UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1996 0-23954
CORNERSTONE REALTY INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1589139
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
306 East Main Street
Richmond, VA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
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
requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 31, 1997, 29,200,462 common shares of the registrant were
outstanding. The common shares are not currently being traded in any market.
Therefore, the common shares did not have either a market selling price or bid
and asked prices within 60 days prior to the date of this filing, and the
aggregate market value of the common shares held by non-affiliates of the
registrant is not determinable.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The portions of the registrant's Prospectus, filed with the Commission on March
20, 1997 as part of its Registration Statement on Form S-3 (Registration No.
333-23693) under the Securities Act of 1933 referred to in Parts I and III.
The portions of the registrant's annual report to security holders for the
fiscal year ended December 31, 1996 incorporated by reference in Part II.
The registrant's Proxy Statement dated April 4, 1997, referred to in Part III.
PART I
Item 1. Business
Cornerstone Realty Income Trust, Inc. (the "Company"), a Virginia
corporation, was incorporated in August 1989. Initial capitalization occurred on
August 18, 1992. Operations of rental property commenced on June 1, 1993. The
business of the Company is to acquire existing residential apartment complexes
located in the mid-Atlantic and southeastern United States. The Company owned
forty properties comprising 9,033 apartment units within that region as of
December 31, 1996. The investment objectives and policies of the Company are
described under the caption "The Company" on pages 18 through 22 of the
Company's prospectus (the "Prospectus") filed with the Securities and Exchange
Commission as part of the Registration Statement on Form S-3 (Registration No.
333-23693), which are hereby incorporated herein by reference. The Company's
first nineteen property acquisitions, (as well as the additional property
acquisitions described below) are described on pages 23 through 29 of the
Prospectus, which are hereby incorporated herein by reference.
In connection with each of its property acquisitions, the Company
obtains a Phase I Environment Report, and such additional environmental reports
and surveys as are necessitated by such preliminary report. Based on such
reports, the Company is not aware of any environmental situations requiring
remediation at its properties which have not been or are not currently being
remediated as necessary.
The following is a summary of the twenty-one property acquisitions made
by the Company during 1996.
On January 31, 1996, the Company purchased The Meadows Apartments in
Asheville, North Carolina. Information with respect to this property is hereby
incorporated herein by reference from pages 23 through 29 of the Prospectus.
On March 1, 1996, the Company acquired the Scarlett Oaks Apartments
(subsequently renamed "West Eagle Greens") in Augusta, Georgia, Ashley Park
Apartments in Richmond, Virginia, and Arbor Trace Apartments in Virginia Beach,
Virginia . Information with respect to these properties is hereby incorporated
herein by reference from pages 23 through 29 of the Prospectus.
2
<PAGE>
On April 30, 1996, the Company acquired Longmeadows Apartments in
Charleston, North Carolina (which was subsequently renamed "Bridgetown Bay") and
Westfield Club Apartments (which was subsequently renamed "Trophy Chase") in
Charlottesville, Virginia. Information with respect to these properties is
hereby incorporated herein by reference from pages 23 through 29 of the
Prospectus.
On May 1, 1996, the Company acquired Beacon Hill in Charlotte, North
Carolina, Lakewood Apartments (which was subsequently renamed "Summerwalk"), in
Concord, North Carolina, and Willow Creek Apartments (which was subsequently
renamed "The Landing") in Durham, North Carolina. Information with respect to
these properties are hereby incorporated herein by reference from pages 23
through 29 of the Prospectus.
On May 31, 1996, the Company acquired Meadow Creek Apartments in
Pineville, North Carolina. Information with respect to this property is hereby
incorporated herein by reference from pages 23 through 29 of the Prospectus.
On June 26, 1996, the Company acquired Lexington Towers Apartments
(which was subsequently renamed "Trolley Square East") in Richmond, Virginia.
Information with respect to this property is hereby incorporated herein by
reference from pages 23 through 29 of the Prospectus.
On July 1, 1996, the Company acquired Oak Park Apartments (which was
subsequently renamed "Savannah West") in Augusta, Georgia and Paces Glen
Apartments in Charlotte, North Carolina. Information with respect to these
properties is hereby incorporated herein by reference from pages 23 through 29
of the Prospectus.
On August 21, 1996, the Company acquired Doctors Park Apartments (which
was subsequently renamed "Signature Place"), in Greenville, North Carolina and
Hampton Glen Apartments in Richmond, Virginia. Information with respect to these
properties is hereby incorporated herein by reference from pages 23 through 29
of the Prospectus.
On September 1, 1996, the Company acquired the Sterling Chase
Apartments (which was subsequently renamed "Heatherwood") in Charlotte, North
Carolina. Information with respect to this property is hereby incorporated
herein by reference from pages 23 through 29 of the Prospectus.
On September 27, 1996, the Company acquired Highland Hills Apartments
in Carrboro, North Carolina. Information with respect to this property is hereby
incorporated herein by reference from pages 23 through 29 of the Prospectus.
On September 30, 1996, the Company acquired Parkside at Woodlake
Apartments in Durham, North Carolina. Information with respect to this property
is hereby incorporated herein by reference from pages 23 through 29 of the
Prospectus.
On October 1, 1996, the Company acquired Greenbrier Apartments in
Fredericksburg, Virginia. Information with respect to this property is hereby
incorporated herein by reference from pages 23 through 29 of the Prospectus.
3
<PAGE>
On November 20, 1996, the Company acquired Deerfield Apartments in
Durham, North Carolina. Information with respect to this property is hereby
incorporated herein by reference from pages 23 through 29 of the Prospectus.
On December 1, 1996, the Company acquired Franklin Towers Apartments
(which was subsequently renamed "Trolley Square West") in Richmond, Virginia.
Information with respect to this property is hereby incorporated herein by
reference from pages 23 through 29 of the Prospectus.
In addition to the above, on January 1, 1997, the Company acquired The
Arbors at Windsor Lake in Columbia, South Carolina and on January 15, 1997, the
Company acquired Westchase Apartments in Charleston, South Carolina. Information
with respect to these properties is hereby incorporated herein by reference from
pages 23 through 29 of the Prospectus.
Item 2. Properties
The Company's forty real estate property investments owned as of
December 31, 1996 are described in Item 1, which is hereby incorporated herein
by reference.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
4
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is currently no established public market in which the Company's
common shares are traded.
On March 1, 1997, there were 12,341 shareholders of record of the
Company's common shares.
Distributions of $6,316,185 and $15,934,901 were made to the
shareholders during 1995 and 1996, respectively.
Item 6. Selected Financial Data
For the information called for by this item, see the information in
Exhibit 13.1 under the caption "Selected Financial Information" on page 19
thereof, which information is hereby incorporated herein by reference.
The selected financial data should be read in conjunction with the
financial statements and related notes of the Company included under Item 8 of
this report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the information required by this item, see the information in
Exhibit 13.1 under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 20 through 23 thereof,
which information is hereby incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company and report of independent
auditors required to be included in this item are set forth in Item 14 of this
report and are hereby incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
5
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the Company's directors and director
nominees see the information under "Ownership of Equity Securities" and
"Election of Directors" in the Company's Proxy Statement dated April 4, 1997,
which information is incorporated herein by reference. For information with
respect to the Company's executive officers see "Executive Officers" in the
Company's Proxy Statement dated April 4, 1997, which information is incorporated
herein by reference.
Item 11. Executive Compensation
The Company did not pay salaries to its officers for the period before
October 1, 1996. During such prior period, the Company operated as an
"externally-advised" and "externally-managed" REIT. The Company has converted
to "self-administered" and "self-managed" status. Information with respect to
this conversion to self-administration is contained under the caption "Certain
Transactions - Conversion to Self-Administration" on pages 43 through 44 of the
Prospectus, which is hereby incorporated herein by reference.
For information with respect to compensation of the Company's executive
officers and directors, see the information under "Compensation of Executive
Officers" and "Compensation of Directors" in the Company's Proxy Statement dated
April 4, 1997, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See the information under "Ownership of Equity Securities" in the
Company's Proxy Statement dated April 4, 1997, which information is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
Before October 1, 1996, the Company operated as an "externally-advised"
and "externally-managed" REIT. Cornerstone Advisors, Inc. served as the advisor
to the Company, Cornerstone Management Group, Inc. served as the manager of the
properties and property acquisition services were provided to the Company by
Cornerstone Realty Group, Inc. (collectively, the "External Companies"). As of
September 1, 1996, the Company agreed with the External Companies on a series of
related transactions, the effect of which was to convert the Company into a
"self-administered" and "self-managed" REIT effective October 1, 1996.
Information with respect to this conversion to self-administration is contained
under the caption "Certain Transactions Conversion to Self-Administration" on
pages 43 through 44 of the Prospectus, which is hereby incorporated herein by
reference.
For additional information on certain relationships and related
transactions, see the information under "Certain Relationships and Agreements"
in the Company's Proxy Statement dated April 4, 1997, which information is
incorporated herein by reference.
6
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of the report
1. Financial Statements
The following financial statements of the registrant
incorporated by reference from pages 23 through 33 of Exhibit
13.1 - 1996 Annual Report:
Independent Auditors' Report
Ernst & Young LLP
Balance Sheets
December 31, 1996 and 1995
Statements of Operations
Years Ended December 31, 1996, 1995 and 1994
Statements of Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
2. Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation
(included on pages 9 through 11 of this Form 10-K Report)
All other financial statement schedules have been omitted
because they are not applicable or not required or because
the required information is included elsewhere in the
financial statements or notes thereto.
3. Exhibits
Incorporated herein by reference are the exhibits listed
under "Exhibits Index" on pages 13 through 15 of this
Form 10-K Report.
(b) Reports on Form 8-K
During the last quarter of 1996, the Company filed the following
Current Reports on Form 8-K:
7
<PAGE>
On October 15, 1996, the registrant filed a Report on Form 8-K. The items
reported were Item 2 (the acquisition of the Sterling Chase, Parkside at
Woodlake and Highland Hills Apartments), and Item 5 (the registrant's conversion
to self-administered and self-managed status.)
On November 15, 1996, a Report on Form 8-K/A to a Report on Form 8-K dated June
26, 1996 was filed by the registrant. The item reported was Item 7. The
financial statements filed were Statements of Income and Direct Operating
Expenses (exclusive of certain items) for Lexington Tower for the year ended
December 31, 1995, for Oak Park for the twelve months ended June 30, 1996, and
for Hampton Glen for the twelve months ended July 31, 1996. Also included were a
Pro Forma Statement of Operations for the six months ended June 30, 1996, a Pro
Forma Balance Sheet as of June 30, 1996, and Pro Forma Statement of Operations
for the year ended December 31, 1995.
On December 16, 1996, a Report on Form 8-K/A to the Report on Form 8-K dated
September 26, 1996 was filed by the registrant. The item reported was Item 7.
The financial statements filed were Statements of Income and Direct Operating
Expenses (exclusive of certain items) for Sterling Chase for the twelve months
ended August 31, 1996 and for Parkside for the twelve months ended September 30,
1996, a Pro Forma Statement of Operations for the nine months ended September
30, 1996 and a Pro Forma Statement of Operations for the year ended December 31,
1995.
8
<PAGE>
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1996)
<TABLE>
<CAPTION>
Subsequently Gross Amount Carried
Encum- Initial Cost Capitalized
Description brances Land Bldg. & Impr. Impr. Land Bldg. & Impr. Total
<S> <C>
1) Polo Club $0 $264,698 $4,035,302 $2,364,656 $264,698 $6,399,958 $6,664,656
* Greenville, SC
* Multi-family housing
2) The Hollows $0 $1,374,840 $2,825,160 $1,238,995 $1,388,546 $4,050,449 $5,438,995
* Raleigh, NC
* Multi-family housing
3) Mayflower Seaside $0 $2,258,169 $5,375,975 $1,711,977 $2,258,248 $7,087,873 $9,346,121
* Virginia Beach, VA
* Multi-family housing
* Retail shops
4) Stone Ridge $0 $374,271 $2,950,729 $2,135,698 $374,271 $5,086,427 $5,460,698
* Columbia, SC
* Multi-family housing
5) County Green $0 $319,250 $3,480,750 $1,332,182 $327,484 $4,804,698 $5,132,182
* Lynchburg, VA
* Multi-family housing
6) Wimbledon Chase $0 $304,590 $2,995,410 $1,968,408 $304,815 $4,963,593 $5,268,408
* Wilmington, NC
* Multi-family housing
7) Harbour Club $0 $1,019,895 $4,230,105 $610,766 $1,020,274 $4,840,492 $5,860,766
* Virginia Beach, VA
* Multi-family housing
8) Chase Mooring $0 $258,126 $3,335,874 $1,379,568 $258,210 $4,715,358 $4,973,568
* Wilmington, NC
* Multi-family housing
9) The Trestles $0 $2,650,884 $7,699,116 $884,689 $2,686,006 $8,548,683 $11,234,689
* Raleigh, NC
* Multi-family housing
10) Wind Lake $0 $1,051,200 $7,708,800 $828,220 $1,088,780 $8,499,440 $9,588,220
* Greensboro, NC
* Multi-family housing
11) Magnolia Run $0 $495,000 $5,005,000 $1,055,252 $509,001 $6,046,251 $6,555,252
* Greenville, SC
* Multi-family housing
12) Breckinridge $0 $1,512,000 $4,088,000 $865,850 $1,558,060 $4,907,790 $6,465,850
* Greenville, SC
* Multi-family housing
</TABLE>
<TABLE>
<CAPTION>
Date of Date
Description Acc. Dep. Const. Acquired Dep. Life
<S> <C>
1) Polo Club $982,336 1972 June 3, 1993 27.5
* Greenville, SC
* Multi-family housing
2) The Hollows $577,553 1974 June 1, 1993 27.5 yrs.
* Raleigh, NC
* Multi-family housing
3) Mayflower Seaside $817,276 1950 Oct. 26, 1993 27.5 yrs.
* Virginia Beach, VA
* Multi-family housing
* Retail shops
4) Stone Ridge $637,308 1975 Dec. 8, 1993 27.5 yrs.
* Columbia, SC
* Multi-family housing
5) County Green $542,906 1976 Dec. 1, 1993 27.5 yrs.
* Lynchburg, VA
* Multi-family housing
6) Wimbledon Chase $531,217 1976 Feb. 1, 1994 27.5 yrs.
* Wilmington, NC
* Multi-family housing
7) Harbour Club $468,719 1988 May 1, 1994 27.5 yrs.
* Virginia Beach, VA
* Multi-family housing
8) Chase Mooring $401,020 1968 Aug. 1, 1994 27.5 yrs.
* Wilmington, NC
* Multi-family housing
9) The Trestles $720,874 1987 Dec. 30, 1994 27.5 yrs.
* Raleigh, NC
* Multi-family housing
10) Wind Lake $542,372 1985 April 1, 1995 27.5 yrs.
* Greensboro, NC
* Multi-family housing
11) Magnolia Run $360,380 1972 June 1, 1995 27.5 yrs.
* Greenville, SC
* Multi-family housing
12) Breckinridge $283,408 1973 June 21, 1995 27.5 yrs.
* Greenville, SC
* Multi-family housing
</Table
9
<PAGE>
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1996)
</TABLE>
<TABLE>
<CAPTION>
Subsequently Gross Amount Carried
Encum- Initial Cost Capitalized
Description brances Land Bldg. & Impr. Impr. Land Bldg. & Impr.
<S> <C>
13) Bay Watch Pointe $0 $775,680 $2,596,845 $1,355,478 $813,935 $3,914,068
* Virginia Beach, VA
* Multi-family housing
14) Hanover Landing $0 $801,500 $4,923,500 $1,283,174 $822,006 $6,186,168
* Charlotte, NC
* Multi-family housing
15) Mill Creek $0 $1,368,000 $7,182,000 $586,406 $1,417,614 $7,718,792
* Winston-Salem, NC
* Multi-family housing
16) Glen Eagles $0 $1,095,000 $6,205,000 $529,058 $899,464 $6,929,594
* Winston-Salem, NC
* Multi-family housing
17) Sailboat Bay $0 $2,002,000 $7,098,000 $3,512,632 $2,066,930 $10,545,702
* Charlotte, NC
* Multi-family housing
18) Tradewinds $0 $1,428,000 $8,772,000 $544,903 $1,436,890 $9,308,013
* Hampton, VA
* Multi-family housing
19) Osprey Landing $0 $393,750 $3,981,250 $1,627,617 $403,837 $5,598,780
* Wilmington, NC
* Multi-family housing
20) The Meadows $0 $186,000 $6,014,000 $721,730 $200,441 $6,721,289
* Asheville, NC
* Multi-family housing
21) West Eagle Green $0 $326,400 $3,693,600 $1,306,476 $316,095 $5,010,381
* Augusta, GA
* Multi-family housing
22) Ashley Park $0 $1,586,650 $10,618,350 $540,351 $1,589,262 $11,156,089
* Richmond, VA
* Multi-family housing
23) Arbor Trace $0 $1,100,000 $3,900,000 $641,816 $1,130,750 $4,511,066
* Virginia Beach, VA
* Multi-family housing
24) Bridgetown Bay $0 $603,000 $4,422,000 $457,705 $624,168 $4,858,537
* Charlotte, NC
* Multi-family housing
</TABLE>
<TABLE>
<CAPTION>
Date of Date
Description Total Acc. Dep. Const. Acquired Dep. Life
<S> <C>
13) Bay Watch Pointe $4,728,003 $215,196 1972 July 18, 1995 27.5 yrs.
* Virginia Beach, VA
* Multi-family housing
14) Hanover Landing $7,008,174 $297,335 1972 Aug. 22, 1995 27.5 yrs.
* Charlotte, NC
* Multi-family housing
15) Mill Creek $9,136,406 $372,584 1984 Sept. 1, 1995 27.5 yrs.
* Winston-Salem, NC
* Multi-family housing
16) Glen Eagles $7,829,058 $332,935 1990 Oct. 1, 1995 27.5 yrs.
* Winston-Salem, NC
* Multi-family housing
17) Sailboat Bay $12,612,632 $410,372 1972 Nov. 1, 1995 27.5 yrs.
* Charlotte, NC
* Multi-family housing
18) Tradewinds $10,744,903 $425,641 1988 Nov. 1, 1995 27.5 yrs.
* Hampton, VA
* Multi-family housing
19) Osprey Landing $6,002,617 $221,985 1973 Nov. 1, 1995 27.5 yrs.
* Wilmington, NC
* Multi-family housing
20) The Meadows $6,921,730 $245,086 1974 Jan. 31, 1996 27.5 yrs.
* Asheville, NC
* Multi-family housing
21) West Eagle Green $5,326,476 $139,525 1974 March 1, 1996 27.5 yrs.
* Augusta, GA
* Multi-family housing
22) Ashley Park $12,745,351 $362,659 1988 March 1, 1996 27.5 yrs.
* Richmond, VA
* Multi-family housing
23) Arbor Trace $5,641,816 $134,044 1985 March 1, 1996 27.5 yrs.
* Virginia Beach, VA
* Multi-family housing
24) Bridgetown Bay $5,482,705 $132,870 1986 April 1, 1996 27.5 yrs.
* Charlotte, NC
* Multi-family housing
</TABLE>
10
<PAGE>
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1996)
<TABLE>
<CAPTION>
Subsequently Gross Amount Carried
Encum- Initial Cost Capitalized
Description brances Land Bldg. & Impr. Impr. Land Bldg. & Impr. Total
<S> <C>
25) Trophy Chase $0 $853,300 $2,856,700 $1,348,276 $880,843 $4,177,433 $5,058,276
* Charlottesville, VA
* Multi-family housing
26) Beacon Hill $0 $3,121,587 $10,457,616 $561,323 $3,075,421 $11,065,105 $14,140,526
* Charlotte, NC
* Multi-family housing
27) Summerwalk $0 $1,528,200 $4,131,800 $788,175 $1,565,050 $4,883,125 $6,448,175
* Concord, NC
* Multi-family housing
28) Willow Creek $0 $1,001,400 $7,343,600 $800,124 $1,024,002 $8,121,122 $9,145,124
* Raleigh, NC
* Multi-family housing
29) Meadowcreek $0 $1,110,000 $9,990,000 $610,655 $1,134,435 $10,576,220 $11,710,655
* Pineville, NC
* Multi-family housing
30) Trolley Square $0 $1,620,000 $4,380,000 $452,907 $1,633,968 $4,818,939 $6,452,907
* Richmond, VA
* Multi-family housing
31) Savannah West $0 $627,860 $9,215,760 $1,114,598 $605,736 $10,352,482 $10,958,218
* Augusta, GA
* Multi-family housing
32) Paces Glen $0 $2,153,250 $5,271,750 $286,013 $2,226,399 $5,484,614 $7,711,013
* Charlotte, NC
* Multi-family housing
33) Signature Place $0 $491,665 $4,971,283 $445,070 $501,992 $5,406,026 $5,908,018
* Charlotte, NC
* Multi-family housing
34) Hampton Glen $0 $1,391,992 $10,207,939 $383,554 $1,414,093 $10,569,392 $11,983,485
* Richmond, VA
* Multi-family housing
35) Heatherwood $0 $2,449,310 $7,756,147 $116,000 $2,463,208 $7,858,249 $10,321,457
* Charlotte, NC
* Multi-family housing
36) Highland Hills $0 $1,210,000 $10,890,000 $597,339 $1,198,030 $11,499,309 $12,697,339
* Carrboro, NC
* Multi-family housing
37) Parkside at Woodlake $0 $2,932,778 $11,731,108 $28,919 $2,884,236 $11,808,569 $14,692,805
* Durham, NC
* Multi-family housing
38) Greenbrier $0 $998,957 $10,100,568 $117,308 $1,009,372 $10,207,461 $11,216,833
* Fredericksburg, VA
* Multi-family housing
39) Deerfield $0 $427,000 $10,248,000 $80,978 $429,995 $10,325,983 $10,755,978
* Durham, NC
* Multi-family housing
40) Franklin Towers $0 $1,145,495 $3,097,080 $103,193 $1,173,715 $3,172,053 $4,345,768
* Richmond, VA
* Multi-family housing
$46,611,697 $245,786,117 $37,318,039 $46,980,280 $282,735,573 $329,715,853
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Date of Date
Description Acc. Dep. Const. Acquired Dep. Life
<S> <C>
25) Trophy Chase $107,038 1970 April 1, 1996 27.5 yrs.
* Charlottesville, VA
* Multi-family housing
26) Beacon Hill $268,969 1985 May 1, 1996 27.5 yrs.
* Charlotte, NC
* Multi-family housing
27) Summerwalk $114,247 1983 May 1, 1996 27.5 yrs.
* Concord, NC
* Multi-family housing
28) Willow Creek $191,297 1984 May 1, 1996 27.5 yrs.
* Raleigh, NC
* Multi-family housing
29) Meadowcreek $255,529 1984 May 31, 1996 27.5 yrs.
* Pineville, NC
* Multi-family housing
30) Trolley Square $147,530 1968 June 25, 1996 27.5 yrs.
* Richmond, VA
* Multi-family housing
31) Savannah West $183,735 1976 July 1, 1996 27.5 yrs.
* Augusta, GA
* Multi-family housing
32) Paces Glen $99,625 1986 July 19, 1996 27.5 yrs.
* Charlotte, NC
* Multi-family housing
33) Signature Place $81,704 1981 August 1, 1996 27.5 yrs.
* Charlotte, NC
* Multi-family housing
34) Hampton Glen $159,883 1986 August 1, 1996 27.5 yrs.
* Richmond, VA
* Multi-family housing
35) Heatherwood $94,473 1980 Sept. 1, 1996 27.5 yrs.
* Charlotte, NC
* Multi-family housing
36) Highland Hills $146,089 1987 Sept. 27, 1996 27.5 yrs.
* Carrboro, NC
* Multi-family housing
37) Parkside at Woodlake $152,478 1996 Aug. 31, 1996 27.5 yrs.
* Durham, NC
* Multi-family housing
38) Greenbrier $92,571 1980 Oct. 1, 1996 27.5 yrs.
* Fredericksburg, VA
* Multi-family housing
39) Deerfield $62,656 1985 Nov. 1, 1996 27.5 yrs.
* Durham, NC
* Multi-family housing
40) Franklin Towers $9,612 1964 Dec. 1, 1996 27.5 yrs.
* Richmond, VA
* Multi-family housing
$12,323,037
===========
</TABLE>
(1) Represents the aggregate cost for Federal Income tax purposes:
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 27th day of
March, 1997.
CORNERSTONE REALTY INCOME TRUST, INC.
By: /s/ Glade M. Knight
------------------------
Glade M. Knight,
Chairman of the Board
and President
Pursuant to the requirements of the Securities Exchange Act 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C>
/s/ Glade M. Knight Director and Principal March 27, 1997
- -------------------------------- Executive Officer
Glade M. Knight
/s/ Stanley J. Olander, Jr. Director, Principal Financial March 27, 1997
- -------------------------------- Officer and Principal Accounting
Stanley J. Olander, Jr. Officer
/s/ Martin Zuckerbrod Director March 27, 1997
- --------------------------------
Martin Zuckerbrod
/s/ Harry S. Taubenfeld Director March 27, 1997
- --------------------------------
Harry S. Taubenfeld
/s/ Leslie A. Grandis Director March 27, 1997
- --------------------------------
Leslie A. Grandis
/s/ Glenn W. Bunting, Jr. Director March 27, 1997
- --------------------------------
Glenn W. Bunting, Jr.
/s/ Penelope W. Kyle Director March 27, 1997
- --------------------------------
Penelope W. Kyle
12
<PAGE>
EXHIBIT INDEX
</TABLE>
<TABLE>
<CAPTION>
Exhibit Number Description Sequential Page Number
<S> <C>
4.1 Amended and Restated Articles of
Incorporation of Cornerstone Realty
Income Trust, Inc., as amended
(Incorporated by reference to Exhibit
3.1 included in the Company's Report on
Form 10-Q for the Quarter ended June 30,
1995; File No. 0-23954)
4.2 Bylaws of Cornerstone Realty
Income Trust, Inc. (Amended
through April 26, 1995)
(Incorporated by reference to
Exhibit 3.2 included in the
Company's Report on Form 10-Q
for the Quarter ended June 30,
1995; File No. 0-23954).
10.1 Form of Amendment and
Restatement of Cornerstone Realty
Income trust, Inc. 1992 Incentive
Plan. (Exhibit 10.14)(1) This is a
compensatory plan or arrangement.
10.2 Form of Amendment and
Restatement of Cornerstone Realty
Income Trust, Inc. 1992 Non-
Employee Directors Stock Option
plan. (Exhibit 10.15)(1) This is a
compensatory plan or arrangement.
10.3 Agreement for Appointment of
Transfer Agent and Registrar
between the Company and First
Union National Bank of North
Carolina (Incorporated by
reference to Exhibit 10.19 to the
Company's Report on Form 10-K
for the Year Ended December 31,
1994; File No. 0-23954).
10.4 Agreement and Bill of Transfer
and Assignment dated October 1,
1996 between Cornerstone
Management Group, Inc. and
Cornerstone Realty Income Trust,
Inc.(2)
13
<PAGE>
<CAPTION>
Exhibit Number Description Sequential Page Number
<S> <C>
10.5 Agreement and Bill of Transfer
and Assignment dated October 1,
1996 between Cornerstone
Advisors, Inc. and Cornerstone
Realty Income trust, Inc.(2)
10.6 Agreement and Bill of Transfer
and Assignment dated October 1,
1996 between Cornerstone Realty
Group, Inc. and Cornerstone
Realty Income Trust, Inc.
(Acquisition/Disposition
Agreement).(2)
10.7 Agreement and Bill of Transfer
and Assignment dated October 1,
1996 between Cornerstone Realty
Group, Inc. and Cornerstone
Realty Income Trust, Inc.
(Personal Property).(2)
10.8 Employment Agreement dated
September 1, 1996 between
Cornerstone Realty Income Trust,
Inc. and Glade M. Knight.(2)
10.9 Employment Agreement dated
September 1, 1996 between
Cornerstone Realty Income Trust,
Inc. and Debra A. Jones.(2)
10.10 Employment Agreement dated
September 1, 1996 between
Cornerstone Realty Income Trust,
Inc. and Stanley J. Olander, Jr.(2)
13.1 1996 Annual Report (with the
exception of the information
incorporated by reference in Items
6, 7 and 14 of this Form 10-K
Report, no other information
appearing in the 1996 Annual
Report is to be deemed filed as a
part of this Form 10-K Report).
FILED HEREWITH.
23 Consent of Independent Auditors.
FILED HEREWITH.
28.1 Portions of pages 18 through 22,
23 through 29, and 43 through 44
of the Prospectus of Cornerstone
Realty Income Trust, Inc. FILED
HEREWITH.
- --------------------------------------
14
<PAGE>
(1) Incorporated herein by reference to the Exhibit referred to in
parentheses which was filed as an Exhibit to the Company's
Post-Effective Amendment No. 5 to its Registration Statement on Form
S-11 (File No. 33-51296), as filed with the Securities and Exchange
Commission on April 28, 1994.
(2) Incorporated herein by reference to the Exhibit of the same number
filed as an Exhibit to the Company Report on Form 8-K dated September
26, 1996 (File No. 0-23954).
15
</TABLE>
Cornerstone
Realty Income Trust
The Multifamily REIT
Annual Report 1996
<PAGE>
Contents
2 Financial Highlights
4 Year in Review
6 Shareholder Letter
18 Board of Directors
19 Selected Financial Information
20 Management's Discussion
23 Independent Auditors' Report
24 Balance Sheets
25 Statements of Operations
26 Statements of Shareholders' Equity
27 Statements of Cash Flows
28 Notes to Financial Statements
34 Investor Information
The Company
Cornerstone Realty Income Trust owns and operates apartment communities in the
southeastern United States. Our mission is to provide high quality rental
housing and achieve growing profits and sustained corporate value for our
shareholders. We offer our residents superior service, beautiful, efficiently
run communities, and a sense of home. We hire the best people in the industry,
train them well, and nourish values throughout the company like vision,
responsiveness, creativity, customer service, continuous improvement, an
entrepreneurial spirit, and results-driven action.
We are a fully integrated, self-administered real estate company headquartered
in Richmond, Virginia with regional offices spread throughout our operating
territory. At December 31, 1996, we owned 40 apartment communities containing
9,033 apartments, all located in growing cities in Virginia, North Carolina,
South Carolina, and Georgia.
Since the company began, our promise to provide our shareholders with steadily
increasing dividends has remained unbroken.
<PAGE>
A Record Of Performance.
A Year Of Record Growth.
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Operating Results for the Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Rental Income $ 40,352,955 $ 16,300,821 $ 8,177,576
Net Income (4,169,849) 5,229,715 2,386,303
Funds from Operations (a) 20,424,226 8,018,533 3,597,121
Distributions Declared and Paid 15,934,901 6,316,185 2,977,136
Balance Sheet Data as of December 31,
- -------------------------------------------------------------------------------------------------------------
Investment in Rental Property $329,715,853 $129,696,447 $54,107,358
Total Assets $322,870,574 $133,181,032 $57,257,950
Shareholders' Equity $254,569,705 $122,154,420 $51,436,863
Shares Outstanding 28,141,509 12,754,331 5,458,648
</TABLE>
(a) "Funds from operations" is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. This definition conforms
to the recommendations set forth in a White Paper adopted by the National
Association of Real Estate Investment Trusts (NAREIT). Funds from operations for
years prior to 1996 have been adjusted to conform to the NAREIT definition. The
company considers funds from operations in evaluating property acquisitions and
its operating performance, and believes that funds from operations should be
considered along with, but not as an alternative to, net income and cash flows
as a measure of the company's operating performance and liquidity. Funds from
operations, which may not be comparable to other similarly titled measures of
the other REITs, does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs.
<GRAPH>
RENTAL INCOME
by quarter
in millions of dollars
1994 1995 1996
--------- --------- ----------
1st Quarter 1.5 2.7 6.5
2nd Quarter 1.9 3.4 8.7
3rd Quarter 2.2 4.4 11.5
4th Quarter 2.4 5.8 13.6
<GRAPH>
TOTAL DISTRIBUTIONS
by quarter
in millions of dollars
1994 1995 1996
--------- --------- ----------
1st Quarter .5 1.1 2.7
2nd Quarter .7 1.4 3.4
3rd Quarter .8 1.7 4.2
4th Quarter .9 2.2 5.6
<GRAPH>
TOTAL ASSETS
by quarter
in millions of dollars
1994 1995 1996
--------- --------- ----------
1st Quarter 31.6 61.2 164.1
2nd Quarter 37.8 79.6 220.5
3rd Quarter 45.3 97.8 294.7
4th Quarter 57.2 133.1 322.9
Cornerstone Realty Income Trust 2 Annual Report
<PAGE>
[photo]
Sailboat Bay
Charlotte, North Carolina
<PAGE>
January
20 Distributed 24.75 cents per share to the shareholders,
totaling $2,728,432.
31 Acquired The Meadows, 176 apartments in Asheville, North
Carolina.
February
22 Announced corporate earnings for 1995 in the Cornerstone Realty Income Trust
Annual Report.
[photo]
Hampton Glen
Richmond, Virginia
March
20 Acquired West Eagle Greens, 165 apartments
in Augusta, Georgia.
29 Acquired Ashley Park, 272 apartments in Richmond, Virginia.
Acquired Arbor Trace, 148 apartments in Virginia Beach, Virginia.
31 Announced equity raised during the first quarter surpassed $30 million.
April
20 Distributed 24.8 cents per share to the shareholders, totaling $3,393,770.
23 Held annual shareholders' meeting in Queens, New York.
30 Acquired Bridgetown Bay, 120 apartments in Charlotte, North Carolina.
Acquired Trophy Chase, 185 apartments in Charlottesville, Virginia.
May
30 Acquired Beacon Hill, 349 apartments in Charlotte, North Carolina.
31 Acquired Meadow Creek, 250 apartments in Pineville, North Carolina.
Acquired Summerwalk, 160 apartments in Concord, North Carolina.
Acquired The Landing, 200 apartments in Durham, North Carolina.
June
26 Acquired Trolley Square East, 197 apartments in Richmond, Virginia.
30 Announced over $52 million in equity raised during the quarter, surpassing
the first quarter's record-breaking investment by $20 million.
[photo]
Beacon Hill
Charlotte, North Carolina
A Record of Performance.
A Year of Record Growth.
July
1 Completed the $200 million offering of shares to investors, bringing total
equity raised to $250 million.
15 Acquired Savannah West, 456 apartments in Augusta, Georgia.
19 Acquired Paces Glen, 172 apartments in Charlotte, North Carolina.
20 Distributed 24.85 cents per share to the shareholders, totaling $4,192,026.
August
1 Acquired Hampton Glen, 232 apartments in Richmond, Virginia. Commenced an
additional $50 million offering of shares to investors.
30 Acquired Signature Place, 171 apartments in Greenville, North Carolina.
[photo]
Paces Glen
Charlotte, North Carolina
September
25 Acquired Heatherwood, 272 apartments in Charlotte, North Carolina.
27 Acquired Highland Hills, 264 apartments in Carrboro, North Carolina.
30 Acquired Parkside at Woodlake, 266 apartments in Durham, North Carolina.
October
1 Began operating as a self-administered firm; advisory contracts ended.
21 Distributed 24.9 cents per share to the shareholders, totaling $5,620,673.
31 Acquired Greenbrier, 258 apartments in Fredericksburg, Virginia. Completed
the $50 million offering of shares to investors, achieving total equity
raised of $300 million.
November
20 Acquired Deerfield, 204 apartments in Durham, North Carolina.
[photo]
Deerfield
Durham, North Carolina
December
31 Acquired Trolley Square West, 128 apartments in Richmond, Virginia.
Cornerstone Realty Income Trust 4/5 Annaul Report 1996
<PAGE>
To Our Shareholders
We give our residents superior service, a sense of community and home.
Cornerstone Realty Income Trust continued to build a strong record of
performance in 1996. It was a year of record growth. We achieved equity
capitalization of $300 million and grew into a company owning 9,033 apartments.
For the second straight year, our size more than doubled.
It takes a team of talented, highly focused people to achieve this level of
performance. At Cornerstone, we are absolutely committed to growing profits by
meeting the strong demand for fine quality housing in today's rental market. We
do this by giving our residents superior service, a sense of community and home.
It was a transcendent year for the company.
In July, we completed a major phase of growth by successfully closing $250
million in offerings of shares to investors. By the end of the year, we had
completed a subsequent offering of $50 million, bringing total equity raised to
$300 million.
We acquired 21 communities containing 4,645 apartments during the year. Our
buying continued to be focused in the burgeoning southeastern states. New
markets entered included our headquarters city of Richmond, Virginia; Augusta,
Georgia; and Durham, North Carolina.
Funds from operations more than doubled from approximately $8 million in 1995 to
$20.4 million in 1996. This dramatic increase was primarily a result of our
portfolio's expansion. Further, "same store sales" for net operating
income--comparing performance of a core group of properties owned throughout
1995 and 1996--showed an extremely healthy 8.8% increase.
Based on our strong record of performance, we achieved a year of record growth.
We are absolutely committed to
growing profits by meeting the
strong demand for fine quality
housing in today's rental market.
Cornerstome Realty Income Trust 6 Annual Report 1996
<PAGE>
We continued our unbroken record of paying steadily increasing
dividends. Per-share dividends increased to 24.9 cents during the year. We paid
almost $16 million in distributions to shareholders, up from $6.3 million in
1995.
Our conversion to a self-administered, self-managed REIT in 1996
marked an important transition for the company. Effective October 1, we ended
our agreements with Cornerstone Advisors, Inc. and Cornerstone Management Group
and brought our entire management in-house. We expect this move to reduce future
operating costs.
It was a landmark year in the growth of Cornerstone. At this writing,
we are working to list our shares for trading on a national stock exchange.
Cornerstone is poised to embark on a new era.
We have some of the best and brightest people in the REIT industry
today. Demand for our apartments continues to grow throughout our market region.
A strong financial structure allows us to seize valuable opportunities when they
arise. We have truly become the industry model for the multifamily REIT.
A strong financial structure allows us to seize valuable opportunities when
they arise.
It takes a team of talented, highly focused people to acheve this level of
performance.
/s/ GLADE M. KNIGHT
--------------------------
Glade M. Knight
Chairman of the Board
Cornerstone Realty Income Trust 7 Annual Report
<PAGE>
[photo]
Beacon Hill
Charlotte, North Carolina
The art and science of buying apartments.
First, consider the science. Painstaking research to locate growing markets
where demand for apartments will remain high in the coming decades. An intimate
knowledge of the markets and the neighborhoods in them. The ability to move
quickly to seize opportunities. Making sure the numbers work.
Then there's the art. A sense of possibility. A vision beyond outdated
architecture or fading paint to what can be. A kind of intuition only born from
years of experience in the business of creating value in apartments.
Cornerstone looked at 197 properties in 1996. Of these we acquired 21. It
was a busy year. We doubled the size of our portfolio. One reason we could
achieve so much is because we know our marketplace. Not only do we know the
sellers and the brokers, but the cities and the neighborhoods and the
properties. Our reputation as serious buyers who can thoroughly evaluate
apartments and act decisively means we're often the first to see a property when
it becomes available. We respond quickly to opportunities, always seeking the
best values for Cornerstone's portfolio.
[photo]
Arbor Trace
Virginia Beach, Virginia
Cornerstone Realty Income Trust 9 Annual Report 1996
[photo]
Hampton Glen, Richmond, Virginia
<PAGE>
We're in the business of creating value.
It takes real talent to create value in this business. To make an apartment
complex into something more - a community, a way of life. Having the vision to
see the possibilities, and the knowledge to see this vision through to
completion, to transform it into reality.
The reality is that superior management is all about creating value. At
Cornerstone, we are experts at transforming apartment communities into valuable
assets offering the comforts wanted by today's renter. Whenever we acquire an
apartment community, our transition team immediately begins to bring the
property up to Cornerstone's high standards. This includes everything from
office computers, to new marketing programs, to renovations when necessary.
Our transformations are completely results-driven. Every management or
marketing strategy we use, every paint job or repair we make, every fitness
center or playground we build, and every landscape we shape is designed to
achieve greater value. The direct result? More residents, higher rents, and
greater profits for shareholders.
[photo]
Parkside at Woodlake
Durham, North Carolina
Cornerstome Realty Income Trust 11 Annual Report 1996
<PAGE>
[photo]
Paces Glen, Charlotte, North Carolina
Our property managers think like entrepreneurs.
It's only good business. Keeping expenses down. Constantly finding ways to
increase income. Managing time well. Cost effectiveness. Ongoing training.
Staying abreast of industry trends. Market research. Target marketing. Teamwork.
Tracking budgets. Rewarding excellence.
Heading every Cornerstone apartment community is a professional property
manager. Our central headquarters and regional offices offer constant support,
the most sophisticated computer system available, ongoing consultation in
marketing and management strategies, and continual training opportunities. But
no one knows the property, the town, or the residents like the people who work
on-site.
That's why our managers and their staffs are taught to think like
entrepreneurs. Everyone, from the leasing agent to the groundskeeper to the
maintenance specialist, works continually to improve the bottom line. They're
given the freedom they need to respond to their own marketplace and seek
creative new ways of growing profits. They receive special incentives for
achieving corporate goals. So when the business performs well, the whole team
wins.
[photo]
Ashley Park
Richmond, Virginia
Cornerstone Realty Income Trust 13 Annual Report 1996
<PAGE>
[photo]
Meadow Creek, Pineville, North Carolina
Once our residents join us, we never want them to leave.
We do everything we can to keep our residents. And we should. The cost of
resident turnover is expensive. That's why we've developed a comprehensive
program especially to retain residents. It includes everything from hiring and
training specialists who focus exclusively on resident retention to making sure
our entire staff works to keep residents happy.
We hire people who are experts in their fields. But they also have
something extra - an absolute commitment to serving our residents. So not only
are requests for repairs fulfilled quickly and expertly, but we follow up to
make sure everything's okay. And we sponsor social gatherings that help our
residents meet their neighbors - and make them feel special. We offer all kinds
of special services, and stay open long after many offices are closed so people
who work from nine to five can see us at their convenience, not ours.
Call it customer service, but it's also good marketing. From the first
day our residents move in, we do everything we can to make them happy and
comfortable in their new home. That's because we never want them to leave.
[photo]
Hampton Glen
Richmond, Virginia
Cornerstone Realty Income Trust 15 Annual Report 1996
<PAGE>
[photo]
Sailboat Bay,
Charlotte, North Carolina
[map of United States with Georgia, South Carolina, North Carolina and Virginia
selected showing Cornerstone Realty Income Trust apartments.]
<PAGE>
<TABLE>
<CAPTION>
APARTMENT NUMBER DATE
COMMUNITY LOCATION OF UNITS ACQUIRED
- -------------------------------------------------------------------------------------------
<S> <C>
The Hollows Raleigh, NC 176 June 1993
Polo Club Greenville, SC 365 June 1993
Mayflower Seaside Virginia Beach, VA 263 October 1993
County Green Lynchburg, VA 180 December 1993
Stone Ridge Columbia, SC 191 December 1993
Wimbledon Chase Wilmington, NC 192 February 1994
Harbour Club Virginia Beach, VA 214 May 1994
Chase Mooring Wilmington, NC 224 August 1994
The Trestles Raleigh, NC 280 December 1994
Wind Lake Greensboro, NC 299 April 1995
Magnolia Run Greenville, SC 212 June 1995
Breckinridge Greenville, SC 236 June 1995
Bay Watch Pointe Virginia Beach, VA 160 July 1995
Hanover Landing Charlotte, NC 192 August 1995
Mill Creek Winston-Salem, NC 220 September 1995
Glen Eagles Winston-Salem, NC 166 October 1995
Sailboat Bay Charlotte, NC 358 November 1995
Tradewinds Hampton, VA 284 November 1995
Osprey Landing Wilmington, NC 176 November 1995
The Meadows Asheville, NC 176 January 1996
West Eagle Greens Augusta, GA 165 March 1996
Ashley Park Richmond, VA 272 March 1996
Arbor Trace Virginia Beach, VA 148 March 1996
Bridgetown Bay Charlotte, NC 120 April 1996
Trophy Chase Charlottesville, VA 185 April 1996
Beacon Hill Charlotte, NC 349 May 1996
Meadow Creek Pineville, NC 250 May 1996
Summerwalk Concord, NC 160 May 1996
The Landing Durham, NC 200 May 1996
Trolley Square
East Richmond, VA 197 June 1996
Savannah West Augusta, GA 456 July 1996
Paces Glen Charlotte, NC 172 July 1996
Signature Place Greenville, NC 171 August 1996
Hampton Glen Richmond, VA 232 August 1996
Heatherwood Charlotte, NC 272 September 1996
Highland Hills Carrboro, NC 264 September 1996
Parkside at
Woodlake Durham, NC 266 September 1996
Greenbrier Fredericksburg, VA 258 October 1996
Deerfield Durham, NC 204 November 1996
Trolley Square
West Richmond, VA 128 December 1996
</TABLE>
Cornerstone Realty Income Trust 17 Annual Report 1996
<PAGE>
Board of Directors
[photo]
Pictured at Ashley Park Apartments from left to right, back row: Leslie A.
Grandis, Martin Zuckerbrod, S. J. Olander, Jr., Glenn W. Bunting, Jr.; front
row: Penelope W. Kyle, Glade M. Knight, Harry S. Taubenfeld
Glade M. Knight (1)
Chairman of the Board and
Chief Executive Officer
S. J. Olander, Jr.
Senior Vice President and
Chief Financial Officer
Glenn W. Bunting, Jr. (1)
President, KB Properties Inc.
Leslie A. Grandis (3)
Partner, McGuire Woods,
Battle & Boothe, LLP
Penelope W. Kyle (2),(3)
Director, Virginia State Lottery
Harry S. Taubenfeld (2)
Real Estate Investor and
Partner, Zuckerbrod &
Taubenfeld, Esqs.
Martin Zuckerbrod (1),(2)
Real Estate Investor and
Partner, Zuckerbrod &
Taubenfeld, Esqs.
(1) Member, Executive Committee
(2) Member, Audit Committee
(3) Member, Compensation Committee
Executive Officers
Glade M. Knight
Chief Executive Officer
Debra A. Jones
Chief Operating Officer
S. J. Olander, Jr.
Chief Financial Officer
[photo]
Left to right: S. J. Olander, Jr.,
Glade M. Knight, Debra A. Jones
Cornerstone Realty Income Trust 18 Annual Report 1996
<PAGE>
Selected Financial Information
<TABLE>
<CAPTION>
As of December 31, 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
OPERATING RESULTS
Rental Income $ 40,352,955 $16,300,821 $ 8,177,576 $ 1,784,868
Net Income (Loss) (4,169,849) 5,229,715 2,386,303 496,646
Distributions Declared and Paid 15,934,901 6,316,185 2,977,136 359,427
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE
Net Income (Loss) $ (0.21) $ 0.64 $ 0.60 $ 0.30
Distributions $ 0.99 $ 0.96 $ 0.89 $ 0.27
Distributions Representing Return of Capital 14% 17% 21% --
Weighted Average Shares Outstanding 20,210,432 8,176,803 4,000,558 1,662,944
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Investment in Rental Property $ 329,715,853 $129,696,447 $ 54,107,358 $ 25,549,790
Total Assets $ 322,870,574 $133,181,032 $ 57,257,950 $ 29,199,079
Notes Payable $ 55,403,000 $ 8,300,000 $ 5,000,000 --
Shareholders' Equity $ 254,569,705 $122,154,420 $ 51,436,863 $ 28,090,912
Shares Outstanding 28,141,509 12,754,331 5,458,648 2,995,210
- ---------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Cash Flows from:
Operating Activities $ 20,162,776 $ 9,618,956 $ 3,718,086 $ 1,670,406
Investing Activities (194,519,406) (75,589,089) (28,557,568) (25,549,790)
Financing Activities 170,466,134 68,754,842 25,519,648 27,487,556
Number of Properties Owned at Year-End 40 19 9 5
- ---------------------------------------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS CALCULATION
Net Income (Loss) $ (4,169,849) $ 5,229,715 $ 2,386,303 $ 496,646
Depreciation of Real Estate 8,068,063 2,788,818 1,210,818 255,338
Management Contract Termination (a) 16,526,012 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Funds from Operations (b) $ 20,424,226 $ 8,018,533 $ 3,597,121 $ 751,984
===========================================================================================================================
</TABLE>
(a) Included in the 1996 operating results is $16,526,012 of management contract
termination expense resulting from the company's conversion to
"self-administered" and "self-managed" status. See Note 6 to the financial
statements.
(b) "Funds from operations" is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. This definition conforms
to the recommendations set forth in a White Paper adopted by the National
Association of Real Estate Investment Trusts (NAREIT). Funds from operations for
years prior to 1996 have been adjusted to conform to the NAREIT definition. The
company considers funds from operations in evaluating property acquisitions and
its operating performance, and believes that funds from operations should be
considered along with, but not as an alternative to, net income and cash flows
as a measure of the company's operating performance and liquidity. Funds from
operations, which may not be comparable to other similarly titled measures of
the other REITs, does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs.
Cornerstone Realty Income Trust 19 Annual Report
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion is based on the financial statements of the
company as of December 31, 1996, 1995 and 1994. This information should be read
in conjunction with the selected financial data and the company's financials
included elsewhere in this annual report. The company is operated and has
elected to be treated as a real estate investment trust (REIT) for federal
income tax purposes.
This annual report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
include, without limitation, statements concerning anticipated lower expenses
from the company's conversion to self-administration, anticipated improvements
in financial operations from completed and planned property renovations, and
expected benefits from the company's ownership of stock in Apple Residential
Income Trust, Inc. (Apple) and the companies that provide advisory and property
management services to Apple. Such statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievement of the company to be materially different from the results of
operations or plans expressed or implied by such forward-looking statements.
Such factors include, among other things, unanticipated adverse business
developments affecting the company, the properties or Apple, as the case may be,
adverse changes in the real estate markets and general and local economies and
business conditions. Although the company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore there can be no assurance
that such statements included in this annual report will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the company or any other person that the results
or conditions described in such statements or the objectives and plans of the
company will be achieved.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO DECEMBER 31, 1995
CONVERSION TO SELF-ADMINISTRATION Effective October 1, 1996, the company
agreed with its affiliated advisor and management companies on a series of
transactions, the effect of which was to convert the company into a
"self-administered" and "self-managed" REIT. The transactions were unanimously
approved by the Board of Directors of the company. The conversion was approved
because it is expected to reduce future operating expenses compared to what
those expenses would have been under the formerly "externally managed and
advised" arrangements. The net effect of these savings on earnings per share
will be partially offset by the issuance of common shares to effect the
transaction as described below.
Pursuant to this conversion, the company agreed to issue 1,400,000 common
shares, with 700,000 shares issued in October 1996 and 700,000 shares to be
issued by September 30, 1997, and paid approximately $1,913,000 to the various
entities for several assets and various contracts. This transaction was
accounted for as the termination of management contracts and resulted in a
one-time expense of $16,526,012. The remaining amounts paid relate primarily to
fixed assets acquired, net of imputed interest. This expense was the primary
factor in the company's net loss of $4,169,849 ($.21 per share) for 1996 versus
net income of $5,229,715 ($.64 per share) in 1995 (See Note 6 to the financial
statements).
INCOME AND OCCUPANCY The results of the company's property operations for
the year ended December 31, 1996 include the results of operations from the 19
properties acquired before 1996 and from the 21 properties acquired in 1996 from
their respective acquisition dates. Accordingly, the company portfolio consisted
of 40 properties at December 31, 1996. Further, the company has acquired two
additional properties in January 1997 (See Liquidity and Capital Resources). The
increased rental income and operating expenses for the year ended December 31,
1996, over the year ended December 31, 1995, is primarily due to a full year of
operation in 1996 of the 1995 acquisitions as well as the incremental effect of
the 1996 acquisitions.
Substantially all of the company's revenue is from the rental operation of
its apartment communities. Rental income increased to $40,352,955 (148%) in 1996
from $16,300,821 in 1995 due to the factors described above. Rental income is
expected to increase from the impact of planned improvements which are being
made in an effort to improve the properties' marketability, economic occupancies
and rental rates.
Cornerstone Realty Income Trust 20 Annual Report
<PAGE>
Overall average economic occupancy was 91% in 1996 and 92% in 1995. Average
rental rates for the portfolio increased to $520 (9%) in 1996 from $479 in 1995.
This increase is due to a combination of increased rental rates from new leases
and property renovation and the acquisition of properties with higher average
rental rates. The properties acquired prior to 1996 had an average economic
occupancy of 90% during 1996 and 92% during 1995. The decrease in occupancy is
partially due to the high volume of property acquisitions in 1996 and 1995 and
the effects of repositioning and renovation activities taking place at the
recently acquired properties.
COMPARABLE PROPERTY RESULTS On a comparative basis, the nine properties
owned during all of 1996 and 1995 provided rental and operating income of
$12,546,624 and $7,082,130, respectively, in 1996 and $11,644,096 and $6,226,341
in 1995. This represents an increase from 1995 to 1996 of 7.9% and 13.7%,
respectively. The conversion to "self-management" took place in October 1996.
Therefore, the actual results for property operations contained a full year of
management expense in 1995 and a partial year of expense in 1996. In order to
make a meaningful comparison of operating income for these properties between
1995 and 1996, property management expenses need to be eliminated from both
years. This adjustment allows for a comparison on a "self-administered" and
"self-managed" basis. As adjusted, the properties provided operating income of
$7,537,707 in 1996 and $6,928,227 in 1995. This represents an operating increase
of 8.8%. The eliminated expenses included property management fees of $535,471
in 1995 and $414,505 in 1996. In addition, expenses related to the property
management contracts of $148,322 in 1995 and $41,072 in 1996 were eliminated.
EXPENSES Total property expenses, excluding management contract
termination, increased to $26,860,354 (144%) in 1996 from $11,005,558 in 1995,
due largely to the increase in the number of apartments. The operating expense
ratio (the ratio of operating expenses, excluding depreciation and amortization,
to rental income) was 43% in 1996 and 46% in 1995. The decline in the operating
expense ratio is attributable to increasing economies of scale based on the
company's growing portfolio of properties and the elimination of property
management and advisory fees in the fourth quarter of 1996.
General and administrative expenses totaled 3.7% of revenues in both 1996
and 1995. These expenses represent the administrative expenses of the company as
distinguished from the operations of the company's properties. In 1996, the
company has continued to expand its internal administrative infrastructure to
keep pace with its rapid growth.
Depreciation of real estate increased to $8,068,063 in 1996 from $2,788,818
in 1995, and is directly attributable to the acquisition of additional apartment
communities in 1995 and 1996.
INTEREST INCOME AND EXPENSE The company's other source of income is from
the investment of its cash and cash reserves. Interest income was $287,344 in
1996 and $226,555 in 1995. The company incurred $1,272,530 and $292,103 of
interest expense in 1996 and 1995, respectively, associated with short-term
borrowings under its line of credit. This is a result of the increased use of
its line of credit to fund acquisitions. The weighted average interest rate on
the line of credit during 1996 was 7.2% compared to 7.8% in 1995.
CHANGES IN ACCOUNTING POLICIES During the first quarter of 1996, the
company adopted the provisions of FASB No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of
this statement did not have an impact on the company's financial statements (See
Note 1 to the financial statements).
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO DECEMBER 31, 1994
INCOME AND OCCUPANCY The company had increased rental income, expenses and
net income in 1995 and 1994 due to the full year of operations from the
properties acquired in 1994 and 1993, respectively, as well as the effect of the
1995 and 1994 acquisitions from their respective acquisition dates.
Rental income in 1995 increased to $16,300,821 (100%), from $8,177,576 in
1994, due to the factors described above. The properties had an average economic
occupancy of 92% during 1995 and 90% in 1994. On a comparative basis, the five
properties owned during all of 1995 and 1994 provided rental and operating
income of $6,681,121 and $3,567,290, respectively, in 1995; and $6,175,925 and
$3,202,454 in 1994. This represents an increase from 1994 to 1995 of 8% and 11%,
respectively.
The 10 properties acquired in 1995 had an average economic occupancy of 93%
during 1995. The nine
Cornerstone Realty Income Trust 21 Annual Report 1996
<PAGE>
properties acquired prior to 1995 had an average economic occupancy of 91% in
1995.
Overall, average rental rates for the portfolio increased from $450 per
month in 1994 to $479 (6%) in 1995. This increase was due to a combination of
increased rental rates from new leases and property renovation and the
acquisition of properties with higher average rental rates.
EXPENSES Total property expenses increased to $11,005,558 (86%) in 1995
from $5,901,759 in 1994 due largely to the increased number of apartments. The
operating expense ratio (the ratio of operating expenses to rental income) was
46% in 1995 and 48% for 1994. General and administrative expenses totaled 3.7%
of revenues in 1995 and 8.8% in 1994. This decrease in percentage is attributed
to efficiency achieved through economies of scale.
INTEREST INCOME AND EXPENSE Interest income was $226,555 in 1995 and
$110,486 in 1994. The company incurred $292,103 of interest expense in 1995
associated with short-term borrowings under its line of credit. The company did
not borrow any funds and, thus, had no interest expense in 1994.
LIQUIDITY AND CAPITAL RESOURCES
EQUITY There was a significant change in the company's liquidity during the
year ended December 31, 1996 as the company continued to grow. During 1996, the
company sold 14,687,178 shares of its common stock to investors bringing the
total number of shares outstanding to 28,141,509. The total gross proceeds from
the shares sold in 1996 was $161,558,958, which netted $144,798,035 to the
company after the payment of brokerage fees and other offering-related costs.
This increased the total gross common equity raised by the company from
$138,434,847 at December 31, 1995 to approximately $300 million at December 31,
1996.
Using proceeds from the sale of common shares and supplemented by
short-term borrowings when necessary, the company acquired 4,645 apartment units
in 21 residential rental communities during 1996. These acquisitions brought the
total number of residential rental communities to 40 and the total apartment
units owned at year-end to 9,033.
NOTES PAYABLE The company intends to acquire additional properties and may
seek to fund these acquisitions through a combination of equity offerings and
unsecured corporate debt. To meet this objective, the company secured an $85
million unsecured line of credit with First Union National Bank of Virginia. The
line expires in March 1997, but is renewable annually by mutual agreement
between the company and the bank. The line bears interest at the 30-day LIBOR
rate plus 160 basis points. The company has received a commitment to increase
the line to $100 million on substantially the same terms. The renewed line will
be provided through a syndicate of several banks, headed by First Union National
Bank of Virginia, and is expected to close in the first quarter of 1997 with a
maturity approximately one year from the closing date. The company anticipates
curtailing the line of credit with the proceeds of future offerings of common
shares.
At year-end, the company had an outstanding balance of $49,903,000 on the
line of credit. In addition, the company carried a $5.5 million unsecured
debenture bearing an effective interest rate of 6.65% per annum. This debt is to
a private lender and is due in June 1999.
In January 1997, the company acquired The Arbors at Windsor Lake, a
228-unit apartment community located in Columbia, South Carolina, for
$10,875,000; and Westchase, a 352-unit apartment community located in
Charleston, South Carolina, for $11 million. The company used its unsecured line
of credit to effect these acquisitions. Upon completion of the renewal of the
unsecured line of credit, the company will have approximately $25 million of
currently available borrowing capacity for future acquisitions.
CAPITAL REQUIREMENTS The company has an ongoing capital expenditure
commitment to fund its renovation program for recently acquired properties. In
addition, the company expects to acquire new properties during the year. The
company anticipates that it will continue to operate as it did in 1996 and fund
these cash needs from a variety of sources including equity, cash reserves and
debt provided by its line of credit.
The company continues to renovate its properties. In connection with these
renovations, the company capitalized improvements of $19,048,039 in 1996.
Approximately $8 million of additional capital improvements are budgeted for
1997 on the existing property portfolio which are expected to be funded through
cash reserves and dividend reinvestment. The company has short-term cash flow
needs in order to conduct the operation of its properties. Historically
Cornerstone Realty Income Trust 22 Annual Report
<PAGE>
the rental income generated from the properties has supplied ample cash to
provide for the payment of these operating expenses and the payment of
distributions.
The company is operated as, and annually elects to be taxed as, a real
estate investment trust under the Internal Revenue Code. As a result, the
company has no provision for taxes and thus there is no effect on the company's
liquidity.
Capital resources are expected to grow with the future sale of its shares
and from cash flow from operations. Approximately 60% of all 1996 distributions
were reinvested in additional common shares. In general, the company's liquidity
and capital resources are believed to be more than adequate to meet its cash
requirements during 1997.
APPLE RESIDENTIAL INCOME TRUST Apple Residential Income Trust, Inc. was
organized by Mr. Knight late in 1996 for the purpose of acquiring apartment
communities in Texas. It commenced operations in January 1997. The company owns
all of the preferred stock in the companies that provide advisory and property
management services to Apple, and expects to receive economic benefits from the
investment. In addition, the company has a right to purchase up to 9.8% of the
common shares of Apple outstanding from time to time and has a right of first
refusal to acquire the assets and business of Apple.
IMPACT OF INFLATION
The company does not believe that inflation had any significant impact on
its operation of the company in 1996. Future inflation, if any, would likely
cause increased operating expenses, but the company believes that increases in
expenses would be more than offset by increases in rental revenues. Continued
inflation may also cause capital appreciation of the company's properties over
time, as rental rates and replacement costs increase.
Independent Auditors' Report
The Board of Directors and Shareholders
Cornerstone Realty Income Trust, Inc.
We have audited the accompanying balance sheets of Cornerstone Realty
Income Trust, Inc. as of December 31, 1996 and 1995, and the related statements
of operations, shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cornerstone Realty Income
Trust, Inc. at December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1996 the company
changed its method of accounting for impairment of long-lived assets and
long-lived assets held for disposition.
/s/ Ernst & Young LLP
Richmond, Virginia
January 24, 1997
Cornerstone Realty Income Trust 23 Annual Report
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
As of December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investment in rental property
Land $ 46,980,280 $ 19,852,544
Building 250,705,667 96,862,036
Property improvements 26,640,085 10,627,687
Furniture and fixtures 5,389,821 2,354,180
-----------------------------------------
329,715,853 129,696,447
Less accumulated depreciation (12,323,037) (4,254,974)
-----------------------------------------
317,392,816 125,441,473
Cash and cash equivalents 3,182,651 7,073,147
Prepaid expenses 557,544 167,152
Other assets 1,737,563 499,260
-----------------------------------------
5,477,758 7,739,559
-----------------------------------------
Total Assets $ 322,870,574 $ 133,181,032
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable $ 55,403,000 $ 8,300,000
Accrued payable--related party 7,297,093 --
Accounts payable 2,087,673 555,691
Accrued expenses 1,366,853 1,257,231
Rents received in advance 491,928 129,648
Tenant security deposits 1,654,322 784,042
-----------------------------------------
68,300,869 11,026,612
Shareholders' Equity
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 28,141,509 shares
and 12,754,331 shares, respectively 276,269,539 123,771,504
Deferred compensation (55,000) (77,000)
Distributions greater than net income (21,644,834) (1,540,084)
-----------------------------------------
254,569,705 122,154,420
-----------------------------------------
Total Liabilities and Shareholders' Equity $ 322,870,574 $ 133,181,032
=========================================
</TABLE>
See accompanying notes to financial statements.
Cornerstone Realty Income Trust 24 Annual Report 1996
<PAGE>
Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
REVENUE
Rental income $ 40,352,955 $ 16,300,821 $ 8,177,576
EXPENSES
Utilities 3,870,541 1,773,648 973,598
Repairs and maintenance 4,203,180 2,042,819 971,376
Taxes and insurance 3,275,422 1,201,812 644,239
Property management fee 1,243,215 896,521 455,650
Property management 741,257 181,166 94,455
Advertising 1,126,295 378,089 189,111
General and administrative 1,495,528 609,969 717,049
Amortization and other depreciation 47,133 30,564 30,628
Depreciation of real estate 8,068,063 2,788,818 1,210,818
Other operating expenses 2,638,183 1,020,242 566,228
Other 151,537 81,910 48,607
Management contract termination 16,526,012 -- --
--------------------------------------------------------------
Total expenses 43,386,366 11,005,558 5,901,759
--------------------------------------------------------------
Income (loss) before interest income (expense) (3,033,411) 5,295,263 2,275,817
Interest income 287,344 226,555 110,486
Interest expense (1,423,782) (292,103) --
--------------------------------------------------------------
Net income (loss) $ (4,169,849) $ 5,229,715 $ 2,386,303
==============================================================
Net income (loss) per share $ (0.21) $ 0.64 $ 0.60
==============================================================
Cash distributions per share $ .99 $ .96 $ .89
==============================================================
Weighted average number of shares outstanding 20,210,432 8,176,803 4,000,558
==============================================================
</TABLE>
See accompanying notes to financial statements.
Cornerstone Realty Income Trust 25 Annual Report 1996
<PAGE>
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Distributions
Common Stock (Greater) Total
----------------------------
Number Deferred Less than Shareholders'
of Shares Amount Compensation Net Income Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1993 2,995,210 $ 27,953,693 $ -- $ 137,219 $ 28,090,912
Net proceeds from the sale of shares 2,294,773 22,223,000 -- -- 22,223,000
Net income -- -- -- 2,386,303 2,386,303
Shares issued to Cornerstone Realty Advisors, Inc. 40,000 440,000 -- -- 440,000
Cash distributions declared and paid to
shareholders ($.8855 per share) -- -- -- (2,977,136) (2,977,136)
Shares issued through reinvestment of dividends 128,665 1,273,784 -- -- 1,273,784
---------------------------------------------------------------------------
Balance at December 31, 1994 5,458,648 51,890,477 -- (453,614) 51,436,863
Net proceeds from the sale of shares 6,930,567 68,255,383 -- -- 68,255,383
Net income -- -- -- 5,229,715 5,229,715
Cash distributions declared and paid to
shareholders ($.9575 per share) -- -- -- (6,316,185) (6,316,185)
Restricted stock grants 10,000 110,000 (110,000) -- --
Amortization of deferred compensation -- -- 33,000 -- 33,000
Shares issued through reinvestment of dividends 355,116 3,515,644 -- -- 3,515,644
---------------------------------------------------------------------------
Balance at December 31, 1995 12,754,331 123,771,504 (77,000) (1,540,084) 122,154,420
Net proceeds from the sale of shares 13,816,973 136,183,048 -- -- 136,183,048
Net loss -- -- -- (4,169,849) (4,169,849)
Cash distributions declared and paid to
shareholders ($.9930 per share) -- -- -- (15,934,901) (15,934,901)
Shares issued in connection with
management contract termination 700,000 7,700,000 -- -- 7,700,000
Amortization of deferred compensation -- -- 22,000 -- 22,000
Shares issued through reinvestment of dividends 870,205 8,614,987 -- -- 8,614,987
---------------------------------------------------------------------------
Balance at December 31, 1996 28,141,509 $ 276,269,539 $ (55,000) $ (21,644,834) $ 254,569,705
===========================================================================
</TABLE>
See accompanying notes to financial statements.
Cornerstone Realty Income Trust 26 Annual Report 1996
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
FROM OPERATING ACTIVITIES
<S> <C>
Net income (loss) $ (4,169,849) $ 5,229,715 $ 2,386,303
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 8,115,196 2,819,382 1,241,446
Amortization of deferred compensation 22,000 33,000 --
Advisor fee -- -- 440,000
Management contract termination 14,997,093 -- --
Changes in operating assets and liabilities:
Prepaid expenses (390,392) (63,594) (39,377)
Other assets (1,285,436) (305,072) (23,206)
Accounts payable 1,531,982 342,293 42,025
Accrued expenses 109,622 1,026,414 (387,720)
Rents received in advance 362,280 63,511 (55,156)
Tenant security deposits 870,280 473,307 113,771
---------------------------------------------------------------
Net cash provided by operating activities 20,162,776 9,618,956 3,718,086
FROM INVESTING ACTIVITIES
Acquisitions of rental property, net of debt assumed (175,471,367) (68,482,525) (22,494,000)
Capital improvements (19,048,039) (7,106,564) (6,063,568)
---------------------------------------------------------------
Net cash used in investing activities (194,519,406) (75,589,089) (28,557,568)
FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 135,653,144 38,300,000 5,000,000
Repayments of short-term borrowings (94,050,144) (35,000,000) --
Net proceeds from issuance of shares 144,798,035 71,771,027 23,496,784
Cash distributions paid to shareholders (15,934,901) (6,316,185) (2,977,136)
---------------------------------------------------------------
Net cash provided by financing activities 170,466,134 68,754,842 25,519,648
Increase (decrease) in cash and cash equivalents (3,890,496) 2,784,709 680,166
Cash and cash equivalents, beginning of year 7,073,147 4,288,438 3,608,272
---------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,182,651 $ 7,073,147 $ 4,288,438
===============================================================
</TABLE>
See accompanying notes to financial statements.
Cornerstone Realty Income Test 27 Annual Report 1996
<PAGE>
Notes to Financial Statements
NOTE 1 GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Cornerstone Realty Income Trust, Inc. (the "company"), a Virginia corporation,
is an owner-operator of residential apartment communities in the mid-Atlantic
and southeastern regions of the United States.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with original maturities of
three months or less. The fair market value of cash and cash equivalents
approximate their carrying value.
INVESTMENT IN RENTAL PROPERTY
The company adopted FASB Statement No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" in the first
quarter of 1996. The company records impairment losses on rental property used
in the operations if indicators of impairment are present and the undiscounted
cash flows estimated to be generated by the respective properties are less than
their carrying amount. Impairment losses are measured as the difference between
the asset's fair value and its carrying value. There was no effect on the
company's financial statements in 1996 as a result of the adoption.
The investment in rental property is recorded at the lower of depreciated
cost or fair value and includes real estate brokerage commissions paid to
Cornerstone Realty Group, a related party, for purchases prior to October 1,
1996 (See Note 6).
Repairs and maintenance costs are expensed as incurred while significant
improvements, renovations and replacements are capitalized. Depreciation is
computed on a straight-line basis over the estimated useful lives of the related
assets which are 27.5 years for buildings and major improvements and a range
from five to seven years for furniture and fixtures.
INCOME RECOGNITION
Rental, interest and other income are recorded on an accrual basis. The
company's properties are leased under operating leases that, typically, have
terms that do not exceed one year.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
STOCK INCENTIVE PLANS
The company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. As discussed in Note 5, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," ("FASB 123") requires use of option
valuation models that were developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
ADVERTISING COSTS
Costs incurred for the production and distribution of advertising are expensed
as incurred.
INCOME PER SHARE
Net income per share is computed based upon the weighted average number of
shares outstanding during the year. Potentially dilutive securities are not
included since their inclusion would not materially dilute net income per share.
FEDERAL INCOME TAXES
The company is operated as, and annually elects to be taxed as, a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"). Generally, a real estate investment trust which complies with the
provisions of the Code and distributes at least 95% of its taxable income to its
shareholders does not pay federal income taxes on its distributed income.
Accordingly, no provision has been made for federal income taxes.
For income tax purposes, distributions paid to shareholders consist of
ordinary income and return of capital or a combination thereof. Distributions
per share were 99.30, 95.75, and 88.55 cents in the years ended December 31,
1996, 1995 and 1994, respectively. In 1996, of the total distribution, 86.4% was
taxable as ordinary income and 13.6% was a non-taxable return of capital. In
1995, of the total distribution, 83% was taxable as ordinary income and 17% was
a non-taxable return of capital. In 1994, 79% was taxable as ordinary income and
21% was a non-taxable return of capital.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with the
current financial statement presentation.
Cornerstone Realty Income Trust 28 Annual Report
<PAGE>
Notes to Financial Statements
NOTE 2 INVESTMENT IN RENTAL PROPERTY
The following is a summary of rental property owned at December 31, 1996.
<TABLE>
<CAPTION>
Initial Carrying Accumulated Date
Description Acquisition Cost Cost* Depreciation Acquired
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
The Hollows $ 4,200,000 $ 5,438,995 $ 577,553 June 1993
Polo Club 4,300,000 6,664,656 982,336 June 1993
Mayflower Seaside 7,634,144 9,346,121 817,276 October 1993
County Green 3,800,000 5,132,182 542,906 December 1993
Stone Ridge 3,325,000 5,460,698 637,308 December 1993
Wimbledon Chase 3,300,000 5,268,408 531,217 February 1994
Harbour Club 5,250,000 5,860,766 468,719 May 1994
Chase Mooring 3,594,000 4,973,568 401,020 August 1994
The Trestles 10,350,000 11,234,689 720,874 December 1994
Wind Lake 8,760,000 9,588,220 542,372 April 1995
Magnolia Run 5,500,000 6,555,252 360,380 June 1995
Breckinridge 5,600,000 6,465,850 283,408 June 1995
Bay Watch Pointe 3,372,525 4,728,003 215,196 July 1995
Hanover Landing 5,725,000 7,008,174 297,335 August 1995
Mill Creek 8,550,000 9,136,406 372,584 September 1995
Glen Eagles 7,300,000 7,829,058 332,935 October 1995
Sailboat Bay 9,100,000 12,612,632 410,372 November 1995
Tradewinds 10,200,000 10,744,903 425,641 November 1995
Osprey Landing 4,375,000 6,002,617 221,985 November 1995
The Meadows 6,200,000 6,921,730 245,086 January 1996
West Eagle Greens 4,020,000 5,326,476 139,525 March 1996
Ashley Park 12,205,000 12,745,351 362,659 March 1996
Arbor Trace 5,000,000 5,641,816 134,044 March 1996
Bridgetown Bay 5,025,000 5,482,705 132,870 April 1996
Trophy Chase 3,710,000 5,058,276 107,038 April 1996
Beacon Hill 13,579,203 14,140,526 268,969 May 1996
Meadow Creek 11,100,000 11,710,655 255,529 May 1996
Summerwalk 5,660,000 6,448,175 114,247 May 1996
The Landing 8,345,000 9,145,124 191,297 May 1996
Trolley Square East 6,000,000 6,452,907 147,530 June 1996
Savannah West 9,843,620 10,958,218 183,735 July 1996
Paces Glen 7,425,000 7,711,013 99,625 July 1996
Signature Place 5,462,948 5,908,018 81,704 August 1996
Hampton Glen 11,599,931 11,983,485 159,883 August 1996
Heatherwood 10,205,457 10,321,457 94,473 September 1996
Highland Hills 12,100,000 12,697,339 146,089 September 1996
Parkside at Woodlake 14,663,886 14,692,805 152,478 September 1996
Greenbrier 11,099,525 11,216,833 92,571 October 1996
Deerfield 10,675,000 10,755,978 62,656 November 1996
Trolley Square West 4,242,575 4,345,768 9,612 December 1996
- ---------------------------------------------------------------------------------------------------------------------------
$292,397,814 $329,715,853 $12,323,037
===========================================================================================================================
</TABLE>
* Includes real estate commissions, closing costs and improvements capitalized
since the date of acquisition.
On January 13, 1997, effective January 1, 1997, the company acquired The
Arbors at Windsor Lake, a 228-unit apartment community located in Columbia,
South Carolina, for $10,875,000. On January 15, 1997, the company acquired
Westchase, a 352-unit apartment community located in Charleston, South Carolina,
for $11 million.
Cornerstone Realty Income Trust 29 Annual Report
<PAGE>
Notes to Financial Statements
The following is a reconciliation of the carrying amount of real estate
owned:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at January 1 $129,696,447 $ 54,107,358 $25,549,790
Real estate purchased 180,971,367 68,482,525 22,494,000
Improvements 19,048,039 7,106,564 6,063,568
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $329,715,853 $129,696,447 $54,107,358
===========================================================================================================================
</TABLE>
The following is a reconciliation of accumulated depreciation:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at January 1 $ 4,254,974 $ 1,466,156 $ 255,338
Depreciation expense 8,068,063 2,788,818 1,210,818
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 12,323,037 $ 4,254,974 $ 1,466,156
===========================================================================================================================
</TABLE>
- ----------------------------------------------------------------------------
NOTE 3 NOTES PAYABLE
In March 1996, the company renewed its agreement with a commercial bank and
increased its unsecured revolving line of credit to $50 million. The line of
credit expires in March 1997, but is renewable annually by mutual agreement
between the company and bank. On January 1, 1997, the company increased its
unsecured line of credit to $85 million. This agreement allows the company to
finance a portion of the purchase price of property acquisitions. Borrowings
under the current agreement are evidenced by an unsecured promissory note and
bear interest at one-month LIBOR plus 160 basis points. At December 31, 1996,
borrowings under the agreement were $49,903,000. The weighted average interest
rate incurred under the line of credit was 7.2% in 1996 and 7.8% in 1995.
On June 25, 1996, in connection with the acquisition of rental property, an
unsecured note was executed by the company in the amount of $5.5 million. The
note bears an effective interest rate of 6.65% per annum. Annual interest
payments are due on January 1, 1997, 1998, and 1999, and the principal balance
is due on June 1, 1999 if not prepaid. The note is prepayable at any time,
without penalty.
In October 1995, the company purchased Glen Eagles Apartments for $7.3
million with $5 million in proceeds from the offering. At the request of the
seller, an unsecured non-interest-bearing note was executed for the remaining
amount of $2.3 million. The balance of the note was paid in full in January 1996
through the sale of additional shares.
The fair market value of the borrowings approximate the recorded amounts. No
interest was capitalized in 1996, 1995 or 1994. Interest paid was $1,075,360,
$227,478 and $0, for 1996, 1995, and 1994, respectively.
- ---------------------------------------------------------------------------
NOTE 4 COMMON STOCK
The company raised capital through a series of continuous offerings of shares
during 1996, 1995 and 1994. The company received gross proceeds of $161,558,958,
$80,142,516 and $26,657,818 from the sale of 14,687,178 shares at $11 per share;
7,285,683 shares at $11 per share; and 2,423,438 shares (at $11 per share)
including shares sold through the reinvestment of distributions for the years
ended December 31, 1996, 1995 and 1994, respectively. The underwriter received
selling commissions and a marketing expense allowance equal to 7.5% and 2.5%,
respectively, of the gross proceeds of shares sold. During 1996, 1995 and 1994,
the underwriter earned $16,159,634, $8,014,252 and $2,663,032, respectively. The
net proceeds of the offering, after deducting selling commissions and other
offering expenses, were $144,798,035 in 1996, $71,771,027 in 1995 and
$23,496,786 in 1994.
The company provides a plan which allows shareholders to reinvest
distributions in the purchase of additional shares of the company. Of the total
proceeds raised from common shares during the years ended December 31, 1996,
1995 and 1994, $9,572,255, $3,904,325 and $1,415,328, respectively, were
provided through the reinvestment of distributions.
Cornerstone Realty Income Trust 30 Annual Report 1996
<PAGE>
- -------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 5 STOCK INCENTIVE PLANS
Based on the outstanding shares under the 1992 Incentive Option Plan, as
amended, a maximum of 1,237,470 options could be granted, at the discretion of
the Board of Directors, to certain officers and key employees of the company.
Also under the Directors Plan, as amended, a maximum of 533,547 options could be
granted to the directors of the company.
In 1996, the company granted 41,289 options to purchase shares under the
Directors Plan and 37,000 options under the Incentive Plan.
Both of the plans generally provide, among other things, that options be
granted at exercise prices not lower than the market value of the shares on the
date of grant. Under the Incentive Plan, options become exercisable at the date
of grant. Generally the optionee has up to 10 years from the date on which the
options first become exercisable during which to exercise the options. Activity
in the company's share option plans during the three years ended December 31,
1996 is summarized in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Outstanding, beginning of year 292,962 $10.99 250,954 $10.98 5,243 $10.28
Granted 78,289 11.00 42,008 11.00 245,711 11.00
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 371,251 $10.99 292,962 $10.99 250,954 $10.98
===========================================================================================================================
Exercisable at end of year 371,251 $10.99 292,962 $10.99 250,954 $10.98
===========================================================================================================================
Weighted-average fair value of
options granted during the year $ .69 $ .60 N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pro forma information regarding net income and earnings per share is required by
FASB 123, which also requires that the information be determined as if the
company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method described in that statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.4%
and 6.9%; a dividend yield of 7.0% for 1995 and 1996; volatility factors of the
expected market price of the company's common stock of .122 for 1995 and 1996;
and a weighted-average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of FASB 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. As the
options are immediately exercisable, the full impact of the pro forma is
disclosed below.
1996 1995
- ------------------------------------------------------------------------------
Pro forma FASB 123
net income (loss) $(4,223,868) $ 5,204,510
As reported net
income (loss) $(4,169,849) 5,229,715
Pro forma FASB 123
earnings per share
(loss) $ .21) $ .64
As reported net income
per share (loss) $ (.21) $ .64
Cornerstone Realty Income Trust 31 Annual Report 1996
<PAGE>
Notes to Financial Statements
- ------------------------------------------------------------------------------
NOTE 6 RELATED-PARTY TRANSACTIONS
Prior to September 30, 1996, the company operated as an "externally advised" and
"externally managed" REIT. Cornerstone Advisors, Inc. served as the advisor,
Cornerstone Management Group, Inc. served as the property manager, and
acquisition services were provided by Cornerstone Realty Group, Inc. Glade M.
Knight, Chairman and Chief Executive Officer of the company, held all of the
stock of Cornerstone Advisors, Inc., Cornerstone Management Group, Inc. and
Cornerstone Realty Group, Inc. (collectively, the "External Companies"). By
agreement, Mr. Knight held part of the stock of the External Companies for the
account and interest of Stanley J. Olander, Jr., Chief Financial Officer of the
company, and Debra A. Jones, Chief Operating Officer of the company.
As of October 1, 1996, the company entered into a series of related-party
transactions with the External Companies, the effect of which was to convert the
company into a "self-administered" and "self-managed" REIT. The transactions
were unanimously approved by the independent members of the Board of Directors.
To effect the transaction, the company agreed to issue 1.4 million shares to
Cornerstone Management Group, Inc. in exchange for the assignment of all of its
rights and interest in, to and under, its management agreements with the
company. On October 1, 1996, the company issued 700,000 shares. The balance of
such shares will be issued on September 30, 1997, and are disclosed on the
balance sheet as "accrued payable-related party" in the amount of $7,162,791
plus accrued, imputed interest of $134,302. The combined $14,997,093 is treated
as a non-cash item on the Statement of Cash Flows. No distributions are payable
with respect to the shares to be issued in 1997 until they are issued. The
consideration for the transaction totaled approximately $15.4 million based upon
the agreed-upon fair market value of $11 per share of the company's common
stock. In addition, on October 1, 1996 the company paid to Cornerstone Realty
Group, Inc. and Cornerstone Advisors, Inc. $1,325,000 in exchange for the
assignment by them of all of their rights and interests in, to and under, their
property acquisition agreement and advisory agreement with the company.
Immediately following the assignment by each of the External Companies of its
rights and interest in, to and under, its respective agreements with the
company, the company terminated each such agreement. The consideration for all
of the above transactions, plus related transaction costs, was accounted for as
a termination of the management administration contracts.
Also on October 1, 1996, the company paid to Cornerstone Realty Group, Inc.
$100,000 and paid to Glade Knight $350,000 for the personal property and
building, respectively, located at 306 E. Main Street, Richmond, Virginia, which
serves as the principal executive office of the company. The company also paid
approximately $138,000 to certain lenders, representing the balance owed on
certain automobile loans, in exchange for the conveyance by Cornerstone Realty
Group, Inc., to the company of such automobiles.
Prior to the October 1, 1996 transaction, Cornerstone Advisors, Inc. (The
"Advisor") was the advisor to the company and provided its day-to-day
management. The Advisor earned a quarterly fee not to exceed .25% of the
company's assets, based on the company's financial performance as defined in the
agreement with the Advisor.
During 1994, the company terminated its former advisory arrangement with
Cornerstone Realty Advisors, Inc. (the "Old Advisor"). Under the former
arrangement, the fee for management services was 1% of the company's assets, as
defined in the agreement. In August 1994, the company purchased the assets of
the Old Advisor in exchange for 40,000 of the company's shares, with a market
value of $440,000, which were distributed to the beneficial owners of the Old
Advisor, all of whom were either directors and/or officers of affiliates of the
company. The $440,000 market value of the shares issued was expensed in 1994.
As properties were acquired, the company paid real estate commissions of 2%
of the purchase prices of properties to Cornerstone Realty Group. In addition
the company entered into agreements with Cornerstone Management Group, Inc. (the
"Management Company") to manage the properties. The Management Company earned a
management fee equal to 5% of rental income and was entitled to be reimbursed
for certain expenses.
The following table is a summary of payments made by the company during the
years ended December 31, 1996, 1995 and 1994 per the terms of the various
contracts with the External Companies:
1996 1995 1994
- -------------------------------------------------------
Cornerstone
Management
Group $1,243,215 $ 2,686,204 $ 1,445,816
Cornerstone
Realty
Group, Inc. 1,957,624 1,302,550 349,980
Cornerstone
Advisors, Inc. 295,759 219,930 0
Cornerstone Realty Income Trust 32 Annual Report 1996
<PAGE>
Notes to Financial Statements
APPLE RESIDENTIAL INCOME TRUST Apple was organized by Mr. Knight late in
1996 for the purpose of acquiring apartment communities in Texas. It commenced
operations in January 1997. The company owns all of the preferred stock in the
companies that provide advisory and property management services to Apple, and
expects to receive economic benefits from the investment. In addition, the
company has a right to purchase up to 9.8% of the common shares of Apple
outstanding from time to time and has a right of first refusal to acquire the
assets and business of Apple.
- -------------------------------------------------------------------------------
NOTE 7 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Rental income $6,552,688 $8,666,887 $11,495,302 $13,638,078
Income (loss) before
interest income (expense) 2,142,429 2,931,010 3,471,329 (11,578,179)
Net income (loss) 2,171,887 2,749,676 3,306,208 (12,397,620) (a)
Net income (loss) per share .16 .16 .14 (.67)
Distributions per share .2475 .248 .2485 .249
1995
- ---------------------------------------------------------------------------------------------------------------------------
Rental income $2,745,012 $3,410,692 $4,383,403 $5,761,714
Income before
interest income (expense) 915,752 1,027,628 1,473,164 1,878,719
Net income 902,832 1,034,183 1,527,978 1,764,722
Net income per share .16 .15 .17 .16
Distributions per share .23 .24 .2425 .245
</TABLE>
(a) Included in the 1996 operating results is $16,526,012 of management contract
termination expense resulting from the company's conversion to
"self-administered" and "self-managed" status. See Note 6 to the financial
statements.
- --------------------------------------------------------------------------------
NOTE 8 PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the years ended December 31,
1996 and 1995 is presented as if (a) the company had qualified as a REIT,
distributed all of its taxable income and, therefore, incurred no federal income
tax expense during the period; and (b) the company had used proceeds from its
best efforts offering to acquire the properties, for properties acquired before
the completion of the offering. Properties acquired after the completion of the
offering were assumed to be acquired using the company's line of credit. The pro
forma information does not purport to represent what the company's results of
operations would have been if such transactions, in fact, had occurred on
January 1, 1995, nor does it purport to represent the results of operations for
future periods.
Unaudited Pro Forma Totals 1996 1995
- -----------------------------------------------------------
Rental income $51,430,900 $47,259,007
Net income (loss) (2,975,417) 13,043,237
Net income (loss) per share (.12) .55
The pro forma information reflects adjustments for the actual rental income and
rental expenses of 19 of the 1996 and all of the 1995 acquisitions for the
respective periods in 1996 and 1995 prior to acquisition by the company. Net
income has been adjusted as follows: (1) property management and advisory
expenses have been adjusted based on the company's contractual arrangements in
effect until the contracts were terminated; (2) interest expense has been
reflected based on market rates at the time of acquisition available to the
company for applicable properties; and (3) depreciation has been adjusted based
on the company's basis in the properties.
Cornerstone Realty Income Trust 33 Annual Report 1996
<PAGE>
Investor Information
CORPORATE HEADQUARTERS
Cornerstone Realty Income Trust
306 East Main Street
Richmond, Virginia 23219
(804) 643-1761
(804) 782-9302 FAX
TRANSFER AGENT
First Union National Bank
Shareholder Services Group
230 South Tryon Street
Charlotte, North Carolina 23288-1153
(800) 829-8432
INDEPENDENT AUDITORS
Ernst & Young LLP
901 East Cary Street
Richmond, Virginia 23219
(804) 344-6000
COUNSEL
McGuire Woods Battle & Boothe, LLP
One James Center
901 East Cary Street
Richmond, Virginia 23219
(804) 775-1000
ANNUAL MEETING
The annual meeting of shareholders will take place on May 6, 1997 in Richmond,
Virginia.
DIVIDEND REINVESTMENT PLAN
We offer shareholders the opportunity to purchase additional shares of common
stock through the reinvestment of distributions. For more information please
contact your investment advisor, or Corporate Services at (804) 643-1761.
10-K REPORT
For a copy of the company's Form 10-K filed with the Securities and Exchange
Commission without charge, please contact Corporate Services.
CORPORATE SERVICES
For additional information about the company, please contact David McKenney,
Vice President of Corporate Services, at (804) 643-1761.
Cornerstone Realty Income Trust 34 Annual Report 1996
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Cornerstone Realty Income Trust, Inc. of our report dated January 24, 1997,
included in the 1996 Annual Report to Shareholders of Cornerstone Realty Income
Trust, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-19187) of Cornerstone Realty Trust, Inc. and in the related
Prospectus of our report dated January 24, 1997, with respect to the financial
statements of Cornerstone Realty Trust, Inc. incorporated by reference, and our
report with respect to the financial statement schedule included in this Annual
Report (Form 10-K) for the year ended December 31, 1996.
Our audits also included the financial statement schedule of Cornerstone Realty
Trust, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Richmond, Virginia
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,182,651
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 329,715,853
<DEPRECIATION> 12,323,037
<TOTAL-ASSETS> 322,870,574
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 276,269,539
<OTHER-SE> (21,699,834)
<TOTAL-LIABILITY-AND-EQUITY> 322,870,574
<SALES> 0
<TOTAL-REVENUES> 40,352,955
<CGS> 0
<TOTAL-COSTS> 43,386,366
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,432,782
<INCOME-PRETAX> (4,169,849)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,169,849)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,169,849)
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0
</TABLE>
THE COMPANY
Cornerstone Realty Income Trust, Inc., a self-administered and
self-managed equity REIT headquartered in Richmond, Virginia, is a fully
integrated real estate organization with expertise in the management,
acquisition, and renovation of apartment communities. The Company focuses on the
ownership of apartment communities located in growing markets in Virginia, North
Carolina, South Carolina and Georgia. On February 28, 1997, the Company owned
the 42 Properties comprising 9,613 apartment units with an aggregate economic
occupancy of 91% and an average monthly rent of $556 per unit as compared to
February 28, 1996, when the Company owned 20 Properties comprising 4,565
apartment units with an aggregate economic occupancy of 88% and an average
monthly rent of $510 per unit. The Company's strategy is to own apartment
communities that cater to tenants with incomes equal to 90% to 115% of the
average local household income.
The Company maintains an intense focus on the operations of its
Properties to generate consistent, sustained growth in net operating income,
which it believes is the key to growing funds from operations per Common Share.
Net operating income growth is evidenced by the 1996 operating performance of
the Initial Properties. For the year ended December 31, 1996 as compared to
the year ended December 31, 1995, the Initial Properties achieved 8.8% growth
in net operating income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Comparison of the Years Ended December
13, 1996 and December 31, 1995 -- Comparable Property Results."
The Company's objective is to increase distributable cash flow and
Common Share value by:
o Increasing rental rates, maintaining high economic occupancy rates,
and controlling costs at the Properties
o Acquiring additional properties at attractive prices that provide
the opportunity to improve operating performance through the application of the
Company's management, marketing, and renovation programs
The Company has six regional property management offices, located in
Blacksburg and Virginia Beach, Virginia; Raleigh, Charlotte and Wilmington,
North Carolina; and Columbia, South Carolina. The Company currently has
approximately 300 employees, including specialists in acquisition, management,
marketing, leasing, development, accounting and information systems. The
Company's executive officers have substantial experience with apartment
properties, having been responsible for the management, acquisition and
renovation of more than 20,000 apartment units over the last 24 years using the
strategies and techniques described below.
Glade M. Knight, the Company's Chairman and Chief Executive Officer,
currently owns approximately 4% of the outstanding Common Shares. Collectively,
the officers and directors of the Company currently own approximately 5% of the
outstanding Common Shares.
GROWTH THROUGH MANAGEMENT AND LEASING
The Company plans to grow net operating income through active property
management, which includes keeping rental rates at or above market levels,
maintaining high economic occupancy through tenant retention, creating a
property identity and effectively marketing each property, and controlling
operating expenses at the property level. The Company's commitment to growth is
evidenced by the 15% increase in net operating income at the 19 Properties
acquired before January 1, 1996 from their dates of acquisition through December
31, 1996.
Management develops the overall management and leasing strategy,
including goals and budgets, for each Property. In order to achieve each
Property's objectives, management delegates significant decision-making
responsibility to regional and on-site employees, thereby instilling in its
employees a sense of ownership of their Property. Management believes that this
strategy is an effective way to maximize each Property's potential. In order to
achieve desired results, the Company emphasizes training for its on-site
employees as well as raising rents to be at or above the market for comparable
properties. The Company also ties on-site employees' bonuses to both net
operating income targets established for their respective Properties and the
Company's overall financial performance.
18
<PAGE>
Management believes that tenant retention is critical to generating net
operating income growth. Tenant retention maintains or increases economic
occupancy and minimizes the costs associated with preparing apartments for new
occupants. The Company employs one person at each Property who has a primary
focus on tenant retention. The tenant retention specialist's objective is to
focus on tenant retention. The tenant retention specialist's objective is to
make tenants feel at home in the community through personal attention, which
includes organizing social functions and activities as well as responding
promptly to any tenant problems that may arise in conjunction with the apartment
or community. The Company's philosophy is to market its Properties continually
to existing tenants in order to achieve a low turnover rate. The Company
believes that the turnover rate at its Properties is below the average turnover
rate for comparable apartment communities.
The Company seeks to create a unique identity for each Property by
emphasizing curb appeal, signage, and attractive common area facilities such as
clubhouses and swimming pools. The Company has upgraded or renovated many of
the Properties' common area facilities after acquisition. Each Property is
marketed as "Cornerstone Community" but typically has an individual Property
name tied to a local theme. Each property has a dedicated on-site marketing
person whose responsibility is to position and market the Property within the
local community through such activities as media advertising, on-site
promotional events and personal calls to local businesses.
Operating expenses are controlled at each Property by setting budgets
at the corporate level and requiring that any expense over budget at a Property
be approved by management. Purchase discounts are sought at both the corporate
level and locally in those areas where the Company has a significant presence.
All contracts for goods and services are re-bid annually to ensure competitive
pricing. The Company as a preventive maintenance program and the ability to
perform work using in-house personnel which helps the Company to reduce expenses
at the Properties. For example, the maintenance manager at each Property is
qualified to perform HVAC and plumbing work which otherwise would be contracted
outside the Company.
An example of the success of the Company's active management strategy
is the Tradewinds Apartments in Hampton, Virginia. Upon acquisition, the
Company's goal was to increase net operating income by: (l) raising rents to
prevailing market rates; (ii) increasing economic occupancy; and (iii)
reducing operating expenses. The Company re-oriented the tenant mix toward
private sector tenants expenses. The Company re-oriented the tenant mix toward
private sector tenants by reducing the Property's reliance on military personnel
as tenants, improved tenant screening, reduced on-site management personnel,
implemented a program of preventive maintenance, and changed the Property's
marketing from newspapers to apartment guides. The result was an increase in
net operating income to $1,214,0000 from $968,000 (25.4%) over the first twelve
months. The increase was the result of a 3% rental increase, an 8% increase in
economic occupancy, and a 9% decrease in operating expenses.
GROWTH THROUGH ACQUISITIONS, RENOVATIONS AND EXPANSION
The Company also plans to generate growth in net operating income
through acquisitions by: (i) acquiring under-performing assets at less than
replacement cost; (ii) correcting operational problems; (iii) making selected
renovations; (iv) increasing economic occupancy; (v) raising rental rates; (vi)
implementing cost controls; and (vii) providing enhanced property and
centralized management. In markets that it targets for acquisition
opportunities, the Company attempts to gain a significant local presense in
order to achieve operating efficiencies. In analyzing acquisition opportunities,
the Company considers acquisitions of property portfolios as well as individual
properties.
The Company has demonstrated an ability to grow through acquisitions.
The Company's first two Properties were acquired in June of 1993. Since that
time, the Company has acquired 40 additional Properties. Twenty-one of the
Properties were acquired in 1996.
The Company analyzes specific criteria in connection with a proposed
acquisition. These criteria include: (i) the market in which a property is
located and whether it has a diversified economy, stable employment base and
increasing average household income; (ii) the property's current and projected
cash flow and the ability to increase net operating income; (iii) the condition
and design of the property and whether the property can benefit from
renovations; (iv) historical and projected occupancy rates; (v) geographic
location in light of the Company's diversification objectives; and (vi) the
purchase price of the property as its relates to the cost of the new
construction.
19
<PAGE>
The Company believes it will be able to purchase properties at less
than replacement cost because of the presence of deferred maintenance,
management neglect, or prior owner's financial distress. Upon acquisition, the
Company seeks to improve both operating results and property identity through a
24-month renovation policy which includes selective renovations such as new
roofs, new exterior siding, exterior painting, clubhouse renovation and
construction, and interior refurbishment. The Company has invested in
renovations to its Properties approximately $19.0 million on 36 communities in
1996, approximately $7.1 million on 16 communities in 1995 and approximately
$6.1 million on eight communities in 1994. Approximately $8.0 million of
additional capital improvements on the Properties are budgeted for 1997. To
date, these actions have permitted the Company to increase rental rates and
improve economic occupancy rates at the Properties.
Because the Company has grown and plans to grow through property
acquisitions, management has created a system establishing "Takeover Teams" to
provide immediate transitional management and leasing services to newly-acquired
properties and to implement quickly the Company's operations and policies. A
Takeover Team consists of senior property management personnel as well as
marketing and maintenance specialists from other communities owned by the
Company. The Takeover Team remains at a property until the Company's management
and leasing programs have been installed and the new on-site team is fully
operational. Typically, this process takes two to four weeks to complete.
An example of the Company's acquisition strategy is the Chase Mooring
Apartments, a 224-unit apartment community located in Wilmington, North
Carolina. This community was purchased in August 1994 for $3,594,000, or
$16,045 per apartment unit. Although the community is well located, the
Property lacked curb appeal, did not have a clubhouse, and had been managed and
maintained on a marginal basis by the original owner. After acquiring the
Property, the Company spent approximately $1.2 million, or $5,414 per unit on
various renovations, including the addition of a clubhouse and rental center
that has become the focus of the Property's community activity. At acquisition,
the average monthly rent at the Property was $382 per apartment unit. As of
December 1996, the average monthly rent at the Property was $513 per unit,
representing an average annual increase of 14.2%. See "Risk Factors--Rapid
Growth."
The Company has also made, and may in the future make, acquisitions of
established apartment communities involved in foreclosure proceedings. In this
situation, the Company seeks properties that have below market-rate leases,
correctable vacancy problems or inefficient property management. The Company
also may make acquisitions of properties from over-leveraged owners of
properties, governmental regulatory authorities, lending institutions that have
taken control of such properties, mortgagees-in-possession and, possibly,
through bankruptcy reorganization proceedings.
If sufficient tenant demand exists and suitable land is available, the
Company may construct Expansion Units on land adjacent to certain Properties.
The Company believes that its successful experience with large-scale property
renovation will also permit strategic and cost-effective property expansion. It
is the Company's policy to acquire Expansion Units on a "turn-key" basis from a
third party contractor, thereby minimizing the risks normally associated with
development and lease-up.
Currently, the Company has planned expansion projects for two existing
Properties: Glen Eagles and The Meadows. Glen Eagles is a 166-unit apartment
community located in Winston-Salem, North Carolina. The land adjacent to the
community will accommodate approximately 220 Expansion Units which can be
served by existing amenities. At The Meadows, a 176-unit community in
Asheville, North Carolina there is additional land for approximately 250
Expansion Units. The Company has acquired these parcels and transferred them to
a developer for construction and lease-up of the Expansion Units with the
agreement that the developer will transfer the completed Expansion Units back
to the Company. The Company does not have interests in any land adjacent to any
other Properties it now owns, but may acquire land or options to acquire land of
this type adjacent to other properties it may acquire in the future.
APPLE RESIDENTIAL INCOME TRUST
In August 1996, Mr. Knight organized Apple for the purpose of acquiring
apartment communities in Texas. Apple plans to elect to be taxed as a REIT for
its taxable year ended December 31, 1996. Mr. Knight is Apple's Chairman and
Chief Executive Officer. Mr. Knight formed Apple as a separate corporation in
an
20
<PAGE>
attempt to insulate the Company from the risks associated with a start-up
company. The Company will participate in Apple's growth through its direct or
indirect receipt of acquisition, disposition, management and advisory fees,
ownership of Apple common shares and possible future acquisition of Apple. As
of February 28, 1997, Apple had raised gross proceeds of approximately $39.6
million in gross proceeds in an ongoing best-efforts equity offering and had
acquired four properties in the Dallas, Texas area.
The Company has a continuing right to own up to 9.8% of the common
shares of Apple. The purchase price under the option equals the public offering
price for the common shares of Apple (currently $10.00 per common share) less
the related selling commissions (currently $1.00 per common share). The Company
has committed to purchase at or before the closing of the Offering sufficient
common shares of Apple so that it will own approximately 9.5% of the total
common shares of Apple outstanding as of March 1, 1997. Thereafter, the Company
intends, if the board of directors of the Company determines it is in the best
interest of the Company and its shareholders, to purchase additional common
shares of Apple at the end of each calendar quarter so as to maintain its
ownership of approximately 9.5% of the outstanding common shares of Apple.
The Company also has a right of first refusal to purchase the
properties and the business of Apple. In addition, by the end of 1997, the
Company will evaluate the acquisition of Apple and, if the board of directors of
the Company determines it is in the best interests of the Company and its
shareholders, offer to acquire Apple or its assets. Any decision to combine the
Company and Apple can be made only by the respective boards of directors, and
depending on the structure of the transaction, the respective shareholders, of
the two companies. It is the current intent of Mr. Knight and the board of
directors of the Company to seek to acquire Apple and expand the geographic
diversity and size of the Company's portfolio of properties if the board of
directors of the Company determines that such an acquisition is in the best
interests of the Company.
The Company will provide advisory, property management and brokerage
services to Apple in exchange for fees and expense reimbursements under a
contract with Apple and subcontracts with Apple Residential Advisors, Inc.
("ARA") and Apple Residential Management Group, Inc. ("ARMG"), the companies
that originally contracted with Apple for such services. The Company also owns
all of the nonvoting preferred shares of ARA and ARMG, which entitle it to 95%
of the economic benefits of such corporations.
FINANCING POLICY
The Company's objective is to seek capital as needed at the lowest
possible cost. In addition to obtaining capital from future sales of Common
Shares, the Company may obtain lines of credit or other unsecured borrowings.
The Company is also not precluded from engaging in secured borrowings, although
its current policy is to hold its Properties on an unmortgaged basis, and as of
the date of this Prospectus, it has no secured debt. The Company may also seek
eventually to issue investment-grade debt, although there is no assurance that
this will occur.
On February 14, 1997, the Company obtained the $100 million Unsecured
Line of Credit from a consortium of three banks headed by First Union National
Bank of Virginia. The Unsecured Line of Credit replaced, and was used to repay
the outstanding balance on, an $85 million unsecured line of credit previously
obtained from First Union National Bank of Virginia. The Unsecured Line of
Credit may be used only for property acquisitions.
The Unsecured Line of Credit bears interest equal to the one-month
London interbank offered rate ("LIBOR") plus 1.60% (subject to certain other
possible adjustments). The interest rate is adjusted monthly. In addition, the
Company is obligated to pay the lenders a quarterly commitment fee equal to
0.25% per annum of the unused portion of the loan commitment. The entire
balance of the Unsecured Line of Credit is due on March 31, 1998. On March 1,
1997, the interest rate on the Unsecured Line of Credit was 7.03%, and the
outstanding balance was approximately $75.2 million.
The Company has also obtained from First Union National Bank of
Virginia a $7.5 million unsecured line of credit for general corporate purposes.
This line of credit also bears interest at LIBOR plus 1.60%, adjusted monthly,
and is due on March 31, 1998. On March 1, 1997, the outstanding balance on this
loan
21
<PAGE>
was approximately $1.7 million. The Company intends to use approximately
$3.8 million of proceeds borrowed under this line of credit to purchase common
shares of Apple prior to or contemporaneous with the closing of the Offering.
In connection with the acquisition of the Trolley Square East
Apartments in 1996, the Company issued the seller a $5.5 million unsecured
promissory note, which bears interest at an effective rate of 6.65% per annum
and is due on June 1, 1999. This promissory note will remain outstanding after
the completion of the Offering.
The Company intends to maintain a debt policy (the "Debt Limitation")
limiting the Company's total combined indebtedness plus its pro rata share of
indebtedness of any unconsolidated investments ("Joint Venture Debt") to 40% of
the Company's total equity market capitalization plus its combined indebtedness
(including its pro rata share of Joint Venture Debt) ("Total Market
Capitalization"). At the closing of the Offering, the Company will have
outstanding indebtedness of approximately $37.8 million or approximately 8% of
Total Market Capitalization based on the midpoint of the Offering Price range
set forth in this Prospectus.
COMPANY HISTORY
The Company was formed in 1993 to continue and expand the apartment
community acquisition, renovation and management strategies of Glade M. Knight,
the Company's Chairman and President. From January 1993 through October 1996,
the Company raised approximately $300 million in equity through a series of
best-efforts public offerings of its Common Shares. A total of 1,312,794 Common
Shares was sold at $10.00 per Common Share in 1993 and the remaining amount was
sold thereafter at $11.00 per Common Share. The last in the series of
best-efforts offerings was completed on October 21, 1996 and raised
approximately $50 million (4,545,455 Common Shares at $11.00 per Common Share).
From time to time, the Company has also utilized short-term unsecured borrowings
to fund property acquisitions.
During his career, Mr. Knight has been involved in the ownership and
management of over 20,000 apartment units, mainly located in the mid-Atlantic
region of the United States. See "Risk Factors--Prior Performance Difficulties
of Certain Affiliates." Senior management of the Company, which consists of Mr.
Knight, Debra A. Jones, Chief Operating Officer, and Stanley J. Olander, Jr.,
Chief Financial Officer, has worked together, in the same business as the
Company, for more than 16 years. Management believes that its long-term
operating experience is invaluable in enabling the Company to operate its
Properties efficiently and to identify and act upon acquisition opportunities.
Glade M. Knight, the Company's Chairman and Chief Executive Officer,
currently owns approximately 4% of the outstanding Common Shares. The combined
Common Share current ownership of senior management is approximately 5% of the
outstanding Common Shares.
The Company's executive offices are located at 306 East Main Street,
Richmond, Virginia 23219 and its telephone number is (804) 643-1761.
22
<PAGE>
PROPERTIES
PROPERTY DESCRIPTIONS AND CHARACTERISTICS
As of February 28, 1997, the Company owned 42 apartment communities
comprising 9,613 apartment units. The Properties are located in North Carolina
(22 communities), Virginia (12 communities), South Carolina (six communities)
and Georgia (two communities).
The following table sets forth the Company's Properties in each of its
15 metropolitan markets as of February 28, 1997:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF NUMBER OF CARRYING COST PORTFOLIO
COMMUNITIES APARTMENT UNITS AT 2-28-97 CARRYING COST
------------------ --------------- --------------- ----------
<S> <C> <C> <C> <C>
Georgia
- ---------
Augusta........... 2 621 $16,630,320 5%
North Carolina
- ---------------
Asheville......... 1 176 6,952,362 2
Charlotte......... 8 1,873 75,844,241 21
Greenville........ 1 171 5,994,281 2
Raleigh/Durham.... 6 1,390 64,325,186 18
Wilmington........ 3 592 16,446,131 5
Winston Salem/
Greensboro........ 3 685 26,597,379 8
South Carolina
- ---------------
Charleston.........1 352 11,014,351 3
Columbia.......... 2 419 16,357,294 5
Greenville........ 3 813 19,770,026 6
Virginia
- ---------------
Charlottesville... 1 185 5,278,053 1
Fredericksburg.....1 258 11,315,775 3
Lynchburg..........1 180 5,156,673 1
Richmond.......... 4 829 35,885,593 10
Virginia Beach.... 5 1,069 36,414,536 10
Total............ 42 9,613 $353,982,201 100%
</TABLE>
Typically, the Company acquires apartment communities that have between
150 and 400 units. The current Properties have an average of 229 units. The
average unit size is approximately 857 square feet. The unit mix of each
property acquisition candidate is evaluated relative to the Company's assessment
of the needs of the local tenant market. The current Properties have an average
acquisition cost of $32,692 per unit (approximately $38 per square foot) and
average monthly rent of $556 per unit.
Typically, the Company's apartment communities consist of multiple two-
and three-story garden-style buildings on a site. In addition, the Company also
owns three high-rise apartment buildings. The Properties generally feature
mature landscaping, paved parking areas and walkways, and various amenities. The
amenities for a typical Property include an outdoor swimming pool, tennis
courts, a clubhouse, an exercisee facility, laundry rooms and a play area. The
Company looks for properties that are in close proximity to employment centers,
shopping areas and entertainment. Most of the Properties were built in the
1970's and 1980's.
The Properties generally consist of wood-frame structures on concrete
slabs with pitched roofs covered with asphalt or composition shingles. Interiors
are generally unfurnished, except for modern kitchen appliances. All kitchens
have a refrigerator, stove and garbage disposal. Most also have a dishwasher.
Some Properties include individual washers and dryers or washer/dryer
connections. Units are generally individually metered for electric and gas
service and have individually-controlled heating and air-conditioning systems.
The Properties consist of approximately 42% one-bedroom units, 49% two-bedroom
units, 8% three-bedroom units, and 1% units of other types.
The Company acquires and operates apartment communities that cater to
tenants who have incomes equal to 90% to 115% of the average local household
income. The Company believes that residents in this category are value-driven,
but also look for certain amenities, such as swimming pools, clubhouses,
exercise facilities and tennis courts. Tenants include young professionals,
manager-level white collar workers, medical personnel, members of the military,
young families and single parents. Generally, the residents at a Property are
employed by a mix of employers.
The Company believes that tenant demand for the Properties is primarily
dependent on the general condition of each market's economy and employment
climate, as well as the rate of household formation and the number of available
apartment units in that market. In evaluating a prospective property and its
marketm, the Company intensively studies and analyzes the area's economic,
demographic and employment conditions and expected future trends. The Company
also analyzes the expected growth in population and number of households in
relation to existing and planned competing apartment communities.
23
<PAGE>
The following table sets forth specific information regarding the Properties:
<TABLE>
<CAPTION>
CARRYING AVERAGE
COST UNIT
INITIAL CARRYING NUMBER PER SIZE
YEAR DATE OF ACQUISITION COST AT OF UNIT AT (SQUARE
PROPERTY LOCATION COMPLETED ACQUISITION COST 2-28-97 (1) UNITS 2-28-97 FEET)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Georgia
- --------------------
Savannah West........ Augusta 1976 July 1996 $ 9,843,620 $11,059,252 456 $24,253 877
West Eagle Greens.... Augusta 1974 March 1996 4,020,000 5,571,068 165 33,764 796
North Carolina
- --------------------
The Meadows.......... Asheville 1974 January 1996 6,200,000 6,952,362 176 39,502 1,068
Highland Hills (3)... Carrboro 1987 September 1996 12,100,000 12,826,027 264 48,583 1,000
Beacon Hill.......... Charlotte 1985 May 1996 13,579,203 14,173,343 349 40,611 734
Bridgetown Bay....... Charlotte 1986 April 1996 5,025,000 5,526,261 120 46,052 867
Hanover Landing...... Charlotte 1972 August 1995 5,725,000 7,032,279 192 36,626 832
Heatherwood.......... Charlotte 1980 September 1996 10,205,457 10,379,553 272 38,160 699
Meadow Creek......... Charlotte 1984 May 1996 11,100,000 11,748,118 250 46,992 860
Paces Glen........... Charlotte 1986 July 1996 7,425,000 7,730,487 172 44,945 907
Sailboat Bay......... Charlotte 1973 November 1995 9,100,000 12,727,982 358 35,553 906
Summerwalk........... Concord 1983 May 1996 5,660,000 6,526,218 160 40,789 963
Deerfield............ Durham 1985 November 1996 10,675,000 10,776,378 204 52,825 888
The Landing.......... Durham 1984 May 1996 8,345,000 9,318,561 200 46,593 960
Parkside at Woodlake. Durham 1996 September 1996 14,663,886 14,698,093 266 55,256 865
Wind Lake............ Greensboro 1985 April 1995 8,760,000 9,599,748 299 32,106 727
Signature Place...... Greenville 1981 August 1996 5,462,948 5,994,281 171 35,054 1,037
The Hollows.......... Raleigh 1974 June 1993 4,200,000 5,454,234 176 30,990 903
The Trestles......... Raleigh 1987 December 1994 10,350,000 11,251,893 280 40,185 776
Chase Mooring ....... Wilmington 1968 August 1994 3,594,000 4,999,181 224 22,318 867
Osprey Landing ...... Wilmington 1973 November 1995 4,375,000 6,152,147 176 34,955 981
Wimbledon Chase ..... Wilmington 1976 February 1994 3,300,000 5,294,803 192 27,577 818
Glen Eagles ......... Winston Salem 1986 October 1995 7,300,000 7,853,256 166 47,309 952
Mill Creek .......... Winston Salem 1984 September 1995 8,550,000 9,144,375 220 41,565 897
<CAPTION>
FEBRUARY STATISTICS
AVERAGE ECONOMIC
RENT PER MONTH OCCUPANCY
---------------- -----------------
1996 (2) 1997 1996 (2) 1997
-------- ---- --------- ----
<S> <C>
Georgia
- ------------------
Savannah West ......... - - $456 - - 88%
West Eagle Greens...... - - 451 - - 83%
North Carolina
- ---------------------
The Meadows ........... $558 585 90% 94%
Highland Hills(3)...... - - 692 - - 99%
Beacon Hill ........... - - 555 - - 96%
Bridgetown Bay ........ - - 589 - - 92%
Hanover Landing ....... 472 504 91% 93%
Heatherwood ........... - - 546 - - 88%
Meadow Creek .......... - - 596 - - 89%
Paces Glen ............ - - 616 - - 86%
Sailboat Bay .......... 508 539 82% 83%
Summerwalk ............ - - 532 - - 92%
Deerfield ............. - - 739 - - 90%
The Landing ........... - - 582 - - 98%
Parkside at Woodlake... - - 709 - - 88%
Wind Lake ............. 494 506 84% 84%
Signature Place ....... - - 492 - - 92%
The Hollows ........... 559 608 99% 88%
The Trestles .......... 545 570 95% 92%
Chase Mooring ......... 484 517 73% 88%
Osprey Landing ........ 458 540 85% 95%
Wimbledon Chase ....... 482 539 89% 97%
Glen Eagles ........... 604 631 92% 91%
Mill Creek ............ 526 560 88% 84%
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
CARRYING AVERAGE
COST UNIT
INITIAL CARRYING NUMBER PER SIZE
YEAR DATE OF ACQUISITION COST AT OF UNIT AT (SQUARE
PROPERTY LOCATION COMPLETED ACQUISITION COST 2-28-97 (1) UNITS 2-28-97 FEET)
-------- -------- --------- ----------- ------------- ----------- --------- ------- -------
<S> <C>
South Carolina
- --------------
Westchase(3)............. Charleston 1985 January 1997 $ 11,000,000 $ 11,014,351 352 $31,291 706
Arbors at Windsor
Lake(3)................. Columbia 1991 January 1997 10,875,000 10,875,000 228 47,697 948
Stone Ridge.............. Columbia 1975 December 1993 3,325,000 5,482,294 191 28,703 1,047
Breckinridge............. Greenville 1973 June 1995 5,600,000 6,504,753 236 27,563 726
Magnolia Run............. Greenville 1972 June 1995 5,500,000 6,586,150 212 31,067 993
Polo Club................ Greenville 1972 June 1993 4,300,000 6,679,123 365 18,299 807
Virginia
- ---------
Trophy Chase............. Charlottesville 1970 April 1996 3,710,000 5,278,053 185 28,530 803
Greenbrier............... Fredericksburg 1970 and 1990 October 1996 11,099,525 11,315,775 258 43,860 851
Tradewinds............... Hampton 1988 November 1995 10,200,000 10,752,883 284 37,862 930
County Green............. Lynchburg 1976 December 1993 3,800,000 5,156,673 180 28,648 1,000
Ashley Park.............. Richmond 1988 March 1996 12,205,000 12,771,523 272 46,954 765
Hampton Glen............. Richmond 1986 August 1996 11,599,931 12,074,674 232 52,046 788
Trolley Square East...... Richmond 1968 June 1996 6,000,000 6,657,892 197 33,796 606
Trolley Square West(3)... Richmond 1964 December 1996 4,242,575 4,381,504 128 34,231 571
Arbor Trace.............. Virginia Beach 1985 March 1996 5,000,000 5,658,916 148 38,236 850
Bay Watch Points......... Virginia Beach 1972 July 1995 3,372,525 4,750,121 160 29,688 911
Harbour Club............. Virginia Beach 1988 May 1994 5,250,000 5,873,957 214 27,448 813
Mayflower Seaside........ Virginia Beach 1950 October 1993 7,634,144 9,378,659 263 35,660 698
------------ ------------ ----- -------- -----
Total/Average............. $314,272,814 $353,982,201 9,613 $36,823 857
============ ============ ===== ======== =====
FEBRUARY STATISTICS
<CAPTION> AVERAGE ECONOMIC
RENT PER MONTH OCCUPANCY
-------------- --------------
1996(2) 1997 1996(2) 1997
------- ---- ------- ----
<S> <C>
South Carolina
- --------------
Westchase(3)............. -- $493 -- 93%
Arbors at Windsor
Lake(3)................. -- 641 -- 81%
Stone Ridge.............. $503 513 88% 91%
Breckinridge............. 406 433 93% 92%
Magnolia Run............. 471 513 98% 95%
Polo Club................ 382 407 92% 88%
Virginia
- ---------
Trophy Chase............. -- 484 -- 87%
Greenbrier............... -- 591 -- 93%
Tradewinds............... 558 571 80% 92%
County Green............. 475 495 90% 95%
Ashley Park.............. -- 572 -- 96%
Hampton Glen............. -- 646 -- 94%
Trolley Square East...... -- 514 -- 95%
Trolley Square West(3)... -- 488 -- 93%
Arbor Trace.............. -- 530 -- 95%
Bay Watch Points......... 556 578 79% 91%
Harbour Club............. 527 552 83% 91%
Mayflower Seaside........ 637 674 91% 93%
---- ---- ---- ----
Total/Average............. $510 $556 88% 91%
==== ==== ==== ====
</TABLE>
Notes to Table of Properties:
(1) "Carrying Cost" includes the purchase price of the Property plus real
estate commissions, closing costs and improvements capitalized since the date of
acquisition.
(2) An open item denotes that the Company did not own the Property during
the month indicated.
(3) The results of operations of the Westchase and Arbors at Windsor Lake
Apartments (which were purchased in January, 1997) and the Trolley Square West
and Highland Hills Apartments (for which audited financial statements were not
available at the time of purchase) are not reflected in the pro forma statements
of operations.
25
<PAGE>
MULTIFAMILY PROPERTIES IN THE COMPANY'S PRINCIPAL MARKETS
Market Demographics. The Company believes that the demographic and economic
trends and conditions in the Company's principal markets indicate a potential
for long term growth in funds from operations. While the Company owns 42
Properties in 15 markets, the majority of the Properties are located in five
metropolitan areas. Based on a survey conducted by M/PF Research, Inc., the
average physical occupancy rate for multifamily properties in the Company's
principal markets equaled 92% for the fourth quarter of 1996. The following
table illustrates the Company's presence in each of its five principal markets:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL MARKET COMPANY
APARTMENT UNITS APARTMENT PHYSICAL PHYSICAL
NUMBER OF OWNED BY THE UNITS OWNED OCCUPANCY OCCUPANCY
METROPOLITAN AREA COMMUNITIES COMPANY BY THE COMPANY 4TH QTR. 1996 4TH QTR. 1996
- ------------------------- ----------- --------------- -------------- ------------- -------------
<S> <C>
Charlotte, NC............ 8 1,873 19% 93% 92%
Raleigh/Durham, NC....... 6 1,390 14 96 95
Virginia Beach, VA....... 5 1,069 11 89 93
Richmond, VA............. 4 829 9 94 96
Greenville, SC........... 3 813 8 89 93
Total/Average....... 26 5,974 61% 92% 94%
</TABLE>
Each of these metropolitan areas is characterized by a diverse economic
base, as indicated below:
ESTIMATED
METROPOLITAN 1996 KEY ECONOMIC
AREA POPULATION CHARACTERISTICS
- -----------------------------------------------------------------------------
Charlotte, NC 1,758,000 o regional/national/international business
center
o 3rd largest banking center in the U.S.
o 42nd largest metropolitan area
o 6th largest wholesale center in the U.S.
o 11th largest distribution center in the U.S.
- -----------------------------------------------------------------------------
Raleigh/Durham, 1,025,000 o Capital of North Carolina
NC o home to three major universities:
Duke University
University of North Carolina
North Carolina State University
o high tech industries in the Research Triangle
- -----------------------------------------------------------------------------
Virginia Beach, 1,430,000 o largest and fastest growing city in Virginia
VA o federal government employment
o wholesale trade/warehousing
o high tech/electronics manufacturing
o transportation equipment manufacturing
- -----------------------------------------------------------------------------
Richmond, VA 942,000 o Capital of Virginia
o Federal Reserve Bank's Fifth District
o diverse economy with 14 Fortune 500 companies
o home to two major universities
Virginia Commonwealth University/Medical
College of Virginia
University of Richmond
- -----------------------------------------------------------------------------
Greenville, SC 860,000 o highest per capita foreign investment of any
MSA in the nation
o manufacturing
o textiles
o automobiles and automobile parts (Michelin,
BMW)
o distribution (regional and national)
- -----------------------------------------------------------------------------
26
<PAGE>
The Company's belief in the growth potential of its principal markets is
based on a multifamily investment environment characterized by increasing
demand, limited new supply and steady job and population growth. The Company
also believes that its growing market share in these markets will further
enhance the Company's growth opportunities.
Demand for Multifamily Housing. The Company believes that there will be an
increase in demand for multifamily housing in its principal markets during the
next decade due to the estimated employment, population and household formation
growth in these markets. During the period from 1985 to 1996, the Company's
principal markets experienced growth in these three areas in excess of national
averages. According to U.S. Department of Commerce statistics, job, population
and household formation growth in the Company's principal markets are projected
to continue to be greater than national averages. Based on calculations derived
from data tabulated by the U.S. Department of Commerce, Bureau of Economic
Analysis, the percentage change in employment, population, and household
formation growth for the Company's principal markets for the period from 1996 to
2005 is estimated to be 17.1%, 11.6% and 14.8%, respectively. All of these
statistics are greater than the national average estimated for each category for
the period 1996 through 2005.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
1985-1996 1996-2005
---------------------------------- ----------------------------------
PROJECTED
HOUSEHOLD PROJECTED PROJECTED HOUSEHOLD
EMPLOYMENT POPULATION FORMATION EMPLOYMENT POPULATION FORMATION
METROPOLITAN AREA GROWTH GROWTH GROWTH GROWTH GROWTH GROWTH
- ------------------------- ---------- ---------- --------- ---------- ----------- ---------
<S> <C>
Charlotte, NC............ 34.5% 23.5% 28.1% 18.1% 12.7% 15.9%
Raleigh/Durham, NC....... 45.4 35.4 40.8 24.5 18.5 21.9
Virginia Beach, VA....... 15.4 18.1 22.4 13.5 8.9 12.0
Richmond, VA............. 23.5 17.3 22.3 13.7 8.7 11.3
Greenville, SC........... 27.9 13.9 20.5 15.6 9.9 13.1
Company's Principal
Markets................ 28.2% 21.2% 26.4% 17.1% 11.6% 14.8%
United States Total..... 22.8% 11.6% 15.6% 11.8% 7.9% 9.0%
</TABLE>
Source: M/PF Research, Inc. (calculations based on data from NPA Data
Services, Inc.).
27
<PAGE>
Supply of Multifamily Housing. Construction of new multifamily apartments
has declined significantly since the mid-1980's in both the United States
generally and the Company's principal markets. The number of multifamily
residential building permits granted in the Company's principal markets for the
period 1991-1996 decreased by 50.8% (43,794 permits) as compared to the earlier
period of 1985-1990 (88,652 permits).
MULTIFAMILY RESIDENTIAL BUILDING PERMITS GRANTED
METROPOLITAN AREA 1985-1990 1991-1996 % CHANGE
------------------------- --------- --------- --------
Charlotte, NC............ 27,145 15,747 -42.0%
Raleigh/Durham, NC....... 18,719 13,707 -26.8
Virginia Beach, VA....... 25,234 7,864 -68.8
Richmond, VA............. 9,304 2,215 -76.2
Greenville, SC........... 8,250 4,261 -50.2
Company's Principal
Markets................ 88,652 43,794 -50.8%
Source: M/PF Research, Inc. (calculations based on data from U.S. Dept. of
Commerce, Bureau of the Census).
As compared to the building permit peak in 1985 of 26,373 apartment units,
the Company's principal markets are experiencing moderate multifamily
construction levels with 1996 building permits for apartment units (11,931)
being less than one-half of the peak level experienced in the 1985. At the same
time, renter household growth in these markets has remained positive, thus
creating a favorable supply/demand relationship.
Other Factors. In addition to the foregoing demographic factors, the
Company believes that demand for multifamily housing in its principal markets
will be positively affected by the following trend: (i) a growing percentage of
renters in the median income bracket whose decision to rent is a lifestyle
choice as well as a financial choice; and (ii) initial high cash costs of home
ownership due to downpayments and closing costs making home ownership a less
attractive housing alternative for an increasing number of people. The Company
believes that these trends will offset to some extent the general trend of a
decline in the growth rate of the adult population in the primary rental
population of 20 to 35 year olds and the effect of current low interest rates
for home mortgages.
The Company believes that the trends discussed above will keep the demand
for multifamily housing growing at a faster rate than the supply of apartments
during the next several years. However, there can be no assurances that any
projected future conditions will be achieved or realized or that the trends
discussed above will continue.
ENVIRONMENTAL MATTERS
It is the Company's policy to obtain a Phase I ESA from a qualified
environmental engineer before the acquisition of any property to identify
potential sources of contamination for which the owner of the property may be
responsible, and to assess the status of environmental regulatory compliance.
The Phase I ESA's include a historical review of a subject property,
reviews of certain public records, preliminary investigations of the surrounding
properties, screening for the presence of asbestos, PCBs and underground storage
tanks, and the preparation and issuance of a written report. The Phase I ESA's
do not include invasive procedures such as soil sampling or ground water
analysis. The Phase I ESA's for the Properties have not revealed any condition
that could have a material adverse effect on the Company's business, assets or
results of operations nor is the Company aware of any such condition, liability
or concern. It is possible that the Phase I ESA's related to any one of the
Properties do not reveal all environmental conditions, liabilities or compliance
concerns or that there are material environmental conditions, liabilities or
compliance concerns that arose at a Property after the related Phase I ESA's
report was completed of which the Company is otherwise unaware. The Company
believes that the Properties are in compliance in all material respects with all
federal, state and local laws, ordinances and regulations regarding hazardous or
toxic substances and other environmental matters. The Company has not been
notified
28
<PAGE>
by any governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental substances in
connection with any of the Properties. See "Risk Factors -- Possible
Environmental Liabilities."
INSURANCE
The Company currently carries comprehensive liability, fire, flood (where
appropriate), worker's compensation, extended coverage and rental loss
insurance, with policy specifications, limits and deductibles customarily
carried for similar properties. Certain types of losses, however (generally of a
catastrophic nature such as acts of war, hurricane coverage in certain areas,
and earthquakes) are either uninsurable or are not economically insurable. See
"Risk Factors-Uninsured Loss." The Company believes, however, that the
Properties are adequately insured in accordance with industry standards.
LEGAL PROCEEDINGS
Neither the Company nor the Properties are presently subject to any
material litigation nor, to the Company's knowledge, is any material litigation
threatened against the Company or the Properties, other than routine litigation
arising in the ordinary course of business and which is expected to be covered
by liability insurance.
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CERTAIN TRANSACTIONS
CONVERSION TO SELF-ADMINISTRATION
Before October 1, 1996, the Company operated as an "externally-advised" and
"externally-managed" REIT. Cornerstone Advisors, Inc. served as the advisor to
the Company, Cornerstone Management Group, Inc. served as the manager of the
Properties, and property acquisition services were provided to the Company by
Cornerstone Realty Group, Inc. Glade M. Knight, Chairman and Chief Executive
Officer of the Company, owned all of the stock of Cornerstone Advisors, Inc.,
Cornerstone Management Group, Inc. and Cornerstone Realty Group, Inc.
(collectively, the "External Companies"). By agreement among Mr. Knight, Stanley
J. Olander, Jr. (Chief Financial Officer of the Company) and Debra A. Jones
(Chief Operating Officer of the Company), Mr. Knight held part of the beneficial
ownership of the External Companies for the account and interest of each of Mr.
Olander and Ms. Jones.
Before October 1, 1996, the Company entered into a separate management
contract with Cornerstone Management Group, Inc. with respect to each Property
acquired. Under the terms of these agreements, the Company was obligated to pay
Cornerstone Management Group, Inc. a management fee equal to 5% of gross rental
income from the related Property plus certain expenses. Under the terms of the
advisory agreement with Cornerstone Advisors, Inc., the Company was obligated to
pay to Cornerstone Advisors, Inc. an annual advisory fee of up to 0.25% of the
Company's assets based on certain performance criteria. Under the terms of the
acquisition agreement with Cornerstone Realty Group, Inc., the Company was
obligated to pay Cornerstone Realty Group, Inc. a brokerage commission of 2% of
the gross purchase price of each Property acquired.
As of September 1, 1996, the Company agreed with the External Companies on
a series of related transactions, the effect of which was to convert the Company
into a "self-administered" and "self-managed" REIT effective October 1, 1996.
The transactions were unanimously approved by the board of directors, which
relied in part upon a "fairness opinion" issued by Arthur Andersen LLP. The
conversion was approved by the board of directors because it was determined to
be in the best interests of the Company and the shareholders for property
acquisition, property management and Company administration to be performed by
the Company's own officers and employees, rather than through contracts with the
External Companies.
To effect the conversion, the Company agreed to issue 1,400,000 Common
Shares to Cornerstone Management Group, Inc. in exchange for the assignment by
such company of all of its rights and interests in, to and under its management
agreements with the Company. On October 1, 1996, the Company issued 700,000
Common Shares, and the balance of such Common Shares will be issued on September
30, 1997. No distributions are payable with respect to the 700,000 unissued
Common Shares until they are issued. However, there are no conditions to the
issuance of the deferred Common Shares other than the passage of time.
In addition, the Company paid to Cornerstone Realty Group, Inc. and
Cornerstone Advisors, Inc. an aggregate of $1,325,000 in exchange for the
assignment by them of all of their rights and interests in the property
acquisition agreement and advisory agreement with the Company. Also on such
date, the Company paid to Cornerstone Realty Group, Inc. $100,000 and paid to
Glade M. Knight $350,000 for the personal property and building, respectively,
located at 306 East Main Street, Richmond, Virginia, which previously had served
as the principal executive office of the Company. Finally, the Company paid
approximately $138,000 to certain lenders, representing the balance owed by
Cornerstone Realty Group, Inc. on certain automobile loans, in exchange for the
conveyance of seven automobiles by it to the Company.
Mr. Knight owned all of the shares of each of the External Companies. Mr.
Knight, however, held a portion of the shares in such companies for the benefit
of Ms. Jones and Mr. Olander. Mr. Knight transferred 109,091 Common Shares and
$100,000 cash to each of these officers from the proceeds of the transactions
described above.
Immediately following the assignment by each of the External Companies of
its rights and interests in its respective agreement with the Company, the
Company terminated each such agreement. Furthermore, as of September 1, 1996,
the Company entered into employment agreements with Mr. Knight, Mr. Olander and
Ms. Jones. See "Management -- Compensation of Officers -- Employment
Agreements."
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Although all of the foregoing transactions involving the Company were
unanimously approved by the Company's board of directors, the transactions were
not the result of arm's-length negotiations. Although the Company did obtain the
fairness opinion described above, it did not obtain independent evaluations or
appraisals of the rights and assets acquired by the Company. See "Risk Factors
- -- Purchase of Former Advisor's and Former Manager's Rights not at
Arm's-Length."
APPLE RESIDENTIAL INCOME TRUST
PURCHASE OF COMMON SHARES OF APPLE
The Company has a continuing right to own up to 9.8% of the common shares
of Apple. The Company has committed to purchase at or before the closing of the
Offering sufficient common shares of Apple so that it will own approximately
9.5% of the total common shares of Apple outstanding as of March 1, 1997.
Thereafter, the Company intends, if the board of directors of the Company
determines it is in the best interest of the Company and its shareholders, to
purchase additional common shares of Apple as of the end of each calendar
quarter so as to maintain its ownership of approximately 9.5% of the outstanding
common shares of Apple.
POSSIBLE ACQUISITION OF APPLE
The Company has a right of first refusal to purchase the properties and
business of Apple. In addition, by the end of 1997, the Company will evaluate
the acquisition of Apple and, if the board of directors of the Company
determines it is in the best interests of the Company and its shareholders,
offer to acquire Apple or its assets. While any decision to combine the Company
and Apple can be made only by the respective boards of directors, and depending
on the structure of the transaction, the respective shareholders, of the two
companies, it is the current intent of Mr. Knight and the board of directors of
the Company to seek to acquire Apple if the board of directors determines such
an acquisition is in the best interests of the Company. See "Risk Factors --
Conflict of Interest in Continuation or Enforcement of Advisory Agreement and
Property Management Agreements."
ACQUISITION, DISPOSITION, ADVISORY AND PROPERTY MANAGEMENT SERVICES
Summary. On or before the closing of the Offering, the Company will acquire
from Mr. Knight all of the assets of ARG in exchange for $350,000 in cash and
Common Shares valued at $1,650,000. The number of Common Shares issued will be
based upon the Offering Price, net of underwriting discounts and commissions.
The sole material asset of ARG is its Property Acquisition/Disposition Agreement
with Apple and the Company will succeed by assignment to the rights, powers,
benefits, duties and obligations of ARG under the Property
Acquisition/Disposition Agreement. See "Risk Factors -- Acquisition of Assets of
Apple Realty Group, Inc. Not at Arm's-Length."
ARA and ARMG provide advisory and property management services,
respectively, to Apple under an Advisory Agreement and a series of Property
Management Agreements. Pursuant to subcontract agreements, each of ARA and ARMG
has delegated its duties and obligations and assigned its rights, powers and
benefits under the agreements with Apple to the Company, and the Company has
agreed to perform all such services for Apple in exchange for all fees and
expense reimbursements payable under the agreements between Apple and ARA and
ARMG.
Acquisition and Disposition Services. Under the Property
Acquisition/Disposition Agreement, the Company will be entitled to a real estate
commission equal to 2% of the gross purchase prices of Apple's properties (net
of acquisition debt), payable by Apple in connection with each property
acquisition on or after March 1, 1997. The Company will also be entitled to a
real estate commission equal to 2% of the gross sales prices of Apple's
properties, payable by Apple in connection with each property sale if, but only
if, any such property is sold and the sales price exceeds the sum of (1) Apple's
cost basis in the property plus (2) 10% of such cost basis. The Company will not
be entitled to any disposition fee in connection with a sale of a property by
Apple to the Company or any affiliate of Mr. Knight but the
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