<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 1-10272
ARCHSTONE COMMUNITIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 74-6056896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7670 South Chester Street, 80112
Englewood, Colorado (Zip Code)
(Address of principal executive offices)
(303) 708-5959
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days.
Yes X No
------- -------
The number of the Registrant's common shares outstanding as of November 10, 1998
was 143,291,864.
1
<PAGE>
ARCHSTONE COMMUNITIES TRUST
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets--September 30, 1998 (unaudited) and December
31, 1997.................................................................. 3
Condensed Statements of Operations--Three and nine months ended September
30, 1998 and 1997 (unaudited)............................................ 4
Condensed Statement of Shareholders' Equity--Nine months ended September
30, 1998 (unaudited)..................................................... 5
Condensed Statements of Cash Flows--Nine months ended September 30, 1998
and 1997 (unaudited)..................................................... 6
Notes to Condensed Financial Statements (unaudited)......................... 7
Independent Accountants' Review Report...................................... 18
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 19
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................... 35
</TABLE>
2
<PAGE>
ARCHSTONE COMMUNITIES TRUST
CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate.................................................................... $4,723,920 $2,604,919
Less accumulated depreciation.................................................. 181,992 129,718
------------- ------------
4,541,928 2,475,201
Homestead convertible mortgage notes receivable................................ 202,366 272,556
Other mortgage notes receivable................................................ 10,745 12,682
------------- ------------
Net investments........................................................... 4,755,039 2,760,439
Cash and cash equivalents...................................................... 9,239 4,927
Restricted cash in tax-deferred exchange escrow................................ 86,315 --
Other assets................................................................... 72,999 40,320
------------- ------------
Total assets.............................................................. $4,923,592 $2,805,686
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unsecured credit facilities.................................................. $ 673,753 $ 231,500
Long-Term Unsecured Debt..................................................... 955,244 630,000
Mortgages payable............................................................ 433,591 265,652
Distributions payable........................................................ -- 31,495
Accounts payable............................................................. 60,771 35,352
Accrued expenses and other liabilities....................................... 109,239 71,251
------------- ------------
Total liabilities......................................................... 2,232,598 1,265,250
------------- ------------
Minority interest.............................................................. 21,779 --
------------- ------------
Shareholders' equity:
Series A Preferred Shares (4,820,915 convertible shares in 1998 and
5,408,393 in 1997; stated liquidation preference of $25 per share)........ 120,523 135,210
Series B Preferred Shares (4,200,000 shares; stated liquidation preference
of $25 per share).......................................................... 105,000 105,000
Series C Preferred Shares (2,000,000 shares; stated liquidation preference
of $25 per share).......................................................... 50,000 --
Common Shares (143,182,781 shares in 1998 and 92,633,724 in 1997)............ 143,183 92,634
Additional paid-in capital................................................... 2,373,520 1,268,741
Employee share purchase notes................................................ (27,382) (17,238)
Unrealized holding gain on Homestead convertible mortgage notes receivable... -- 83,794
Distributions in excess of net earnings...................................... (95,629) (127,705)
------------- ------------
Total shareholders' equity................................................ 2,669,215 1,540,436
------------- ------------
Total liabilities and shareholders' equity................................ $4,923,592 $2,805,686
============= ============
</TABLE>
The accompanying notes are an integral part of the
condensed financial statements.
3
<PAGE>
ARCHSTONE COMMUNITIES TRUST
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
Rental revenues..................................................... $151,516 $85,760 $331,621 $247,122
Interest income on Homestead convertible mortgage notes............. 5,825 4,430 17,065 11,404
Other income........................................................ 1,704 686 4,146 2,024
-------- ------- -------- --------
159,045 90,876 352,832 260,550
-------- ------- -------- --------
Expenses:
Rental expenses (including $2,139 and $7,642 paid to affiliates for
the three and nine months ended September 30, 1997, respectively) 43,300 24,817 90,823 71,004
Real estate taxes................................................... 12,971 7,135 28,623 21,059
Depreciation on real estate investments............................. 31,903 13,364 64,276 38,052
Interest............................................................ 24,522 15,943 56,151 45,702
General and administrative:
Paid to affiliate................................................ 1,255 3,945 2,994 13,268
Other............................................................ 3,881 723 8,005 1,311
Nonrecurring expenses:
Branding strategy and Atlantic Merger integration................ 2,193 -- 2,193 --
Costs incurred in acquiring Management Companies from an
affiliate..................................................... -- 71,707 -- 71,707
Other............................................................... 1,059 99 4,459 1,963
-------- ------- -------- --------
121,084 137,733 257,524 264,066
-------- ------- -------- --------
Earnings (loss) from operations....................................... 37,961 (46,857) 95,308 (3,516)
Gains on dispositions of depreciated real estate, net............... 21,204 10,723 36,688 47,930
-------- ------- -------- --------
Earnings (loss) before extraordinary item............................. 59,165 (36,134) 131,996 44,414
Less: Extraordinary item write-off of unamortized loan costs...... 1,497 -- 1,497 --
-------- ------- -------- --------
Net earnings (loss)................................................... 57,668 (36,134) 130,499 44,414
Less: Preferred Share dividends.................................... 5,723 4,785 15,192 14,625
-------- ------- -------- --------
Net earnings (loss) attributable to Common Shares -- Basic............ $ 51,945 $(40,919) $115,307 $ 29,789
======== ======= ======== ========
Weighted average Common Shares outstanding -- Basic................... 143,059 81,506 110,278 78,280
-------- ------- -------- --------
Weighted average Common Shares outstanding -- Diluted................. 150,600 81,540 117,492 78,314
-------- ------- -------- --------
Earnings (loss) before extraordinary item per Common Share:
Basic and Diluted................................................... $ 0.37 $ (0.50) $ 1.06 $ 0.38
======== ======= ======== ========
Net earnings (loss) per Common Share:
Basic............................................................... $ 0.36 $ (0.50) $ 1.05 $ 0.38
======== ======= ======== ========
Diluted............................................................. $ 0.36 $ (0.50) $ 1.04 $ 0.38
======== ======= ======== ========
Distributions paid per Common Share................................... $ 0.355 $ 0.325 $ 1.035 $ 0.975
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
4
<PAGE>
ARCHSTONE COMMUNITIES TRUST
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 1998
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Shares of beneficial
interest, $1.00 par value
-------------------------------------------------------
Series A Series B Series C
Preferred Preferred Preferred Common
Shares at Shares at Shares at Shares
aggregate aggregate aggregate at
liquidation liquidation liquidation par
preference preference preference value
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1997........... $135,210 $105,000 $ -- $ 92,634
Comprehensive income:
Net earnings........................ -- -- -- --
Preferred Share dividends paid...... -- -- -- --
Other comprehensive income -
Change in unrealized holding
gain on Homestead convertible
mortgage notes receivable......... -- -- -- --
Comprehensive income attributable
to Common Shares....................
Common Share distributions............. -- -- -- --
Atlantic Merger........................ -- -- 50,000 47,752
Sale of shares, net of expenses........ -- -- -- 2,050
Conversion of 588,678 Series A
Preferred Shares into 792,849
Common Shares........................ (14,687) -- -- 793
Other, net............................. -- -- -- (46)
--------- -------- ------- ---------
Balances at September 30, 1998.......... $120,523 $105,000 $50,000 $143,183
========= ======== ======= =========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
holding
Employee gain on
Additional share Homestead Distributions
paid-in purchase convertible in excess of
capital notes mortgages net earnings Total
---------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997........... $1,268,741 $(17,238) $ 83,794 $(127,705) $1,540,436
----------
Comprehensive income:
Net earnings........................ -- -- -- 130,499 130,499
Preferred Share dividends paid...... -- -- -- (15,192) (15,192)
Other comprehensive income -
Change in unrealized holding
gain on Homestead convertible
mortgage notes receivable......... -- -- (83,794) -- (83,794)
----------
Comprehensive income attributable
to Common Shares.................... 31,513
----------
Common Share distributions............. -- -- -- (83,231) (83,231)
Atlantic Merger........................ 1,049,751 (11,338) -- -- 1,136,165
Sale of shares, net of expenses........ 41,959 -- -- -- 44,009
Conversion of 588,678 Series A
Preferred Shares into 792,849
Common Shares........................ 13,894 -- -- -- --
Other, net............................. (825) 1,194 -- -- 323
---------- --------- ----------- ------------- ----------
Balances at September 30, 1998.......... $2,373,520 $(27,382) $ -- $ (95,629) $2,669,215
========== ========= =========== ============= ==========
</TABLE>
The accompanying notes are an integral part of the
condensed financial statements.
5
<PAGE>
ARCHSTONE COMMUNITIES TRUST
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Operating activities:
Net earnings............................................................. $ 130,499 $ 44,414
Adjustments to reconcile net earnings to net cash flow provided
by operating activities:
Depreciation and amortization.......................................... 64,470 39,334
Gains on dispositions of depreciated real estate, net.................. (36,688) (47,930)
Provision for possible loss on investments............................. 3,000 1,500
Extraordinary item--write-off of unamortized loan costs................ 1,497 --
Costs incurred in acquiring Management Companies from an affiliate..... -- 71,707
Change in accounts payable............................................... (3,955) 1,097
Change in accrued expenses and other liabilities......................... 10,430 3,771
Change in other operating assets......................................... (15,362) (12,225)
--------- ---------
Net cash flow provided by operating activities......................... 153,891 101,668
--------- ---------
Investing activities:
Real estate investments.................................................. (437,543) (468,720)
Proceeds from dispositions, net of closing costs......................... 221,177 284,191
Cash acquired in Atlantic Merger......................................... 79,359 --
Change in tax-deferred exchange escrow................................... (86,315) (22,918)
Funding of Homestead convertible mortgage notes receivable............... (11,895) (61,250)
Advances on other mortgage notes receivable.............................. (1,600) (3,763)
Principal repayments on other mortgage notes receivable.................. 1,238 1,443
--------- ---------
Net cash flow used in investing activities............................. (235,579) (271,017)
--------- ---------
Financing activities:
Proceeds from Long-Term Unsecured Debt................................... 171,200 50,000
Debt issuance costs incurred............................................. (8,999) (1,424)
Principal prepayment of mortgages payable................................ (39,950) (26,543)
Regularly scheduled principal payments on mortgages payable.............. (3,181) (2,225)
Proceeds from unsecured credit facilities................................ 768,529 884,782
Principal payments on unsecured credit facilities........................ (716,048) (895,549)
Proceeds from sale of Common Shares, net................................. 44,009 249,223
Cash distributions paid on Common Shares................................. (114,726) (75,472)
Cash dividends paid on Preferred Shares.................................. (15,192) (14,625)
Other.................................................................... 358 1,753
--------- ---------
Net cash flow provided by financing activities......................... 86,000 169,920
--------- ---------
Net change in cash and cash equivalents.................................... 4,312 571
Cash and cash equivalents at beginning of period........................... 4,927 5,601
--------- ---------
Cash and cash equivalents at end of period................................. $ 9,239 $ 6,172
========= =========
</TABLE>
See Note 8 for supplemental information on significant non-cash investing and
financing activities.
The accompanying notes are an integral part of the condensed financial
statements.
6
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
(1) General
In July 1998, Security Capital Atlantic Incorporated ("Atlantic") was
merged with and into Security Capital Pacific Trust ("PTR"). This transaction is
hereafter referred to as the "Atlantic Merger". Upon consummation of the
Atlantic Merger, the name of the company was changed to Archstone Communities
Trust ("Archstone"). Financial information and references throughout this
document are labeled "Archstone" for both pre- and post-merger periods as a
result of this name change. Archstone's financial statements and related
footnotes as of and for the three and nine months ended September 30, 1998 give
effect to the Atlantic Merger which was accounted for under the purchase method.
See Note 2 for a more complete discussion of the Atlantic Merger.
The condensed financial statements of Archstone are unaudited and certain
information and footnote disclosures normally included in financial statements
have been omitted. While management believes that the disclosures presented are
adequate, these interim financial statements should be read in conjunction with
the financial statements and notes included in Archstone's 1997 Annual Report on
Form 10-K ("1997 Form 10-K").
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary for a fair presentation of
Archstone's financial statements for the interim periods presented. The results
of operations for the three and nine month periods ended September 30, 1998 and
1997 are not indicative of the results to be expected for the entire year.
The accounts of Archstone and its controlled subsidiaries are consolidated
in the accompanying condensed financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of these financial statements in conformity with generally
accepted accounting principles ("GAAP") required management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual amounts realized or paid could differ from those estimates.
Reclassifications
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
New Accounting Rules
In April 1998, Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" was issued which requires that costs associated with start-
up activities such as the opening of a new business or division be expensed as
incurred. The new rules, which become effective January 1, 1999, are not
expected to have a material impact on Archstone's financial position or results
of operations.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued,
establishing standards for the accounting and reporting for derivative
instruments. The new rules, which become effective January 1, 2000, are not
expected to have a material impact on Archstone's financial position or results
of operations. Archstone had no open derivative financial instruments
outstanding which could result in a loss to the company as of September 30,
1998.
Per Share Data
Following is a reconciliation of the calculation used to compute basic net
earnings (loss) per Archstone common share of beneficial interest, par value
$1.00 per share ("Common Share"), to that used to compute diluted net earnings
(loss) per Common Share, for the periods indicated (in thousands, except per
share amounts):
7
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------------------- ---------------------
Reconciliation of numerator between basic and
diluted net earnings (loss) per Common Share:
<S> <C> <C> <C> <C>
Net earnings (loss) attributable to Common Shares--Basic.................. $51,945 $(40,919) $115,307 $29,789
Dividends on Series A Preferred Shares............................... 2,333 2,423 7,117 7,539
Minority interest..................................................... 323 -- 323 --
------- -------- -------- -------
Net earnings (loss) attributable to Common Shares--Diluted................ $54,601 $(38,496) $122,747 $37,328
======= ======== ======== =======
Reconciliation of denominator between basic and
diluted net earnings (loss) per Common Share:
Weighted average number of Common Shares outstanding--Basic............... 143,059 81,506 110,278 78,280
Assumed conversion of Series A Preferred Shares into Common Shares.... 6,625 -- 6,878 --
Minority interest..................................................... 908 -- 307 --
Incremental options outstanding....................................... 8 34 29 34
------- -------- -------- -------
Weighted average number of Common Shares outstanding--Diluted............. 150,600 81,540 117,492 78,314
======= ======== ======== =======
</TABLE>
(2) Atlantic Merger
In July 1998, Atlantic, a multifamily real estate investment trust ("REIT")
which operated primarily in the mid-Atlantic and southeastern United States, was
merged with and into PTR. The combined company has continued its existence under
the name Archstone and is traded on the New York Stock Exchange ("NYSE") under
the symbol "ASN". In accordance with the terms of the Atlantic Merger, each
outstanding Atlantic common share was converted into the right to receive one
Common Share and each outstanding Atlantic Series A preferred share was
converted into the right to receive one comparable share of a new class of
Archstone Series C cumulative redeemable preferred shares (the "Series C
Preferred Shares"). As a result, 47,752,052 Common Shares and 2,000,000 Series C
Preferred Shares were issued to Atlantic's shareholders in exchange for all of
the outstanding Atlantic common shares and Atlantic Series A preferred shares.
In addition, Archstone assumed Atlantic's debt and other liabilities. The total
purchase price paid for Atlantic aggregated approximately $1.9 billion. The
transaction was structured as a tax-free merger and was accounted for under the
purchase method.
In addition to approving the Atlantic Merger, PTR shareholders also
approved the following matters: (i) an amended and restated declaration of trust
which, among other things, changed PTR's name to Archstone, increased the
authorized shares from 150,000,000 to 250,000,000, divided the Archstone Board
of Trustees (the "Board") into three classes, each serving staggered three year
terms, and eliminated certain restrictions on the company's operations and
ability to enter into certain types of transactions; and (ii) an increase in the
number of Common Shares available for award under the Archstone 1997 Long-Term
Incentive Plan ("Incentive Plan") and the Archstone 1996 Share Option Plan for
Outside Trustees in amounts equal to the number of shares authorized under the
corresponding Atlantic option plans.
At September 30, 1998, Security Capital Group Incorporated ("Security
Capital"), which voted its shares in favor of the Atlantic Merger, owned
approximately 38% of the outstanding Common Shares and is Archstone's largest
shareholder.
8
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
As part of the Atlantic Merger, Archstone's Common Share distributions and
Series A cumulative convertible preferred share (the "Series A Preferred Share")
dividends were adjusted subsequent to the close of the transaction to an
annualized level of $1.42 per Common Share and $1.91 per Series A Preferred
Share. The annualized dividend level of Archstone's Series B cumulative
redeemable preferred shares (the "Series B Preferred Shares") and Series C
Preferred Shares issued in the Atlantic Merger remained the same at $2.25 and
$2.1563 per share, respectively. See Note 6 for additional information on
Archstone's cash distributions and dividends.
The following summarized pro forma unaudited information represents the
combined historical operating results of PTR and Atlantic with the appropriate
purchase accounting adjustments, assuming the Atlantic Merger had occurred on
January 1, 1997. The pro forma financial information presented is not
necessarily indicative of what Archstone's actual operating results would have
been had PTR and Atlantic constituted a single entity during such periods (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1998 1997 1998 1997
------------ ----------- ----------- ------------
(actual)
<S> <C> <C> <C> <C>
Rental income........................................... $151,516 $128,703 $428,450 $370,887
======== ======== ======== ========
Net earnings (loss) attributable to Common Shares
before extraordinary items........................... $53,442 $(28,489) $139,847 $64,368
======== ======== ======== ========
Net earnings (loss) attributable to Common Shares....... $51,945 $(28,489) $138,127 $64,368
======== ======== ======== ========
Weighted average Common Shares outstanding:
Basic............................................ 143,059 124,504 141,938 119,005
======== ======== ======== ========
Diluted.......................................... 150,600 124,538 141,967 119,039
======== ======== ======== ========
Earnings (loss) attributable to Common Shares before
extraordinary items per Common Share:
Basic and Diluted................................. $0.37 $(0.23) $0.99 $0.54
======== ======== ======== ========
Net earnings (loss) attributable to Common Shares per
Common Share:
Basic and Diluted................................. $0.36 $(0.23) $0.97 $0.54
======== ======== ======== ========
</TABLE>
As a result of the Atlantic Merger, Archstone incurred approximately $1.1
million in merger integration costs. Additionally, in conjunction with the
Atlantic Merger, Archstone introduced a national branding strategy with the
objective of achieving long-term brand loyalty, lower resident turnover and
greater market share. Archstone incurred approximately $1.1 million of costs for
the implementation of its branding strategy.
9
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(3) Real Estate
Investments in Real Estate
Equity investments in real estate, at cost, were as follows (dollar amounts
in thousands):
<TABLE>
<CAPTION>
September 30, 1998 (1) December 31, 1997
---------------------- ----------------------
Investment Units Investment Units
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating communities.......................... $3,917,534 69,515 $2,237,789 43,465
Communities under construction (2)............. 688,588 13,471 232,770 5,545
Development communities In Planning (2) (3):
Owned........................................ 64,139 4,334 80,781 4,468
Under Control (4)............................ -- 5,850 -- 6,090
---------- ------ ---------- ------
Total development communities In Planning.. 64,139 10,184 80,781 10,558
Other land held................................. 30,789 -- 27,517 --
---------- ------ ---------- ------
Total multifamily.......................... 4,701,050 93,170 2,578,857 59,568
====== ======
Non-multifamily................................. 22,870 26,062
---------- ----------
Total real estate.......................... $4,723,920 $2,604,919
========== ==========
</TABLE>
(1) Includes the real estate assets acquired in the Atlantic Merger.
(2) Unit information is based on management's estimates and has not been audited
or reviewed by Archstone's independent accountants.
(3) "In Planning" is defined as parcels of land owned or Under Control upon
which multifamily construction is expected to commence within 36 months.
"Under Control" means Archstone has an exclusive right (through contingent
contract or letter of intent) during a contractually agreed-upon time period
to acquire land for future development of multifamily communities at a fixed
price, subject to approval of contingencies during the due diligence
process, but does not currently own the land. There can be no assurance
that such land will be acquired.
(4) Archstone's investment as of September 30, 1998 and December 31, 1997 for
developments Under Control was $3.0 million and $3.8 million, respectively,
and is reflected in the "Other assets" caption of Archstone's balance
sheets.
Capital Expenditures
In conjunction with the underwriting of each acquisition of a multifamily
operating community, Archstone prepares acquisition budgets that encompass the
incremental capital needed to achieve Archstone's investment objectives. These
expenditures, combined with the initial purchase price and related closing
costs, are capitalized and classified as "acquisition-related" capital
expenditures, as incurred.
As part of its operating strategy, Archstone conducts regular reviews of
its assets to evaluate each community's physical condition relative to
management's business objectives and the community's competitive position in its
market. In conducting these evaluations, management considers Archstone's return
on investment in relation to its long-term cost of capital as well as its
research and analysis of competitive market factors.
10
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
Capital expenditures for operating communities are classified as either
"redevelopment" or "recurring". The redevelopment category includes: (i)
redevelopment initiatives, which are intended to reposition the community in the
marketplace and include items such as significant upgrades to the interiors,
exteriors, landscaping and amenities; (ii) revenue-enhancing expenditures,
which include investments that are expected to produce incremental community
revenues, such as building garages/carports, adding storage facilities or gating
a community; and (iii) expense-reducing expenditures, which include items such
as water submetering systems and xeriscaping that reduce future operating costs.
Recurring capital expenditures consist of significant expenditures for
items having a useful life in excess of one year which are incurred to maintain
a community's long-term physical condition at a level commensurate with
Archstone's stringent operating standards. Examples of recurring capital
expenditures include roof replacements, parking lot resurfacing and exterior
painting.
Repairs, maintenance and make-ready expenditures, including the replacement
of carpet, appliances and HVAC systems, are expensed as incurred, to the extent
they are not acquisition-related costs identified during Archstone's pre-
acquisition due diligence. Make-ready expenditures are costs incurred in
preparing a vacant multifamily unit for the next resident.
The change in investments in real estate, at cost, consisted of the
following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1998.................................... $2,604,919
Multifamily:
Real estate assets acquired in the Atlantic Merger........ 1,823,727
Acquisition-related expenditures.......................... 170,635
Redevelopment expenditures................................ 34,611
Recurring capital expenditures............................ 6,496
Development expenditures, excluding land acquisitions..... 243,290
Acquisition and improvement of land for development....... 36,957
Dispositions.............................................. (188,853)
Provision for possible loss on investments................ (700)
----------
Net multifamily activity...................................... 4,731,082
Non-multifamily dispositions.................................. (7,162)
----------
Balance at September 30, 1998................................. $4,723,920
==========
</TABLE>
At September 30, 1998, Archstone had unfunded multifamily construction and
redevelopment commitments aggregating approximately $470.1 million.
Gains on Dispositions of Investments
During the nine months ended September 30, 1998, Archstone disposed of 11
multifamily communities and certain non-multifamily real estate assets,
representing gross proceeds of $223.5 million. As of September 30, 1998,
Archstone held a portion of the 1998 disposition proceeds aggregating $86.3
million in an interest bearing escrow account, pending the acquisition of other
multifamily communities to complete tax-deferred exchanges or the repayment of
borrowings under Archstone's credit facilities. Archstone disposed of 25
multifamily communities and certain non-multifamily real estate assets,
representing gross proceeds of $290.5 million during the nine months ended
September 30, 1997. For federal income tax purposes, the dispositions were
generally structured as tax-deferred exchanges, which deferred gain recognition.
However, for financial reporting purposes, the transactions qualified for profit
recognition and aggregate gains of $36.7 million and $47.9 million were recorded
for the nine months ended September 30, 1998 and 1997, respectively.
11
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
As part of Archstone's asset optimization strategy, 17 multifamily
communities and certain non-multifamily real estate assets with an aggregate
carrying value of approximately $226.7 million were held for disposition as of
September 30, 1998. Each property's carrying value is less than or equal to its
estimated fair market value, net of estimated costs to sell. Operating
communities are not depreciated during the period for which they are determined
to be held for disposition. Subject to normal closing risks, Archstone expects
to complete the disposition of many of these properties and redeploy a portion
of the net proceeds into the development or acquisition of multifamily
communities, and use the remainder of the proceeds to repay balances under
Archstone's credit facilities. The property level earnings, after interest and
depreciation, from communities held for disposition at September 30, 1998 were
$8.6 million and $7.1 million for the nine months ended September 30, 1998 and
1997, respectively.
(4) Mortgage Notes Receivable
During the six month period ended June 30, 1998, Archstone funded the final
$11.9 million under its $198.8 million funding commitment to Homestead Village
Incorporated ("Homestead"). The Homestead convertible mortgage notes receivable
are convertible into Homestead common stock on the basis of one share of
Homestead common stock for every $11.50 of principal face amount outstanding.
Following is a reconciliation of the Homestead convertible mortgage notes
receivable components to the amount reflected in the accompanying condensed
balance sheet (in thousands):
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Face amount of Homestead convertible mortgage notes receivable......... $221,334
Original issue discount................................................ (22,501)
--------
Amount funded.......................................................... 198,833
Amortization of original issue discount................................ 2,106
Conversion feature--initial value...................................... 15,590
Unamortized discount on conversion feature............................. (14,163)
--------
Carrying value and fair value.......................................... $202,366
========
</TABLE>
During the six months ended June 30, 1998, management concluded that the
full collectibility of certain other mortgage notes receivable secured by non-
multifamily assets was doubtful. As a result, a provision for possible loss of
$2.3 million was recorded to reduce these notes to their estimated net
realizable value.
12
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(5) Borrowings
Unsecured Credit Facilities
Upon consummation of the Atlantic Merger in July 1998, Archstone replaced
its $350 million unsecured revolving line of credit with a $750 million
unsecured revolving line of credit provided by a group of financial institutions
led by Chase Bank of Texas, National Association ("Chase") (collectively the
"Lenders"). The new $750 million line of credit matures in July 2001, at which
time it may be converted into a two-year term loan at Archstone's option. The
new line of credit bears interest at the greater of prime or the federal funds
rate plus 0.50%, or at Archstone's option, LIBOR (5.659% at September 30, 1998)
plus 0.65%. The spread over LIBOR can vary from LIBOR plus 0.50% to LIBOR plus
1.25% based upon the rating of Archstone's long-term unsecured senior notes
("Long-Term Unsecured Debt"). Under a competitive bid option contained in the
credit agreement, Archstone may be able to borrow at a lower interest rate
spread over LIBOR, depending on market conditions, on up to $375 million of
borrowings. Under the new agreement, Archstone pays a facility fee, which is
equal to 0.15% of the commitment.
Upon replacing the $350 million credit facility with the new $750 million
credit facility, Archstone expensed the remaining $1.5 million of unamortized
loan costs associated with the old $350 million credit facility, which was
recorded as an extraordinary item during the three months ended September 30,
1998.
The following table summarizes Archstone's line of credit borrowings
(dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Total line of credit........................................ $750,000 $350,000
Borrowings outstanding at end of period..................... $624,000 $223,500
Weighted average daily borrowings........................... $294,437 $121,038
Weighted average daily nominal interest rate................ 6.5% 6.7%
Weighted average daily effective interest rate.............. 7.0% 8.4%
Weighted average nominal interest rate at end of period..... 6.3% 6.9%
</TABLE>
In September 1996, Archstone entered into a short-term, unsecured borrowing
agreement with Chase in order to enhance cash management flexibility. This
borrowing agreement was renegotiated by Archstone upon consummation of the
Atlantic Merger under similar terms as the previous agreement. In October 1998,
the maximum borrowing capacity under the agreement was increased to $100
million. The agreement matures in July 1999 and bears interest at an overnight
rate that ranged from 5.93% to 7.13% during the nine months ended September 30,
1998. At September 30, 1998, there was $49.8 million outstanding under this
agreement.
In May 1998, Atlantic entered into a $150 million unsecured delayed draw
term loan to provide bridge financing until the Atlantic Merger was consummated.
This obligation was assumed by Archstone (with all of Atlantic's other debt) in
the Atlantic Merger. The obligation, which was scheduled to mature in September
1998, was renegotiated by Archstone under similar terms as the previous
agreement and the maturity date was extended to March 31, 1999. Borrowings on
this credit facility bear interest at prime or, at Archstone's option, LIBOR
plus 0.90%. Archstone pays an annual facility fee of 0.15% on the unused
commitment. This credit facility had no borrowings outstanding as of September
30, 1998.
13
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
Long-Term Unsecured Debt
Archstone has issued Long-Term Unsecured Debt which bears interest at fixed
rates, payable semi-annually. Funds from such issuances were used primarily
for acquisition, development and redevelopment of multifamily communities and to
repay credit facility balances incurred for such purposes. The following table
summarizes the Long-Term Unsecured Debt as of September 30, 1998:
<TABLE>
<CAPTION>
Issuance Average Effective
and Interest Rate, Average
Outstanding Average Including offering Remaining
Principal Coupon discounts and Life
Date of Issuance Amount Rate issuance costs (Years)
- ----------------------------------------------- ------------- ------- ------------------ ---------
<S> <C> <C> <C> <C>
September 25, 1998............................. $25.0 million 6.170% 6.398% 2.13
September 23, 1998............................. 21.2 million 6.370 6.565 3.13
March 6, 1998.................................. 125.0 million 7.200 7.864 12.42
August 20, 1997 (1)............................ 154.0 million 7.528 7.280 10.43
March 31, 1997................................. 50.0 million 7.905 7.850 14.50
October 21, 1996............................... 130.0 million 7.350 7.500 4.89
August 6, 1996................................. 100.0 million 7.840 7.950 13.43
February 23, 1996.............................. 150.0 million 7.710 7.840 12.96
February 8, 1994............................... 200.0 million 7.240 7.370 9.71
-------------- ----- ----- -----
Total/average.................................. $955.2 million 7.420% 7.554% 10.33
============== ===== ===== =====
</TABLE>
(1) Represents Long-Term Unsecured Debt assumed in the Atlantic Merger.
Mortgages Payable
Mortgages payable at September 30, 1998 consisted of the following (dollar
amounts in thousands):
<TABLE>
<CAPTION>
Effective Principal Principal
Interest Balance at Balance at
Type of Mortgage Rate (1) September 30, 1998 December 31, 1997
- ------------------------------------ --------- ------------------ -----------------
<S> <C> <C> <C>
Conventional fixed rate........... 7.77% $160,499 $143,963
Tax-exempt fixed rate (2)......... 6.10 74,357 46,298
Tax-exempt floating rate (2)...... 4.48 194,083 68,440
Combined (3)...................... 8.84 5,743 5,794
Other............................. 5.43 1,916 1,157
Principal reserve fund (4)........ -- (3,007) --
---- -------- --------
Total/average mortgage debt... 6.02% $433,591 $265,652
==== ======== ========
</TABLE>
(1) Represents the effective interest rate, including loan cost amortization
and other ongoing fees and expenses.
(2) Tax-exempt effective interest rates include credit enhancement and other
bond-related costs, where applicable.
(3) This category represents one multifamily community which was refinanced in
1990 pursuant to multifamily bonds aggregating $6.2 million. The bonds
consist of $4.5 million Series A tax-exempt fixed rate bonds and $1.7
million Series B taxable fixed rate bonds.
(4) Archstone has a 30-year credit enhancement agreement with FNMA related to
the underlying tax-exempt bond issues. This credit enhancement agreement
requires Archstone to make monthly payments into a principal reserve
account based on a 30-year amortization.
14
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
The change in mortgages payable during the nine months ended September 30,
1998 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1998........................................ $265,652
Mortgage notes assumed in Atlantic Merger......................... 160,329
Other mortgage notes assumed...................................... 50,841
Principal payments, including prepayments and amortization........ (43,231)
--------
Balance at September 30, 1998..................................... $433,591
========
</TABLE>
Scheduled Debt Maturities
Approximate principal payments due during each of the calendar years in the
20-year period ending December 31, 2017 and thereafter, as of September 30,
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Unsecured Long-Term
Credit Facilities Unsecured Debt Mortgages Total
----------------- -------------- --------- ----------
<S> <C> <C> <C> <C>
1998....................... $ -- $ -- $32,175 $ 32,175
1999....................... 49,753 30,310 10,862 90,925
2000....................... -- 25,310 7,422 32,732
2001....................... 624,000 34,010 31,973 689,983
2002....................... -- 47,810 20,731 68,541
2003....................... -- 51,560 11,193 62,753
2004....................... -- 51,560 5,636 57,196
2005....................... -- 51,560 36,101 87,661
2006....................... -- 51,560 17,408 68,968
2007....................... -- 51,560 19,068 70,628
2008....................... -- 51,560 22,760 74,320
2009....................... -- 71,467 5,802 77,269
2010....................... -- 63,836 9,444 73,280
2011....................... -- 50,086 6,714 56,800
2012....................... -- 55,086 6,990 62,076
2013....................... -- 70,086 7,350 77,436
2014....................... -- 52,586 20,790 73,376
2015....................... -- 50,086 53,402 103,488
2016....................... -- 55,086 8,055 63,141
2017....................... -- 40,125 8,731 48,856
2018 - 2029................ -- -- 90,984 90,984
-------- -------- -------- ----------
Total................... $673,753 $955,244 $433,591 $2,062,588
======== ======== ======== ==========
</TABLE>
General
Archstone's debt instruments generally contain certain covenants common to
the type of facility or borrowing, including financial covenants establishing
minimum debt service coverage ratios and maximum leverage ratios. Archstone was
in compliance with all debt covenants at September 30, 1998.
For the nine months ended September 30, 1998 and 1997, the total interest
paid in cash on all outstanding debt was $75.0 million and $59.1 million,
respectively. For the nine months ended September 30, 1998 and 1997, interest
capitalized as part of real estate projects under development was $20.8 and
$13.3 million, respectively.
Amortization of loan costs included in interest expense for the nine months
ended September 30, 1998 and 1997 was $2.4 million for each period.
15
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(6) Cash Distributions/Dividends
Archstone paid first and second quarter 1998 distributions of $0.34 per
Common Share on February 25 and May 28, 1998 and the third quarter 1998
distribution of $0.355 per Common Share on August 27, 1998. On October 15,
1998, the Board declared the fourth quarter 1998 cash distribution of $0.355 per
Common Share, payable on November 24, 1998, to shareholders of record on
November 10, 1998. On March 31 and June 30, 1998 Archstone paid first and
second quarter dividends of $0.4579 per Series A Preferred Share and on
September 30, 1998 paid the third quarter dividend of $0.4781 per Series A
Preferred Share. On March 31, June 30 and September 30, 1998 Archstone paid
quarterly dividends of $0.5625 per Series B Preferred Share. On September 30,
1998, Archstone paid the third quarter dividend of $0.5391 per Series C
Preferred Share. Collectively, the Series A, B and C Preferred Shares are
referred to as the "Preferred Shares".
(7) Shareholders' Equity
On April 23, 1998, Archstone sold 2,049,587 Common Shares at $22.6875 per
share in an underwritten public offering. The net proceeds of $44.0 million
(net of underwriting discount and offering costs) were used to repay borrowings
under Archstone's credit facilities.
See Note 2 for a discussion of the Common Shares and Series C Preferred
Shares issued to Atlantic's shareholders in the Atlantic Merger.
(8) Supplemental Cash Flow Information
Non-cash investing and financing activities for the nine months ended
September 30, 1998 and 1997 are as follows:
(i) Archstone issued 47,752,052 Common Shares valued at approximately $1.1
billion, 2,000,000 Series C Preferred Shares valued at approximately $50.6
million and assumed debt and other liabilities valued at approximately
$778.9 million in exchange for approximately $1.9 billion of assets in the
Atlantic Merger.
(ii) Archstone recognized an $83.8 million decrease and a $40.4 million
increase in the unrealized gain on the Homestead convertible mortgage
notes receivable during the nine months ended September 30, 1998 and 1997,
respectively.
(iii) Holders of Archstone's Series A Preferred Shares converted $14.7 million
and $24.4 million of their shares into Common Shares during the nine
months ended September 30, 1998 and 1997, respectively.
(iv) In connection with the acquisition of multifamily communities, Archstone
assumed mortgage debt (excluding the mortgage debt assumed in the Atlantic
Merger) of $50.8 million and $94.8 million during the nine months ended
September 30, 1998 and 1997, respectively.
(v) In connection with the internalization of management transaction in
September 1997, Archstone issued 3,295,533 Common Shares valued at $73.3
million in exchange for the operations and business of the Management
Companies.
(vi) Archstone received notes from employees aggregating $17.1 million for the
purchase of Common Shares under the Incentive Plan in 1997.
16
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Concluded)
(9) Subsequent Event
Between October 1, 1998 and November 10, 1998, Archstone issued an
aggregate amount of $266.0 million in Long-Term Unsecured Debt through its
medium-term note program, which proceeds were used to repay borrowings on
Archstone's credit facilities. After giving effect to the pay downs,
Archstone's credit facilities had an aggregate outstanding balance of
$433.6 million as of November 10, 1998. The notes have various maturity
dates ranging from October 15, 2000 to October 1, 2008, with an aggregate
weighted average life to maturity of 4.02 years. The notes have nominal
interest rates ranging from 6.32% to 7.20% with a weighted average nominal
interest rate of 7.05% and a weighted average effective interest rate of
7.21%.
After giving effect to these notes, Archstone has $87.2 million
remaining in shelf-registered securities available for issuance. Archstone
can issue these securities in the form of Long-Term Unsecured Debt,
preferred shares or Common Shares on an as-needed basis, subject to
Archstone's ability to effect offerings on satisfactory terms.
17
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Trustees and Shareholders
ARCHSTONE COMMUNITIES TRUST:
We have reviewed the accompanying condensed balance sheet of ARCHSTONE
COMMUNITIES TRUST as of September 30, 1998, the related condensed statements of
operations for the three and nine month periods ended September 30, 1998 and
1997, the condensed statement of shareholders' equity for the nine month period
ended September 30, 1998 and the related condensed statements of cash flows for
the nine month periods ended September 30, 1998 and 1997. These condensed
financial statements are the responsibility of the Trust's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed financial statements referred to above for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of SECURITY CAPITAL PACIFIC TRUST as of December
31, 1997, and the related statements of earnings, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
January 31, 1998, except as to Note 13, which is as of March 6, 1998, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying condensed balance sheet as of
December 31, 1997 is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
KPMG Peat Marwick LLP
Chicago, Illinois
October 30, 1998, except as to Note 9
which is as of November 10, 1998
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with Archstone's
(formerly PTR's) 1997 Form 10-K as well as the financial statements and notes
included in Item 1 of this report. In addition to historical information, "Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations", contains forward-looking statements under the federal securities
law. These statements are based on current expectations, estimates and
projections about the industry and markets in which Archstone operates,
management's beliefs and assumptions made by management. Forward-looking
statements are not guarantees of future performance and involve certain risks
and uncertainties which are difficult to predict. Actual operating results may
be affected by changes in national and local economic conditions, competitive
market conditions, changes in financial markets that could adversely affect
Archstone's cost of capital and its ability to meet its financing needs and
obligations, weather, obtaining governmental approvals and meeting development
schedules, and therefore, may differ materially from what is expressed or
forecasted in this document.
Atlantic Merger
In July 1998, Atlantic, a multifamily REIT which operated primarily in the
mid-Atlantic and southeastern United States, was merged with and into PTR. The
combined company has continued its existence under the name Archstone and is
traded on the NYSE under the symbol "ASN". In accordance with the terms of the
Atlantic Merger, each outstanding Atlantic common share was converted into the
right to receive one Common Share and each outstanding Atlantic Series A
preferred share was converted into the right to receive one comparable share of
a new class of Archstone Series C Preferred Shares. As a result, 47,752,052
Common Shares and 2,000,000 Series C Preferred Shares were issued to Atlantic's
shareholders in exchange for all of the outstanding Atlantic common shares and
Atlantic Series A preferred shares. In addition, Archstone assumed Atlantic's
debt and other liabilities. The total purchase price paid for Atlantic
aggregated approximately $1.9 billion. The transaction was structured as a tax-
free merger and was accounted for under the purchase method.
In addition to approving the Atlantic Merger, PTR shareholders also
approved the following matters: (i) an amended and restated declaration of trust
which, among other things, changed PTR's name to Archstone, increased the
authorized shares from 150,000,000 to 250,000,000, divided the Board into three
classes, each serving staggered three-year terms, and eliminated certain
restrictions on the company's operations and ability to enter into certain types
of transactions; and (ii) an increase in the number of Common Shares available
for award under the Incentive Plan and the Archstone 1996 Share Option Plan for
Outside Trustees in amounts equal to the number of shares authorized under the
corresponding Atlantic option plans.
At September 30, 1998, Security Capital, which voted its shares in favor of
the Atlantic Merger, owned approximately 38% of the outstanding Common Shares
and is Archstone's largest shareholder.
As part of the Atlantic Merger, Archstone's Common Share distributions and
Series A Preferred Share dividends were adjusted subsequent to the close of the
transaction to an annualized level of $1.42 per Common Share and $1.91 per
Series A Preferred Share. The annualized dividend level of Archstone's Series B
Preferred Shares and the Series C Preferred Shares issued in the Atlantic Merger
remained the same at $2.25 and $2.1563 per share, respectively.
At September 30, 1998 Archstone had 319 multifamily communities, consisting
of 93,170 units, including 23,655 development units under construction or In
Planning (including 19 communities aggregating 5,850 units that are Under
Control but not owned as of September 30, 1998) in markets that include 29 of
the nation's 50 largest metropolitan markets. Archstone's total market
capitalization was approximately $5.3 billion at September 30, 1998.
19
<PAGE>
Investments
Investment Summary
Archstone's results of operations, financial position and liquidity have
been significantly influenced by the operations of and investments in
multifamily communities. Following is an overview of Archstone's multifamily
portfolio and related investment activity for the periods indicated (dollar
amounts in thousands):
<TABLE>
<CAPTION>
Three Months Three Months Three Months Nine Months
Ended Ended Ended Ended
March 31, June 30, September 30, September 30,
1998 1998 1998 1998
Investment Summary (1) -------------- ------------- ------------- -------------
- ----------------------
Operating Communities:
<S> <C> <C> <C> <C>
Communities............................ 138 143 237 237
Units.................................. 42,859 44,513 69,515 69,515
Total expected investment (2).......... $2,296,990 $2,420,441 $3,962,850 $3,962,850
Development Pipeline:
Starts During Period (3):
Communities............................ 3 8 4 15
Units.................................. 1,040 2,438 1,086 4,564
Total expected investment (2).......... $94,312 $226,836 $92,045 $413,193
Completions During Period (3):
Communities............................ 3 2 5 10
Units.................................. 698 840 1,648 3,186
Total expected investment (2).......... $41,261 $56,043 $103,444 $200,748
Stabilizations During Period (3):
Communities............................ 5 3 5 13
Units.................................. 1,622 594 1,888 4,104
Total expected investment (2).......... $92,173 $36,399 $120,060 $248,632
Under Construction at End of Period:
Communities............................ 18 24 47 47
Units.................................. 5,887 7,485 13,471 13,471
Total expected investment (2).......... $473,656 $646,993 $1,148,910 $1,148,910
In Planning at End of Period:
Communities............................ 35 33 35 35
Units.................................. 10,351 9,725 10,184 10,184
Total expected investment (2).......... $923,924 $857,611 $910,789 $910,789
Development Expenditures During Period.. $58,442 $61,155 $123,693 $243,290
Acquisitions (4):
Communities............................ 3 3 4 10
Units.................................. 568 814 1,098 2,480
Total expected investment (2).......... $36,215 $66,542 $82,201 $184,958
Dispositions:
Communities............................ 5 -- 6 11
Units.................................. 1,872 -- 2,158 4,030
Gross sales proceeds................... $101,109 -- $122,364 $223,473
Gains (5).............................. $15,484 -- $21,204 $36,688
</TABLE>
__________
(1) Reflects investments of PTR only for the three months ended March 31, 1998
and the three months ended June 30, 1998. For the three months ended
September 30, 1998, includes the real estate assets acquired in the Atlantic
Merger.
(2) For community developments, represents total budgeted land and development
costs; for operating communities, represents costs plus budgeted
expenditures, including planned redevelopment costs needed to conform to or
maintain the community at Archstone's standards.
(3) Excludes $95.5 million of starts, $39.8 million of completions and $40.5
million of stabilizations by Atlantic during the first six months of 1998,
based on total expected investment as of September 30, 1998.
(4) In addition to the community acquisitions noted, during the three months
ended September 30, 1998 Archstone acquired 91 multifamily operating
communities, representing 24,414 units at a total expected investment of
$1.5 billion in the Atlantic Merger.
(5) Includes the disposition of certain non-multifamily real estate assets with
aggregate gains of $1,254,244.
20
<PAGE>
Geographic Distribution
To effectively manage its multifamily communities, Archstone has organized
its operations into three regions (Central, Southeast and West). The table below
summarizes the geographic distribution of Archstone's multifamily communities
which are operating, under construction or In Planning, based on total expected
investment at September 30, 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Total Portfolio %
Market Distribution by Market
- ------------------------------------------------------------------------ -------------------------
<S> <C>
Central
Austin................................................................ 2.12%
Dallas................................................................ 1.27
Denver................................................................ 3.97
El Paso............................................................... 1.08
Houston............................................................... 3.45
Salt Lake City........................................................ 3.79
San Antonio........................................................... 2.12
Other................................................................. 0.60
-------------------------
Central Region Subtotal............................................ 18.40%
-------------------------
Southeast
Atlanta............................................................... 8.49%
Birmingham............................................................ 1.15
Charlotte............................................................. 3.27
Jacksonville.......................................................... 1.63
Nashville............................................................. 1.70
Orlando............................................................... 1.26
Raleigh............................................................... 5.05
Richmond.............................................................. 2.62
Southeast Florida..................................................... 5.06
Washington, D.C....................................................... 4.99
West Coast Florida.................................................... 2.24
Other................................................................. 1.23
-------------------------
Southeast Region Subtotal.......................................... 38.69%
-------------------------
West
Albuquerque........................................................... 2.42%
Las Vegas............................................................. 1.37
Phoenix............................................................... 6.16
Portland.............................................................. 2.02
San Francisco Bay Area................................................ 9.40
Seattle............................................................... 6.61
Southern California................................................... 13.79
Other................................................................. 1.14
-------------------------
West Region Subtotal............................................... 42.91%
-------------------------
Total Archstone................................................. 100.00%
=========================
</TABLE>
21
<PAGE>
Current Development Activity
The following table summarizes Archstone's development communities under
construction as of September 30, 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Actual or Expected
Total Expected Date for Stabilization
Number of Archstone Expected Start Date First Units Date %
Units Investment Investment (1) (Quarter/Year) (Quarter/Year) (2) (Quarter/Year) Leased (3)
--------- ---------- -------------- -------------- ------------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Central Region:
Austin, Texas:
Monterey Ranch I................. 168 $ 3,474 $ 12,855 Q2/98 Q2/99 Q4/99 n/a
Monterey Ranch III............... 448 6,456 31,669 Q3/98 Q3/99 Q2/00 n/a
--------- ---------- --------------
Total Austin................... 616 $ 9,930 $ 44,524
--------- ---------- --------------
Denver, Colorado:
Archstone Dakota Ridge........... 480 $ 13,539 $ 35,541 Q1/98 Q1/99 Q4/00 n/a
Fox Creek II..................... 112 4,186 9,296 Q2/98 Q1/99 Q3/99 n/a
--------- ---------- --------------
Total Denver................... 592 $ 17,725 $ 44,837
--------- ---------- --------------
Houston, Texas:
Braeswood II..................... 36 $ 1,758 $ 4,179 Q3/98 Q2/99 Q3/99 n/a
Oaks at Medical Center II........ 318 15,831 20,229 Q4/97 Q3/98 Q2/99 64.2%
--------- ---------- --------------
Total Houston.................. 354 $ 17,589 $ 24,408
--------- ---------- --------------
Kansas City, Kansas:
Crown Chase...................... 220 $ 6,591 $ 16,384 Q1/98 Q1/99 Q1/00 n/a
--------- ---------- --------------
Salt Lake City, Utah:
Archstone River Oaks............. 448 $ 11,957 $ 37,483 Q2/98 Q2/99 Q4/00 n/a
--------- ---------- --------------
Total Central Region........... 2,230 $ 63,792 $ 167,636
========= ========== ==============
West Region:
Orange County, California:
Las Flores Apartment Homes....... 504 $ 40,681 $ 45,668 Q4/96 Q2/98 Q2/99 56.9%
Sorrento......................... 241 22,145 22,174 Q2/97 Q2/98 Q4/98 77.6%
--------- ---------- --------------
Total Orange County............ 745 $ 62,826 $ 67,842
--------- ---------- --------------
Phoenix, Arizona:
Arrowhead I...................... 272 $ 17,897 $ 18,805 Q3/96 Q1/98 Q4/98 81.6%
Arrowhead II..................... 200 5,964 13,535 Q2/98 Q1/99 Q2/00 n/a
San Marbeya...................... 404 16,637 28,246 Q4/97 Q4/98 Q1/00 n/a
San Valiente II.................. 228 10,672 14,459 Q4/97 Q4/98 Q4/99 n/a
--------- ---------- --------------
Total Phoenix.................. 1,104 $ 51,170 $ 75,045
--------- ---------- --------------
Portland, Oregon:
Hedges Creek..................... 408 $ 24,918 $ 27,720 Q2/97 Q2/98 Q2/99 54.7%
--------- ---------- --------------
San Diego, California:
Archstone Torrey Hills........... 340 $ 17,787 $ 42,963 Q1/98 Q2/99 Q2/00 n/a
--------- ---------- --------------
San Francisco Bay Area, California:
Archstone Emerald Park........... 324 $ 19,903 $ 45,152 Q4/97 Q1/99 Q4/99 n/a
Archstone Hacienda............... 540 25,833 74,450 Q2/98 Q2/99 Q4/00 n/a
Archstone Monterey Grove......... 224 15,972 26,678 Q4/97 Q1/99 Q3/99 n/a
--------- ---------- --------------
Total San Francisco Bay Area 1,088 $ 61,708 $ 146,280
--------- ---------- --------------
Seattle, Washington:
Archstone Inglewood Hill......... 230 $ 7,730 $ 20,343 Q2/98 Q2/99 Q2/00 n/a
Archstone Northcreek............. 524 15,084 44,025 Q2/98 Q1/99 Q1/01 n/a
Forestview....................... 192 15,539 15,857 Q2/97 Q2/98 Q4/98 90.6%
Stonemeadow Farms................ 280 22,434 22,600 Q2/97 Q2/98 Q1/99 58.6%
--------- ---------- --------------
Total Seattle.................. 1,226 $ 60,787 $ 102,825
--------- ---------- --------------
Total West Region.............. 4,911 $ 279,196 $ 462,675
========= ========== ==============
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Actual or
Expected Date Expected
Start for Stabilization
Total Date First Units Date
Number of Archstone Expected (Quarter/ (Quarter/ (Quarter/ %
Units Investment Investment/(1)/ Year) Year)/(2)/ Year) Leased/(3)/
--------- ---------- --------------- --------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Southeast Region:
Atlanta, Georgia:
Cameron at Barrett Creek...... 332 $ 18,383 $ 27,822 Q4/97 Q1/99 Q3/00 n/a
Cameron at North Point........ 264 21,245 24,384 Q4/97 Q3/98 Q1/00 20.8%
Cameron Bridge................ 224 17,717 19,909 Q4/97 Q3/98 Q4/99 29.0%
Cameron Landing............... 368 23,841 27,267 Q1/97 Q4/97 Q4/98 99.2%
-------- -------- ----------
Total Atlanta............... 1,188 $ 81,186 $ 99,382
======== ======== ==========
Birmingham, Alabama:
Cameron at the Summit II...... 268 $ 5,794 $ 18,939 Q2/98 Q2/99 Q3/00 n/a
-------- -------- ----------
Charlotte, North Carolina:
Waterford Square II........... 286 $ 18,312 $ 18,947 Q2/96 Q2/97 Q4/98 86.7%
-------- -------- ----------
Indianapolis, Indiana:
Cameron at River Ridge........ 202 $ 3,270 $ 14,846 Q2/98 Q2/99 Q2/00 n/a
-------- -------- ----------
Nashville, Tennessee:
Monthaven Place............... 216 $ 2,386 $ 15,361 Q2/98 Q2/99 Q3/00 n/a
-------- -------- ----------
Orlando, Florida:
Cameron Promenade............. 212 $ 15,839 $ 16,909 Q3/97 Q2/98 Q1/99 79.7%
Cameron Wellington II......... 120 10,820 11,835 Q3/97 Q2/98 Q1/99 70.8%
-------- -------- ----------
Total Orlando............... 332 $ 26,659 $ 28,744
======== ======== ==========
Raleigh, North Carolina:
Archstone at Preston.......... 388 $ 7,321 $ 31,289 Q2/98 Q2/99 Q2/01 n/a
Cameron Southpoint............ 288 15,829 21,451 Q3/97 Q3/98 Q3/99 29.2%
Cameron Woods................. 328 17,677 23,457 Q3/97 Q3/98 Q1/00 29.6%
-------- -------- ----------
Total Raleigh............... 1,004 $ 40,827 $ 76,197
======== ======== ==========
Richmond, Virginia:
Archstone at Swift Creek...... 288 $ 5,925 $ 22,873 Q2/98 Q3/99 Q1/01 n/a
Cameron at Virginia Center.... 264 19,983 21,313 Q2/97 Q2/98 Q1/99 76.1%
Cameron at Virginia Center II. 88 1,885 7,588 Q2/98 Q3/99 Q1/00 n/a
Cameron at Wyndham............ 312 25,683 26,985 Q3/96 Q4/97 Q4/98 82.7%
Cameron Crossing II........... 144 11,982 12,657 Q2/97 Q2/98 Q4/98 98.6%
-------- -------- ----------
Total Richmond.............. 1,096 $ 65,458 $ 91,416
======== ======== ==========
Southeast, Florida:
Cameron Gardens............... 300 $ 22,505 $ 25,524 Q4/97 Q3/98 Q3/99 36.3%
Cameron Palms................. 340 21,690 29,598 Q4/97 Q4/98 Q1/00 n/a
Cameron Park I................ 196 16,030 17,243 Q4/97 Q3/98 Q2/99 42.9%
Cameron Waterways............. 300 24,801 26,206 Q1/97 Q1/98 Q4/98 89.7%
-------- -------- ----------
Total Southeast Florida..... 1,136 $ 85,026 $ 98,571
======== ======== ==========
Washington, D.C.:
Archstone Governor's Green.... 338 $ 13,030 $ 36,446 Q3/98 Q3/99 Q3/00 n/a
-------- -------- ----------
West Coast, Florida:
Archstone Rocky Creek......... 264 $ 3,652 $ 19,750 Q3/98 Q3/99 Q3/00 n/a
-------- -------- ----------
Total Southeast Region...... 6,330 $345,600 $ 518,599
-------- -------- ----------
Total Communities
Under Construction....... 13,471 $688,588 $1,148,910
======== ======== ==========
</TABLE>
(1) Represents total budgeted land and development costs.
(2) Represents the quarter that the first completed units were made available
for leasing (or are expected to be made available). Archstone begins
leasing completed units prior to completion of the entire community.
(3) The percentage leased is based on leased units divided by total number of
units in the community (completed and under construction) as of September
30, 1998. A "n/a" indicates the communities where lease-up has not yet
commenced.
See Archstone's 1997 Form 10-K "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Current Development
Activity" for a discussion of various risks associated with Archstone's
development and construction activities.
23
<PAGE>
Results of Operations
Nine Months Ended September 30, 1998 Compared to September 30, 1997
Net earnings attributable to Common Shares for the nine months ended
September 30, 1998 and 1997 were $115.3 million and $29.8 million, respectively,
an increase of $85.5 million (286.9%). This net increase resulted primarily from
the following:
(i) Increased earnings attributable to the multifamily operating
communities acquired in the Atlantic Merger which was consummated in
July 1998;
(ii) Increased earnings from other multifamily operating communities in
Archstone's target markets;
(iii) Increased earnings resulting from the one-time non-cash operating
expense adjustment of approximately $71.7 million related to the
costs incurred in acquiring the businesses and operations of the
Management Companies from Security Capital in September 1997. As a
result of this transaction, Archstone became an internally managed
REIT. (See "--Costs Incurred in Acquiring Management Companies from
an Affiliate");
(iv) Decreased earnings resulting from the one-time operating expense
adjustments related to Archstone's branding strategy aggregating $1.1
million and Atlantic Merger integration costs aggregating $1.1
million during the three months ended September 30, 1998 (See
"--Nonrecurring Expenses Related to Archstone's Branding Strategy and
Atlantic Merger Integration"); and,
(v) Decreased earnings resulting from an $11.2 million decrease in net
gains on dispositions of depreciated real estate, partially
offsetting the increases outlined above.
A discussion of the major components of Archstone's results of operations
follows.
Community Operations
At September 30, 1998 and 1997, multifamily investments comprised over 99%
of Archstone's total real estate portfolio, based on total expected investment.
The following table summarizes the net operating income generated for each
period (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997 Increase
-------- -------- --------
<S> <C> <C> <C>
Rental revenues................................. $331,621 $247,122 $84,499
-------- -------- -------
Property operating expenses:
Rental expenses............................... 90,823 71,004 19,819
Real estate taxes............................. 28,623 21,059 7,564
-------- -------- -------
Total property operating expenses........... 119,446 92,063 27,383
-------- -------- -------
Net operating income............................ $212,175 $155,059 $57,116
======== ======== =======
Operating margin (net operating income/
rental revenues).............................. 64.0% 62.7% 1.3%
======== ======== =======
</TABLE>
24
<PAGE>
The increases in rental revenues and property operating expenses in each
period are primarily a result of rental rate increases and net increases in the
number of multifamily operating units resulting from Archstone's substantial
development and acquisition activity, including the 91 multifamily operating
communities acquired in the Atlantic Merger. Archstone's multifamily operating
portfolio consisted of 69,515 and 42,184 units as of September 30, 1998 and
1997, respectively. Archstone continues to focus its investment efforts on
markets that management believes have higher barriers to entry against new
development, combined with better economic fundamentals, while reducing
investments in certain markets having less attractive growth prospects. The
positive impact of Archstone's investment strategy and customer-focused property
management program is reflected in an improving operating margin which has grown
from 62.7% during the nine months ended September 30, 1997 to 64.0% during the
nine months ended September 30, 1998. The higher profitability during the nine
months ended September 30, 1998 is partially attributable to Archstone's
acquisition of its property management company in September 1997. After that
date, Archstone directly incurred personnel and other costs related to property
management overhead, in lieu of paying a property management fee to Security
Capital, which resulted in a net reduction of property management expenses
during the nine months ended September 30, 1998.
Archstone categorizes operating multifamily communities (which include all
completed revenue-generating communities) as either "stabilized" or "pre-
stabilized." The term "stabilized" means that redevelopment, repositioning,
new management and new marketing programs (or development and marketing in the
case of newly developed communities) have been completed for a sufficient period
of time (but in no event longer than 12 months, except for major redevelopments)
to achieve 93% occupancy at market rents. Prior to being "stabilized", a
community is considered "pre-stabilized". Approximately 83.4% and 71.9% of
Archstone's multifamily operating portfolio was classified as stabilized as of
September 30, 1998 and 1997, respectively, based on total expected investment.
Analysis of Same Store Community Results
The results of Archstone's operating communities which were fully operating
on July 1, 1997 ("Same Store Communities") continued to improve as a result of
Archstone's consistent emphasis on customer-focused operations, combined with
improving economic fundamentals in many of its markets. Following is a summary
of Same Store Community results comparing the third quarter 1998 to the third
quarter 1997, assuming that the Atlantic Merger was consummated at the beginning
of the comparison period (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998 vs. 1997
------------------------------
<S> <C>
Rental revenue growth.................................. 3.76%
Property Operating Expense growth (1).................. 0.34%
Net Operating Income growth (2)........................ 5.94%
Number of units in Same Store Communities.............. 47,781
Total expected investment of Same Store Communities.... $2,576,598
</TABLE>
(1) Property Operating Expense: Operating expenses (excluding depreciation and
interest expense) as adjusted to remove the accounting differences which
result from capitalizing certain costs during the period of pre-
stabilization and expensing those costs once the community has reached
stabilization.
(2) Net Operating Income: Total rental revenues less Property Operating
Expenses, as defined in Note 1 above.
25
<PAGE>
Homestead Interest and Homestead Convertible Mortgage Notes Receivable
During the six months ended June 30, 1998, Archstone funded the final $11.9
million under its $198.8 million total funding commitment to Homestead. As of
September 30, 1998 the face amount of the convertible mortgage notes aggregated
$221.3 million.
During the nine months ended September 30, 1998 and 1997, Archstone
recorded $17.1 million and $11.4 million in interest income, respectively ($15.7
million and $10.5 million, respectively for purposes of calculating funds from
operations), from the Homestead convertible mortgage notes receivable. The
increase is a direct result of higher average outstanding note balances during
the nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. Archstone deducts from net earnings the interest income
related to the amortization of the conversion discount and warrant-related
deferred revenue in calculating funds from operations.
The Homestead convertible mortgage notes receivable are convertible into
Homestead common stock on the basis of one share of Homestead common stock for
every $11.50 of principal face amount outstanding, which would result in the
ownership of approximately 19.2 million shares of Homestead common stock, if
converted.
See "--Funding Sources" for a discussion of the potential monetization of
these notes and Atlantic's sale of its Homestead convertible mortgage notes
receivable prior to the consummation of the Atlantic Merger.
Depreciation Expense
The increase in depreciation expense resulted primarily from the increase
in the number and cost basis of operating communities, including those acquired
in the Atlantic Merger, partially offset by dispositions.
Interest Expense
The following table summarizes Archstone's interest expense (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Unsecured credit facilities........... $ 17,535 $ 11,294
Long-Term Unsecured Debt.............. 43,434 34,456
Mortgages payable..................... 15,946 13,284
Capitalized interest.................. (20,764) (13,332)
-------- --------
Total interest expense............. $ 56,151 $ 45,702
======== ========
</TABLE>
The increase in interest cost on Archstone's credit facilities in 1998
resulted primarily from higher average borrowings outstanding during the nine
months ended September 30, 1998, as compared to the nine months ended September
30, 1997. These higher average credit facility balances are due primarily to an
increase in Archstone's borrowings to fund investment activities. See
"--Borrowings and Recent Offerings" for a discussion of recent repayments of
borrowings under Archstone's credit facilities. Long-Term Unsecured Debt
interest cost increased due to the issuance of $221.2 million of Long-Term
Unsecured Debt between March 1997 and September 1998 and the assumption of
$154.1 million of Long-Term Unsecured Debt in the Atlantic Merger. Mortgage
interest cost increased as a result of additional weighted average debt
outstanding due to mortgage assumptions related to community acquisitions
(including $160.3 million of mortgage debt assumed in the Atlantic Merger) which
were partially offset by prepayments during the nine months ended September 30,
1998 and 1997. These increases in interest costs were partially offset by an
increase in capitalized interest which was primarily attributable to higher
levels of multifamily development activity for the nine months ended September
30, 1998 as compared to the same period in 1997.
26
<PAGE>
General and Administrative Expenses
Archstone's overall general and administrative expenses of $11.0 million
during the nine months ended September 30, 1998 decreased $3.6 million from the
$14.6 million expensed during the nine months ended September 30, 1997. This
overall decrease is primarily attributable to the fact that Archstone did not
pay an external management fee during the nine months ended September 30, 1998
due to the termination of the external management agreement in connection with
the acquisition of its REIT and property management companies in September 1997.
In lieu of paying an external management fee, Archstone is now internally
managed and directly incurs: (i) actual personnel and other operating costs, and
(ii) amounts paid to Security Capital under the administrative services
agreement, which was entered into in September 1997. The portion of these costs
related to development activities are capitalized, whereas none of the prior
external management fee was capitalized.
Nonrecurring Expenses Related to Archstone's Branding Strategy and Atlantic
Merger Integration
As a result of the Atlantic Merger, Archstone incurred approximately $1.1
million in merger integration costs. Additionally, in conjunction with the
Atlantic Merger, Archstone introduced a national branding strategy with the
objective of achieving long-term brand loyalty, lower resident turnover and
greater market share. Archstone incurred approximately $1.1 million of costs for
the implementation of its branding strategy. The $1.1 million related to the
implementation of the branding strategy and the $1.1 million of costs associated
with the integration of the Atlantic Merger were both recorded as non-recurring
operating expenses during the three months ended September 30, 1998, but were
added back to net earnings for purposes of calculating funds from operations,
due to the non-recurring nature of the expenses.
Costs Incurred in Acquiring Management Companies from an Affiliate
In September 1997, Archstone acquired the operations and businesses of the
Management Companies valued at approximately $75.8 million from Security Capital
in exchange for 3,295,533 Common Shares. The market value of the shares issued
to Security Capital on the merger date was approximately $73.3 million, based on
the $22.25 per share closing price of the Common Shares, of which approximately
$1.6 million was allocated to the estimated fair value of the tangible net
assets acquired. The $71.7 million difference was accounted for as costs
incurred in acquiring the Management Companies from an affiliate. This one-time
adjustment was recorded as a non-recurring non-cash operating expense during the
three months ended September 30, 1997, but was added back to net earnings for
purposes of calculating funds from operations, due to the non-recurring and non-
cash nature of this expense.
Provision for Possible Loss on Investments
During the three months ended June 30, 1998, management concluded that the
full recovery of certain investments (primarily mortgage notes receivable
secured by non-multifamily assets) was doubtful. As a result, a provision for
possible loss of $3.0 million was recorded to reduce these assets to their
estimated net realizable value. A similar provision of $1.5 million relating to
certain investments held for disposition was recorded during the three months
ended March 31, 1997.
Gains on Dispositions of Depreciated Real Estate
During the nine months ended September 30, 1998, Archstone disposed of 11
multifamily communities and certain non-multifamily real estate assets,
representing gross proceeds of $223.5 million. As of September 30, 1998,
Archstone held a portion of the 1998 disposition proceeds aggregating $86.3
million in an interest bearing escrow account, pending the acquisition of other
multifamily communities to complete tax-deferred exchanges or the repayment of
borrowings under Archstone's credit facilities. Archstone disposed of 25
multifamily communities and certain non-multifamily real estate assets,
representing gross proceeds of $290.5 million during the nine months ended
September 30, 1997. For federal income tax purposes, the dispositions were
generally structured as tax-deferred exchanges, which deferred gain recognition.
However, for financial reporting purposes, the transactions qualified for profit
recognition and aggregate gains of $36.7 million and $47.9 million were recorded
for the nine months ended September 30, 1998 and 1997, respectively.
As of September 30, 1998, 17 multifamily communities and certain non-
multifamily real estate assets having an aggregate carrying value of $226.7
million were held for disposition. Subject to normal closing risks, Archstone
expects to complete the disposition of many of these properties and use the
proceeds to fund the development and acquisition of multifamily communities.
27
<PAGE>
Extraordinary Item--Write-off of Unamortized Loan Costs
Upon consummation of the Atlantic Merger, Archstone replaced its $350
million unsecured revolving line of credit with a $750 million unsecured
revolving line of credit provided by a group of financial institutions led by
Chase. Accordingly, Archstone expensed the remaining $1.5 million of unamortized
loan costs associated with the previous $350 million credit facility, as an
extraordinary item during the three months ended September 30, 1998.
Three Months Ended September 30, 1998 and 1997
Revenues and expenses for the three months ended September 30, 1998
compared to the three months ended September 30, 1997 reflect changes similar to
those discussed in the preceding paragraphs for the comparison of the nine
months ended on the same dates. The changes are substantially attributable to
the same reasons discussed in the preceding paragraphs for the nine months ended
September 30, 1998 and 1997.
Liquidity and Capital Resources
In recent months the real estate industry has experienced a general
tightening of the equity and credit markets. Management believes that this
restriction of credit availability should reduce multifamily construction
volumes throughout the country, which should improve the future fundamentals for
Archstone's business. Archstone has spent substantial time creating the
financial flexibility to remain competitive and take advantage of changes in
market conditions such as those that are currently being experienced. To provide
funding for Archstone's development and other investment needs, management
increased availability under its credit facilities to an aggregate borrowing
capacity of $1 billion (with an outstanding balance of $433.6 million and
available capacity of $566.4 million as of November 10, 1998) and issued
additional Long-Term Unsecured Debt to partially repay credit facilities. (See
"Scheduled Debt Maturities and Interest Debt Requirements" for a discussion of
Archstone's relatively level principal amortization schedule). Archstone
believes that its conservative ratio (36.73% as of November 10, 1998) of long
term debt to long term undepreciated book capitalization (the sum of long term
debt and shareholders' equity after adding back accumulated depreciation)
provides considerable financial flexibility to fund its investment activities
through the issuance of additional Long-Term Unsecured Debt or preferred shares
during the next year, without the need to raise additional common equity.
Because of the substantial increases in the spreads between rates on secured and
unsecured debt that exist in today's current market environment, Archstone
expects to issue a limited amount of secured debt during the next nine months.
Funds from such issuances would be used to fund the acquisition of properties at
attractive yields that management expects will become available as a result of
liquidity constraints in the market, incremental expenditures for Archstone's
development activities and to repay balances under Archstone's credit
facilities. Archstone also continues to employ its proven asset optimization
strategy to fund its investment activity. This strategy involves the disposition
of assets in markets with less attractive economic fundamentals and the
redeployment of the capital into well-located communities in markets with higher
growth prospects.
Archstone considers its liquidity and ability to generate cash to be
adequate and expects it to continue to be sufficient to meet all of its known
cash flow requirements.
Operating Activities
Net cash flow provided by operating activities increased by $52.2 million
(51.4%) for the nine months ended September 30, 1998 as compared to the same
period in 1997. This increase was due primarily to increased cash generated by
multifamily communities, which is expected to increase in future periods as a
result of the Atlantic Merger and other investment activities.
28
<PAGE>
Investing and Financing Activities
During the nine months ended September 30, 1998 and 1997, Archstone
invested cash of $437.5 million and $468.7 million, respectively, in real estate
investments relating primarily to the development and acquisition activity
summarized in "-Investments" above. The $437.5 million invested in real estate
and $11.9 million in fundings of Homestead convertible mortgage notes receivable
(which fulfilled Archstone's total Homestead funding commitment) during the nine
months ended September 30, 1998 were financed primarily from $79.4 million of
cash acquired in the Atlantic Merger, $134.9 million of net proceeds from
property dispositions (excluding $86.3 million held in escrow pending tax-
deferred exchanges) and borrowings under Archstone's credit facilities. These
credit facilities were partially repaid with proceeds from the issuance of $46.2
million and $125 million of Long-Term Unsecured Debt in September 1998 and March
1998, respectively, and $44.0 million in net proceeds from the sale of Common
Shares in April 1998. The $468.7 million invested in real estate and $61.3
million in fundings of Homestead convertible mortgage notes receivable during
the nine months ended September 30, 1997 were financed primarily from $261.3
million in net proceeds from property dispositions (excluding $22.9 million held
in escrow pending tax-deferred exchanges) and borrowings under Archstone's
credit facilities. These credit facilities were partially repaid with $50
million in proceeds from Long-Term Unsecured Debt issued in March 1997, $54.3
million in net proceeds from the sale of 2.5 million Common Shares in June 1997
and $194.1 million in net proceeds from the rights and oversubscription
offerings that closed in September 1997 in connection with the internalization
of management transaction.
Other significant financing activity included the payment of $129.9 million
and $90.1 million in Common Share distributions and Preferred Share dividends
for the nine months ended September 30, 1998 and 1997, respectively. The
increase is primarily attributable to: (i) an increase in the quarterly
distribution level from $0.325 per Common Share paid during the nine months
ended September 30, 1997 to the $0.34 per Common Share paid during the first six
months of 1998 which was subsequently increased to $0.355 per Common Share upon
consummation of the Atlantic Merger; and (ii) an increase in the overall number
of Common Shares outstanding, including the 47,752,052 Common Shares issued in
the Atlantic Merger. Preferred Share dividends increased approximately $0.6
million during the respective periods primarily due to the issuance of 2,000,000
Series C Preferred Shares to Atlantic's preferred shareholders as described in
"Atlantic Merger" above. This increase was partially offset by a decrease in the
Series A Preferred Share dividends paid as a result of conversions of Series A
Preferred Shares to Common Shares, which increased Common Share distributions
paid. Archstone prepaid mortgages of $40.0 million and $26.5 million during the
nine months ended September 30, 1998 and 1997 respectively, primarily in
connection with the disposition of multifamily communities.
Significant non-cash investing and financing activities included: (i) the
acquisition of $1.9 billion of assets (excluding $79.4 million of cash acquired)
in the Atlantic Merger which was consummated in July 1998, in exchange for the
issuance of $1.1 billion of Common Shares, $50.6 million of Series C Preferred
Shares and the assumption of $778.9 million in debt and other liabilities; (ii)
the conversion of Series A Preferred Shares to Common Shares aggregating $14.7
million and $24.4 million during the nine months ended September 30, 1998 and
1997, respectively; (iii) the assumption of $50.8 million and $94.8 million of
mortgage debt during the nine months ended September 30, 1998 and 1997,
respectively (excluding mortgage debt assumed in the Atlantic Merger); (iv) an
$83.8 million decrease and a $40.4 million increase in the unrealized gain on
the Homestead convertible mortgage notes receivable during the nine months ended
September 30, 1998 and 1997, respectively; (v) the issuance of 3,295,533 Common
Shares valued at $73.3 million in exchange for the operations and business of
the Management Companies in September 1997; and (vi) the receipt of notes from
employees aggregating $17.1 million for the purchase of Common Shares under the
Incentive Plan in 1997.
Borrowings and Offerings
Upon consummation of the Atlantic Merger in July 1998, Archstone replaced
its $350 million unsecured revolving line of credit with a $750 million
unsecured revolving line of credit provided by a group of financial institutions
led by Chase. This new line of credit has terms similar to those of the old $350
million line of credit facility and matures in July 2001, at which time it may
be converted into a two-year term loan, at Archstone's option.
In September 1996, Archstone entered into a short-term, unsecured borrowing
agreement with Chase in order to enhance cash management flexibility. This
borrowing agreement was renegotiated by Archstone upon consummation of the
Atlantic Merger under terms similar to the previous agreement. In October 1998,
the maximum borrowing capacity under the agreement was increased to $100
million. The agreement matures in July 1999 and bears interest at an overnight
rate that ranged from 5.93% to 7.13% during the nine months ended September 30,
1998.
29
<PAGE>
In May 1998, Atlantic entered into a $150 million unsecured delayed draw
term loan to provide bridge financing until the Atlantic Merger was consummated.
This obligation was assumed by Archstone (with all of Atlantic's other debt) in
the Atlantic Merger. The obligation, which was scheduled to mature in September
1998, was renegotiated by Archstone under similar terms as the previous
agreement and the maturity date was extended to March 31, 1998. Borrowings on
this credit facility bear interest at prime or, at Archstone's option, LIBOR
plus 0.90%. Archstone pays an annual facility fee of 0.15% on the unused
commitment.
On March 6, 1998, Archstone issued $125 million of 7.20% Long-Term
Unsecured Debt, the proceeds from which were used to repay borrowings on
Archstone's credit facilities. The 7.20% Notes pay interest semi-annually on
March 1 and September 1 of each year through maturity on March 1, 2013, and have
an average effective interest rate of 7.86% with an average life of 13.0 years.
Annual principal payments of $25 million commence on March 1, 2009.
On April 23, 1998, Archstone sold 2,049,587 Common Shares at $22.6875 per
share in an underwritten public offering. The net proceeds of $44.0 million (net
of underwriting discount and offering costs) were used to repay borrowings under
Archstone's credit facilities.
In September 1998, Archstone issued an aggregate amount of $46.2 million in
Long-Term Unsecured Debt through its medium-term note program, which proceeds
were used to repay borrowings on Archstone's credit facilities. The notes have
maturity dates ranging from October 13, 2000 to October 15, 2001. The notes have
nominal interest rates ranging from 6.17% to 6.37%, with aggregate weighted
average nominal and effective interest rates of 6.26% and 6.48%, respectively.
Between October 1, 1998 and November 10, 1998, Archstone issued an
aggregate amount of $266.0 million in Long-Term Unsecured Debt through its
medium-term note program, which proceeds were used to repay borrowings on
Archstone's credit facilities. The notes have various maturity dates ranging
from October 15, 2000 to October 1, 2008, with a weighted average life to
maturity of 4.02 years. The notes have nominal interest rates ranging from 6.32%
to 7.20%, with aggregate weighted average nominal and effective interest rates
of 7.05% and 7.21%, respectively.
The aggregate outstanding balance on Archstone's credit facilities was
reduced from $673.8 million as of September 30, 1998 to $433.6 million as of
November 10, 1998 which resulted primarily from the issuances of Long-Term
Unsecured Debt and asset dispositions.
30
<PAGE>
Scheduled Debt Maturities and Interest Payment Requirements
In order to minimize refinancing risk, Archstone's Long-Term Unsecured Debt
obligations are carefully structured to create a relatively level principal
maturity schedule without large payments due in any future year. Approximate
principal reductions due during each of the calendar years in the 20-year period
ending December 31, 2017 and thereafter, as of September 30, 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
Unsecured Long-Term
Credit Unsecured
Facilities Debt Mortgages Total
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
1998............. $ -- $ -- $ 32,175 $ 32,175
1999............. 49,753 30,310 10,862 90,925
2000............. -- 25,310 7,422 32,732
2001............. 624,000 34,010 31,973 689,983
2002............. -- 47,810 20,731 68,541
2003............. -- 51,560 11,193 62,753
2004............. -- 51,560 5,636 57,196
2005............. -- 51,560 36,101 87,661
2006............. -- 51,560 17,408 68,968
2007............. -- 51,560 19,068 70,628
2008............. -- 51,560 22,760 74,320
2009............. -- 71,467 5,802 77,269
2010............. -- 63,836 9,444 73,280
2011............. -- 50,086 6,714 56,800
2012............. -- 55,086 6,990 62,076
2013............. -- 70,086 7,350 77,436
2014............. -- 52,586 20,790 73,376
2015............. -- 50,086 53,402 103,488
2016............. -- 55,086 8,055 63,141
2017............. -- 40,125 8,731 48,856
2018 - 2029...... -- -- 90,984 90,984
-------- -------- -------- ----------
Total.......... $673,753 $955,244 $433,591 $2,062,588
======== ======== ======== ==========
</TABLE>
Archstone's credit facilities, Long-Term Unsecured Debt and mortgages
payable had all-in effective interest rates of 6.93%, 7.55% and 6.02%,
respectively, as of September 30, 1998.
Shareholder Dividends/Distributions
Archstone paid first and second quarter 1998 distributions of $0.34 per
Common Share on February 25 and May 28, 1998 and its third quarter 1998
distribution of $0.355 per Common Share on August 27, 1998. On October 15, 1998,
the Board declared the fourth quarter cash distribution of $0.355 per Common
Share, payable on November 24, 1998, to shareholders of record on November 10,
1998. On March 31 and June 30, 1998 Archstone paid first and second quarter
dividends of $0.4579 per Series A Preferred Share and on September 30, 1998 paid
the third quarter dividend of $0.4781 per Series A Preferred Share. On March 31,
June 30 and September 30, 1998 Archstone paid quarterly dividends of $0.5625 per
Series B Preferred Share. On September 30, 1998, Archstone paid the third
quarter dividend of $0.5391 per Series C Preferred Share.
Based on current distribution levels and the number of Archstone shares
outstanding at September 30, 1998, Archstone has the following annual
dividend/distribution requirements (in thousands):
<TABLE>
<S> <C>
Common Share distributions................................. $203,320
Series A Preferred Share dividends......................... 9,220
Series B Preferred Share dividends......................... 9,450
Series C Preferred Share dividends......................... 4,312
--------
Total dividend/distribution requirements................... $226,302
========
</TABLE>
Management anticipates that all interest and distribution/dividend
requirements can be funded from operating cash flow.
31
<PAGE>
Commitments and Contingencies
At September 30, 1998, Archstone had unfunded multifamily construction and
redevelopment commitments aggregating approximately $470.1 million. Archstone
anticipates completion of these communities that are currently under
construction and the planned redevelopments by 2000. Actual costs incurred could
be greater or less than Archstone's current estimates. Management believes that
Archstone's unused borrowing capacity under its credit facilities, which
aggregated $566.4 million at November 10, 1998, is sufficient to fund
Archstone's investment commitments prior to repaying these balances with long
term sources of capital.
Archstone is a party to various claims and routine litigation arising in
the ordinary course of business. Archstone does not believe that the results of
any such claims and litigation, individually or in the aggregate, will have a
material adverse effect on its business, financial position or results of
operations.
Funding Sources
Archstone expects to finance its investment and operating needs, including
those outlined above, primarily with cash flow from operating activities,
borrowings under its credit facilities and disposition proceeds prior to
arranging long-term financing. Archstone uses its credit facilities to
facilitate an efficient response to market opportunities while minimizing the
amount of cash invested in short-term investments at lower yields.
Other sources of future liquidity and financial flexibility include:
(i) Archstone currently has $87.2 million in shelf-registered securities which
can be issued in the form of Long-Term Unsecured Debt, preferred shares or
Common Shares on an as-needed basis, subject to its ability to effect
offerings on satisfactory terms. Management intends to file an additional
shelf registration statement similar to its existing shelf to enhance
Archstone's ability to utilize this option as a funding source. Archstone
believes that its conservative ratio of long-term debt to total long-term
undepreciated book capitalization (the sum of long-term unsecured debt and
shareholders' equity after adding back accumulated depreciation) of 36.73%
at November 10, 1998 provides considerable financial flexibility to fund
its investment activities through the issuance of additional Long-Term
Unsecured Debt or preferred shares during the next year, without the need
to raise additional common equity. In addition, management expects to issue
a limited amount of secured debt during the next nine months.
(ii) Archstone continues to explore the potential monetization of its $221.3
million (face amount at September 30, 1998) investment in its Homestead
convertible mortgage notes receivable. Management views the potential sale
or other monetization of these assets as a potential future source of
funds. Although there is no established market for these securities,
management's ability to consummate this type of transaction was
demonstrated in July 1998 when, prior to the consummation of the Atlantic
Merger, Atlantic sold all of its Homestead convertible mortgage notes
receivable for $119.4 million plus accrued interest of $1.0 million, which
resulted in a taxable gain of approximately $8.9 million. The net proceeds
from the sale of these notes were used to repay borrowings on Archstone's
credit facilities.
Year 2000 Issue
Archstone uses a significant number of information technology ("IT") and
non-IT computer systems in its operations. The IT systems include accounting and
property management systems, its desktop and communications systems and its
other corporate systems. The non-IT systems include embedded microprocessors
that control building systems such as lighting, security, fire, elevators,
heating, ventilating and air conditioning systems.
In 1997, Archstone began to address the year 2000 issue (that is, the fact
that some systems might fail or produce inaccurate results using dates in or
around the year 2000). Most of Archstone's key IT systems, including its
property management software has recently been replaced or upgraded and
management plans to replace or upgrade the remaining key IT systems during 1999.
Management believes, based on statements by vendors and on its own testing, that
all of the replacements and upgrades for mission-critical IT systems are year
2000 ready. Management is also continuing to replace or upgrade other non-
critical IT systems with year 2000 ready systems to the extent that it is cost-
effective to do so.
32
<PAGE>
Archstone is working with its vendors to confirm that the non-IT systems at
its communities are year 2000 compliant and is continuing to replace critical
non-IT systems that it believes are not year 2000 compliant. Archstone expects
that its communities will be year 2000 compliant by the end of the third quarter
of 1999.
Archstone relies on a variety of outside suppliers to provide critical
services to its communities. Of particular concern are the local utilities.
Electric utilities, for example, use numerous embedded systems in producing,
measuring, controlling and dispensing electricity. Without electricity, almost
none of the systems at any community will function. Archstone does not control
these outside suppliers and for some suppliers there may be no feasible
alternative supplier available. The sustained failure of a utility or other
supplier could have a material adverse effect on the operations of the affected
community, and a widespread sustained failure of utilities or other suppliers
could have a material adverse effect on Archstone.
Archstone has developed and will continue to refine contingency plans to
address the risk created by the year 2000 issue. These plans generally include
having community management representation on-site at the communities during the
century change to handle year 2000 issues as they arise and using the methods
that Archstone's community managers customarily use to address failures by
systems and suppliers.
Archstone's historical costs for addressing the year 2000 issue are not
material and management does not anticipate that its future costs associated
with the year 2000 issue will be material. Archstone does not separately track
the internal costs incurred for year 2000 compliance issues. Such costs are
principally the related payroll of its information technology group. Although
the cost of replacing Archstone's key IT systems is substantial, the
replacements have been and are being made to improve operational efficiency and
were not accelerated due to the year 2000 issue. Funds expended to date to
address year 2000 issues have been made from operating cash flow. Archstone has
not delayed any material projects as a result of the year 2000 issue.
There can be no assurance that year 2000 remediation by Archstone or third
parties will be properly and timely completed and failure to do so could have a
material adverse effect on Archstone, its business and financial condition.
Archstone cannot predict the actual effects of the year 2000 issue which depends
on numerous uncertainties, many of which are outside its control, such as
whether significant third parties such as banks and utilities address year 2000
issues properly and timely and whether broad-based or systemic economic failures
may occur. Archstone will continue to monitor these issues through its year
2000 compliance program.
Capital Expenditures
In conjunction with the underwriting of each acquisition of a multifamily
operating community, Archstone prepares acquisition budgets that encompass the
incremental capital needed to achieve Archstone's investment objectives. These
expenditures, combined with the initial purchase price and related closing
costs, are capitalized and classified as "acquisition-related" capital
expenditures, as incurred.
As part of its operating strategy, Archstone conducts regular reviews of
its assets to evaluate each community's physical condition relative to
management's business objectives and the community's competitive position in its
market. In conducting these evaluations, management considers Archstone's return
on investment in relation to its long-term cost of capital as well as its
research and analysis of competitive market factors.
Capital expenditures for operating communities are classified as either
"redevelopment" or "recurring". The redevelopment category includes: (i)
redevelopment initiatives, which are intended to reposition the community in the
marketplace and include items such as significant upgrades to the interiors,
exteriors, landscaping and amenities; (ii) revenue-enhancing expenditures, which
include investments that are expected to produce incremental community revenues,
such as building garages/carports, adding storage facilities or gating a
community; and (iii) expense-reducing expenditures, which include items such as
water submetering systems and xeriscaping that reduce future operating costs.
Archstone had 20 communities representing $384.2 million in total expected
investment undergoing significant redevelopment activities as of September 30,
1998. Overall redevelopment expenditures (including revenue-enhancing and
expense-reducing expenditures) aggregated $34.6 million during the nine months
ended September 30, 1998.
Recurring capital expenditures, which totaled $6.5 million during the nine
months ended September 30, 1998, consist of significant expenditures for items
having a useful life in excess of one year which are incurred to maintain a
community's long-term physical condition at a level commensurate with
Archstone's stringent operating standards. Examples of recurring capital
expenditures include roof replacements, parking lot resurfacing and exterior
painting.
33
<PAGE>
Repairs, maintenance and make-ready expenditures, including the replacement
of carpet, appliances and HVAC systems, are expensed as incurred, to the extent
they are not acquisition-related costs identified during Archstone's pre-
acquisition due-diligence. Make-ready expenditures are costs incurred in
preparing a vacant multifamily unit for the next resident.
Funds From Operations
Funds from operations is defined as net earnings computed in accordance
with GAAP, excluding real estate depreciation, gains (or losses) from
depreciated real estate, provisions for possible losses, non-cash interest
income, extraordinary items and significant non-recurring items. Funds from
operations should not be considered as an alternative to net earnings or any
other GAAP measurement of performance as an indicator of Archstone's operating
performance or as an alternative to cash flow from operating, investing or
financing activities as a measure of liquidity. Archstone believes that funds
from operations is helpful to the reader as a measure of the performance of an
equity REIT because, along with cash flow from operating, investing and
financing activities, it provides the reader with an indication of the ability
of Archstone to incur and service debt, to make capital expenditures and to fund
other cash needs. The funds from operations measure presented by Archstone,
while consistent with the National Association of Real Estate Investment Trusts'
definition, will not be comparable to similarly titled measures of other REIT's
that do not compute funds from operations in a manner consistent with Archstone.
Funds from operations is not intended to represent cash available to
shareholders. Cash distributions paid to shareholders are described above under
"--Distributions". Funds from operations are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings (loss) attributable to Common Shares - Basic................ $ 51,945 $(40,919) $115,307 $ 29,789
Add (Deduct):
Depreciation on real estate investments............................... 31,903 13,364 64,276 38,052
Gains on dispositions of depreciated real estate, net................. (21,204) (10,723) (36,688) (47,930)
Nonrecurring expenses................................................. 2,193 71,707 2,193 71,707
Extraordinary item - write-off of unamortized loan costs.............. 1,497 -- 1,497 --
Other, net............................................................ 14 (340) 2,275 632
-------- -------- -------- --------
Funds from operations attributable to Common Shares - Basic.............. 66,348 33,089 148,860 92,250
Add Back: Dividends on Series A Preferred Shares...................... 2,333 2,423 7,117 7,539
-------- -------- -------- --------
Funds from operations attributable to Common Shares - Diluted............ $ 68,681 $ 35,512 $155,977 $ 99,789
======== ======== ======== ========
Weighted average Common Shares outstanding - Basic....................... 143,967 81,506 110,585 78,280
Conversion of Series A Preferred Shares............................... 6,625 7,471 6,878 7,818
Incremental Options................................................... 8 34 29 34
-------- -------- -------- --------
Weighted average Common Shares outstanding - Diluted..................... 150,600 89,011 117,492 86,132
======== ======= ======== ========
</TABLE>
34
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12.1 --Computation of Ratio of Earnings to Fixed Charges
12.2 --Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends
15.1 --Letter from KPMG Peat Marwick LLP dated November 16, 1998
regarding unaudited financial information
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
Date Item Reported Financial Statements
----------------- -------------- --------------------
<S> <C> <C>
July 7, 1998 Item 5, Item 7 No
July 15, 1998 Item 2, Item 7 No
September 1, 1998 Item 5, Item 7 Yes
</TABLE>
35
<PAGE>
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.
ARCHSTONE COMMUNITIES TRUST
By: /s/ William Kell
----------------
William Kell
Senior Vice President
(Principal Financial Officer)
By: /s/ Ash K. Atwood
-----------------
Ash K. Atwood,
Vice President
(Principal Accounting Officer)
Date: November 16, 1998
36
<PAGE>
EXHIBIT 12.1
ARCHSTONE COMMUNITIES TRUST
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Twelve Months Ended December 31,
-------------------- --------------------------------------------------------
1998 1997(1) 1997(1) 1996 1995 1994 1993
-------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) from operations...............
$ 95,308 $(3,516) $24,686 $ 94,089 $ 81,696 $46,719 $23,191
Add:
Interest expense............................ 56,151 45,702 61,153 35,288 19,584 19,442 3,923
-------- ------- ------- -------- -------- ------- -------
Earnings as adjusted.......................... $151,459 $42,186 $85,839 $129,377 $101,280 $66,161 $27,114
======== ======= ======= ======== ======== ======= =======
Fixed charges:
Interest expense............................ $ 56,151 $45,702 $61,153 $ 35,288 $ 19,584 $19,442 $ 3,923
Capitalized interest........................ 20,764 13,332 17,606 16,941 11,741 6,029 2,818
-------- ------- ------- -------- -------- ------- -------
Total fixed charges....................... $ 76,915 $59,034 $78,759 $ 52,229 $ 31,325 $25,471 $ 6,741
======== ======= ======= ======== ======== ======= =======
Ratio of earnings to fixed charges............ 2.0 0.7 1.1 2.5 3.2 2.6 4.0
======== ======= ======= ======== ======== ======= =======
</TABLE>
(1) Earnings from operations for 1997 includes a one-time, non-cash charge of
$71.7 million associated with costs incurred in acquiring the Management
Companies from an affiliate. Accordingly, earnings from operations were
insufficient to cover fixed charges by $16.8 million for the nine months
ended September 30, 1997. Excluding this charge, the ratio of earnings to
fixed charges for the nine months ended September 30, 1997 and for the year
ended December 31, 1997 would be 1.9 and 2.0, respectively.
37
<PAGE>
EXHIBIT 12.2
ARCHSTONE COMMUNITIES TRUST
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Twelve Months Ended December 31,
-------------------- --------------------------------------------------------
1998 1997(1) 1997(1) 1996 1995 1994 1993
-------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) from operations............... $ 95,308 $(3,516) $24,686 $ 94,089 $ 81,696 $46,719 $23,191
Add:
Interest expense............................ 56,151 45,702 61,153 35,288 19,584 19,442 3,923
-------- ------- ------- -------- -------- ------- -------
Earnings as adjusted.......................... $151,459 $42,186 $85,839 $129,377 $101,280 $66,161 $27,114
======== ======= ======= ======== ======== ======= =======
Combined fixed charges and Preferred Share
dividends:
Interest expense............................ $ 56,151 $45,702 $61,153 $ 35,288 $ 19,584 $19,442 $ 3,923
Capitalized interest........................ 20,764 13,332 17,606 16,941 11,741 6,029 2,818
-------- ------- ------- -------- -------- ------- -------
Total fixed charges....................... $ 76,915 $59,034 $78,759 $ 52,229 $ 31,325 $25,471 $ 6,741
-------- ------- ------- -------- -------- ------- -------
Preferred Share dividends................... 15,192 14,625 19,384 24,167 21,823 16,100 1,341
-------- ------- ------- -------- -------- ------- -------
Combined fixed charges and Preferred Share
dividends.................................... $ 92,107 $73,659 $98,143 $ 76,396 $ 53,148 $41,571 $ 8,082
======== ======= ======= ======== ======== ======= =======
Ratio of earnings to combined fixed charges
and Preferred Share dividends................ 1.6 0.6 0.9 1.7 1.9 1.6 3.4
======== ======= ======= ======== ======== ======= =======
</TABLE>
(1) Earnings from operations for 1997 includes a one-time, non-cash charge of
$71.7 million associated with costs incurred in acquiring the Management
Companies from an affiliate. Accordingly, earnings from operations were
insufficient to cover combined fixed charges and Preferred Share dividends
by $31.5 million and $12.3 million for the nine months ended September 30,
1997 and for the year ended December 31, 1997, respectively. Excluding
this charge, the ratio of earnings to combined fixed charges and Preferred
Share dividends for the nine months ended September 30, 1997 and for the
year ended December 31, 1997 would be 1.5 and 1.6, respectively.
38
<PAGE>
Exhibit 15.1
Board of Trustees and Shareholders
Archstone Communities Trust
Gentlemen:
Re: Registration Statements Nos. 333-31031, 333-31033, 333-31405, 333-42283,
333-43723, 333-24035, 333-44639, 333-51139, 333-60815, 333-60817 and 333-60847.
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated October 30, 1998, except as to
Note 9 which is as of November 10, 1998 related to our review of interim
financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant, or a report prepared by an accountant within the meaning of sections
7 and 11 of the Act.
KPMG Peat Marwick LLP
Chicago, Illinois
November 16, 1998
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Form 10-Q for the nine months ended September 30, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,239
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,723,920
<DEPRECIATION> 181,992
<TOTAL-ASSETS> 4,923,592
<CURRENT-LIABILITIES> 0
<BONDS> 1,388,835
275,523
0
<COMMON> 143,183
<OTHER-SE> 2,250,509
<TOTAL-LIABILITY-AND-EQUITY> 4,923,592
<SALES> 331,621
<TOTAL-REVENUES> 352,832
<CGS> 0
<TOTAL-COSTS> 183,722
<OTHER-EXPENSES> 14,651
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 56,151
<INCOME-PRETAX> 116,804
<INCOME-TAX> 0
<INCOME-CONTINUING> 116,804
<DISCONTINUED> 0
<EXTRAORDINARY> 1,497
<CHANGES> 0
<NET-INCOME> 115,307
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
</TABLE>
