarter of 1999 the Company recognized an
extraordinary loss of approximately $437,000 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, partially offset by debt
discounts obtained from the former lenders. The transaction will result in lower
interest 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 six months ended June
30, 1999 amounted to approximately $372,000 funded from cash flow and borrowings
under the Facility.
The Company's Major Maintenance and Replacement costs for the six
months ended June 30, 1999 amounted to approximately $4.6 million for the Rental
Properties. Of this total, about $3.4 million was capitalized, and approximately
$1.2 million of Major Maintenance and Replacement costs were expensed. These
expenditures were funded from cash flow, maintenance escrow funds and borrowings
under the 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 completed all Year 2000 system projects in
July 1999, but will continue to monitor the software vendors for any updates to
their software. The Company is continuing to evaluate 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.
24
<PAGE> 25
The following is the status of the Company's Year 2000 compliance as of
July 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 Compliant Upgraded Software
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
Servers - Microsoft N/T C Compliant Upgraded Software
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
Servers - Citrix C Compliant
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
SOFTWARE AS/400 - (General Ledger, C Compliant
MIDRANGE Accounts Payable)
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
AS/400 - (Rent Receivables) C Compliant New software implemented
in July 1999
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
AS/400 - (Fixed Assets) C Compliant
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
AS/400 - In-house (Investment L N/A Replaced with Year 2000
Management) compliant external tax
service
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
SOFTWARE PCS Server - (Payroll) C Compliant
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
- --------------- ------------------------------- --------- ---------------- ---------------------------- ---------------
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 $100,000 to $200,000 to address Year 2000
contingencies. As of June 30, 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 cannot 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
residents became unable to pay rent due to Year 2000 related problems
encountered by residents' employers or banking institutions.
25
<PAGE> 26
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 June 30, 1999. A dividend of approximately $4.1 million
was paid on July 15, 1999 to shareholders of record on June 30, 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. As a result of the
merger agreement, subsequent to the dividend paid by the Company on July 15,
1999 and prior to the merger, the amount per share of each subsequent quarterly
dividend declared by the Company will not exceed an amount equal to the dividend
on a common share of EQR for such quarter multiplied by 0.463.
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.
26
<PAGE> 27
Item 5. Other Information
This Form 10-Q contains certain forward-looking statements regarding
prospects for (i) proposed capital improvements to Properties, contingent, in
all cases, upon available financing, successful implementation and availability
and achievement of projected returns on investment, (ii) the Company's quarterly
dividends and its distribution policy, (iii) the Company's foreseeable capital
and liquidity requirements and sources, (iv) its successful resolution of
external Year 2000 compliance issues in a timely manner and within an estimated
range of costs, and (v) the Company's merger agreement with Equity Residential
Properties Trust. 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 and the merger
agreement, 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 NO. DESCRIPTION SEQUENTIAL PAGE
<S> <C> <C>
11.1 Statement re: computation of Per Share Earnings See Note 1 of Notes to Consolidated Financial
Statements
27 Financial Data Schedule Filed as an Exhibit to this Form 10-Q
</TABLE>
(b) Reports on Form 8-K:
(1) Report of Agreement and Plan of Merger pursuant to which
Lexford has agreed, subject to shareholder approval and other
customary conditions, to merge with and into Equity
Residential Properties Trust, filed July 2, 1999.
27
<PAGE> 28
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 August 16, 1999 By: /s/ John B. Bartling
------------------------------
John B. Bartling
President and Chief Executive Officer
Dated August 16, 1999 By: /s/ Mark D. Thompson
------------------------------
Mark D. Thompson
Executive Vice President and Chief
Financial Officer
(Principal Accounting Officer)
Dated August 16, 1999 By: /s/ Ronald P. Koegler
------------------------------
Ronald P. Koegler
Senior Vice President and Controller
28
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 498
<SECURITIES> 0
<RECEIVABLES> 2,614
<ALLOWANCES> 1,005
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 608,053
<DEPRECIATION> 40,283
<TOTAL-ASSETS> 618,588
<CURRENT-LIABILITIES> 0
<BONDS> 520,649
0
0
<COMMON> 96
<OTHER-SE> 56,682
<TOTAL-LIABILITY-AND-EQUITY> 618,588
<SALES> 226
<TOTAL-REVENUES> 78,500
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 49,973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,373
<INCOME-PRETAX> 6,380
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,380
<DISCONTINUED> 0
<EXTRAORDINARY> (248)
<CHANGES> (700)
<NET-INCOME> 5,432
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
</TABLE>
