UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number 1-12875
CORNERSTONE REALTY INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1589139
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At April 20, 1998, there were outstanding 35,998,401 shares of common
stock, no par value, of the registrant.
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 1998 3
and December 31, 1997
Consolidated Statements of Operations - 4
Three months ended March 31, 1998
and March 31, 1997
Consolidated Statement of Shareholders' Equity- 5
Three months ended March 31, 1998
Consolidated Statements of Cash Flows - 6
Three months ended March 31, 1998
and March 31, 1997
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 10
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities (not applicable).
Item 3. Defaults Upon Senior Securities
(not applicable).
Item 4. Submission of Matters to a Vote of
Security Holders (not applicable).
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------------------------------------
<S> <C>
ASSETS
Investment in Rental Property
Land $ 80,954,947 $ 76,812,953
Building and improvements 430,675,170 402,545,094
Furniture and fixtures 8,924,547 8,217,149
--------------------------------------------
520,554,664 487,575,196
Less accumulated depreciation (32,170,014) (27,486,630)
--------------------------------------------
488,384,650 460,088,566
--------------------------------------------
Cash and cash equivalents 3,761,706 4,513,986
Prepaid expenses 773,109 797,484
Other assets 9,002,693 8,786,414
--------------------------------------------
13,537,508 14,097,884
--------------------------------------------
Total Assets $501,922,158 $474,186,450
============================================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable $ 180,116,147 $ 151,569,147
Accounts payable 2,180,939 3,812,578
Accrued expenses 3,092,794 1,158,014
Rents received in advance 220,920 463,997
Tenant security deposits 1,887,367 1,854,462
--------------------------------------------
187,498,167 158,858,198
Shareholders' equity
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 35,752,760 shares
and 35,510,327 shares, respectively 351,868,663 349,135,379
Deferred compensation (57,477) (62,976)
Distributions greater than net income (37,387,195) (33,744,151)
--------------------------------------------
314,423,991 315,328,252
--------------------------------------------
Total Liabilities and Shareholders' Equity $ 501,922,158 $ 474,186,450
============================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1998 1997
------------------------------------------------
<S> <C>
REVENUE:
Rental income $ 20,120,435 $ 15,005,315
Other income 842,034 380,030
EXPENSES:
Property and maintenance 5,499,525 4,180,639
Taxes and insurance 1,523,849 1,396,859
Property management 512,319 392,200
General and administrative 356,339 346,119
Amortization expense and other depreciation 16,138 7,641
Depreciation of rental property 4,683,384 3,184,003
Other 406,959 359,437
Management contract termination - 135,999
------------------------------------------------
Total expenses 12,998,513 10,002,897
------------------------------------------------
Income before interest income (expense) 7,963,956 5,382,448
Interest and dividend income 93,010 3,140
Interest expense (2,820,918) (1,383,848)
------------------------------------------------
Net income $ 5,236,048 $ 4,001,740
================================================
Basic and diluted earnings per common share $ 0.15 $ 0.14
================================================
Distributions per common share $ 0.26 $ 0.25
================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Distributions
------------------------------- greater Total
Number Deferred than Shareholders'
of Shares Amount Compensation Net Income Equity
------------------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1997 35,510,327 $ 349,135,379 $ (62,976) $ (33,744,151) $ 315,328,252
Net income - - - 5,236,048 5,236,048
Cash distributions declared and paid
to shareholders ($. 26 per share) - - - (8,879,092) (8,879,092)
Amortization of deferred compensation - - 5,499 - 5,499
Shares issued through reinvestment
of distributions 242,433 2,733,284 - - 2,733,284
-------------------------------------------------------------------------------------------
Balance at March 31, 1998 35,752,760 $ 351,868,663 $ (57,477) $ (37,387,195) $ 314,423,991
===========================================================================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
--------------------------------------------
<S> <C>
Cash flow from operating activities:
Net income $5,236,048 $4,001,740
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,699,522 3,191,644
Amortization of deferred compensation 5,499 5,499
Amortization of deferred financing costs 50,001 66,666
Management contract termination - 135,999
Amortization of Apple Realty Group, Inc. contract 259,965 250,000
Changes in operating assets and liabilities:
Prepaid expenses 24,375 172,015
Other assets (542,383) (1,812,670)
Accounts payable (1,631,639) (1,375,481)
Accrued expenses 1,934,780 1,192,868
Rent received in advance (243,077) (298,616)
Tenant security deposits 32,905 83,008
--------------------------------------------
Net cash provided by operating activities 9,825,996 5,612,672
Cash flow from investing activities:
Acquisitions of rental property (27,906,914) (35,191,500)
Capital improvements (5,072,554) (5,919,702)
Apple Realty Group, Inc. contract purchase - (350,000)
--------------------------------------------
Net cash used in investing activities (32,979,468) (41,461,202)
Cash flow from financing activities:
Proceeds from short-term borrowings 41,295,000 120,427,606
Repayments of short-term borrowings (12,748,000) (82,434,647)
Net proceeds from issuance of shares 2,733,284 5,691,552
Cash distributions declared and paid to shareholders (8,879,092) (7,013,490)
--------------------------------------------
Net cash provided by financing activities 22,401,192 36,671,021
Increase (decrease) in cash and cash equivalents (752,280) 822,491
Cash and cash equivalents, beginning of period 4,513,986 3,182,651
--------------------------------------------
Cash and cash equivalents
end of period $3,761,706 $4,005,142
============================================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1998
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
required by generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1998. These financial statements should be read in
conjunction with the Company's December 31, 1997 Form 10-K.
All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the Statement 128
requirements.
Certain previously reported amounts have been reclassified to conform
with the current financial statement presentation.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's
net income or shareholders' equity. The Company does not currently have
any items of comprehensive income requiring separate reporting and
disclosure.
(2) Notes Payable
In October, 1997, the Company obtained a $175 million unsecured line of
credit with a consortium of six banks to fund property acquisitions.
The new line of credit bears interest at one month LIBOR plus 120 basis
points. In addition, the Company is obligated to pay lenders a
quarterly commitment fee equal to .20% per annum of the unused portion
of the line. The entire balance is due on October 30, 2000. At March
31, 1998, borrowings under the agreement were $174 million.
During 1997, the Company also obtained a $5 million unsecured line of
credit for general corporate purposes. This line of credit bears
interest at LIBOR plus 160 basis points and is due on March 31, 1999.
At March 31, 1998, borrowings under the agreement were $715,000.
<PAGE>
(3) Related Parties
In August 1996, Glade M. Knight, Chairman and Chief Executive Officer
of the Company, established Apple Residential Income Trust, Inc.
(Apple) for the purpose of acquiring apartment communities in Texas.
Companies owned by Mr. Knight provided advisory, property management,
and asset acquisition services to Apple. In March 1997, the Company
entered into subcontract arrangements with the companies owned by Mr.
Knight to provide property management services and advisory services to
Apple. Property management fees are 5% of monthly gross revenues plus
certain expense reimbursements. Advisory fees are .1% to 25% of total
capital raised by Apple based on the financial performance of Apple as
defined in the agreement. The amount of fees received by the Company
under the contracts for the three months ended March 31,1998 were
$351,534 and direct expenses associated with providing these services
were $121,345.
During March 1997, the Company acquired all the assets of Apple Realty
Group, Inc., which provided the real estate acquisition and disposal
services for Apple. The sole asset of Apple Realty Group, Inc. was the
acquisition/disposition contract with Apple, which expires on October
31, 2001. The Company paid $350,000 cash and issued stock valued at
$1,650,000 for this contract. Under the terms of the contract, Apple
pays a real estate commission equal to 2% of the purchase price of the
properties acquired. The Company is amortizing its purchase of this
contract over the anticipated total acquisitions by Apple during the
contract period. For the three months ended March 31,1998, the Company
received $490,500 in real estate commissions under this contract and
amortized $259,965 of the purchase price of this contract.
Apple granted the Company a continuing right to own 9.8% of the common
shares of Apple at its selling price, net of selling commissions. In
April 1997, the Company purchased 417,778 shares of Apple for $3.76
million. This represents approximately 2.5% of the common shares of
Apple outstanding as of March 31, 1998. Apple shares are sold under a
"best efforts" offering, and no market exists for trading of Apple
shares. For the three months ended March 31, 1998, dividend income from
the Company's investment in Apple was $83,550.
<PAGE>
(4) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
3/31/98 3/31/97
------- -------
<S> <C>
Numerator:
Net income $ 5,236,048 $ 4,001,740
Numerator for basic and
diluted earnings 5,236,048 4,001,740
Denominator:
Denominator for basic
earnings per share-weighted-
average shares 35,752,760 28,424,683
Effect of dilutive securities:
Stock options 5,651 343
-------------------------------------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 35,758,411 28,425,026
-------------------------------------------------------------------------------------------
Basic and diluted earnings per
common share $ 0.15 $ 0.14
--------------------------------------------------------------------------------------------
</TABLE>
(5) Subsequent Events
In April 1998, the Company distributed to its shareholders
approximately $9,295,697 (26 cents per share) of which approximately
$2,766,046 was reinvested in the purchase of additional shares of the
Company.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This 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 improvements in financial operations from
completed and planned property renovations, and expected benefits from
the Company's ownership of stock in Apple and the acquisition, advisory
and property management services provided 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 quarterly 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
Income and occupancy
The Company's property operations for the three months ended March 31,
1998 reflect the operations from the 51 properties acquired before 1998
and from the 3 properties acquired in 1998 from their respective
acquisition dates. The increase in rental income and operating expenses
from first quarter 1997 to first quarter 1998 is primarily due to a
full quarter of operation of the 1997 acquisitions as well as the
incremental effect of the 1998 acquisitions.
Substantially all of the Company's income is from the rental operation
of apartment communities. Rental income for the first three months
increased to $20,120,435 in 1998 from $15,005,315 in 1997 due to the
factors above. Rental income is expected to continue 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. The Company's other sources of income are fees for
certain services provided to Apple and returns on the investment of its
cash and cash reserves.
Overall economic occupancy for the Company's properties averaged 91%
and 92% at the end of the three months ended March 31, 1998 and 1997,
respectively. Overall average rental rates for the portfolio increased
5.4% from $556 at March 31, 1997, to $586 at March 31, 1998.
<PAGE>
Comparable property operations
On a comparative basis, the 39 properties acquired prior to 1997
provided rental and operating income of $15,994,634 and $10,171,367,
respectively during the quarter ended March 31, 1998 and $15,232,646
and $9,552,573 for the same period in 1997. This represents an increase
from the quarter ended March 31, 1997 to the quarter ended March 31,
1998 of 5% and 6%, respectively.
Expenses
Total expenses for the first three months increased to $12,998,513 in
1998 from $10,002,897 in 1997. The increases are due largely to the
increase in the number of apartments. The operating expense ratio (the
ratio of rental expenses, excluding management contract termination,
general and administrative, amortization and depreciation expense, to
rental income) was 40% and 43% for the three months ended March 31,
1998 and 1997, respectively.
Depreciation expense for the first three months has increased to
$4,683,384 in 1998 from $3,184,003 in 1997. The increase is directly
attributable to the acquisition of additional apartment communities in
1998 and 1997.
General and administrative expenses totaled 1.8% of rental income for
the three months ended March 31,1998 and 2.3% for the same period in
1997. These expenses represent the administrative expenses of the
Company as distinguished from the operations of the Company's
properties. The Company continues to expand its internal administrative
infrastructure to keep pace with its growth.
Interest and investment income and expense
The Company earned interest income of $9,460 in 1998 and $3,140 in 1997
from the investment of its cash and cash reserves. The Company incurred
interest expense of $2,820,918 and $1,383,848 during the first three
months of 1998 and 1997, respectively, associated with borrowings under
its line of credit. This is a result of the increased use of its line
of credit to fund acquisitions.
Income and expense from relationship with Apple Residential Income
Trust
The Company received $351,534 and $46,431, for the quarters ended March
31, 1998 and 1997, respectively, for advisory and property management
services rendered to Apple. The Company received $490,500 and $333,540,
for the quarters ended March 31,1998 and 1997, respectively, in real
estate commissions under separate contract and amortized $259,965 as of
March 31,1998 and $250,000 as of March 31, 1997 of the purchase price
of this contract. The Company incurred approximately $121,345 and
$27,738 for the quarters ended March 31, 1998 and 1997 in related
expenses. Dividend income from the Company's investment in Apple was
$83,550 for the three months ended March 31, 1998.
<PAGE>
Liquidity and Capital Resources
General
There was a significant change in the Company's liquidity during the
three months ended March 31,1998 as the Company continued to acquire
properties. Using the proceeds from its line of credit, the Company
acquired 662 apartment units in three residential rental communities
during the three months ended March 31,1998. These acquisitions brought
the total number of residential communities to 54 and the total
apartment units owned at March 31, 1998 to 12,584.
The following is a summary of the properties acquired during 1998:
<TABLE>
<CAPTION>
Property Name Date Acquired Units Purchase Price Location
<S> <C>
Stone Point Apartments January 1998 192 $9,700,000 Charlotte,NC
Pinnacle Ridge Apartments March 1998 166 $5,731,150 Asheville,NC
(formerly named Edgewood Knoll)
Hampton Pointe Apartments March 1998 304 $12,225,000 Charleston,SC
</TABLE>
Investment in Apple Residential Income Trust
As of March 31,1998, the Company's 417,778 common shares of Apple
represent approximately 2.5% of common shares of Apple outstanding at
March 31,1998. The Company has a continuing right to own up to 9.8% of
the common shares of Apple at the market price, net of selling
commissions.
Notes payable
The Company continued to acquire property and finance improvements
during the quarter using its unsecured line of credit with the
consortium of banks. As of March 31,1998, the Company had an
outstanding balance of $174 million on the acquisition line of credit
and $715,000 on its general corporate line of credit. In addition, the
Company had outstanding a $5.5 million unsecured note.
Capital Requirements
The Company has an ongoing capital expenditure commitment to fund its
renovation program for recently acquired properties. In addition, the
Company is always assessing potential acquisitions and intends to
acquire additional properties during 1998. However, no material
commitments existed on April 1, 1998 for the purchase of additional
properties. The expected source to fund the improvements and
acquisitions is from a variety of sources including additional equity,
cash reserves, and debt, provided by its line of credit (including
possible increases thereunder).
The Company capitalized $5.1 million of improvements to its various
properties during the first quarter of 1998. It is anticipated that
some $12 million in additional capital improvements will be completed
during the next year on the current portfolio.
The Company has short-term cash flow needs in order to conduct the
operation of its properties. The rental income generated from the
properties supplies sufficient cash to provide for the payment of these
operating expenses and distributions.
Capital resources are expected to grow with the future sale of its
shares and from cash flow from operations. Approximately 31% of all
first quarter 1998 distributions, totaling $2,733,284, were reinvested
in additional common shares. In general, the Company's liquidity and
capital resources are expected to be adequate to meet its cash
requirements in 1998.
<PAGE>
Part II, Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27-Financial Data Schedule
(b) Reports on Form 8-K
The following table lists the reports on Form 8-K filed by the Company
during the quarter ended March 31,1998, the items reported and the financial
statements included in such filings.
<TABLE>
<CAPTION>
Type and Date
of Reports Items Reported Financial Statements Filed
<S> <C>
Form 8-K/A (date of 7 Historical Statements of Income and Direct
Original Report: Operating Expenses of Stone Brooke (formerly
October 31, 1997) Barrington Parc), St. Regis (formerly Sterling
Arbor), and Remington Place (formerly Sterling
Place) for the twelve months ended September
30, 1997.
Form 8-K dated 5, 7 None
December 30, 1997
Form 8-K dated 5, 7 None
January 13, 1998
Form 8-K dated 2, 7 None
January 15, 1998
Form 8-K/A (date of 7 Historical Statement of Income and Direct
Original Report: Operating Expenses of Stone Point Apartments
January 15,1998) (formerly Sterling Point), for
the twelve months ended December 31, 1997.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cornerstone Realty Income Trust, Inc.
(Registrant)
DATE: 5/6/98 BY: /s/ Stanley J. Olander
-----------------------------------
Stanley J. Olander
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,761,706
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 520,554,664
<DEPRECIATION> 32,170,014
<TOTAL-ASSETS> 501,922,158
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 351,868,663
<OTHER-SE> (37,444,672)
<TOTAL-LIABILITY-AND-EQUITY> 314,423,991
<SALES> 0
<TOTAL-REVENUES> 20,120,435
<CGS> 0
<TOTAL-COSTS> 12,998,513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,820,918
<INCOME-PRETAX> 5,236,048
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,236,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,236,048<F2>
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<FN>
<F1>Current Assets and Current Liabilities are not separated to conform
with industry standards.
<F2>Income is from rental income. There are no Sales or Cost of Goods
Sold.
</FN>
</TABLE>
