<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 March 31, 1999
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 80012
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 ________
--------
At May 10, 1999, there were approximately 138,990,000 of the Registrant's
common shares outstanding.
<PAGE>
Archstone Communities Trust
Index
<TABLE>
<CAPTION>
Page
Number
----------
<S> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets - March 31, 1999 (unaudited) and December 31, 1998........... 3
Condensed Statements of Earnings - Three months ended March 31, 1999 and 1998
(unaudited)......................................................................... 4
Condensed Statement of Shareholders' Equity - Three months ended March 31, 1999
(unaudited)......................................................................... 5
Condensed Statements of Cash Flows - Three months ended March 31, 1999 and 1998
(unaudited)......................................................................... 6
Notes to Condensed Financial Statements (unaudited)................................... 7
Independent Accountants' Review Report................................................ 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 20
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K...................................................... 21
</TABLE>
2
<PAGE>
Archstone Communities Trust
Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------ ----------- ------------
(unaudited)
<S> <C> <C>
Real estate........................................................................ $4,993,234 $4,869,801
Less accumulated depreciation...................................................... 231,107 205,795
---------- ----------
4,762,127 4,664,006
Mortgage notes receivable, net..................................................... 211,101 211,967
---------- ----------
Net investments............................................................. 4,973,228 4,875,973
Cash and cash equivalents.......................................................... 29,489 10,119
Restricted cash in tax-deferred exchange escrow.................................... 50 90,874
Other assets....................................................................... 80,854 82,932
---------- ----------
Total assets.............................................................. $5,083,621 $5,059,898
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unsecured credit facilities.................................................... $ 387,843 $ 264,651
Long-Term Unsecured Debt....................................................... 1,231,089 1,231,167
Mortgages payable.............................................................. 712,327 676,613
Distributions payable.......................................................... - 53,364
Accounts payable............................................................... 46,427 55,649
Accrued expenses............................................................... 65,109 83,114
Other liabilities.............................................................. 41,761 45,556
---------- ----------
Total liabilities.......................................................... 2,484,556 2,410,114
---------- ----------
Minority interest.................................................................. 20,319 21,459
---------- ----------
Shareholders' equity:
Series A Convertible Preferred Shares (4,493,715 shares in 1999 and
4,700,615 in 1998; stated liquidation preference of $25 per share)........... 112,343 117,515
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 50,000
Common Shares (138,987,595 shares in 1999 and 143,313,015 in 1998)............. 138,988 143,313
Additional paid-in capital..................................................... 2,295,798 2,376,514
Employee share purchase notes.................................................. (23,486) (26,275)
Distributions in excess of net earnings........................................ (99,897) (137,742)
---------- ----------
Total shareholders' equity................................................ 2,578,746 2,628,325
---------- ----------
Total liabilities and shareholders' equity................................ $5,083,621 $5,059,898
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
3
<PAGE>
Archstone Communities Trust
Condensed Statements of Earnings
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Revenues:
Rental revenues..................................................... $153,254 $88,553
Other income........................................................ 8,133 7,058
-------- -------
161,387 95,611
-------- -------
Expenses:
Rental expenses..................................................... 39,689 23,400
Real estate taxes................................................... 14,052 8,021
Depreciation on real estate investments............................. 32,797 16,258
Interest............................................................ 27,018 15,623
General and administrative.......................................... 5,332 2,821
Other............................................................... 3,169 189
-------- -------
122,057 66,312
-------- -------
Earnings from operations............................................... 39,330 29,299
Gains on dispositions of depreciated real estate, net............... 5,319 15,484
-------- --------
Earnings before extraordinary item..................................... 44,649 44,783
Less: extraordinary item - loss on early extinguishment of debt.... 1,113 -
-------- -------
Net earnings........................................................... 43,536 44,783
Less: Preferred Share dividends.................................... 5,691 4,712
-------- -------
Net earnings attributable to Common Shares - Basic..................... $ 37,845 $40,071
======== =======
Weighted average Common Shares outstanding - Basic..................... 141,295 92,783
-------- -------
Weighted average Common Shares outstanding - Diluted................... 141,300 99,970
-------- -------
Earnings before extraordinary item per Common Share:
Basic............................................................... $ 0.28 $ 0.43
======== =======
Diluted............................................................. $ 0.28 $ 0.42
======== =======
Net earnings per Common Share:
Basic............................................................... $ 0.27 $ 0.43
======== =======
Diluted............................................................. $ 0.27 $ 0.42
======== =======
Distributions paid per Common Share.................................... $ 0.37 $ 0.34
======== =======
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
4
<PAGE>
Archstone Communities Trust
Condensed Statement of Shareholders' Equity
Three Months Ended March 31, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Series A
Convertible Series B Series C
Preferred Preferred Preferred
Shares at Shares at Shares at
aggregate aggregate aggregate Additional
liquidation liquidation liquidation Common Shares paid-in
preference preference preference at par value capital
----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998......... $117,515 $105,000 $50,000 $143,313 $2,376,514
Comprehensive income:
Net earnings....................... - - - - -
Preferred Share dividends paid..... - - - - -
Comprehensive income attributable - - - - -
to Common Shares..................
Repurchase of shares, net of expenses (750) - - (4,452) (82,994)
Other, net............................ (4,422) - - 127 2,278
------------ ----------- ----------- ----------- ----------
Balances at March 31, 1999............ $112,343 $105,000 $50,000 $138,988 $2,295,798
=========== =========== =========== =========== ==========
<CAPTION>
Employee
share Distributions
purchase in excess of
notes net earnings Total
-------- ------------ ----------
<S> <C> <C> <C>
Balances at December 31, 1998......... $(26,275) $(137,742) $2,628,325
Comprehensive income:
Net earnings....................... - 43,536 43,536
Preferred Share dividends paid..... - (5,691) (5,691)
----------
Comprehensive income attributable
to Common Shares.................. - - 37,845
----------
Repurchase of shares, net of expenses - - (88,196)
Other, net............................ 2,789 - 772
-------- ------------ ----------
Balances at March 31, 1999............ $(23,486) $ (99,897) $2,578,746
======== ============ ==========
</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>
Three Months Ended
March 31,
------------------------------------------
1999 1998
---------------- -------------------
<S> <C> <C>
Operating activities:
Net earnings.................................................................... $ 43,536 $ 44,783
Adjustments to reconcile net earnings to net cash flow provided by operating
activities:
Depreciation and amortization................................................. 32,830 16,674
Gains on dispositions of depreciated real estate, net......................... (5,319) (15,484)
Provision for possible loss on investments.................................... 2,000 -
Change in accounts payable...................................................... (998) (3,242)
Change in accrued expenses and other liabilities................................ (22,936) (5,430)
Change in other assets.......................................................... 2,896 (2,767)
---------------- -------------------
Net cash flow provided by operating activities................................ 52,009 34,534
---------------- -------------------
Investing activities:
Real estate investments......................................................... (236,921) (117,613)
Proceeds from dispositions, net of closing costs................................ 110,502 99,538
Change in tax-deferred exchange escrow.......................................... 90,824 (15,287)
Funding of convertible mortgage notes receivable................................ - (4,000)
Other, net..................................................................... 1,491 1,135
---------------- -------------------
Net cash flow used in investing activities.................................... (34,104) (36,227)
---------------- -------------------
Financing activities:
Proceeds from Long-Term Unsecured Debt.......................................... - 125,000
Proceeds from Fannie Mae secured debt........................................... 36,206 -
Debt issuance costs incurred.................................................... (1,852) (6,589)
Principal prepayment of mortgages payable....................................... (7,871) (11,100)
Regularly scheduled principal payments on mortgages payable..................... (1,733) (840)
Proceeds from unsecured credit facilities....................................... 432,988 192,094
Principal payments on unsecured credit facilities............................... (309,796) (260,353)
Repurchase of Common Shares..................................................... (88,196) -
Cash distributions paid on Common Shares........................................ (53,364) (31,495)
Cash dividends paid on Preferred Shares......................................... (5,691) (4,712)
Other, net...................................................................... 774 71
---------------- -------------------
Net cash flow provided by financing activities................................ 1,465 2,076
---------------- -------------------
Net change in cash and cash equivalents........................................... 19,370 383
Cash and cash equivalents at beginning of period.................................. 10,119 4,927
---------------- -------------------
Cash and cash equivalents at end of period........................................ $ 29,489 $ 5,310
================ ===================
Significant non-cash investing and financing activities:
Assumption of mortgages payable upon purchase of apartment communities......... $ 9,411 $ 8,153
Series A Convertible Preferred Shares converted to Common Shares............... $ 4,422 $ 6,947
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
6
<PAGE>
Archstone Communities Trust
Notes to Condensed Financial Statements
March 31, 1999 and 1998
(Unaudited)
(1) General
In July 1998, Security Capital Pacific Trust consummated a merger with
Security Capital Atlantic Incorporated (the "Atlantic Merger") to form the
company now known as Archstone Communities Trust. The transaction was accounted
for as a purchase and therefore, the financial information as of and for the
periods prior to the merger date reflects only the balances and activity of
Security Capital Pacific Trust.
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 1998 Annual Report on
Form 10-K ("1998 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 month periods ended March 31, 1999 and 1998 are not
necessarily 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. Archstone uses
the equity method to account for its investments when it does not control, but
has the ability to exercise significant influence over, the operating and
financial policies of the investee. For an investee accounted for under the
equity method, Archstone's share of net earnings or losses of the investee is
reflected in income as earned and dividends are credited against the investment
as received.
The preparation of these financial statements in conformity with generally
accepted accounting principles ("GAAP") requires 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 1998 amounts have been reclassified to conform to the 1999
presentation.
Administrative Services Agreement
Archstone paid $1.8 million and $1.2 million to an affiliate for services
purchased under an administrative services agreement during the three months
ended March 31, 1999 and 1998, respectively.
7
<PAGE>
Archstone Communities Trust
Notes to Condensed Financial Statements - (Continued)
Per Share Data
Following is a reconciliation of the components used to compute basic and
diluted net earnings per share ("EPS"), for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------
1999 1998
---------------------- ----------------------
Reconciliation of numerator between basic and diluted net earnings per Common
Share/(1)/ :
<S> <C> <C>
Net earnings attributable to Common Shares - Basic........................... $ 37,845 $ 40,071
Dividends on Series A Preferred Shares.................................... - 2,370
---------------------- ----------------------
Net earnings attributable to Common Shares - Diluted......................... $ 37,845 $ 42,441
====================== ======================
</TABLE>
Reconciliation of denominator between basic and diluted net
earnings per Common Share/(1)/:
<TABLE>
<S> <C> <C>
Weighted average number of Common Shares outstanding - Basic................. 141,295 92,783
Assumed conversion of Series A Preferred Shares into Common Shares........ - 7,056
Incremental options outstanding........................................... 5 131
---------------------- ----------------------
Weighted average number of Common Shares outstanding - Diluted............... 141,300 99,970
====================== ======================
</TABLE>
/(1)/ Excludes the impact of potentially dilutive equity securities
during the period in which they are anti-dilutive.
(2) Real Estate
Investments in Real Estate
Equity investments in real estate, at cost, were as follows
(dollar amounts in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------------------- ---------------------------------
Investment Units Investment Units
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Apartment Communities:
Operating communities................................. $ 4,110,464 68,945 $ 4,027,044 69,341
Communities under construction/(1)/................... 644,954 10,196 701,897 12,120
Development communities In Planning/(1)// (2)/:
Owned.............................................. 69,306 2,944 69,710 3,398
Under Control /(3)/................................ - 3,725 - 3,772
--------------- --------------- --------------- ---------------
Total development communities In Planning......... 69,306 6,669 69,710 7,170
--------------- --------------- --------------- ---------------
Total apartment communities...................... 4,824,724 85,810 4,798,651 88,631
--------------- =============== --------------- ===============
Other real estate assets................................ 168,510 71,150
--------------- ---------------
Total real estate................................ $ 4,993,234 $ 4,869,801
=============== ===============
</TABLE>
(1) Unit information is based on management's estimates and has not been
audited or reviewed by Archstone's independent accountants.
(2) "In Planning" is defined as parcels of land owned or Under Control upon
which construction of apartments 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 apartment 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.
(3) Archstone's investment as of March 31, 1999 and December 31, 1998 for
developments Under Control was $5.7 million and $4.8 million, respectively,
and is reflected in the ''Other assets'' caption of Archstone's Balance
Sheets.
8
<PAGE>
Archstone Communities Trust
Notes to Condensed Financial Statements - (Continued)
The change in investments in real estate, at cost, consisted of the
following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1999.................................................... $ 4,869,801
Apartment communities:
Acquisition-related expenditures......................................... 90,063
Redevelopment expenditures............................................... 11,897
Recurring capital expenditures........................................... 1,845
Development expenditures, excluding land acquisitions.................... 92,986
Acquisition and improvement of land for development...................... 8,517
Dispositions............................................................. (111,368)
Provision for possible loss on investments............................... (450)
-------------
Net apartment community activity.......................................... 4,963,291
Other:
Change in other real estate assets....................................... 32,424
Provision for possible loss on investments............................... (1,550)
Dispositions................................................................. (931)
-------------
Other, net.............................................................. 29,943
-------------
Balance at March 31, 1999....................................................... $ 4,993,234
=============
</TABLE>
At March 31, 1999, Archstone had unfunded apartment construction,
redevelopment and operating community acquisition commitments aggregating
approximately $330.8 million.
Archstone had 13 apartment communities and certain other real estate assets
under contract for sale with an aggregate carrying value of $133.2 million as of
March 31, 1999. Each property's carrying value is less than or equal to its
estimated fair market value, net of estimated costs to sell. The property-level
earnings, after mortgage interest and depreciation, from communities held for
disposition at March 31, 1999 were $878,000 and $739,000 for the three months
ended March 31, 1999 and 1998, respectively.
During the three months ended March 31, 1999, Archstone concluded that the
full recovery of certain real estate assets was doubtful. As a result, a
provision for possible loss of $2.0 million was recorded to reduce these assets
to their estimated net realizable value.
(3) Borrowings
Unsecured Credit Facilities
Archstone has a $750 million unsecured revolving line of credit provided by
a group of financial institutions led by Chase Bank of Texas, National
Association ("Chase"). The $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 line of credit bears interest at the greater of prime or the federal funds
rate plus 0.50%, or at Archstone's option, LIBOR (4.96% at March 31, 1999) plus
0.65%. 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
agreement, Archstone pays a facility fee, which is equal to 0.15% of the
commitment.
The following table summarizes Archstone's line of credit borrowings
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Total line of credit................................................. $ 750,000 $ 750,000
Borrowings outstanding at end of period.............................. $ 372,000 $ 234,000
Weighted average daily borrowings.................................... $ 288,644 $ 340,658
Weighted average daily nominal interest rate......................... 5.8% 6.3%
Weighted average daily effective interest rate....................... 6.3% 6.8%
Weighted average nominal interest rate at end of period.............. 5.6% 6.2%
</TABLE>
9
<PAGE>
Archstone Communities Trust
Notes to Condensed Financial Statements - (Continued)
On April 13, 1999, Archstone entered into an interest rate swap agreement
with a notional amount of $100 million, relating to a portion of the outstanding
balance on its $750 million unsecured line of credit. The $100 million swap
effectively provides for a fixed nominal interest rate of 5.05% through April
13, 2000, at which time the agreement terminates.
Archstone's $100 million short-term, unsecured borrowing agreement with
Chase bears interest at an overnight rate that ranged from 5.62% to 6.25% during
the three months ended March 31, 1999. At March 31, 1999, there was $15.8
million outstanding under this agreement.
Long-Term Unsecured Debt
As of March 31, 1999, Archstone had $1.2 billion of long-term unsecured
senior notes ("Long-Term Unsecured Debt") issued and outstanding. Archstone's
Long-Term Unsecured Debt generally features semi-annual interest payments and
either amortizing annual principal payments or balloon payments due at maturity.
As of March 31, 1999, the $1.2 billion of aggregate Long-Term Unsecured Debt
outstanding had a weighted average coupon rate of 7.3%, a weighted average
effective interest rate (including offering discounts and issuance costs) of
7.5% and a weighted average remaining life to maturity of 8.4 years.
Mortgages Payable
Archstone's mortgages payable generally feature either monthly interest and
principal payments or monthly interest only payments with balloon payments due
at maturity. A summary of all mortgages payable outstanding at March 31, 1999
follows (amounts in thousands):
<TABLE>
<CAPTION>
Effective Interest Principal Balance at Principal Balance at
Type of Mortgage Rate /(1)/ March 31, 1999 December 31, 1998
- ----------------------------------------------- ------------------ -------------------- --------------------
<S> <C> <C> <C>
Fannie Mae secured debt(2)..................... 6.2% $ 304,656 $ 268,450
Conventional fixed rate........................ 7.9 109,535 108,588
Tax-exempt fixed rate.......................... 6.4 60,734 61,604
Tax-exempt floating rate....................... 4.0 208,890 209,316
Other.......................................... 6.3 28,512 28,655
------------------ -------------------- --------------------
Total/average mortgage debt.................. 5.9% $ 712,327 $ 676,613
================== ==================== ====================
</TABLE>
(1) Includes the effect of interest rate hedges, credit enhancements, other
bond-related costs and loan cost amortization, where applicable, as of
March 31, 1999.
(2) Includes: (i) $118.5 million at a floating effective interest rate of 5.9%
at March 31, 1999, which is subject to an interest rate cap agreement with
an all-in effective interest rate of 6.9%, (ii) $150.0 million subject to
an interest rate swap, which effectively provides for a fixed interest rate
of 6.3% until maturity, and (iii) $36.2 million at an all-in effective
fixed interest rate of 6.7%.
The change in mortgages payable during the three months ended March 31,
1999 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1999.......................................... $ 676,613
Mortgage notes issued/assumed....................................... 45,617
Principal payments, including prepayments and amortization.......... (9,903)
----------
Balance at March 31, 1999........................................... $ 712,327
==========
</TABLE>
10
<PAGE>
Archstone Communities Trust
Notes to Condensed Financial Statements - (Continued)
Scheduled Debt Maturities
Approximate principal payments due during each of the next five calendar
years and thereafter, as of March 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Long-Term Mortgages
Unsecured Debt Payable Total
-------------- ---------- -----------
<S> <C> <C> <C>
1999......................................... $ 30,232 $ 9,474 $ 39,706
2000......................................... 75,310 7,947 83,257
2001......................................... 70,010 13,902 83,912
2002......................................... 97,810 6,335 104,145
2003......................................... 171,560 26,965 198,525
Thereafter................................... 786,167 647,704 1,433,871
-------------- ----------- -----------
Total................................... $ 1,231,089 $ 712,327 $ 1,943,416
============== =========== ===========
</TABLE>
The average annual principal payments due from 2004 to 2018 are $90.2
million per year.
The $750 million unsecured credit facility matures in July 2001, at which
time it may be converted into a two-year term loan, at Archstone's option.
Archstone's short-term $100 million unsecured borrowing agreement with Chase
matures in July 1999.
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 covenants pertaining to its debt instruments at March 31,
1999.
For the three months ended March 31, 1999 and 1998, the total interest paid
in cash on all outstanding debt was $41.3 million and $24.7 million,
respectively. Archstone capitalizes interest incurred during the construction
period as part of the cost of apartment communities under development. Interest
capitalized during the three months ended March 31, 1999 and 1998 was $8.8
million and $5.2 million, respectively.
Amortization of loan costs included in interest expense for the three
months ended March 31, 1999 and 1998 was $1.4 million and $859,000,
respectively.
(4) Cash Distributions/Dividends
Archstone paid the first quarter 1999 distribution of $0.37 per Archstone
Common Share of beneficial interest, par value $1.00 per share ("Common Share")
on February 26, 1999. On April 21, 1999, the Board declared the second quarter
1999 cash distribution of $0.37 per Common Share, payable on May 28, 1999, to
shareholders of record on May 14, 1999. On March 31, 1999 Archstone paid
quarterly dividends of $0.4984 per Series A Cumulative Convertible Preferred
Share of Beneficial Interest (the "Series A Convertible Preferred Shares"),
$0.5625 per Series B Non-Convertible Cumulative Redeemable Preferred Share of
Beneficial Interest (the "Series B Preferred Shares") and $0.5391 per Series C
Non-Convertible Cumulative Redeemable Preferred Share of Beneficial Interest
(the "Series C Preferred Shares"). Collectively, the Series A, B and C Preferred
Shares are referred to as the "Preferred Shares".
(5) Shareholders' Equity
In February 1999, the Board authorized the repurchase of up to $100 million
of Archstone's Common Shares. Through April 16, 1999, Archstone had repurchased
4.6 million of its Common Shares at a weighted average price of $19.58 per
share, for a total purchase price of $89.9 million. Apartment community
disposition proceeds were used to reduce Archstone's unsecured credit facility
balances, providing the capacity to fund the share purchases.
11
<PAGE>
Archstone Communities Trust
Notes to Condensed Financial Statements - (Concluded)
During the three months ended March 31, 1999, approximately 176,900 of
Series A Convertible Preferred Shares were converted, at the option of the
holders, into approximately 238,300 Common Shares. This activity is included in
"Other, net" in the accompanying Condensed Statement of Shareholders' Equity.
At March 31, 1999, Security Capital Group Incorporated, Archstone's largest
shareholder, owned approximately 39.0% of Archstone's Common Shares outstanding.
(6) Segment Data
During 1998, Archstone adopted Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which established standards for the way that public business enterprises report
information about operating segments in audited financial statements, as well as
related disclosures about products and services, geographic areas and major
customers.
Archstone defines each of its apartment communities as individual operating
segments. Management has determined that all of its apartment communities have
similar economic characteristics and also meet the other criteria which permit
the apartment communities to be aggregated into one reportable segment.
Archstone relies primarily on Net Operating Income, defined as rental revenues
less property operating expenses and real estate taxes, ("NOI") generated from
its apartment communities for purposes of making decisions about allocating
resources and assessing segment performance.
Following are reconciliations of the reportable segment's: (i) revenues to
Archstone's consolidated revenues and (ii) NOI to Archstone's consolidated
earnings from operations (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Reportable apartment community segment revenues................ $ 152,490 $ 87,356
Other non-reportable operating segment revenues/(1)/........... 8,897 8,255
--------- ---------
Total segment and consolidated revenues........................ $ 161,387 $ 95,611
========= =========
Three Months Ended March 31,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Reportable apartment community segment Net Operating Income.... $ 98,772 $ 56,076
Other non-reportable operating segment Net Operating Income.... 741 1,056
--------- ---------
Total segment Net Operating Income............................ 99,513 57,132
--------- ---------
Reconciling items:
Other income.................................................. 8,133 7,058
Depreciation on real estate investments....................... (32,797) (16,258)
Interest expense.............................................. (27,018) (15,623)
General and administrative expenses........................... (5,332) (2,821)
Other expenses................................................ (3,169) (189)
--------- ---------
Consolidated earnings from operations.......................... $ 39,330 $ 29,299
========= =========
</TABLE>
(1) Includes $5.8 million and $5.5 million of interest income on the
convertible mortgage notes receivable for the three months ended March 31,
1999 and 1998, respectively. Also includes revenues generated from the
operation or sale of other real estate assets, interest income and other
income.
Archstone does not derive any of its consolidated revenues from foreign
countries and does not have any major customers that individually account for
10% or more of Archstone's consolidated revenues.
12
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Trustees and Shareholders
of Archstone Communities Trust:
We have reviewed the accompanying condensed balance sheet of Archstone
Communities Trust as of March 31, 1999, the related condensed statements of
earnings for the three month periods ended March 31, 1999 and 1998, the
condensed statement of shareholders' equity for the three month period ended
March 31, 1999 and the condensed statements of cash flows for the three month
periods ended March 31, 1999 and 1998. 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 Archstone Communities Trust as of December 31,
1998, 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 22, 1999, except as to Note 15, which is as of March 5, 1999, 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, 1998 is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
KPMG LLP
Chicago, Illinois
April 16, 1999
13
<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
1998 Form 10-K as well as the financial statements and notes included in Item 1
of this report. The statements contained in this report that are not historical
facts are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934. These forward-looking statements are based on current expectations and
projections about the industry and markets in which Archstone operates,
management's beliefs and assumptions made by management. Words such as
"expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Archstone undertakes no obligation to update publicly any forward-
looking statements, whether as a result of new information, future events or
otherwise. See Archstone's 1998 Form 10-K "Item 1. Business" for a discussion of
risk factors that could impact Archstone's future financial performance.
Results of Operations
Three Months Ended March 31, 1999 Compared to March 31, 1998
Earnings from operations increased $10.0 million during the three months
ended March 31, 1999 over the same period in 1998. This increase was offset by:
(i) a $10.1 million decrease in net gains on dispositions of depreciated real
estate, (ii) a $1.1 million extraordinary item related to the early
extinguishment of certain mortgage debt, and (iii) a $1.0 million increase in
Preferred Share dividends, to produce a net decrease in net earnings
attributable to Common Shares of $2.2 million.
Apartment Community Operations
At March 31, 1999, investments in apartment communities comprised over 99%
of Archstone's total real estate portfolio, based on total expected investment.
The following table summarizes the NOI generated from Archstone's apartment
communities for each period (in thousands, except for percentages):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------- -------------
1999 1998 Increase
------------ ------------ ------------
<S> <C> <C> <C>
Rental revenues............................... $ 152,490 $ 87,356 74.6%
Property operating expenses:
Rental expenses............................. 39,666 23,302 70.2%
Real estate taxes........................... 14,052 7,978 76.1%
------------ ------------ ------------
Total property operating expenses......... 53,718 31,280 71.7%
------------ ------------ ------------
Net Operating Income.......................... $ 98,772 $ 56,076 76.1%
============ ============ ============
Operating margin (NOI/rental revenues)........ 64.8% 64.2% 0.6%
============ ============ ============
</TABLE>
The increases in rental revenues, property operating expenses and real
estate taxes are due primarily to a net increase of 95 operating apartment
communities from March 31, 1998 to March 31, 1999 (including those acquired in
the Atlantic Merger) and growth in NOI from operating apartment communities.
Increased operating efficiencies and Archstone's commitment to customer-focused
operations have contributed to the improvement in operating margins.
Approximately 84.2% and 85.2% of Archstone's operating portfolio was
classified as stabilized (meaning that development/redevelopment, new marketing
programs and possibly new management have been completed for a sufficient period
of time to achieve 93% occupancy at market rents) as of March 31, 1999 and 1998,
respectively. The full impact on NOI from Archstone's development activities
and, to a lesser extent, acquisition activities, is not reflected until after
the communities are stabilized. As buildings are completed and leased, NOI
increases until the overall community is producing a stabilized yield, which is
generally achieved 18 to 24 months after construction commences. Management
believes Archstone's operating results continue to demonstrate that its
development activities contribute positively to long-term operating performance.
14
<PAGE>
Management believes that future property operating results will be
positively impacted by Archstone's customer focused operating initiatives and
its recently implemented national branding strategy, which was designed to
increase customer loyalty and reduce turnover rates through quality service
guarantees and other similar initiatives.
Other Income
Other income is primarily influenced by interest income on convertible
mortgage notes receivable. During the three months ended March 31, 1999 and
1998, Archstone recorded $5.8 million and $5.5 million in interest income,
respectively ($5.3 million and $5.1 million, respectively for purposes of
calculating funds from operations), from these notes. The increase is a direct
result of higher average outstanding note balances during the three months ended
March 31, 1999 as compared to the three months ended March 31, 1998. See "-
Liquidity and Capital Resources-Funding Sources" for a discussion of the future
monetization of these notes.
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 increase in interest expense is primarily attributable to higher
outstanding debt balances associated with the financing of Archstone's
investment activities. These higher borrowing costs were partially offset by the
capitalization of interest on apartment development activities. Interest expense
will be higher in 1999 as compared to 1998 primarily due to the debt assumed in
the Atlantic Merger and the debt issued in 1998 and 1999 to fund Archstone's
investment activities.
General and Administrative Expenses
The overall increase in general and administrative expenses relates
primarily to the incremental costs associated with operating the company after
the Atlantic Merger.
Provision for Possible Loss on Investments
During the three months ended March 31, 1999, management concluded that the
full recovery of certain real estate investments was doubtful. As a result, a
provision for possible loss of $2.0 million, which is included in "Other" in the
accompanying Condensed Statements of Earnings, was recorded to reduce these
assets to their estimated net realizable value.
Gains on Dispositions of Depreciated Real Estate
During the three months ended March 31, 1999, Archstone disposed of nine
apartment communities and certain other real estate assets, representing gross
proceeds of $113.1 million. Archstone disposed of five apartment communities and
certain other real estate assets, representing gross proceeds of $101.1 million
during the three months ended March 31, 1998. Aggregate net gains of $5.3
million and $15.5 million, were recorded for the three months ended March 31,
1999 and March 31, 1998, respectively.
As part of its ongoing asset optimization strategy, Archstone had 13
apartment communities and certain other real estate assets under contract for
sale with an aggregate carrying value of $133.2 million as of March 31, 1999.
Subject to normal closing risks, Archstone expects to complete these and other
dispositions during 1999 and use the proceeds to fund future investment
opportunities. As part of management's long-term strategy of proactively
managing its investments, Archstone will continue to pursue favorable
opportunities to dispose of assets that do not meet its long-term investment
criteria, and use such proceeds for incremental investments in its specifically
targeted markets, including California, Washington, D.C. and Boston,
Massachusetts.
Preferred Share Dividends
The higher level of Preferred Share dividends is attributable to the
assumption of the Series C Preferred Shares in the Atlantic Merger and an
increase in the Series A Convertible Preferred Share dividend rate, partially
offset by conversions of Series A Convertible Preferred Shares into Common
Shares.
15
<PAGE>
Liquidity and Capital Resources
Archstone has a conservative financial strategy and prudently manages its
balance sheet in order to avoid liquidity issues in any given quarter or year.
Archstone believes that this approach to proactively managing its financial
position will provide a competitive advantage when many of Archstone's
competitors do not have access to capital to fund incremental investment
opportunities.
Archstone continues to focus on community dispositions in its non-core
markets as a source of funds for incremental strategic investments in its
specifically targeted markets, including California, Washington, D.C. and
Boston, Massachusetts. In addition, as of May 10, 1999, Archstone also has a
total of $471.1 million of undrawn capacity on its existing unsecured credit
facilities to fund incremental investment opportunities. Archstone has only
$112.3 million of Long-Term Unsecured Debt and mortgages payable with final
maturities in 1999 and 2000. Furthermore, as of March 31, 1999, 79% of
Archstone's assets were unencumbered by mortgages. As a result of these factors,
Archstone believes that its financial and liquidity position are relatively
strong and the company is positioned to capitalize on investment opportunities
that may arise during the remainder of 1999.
Operating Activities
Net cash flow provided by operating activities increased by $17.5 million
(50.6%) for the three months ended March 31, 1999 as compared to the same period
of 1998. This increase is due primarily to the Atlantic Merger in July 1998, the
development of new apartment communities and cash flow growth from existing
apartment communities.
Investing and Financing Activities
During the three months ended March 31, 1999 and 1998, Archstone invested
$236.9 million and $117.6 million, respectively, in real estate investments. The
$236.9 million invested in real estate and the repurchase of $88.2 million of
Common Shares during the three months ended March 31, 1999 were financed
primarily from property dispositions, tax-deferred exchange escrow proceeds,
cash flow from operations and additional borrowings. The $117.6 million invested
in real estate during the three months ended March 31, 1998 was financed
primarily from property dispositions and borrowings under Archstone's unsecured
credit facilities. These unsecured credit facilities were partially repaid with
proceeds related to the issuance of $125 million of Long-Term Debt in March
1998.
Other significant financing activities included: (i) the payment of $59.1
million and $36.2 million in Common and Preferred Share distributions for the
three months ended March 31, 1999 and 1998, respectively. The increases are
primarily attributable to an increase in the overall number of Common Shares
outstanding, Series C Preferred Shares assumed in the Atlantic Merger in 1998,
and an increase in the cash distributions paid per Common Share; and (ii) the
prepayment of mortgages due to community dispositions of $7.9 million and $11.1
million during the three months ended March 31, 1999 and 1998, respectively.
Archstone's significant non-cash investing and financing activities during
the three months ended March 31, 1999 and 1998 included the assumption of
mortgage debt and the conversion of Series A Convertible Preferred Shares into
Common Shares.
Scheduled Debt Maturities and Interest Payment Requirements
In order to reduce refinancing risk, Archstone's long-term debt obligations
are carefully structured to create a relatively level principal maturity
schedule in an attempt to minimize the requirement for large payments due in any
single year. As of March 31, 1999, Archstone has only $35.5 million of long-term
debt payments with final maturities due during the remainder of 1999 and only
$76.8 million of final maturities during 2000.
Archstone currently has $850 million in total borrowing capacity under its
unsecured credit facilities, with $378.9 million outstanding and an available
balance of $471.1 million at May 10, 1999. Archstone's unsecured credit
facilities, Long-Term Unsecured Debt and mortgages payable had all-in effective
interest rates of 6.3%, 7.5% and 5.9%, respectively, as of March 31, 1999.
16
<PAGE>
Shareholder Dividend/Distribution Requirements
Archstone paid the first quarter 1999 distribution of $0.37 per Common
Share on February 26, 1999. On April 21, 1999 the Board declared a cash
distribution of $0.37 per Common Share, payable on May 28, 1999 to shareholders
of record on May 14, 1999. On March 31, 1999, Archstone paid quarterly dividends
of $0.4984 per Series A Convertible Preferred Share, $0.5625 per Series B
Preferred Share and $0.5391 per Series C Preferred Share.
Based on current distribution levels (excluding the impact of anticipated
future increases in Archstone's dividend/distribution levels) and the number of
Archstone shares outstanding as of March 31, 1999, the company anticipates that
it will pay the following dividends/distributions during the next 12 months (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Common Share distributions....................................... $ 205,702
Series A Convertible Preferred Share dividends................... 8,956
Series B Preferred Share dividends............................... 9,450
Series C Preferred Share dividends............................... 4,312
---------
Total dividend/distribution requirements......................... $ 228,420
=========
</TABLE>
Management anticipates that all interest and distribution/dividend
requirements can be funded from operating cash flow.
At March 31, 1999, Security Capital Group Incorporated, Archstone's largest
shareholder, owned approximately 39.0% of Archstone's Common Shares outstanding.
Share Repurchase Program
In February 1999, the Board authorized the repurchase of up to $100 million
of Archstone's Common Shares. Through April 16, 1999, Archstone had repurchased
4.6 million of its Common Shares at a weighted average price of $19.58 per
share, for a total purchase price of $89.9 million. Apartment community
disposition proceeds were used to reduce Archstone's unsecured credit
facilities, providing the capacity to fund the share purchases.
Planned Investments
Following is a summary of unfunded planned investments as of March 31, 1999
(dollar amounts in thousands). The amounts labeled "Discretionary" represent
future investments that Archstone plans to make, although there is not a
contractual commitment to do so. The amounts labeled "Committed" represent the
approximate amount that Archstone is contractually committed to fund. For
community acquisitions under contract, only the transactions with non-refundable
earnest money are reflected as "Committed".
<TABLE>
<CAPTION>
Planned Investments
--------------- ----------------------------------
Units Discretionary Committed
--------------- --------------- ---------------
<S> <C> <C> <C>
Planned operating community improvements............. - $ 99,470 $ 8,357
Communities under construction....................... 10,196 - 259,470
Communities In Planning and owned.................... 2,944 234,904 -
Communities In Planning and Under Control............ 3,725 411,389 -
Operating community acquisitions under contract or
letter of intent.................................. 1,052 45,750 62,952
--------------- --------------- ---------------
Total...................................... 17,917 $ 791,513 $ 330,779
=============== =============== ===============
</TABLE>
17
<PAGE>
Archstone anticipates completion of most of the communities that are
currently under construction and the planned operating community improvements in
the remainder of 1999 and 2000 and expects to start construction on
approximately $200 million, based on total expected investment, of communities
that are currently in planning, during the remainder of 1999. Acquisitions of
operating communities that are currently under contract or letter of intent are
expected to be funded with disposition proceeds during the remainder of 1999. No
assurances can be given that communities Archstone does not currently own will
be acquired or that planned developments will actually occur. In addition,
actual costs incurred could be greater or less than Archstone's current
estimates.
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 unsecured credit facilities and disposition proceeds, prior
to arranging long-term financing. Archstone routinely uses its unsecured credit
facilities to facilitate an efficient response to market opportunities while
minimizing the amount of cash invested in short-term investments at lower
yields. The unsecured credit facilities had $471.1 million in available undrawn
capacity as of May 10, 1999.
Other sources of future liquidity and financial flexibility include:
(i) Archstone currently has $827.2 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.
(ii) Archstone continues to explore the potential monetization of its
$221.3 million (face amount at March 31, 1999) investment in its
convertible mortgage notes receivable. Management views the future
sale or other monetization of these assets as a potential source of
funds, although there is presently no established market for these
securities.
Other Contingencies and Hedging Activities
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 aggregate, will have a
material adverse effect on its business, financial position or results of
operations.
Archstone has only limited involvement with derivative financial
instruments and does not use them for trading purposes. Archstone occasionally
utilizes derivative financial instruments as hedges in anticipation of future
debt transactions to manage well-defined interest rate risk or to minimize
exposure to variable rate debt.
On April 13, 1999, Archstone entered into an interest rate swap agreement
with a notional amount of $100 million, relating to a portion of the outstanding
balance on its $750 million unsecured line of credit. The $100 million swap
effectively provides for a fixed interest rate of 5.05% through April 13, 2000,
at which time the agreement terminates.
In January 1999, Archstone entered into two interest rate swap agreements
with notional amounts aggregating $55.0 million, relating to Long-Term Unsecured
Debt. The $55.0 million of notes, which were originally issued at a floating
weighted average effective interest rate of 7.34%, were effectively converted to
a fixed weighted average interest rate of 7.12% through maturity. In January
1999, Archstone also entered into an interest rate swap on $150 million of
Fannie Mae secured debt, which effectively provides for a fixed interest rate of
6.3% until maturity in 2006.
In connection with the closing of the $268.5 million Fannie Mae secured
debt agreement in December 1998, Archstone entered into an interest rate cap
agreement on December 30, 1998 with a notional amount aggregating $118.5
million, which capped this portion of the debt at an effective interest rate of
6.9% through December 2002. The actual floating effective interest rate on the
$118.5 million was 5.9% at March 31, 1999.
At March 31, 1999, Archstone had a net unrealized gain of $5.1 million on
its outstanding derivative financial instruments.
18
<PAGE>
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, have recently been replaced or upgraded and
management plans to replace or upgrade the remaining key IT systems during the
third quarter of 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.
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. In management's view, the most significant
foreseeable external risk associated with the year 2000 issue is the potential
for a sustained failure of a utility or other supplier which could have a
material adverse effect on the operations of the affected community. A
widespread sustained failure of utilities or other suppliers in areas that
Archstone has a substantial presence 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 available 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. In the event that the
implementation of these systems is unexpectedly delayed, Archstone would be
required to make modifications and upgrades to its existing accounting systems
for financial reporting purposes. Management believes that the costs of these
modifications and upgrades would not have a material adverse impact on the
Company's financial position or results of operations. Funds expended to date to
address year 2000 issues have come 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.
19
<PAGE>
Funds From Operations
Archstone believes that funds from operations is helpful to the reader as a
measure of the performance of an equity real estate investment trust ("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, to make
Common Share and Preferred Share distributions and to fund other cash needs.
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. 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 summarized above in "-Shareholder Dividend/Distribution
Requirements". Funds from operations were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Net earnings attributable to Common Shares - Basic........................... $ 37,845 $ 40,071
Add (Deduct):
Depreciation on real estate investments................................... 32,797 16,258
Provision for possible loss on investments................................ 2,000 -
Gains on dispositions of investments, net................................. (5,319) (15,484)
Extraordinary item - loss on early extinguishment of debt................. 1,113 -
Other, net................................................................ (29) (432)
-------- --------
Funds from operations attributable to Common Shares - Basic.................. 68,407 40,413
Series A Convertible Preferred Share dividends............................ 2,250 2,370
-------- --------
Funds from operations attributable to Common Shares - Diluted................ $ 70,657 $ 42,783
======== ========
Weighted average Common Shares outstanding - Diluted......................... 148,419 99,970
======== ========
</TABLE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Archstone is exposed to interest rate changes primarily as a result of its
unsecured credit facilities and other variable rate debt used to finance its
investment activity and maintain financial liquidity. Archstone's interest rate
risk management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower its overall borrowing costs. To achieve its
objectives, Archstone borrows primarily at fixed rates. Archstone has only
limited involvement with derivative financial instruments and does not use them
for trading purposes. Archstone occasionally utilizes derivative financial
instruments as hedges in anticipation of future debt transactions to manage
well-defined interest rate risk or to minimize exposure to variable rate debt.
See Archstone's 1998 Form 10-K "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk" for a more complete discussion of Archstone's
interest rate sensitive assets and liabilities. As of March 31, 1999, there have
been no material changes in the fair values of assets and liabilities disclosed
in "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in
Archstone's 1998 Form 10-K, as compared to their respective book values.
20
<PAGE>
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12.1 -Computation 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 LLP dated May 14, 1999 regarding unaudited
financial information
27 -Financial Data Schedule
99.1 -Current Development Activity
(b) Reports on Form 8-K:
Date Item Reported Financial Statements
------------------ ----------------- ------------------------
February 16, 1999 Item 5, Item 7 No
21
<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/ CHARLES E. MUELLER, JR.
-----------------------------
Charles E. Mueller, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ WILLIAM KELL
------------------
William Kell
Senior Vice President and Controller
(Principal Accounting Officer)
Date: May 14, 1999
22
<PAGE>
EXHIBIT 12.1
ARCHSTONE COMMUNITIES TRUST
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, Twelve Months Ended December 31,
--------------------------------- ---------------------------------------------------------------
1999 1998 1998 1997/(1)/ 1996 1995 1994
------------ ------------------ ---------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from operations..... $ 39,330 $ 29,299 $ 133,926 $ 24,686 $ 94,089 $ 81,696 $ 46,719
Add:
Interest expense........... 27,018 15,623 83,350 61,153 35,288 19,584 19,442
------------ ------------------ ---------- ---------- ---------- ---------- ---------
Earnings as adjusted......... $ 66,348 $ 44,922 $ 217,276 $ 85,839 $ 129,377 $ 101,280 $ 66,161
============ ================== ========== ========== ========== ========== =========
Fixed charges:
Interest expense........... $ 27,018 $ 15,623 $ 83,350 $ 61,153 $ 35,288 $ 19,584 $ 19,442
Capitalized interest....... 8,838 5,214 29,942 17,606 16,941 11,741 6,029
------------ ------------------ ---------- ---------- ---------- ---------- ---------
Total fixed charges..... $ 35,856 $ 20,837 $ 113,292 $ 78,759 $ 52,229 $ 31,325 $ 25,471
============ ================== ========== ========== ========== ========== =========
Ratio of earnings to fixed
charges..................... 1.9 2.2 1.9 1.1 2.5 3.2 2.6
============ ================== ========== ========== ========== ========== =========
</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. Excluding this charge, the ratio of earnings
to fixed charges for the year ended December 31, 1997 would be 2.0.
<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>
Three Months Ended
March 31, Twelve Months Ended December 31,
-------------------- --------------------------------------------------------
1999 1998 1998 1997/(1)/ 1996 1995 1994
--------- --------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from operations........................ $39,330 $29,299 $133,926 $24,686 $ 94,089 $ 81,696 $46,719
Add:
Interest expense.............................. 27,018 15,623 83,350 61,153 35,288 19,584 19,442
-------- ---------- --------- -------- --------- -------- --------
Earnings as adjusted............................ $66,348 $44,922 $217,276 $85,839 $129,377 $101,280 $66,161
======== ========== ========= ======== ========= ======== ========
Combined fixed charges and Preferred Share
dividends:
Interest expense.............................. $27,018 $15,623 $ 83,350 $61,153 $ 35,288 $ 19,584 $19,442
Capitalized interest.......................... 8,838 5,214 29,942 17,606 16,941 11,741 6,029
-------- ---------- --------- -------- --------- -------- --------
Total fixed charges........................ $35,856 $20,837 $113,292 $78,759 $ 52,229 $ 31,325 $25,471
======== ========== ========= ======== ========= ======== ========
Preferred Share dividends..................... 5,691 4,712 20,938 19,384 24,167 21,823 16,100
-------- ---------- --------- -------- --------- -------- --------
Combined fixed charges and Preferred Share
dividends...................................... $41,547 $25,549 $134,230 $98,143 $ 76,396 $ 53,148 $41,571
======== ========== ========= ======== ========= ======== ========
Ratio of earnings to combined charges and
Preferred Share dividends...................... 1.6 1.8 1.6 0.9 1.7 1.9 1.6
======== ========== ========= ======== ========= ======== ========
</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 $12.3 million. Excluding this charge, the ratio of earnings to combined
fixed charges and Preferred Share dividends for the year ended December 31,
1997 would be 1.6.
<PAGE>
EXHIBIT 15.1
Board of Trustees and Shareholders
Archstone Communities Trust
Gentlemen:
Re: Registration Statements Nos. 333-43723, 333-44639, 333-51139, 333-60815,
333-60817, 333-60847 and 333-68591.
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 16, 1999 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 LLP
Chicago, Illinois
May 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,489
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,993,234
<DEPRECIATION> 231,107
<TOTAL-ASSETS> 5,083,621
<CURRENT-LIABILITIES> 0
<BONDS> 1,943,416
138,988
0
<COMMON> 267,343
<OTHER-SE> 2,172,415
<TOTAL-LIABILITY-AND-EQUITY> 5,083,621
<SALES> 153,254
<TOTAL-REVENUES> 161,387
<CGS> 0
<TOTAL-COSTS> 86,538
<OTHER-EXPENSES> 6,501
<LOSS-PROVISION> 2,000
<INTEREST-EXPENSE> 27,018
<INCOME-PRETAX> 38,958
<INCOME-TAX> 0
<INCOME-CONTINUING> 38,958
<DISCONTINUED> 0
<EXTRAORDINARY> 1,113
<CHANGES> 0
<NET-INCOME> 37,845
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
<PAGE>
Exhibit 99.1
<TABLE>
<CAPTION>
Actual or Expected
Total Expected Date for Stabilization %
Number of Archstone Expected Start Date First Units Date Leased
Units Investment Investment/(1)/(Quarter/Year) (Quarter/Year)/(2)/(Quarter/Year) /(3)/
--------- ---------- -------------- ------------ ----------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Central Region:
Austin, Texas:
Archstone Monterey Ranch I........ 168 $ 7,317 $ 12,855 Q2/98 Q2/99 Q4/99 n/a
Archstone Monterey Ranch III...... 448 8,015 31,669 Q3/98 Q4/99 Q2/00 n/a
--------- ---------- -------------
Total Austin..................... 616 $ 15,332 $ 44,524
--------- ---------- -------------
Denver, Colorado:
Archstone Dakota Ridge............ 480 $ 25,847 $ 35,541 Q1/98 Q1/99 Q2/00 37.9%
Fox Creek II...................... 112 8,743 9,296 Q2/98 Q1/99 Q3/99 67.0%
--------- ---------- -------------
Total Denver..................... 592 $ 34,590 $ 44,837
--------- ---------- -------------
Houston, Texas:
Archstone Braeswood II............ 36 $ 3,158 $ 4,179 Q3/98 Q2/99 Q3/99 n/a
Archstone Medical Center II....... 318 19,131 20,229 Q4/97 Q3/98 Q2/99 91.8%
--------- ---------- -------------
Total Houston.................... 354 $ 22,289 $ 24,408
--------- ---------- -------------
Salt Lake City, Utah:
Archstone River Oaks.............. 448 $ 24,591 $ 37,483 Q2/98 Q1/99 Q4/00 14.3%
--------- ---------- -------------
Total Central Region.......... 2,010 $ 96,802 $151,252
========= ========== =============
East Region:
Atlanta, Georgia:
Cameron at Barrett Creek.......... 332 $ 25,989 $ 27,822 Q4/97 Q4/98 Q1/00 44.3%
Cameron at North Point............ 264 22,769 24,384 Q4/97 Q3/98 Q2/99 89.4%
Cameron Bridge.................... 224 18,956 19,909 Q4/97 Q3/98 Q2/99 86.6%
--------- ---------- -------------
Total Atlanta.................... 820 $ 67,714 $ 72,115
--------- ---------- -------------
Birmingham, Alabama:
Cameron at the Summit II.......... 268 $ 12,976 $ 18,939 Q2/98 Q2/99 Q3/00 n/a
--------- ---------- -------------
Boston, Massachusetts:
Archstone Tewksbury............... 168 $ 4,728 $ 21,402 Q1/99 Q1/00 Q3/00 n/a
--------- ---------- -------------
Indianapolis, Indiana:
Cameron at River Ridge............ 202 $ 9,429 $ 15,846 Q2/98 Q2/99 Q2/00 n/a
--------- ---------- -------------
Raleigh, North Carolina:
Archstone at Preston.............. 388 $ 18,385 $ 31,289 Q2/98 Q2/99 Q2/01 n/a
Cameron Southpoint................ 288 20,064 21,451 Q3/97 Q3/98 Q2/99 84.4%
Cameron Woods..................... 328 21,970 23,457 Q3/97 Q3/98 Q4/99 68.3%
--------- ---------- -------------
Total Raleigh.................... 1,004 $ 60,419 $ 76,197
--------- ---------- -------------
Richmond, Virginia:
Archstone at Swift Creek I........ 288 $ 12,867 $ 22,873 Q2/98 Q3/99 Q1/01 n/a
Cameron at Virginia Center II..... 88 5,656 7,588 Q2/98 Q3/99 Q1/00 n/a
--------- ---------- -------------
Total Richmond................... 376 $ 18,523 $ 30,461
--------- ---------- -------------
Southeast, Florida:
Cameron Gardens................... 300 $ 24,501 $ 25,524 Q4/97 Q3/98 Q3/99 79.7%
Cameron Palms..................... 340 27,733 29,598 Q4/97 Q4/98 Q4/99 53.8%
--------- ---------- -------------
Total Southeast Florida.......... 640 $ 52,234 $ 55,122
--------- ---------- -------------
Washington, D.C.:
Archstone Governor's Green........ 338 $ 17,322 $ 36,446 Q3/98 Q3/99 Q3/00 n/a
--------- ---------- -------------
West Coast, Florida:
Archstone Rocky Creek............. 264 $ 8,714 $ 19,750 Q3/98 Q3/99 Q3/00 n/a
--------- ---------- -------------
Total East Region................ 4,080 $252,059 $346,278
========= ========== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Actual or Expected
Total Expected Date for Stabilization %
Number of Archstone Expected Start Date First Units Date Leased
Units Investment Investment/(1)/(Quarter/Year) (Quarter/Year)/(2)/(Quarter/Year) /(3)/
---------- ----------- --------------- ------------- ------------------ -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
West Region:
Orange County, California:
Las Flores Apartment Homes........ 504 $ 50,427 $ 53,120 Q4/96 Q2/98 Q3/99 84.1%
------- --------- ---------
Phoenix, Arizona:
Arrowhead II...................... 200 $ 10,704 $ 13,535 Q2/98 Q1/99 Q2/00 21.0%
San Marbeya....................... 404 25,100 28,246 Q4/97 Q4/98 Q1/00 60.4%
San Valiente II................... 228 13,535 14,459 Q4/97 Q4/98 Q4/99 58.8%
------- --------- ---------
Total Phoenix.................... 832 $ 49,339 $ 56,240
------- --------- ---------
Portland, Oregon:
Hedges Creek...................... 408 $ 27,270 $ 27,720 Q2/97 Q2/98 Q3/99 79.2%
------- --------- ---------
Reno, Nevada:
The Enclave II.................... 180 $ 7,755 $ 16,204 Q4/98 Q3/99 Q1/00 n/a
------- --------- ---------
San Diego, California:
Archstone Torrey Hills............ 340 $ 24,000 $ 42,963 Q1/98 Q3/99 Q2/00 n/a
------- --------- ---------
San Francisco Bay Area, California:
Archstone Emerald Park............ 324 $ 32,852 $ 45,152 Q4/97 Q2/99 Q1/00 n/a
Archstone Hacienda................ 540 39,269 74,450 Q2/98 Q2/99 Q3/00 n/a
Archstone Monterey Grove.......... 224 23,120 26,678 Q4/97 Q1/99 Q4/99 19.2%
------- --------- ---------
Total San Francisco Bay Area..... 1,088 $ 95,241 $146,280
------- --------- ---------
Seattle, Washington:
Archstone Inglewood Hill.......... 230 $ 14,236 $ 20,343 Q2/98 Q2/99 Q2/00 n/a
Archstone Northcreek.............. 524 27,825 44,025 Q2/98 Q2/99 Q1/01 n/a
------- --------- ---------
Total Seattle.................... 754 $ 42,061 $ 64,368
------- --------- ---------
Total West Region................ 4,106 $296,093 $406,895
------- --------- ---------
Total Communities
Under Construction......... 10,196 $644,954 $904,425
======= ========= =========
</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 March 31,
1999. A "n/a" indicates the communities where lease-up has not yet
commenced.
