UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
FOR QUARTERLY AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-10524
UNITED DOMINION REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0857512
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
10 South Sixth Street, Richmond, Virginia 23219-3802
(Address of principal executive offices - zip code)
(804) 780-2691
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to filing requirements
for at least the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 7, 1998:
Common Stock: 103,472,610
<PAGE>
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Real estate owned:
Real estate held for investment $ 2,813,957 $ 2,281,438
Less: accumulated depreciation 242,803 200,506
---------------- ----------------
2,571,154 2,080,932
Real estate under development 43,811 24,598
Real estate held for disposition 104,864 166,501
Cash and cash equivalents 11,575 473
Other assets 97,796 41,221
---------------- ----------------
Total assets $ 2,829,200 $ 2,313,725
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable-secured $ 623,248 $ 417,325
Notes payable-unsecured 827,881 738,901
Distributions payable to common and preferred shareholders 29,867 25,607
Accounts payable, accrued expenses and other liabilities 73,085 58,842
---------------- ----------------
Total liabilities 1,554,081 1,240,675
Minority interest of unitholders in operating partnership 51,675 14,693
Shareholders' equity:
Preferred stock, no par value; $25 liquidation preference,
25,000,000 shares authorized;
4,200,000 shares 9.25% Series A Cumulative Redeemable 105,000 105,000
6,000,000 shares 8.60% Series B Cumulative Redeemable 150,000 150,000
Common stock, $1 par value; 150,000,000 shares authorized
101,988,375 shares issued and outstanding (89,168,442 in 1997) 101,988 89,168
Additional paid-in capital 1,070,440 906,307
Notes receivable from officer-shareholders (8,333) (8,806)
Distributions in excess of net income (195,651) (183,312)
---------------- ----------------
Total shareholders' equity 1,223,444 1,058,357
================ ================
Total liabilities and shareholders' equity $ 2,829,200 $ 2,313,725
================ ================
</TABLE>
See accompanying notes.
2
<PAGE>
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- ---------------------------
1998 1997 1998 1997
------------------------------- ---------------------------
<S> <C>
Revenues
Rental income $118,176 $95,341 $222,275 $185,312
Interest and other non-property income 1,147 137 2,159 388
------------- ---------- --------- --------
119,323 95,478 224,434 185,700
Expenses
Rental expenses:
Utilities 6,140 5,658 11,945 12,124
Repairs and maintenance 15,681 14,206 28,035 26,179
Real estate taxes 10,343 7,796 19,341 14,907
Property management 4,638 3,297 7,920 6,074
Other operating expenses 12,516 9,959 23,031 19,235
Real estate depreciation 25,548 19,127 46,476 35,289
Interest 25,736 19,769 48,561 38,919
General and administrative 2,539 1,820 4,618 3,653
Other depreciation and amortization 795 395 1,541 845
---------- ------------ ----------- -----------
103,936 82,027 191,468 157,225
---------- ------------ ----------- -----------
Income before gains on sales of investments,
minority interest unitholders in
operating partnership and extraordinary item 15,387 13,451 32,966 28,475
Gains on sales of investments 20,721 1,254 20,461 3,374
---------- ------------ ----------- -----------
Income before minority interest of unitholders in
operating partnership and extraordinary item 36,108 14,705 53,427 31,849
Minority interest of unitholders in operating
partnership (987) (28) (1,122) (59)
---------- ------------ ----------- -----------
Income before extraordinary item 35,121 14,677 52,305 31,790
Extraordinary item-early extinguishment of debt (116) -- (116) --
---------- ------------ ----------- -----------
Net income 35,005 14,677 52,189 31,790
Dividends to preferred shareholders (5,653) (3,611) (11,303) (6,039)
---------- ------------ ----------- -----------
Net income available to common shareholders $29,352 $11,066 $40,886 $25,751
========== ============ =========== ===========
Earnings per common share:
Basic earnings per common share $0.29 $0.13 $0.42 $0.30
========== ============ =========== ===========
Diluted earnings per common share $0.29 $0.13 $0.42 $0.30
========== ============ =========== ===========
Distributions declared per common share $0.2625 $0.2525 $0.5250 $0.5050
========== ============ =========== ===========
Weighted average number of common shares
outstanding-basic 101,562 86,877 96,244 85,967
Weighted average number of common shares
outstanding-diluted 105,145 87,036 98,666 86,157
</TABLE>
See accompanying notes.
3
<PAGE>
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30, 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C>
Operating Activities
Net income $ 52,189 $ 31,790
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 48,017 36,134
Minority interest of unitholders in operating partnership 1,122 59
Gains on sales of investments (20,461) (3,374)
Amortization of deferred financing costs 965 810
Changes in operating assets and liabilities:
Increase/(decrease) in operating liabilities (695) 2,473
Increase in operating assets (1,307) (4,572)
-------- --------
Net cash provided by operating activities 79,830 63,320
Investing Activities
Acquisition of real estate, net of liabilities assumed (129,049) (150,615)
Capital expenditures (33,937) (45,966)
Development of real estate assets (30,075) (24,861)
Net proceeds from sales of investments 85,684 27,089
Proceeds from interest rate hedge transaction -- 1,538
Issuance of and payments on notes receivable (12,951) 2,142
Net cash acquired in acquisition of ASR Investments Corporation 330 --
-------- --------
Net cash used in investing activities (119,998) (190,673)
Financing Activities
Net proceeds from the issuance of common stock 38,876 59,670
Net proceeds from the sale of preferred stock -- 145,275
Net proceeds from the issuance of common stock through the
dividend reinvestment and stock purchase plan 29,017 14,538
Gross proceeds from the issuance of unsecured notes payable -- 125,000
Net borrowings/(repayments) of short-term bank debt 96,900 (104,750)
Distributions paid to preferred shareholders (11,303) (4,856)
Distributions paid to common shareholders (48,963) (41,482)
Distributions paid to minority interest unitholders (2,586) (67)
Scheduled principal payments on secured notes payable (3,192) (2,773)
Gross proceeds from the issuance of secured notes payable 7,770 --
Non-scheduled payments on secured notes payable (46,431) (3,350)
Payments on unsecured notes payable (7,504) (63,414)
Payment of financing costs (1,314) (1,594)
-------- --------
Net cash provided by financing activities 51,270 122,197
Net increase (decrease) in cash and cash equivalents 11,102 (5,156)
Cash and cash equivalents, beginning of period 473 13,452
-------- --------
Cash and cash equivalents, end of period $ 11,575 $ 8,296
======== ========
Supplemental Information:
Interest paid during the period $ 48,496 $ 37,628
Non-cash transactions associated with the acquisition
of properties:
Secured debt assumed through the acquisition of properties 86,626 22,063
Issuance of operating partnership units 17,617 --
Issuance of common stock 1,077 --
Non-cash transactions associated with the acquisition of
ASR Investment Corporation:
Real estate assets acquired 313,700 --
Other operating assets acquired 8,848
Issuance of common stock 108,456 --
Issuance of operating partnership units 21,420 --
Secured debt assumed 179,440 --
Operating liabilities assumed 13,553 --
</TABLE>
See accompanying notes.
4
<PAGE>
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Preferred Stock
Balance, December 31, 1997 $ 255,000
-------------------
Balance, June 30, 1998 $ 255,000
===================
Common Stock, $1 Par Value
Balance, December 31, 1997 $ 89,168
Issuance of common shares through Unit Investment Trust 2,804
Issuance of common shares in the acquisition of ASR Investments Corporation 7,743
Issuance of common shares through dividend reinvestment
and stock purchase plan 2,157
Issuance of common shares in connection with the acquisition of properties 73
Issuance of common shares through exercise of stock options 43
-------------------
Balance, June 30, 1998 $ 101,988
===================
Additional Paid-in Capital
Balance, December 31, 1997 $ 906,307
Issuance of common shares through Unit Investment Trust 35,150
Issuance of common shares in the acquisition of ASR Investments Corporation 100,713
Issuance of common shares through dividend reinvestment
and stock purchase plan 26,860
Issuance of common shares in connection with the acquisition of properties 1,004
Issuance of common shares through exercise of stock options 406
-------------------
Balance, June 30, 1998 $ 1,070,440
===================
Notes Receivable from Officer-Shareholders
Balance, December 31, 1997 $ (8,806)
Principal repayments 473
===================
Balance, June 30, 1998 $ (8,333)
===================
Distributions in Excess of Net Income
Balance, December 31, 1997 $ (183,312)
Net income 52,189
Common stock distributions declared ($0.5250 per share) (53,225)
Preferred stock distributions declared-Series A ($1.16 per share) (4,856)
Preferred stock distributions declared-Series B ($1.08 per share) (6,447)
-------------------
Balance, June 30, 1998 $ (195,651)
===================
Total Shareholders' Equity $ 1,223,444
===================
</TABLE>
See accompanying notes.
5
<PAGE>
UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of presentation
The accompanying consolidated financial statements include the accounts of
United Dominion Realty Trust, Inc. and its subsidiaries, including United
Dominion Realty, L.P., its Operating Partnership, (collectively, the "Company").
As of June 30, 1998, United Dominion Realty Trust, Inc. and its wholly-owned
subsidiaries (collectively "United Dominion") had a 85% interest in the
Operating Partnership. The financial statements of the Company include the
minority interest of unitholders in the operating partnership. As of June 30,
1998, there were 13,496,109 units in the Operating Partnership outstanding, of
which 11,476,448, or 85.0% were owned by United Dominion and 2,019,660 or 15.0%
were owned by non-affiliated limited partners. All significant inter-company
accounts and transactions have been eliminated in consolidation. In addition, in
connection with the ASR merger, the Company acquired Heritage Communities L.P.,
a Delaware limited partnership. As of June 30, 1998, there were 4,504,243 units
in the Operating Partnership outstanding, of which 2,974,253, or 66% were owned
by United Dominion and 34% were owned by non-affiliated limited partners. The
consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of financial position
at June 30, 1998 and results of operations for the interim periods ended June
30, 1998 and 1997. Such adjustments are normal and recurring in nature. The
interim results presented are not necessarily indicative of results that can be
expected for a full year. The accompanying consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes appearing in the Company's December 31, 1997 Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
2. Real estate held for investment
The following table summarizes real estate held for investment:
June 30, December 31,
Dollars in thousands 1998 1997
- -----------------------------------------------------------------------------
Land and land improvements $ 480,376 $ 393,505
Buildings and improvements 2,203,077 1,783,565
Furniture, fixtures and equipment 124,340 100,380
Construction in progress 6,164 3,988
----------- -----------
Real estate held for investment 2,813,957 2,281,438
Accumulated depreciation (242,803) (200,506)
----------- -----------
Real estate held for investment, net $ 2,571,154 $ 2,080,932
=========== ===========
3. Notes payable - secured
Notes payable-secured, which encumber $.9 billion or 30% of the Company's real
estate owned, at cost, ($2.1 billion or 70% of the Company's real estate
owned, at cost, is unencumbered) consist of the following at June 30, 1998:
<TABLE>
<CAPTION>
Principal Weighted Average Weighted Average No. Communities
Dollars in thousands Balance Interest Rate Years to Maturity Encumbered
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Fixed Rate Debt
Mortgage notes payable $ 331,063 7.83% 4.8 64
Tax-exempt secured notes payable 131,250 7.01% 21.8 18
REMIC financings 79,476 7.38% 2.5 23
Secured notes payable (a) 45,000 7.29% 1.1 5
-----------------------------------------------------------------------------
Total Fixed Rate Notes 586,789 7.55% 8.1 110
Variable Rate Debt
Secured notes payable 26,559 6.52% 5.7 6
Tax-exempt secured notes payable 9,900 6.13% 9.1 2
-----------------------------------------------------------------------------
Total Variable Rate Notes 36,459 6.41% 6.4 8
-----------------------------------------------------------------------------
Total Notes Payable - Secured $ 623,248 7.48% 8.0 118
=============================================================================
</TABLE>
(a) Variable-rate secured notes payable which have been effectively swapped to
a fixed-rate consist of a $32.7 million variable-rate secured senior credit
facility which encumbers five apartment communities and two variable-rate
construction notes payable aggregating $12.3 million. The Company has five
interest rate swap agreements with an aggregate notional value of $45
million under which the Company pays a fixed-rate of interest and receives
a variable-rate on the notional amounts. The interest rate swap agreements
effectively change the Company's interest rate exposure on $45 million from
a variable-rate to a weighted average fixed-rate of approximately 7.29%.
6
<PAGE>
4. Notes payable - unsecured
A summary of notes payable - unsecured is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
Dollars in thousands 1998 1997
----------------- ----------------
<S> <C>
Commercial Banks
Borrowings outstanding under
revolving credit facilities $ 232,500 $135,600
Insurance Companies--Senior Unsecured Notes
7.98% due March, 1999-2003 (a) 37,143 44,571
8.72% due November 1998 2,000 2,000
--------- ---------
39,143 46,571
Other (b) 6,238 6,730
Senior Unsecured Notes - Other
7.25% Notes due April 1999 75,000 75,000
8.50% Debentures due September 2024 (c) 150,000 150,000
7.95% Medium-Term Notes due July 2006 125,000 125,000
7.25% Notes due January 2007 125,000 125,000
7.07% Medium-Term Notes due November 2006 25,000 25,000
7.02% Medium-Term Notes due November 2005 50,000 50,000
-------- --------
550,000 550,000
------- -------
Total Notes Payable - Unsecured $827,881 $738,901
======== ========
</TABLE>
(a) Payable in five equal annual principal installments of $7.4 million.
(b) Includes $5.8 million and $6.2 million at June 30, 1998 and December
31, 1997, respectively, of deferred gains from the termination of
interest rate hedge transactions.
(c) Debentures include an investor put feature, which grants a one time
option to redeem debentures in September 2004.
<PAGE>
5. Earnings Per Share
Basic earnings per common share is computed using net income available to common
shareholders and the weighted average shares outstanding. Diluted earnings per
common share is also computed using net income available to common shareholders,
however, the weighted average shares outstanding are adjusted for potentially
dilutive securities for the periods presented. The effect of the operating
partnership units was antidilutive for the three and six months ended June 30,
1997, and is therefore not included in the following calculations. The
following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------- ----------------------
<S> <C>
In thousands, except per share data
- -----------------------------------
Numerator:
Numerator for basic earnings per share-net
income available to common shareholders $ 29,352 $ 11,066 $ 40,886 $ 25,751
Effect of minority interest 987 -- 1,122 --
-------- -------- -------- --------
Numerator for diluted earnings per share- net
income available to common shareholders $ 30,339 $ 11,066 $ 42,008 $ 25,751
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share-
weighted average shares 101,562 86,877 96,244 85,967
Effect of dilutive securities:
Operating partnership units 3,478 -- 2,311 --
Employee stock options 105 159 111 190
-------- -------- -------- --------
Dilutive potential common shares
denominator for dilutive earnings per
share-adjusted weighted average shares
and assumed conversions 105,145 87,036 98,666 86,157
======== ======== ======== ========
Basic earnings per common share $ .29 $ .13 $ .42 $ .30
Diluted earnings per common share $ .29 $ .13 $ .42 $ .30
</TABLE>
6. Pro Forma Financial Information
On March 27, 1998, the Company completed the acquisition of ASR Investments
Corporation (ASR) in a statutory merger. ASR was a publicly-traded multifamily
REIT that owned and operated 39 communities with 7,550 apartment homes located
in Arizona, Texas, New Mexico and the state of Washington. Each share of ASR's
common stock was exchanged for 1.575 shares of the Company's common stock. The
acquisition was structured as a tax-free transaction and was treated as a
purchase for accounting purposes. In connection with the acquisition, the
Company acquired primarily real estate assets totaling $313.7 million.
Consideration given by the Company included 7,742,839 shares of the Company's
common stock valued at $14 per share for an aggregate equity value of $108.4
million plus the issuance of 1,529,990 Units in the ASR Operating Partnership
valued at $21.4 million. In addition, the Company assumed, at fair value,
mortgage debt totaling $179.4 million and other liabilities of $13.6 million.
Information concerning unaudited pro forma results of operations for the six
months ended June 30, 1998 and 1997 are set forth below. For the six months
ended June 30, 1998, such pro forma information assumes the acquisition of ASR
as if the transaction occurred on January 1, 1997. For the six months ended
June 30, 1997, such pro forma information assumes the following transactions
occurred on January 1, 1997: (i) the acquisition by the Company of 17 apartment
communities with 5,659 apartment homes at a total cost of $219 million and (ii)
the acquisition by ASR Investments Corporation of 22 apartment communities with
4,208 apartment homes at a total cost of $176 million.
8
<PAGE>
Pro Forma
Six Months Ended
June 30
1998 1997
--------------------------
In thousands, except per share amounts
--------------------------------------
Rental income $ 234,005 $ 223,527
Net income available to common shareholders
before extraordinary item $ 41,724 $ 23,284
Net income per common share before
extraordinary item-basic $ .40 $ .25
Net income per common share before
extraordinary item-diluted $ .39 $ .25
The unaudited information is not necessarily indicative of what the Company's
consolidated results of operations would have been if the acquisitions had
occurred at the beginning of each period presented. Additionally, the pro forma
information does not purport to be indicative of the Company's results of
operations for future periods.
7. Accounting Pronouncements
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income" (Statement 130). Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
Statement 130 had no impact on the Company's net income or stockholders' equity
for each of the periods presented.
On March 19, 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus decision on Issue No. 97-11, "Accounting for
Internal Costs Relating to Real Estate Property Acquisitions" which provides
that internal costs of identifying and acquiring operating properties should be
expensed as incurred. The Company had historically capitalized, on a successful
efforts basis, the direct internal costs of identifying and acquiring operating
property and, accordingly, has realized an increase in expense with the adoption
of this consensus on March 19, 1998. The Company does not expect the impact on
earnings to be material in 1998.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement 133)
which is required to be adopted in years beginning after June 15, 1999.
Statement 133 permits early adoption as of the beginning of any fiscal quarter
after its issuance, however, the Company does not anticipate adopting Statement
133 until such time as it is required. Statement 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in fair value of the
hedged assets, liabilities, or firm commitments are recognized through earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of the derivative's change in fair value
will be immediately recognized in earnings. The Company has not yet determined
what the effect of Statement 133 will be on earnings and the financial position
of the Company, however, given the Company's use of derivatives, management does
not anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company.
9
<PAGE>
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company considers portions of the information contained in Item 2. to
include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved.
The Company is engaged in the ownership, acquisition, development and operation
of apartment communities throughout the country. Management's strategy is to
transform the Company into a national, low cost provider of "B" and "A" quality
apartment homes. The Company is implementing this strategy through the
acquisition of portfolios of higher quality communities, the sale of lower
quality communities, a greater commitment to development and the upgrade of
older communities. The Company's investment strategy focuses on acquiring
apartment communities in targeted major U.S. markets, currently 24, and
geographically expanding into other major markets in the Mid West and Far West.
The Company intends to continue its expansion into other areas of the United
States and enter into new markets as appropriate opportunities arise. The
Company seeks to be a market leader by operating a sufficiently sized portfolio
of apartments within each market in order to drive down operating costs through
economies of scale and management efficiencies. The Company believes this market
diversification increases investment opportunity and decreases the risk
associated with cyclical local real estate markets and economies.
[This space intentionally left blank]
10
<PAGE>
The following table summarizes the Company's apartment market information by
geographic market:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
As of June 30, 1998 June 30, 1998 June 30, 1998
- ------------------------------------------------------------------ --------------------- ---------------------
<S> <C>
Average Average
No. of No. of % of Carrying Physical Monthly Physical Monthly
Apartment Apartment Apartment Value Occupancy Rental Occupancy Rental
Market Communities Homes Homes (in thousands) ** Rates * ** Rates *
- ------------------------------------------------------------------ --------------------------------------------------
Dallas, TX*** 29 8,954 13% $ 375,607 93.7% $ 598 94.1% $ 601
Houston, TX*** 23 5,783 8% 192,395 92.1% 545 93.0% 546
San Antonio, TX 12 3,673 5% 149,243 91.7% 621 92.1% 622
Orlando, FL 12 3,584 5% 160,634 93.7% 622 93.3% 628
Raleigh, NC 11 3,484 5% 152,537 93.3% 653 94.0% 655
Columbia, SC 11 3,326 5% 111,650 93.8% 510 93.5% 512
Phoenix, AZ*** 9 3,136 4% 168,176 91.0% 655 89.7% 660
Richmond, VA 10 3,091 4% 113,062 92.9% 602 93.8% 605
Tampa, FL 9 2,669 4% 100,558 95.4% 599 95.0% 602
Eastern NC 10 2,573 4% 105,257 87.1% 594 85.9% 605
Charlotte, NC 11 2,566 4% 118,879 89.2% 654 89.7% 656
Nashville, TN 9 2,416 3% 113,312 92.8% 597 93.5% 597
Memphis, TN 6 2,196 3% 100,481 89.9% 539 88.6% 540
Greensboro, NC 8 2,123 3% 100,428 82.0% 612 84.7% 612
Baltimore, MD 8 1,746 3% 78,897 92.8% 672 94.3% 673
Washington, DC 6 1,483 2% 66,561 91.5% 694 92.5% 695
Hampton Roads, VA 8 1,830 3% 62,737 91.4% 553 92.0% 554
Atlanta, GA 7 1,642 2% 76,666 91.5% 620 92.2% 623
Greenville, SC 6 1,436 2% 52,878 87.1% 528 86.7% 529
Jacksonville 3 1,157 2% 55,288 91.4% 607 91.3% 611
Tucson, AZ *** 8 1,112 2% 29,007 -- -- 90.8% 425
Miami/Ft.Lauderdale 4 960 1% 62,450 92.1% 811 91.1% 815
Fayetteville, NC 3 884 1% 40,550 90.2% 565 90.8% 566
Eastern Shore, MD 4 784 1% 33,974 97.7% 648 98.0% 651
Other Florida 7 1,646 2% 71,358 94.5% 581 93.4% 585
Other Virginia 6 1,156 2% 47,203 82.4% 603 84.0% 605
Washington state*** 3 812 1% 38,268 -- -- 75.3% 627
Other Texas 3 776 1% 22,526 87.7% 526 86.4% 527
New Mexico*** 4 758 1% 28,704 79.5% 550 76.3% 550
Austin, TX 2 542 1% 22,559 90.0% 593 90.5% 594
Arkansas 2 512 1% 21,305 92.1% 577 91.6% 578
Other Georgia 2 468 1% 22,049 89.1% 646 86.8% 650
Other South Carolina 2 408 1% 13,174 89.9% 423 88.3% 425
Nevada 1 384 -- 20,401 81.7% 648 79.0% 645
Oklahoma 1 316 -- 9,605 89.8% 457 90.6% 454
Alabama 1 242 -- 11,087 91.1% 519 89.7% 519
Delaware 2 368 -- 17,466 93.8% 614 94.5% 615
Other North Carolina 1 168 -- 7,458 93.1% 585 91.9% 588
- -----------------------------------------------------------------------------------------------------------------------
Total 264 71,164 100% $2,974,390 91.3% $ 601 91.3% $ 604
=======================================================================================================================
</TABLE>
* Average monthly rental rates represent potential rent collections
(gross potential rents less market adjustments), which approximate net
effective rents. These figures exclude 1998 acquisitions.
** Physical occupancy is defined as rental income (potential rental
collections less vacancy loss, management units, units held out of
service and move-in concessions) divided by potential collections
(gross potential rent less management units, units held out of service
and move-in concessions) for the period, expressed as a percentage.
*** Physical Occupancy and Average Monthly Rental Rates are not available
for the communities included in these markets which were acquired on
March 27, 1998 in connection with the acquisition of ASR Investments
Corporation as the markets include only non-mature properties.
11
<PAGE>
Liquidity and Capital Resources
As a qualified real estate investment trust ("REIT"), the Company distributes a
substantial portion of its cash flow to its shareholders in the form of
quarterly distributions. The Company believes that cash provided by operations
will be adequate to meet normal operating requirements and payment of
distributions by the Company in accordance with REIT requirements in both the
short and long term. For the six months ended June 30, 1998, the Company's cash
flow from operating activities exceeded cash distributions paid to preferred and
common shareholders and operating partnership unitholders by $17.0 million. The
Company utilizes a variety of primarily external financing sources to fund
portfolio growth, major capital improvement programs and balloon debt payments.
The Company's bank lines of credit generally have been used to temporarily
finance these expenditures, and subsequently this short-term bank debt has been
replaced with longer term debt or equity. At June 30, 1998, the Company had
cash and cash equivalents of $11.6 million and amounts available under its
credit facilities aggregating $32.5 million. The following discussion explains
the changes in net cash provided by operating activities, net cash used for
investing activities and net cash provided by financing activities which are
presented in the Company's Consolidated Statements of Cash Flows.
Operating Activities
For the six months ended June 30, 1998, the Company's cash flow from operating
activities increased $16.5 million over the same period last year. This
increase is primarily due to the increased operating income from the Company's
acquired apartment communities, as well as increases in property operating
income within the Company's mature apartment portfolio achieved through higher
rental rates and decreased property operating expenses as discussed below and
under "Results of Operations".
Investing Activities
During the six months ended June 30, 1998, net cash used for investing
activities was $120.0 million compared to $190.7 million for the same period
last year. Changes in the level of investing activities from period to period
primarily reflect the changing levels of the Company's acquisition, capital
expenditure, development and sales programs.
Acquisitions
The Company seeks to acquire apartment communities in individual or portfolio
transactions that can provide returns on investment in the 10 1/2% range by the
third year of ownership. These acquisitions typically have the prospect for
future cash flow growth and appreciation.
During the first six months of 1998, the Company acquired 17 apartment
communities with 5,682 apartment homes (excluding ASR) at a total cost
(including closing costs) of $239.6 million or $42,200 per home. The communities
acquired by market were as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Purchase
Purchase No. Apt. Year Price Cost
Location Date Name Homes Built (thousands) per Home
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
San Antonio, Texas 04/16/98 Audubon 216 1984 $ 7,082 $32,787
04/16/98 Carmel 228 1984 8,084 35,456
04/16/98 Cimarron 140 1984 5,087 36,336
04/16/98 Grand Cypress 164 1995 9,975 60,823
04/16/98 Kenton Place 244 1982 11,883 48,701
04/16/98 Peppermill 232 1984 8,151 35,134
04/16/98 Villages of Thousand Oaks 466 1983 13,986 30,013
Memphis, Tennessee 01/09/98 The Trails at Kirby Parkway(a) 376 1987 16,757 44,566
01/09/98 Cinnamon Trails 208 1989 9,531 45,822
01/09/98 The Trails at Mount Moriah(a) 630 1990/91 28,026 44,486
02/06/98 Dogwood Creek 278 1997 18,446 66,353
Phoenix, Arizona 01/09/98 The Village at North Park 320 1983 15,056 47,050
05/28/98 Rancho Mirage 856 1984/85 38,538 45,021
06/09/98 Woodland Park 300 1980 9,723 32,410
Dallas, Texas 01/30/98 Summit Ridge 264 1983 8,034 30,430
04/16/98 The Crest 280 1983 7,026 25,093
Atlanta, Georgia 04/15/98 Waterford Place 180 1990 11,900 66,111
Nashville, Tennessee 05/20/98 Williamsburg Apartments 300 1986 12,307 41,023
-------------------------------------------------------------------------------------------------------
Total/Weighted Average 5,682 1986 $239,592 $42,167
(a) These two properties are operating as one apartment community named The Trails.
</TABLE>
On July 2, 1998, the Company acquired a portfolio of four class A apartment
communities in Ohio in a transaction valued at approximately $15.5 million. The
acquisition includes 684 completed apartment homes and 452 homes which are
currently in various stages of construction and lease-up and are scheduled for
completion during 1998 and 1999. This portfolio acquisition allowed the Company
to continue with its national strategy and enter into a Mid-western market the
Company had targeted.
Mergers
On March 27, 1998, the Company completed the acquisition of ASR Investments
Corporation in a statutory merger (the "Merger"). ASR was a publicly-traded
multifamily REIT with apartment communities located in Arizona, Texas, New
Mexico and the state of Washington. Each share of ASR's common stock was
exchanged for 1.575 shares of the Company's common stock. The acquisition was
structured as a tax-free merger and was treated as a purchase for accounting
purposes. In connection with the acquisition, the Company acquired primarily
real estate assets totaling $313.7 million. Consideration given by the Company
included 7,742,839 shares of the Company's common stock valued at $14 per share
for an aggregate equity value of $108.4 million plus the issuance of 1,529,990
Units in the ASR Operating Partnership valued at $21.4 million. In addition,
the Company assumed, at fair value, mortgage debt totaling $179.4 million and
other liabilities of $13.6 million.
The Merger both strengthened the Company's position in several long-term growth
markets in the Southwest and established an initial presence in the Northwest
where the Company plans to make additional acquisitions in the future. These
communities are projected to produce a first year return on investment in the 9%
range. The 7,550 apartment homes had a weighted average year built of 1984 and
are geographically distributed as follows:
Number of Number of
City/State Apartment Communities Apartment Homes
- ------------------ --------------------- ---------------
Houston, Texas 14 2,261
Dallas, Texas 8 1,889
Tucson, Arizona 8 1,112
Phoenix, Arizona 3 928
Albuquerque, New Mexico 3 548
Washington 3 812
--- ------
Total 39 7,550
=== =====
13
<PAGE>
Real estate under development
Consistent with the Company's acquisition strategy, development activity is
focused primarily in sub-markets within its major markets. During the first six
months of 1998, the Company invested approximately $30.1 million in development
projects.
At June 30, 1998, the Company had 1,587 apartment homes under development as
outlined below (dollars in thousands, except cost per home):
<TABLE>
<CAPTION>
Development Estimated Estimated Expected
No. Apt. Completed Costs Development Cost Completion
Property Location Homes Apt. Homes to Date Cost Per Home Date
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
New Apartment Communities
Dominion Franklin Nashville, TN 360 -- $16,324 $ 22,082 $ 61,300 1Q99
Ashlar I Fort Myers, FL 260 -- 3,710 18,566 71,400 2Q99
Sierra Foothills Phoenix, AZ 322 -- 2,844 21,062 65,400 4Q99
Stone Creek Houston, TX 216 -- 1,046 11,043 51,100 2Q99
Ashton at Waterford Lakes Orlando, FL 292 -- 3,078 18,643 63,850 3Q99
-----------------------------------------------------------
1,450 -- 27,002 91,396 63,000
Additional Phases
Mill Creek II Wilmington, NC 180 43 8,497 12,105 67,250 4Q98
-----------------------------------------------------------
Land Held for Development
Indian Creek Dallas, TX -- -- 3,065 -- -- --
Ashlar II Fort Myers, FL -- -- 1,127 -- -- --
Wimbledon II Dallas, TX -- -- 647 -- -- --
Park 10 Houston, TX -- -- 2,005 -- -- --
Manor at England Run III Fredericksburg, VA -- -- 542 -- -- --
Other -- -- 926 -- -- --
-----------------------------------------------------------
-- -- 8,312 -- --
-----------------------------------------------------------
1,630 43 $43,811 $103,501 $63,500
===========================================================
</TABLE>
The Company completed the following development project during 1998 (dollars in
thousands, except cost per home):
<TABLE>
<CAPTION>
Original
Budgeted
No. Apt. Development Development Cost Date of % Leased
Property Location Homes Costs Cost Per Home Completion at 6/30/98
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Additional Phases
Oak Forest II Dallas, TX 260 $11,858 $13,375 $51,400 1Q98 91%
=====================================================
</TABLE>
In July 1998 the Company acquired two communities which contain 452 apartment
homes under various stages of development and lease-up in connection with a
portfolio acquisition.
Due to the fact that the acquisitions market has become very competitive, the
Company has increased its commitment to development. During 1998, the Company
expects to start another 1,700 apartment homes in five different markets,
investing approximately $100 million on the development of new communities and
additional phases to existing communities which are anticipated to provide
stabilized returns on investment exceeding that of communities acquired.
Capital Expenditures
During the first half of 1998, the Company invested $33.9 million on capital
improvements to its apartment portfolio. During this period, capitalized
expenditures averaged $975 per home (on an annualized basis) for all apartment
homes acquired prior to 1996. A significant portion of these expenditures are
designed to increase revenues or reduce expenses. These improvements include
the addition of intrusion alarms, sub-meters to pass the cost of water and sewer
to residents, various interior upgrades and enhanced amenities such as business
and fitness centers. These expenditures should allow the Company's communities
to operate more effectively in competitive markets over the long-term. Capital
expenditures for the full year 1998 are expected to be at or below 1997 levels.
The Company has reduced its capital expenditures this year versus last year on
its mature apartment homes, but will continue to add revenue-enhancing
improvements as needed.
14
<PAGE>
Disposition of investments
In an effort to upgrade its apartment portfolio, the Company continually
undertakes portfolio review analyses with the objective of identifying
properties that no longer meet the Company's investment objectives due to size,
location, age, quality and/or performance. These sales allow the Company to
reduce the age of its existing portfolio, which should result in lower operating
expense and capital expenditure growth associated with the older properties. The
sales are initially dilutive to earnings as the initial returns on investment on
higher quality apartments are lower than the returns on investment on the
communities being sold. Management of the Company believes this is a good time
to sell properties given the competitive nature of the acquisitions market, and
as such, intends to sell approximately $120 million or more of real estate
during the remainder of 1998.
On January 20, 1998, the Company sold a portfolio of five apartment communities
containing 2,406 apartment homes, which had a weighted average age of 21 years
for an aggregate sales price of $65.6 million. The transaction was structured
to qualify as a like-kind exchange under Section 1031 of the Internal Revenue
Code, so the related capital gain will be deferred for federal income tax
purposes. These five communities, all located in Texas, were acquired on
December 31, 1996 in connection with the South West Property Trust Inc. Merger
("South West Merger"), and accordingly, no significant gain or loss was recorded
for financial reporting purposes.
On April 24, 1998, the Company sold a portfolio of eleven Southeast apartment
communities containing 2,303 homes, which had a weighted average age of 24 years
for an aggregate sales price of $69.4 million. For income tax purposes, eight
of the eleven communities sold were structured to qualify as a tax deferred
exchange so that the related capital gains will be deferred. The Company
realized a $21.2 million gain on the sale for financial reporting purposes in
the second quarter of 1998.
The Company has a portfolio of eight communities containing 1,870 apartment
homes under contract for sale at June 30, 1998 for an aggregate sales price of
$60.3 million, with closing anticipated in the fourth quarter of 1998. The
Company anticipates realizing a $12.0 million gain on the sale for financial
reporting purposes. There can be no assurances that this transaction will be
consummated.
Financing Activities
Net cash provided by financing activities during the six months ended June 30,
1998 was $51.3 million compared to $122.2 million for the same period last year.
Cash provided by financing activities
During the first quarter of 1998, the Company entered into two separate
transactions to sell its common stock to Unit Investment Trusts ("UIT"). In
February 1998, the Company issued 1.7 million shares of its common stock at a
gross sales price of $14.31 per share to a UIT. In March 1998, the Company
issued 1.1 million shares of its common stock at a gross sales price of $14.19
to a second UIT. The net proceeds from the two UIT's aggregating $38.0 million
were primarily used to curtail bank debt.
The Company issued 2,157,436 shares of its common stock and received $29.0
million under its Dividend Reinvestment and Stock Purchase Plan (the "Plan")
during the first half of 1998, which included $22.9 million in optional cash
investments and $6.1 million of reinvested distributions.
Depending upon the volume and timing of acquisition activity, the Company
anticipates raising additional debt and equity capital during the next twelve
months to finance capital requirements, while striving to minimize the overall
cost of capital.
Derivative Instruments
The Company has, from time to time, used derivative instruments to synthetically
alter on-balance sheet liabilities to hedge anticipated transactions. Derivative
contracts did not have a material impact on the results of operations during the
three and six months ended June 30, 1998 and 1997.
15
<PAGE>
In order to reduce the interest rate risk associated with the anticipated
issuance of unsecured notes during 1998, the Company entered into a $100 million
(notional amount) fixed pay forward starting swap agreement with a major Wall
Street investment banking firm in July 1997. The transaction allowed the
Company to lock-in a ten year Treasury rate of 6.486% on or before September 9,
1998. This interest rate risk management agreement had an unfavorable position
to the Company of $7.9 million at June 30, 1998.
Funds from Operations
Funds from operations ("FFO") is defined as income before gains (losses) on
sales of investments, minority interest of unitholders in operating partnership
and extraordinary items (computed in accordance with generally accepted
accounting principles) plus real estate depreciation, less preferred dividends
and after adjustment for significant non-recurring items, if any. The Company
computes FFO in accordance with the recommendations set forth by the National
Association of Real Estate Investment Trusts ("NAREIT"). The Company considers
FFO in evaluating property acquisitions and its operating performance, and
believes that FFO should be considered along with, but not as an alternative to,
net income and cash flows as a measure of the Company's operating performance
and liquidity. FFO does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs.
For the three months ended June 30, 1998, FFO increased 22.7% to $35.3 million,
compared with $28.7 million for the same period last year. For the six months
ended June 30, 1998, FFO increased 18.1% to $67.6 million, compared with $57.2
million for the same period last year. The increase in FFO was principally due
to the increased net rental income from the Company's non-mature apartment homes
acquired and developed subsequent to January 1, 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) (in thousands)
----------------------------------- -------------------------------------
1998 1997 % Change 1998 1997 % Change
----------------------------------- -------------------------------------
<S> <C>
Calculation of funds from operations:
Income before gains on sales of investments
and minority interest of unitholders in
operating partnership $ 15,387 $ 13,451 14.4% $ 32,966 $ 28,475 15.8%
Adjustments:
Real estate depreciation 25,548 19,127 33.6% 46,476 35,289 31.7%
Dividends to preferred shareholders (5,653) (3,611) 56.5% (11,303) (6,039) 87.2%
Changes in accounting for internal
acquisition costs -- (220) -- (544) (479) 13.6%
----------------------------------- -------------------------------------
Funds from operations $ 35,282 $ 28,747 22.7% $ 67,595 57,246 18.1%
=================================== =====================================
</TABLE>
Results of Operations
The Company's net income is primarily generated from the operations of its
apartment communities. For purposes of evaluating the Company's comparative
operating performance, the Company categorizes its apartment communities into
two categories, mature and non-mature. For the 1998 versus 1997 comparison,
these communities are as follows: (i) mature--those communities acquired,
developed and stabilized prior to January 1, 1997 and held throughout the first
six months of 1998 and 1997 and (ii) non-mature--those communities acquired,
developed or sold subsequent January 1, 1997.
For the first half of 1998, the Company's apartment operations were divided into
four geographic regions, each of which constitutes a core operating unit. Based
on the total number apartment homes, the Northern Region constitutes 27.6% of
the Company's apartment portfolio and includes Delaware, Maryland, Virginia and
northern North Carolina. The Southern Region constitutes 20.7% of the Company's
portfolio and includes Charlotte, North Carolina, South Carolina, Georgia,
Tennessee and Alabama. The Florida Region includes the entire state of Florida
or 14.1% of the Company's apartment portfolio, while the Western Region
constitutes 37.6% of the Company's apartment portfolio and includes Texas,
Arkansas, Oklahoma, Nevada, New Mexico, Arizona and Washington. For the three
and six months ended June 30, 1998, the Company reported increases over the same
period last year in rental income, income before gains on sales of investments
and minority interest of unitholders in operating partnership and net income.
The non-mature apartment homes provided a substantial portion of the aggregate
reported increases. Compared to the same period last year, net income available
to common shareholders increased $18.3 and $15.1 million for the three and six
months ended June 30, 1998. Net income available to common shareholders for the
three and six months ended June 30, 1998 included aggregate gains of $20.7 ($.20
per share) million and $20.5 million ($.21 per share), respectively, on the
sales of investments. The combination of initially lower returns on newer,
higher quality replacement acquisitions together with the money market returns
earned on escrowed funds required to complete 1031 exchanges had a cost of $.01
per share and $.02 per share for the three and six months ended June 30, 1998,
respectively.
16
<PAGE>
All Apartment Communities
The operating performance of the Company's 264 apartment communities with 71,164
apartment homes for the three and six months ended June 30, 1998, and 218
apartment communities with 59,437 apartment homes for the three and six months
ended June 30, 1997, respectively, is summarized in the chart below (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
<S> <C>
1998 1997 % Change 1998 1997 % Change
--------------------------------- ---------------------------------
Property rental income $ 117,831 $ 94,591 24.6% $ 221,547 $ 183,813 20.5%
Property operating expenses (excluding
depreciation and amortization) (49,144) (40,699) 20.7% (90,026) (78,080) 15.3%
--------------------------------- ---------------------------------
Property operating income $ 68,687 $ 53,892 27.5% $ 131,521 $ 105,733 24.4%
================================= =================================
Weighted average number
of apartment homes 70,726 58,678 20.5% 63,341 57,545 10.1%
Physical occupancy 91.3% 92.4% (1.1%) 91.3% 91.9% (0.6%)
</TABLE>
Due to the acquisition and development of 22,919 apartment homes since January
1, 1997, the weighted average number of apartment homes increased significantly
during both periods presented, resulting in significant increases in property
rental income and property operating expenses for the first half of 1998.
Mature Apartment Communities
The operating performance for the Company's 181 mature apartment communities
with 48,245 apartment homes for the three and six months ended June 30, 1998 is
summarized in total and by geographic region below (dollars in thousands):
Total Mature Operating Performance
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ------------------------------
1998 1997 %Change 1998 1997 % Change
-------------------------------- ------------------------------
<S> <C>
Property rental income $ 81,874 $ 79,118 3.5% $ 162,819 $ 157,089 3.6%
Property operating expenses
(excluding depreciation
and amortization) (33,224) (33,747) (1.5%) (64,547) (65,971) (2.2%)
-------------------------------- ------------------------------
Property operating income $ 48,650 $ 45,371 7.2% $ 98,272 $ 91,118 7.9%
================================ ==============================
Physical occupancy 92.6% 92.6% -- 92.5% 92.2% 0.3%
Average monthly rents $ 599 $ 579 3.5% $ 597 $ 576 3.7%
</TABLE>
Mature Operating Performance (By Geographic Region)
Three Months Ended June 30,
<TABLE>
<CAPTION>
North South Florida West Total
-------------------- ------------------ ------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
-------------------- ------------------ ------------------- -------------------- --------------------
<S> <C>
Property rental income $ 30,830 $ 29,602 $17,991 $ 17,480 $ 15,061 $ 14,416 $ 17,992 $17,620 $ 81,874 $ 79,118
Property operating
expenses (excluding
depreciation and
amortization) (11,124) (11,542) (7,951) (8,020) (6,465) (6,651) (7,684) (7,534) (33,224) (33,747)
--------------------- ------------------ ------------------- -------------------- --------------------
Property operating
income $ 19,706 $ 18,060 $10,040 $ 9,460 $ 8,596 $ 7,765 $ 10,308 $10,086 $ 48,650 $ 45,371
===================== ================== =================== ==========================================
Physical occupancy 92.4% 92.3% 92.3% 91.6% 93.3% 93.9% 92.7% 93.0% 92.6% 92.6%
Average monthly rents $ 615 $ 595 $ 559 $ 544 $ 627 $ 598 $ 592 $ 576 $ 599 $ 579
</TABLE>
17
<PAGE>
Six Months Ended June 30,
<TABLE>
<CAPTION>
North South Florida West Total
-------------------- ------------------ ------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
-------------------- ------------------ ------------------- -------------------- --------------------
<S> <C>
Property rental income $ 60,870 $ 58,944 $ 35,892 $ 34,586 $ 30,094 $ 28,737 $35,963 $ 34,822 $ 162,819 $157,089
Property operating
expenses (excluding
depreciation and
amortization) (21,635) (22,621) (15,389) (15,595) (12,611) (13,193) (14,912) (14,562) (64,547) (65,971)
--------------------- ------------------ ------------------ -------------------- --------------------
Property operating
income $ 39,235 $ 36,323 $ 20,503 $ 18,991 $ 17,483 $ 15,544 $21,051 $ 20,260 $ 98,272 $ 91,118
===================== ================== ================== ==================== ====================
Physical occupancy 91.6% 92.2% 92.4% 90.5% 94.0% 93.8% 92.9% 92.9% 92.5% 92.2%
Average monthly rents $ 614 $ 592 $ 558 $ 543 $ 623 $ 596 $590 $ 572 $ 597 $ 576
</TABLE>
For the six months ended June 30,1998, the Company's mature communities provided
approximately 73.5% of the Company's property rental income and 74.7% of its
property operating income. During the first half 1998, the Company's mature
communities continued to generate strong rent growth. Compared to the same
period last year, total property rental income from these apartment homes grew
3.6%, or $5.7 million, reflecting an increase in average monthly rents of 3.7%
to $597 per month. A portion of the rent growth reflected the impact of upgrades
and revenue enhancing capital expenditures. For the quarter ended June 30, 1998
total property rental income grew 3.5% or $2.8 million, reflecting the 3.5%
increase in average monthly rents to $599 as physical occupancy remained flat
compared to the same period last year. The Company expects to maintain
annualized rent growth in the 3 1/2% range and economic occupancy in the 91% to
93% range during the remainder of 1998.
For the six months ended June 30, 1998, property operating expenses at these
communities decreased 2.2%, or $1.4 million, resulting in a decrease in the
operating expense ratio of 42.0% to 39.6%. This decline is primarily the result
of two factors: (i) lower utility expenses directly attributable to the
Company's water sub-metering initiative and (ii) overall decreases in repairs
and maintenance and other operating expenses. The decreases in repairs and
maintenance and other operating expenses occurred as the Company has begun to
benefit from its upgrade program. In addition, the Company has taken advantage
of economies of scale due to its increased size and centralized purchasing. For
the quarter ended June 30, 1998, rental expenses decreased 1.5% or $0.5 million
due to the same factors discussed above. The Company's objective is to maintain
annualized rental expense growth in the 2% range during the remainder of 1998.
Non-Mature Communities
The operating performance for the three and six months ended June 30, 1998 for
the Company's 83 non-mature communities with 22,919 homes is summarized in the
chart below (dollars in thousands):
Three Months Ended June 30:
<TABLE>
<CAPTION>
Sales Development
1997 Acquisitions 1998 Acquisitions Properties Properties Total Non-Mature
----------------- ---------------------- ----------------- ---------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
----------------- ---------------------- ----------------- ---------------- --------------------
<S> <C>
Property rental income $ 14,237 $ 5,330 $ 18,589 $ -- $ 1,138 $ 9,618 $ 1,993 $ 525 $ 35,957 $ 15,473
Property operating
expenses (excluding
depreciation and
amortization) (6,143) (1,869) (8,288) -- (714) (4,845) (775) (238) (15,920) (6,952)
------------------ ---------------------- ----------------- ---------------- ---------------------
Property operating
income $ 8,094 $ 3,461 $ 10,301 $ -- $ 424 $ 4,773 $ 1,218 $ 287 $ 20,037 $ 8,521
================== ====================== ================= ================ =====================
</TABLE>
18
<PAGE>
Six Months Ended June 30:
<TABLE>
<CAPTION>
Sales Development
1997 Acquisitions 1998 Acquisitions Properties Properties Total Non-Mature
----------------- ---------------------- ----------------- ---------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
----------------- ---------------------- ----------------- ---------------- --------------------
<S> <C>
Property rental income $ 28,177 $ 6,433 $ 21,377 $ -- $ 5,461 $ 19,432 $ 3,713 $ 859 $ 58,728 $26,724
Property operating
expenses (excluding
depreciation and
amortization) (11,997) (2,186) (9,215) -- (2,759) (9,582) (1,508) (341) (25,479) (12,109)
------------------- --------------------- ------------------ ---------------- --------------------
Property operating
income $ 16,180 $ 4,247 $ 12,162 $ -- $ 2,702 $ 9,850 $ 2,205 $ 518 $ 33,249 $14,615
==================== ===================== ================== ================ =====================
</TABLE>
For the six months ended June 30, 1998, the Company's non-mature communities
provided approximately 26.5% of the Company's property rental income and 25.3%
of its property operating income. For the quarter ended June 30, 1998, these
communities had physical occupancy of 88.6% (including Development Properties
undergoing lease-up) and an operating margin of 55.7%. For the six months ended
June 30, 1998, these communities had physical occupancy of 88.2% (including
Development Properties undergoing lease-up) and an operating margin of 56.6%.
1997 Acquisitions
The 27 communities containing 8,524 apartment homes (net of one resold) included
in this category had average monthly rental rates of $597, physical occupancy of
90.8% and an operating margin of 57.4% for the first half of 1998. For the
second quarter of 1998, these communities had average monthly rental rates of
$599, physical occupancy of 91.5% and an operating margin of 56.9%. The
annualized return on investment for these communities for the six months ended
June 30, 1998, on an average investment of approximately $357 million, was 9.3%.
1998 Acquisitions
Included in this category are the following: (i) the 17 communities with 5,682
apartment homes acquired by the Company during the first six months of 1998
which are projected to have a first year return on investment in the 9% to
9 1/2% range and (ii) the 39 communities with 7,550 apartment homes included in
the ASR portfolio acquired on March 27, 1998 which are projected to have a first
year return on investment in the 9% range. On an average investment of $543.9
million, these communities provided a 9.0% return on investment for the three
and six months ended June 30, 1998.
Sales
Included in this category are the 29 communities with 7,518 apartment homes sold
as part of the Company's disposition program (see Disposition of investments
under Liquidity and Capital Resources) since January 1, 1997 (17 communities
with 4,948 apartment homes were sold during the first half of 1998).
Development
This represents the 1,158 homes developed at various times since January 1, 1997
which includes one new apartment community and seven additional phases to
existing communities. These communities did not have a material impact on the
results of operations for the three and six months ended June 30,1998.
Real Estate Depreciation
Real estate depreciation increased $6.4 million or 33.6% and $11.2 million or
31.7% for the three and six months ended June 30, 1998, respectively over the
same periods last year. These increases are directly attributable to the
addition of depreciable real estate assets as a result of the Company's
acquisition, development and capital expenditure programs.
Interest Expense
Interest expense increased $6.0 million and $9.6 million for the three and six
months ended June 30, 1998, respectively over the same periods last year. The
weighted average amount of debt employed during the first six months of 1998 was
higher than it was for the same period during 1997 ($1.4 billion in 1998 versus
$1.1 billion in 1997). For both the three and six months ended June 30, 1998,
the weighted average interest rate on this debt was slightly lower than it was
during the same periods last year, decreasing from 7.5% in 1997 to 7.4% in 1998.
For the quarter ended June 30, 1998, the weighted average amount of debt
outstanding was higher than the same period last year ($1.5 billion in 1998
versus $1.1 billion in 1997). For the three and six months ended June 30, 1998,
total interest capitalized was $777,000 and $1.3 million, respectively.
19
<PAGE>
General and Administrative
During the three and six months ended June 30, 1998, general and administrative
expenses increased by $719,000 and $965,000 over the same periods last year due
to the increased size of the Company. In 1998, the Company incurred increases in
most of its general and administrative expense categories, as it invested
heavily in its personnel and technological infrastructure as part of a strategic
plan to position the Company for future growth. Despite the significant
improvement of its infrastructure, the Company has been able to keep general and
administrative expenses remained relatively flat year over year as a percentage
of rental income.
Inflation
The Company believes that the direct effects of inflation on the Company's
operations have been inconsequential.
20
<PAGE>
PART II
Item 1. LEGAL PROCEEDINGS
Neither the Company nor any of its apartment communities is presently
subject to any material litigation nor, to the Company's knowledge, is any
litigation threatened against the Company or any of the communities, other
than routine actions arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and all of which
collectively are not expected to have a material adverse effect on the
business or financial condition or results of operations of the Company.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULT UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying index to exhibits are filed as
part of this quarterly report.
(b) A Form 8-K dated March 27, 1998 was filed with the Securities and
Exchange Commission on April 13, 1998. The filing reported the
merger of ASR Investments Corporation into a wholly-owned
subsidiary of the Company on March 27, 1998. The Form 8-K was
subsequently amended by Form 8-K/A No. 1 which was filed with the
Securities and Exchange Commission on June 12, 1998. This Form
8-K/A contained the audited financial statements of ASR Investment
Corporation for the year ended December 31, 1997.
A Form 8-K dated June 9, 1998 was filed with the Securities and
Exchange Commission on June 24, 1998. The filing reported the
acquisition by the Company of properties which were in the
aggregate "significant".
21
<PAGE>
EXHIBIT INDEX
Item 6 (a)
The exhibits listed below are filed as part of this quarterly
report. References under the caption ALocation@ to exhibits, forms, or
other filings indicate that the form or other filing has been filed, that the
indexed exhibit and the exhibit referred to are the same and that the
exhibit referred to is incorporated by reference.
<TABLE>
<CAPTION>
Exhibit Description Location
- ------- ----------- --------------------------------------
<S> <C>
2 Agreement and Plan of Merger dated Exhibit 2(a) to the Company's Form S-4 Registration
as of December 19, 1997, between Statement (Registration No. 333-45305) filed with
the Company, ASR Investment the Commission on January 30, 1998.
Corporation and ASR Acquisition Sub,
Inc.
3(a) Restated Articles of Incorporation Exhibit 4(b) to the Company's Form S-3 Registration
Statement (Registration No. 333-44463) filed
with the Commission on January 16, 1998.
3(a)(i) Amendment of Articles of Exhibit 3 to the Company's Form 8-A
Incorporation Registration Statement dated February 4,
1998.
3(b) Restated By-Laws Exhibit 3(b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997.
4(i)(a) Specimen Common Stock Exhibit 4(i) to the Company's Annual Report
Certificate on Form 10-K for the year ended December 31, 1993.
4(i)(b) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A
of 9 1/4% Series A Cumulative Registration Statement dated April 24, 1995.
Redeemable Preferred Stock
4(i)(c) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A
of 8.60% Series B Cumulative Registration Statement dated June 11, 1997.
Redeemable Preferred Stock
4(i)(d) Rights Agreement dated as of Exhibit 1 to the Company's Form 8-A
January 27, 1998, between the Company Registration Statement dated February 4, 1998.
and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent.
4(i)(e) Form of Rights Certificate Exhibit 4(e) to the Company's Form 8-A
Registration Statement dated February 4, 1998.
4(ii)(a) Loan Agreement dated as of Exhibit 6(c)(i) to the Company's Form 8-A
November 7, 1991, between the Registration Statement dated April 19, 1990.
Company and Aid Association for
Lutherans
4(ii)(e) Note Purchase Agreement dated Exhibit 6(c)(5) to the Company's Form 8-A
as of February 15, 1993, between Registration Statement dated April 19, 1990.
the Company and CIGNA Property
and Casualty Insurance Company,
Connecticut General Life Insurance
Company, Connecticut General Life
Insurance Company, on behalf of
one or more separate accounts,
Insurance Company of North
America, Principal Mutual Life
Insurance Company and Aid
Association for Lutherans
10(i) Employment Agreement between Exhibit 10(v)(i) to the Company's Annual Report
the Company and John P. McCann on Form 10-K for the year ended December 31, 1982.
dated October 29, 1982.
10(ii) Employment Agreement between Exhibit 10(v)(ii) to the Company's Annual Report
the Company and James Dolphin on Form 10-K for the year ended December 31, 1982.
dated October 29, 1982.
10(iii) Employment Agreement between Exhibit 10(iv) to the Company's Annual
the Company and John S. Schneider Report on Form 10-K for the year ended
dated December 14, 1996. December 31, 1996.
10(iv) 1985 Stock Option Plan, Filed herewith.
as amended.
10(v) 1991 Stock Purchase and Loan Exhibit 10(viii) to the Company's Quarterly Report
Plan. on Form 10-Q for the quarter ended March 31, 1997.
10(vi) Second Amended and Restated Exhibit 10(ix) to the Company's Quarterly Report on
Agreement of Limited Partnership of Form 10-Q for the quarter ended September 30,1997.
United Dominion Realty, L.P.
Dated as of August 30, 1997.
10(vi)(a) Subordination Agreement dated Exhibit 10(vi)(a) to the Company's Form 10-Q for
April 16, 1998, between the the quarter ended March 31, 1998.
Company and United Dominion
Realty, L.P.
12 Computation of Ratio of Earnings Filed herewith.
to Fixed Charges.
27 Financial Data Schedule Filed herewith.
</TABLE>
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Quarterly Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
United Dominion Realty Trust, Inc.
(registrant)
Date: August 14, 1998 /s/ James Dolphin
- ------------------------------------ -----------------
James Dolphin
Executive Vice President, Chief
Financial Officer and Chief
Accounting Officer
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
United Dominion Realty Trust, Inc.
(registrant)
Date: August 14, 1998
- ---------------------------------- -------------------------------
James Dolphin
Executive Vice President, Chief
Financial Officer and Chief
Accounting Officer
<PAGE>
UNITED DOMINION REALITY TRUST, INC. 1985 STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
1.01 Affiliate means any "subsidiary" or "parent" corporation (within
the meaning of Section 422A of the Code) of the Company.
1.02 Agreement means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying the terms
and conditions of an Option granted to such Participant.
1.03 Board means the Board of Directors of the Company.
1.04 Code means the Internal Revenue Code of 1954, as amended, and the
Internal Revenue Code of 1986, as amended.
1.05 Committee means the Compensation Committee of the Board.
1.06 Common Stock means the Common Stock of the Company.
1.07 Company means United Dominion Realty Trust, Inc.
1.08 Director means a member of the Board who is not employed by the Company
or an Affiliate.
1.09 Director Option means an Option granted to a Director.
1.10 ERISA means the Employee Retirement Income Security Act of 1974, as
amended.
1.11 Fair Market Value means, on any given date, the closing sale price
of the Common Stock on the NYSE on such date, or, if the NYSE shall be closed
on such date, or if the Common Stock is not traded on the NYSE on such date,
the next preceding date on which the NYSE shall have been open and the Common
Stock traded thereon.
1.12 NYSE means the New York Stock Exchange.
1.13 Option means a stock option that entitles the holder to purchase
from the Company a stated number of shares of Common Stock, at the price set
forth in an Agreement.
1.14 Participant means an employee of the Company or an Affiliate,
including such an employee who is also a member of the Board, who satisfies
requirements of Article IV and is selected by the Committee to receive an
Option.
<PAGE>
1.15 Plan means the United Dominion Realty Trust, Inc. 1985 Stock Option
Plan.
1.16 Stated Termination Date means the date specified in or determined
pursuant to an Agreement on which the Option which is the subject of such
Agreement terminates.
1.17 Ten Percent Shareholder means any individual owning more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of an Affiliate. An individual shall be considered to own any
voting stock owned (directly or indirectly) by or for brothers, sisters,
spouse, ancestors or lineal descendants and shall be considered to own
proportionately any voting stock owned (directly or indirectly) by or for a
corporation, partnership, estate or trust of which such individual is a
shareholder, partner or beneficiary.
ARTICLE II
PURPOSES
The Plan is intended to assist the Company in recruiting and retaining
Directors and key employees with ability and initiative by enabling Directors
and employees who contribute significantly to the Company or an Affiliate to
participate in its future success and to associate their interests with
those of the Company. It is further intended that Options granted under the
Plan shall constitute "incentive stock options" within the meaning of
Section 422A of the Code, but no Option shall be invalid for failure to qualify
as an incentive stock option. The proceeds received by the Company from
the sale of Common Stock pursuant to the Plan shall be used for general
corporate purposes.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall have
authority to grant Options upon such terms (not inconsistent with the
provisions of the Plan) as it may consider appropriate. Such terms may include
conditions (in addition to those contained in the Plan) upon the
exercisability of all or any part of an Option. Notwithstanding any such
conditions, the Committee, in its discretion, may accelerate the time at
which any Option, other than a Director Option, may be exercised; provided,
however, that no acceleration shall affect the applicability of Section 7.04
(relating to the order in which incentive stock options may be exercised)
or Section 4.02 (relating to the maximum number of shares for which an
incentive stock option may be exercisable in any calendar year). In addition,
the Committee shall have complete authority to interpret all provisions of the
Plan; to prescribe the form of Agreements; to adopt, amend, and rescind rules
and regulations pertaining to the administration of the Plan; and to make all
other determinations necessary or advisable for the administration of the
Plan. The express grant in the Plan of any specific power to the Committee
shall not be construed as limiting the power or authority of the Committee. Any
decision made, or action taken, by the Committee in connection with the
administration of the Plan shall be final and conclusive. No member of the
Committee shall be liable for any act done in good faith with respect to the
Plan or any Agreement or Option. All expenses of administering the Plan
shall be borne by the Company.
<PAGE>
ARTICLE IV
ELIGIBILITY
4.01 General. Any employee (including an employee who is a member of
the Board)of the Company or of any Affiliate (including any corporation
that becomes an Affiliate after the adoption of the Plan) who, in the
judgment of the Committee, has contributed or can be expected to
contribute to the profits or growth of the Company or such Affiliate may, and
each Director will, be granted one or more Options. All Options granted under
the Plan shall be evidenced by Agreements that shall be subject to applicable
provisions of the Plan and to such other provisions consistent with the Plan
as the Committee may adopt. No Participant may be granted incentive stock
options (under all incentive stock option plans of the Company and Affiliates)
which are first exercisable in any calendar year for stock having an
aggregate fair market value (determined as of the date an option is granted)
exceeding $100,000.
4.02 Grants to Employees. The Committee will designate employees to
whom Options are to be granted and will specify the number of shares of Common
Stock subject to each grant.
4.03 Director Options. Each Director will be granted Options to
purchase 2,000 shares of Common Stock on each date each director is elected or
re-elected to the Board. The option price of such Director Options will in
each case be the Fair Market Value on the date of grant and will be payable
only in cash. Such Director Options will be exercisable for a period of ten
(10) years from the date of grant (subject to earlier termination as
described below) and will be immediately exercisable in whole or from time to
time in part.
In addition, on the date of his or her first being elected to the Board, a
Director will be granted options to purchase 5,000 shares of Common Stock
at the Fair Market Value on the date of grant. The option price of such
Director Options will be payable only in cash; such Director Options will be
exercisable for a period of five (5) years from the date of grant (subject to
earlier termination as described below) and will be immediately
exercisable in whole or from time to time in part.
Notwithstanding anything to the contrary in this Section 4.03, a Director
first elected to the Board pursuant to any agreement relating to the
acquisition, by merger or otherwise, of assets by the Company or any Affiliate
or to the sale by the Company of its securities will not be granted Options
upon being first elected, but such Director will be granted Options to
purchase 2,000 shares of Common Stock as provided herein upon being
re-elected to the Board.
<PAGE>
Options granted to a Director will terminate 30 days after the Director
resigns or is removed from the Board, or 30 days after the annual meeting of
shareholders at which the Director's term expires, if the Director does not
stand or is not nominated for re-election or retires at that meeting.
Notwithstanding the foregoing, if, at the date of such resignation or
removal or at the date of such annual meeting of shareholders, as the case
may be, such Director has completed at least ten (10) years of service on the
Board (including, as such service, service as a director of a corporation
whose assets are acquired by the Company, by merger or otherwise), Options
held by such Director on such date will terminate upon the earlier of (i) the
second anniversary of such date or (ii) the Termination Date of such Options.
The provisions of this Section 4.03 will control in the event of any
inconsistency with other provisions of the Plan and may not be varied by the
Committee in any Agreement.
ARTICLE V
STOCK SUBJECT TO OPTIONS
The maximum number of shares of Common Stock that may be issued pursuant to
Options granted under the Plan at any time is (i) 8% of the number of shares of
Common Stock issued and outstanding at that time, less (ii) the number of
shares subject to outstanding Options at that time, provided that the maximum
aggregate number of shares of Common Stock that may be issued pursuant to
Options granted under the Plan is 12,000,000 (subject to adjustment as
provided in Article IX). If an Option is terminated, in whole or in part,
for any reason other than its exercise, the number of shares of Common Stock
allocated to the Option or portion thereof may be reallocated to other Options
to be granted under the Plan.
ARTICLE VI
OPTION PRICE
The price per share for Common Stock purchased by the exercise of any
Option granted under the Plan shall be determined by the Committee on the date
the Option is granted; provided, however, that the price per share shall not
be less than the Fair Market Value on the date of grant in the case of
Option that is an incentive stock option, and that in the case of a Director
Option the price per share shall be the Fair Market Value. In addition,
the price per share shall not be less than 110% of such Fair Market Value in
the case of an Option that is an incentive stock granted to a Participant who is
a Ten Percent Shareholder on the date the Option is granted.
ARTICLE VII
EXERCISE OF OPTIONS
7.01 Maximum Option Period. No Option shall be exercisable after the
expiration of ten years from the date the Option was granted. The terms of any
Option not prescribed by the Plan may provide that it is exercisable for a
period less than such maximum period.
<PAGE>
7.02 Nontransferability. Any Option granted under the Plan shall be
nontransferable except by will or by the laws of descent and distribution and,
during the lifetime of the Participant to whom the Option is granted, may be
exercised only by the Participant. No right or interest of a Participant in
any Option shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
7.03 Employee Status. For purposes of determining the applicability of
Section 422A of the Code and Section 7.01, the Board may decide in each case to
what extent leaves of absence for governmental or military service, illness,
temporary disability, or other reasons shall not be deemed interruptions of
continuous employment.
7.04 Nonexercisability. While Previously Granted Option Outstanding. No
Option which is an incentive stock option and which was granted before January
1, 1987 shall be exercisable by a Participant while that Participant has
outstanding (within the meaning of Subsection 422A(c)(7) of the Code) any
option which was granted before the Option was granted and which is an incentive
stock option to purchase stock in the Company, in a corporation that (at the
time the Option was granted) was an Affiliate, or in a predecessor of any of
such corporations.
ARTICLE VIII
METHOD OF EXERCISE
8.01 Exercise. Subject to the provisions of Articles VII and X, an Option
other than a Director Option may be exercised in whole at any time or in
part from time to time at such times and in compliance with such
requirements as the Committee shall determine. An Option granted under the
Plan may be exercised with respect to any number of whole shares less than the
full number for which the Option could be exercised. Such partial
exercise of an Option shall not affect the right to exercise the Option from
time to time in accordance with the Plan with respect to remaining shares
subject to the Option.
8.02 Payment. Payment of the Option price shall be made in cash or,
in the case of Options other than Director Options, a cash equivalent
acceptable to the Committee. If the Agreement provides, payment of all or a
part of the Option price may be made by surrendering shares of Common Stock
to the Company. If Common Stock is used to pay all or part of the Option
price, the shares surrendered must have a Fair Market Value (determined as of
the day preceding the date of exercise) that is not less than such price or part
thereof.
8.03 Installment Payment. If the Agreement provides, and if the
Participant is employed by the Company on the date the Option is exercised,
payment of all or part of the Option price may be made in installments. In
that event, the Company shall lend the Participant an amount equal to not
more than ninety percent (90%) of the Option price of the shares acquired by
the exercise of the Option. This amount shall be evidenced by the
Participant's promissory note and shall be payable in not more than five equal
annual installments, unless the amount of the loan exceeds the maximum loan
value for the shares purchased, which value shall be established from time to
time by regulations of the Board of Governors of the Federal Reserve System
(the "Fed"). In that event, the note shall be payable in equal quarterly
installments over a period of time not to exceed five years. The Committee,
however, may vary such terms and make such other provisions concerning the
unpaid balance of such purchase price in the case of hardship, subsequent
termination of employment, absence on military or government service, or
subsequent death of the Participant as in its discretion are necessary or
advisable in order to protect the Company, promote the purposes of the
Plan and comply with regulations of the Fed relating to securities credit
transactions.
<PAGE>
The Participant shall pay interest on the unpaid balance at the minimum rate
necessary to avoid imputed interest or original issue discount under the
Code. All shares acquired with cash borrowed from the Company shall be
pledged to the Company as security for the repayment thereof. In the
discretion of the Committee, shares may be released from such pledge
proportionately as payments on the note (together with interest) are made,
provided the release of such shares complies with the regulations of the Fed
relating to securities credit transactions then applicable. While shares
are so pledged, and so long as there has been no default in the installment
payments, such shares shall remain registered in the name of the
Participant, and he shall have the right to vote such shares and to receive all
dividends thereon.
8.04 Shareholders' Rights. No Participant shall, as a result of
receiving any Option, have any rights as a shareholder until the date he
exercises such Option.
ARTICLE IX
ADJUSTMENT UPON CHANGE IN COMMON STOCK
Should the Company effect one or more stock dividends, stock split-ups,
subdivisions or consolidations of shares, or other similar changes in
capitalization, the maximum number of shares as to which Options may be granted
under the Plan shall be proportionately adjusted and the terms of options
shall be adjusted as the Board shall determine to be equitably required.
Any determination made under this Article IX by the Board shall be final and
conclusive.
The issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property or for
labor or services, either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or obligations
of the Company convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to,
Options.
<PAGE>
ARTICLE X
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
No Option shall be exercisable, no Common Stock shall be issued, no
certificates for shares of Common Stock shall be delivered, and no payment
shall be made under the Plan except in compliance with all applicable federal
and state laws and regulations and rules of all domestic stock exchanges on
which the Common Stock may be listed. The Company shall have the right to rely
on the opinion of its counsel as to such compliance. Any share certificate
issued to evidence Common Stock for which an Option is exercised may bear
such legends and statements as the Board may deem advisable to assure
compliance with federal and state laws and regulations. No Option shall be
exercised, no Common Stock shall be issued, no certificate for shares shall be
delivered, and no payment shall be made under the Plan until the Company has
obtained such consent or approval as the Board may deem advisable from
regulatory bodies having jurisdiction over such matters.
ARTICLE XI
GENERAL PROVISIONS
11.01 Effect on Employment. Neither the adoption of the Plan, its
operation, nor any documents describing or referring to the Plan (or any part
thereof) shall confer upon any Board member any right to continue on the Board
or to confer upon any employee any right to continue in the employ of the
Company or an Affiliate or in any way affect any right and power of the
Company or an Affiliate to remove any Board member or terminate the
employment of any employee at any time with or without assigning a reason
thereof.
11.02 Unfunded Plan. The Plan, insofar as it provides for grants, shall
be unfunded, and the Company shall not be required to segregate any assets
that may at any time be represented by grants under the Plan. Any liability
of the Company to any person with respect to any grant under the Plan shall
be based solely upon any contractual obligations that may be created pursuant
to the Plan. No such obligation of the Company shall be deemed to be secured
by any pledge of, or other encumbrance on, any property of the Company.
11.03 Rules of Construction. Headings are given to the articles and
sections of the Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.
<PAGE>
ARTICLE XII
AMENDMENT
The Board may amend or terminate the Plan from time to time; provided,
however, that no amendment may become effective until shareholder approval
is obtained if the amendment (i) increases the aggregate number of shares that
may be issued under Options or (ii) changes the class of persons eligible to
become Participants or (iii) otherwise materially increase the benefits
accruing to Participants. No amendment shall, without a Participant's consent,
adversely affect any rights of such Participant under any Option outstanding
at the time such amendment is made.
ARTICLE XIII
DURATION OF PLAN
No Option may be granted under the Plan after December 31, 2002. Options
granted before such date shall remain valid in accordance with their terms.
ARTICLE XIV
EFFECTIVE DATE OF PLAN
Options may be granted under the Plan upon its adoption by the Board,
provided that no Option will be effective unless the Plan is approved (at a
duly held shareholders' meeting within twelve months of such adoption) by
shareholders holding a majority of the Company's outstanding voting stock.
EXHIBIT 12
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- -------------- -------------- --------------
<S> <C>
Net income $35,005 $14,677 $52,189 $31,790
Add:
Portion of rents representative
of the interest factor 133 105 246 194
Interest on indebtedness 25,736 19,769 48,561 38,919
------------- -------------- -------------- --------------
Earnings $60,874 $34,551 $100,996 $70,903
============= ============== ============== ==============
Fixed charges and preferred stock dividend:
Interest on indebtedness $25,736 $19,769 $48,561 $38,919
Capitalized interest 777 721 1,312 1,230
Portion of rents representative
of the interest factor 133 105 246 194
------------- -------------- -------------- --------------
Fixed charges 26,646 20,595 50,119 40,343
------------- -------------- -------------- --------------
Add:
Preferred stock dividend 5,653 3,611 11,303 6,039
------------- -------------- -------------- --------------
Combined fixed charges and
preferred stock dividend $32,299 $24,206 $61,422 $46,382
============= ============== ============== ==============
Ratio of earnings to fixed charges 22.8x 1.68x 2.02x 1.76x
Ratio of earnings to combined fixed charges
and preferred stock dividend 1.88 1.43 1.64 1.53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,575
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 97,796
<PP&E> 2,962,632
<DEPRECIATION> 242,803
<TOTAL-ASSETS> 2,829,200
<CURRENT-LIABILITIES> 102,952
<BONDS> 1,451,129
0
255,000
<COMMON> 101,988
<OTHER-SE> 866,456
<TOTAL-LIABILITY-AND-EQUITY> 2,829,200
<SALES> 222,275
<TOTAL-REVENUES> 224,434
<CGS> 0
<TOTAL-COSTS> 90,272
<OTHER-EXPENSES> 52,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,561
<INCOME-PRETAX> 52,189
<INCOME-TAX> 0
<INCOME-CONTINUING> 52,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,189
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
