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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12875
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 November 1, 1998, there were outstanding 39,112,958 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 - September 30, 1998 3
and December 31, 1997
Consolidated Statements of Operations - 4
Three months ended September 30, 1998
and September 30, 1997
Nine months ended September 30, 1998
and September 30, 1997
Consolidated Statement of Shareholders' Equity- 5
Nine months ended September 30, 1998
Consolidated Statements of Cash Flows - 6
Nine months ended September 30, 1998
and September 30, 1997
Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis 12
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. 17
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ---------------
ASSETS
<S> <C> <C>
Investment in Rental Property
Land $ 86,076,966 $76,812,953
Buildings and property improvements 466,514,341 402,545,094
Furniture and fixtures 11,187,945 8,217,149
-------------- ---------------
563,779,252 487,575,196
Less accumulated depreciation (42,482,032) (27,486,630)
-------------- ---------------
521,297,220 460,088,566
Cash and cash equivalents 4,069,280 4,513,986
Prepaid expenses 446,202 797,484
Other assets 9,063,522 8,786,414
-------------- ---------------
Total Assets $534,876,224 $474,186,450
============== ===============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable $185,499,999 $151,569,147
Accounts payable 2,110,858 3,812,578
Accrued expenses 4,697,340 1,158,014
Rents received in advance 204,525 463,997
Tenant security deposits 1,728,587 1,854,462
-------------- ---------------
Total Liabilities 194,241,309 158,858,198
Shareholders' equity
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 38,856,370 shares
and 35,510,327 shares, respectively 385,602,116 349,135,379
Deferred compensation (46,479) (62,976)
Distributions greater than net income (44,920,722) (33,744,151)
-------------- ---------------
Total Shareholders' Equity 340,634,915 315,328,252
-------------- ---------------
Total Liabilities and Shareholders' Equity $534,876,224 $474,186,450
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------------------- ------------------------------
REVENUE:
<S> <C> <C> <C> <C>
Rental income $ 23,138,533 $ 18,392,072 $ 65,130,354 $ 50,229,454
Other income 1,860,746 573,334 3,553,300 1,476,041
EXPENSES:
Property and maintenance 6,623,932 5,077,099 18,099,464 13,973,552
Taxes and insurance 1,957,514 1,556,811 5,162,507 4,390,207
Property management 512,327 414,354 1,567,707 1,246,435
General and administrative 424,479 351,381 1,347,816 1,061,228
Amortization expense and other depreciation 8,176 32,934 38,460 58,216
Depreciation of rental property 5,305,327 3,826,280 14,995,402 10,791,653
Other 761,534 327,594 1,530,189 1,069,036
Management contract termination - 141,754 - 413,752
----------------------------- ------------------------------
Total expenses 15,593,289 11,728,207 42,741,545 33,004,079
----------------------------- ------------------------------
Income before interest income (expense) 9,405,990 7,237,199 25,942,109 18,701,416
Interest and investment income 102,490 103,780 323,689 207,560
Interest expense (3,219,107) (2,004,133) (9,227,446) (5,041,086)
----------------------------- ------------------------------
Net income $ 6,289,373 $ 5,336,846 $ 17,038,352 $ 13,867,890
============================= ==============================
Basic and diluted earnings per common share $ 0.16 $ 0.15 $ 0.46 $ 0.44
============================= ==============================
Distributions per common share $ 0.26 $ 0.25 $ 0.77 $ 0.75
============================= ==============================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Distributions
(Greater) Total
Number Deferred Less than Shareholders'
of Shares Amount Compensation Net Income Equity
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 35,510,327 $349,135,379 ($62,976) ($33,744,151) $315,328,252
Net proceeds from the sale of shares 2,618,825 28,192,744 - - 28,192,744
Net income - - - 17,038,352 17,038,352
Cash distributions declared to shareholders
($.77 per share) - - - (28,214,923) (28,214,923)
Amortization of deferred compensation - - 16,497 - 16,497
Shares issued through dividend reinvestment plan 727,218 8,273,993 - - 8,273,993
--------------------------------------------------------------------
Balance at September 30, 1998 38,856,370 $385,602,116 ($46,479) ($44,920,722) $340,634,915
===================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1997
--------------------------------------
Cash flow from operating activities:
<S> <C> <C>
Net income $17,038,352 $13,867,890
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 15,033,862 10,849,869
Amortization of deferred compensation 16,497 16,497
Amortization of Apple Realty Group contract purchase 1,043,349 626,000
Management contract termination - 402,907
Amortization of deferred financing costs 161,890 191,664
Changes in operating assets and liabilities:
Prepaid expenses 351,282 196,750
Other assets (1,520,806) (351,725)
Accounts payable (1,701,720) (1,196,288)
Accrued expenses 3,539,326 1,823,866
Rent received in advance (259,472) (254,894)
Tenant security deposits (125,875) 224,647
-------------- --------------
Net cash provided by operating activities 33,576,685 26,397,183
Cash flow from investing activities:
Acquisitions of rental property (56,908,659) (108,564,222)
Capital improvements (19,295,398) (18,343,087)
Purchase of Apple Realty Group contract - (350,000)
Purchase of Apple Residential Income Trust, Inc. - (3,760,000)
-------------- --------------
Net cash used in investing activities (76,204,057) (131,017,309)
Cash flow from financing activities:
Proceeds from short-term borrowings 86,189,852 209,187,294
Repayments of short-term borrowings (52,259,000) (141,300,147)
Net proceeds from issuance of shares 36,466,737 60,687,079
Cash distributions paid to shareholders (28,214,923) (22,686,901)
-------------- --------------
Net cash provided by financing activities 42,182,666 105,887,325
Increase (decrease) in cash and cash
equivalents (444,706) 1,267,199
Cash and cash equivalents, beginning of year 4,513,986 3,182,651
--------------------------------------
Cash and cash equivalents, end of period
$4,069,280 $4,449,850
======================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC
Notes to Consolidated Financial Statements (Unaudited)
September 30, 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 and nine months ended September 30, 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.
<PAGE>
(2) Investment in Rental Property
The Company purchased six properties for $56 million during the nine
months ended September 30, 1998. The following is a summary of rental
property acquired during the nine months ended September 30, 1998:
Initial Date of
Description Acquisition Cost Acquisition
----------- ---------------- -----------
Stone Point $ 9,700,000 January, 1998
Hampton Pointe 12,225,000 March, 1998
Pinnacle Ridge 5,731,150 March, 1998
(formerly named
Edgewood Knoll)
The Timbers 8,100,000 June, 1998
The Gables 11,500,000 July, 1998
Spring Lake 9,000,000 August, 1998
(3) 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
line of credit bears interest at one month LIBOR plus 120 basis points. In
addition, the Company is obligated to pay the 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 September 30, 1998,
borrowings on the unsecured line of credit were $175 million.
On October 16, 1998, the Company closed a $25 million extension on its
unsecured line of credit, bringing to $200 million the maximum permitted
borrowing under the Company's unsecured line of credit. The $25 million
extension on its unsecured line of credit is due on February 28, 1999. At
October 31, 1998, borrowings under the agreement were $196 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 September
30, 1998, borrowings under the agreement were $5 million.
(4) Common Stock
During 1998, the Company raised $30 million by issuing 2.6 million common
shares through its participation in a Unit Investment Trust, which
resulted in $28.1 million net proceeds to the Company, after underwriting
discounts, commissions and other direct costs. The Company used the
proceeds to pay down its line of credit, the acquisition of additional
apartment communities and for working capital.
<PAGE>
(5) 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 and the Company have contracts to provide advisory, property
management, and asset acquisition services to Apple. The Company owns all
of the preferred shares of these companies, entitling the Company to 95%
of the dividends payable by those companies. In March 1997, the Company
entered into subcontract arrangements with these companies 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 nine months ended September 30,1998 was $1,466,199 and direct
expenses associated with providing these services were $405,482, net of
$126,000 in expense reimbursements.
During March 1997, the Company acquired all the assets of Apple Realty
Group, Inc., which provided the real estate acquisition and disposition
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 nine months ended September 30,1998, the Company received $2,087,101
in real estate commissions and $32,500 in expense reimbursements under
this contract and amortized $1,043,349 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% of the common shares of Apple outstanding
as of September 30, 1998. No market currently exists for trading of Apple
shares. For the nine months ended September 30, 1998, dividend income from
the Company's investment in Apple was $252,326.
<PAGE>
(6) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Nine Months Three Month Nine Months
Ended Ended Ended Ended
September 30, 1998 September 30, 1998 September 30, 1997 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 6,289,373 $17,038,352 $5,336,846 $13,867,890
Numerator for
basic and
diluted earnings 6,289,373 17,038,352 5,336,846 13,867,890
Denominator:
Denominator for basic
earnings per share-
weighted-
average shares 38,806,665 37,148,312 34,480,183 31,672,928
Effect of dilutive
securities:
Stock options 15,416 27,059 2,761 1,299
---------- ---------- ---------- ----------
Denominator for diluted
earnings per share-
adjusted weighted-
average shares and
assumed conversions 38,822,081 37,175,371 34,4482,944 31,674,227
---------- ---------- ----------- ----------
Basic and diluted
earnings per
common share $ .16 $ 0.46 $ .15 $ 0.44
----------- ----------- ------------ -----------
</TABLE>
(7) Subsequent Events
The Company has been providing property management and advisory services to
Apple through subcontract agreements (see Note 5). Effective on the close
of business on September 30, 1998, the subcontract agreements were
terminated and Apple Residential Advisors, Inc. ("ARA") assigned to Apple
Residential Management Group, Inc. ("ARMG") its rights and responsibilities
under the advisory agreement. Thus, as of October 1, 1998, the property
management and advisory services to Apple are now being performed by ARMG
using employees leased from the Company. These entities will be
consolidated into the Company's financial statement, since the Company
controls them.
The Company has been providing real estate brokerage services to Apple
under the acquisition/disposition contract it acquired when it purchased
all of the assets of Apple Realty Group, Inc. (see Note 5). Effective
October 1, 1998, the Company sold to ARMG its rights in the real estate
brokerage agreement. Beginning on such date ARMG will provide the services
and be entitled to the compensation under the real estate brokerage
agreement. ARMG will lease employees necessary to provide such services
from the Company.
For the reasons set forth above, it is not expected that the
restructuring of the service relationship with Apple will have any
material effect on the Company.
On October 16, 1998, the Company acquired an approximately 88 percent
interest as a general partner in Cornerstone REIT, L.P., a Virginia
limited partnership (the "Limited Partnership") which was organized by
the Company to acquire Cape Landing Apartments, a 288-unit apartment
community located in Myrtle Beach, South Carolina. The purchase price of
the property was $17.1 million. The Company entered into an agreement of
limited partnership (the "Agreement") with Cape Landing Apartments, LLC, a
North Carolina limited liability company (the "Limited Partner"). Pursuant
to the Agreement, the Limited Partner contributed an approximately 12
percent interest in the property to the Limited Partnership in exchange
for 185,887 partnership units. The Limited Partner sold its remaining
interest in the property to the Limited Partnership for $15.1 million. The
Company contributed $15.1 million to the Limited Partnership, $11.05
million of which the Company borrowed under its unsecured line of credit
and $4.05 million of which was funded from operations, in exchange for
1,403,445 partnership units. The Limited Partnership's sole asset is the
property. The operating partnership units can be exchanged at the option
of the holder for cash or common stock to be determined by the Company at
a ratio of one share of common stock for every operating partnership unit.
In October 1998, the Company distributed to its shareholders
approximately $10 million (26 cents per share) of which approximately $2.6
million 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 and
Year 2000 compliance issues. 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
Substantially all of the Company's income is from the rental operation of
apartment communities. The Company's rental income increased 30% in the
first nine months of 1998 to $65 million up $15 million over the first
nine months of 1997. For the third quarter of 1998, the Company's rental
income of $23.1 million was $4.7 million, or 26% higher than the same
period of 1997. The increases in rental income are primarily due to the
acquisition of additional apartment communities in 1998 and 1997.
Rental income is expected to continue to increase from the impact of
continuing 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 92% for
the nine months ended September 1998 and 1997, respectively. For the third
quarter of 1998 and 1997, economic occupancy averaged 93 % and 92 %,
respectively. Overall average rental rates for the portfolio increased 5 %
from $575 at September 30, 1997, to $602 at September 30, 1998. For the
third quarter of 1997 and 1998, average rental rates increased 6% from
$564 to $597, respectively.
<PAGE>
Expenses
Total expenses for the first nine months increased to $42.7 million in
1998 from $33 million in 1997. For the third quarter of 1998, total
expenses increased to $15.6 million from $11.7 million for the same period
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 the 1997 management contract termination, general and
administrative, amortization and depreciation expense, to rental income)
was 38% and 39% for the nine months ended September 30, 1998 and 1997,
respectively. For the third quarter of 1998 and 1997, the operating
expense ratio was 39%.
Depreciation expense for the first nine months has increased to $15
million in 1998 from $10.8 million in 1997. For the third quarter of 1998
and 1997 depreciation expense was $5.3 million and $3.8 million,
respectively. The increases are directly attributable to the acquisition
of additional apartment communities in 1998 and 1997.
<PAGE>
General and administrative expenses totaled 2% of rental income for the
first nine months of 1998 and 1997. For the third quarter of 1998 and
1997, general and administrative expenses totaled 2% of rental income.
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.
Comparable property operations
On a comparative basis, the 39 properties acquired prior to 1997 provided
rental income of $44 million and $42 million during the first nine months
of 1998 and 1997, respectively. This represents an increase from the first
nine months of 1997 to the first nine months of 1998 of 5%. During the
third quarter of 1998 and 1997, these same community operations provided
rental income of $15 million and $14.4 million respectively. This
represents an increase from the third quarter of 1997 to the third quarter
of 1998 of 4 %. Net operating income increased 6% from $26 million for the
first nine months of 1997 to $28 million for the same period in 1998. For
the third quarter of 1998 and 1997, net operating income increased 5% from
$9 million to $9.4 million.
Interest and investment income and expense
The Company earned interest income of $323,689 in 1998 and $207,560 in
1997 from the investment of its cash and cash reserves. For the third
quarter of 1998, interest income was $102,490 as compared to $103,780 for
the same period in 1997.
The Company incurred interest expense of $9 million and $5 million during
the first nine months of 1998 and 1997, respectively. For the quarters
ended September 30, 1998 and 1997, interest expense was $3 million and $2
million, respectively. The increases are a result of the increased use of
its line of credit to fund acquisitions.
<PAGE>
Income and expense from relationship with Apple Residential Income Trust
The Company received $1,466,199 and $539,975, for the first nine months of
1998 and 1997, respectively, for advisory and property management services
rendered to Apple. For the third quarter of 1998 and 1997, the Company
received $648,245 and $309,005, respectively for the same services. The
Company received $2,087,101 and $936,066, for the first nine months of
1998 and 1997, respectively, in real estate commissions under separate
contract. The Company amortized $1,043,349 as of September 30,1998 and
$626,000 as of September 30, 1997 of the purchase price of this contract.
During the third quarter of 1998 and 1997, the Company received $1,212,501
and $262,000, respectively, in real estate commissions. The Company
amortized $579,811 in the third quarter of 1998 and amortized $170,000 for
the same period in 1997 of the purchase price of the contract. The Company
incurred approximately $405,482 and $224,342 for the nine months ended
September 30, 1998 and 1997 in related expenses. For the third quarter of
1998, the Company incurred $149,378 and $88,590 for the same period in
1997. Dividend income from the Company's investment income in Apple was
$252,326 for the first nine months of 1998 and $167,529 for the first nine
months of 1997. For the third quarter of 1998, the investment income was
$83,550.
Liquidity and Capital Resources
General
There was a significant change in the Company's liquidity during the first
nine months of 1998 as the Company continued to acquire properties. Using
the proceeds from its line of credit and from the sale of its common
shares, the Company acquired 1,540 apartment homes in six residential
rental communities during the nine months ended September 30, 1998. These
acquisitions brought the total number of residential communities to 57 and
the total apartment homes owned at September 30, 1998 to 13,174.
The following is a summary of the properties acquired during 1998:
<TABLE>
<CAPTION>
Apartment
Property Name Date Acquired Homes Purchase Price Location
------------- ------------- ----- -------------- --------
<S> <C> <C> <C> <C>
Stone Point Apartments January 1998 192 $ 9,700,000 Charlotte, NC
Hampton Pointe Apartments March 1998 304 12,225,000 Charleston, SC
Pinnacle Ridge Apartments March 1998 166 5,731,150 Asheville, NC
(formerly named
Edgewood Knoll)
The Timbers June 1998 176 8,100,000 Raleigh, NC
The Gables July, 1998 224 11,500,000 Richmond, VA
Spring Lake August, 1998 188 9,000,000 Morrow, GA
</TABLE>
Investment in Apple Residential Income Trust
As of September 30, 1998, the Company's 417,778 common shares of Apple
represent approximately 2% of common shares of Apple outstanding at
September 30, 1998. The Company has a right (extending through the end of
Apple's initial public offering) to own up to 9.8% of the common shares of
Apple at the offering price, net of selling commissions.
Notes payable
The Company continued to acquire property and finance improvements during
the first nine months of 1998 using its unsecured line of credit with the
consortium of banks. As of September 30, 1998, the Company had an
outstanding balance of $175 million on the acquisition line of credit and
$5 million on its general corporate line of credit. During October 1998,
the Company increased its acquisition line of credit to $200 million. At
October 31, 1998, borrowings on the acquisition line of credit were $196
million and $4.2 million on the general corporate line of credit. In
addition, the Company had outstanding a $5.5 million unsecured note.
<PAGE>
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 November 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 $19 million of improvements to its various
properties during the first three quarters of 1998. It is anticipated that
some $9 million in additional capital improvements will be completed
during the next twelve months 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. As of September 30, 1998 approximately
29% of the distributions, totaling $8,273,993, 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 for
the next twelve months.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date
using "00" as the year 1900 rather than the year 2000.
The Company has completed an assessment of its programs and determined
that it will require upgrading portions of its software so that its
computer systems will function properly with respect to dates in the year
2000 and thereafter, as well as upgrading certain computer hardware. The
Company is actively engaged in upgrading the computer systems. The
Company's accounting, property management, human resource, and payroll
applications are classified as year 2000 compliant by their respective
software vendors once upgraded, but have not been tested by the Company.
As the software is upgraded, the Company will begin testing their
compliancy which will be included in the overall system testing which is
scheduled to be completed in the second quarter of 1999. To the extent
such vendors are unable to perform services due to their year 2000 related
issues, the Company will seek other similar vendors who are capable of
providing services.
<PAGE>
The Company is also exposed to the risk that one or more of its vendors or
service providers could experience year 2000 problems that impact the
ability of such vendor or service provider to provide goods and services.
Though this is not considered as significant a risk with respect to the
suppliers of goods, due to the availability of alternative suppliers, the
disruption of certain services, such as utilities, could, depending upon
the extent of the disruption, have a material adverse impact on the
Company's operations. To date, the Company is not aware of any vendor or
service provider year 2000 issue that management believes would have a
material adverse impact on the Company's operations. However, the Company
has no means of ensuring that its vendors or service providers will be
year 2000 ready. The inability of vendors or service providers to complete
their year 2000 resolution process in a timely fashion could have an
adverse impact on the Company. The effect on non-compliance by vendors or
service providers is not determinable at this time.
The Company utilizes microprocessors which are imbedded in systems which
are part of the Company's operations. In particular. year 2000 problems in
the HVAC, elevator, telephone, security or other such systems at the
properties could disrupt operations at the affected properties. The
Company anticipates that its assessment will be complete by the end of
1998. At this point, based on the status of its assessment the Company
does not believe a material number of these systems will be non-compliant.
Additionally, many of these systems, which operate automatically, can be
operated manually and consequently in the event these systems experience a
failure as a result of the year 2000 problem, the disruption caused by
such failure should not be material the Company's operations.
There should be no additional cost to the Company for the software and
computer hardware upgrades. The software upgrades are included in the
annual maintenance fee paid by the Company to the vendors and the computer
hardware upgrades are included in the ordinary course regardless of the
year 2000 issue. Substantially all of those costs have been expensed as
incurred in 1998 and the remaining will be expensed as incurred during the
first quarter of 1999.
Management believes it is devoting the resources necessary to achieve year
2000 readiness in a timely manner.
<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 September 30, 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> <C>
Form 8-K/A (date of 7(a),(b),(c) Historical Statements of Income
Original Report: and Direct Operating Expenses of
June 4, 1998) The Timbers Apartments for the
twelve months ended April 30, 1998.
Form 8-K dated 2, 7 None
July 2, 1998
Form 8-K 2, 7 None
dated
August 12, 1998
Form 8-K/A (date 7(a),(b) (c) Historical Statements of Income
of Original and Direct Operating Expenses of
Report: July The Gables Apartments for the
2, 1998) twelve months ended May 31, 1998.
</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: 11-16-98 BY: /s/ Stanley J. Olander
-----------------------------------
Stanley J. Olander
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,069,280
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 563,779,252
<DEPRECIATION> 42,482,032
<TOTAL-ASSETS> 534,876,224
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 385,602,116
<OTHER-SE> (44,967,201)
<TOTAL-LIABILITY-AND-EQUITY> 534,876,224
<SALES> 0
<TOTAL-REVENUES> 68,683,654
<CGS> 0
<TOTAL-COSTS> 42,741,545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,227,446
<INCOME-PRETAX> 17,038,352
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,038,352
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,038,352
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
<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>
