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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12875
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, 1999, there were outstanding 38,844,517 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, 1999 3
and December 31, 1998
Consolidated Statements of Operations - 4
Three months ended September 30, 1999
and September 30, 1998
Nine months ended September 30, 1999
and September 30, 1998
Consolidated Statement of Shareholders' Equity- 5
Nine months ended September 30, 1999
Consolidated Statements of Cash Flows - 6
Nine months ended September 30, 1999
and September 30, 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 12
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures about 17
Market Risk
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 18
Security Holders.
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 21
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Investment in rental property:
Land $ 135,475,420 $ 87,100,659
Buildings and property improvements 750,830,044 487,972,647
Furniture and fixtures 20,463,789 12,365,052
------------------ ------------------
906,769,253 587,438,358
Less accumulated depreciation (68,079,254) (48,227,760)
------------------ ------------------
838,689,999 539,210,598
Cash and cash equivalents 19,559,391 2,590,364
Prepaid expenses 1,073,328 1,372,498
Other assets 8,002,943 9,174,148
------------------ ------------------
Total Assets $867,325,661 $552,347,608
================== ==================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable-unsecured $ 150,000,000 $ 201,892,999
Notes payable-secured 105,241,662 -
Distributions payable 4,485,881 -
Accounts payable 6,498,715 4,301,682
Accrued expenses 10,458,325 2,730,418
Rents received in advance 269,677 506,649
Tenant security deposits 2,065,322 1,729,671
------------------ ------------------
Total Liabilities 279,019,582 211,161,419
Minority interest of unitholders in operating partnership 1,939,890 2,014,693
Shareholders' equity
Preferred stock, no par value, authorized 25,000,000
shares; 12,666,019 shares, $25 liquidation preference,
Series A Cumulative Convertible Redeemable issued
and outstanding 263,038,214 -
Common stock, no par value, authorized 100,000,000
shares; issued and outstanding 39,076,617 shares
and 39,113,916 shares, respectively 387,460,456 388,131,512
Deferred compensation (79,835) (108,905)
Distributions greater than net income (64,052,646) (48,851,111)
------------------ ------------------
Total Shareholders' Equity 586,366,189 339,171,496
------------------ ------------------
Total Liabilities and Shareholders' Equity $867,325,661 $552,347,608
================== ==================
</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,
1999 1998 1999 1998
----------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Rental income $ 34,887,760 $ 23,138,533 $ 82,309,910 $ 65,130,354
Other income 212,837 1,860,746 3,954,604 3,553,300
EXPENSES:
Property and maintenance 9,640,510 6,623,932 22,495,898 18,099,464
Taxes and insurance 3,415,101 1,957,514 7,291,159 5,162,507
Property management 627,444 512,327 1,722,673 1,567,707
General and administrative 538,307 424,479 2,667,834 1,347,816
Amortization expense - 709 55,657 16,891
Other depreciation 5,740 7,467 17,228 21,569
Depreciation of rental property 8,141,281 5,305,327 19,851,494 14,995,402
Other 151,763 761,534 752,414 1,530,189
----------------------------------- -----------------------------------
Total expenses 22,520,146 15,593,289 54,854,357 42,741,545
----------------------------------- -----------------------------------
Income before interest and dividend income (expense) 12,580,451 9,405,990 31,410,157 25,942,109
Interest and dividend income 109,904 102,490 323,203 323,689
Interest expense (3,943,225) (3,219,107) (10,876,360) (9,227,446)
----------------------------------- -----------------------------------
Income before minority interest in
operating partnership 8,747,130 6,289,373 20,857,000 17,038,352
Minority Interest of unitholders in
operating partnership 15,008 - 73,907 -
----------------------------------- -----------------------------------
Net income $ 8,732,122 $ 6,289,373 $ 20,783,093 $ 17,038,352
Distributions to preferred shareholders 4,923,280 - 4,923,280 -
----------------------------------- -----------------------------------
Net income available to common shareholders $ 3,808,842 $ 6,289,373 $ 15,859,813 $ 17,038,352
=================================== ===================================
Net Income per share-basic and diluted $ 0.10 $ 0.16 $ 0.40 $ 0.46
=================================== ===================================
Distributions per common share $ 0.27 $ 0.26 $ 0.80 $ 0.77
=================================== ===================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Distributions
Number Common Number Preferred (Greater) Total
of Common Stock of Preferred Stock Deferred Less than Shareholders'
Shares Amount Shares Amount Compensation Net Income Equity
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 39,113,916 $388,131,512 - - ($108,905) ($48,851,111) $339,171,496
Net income - - - - - 20,783,093 20,783,093
Issuance of Series A
Convertible Preferred Stock - - 12,666,019 263,038,214 - - 263,038,214
Cash distributions declared
to common shareholders - - - - - (31,498,747) (31,498,747)
($.80 per share)
Preferred stock dividend
declared ($.35 per share) - - - - (4,485,881) (4,485,881)
Exercise of stock options 539 5,390 - - - - 5,390
Purchase of common stock held
by Apple Residential Income
Trust Inc. ("Apple") (758,000) (7,769,500) - - (7,769,500)
Amortization of deferred
compensation - - - - 29,070 - 29,070
Shares issued through dividend
reinvestment plan 720,162 7,093,054 - - - - 7,093,054
---------------------------------------------------------------------------------------------------
Balance at September 30, 1999 39,076,617 $387,460,456 12,666,019 $263,038,214 ($79,835) ($64,052,646) $586,366,189
===================================================================================================
</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,
1999 1998
-----------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income $20,783,093 $17,038,352
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 19,924,379 15,033,862
Minority interest of unitholders in operating partnership 73,907 -
Amortization of deferred compensation 29,070 16,497
Amortization of Apple Realty Group contract purchase 241,438 1,043,349
Amortization of deferred financing costs 172,172 161,890
Changes in operating assets and liabilities:
Operating assets (2,323,837) (1,169,524)
Operating liabilities (889,372) 1,452,259
------------- ------------
Net cash provided by operating activities 38,010,850 33,576,685
Cash flow from investing activities:
Purchase of Apple Residential Income
Trust, Inc., net of cash
Acquistions of rental property (868,173) (56,908,659)
Proceeds from the sale of land 764,668 -
Capital improvements (17,890,876) (19,295,398)
------------- ------------
Net cash used in investing activities (17,994,381) (76,204,057)
Cash flow from financing activities:
Proceeds from short-term borrowings 52,467,001 86,189,852
Repayments of short-term borrowings (104,360,000) (52,259,000)
Proceeds from secured notes payable 73,500,000 -
Repayment of mortgage notes (105,430) -
Net proceeds from issuance of common shares 7,098,444 36,466,737
Cash distributions to operating partnership unitholders (148,710) -
Cash distributions paid to common shareholders (31,498,747) (28,214,923)
------------- -----------
Net cash provided by (used in) financing activities (3,047,442) 42,182,666
Increase (decrease) in cash and cash equivalents 16,969,027 (444,706)
Cash and cash equivalents, beginning of year 2,590,364 4,513,986
============= ===========
Cash and cash equivalents, end of period $19,559,391 $4,069,280
============= ===========
Supplemental information:
Non-cash transactions associated with:
Apple Acquisition
Real estate assets acquired $ 302,204,687 -
Issuance of preferred stock 263,038,214 -
Assumption of mortgage notes 31,847,092 -
Company common stock held by Apple 7,769,500 -
Operating assets acquired 632,831 -
Operating liabilities acquired 10,912,991 -
Other 3,940,548 -
Accretion of preferred dividend 437,399
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1999
(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 nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1999. These financial statements should be read in
conjunction with the Company's December 31, 1998 Annual Report on Form
10-K.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting the Costs of
Start-up Activities". The SOP is effective beginning on January 1,
1999, and requires that start-up costs capitalized prior to January 1,
1999 be written off and any future start-up costs be expensed as
incurred. The unamortized balance of organization costs of $55,657 was
written off as a cumulative effect of an accounting change as of
January 1, 1999 and is reflected in amortization expense.
Certain previously reported amounts have been reclassified to conform
with the current financial statement presentation.
The Company did not have any items of comprehensive income requiring
separate reporting and disclosure for the periods presented.
(2) Acquisition of Apple Residential Income Trust, Inc.
---------------------------------------------------
On July 23, 1999, the Company completed the acquisition of Apple
Residential Income Trust, Inc. ("Apple") which included 29 apartment
communities containing 7,503 apartment units. The merger qualified as a
tax-free reorganization and was accounted for under the purchase method
of accounting. The acquisition was structured as a merger of Apple into
a majority-owned subsidiary of the Company. The aggregate purchase
price was approximately $311 million. Under the terms of the merger
agreement, each Apple shareholder received 0.4 of a share of the
Company's $25 Series A Convertible Preferred Stock for each share of
Apple common stock. A total of 12,666,019 shares of the Company's
Series A Convertible Preferred Stock were issued as a result of the
merger. The Series A Convertible Preferred Stock has a first year
dividend rate of $2.125, which will increase to $2.25 in the second
year and $2.375 in the third year and thereafter. The Company is
imputing dividends calculated as the present value difference between
the perpetual preferred stock distribution and the stated distribution
rate. Each share of Series A Convertible Preferred Stock carries a $25
per share liquidation preference and is convertible into 1.5823 shares
of the Company's common stock, which reflects a conversion price of
$15.80 for the Company's common stock. After five years, the Series A
Convertible Preferred Stock will be redeemable at $25 per share plus
any accrued dividends, at the option of the Company, in whole or in
part, for cash or stock,
7
<PAGE>
subject to certain conditions. In addition, the Company assumed
approximately $32 million of Apple debt with an effective interest rate
of approximately 6.475%. No goodwill was recorded as a result of this
transaction.
The following unaudited pro forma information for the nine months ended
September 30, 1999 and 1998 assumes the acquisition of Apple was
completed on January 1 of the respective periods. The pro forma
information is not necessarily indicative of what the Company's
consolidated results of operations would have been if the acquisition
previously described has occurred at the beginning of each period
presented. Additionally, the pro forma information does not purport to
be indicative of the Company's results of operations for future
periods.
Nine Months Nine Months
Ended Ended
9-30-99 9-30-98
------- -------
Rental income $109,595,635 $103,388,563
Net income available to
common shareholders 1,549,151 6,596,634
Net income per common
share-basic and diluted $.04 $.18
The pro forma information presented above reflects adjustments for the
actual rental income and rental expenses of the 22 properties acquired
during 1998 and the 3 properties acquired in 1999 (including the Apple
properties) for the respective periods in 1998 prior to acquisition.
Net income has been adjusted as follows: (1) revenues and expenses
related to the acquisition have been eliminated; (2) depreciation
expense has been adjusted based on the Company's basis in the
properties; (3) interest expense has been adjusted based on the market
rate available to the Company at the time of acquisition.
(3) Notes Payable
-------------
On September 29, 1999, the Company placed $73.5 million of secured
debt. The loan is secured by ten properties. The loan is interest only
and bears interest at a fixed interest rate of 7.29% per annum and the
maturity date is September, 2006. The proceeds were used to pay down
short-term debt and to curtail the Company's existing line of credit,
described below.
During July, 1999, the Company increased the $175 million unsecured
line of credit to $185 million with a consortium of six banks and
extended the maturity date to July 9, 2002. The line of credit bears
interest at one month LIBOR plus 120 basis points, reduced from one
month LIBOR plus 135 basis points. At June 30, 1999, borrowings under
the agreement were $175 million. Proceeds from the debt described
above, were used to repay $25 million of the Company's line of credit,
a $5.5 million loan, and $25 million of other unsecured debt. At
September 30, 1999, borrowings under the unsecured line of credit were
$150 million. At September 30, 1999, the Company had an unused
borrowing capacity of $35 million under the unsecured line of credit.
8
<PAGE>
The Company has available a $5 million unsecured line of credit for
general corporate purposes. This line of credit bears interest at LIBOR
plus 135 basis points and the maturity date was extended to October 31,
2000. At September 30, 1999, the Company had no outstanding borrowings
under this agreement.
In connection with the Apple merger, the Company assumed six mortgage
notes with a principal amount of $30.8 million. These mortgages were
recorded at a fair value of $31.8 million at the date of assumption.
The difference between the fair value and principal is being amortized
as an adjustment to interest expense over the term of the respective
notes. Mortgage notes payable are due in monthly installments,
including principal and interest.
The aggregate maturities of mortgage notes payable subsequent to
September 30, 1999 are as follows:
Year Amount
---- -------
1999 $159,721
2000 658,443
2001 691,481
2002 726,985
2003 7,953,582
Thereafter 21,551,450
-----------
$31,741,662
===========
(4) Related Parties
---------------
The service fees received by the Company from Apple terminated upon the
consummation of the merger described in Note (2).
Prior to the merger, the Company had entered into subcontract
arrangements with the companies owned by Mr. Glade M. Knight to provide
property management services and advisory services to Apple. Property
management fees were 5% of monthly gross revenues plus certain expense
reimbursements. Advisory fees were .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
9
<PAGE>
months ended September 30, 1999 and 1998 were $1.9 million and $1.5
million, respectively.
The Company also previously rendered property acquisition services to
Apple. The Company paid $350,000 in cash and issued stock valued at
$1,650,000 for the acquisition/disposition contract. Under the terms of
the contract, Apple paid a real estate commission equal to 2% of the
purchase price of the properties acquired. The Company amortized its
purchase of this contract over the anticipated total acquisitions by
Apple during the contract period. For the nine months ended September
30, 1999 and 1998, the Company received $561,484 and $2 million,
respectively, in real estate commissions under this contract and
amortized $241,438 and $1 million of the purchase price of this
contract.
During 1998 the Company purchased 417,778 shares of Apple for $3.76
million. The Company recognized dividend income for the nine months
ended September 30, 1999 and 1998 of $194,580 and $252,326,
respectively, on its investment in Apple.
During May, 1999, Apple paid the Company $1.5 million to modify the
Company's right of first refusal to purchase Apple's common shares or
business and the service contracts between Apple and the Company to
allow for termination of such agreements in the event of a change of
control of the Company. The Company recorded the payment as other
income.
10
<PAGE>
(5) Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted
earnings per share in accordance with FAS 128:
<TABLE>
<CAPTION>
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, 1999 September 30, 1999 September 30, 1998 September 30, 1998
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator:
Net income available to
common shareholders $3,808,842 $15,859,813 $6,289,373 $17,038,352
Numerator for basic and
diluted earnings 3,808,842 15,859,813 6,289,373 17,038,352
Denominator:
Denominator for basic
earnings per share-weighted-
average shares 39,031,951 39,304,761 38,806,665 37,148,312
Effect of dilutive securities:
Stock options - - 15,416 27,059
Series A Convertible Preferred - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 39,031,951 39,304,761 38,822,081 37,175,371
- ---------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per
common share $ .10 $ .40 $ 0.16 $ .46
--------------------------------------------------------------------------------------------------------------------------
*Series A Convertible Preferred Stock was not included in dilutive earnings per
common share calculations since its effect was anti-dilutive.
</TABLE>
(6) Subsequent Events
-----------------
In October 1999, the Company distributed to its common shareholders
approximately $10,755,972 (27 cents per share), of which approximately
$2,055,047 was reinvested in the purchase of additional shares of the
Company. In addition, the Company distributed $4,485,637 to its
preferred shareholders.
On September 30, 1999, the Company's Board of Directors authorized a
common share repurchase program to purchase up to $50 million of the
Company's common shares. As of November 1, 1999, the Company had
repurchased 226,600 common shares for $2,290,486.
11
<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 acquisition of Apple. Such statements involve known and
unknown risks, uncertainties, and other factors which may cause the
actual results, performance, or achievements 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 or the properties, as the case may be, the
possibility that the merger of the Company and Apple will not have the
effects anticipated by the Company, 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.
Merger with Apple Residential Income Trust, Inc.
------------------------------------------------
On July 23, 1999, the Company completed the acquisition of Apple, which
owned 29 apartment communities containing 7,503 apartment units. The
merger qualified as a tax-free reorganization and was accounted for
under the purchase method of accounting. The acquisition was structured
as a merger of Apple into a majority-owned subsidiary of the Company.
The aggregate purchase price was approximately $311 million. Under the
terms of the merger agreement, each Apple shareholder received 0.4 of a
share of the Company's $25 Series A Convertible Preferred Stock for
each share of Apple common stock. A total of 12,666,019 shares of the
Company's Series A Convertible Preferred Stock were issued as a result
of the merger. The Series A Convertible Preferred Stock has a first
year dividend rate of $2.125, which will increase to $2.25 in the
second year and $2.375 in the third year and thereafter. Each share of
Series A Convertible Preferred Stock carries a $25 per share
liquidation preference and is convertible into 1.5823 shares of the
Company's common stock, which reflects a conversion price of $15.80 for
the Company's common stock. After five years, the Series A Convertible
Preferred Stock will be redeemable at $25 per share plus any accrued
dividends, at the option of the Company, in whole or in part, for cash
or stock, subject to certain conditions. In addition, the Company
assumed approximately $32 million of Apple debt with an effective
interest rate of approximately 6.475%. (See Note 2 to the consolidated
financial statements for further information.)
12
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Income and occupancy
--------------------
The Company's property operations for the nine months ended September
30, 1999 include the results of operations from the 87 properties
acquired to date, including properties acquired through the acquisition
of Apple on July 23, 1999. The increased rental income and operating
expenses for the nine and three months ended September 30, 1999 over
the same period in 1998 is primarily due to a full nine months of
operation of the 7 properties acquired in 1998 and the operations of
the 29 properties acquired on July 23, 1999.
Substantially all of the Company's income is from the rental operation
of apartment communities. Rental income for the nine months increased
to $82 million in 1999 from $65 million in 1998 due to the factors
above. For the third quarter of 1999, the Company's rental income of
$35 million was $12 million, or 51%, higher than the same period of
1998. 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 were fees for certain services
provided to Apple, which terminated upon completion of the merger, and
returns on the investment of its cash and cash reserves. In addition,
other income for the nine months ended reflects the $1.5 million
payment from Apple to the Company to modify certain contracts described
in Note 5 of the September 30, 1999 unaudited quarterly financial
statements.
Overall economic occupancy for the Company's properties averaged 92%
for the nine months ended September 30, 1999 and 1998. For the third
quarter of 1999 and 1998, economic occupancy averaged 93%. Overall
average rental rates for the portfolio increased 3% from $602 for the
nine months ended September 30, 1998, to $619 for the nine months ended
September 30, 1999. For the third quarter of 1999 and 1998, average
rental rates increased 4% from $597 to $624, respectively.
Comparable property operations
------------------------------
On a comparative basis, the 61 properties acquired prior to 1998,
including 10 Apple properties that were owned by Apple prior to 1998,
provided rental and operating income of $65.6 million and $41.6
million, respectively during the nine months ended September 30, 1999
and $62.8 million and $39.4 million for the same period in 1998. This
represents an increase in rental and operating income from the first
nine months of 1998 compared to the first nine months of 1999 of 4% and
6%, respectively. During the third quarter of 1999 and 1998, these same
community operations provided rental and operating income of $24.6
million and $14.9 million and $23.7 million and $14.2 million,
respectively. This represents an increase in rental and operating
income from the third quarter of 1998 compared to the third quarter of
1999 of 4% and 5%, respectively.
Expenses
--------
Total expenses for the first nine months increased 28% to $55 million
in 1999 from $43 million in 1998. For the third quarter of 1999, total
expenses increased to $23 million from $16 million for the same period
in 1998. The increases are due largely to full three quarters of
expenses of the 1998 acquisitions along with the addition of the Apple
properties acquired on July 23, 1999. The operating expense ratio (the
ratio of operating expenses, excluding depreciation, amortization,
general and administrative, and other
13
<PAGE>
expenses, to rental income) was 38% for both the nine month periods in
1999 and 1998, respectively. The operating expense ratio for the third
quarter of 1999 and 1998 was 39%.
Depreciation expense for the first nine months has increased to $20
million in 1999 from $15 million in 1998. For the third quarter of 1999
and 1998 depreciation expense was $8 million and $5 million,
respectively. The increases are directly attributable to the full three
quarters of depreciation of the 1998 acquisitions and the addition of
the Apple properties for the period beginning July 23, 1999.
General and administrative expenses totaled 3% of rental income for the
nine months ended September 30, 1999 and 2% for the same period in
1998. For the third quarter of 1999 and 1998, 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.
Interest and investment income and expense
------------------------------------------
The Company earned interest income of $128,623 in 1999 and $71,363 in
1998 from the investment of its cash and cash reserves. For the third
quarter of 1999, interest income was $85,354 and $18,940 for the same
period in 1998. Dividend income from the Company's investment in Apple
was $194,580 and $252,326 for the nine months ended September 30, 1999
and 1998, respectively. For the third quarter of 1998, dividend income
was $83,550 and $21,620 was earned in the third quarter of 1999 as the
merger was completed on July 23, 1999.
The Company incurred interest expense of $10.9 million and $9.2 million
during the first nine months of 1999 and 1998, respectively, associated
with borrowings under its lines of credit. For the third quarter of
1999 and 1998, interest expense was $3.9 million and $3.2 million,
respectively. The increase in interest expense relates to the
increased use of the line of credit and the assumption of $32 million
of mortgage notes through the acquisition of Apple.
Income and expense from relationship with Apple Residential Income
Trust
------------------------------------------------------------------
The fees received by the Company from service contracts with Apple
terminated upon consummation of the merger. The Company received $1.9
million and $1.5 million for the first nine months of 1999 and 1998,
respectively, for advisory and property management services rendered to
Apple. For the third quarter of 1999 and 1998, the Company received
$212,838 and $647,491, respectively for the same services. The Company
received $561,484 and $2.1 million for the first nine months of 1999
and 1998, respectively, in real estate commissions under separate
contract and amortized $241,438 as of September 30, 1999 and $1 million
as of September 30, 1998 of the purchase price of this contract. During
the third quarter of 1998, the Company received $1.2 million in real
estate commissions and no commissions were received in the same period
of 1999. The Company amortized in the third quarter of 1998 $579,811 of
the purchase price of the contract.
During May, 1999, Apple paid the Company $1.5 million to modify the
Company's right of first refusal to purchase Apple's common shares and
the business and the service contracts between Apple and Cornerstone to
allow for termination of such agreements in the event of a change of
control of the Company. The Company recorded the payment as other
income.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Capital Requirements
---------------------
The Company has an ongoing capital expenditure commitment to fund its
renovation program for recently acquired properties. The Company is
always assessing potential acquisitions and intends to acquire
additional properties during 1999. However, no material commitments
existed on November 1, 1999 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 lines of credit (including possible increases
thereunder). The Company may seek to obtain additional debt financing
to meet its objectives. Given the Company's current debt level, the
Company is confident that it would be able to obtain debt financing
from a variety of sources, both secured and unsecured.
The Company capitalized $18 million of improvements to its various
properties during the nine month period ended September 30, 1999. It is
anticipated that some $20 million in additional capital improvements
will be completed during the next 12 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. Approximately 23% of all
1999 distributions, totaling $7,093,054, 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
1999.
Notes payable
-------------
On September 29, 1999, the Company placed $73.5 million in secured
debt. The loan is secured by ten properties. The loan is interest only
and bears interest at a fixed interest rate of 7.29% per annum and the
maturity date is September, 2006. The proceeds were used to pay down
short-term debt and to curtail the Company's existing line of credit,
described below.
During July, 1999, the Company increased the $175 million unsecured
line of credit to $185 million with a consortium of six banks and
extended the maturity date to July 9, 2002. The line of credit bears
interest at one month LIBOR plus 120 basis points, reduced from one
month LIBOR plus 135 basis points. At June 30, 1999, borrowings under
the agreement were $175 million. Proceeds from the debt described
above, were used to repay $35 million of the Company's line of credit,
a $5.5 million loan, and $25 million of other unsecured debt. At
September 30, 1999, borrowings under the unsecured line of credit were
$150 million. At September 30, 1999, the Company had an unused
borrowing capacity
15
<PAGE>
of $35 million under the unsecured line of credit.
In connection with the Apple merger, the Company assumed six mortgage
notes with a principal amount of $30.7 million. Five of these mortgages
were recorded at a fair value of $31.7 million at the date of
assumption. The difference between the fair value and principal is
being amortized as an adjustment to interest expense over the term of
the respective notes. No adjustment was required for the remaining
mortgage assumed. Mortgage notes payable are due in monthly
installments, including principal and interest.
The Company had no outstanding balance on its $5 million general
corporate line of credit at September 30, 1999.
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. Any of
the Company's computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations including among
other things a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
As of September 30, 1999, approximately 95% of the Company's computer
systems have been upgraded and deemed to be year 2000 compliant. The
Company's accounting, human resource, and payroll applications have
been upgraded and are currently being tested for year 2000 readiness by
the Company which is scheduled to be completed in the fourth quarter of
1999.
The Company has performed procedures and determined that HVAC,
elevator, telephone, and security systems are year 2000 compliant.
Management believes it is devoting the resources necessary to achieve
year 2000 readiness in a timely manner. Total costs incurred or
anticipated to be incurred related to achieve year 2000 readiness are
not anticipated to be significant.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In connection with the acquisition of Apple Residential Income Trust,
Inc., the Company assumed $31.8 million of mortgage loans. The Company
marked this debt to market using interest rates available on similar
loans at the time of assumption, resulting in an effective interest
rate of approximately 6.475%. In addition, the Company secured 10
properties with $73.5 million of secured debt with a fixed interest
rate of 7.29%.
There have been no other material changes since December 31, 1998. See
the information provided in the Company's Annual Report on Form 10-K
under Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations.
17
<PAGE>
Part II
Item 4. Submission of Matters to a Vote of Security Holders
On July 15, 1999, the Company held a Special Meeting of Shareholders
for the purpose of considering (1) the approval and adoption of the
Agreement and Plan of Merger, dated as of March 30, 1999, by and
between the Company, Apple Residential Income Trust, Inc., and
Cornerstone Acquisition Company (a Virginia corporation and a
subsidiary of the Company) (the "Merger Agreement"), by which Apple
Residential Income Trust, Inc. would merge with and into Cornerstone
Acquisition Company (the "Merger"), the Merger and the other
transactions contemplated by the Merger Agreement, as more fully
described in the Joint Proxy Statement/Prospectus of the Company and
Apple Residential Income Trust, Inc., dated as of June 2, 1999 (the
"Joint Proxy Statement"), (2) the approval of the issuance by the
Company of Series A Convertible Preferred Shares in connection with the
Merger, as defined and more fully described in the Joint Proxy
Statement, and (3) the approval of certain amendments to the Company's
Bylaws related to the issuance by the Company of the Series A
Convertible Preferred Shares in connection with the Merger, as defined
and more fully described in the Joint Proxy Statement, and as more
fully set forth below.
The proposed amendments to the Bylaws would (1) provide that the
holders of the Series A Convertible Preferred Shares may exercise the
limited voting rights granted to them under the Articles of Amendment
creating the shares or under law, (2) permit the Series A Convertible
Preferred Shares to be issued in uncertificated form, (3) amend the
Bylaws' limitation on share ownership designed to preserve REIT tax
classification to provide that no person (as defined in the Bylaws) may
own more than 9.8% of the total number of issued and outstanding shares
of any separate class or series of Company capital stock, and (4)
permit the Company Board of Directors to interpret or amend the Bylaws
to give effect to the foregoing provisions.
Set forth below are the amendments to the Bylaws submitted for
shareholder approval in conjunction with the Merger and the related
issuance of the Series A Convertible Preferred Shares.
1. Add Bylaw 5.20 to Address Preferred Share Voting Rights:
5.20 PREFERRED SHARES AND OTHER SECURITIES. Notwithstanding
anything to the contrary in this Article V or elsewhere in these
Bylaws, holders of any preferred shares or other Securities of the
Company who, pursuant to the documents duly creating such preferred
shares or other Securities, are granted voting rights, including rights
to nominate and elect Directors, shall have such rights as set forth in
the documents creating such preferred shares or other Securities.
Furthermore, notwithstanding anything to the contrary in these Bylaws,
the Directors may interpret these Bylaws and may propose and adopt
amendments to these Bylaws as they deem necessary or convenient to give
effect to the foregoing provision of this Section 5.20.
2. Renumber existing Bylaw 7.1 as 7.1(a) and add a new Bylaw 7.1(b) to
address Series A Preferred Shares Being Uncertificated:
18
<PAGE>
(b) Notwithstanding anything to the contrary in this Section
7.1 or elsewhere in these Bylaws, if the documents duly creating any
preferred shares or other Securities of the Company provide that such
preferred shares or other Securities of the Company are to be
"uncertificated," certificates need not be issued in respect of such
preferred shares or other Securities. The provisions of these Bylaws
addressing Shares held in uncertificated form shall apply to any such
preferred shares or other Securities. Notwithstanding anything to the
contrary in these Bylaws, the Directors may interpret these Bylaws and
may propose and adopt such amendments to these Bylaws as shall be
necessary or convenient to give effect to the foregoing provisions of
this Section 7.1(b).
3. To address Share Accumulation Restrictions:
Replace Existing Bylaw 7.5(g) with the following:
(g) For purposes of Section 7.3, 7.4 and 7.5, "Shares" means
the Common Shares of the Company and any other stock of the Company (as
"stock" is defined in applicable Internal Revenue Code Sections
addressing stock ownership requirements for REITs).
Amend the first sentence of Bylaw 7.5(a)(i) to read as follows:
(a)(i) Subject to the provisions of Section 7.5(b), no Person
may own in excess of 9.8% of the total number of the issued and
outstanding Shares of any separate class or series, and no Shares shall
be transferred (or issued) to any person if, following the transfer or
issuance, the Person's direct or indirect ownership of Shares would
exceed this limit.
4. Add sentence to Bylaw 11.11 to enable Bylaw amendments:
The Board of Directors may also amend or revise the Bylaws to the
extent other provisions of these Bylaws expressly permit such amendment
or revision.
On June 1, 1999, the record date for determining Common Shares entitled
to vote at the Special Meeting, there were 39,621,222 issued and
outstanding Common Shares of the Company. At the Meeting, a quorum was
present. Each of the proposals presented at the Special Meeting of
Shareholders of the Company on July 15, 1999 was approved, with the
following representing the vote totals thereon:
(1) The proposal to approve and adopt the Merger Agreement, the Merger and
the other transactions contemplated by the Merger Agreement, as more
fully described in the Joint Proxy Statement.
APPROVAL 21,925,731 DISAPPROVAL 1,166,486 ABSTAIN 351,594
---------- --------- -------
(2) The proposal to approve the issuance by the Company of Series A
Convertible Preferred Shares in connection with the Merger, as defined
and more fully described in the Joint Proxy Statement.
APPROVAL 21,677,025 DISAPPROVAL 1,307,809 ABSTAIN 458,977
---------- --------- -------
19
<PAGE>
(3) The proposal to approve certain amendments to the Company's Bylaws
relating to the issuance by the Company of Series A Convertible
Preferred Shares in connection with the Merger, as defined and more
fully described in the Joint Proxy Statement.
APPROVAL 21,672,241 DISAPPROVAL 1,272,273 ABSTAIN 499,297
---------- --------- -------
20
<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, 1999, the items reported and the
financial statements included in such filings.
Type and Date
of Reports Items Reported Financials Statements Filed
Form 8-K dated 2,5,7 None
July 23, 1999 and
filed August 6, 1999
Form 8-K dated 5,7 None
June 25, 1999 and
filed August 12, 1999
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cornerstone Realty Income Trust, Inc.
-------------------------------------
(Registrant)
DATE: 11-15-99 BY: /s/ Stanley J. Olander
-------------------- ---------------------------
Stanley J. Olander
Vice President and Chief Financial Officer
22
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 19,559,461
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
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<PP&E> 906,769,253
<DEPRECIATION> 68,079,254
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0
263,475,613
<COMMON> 387,460,456
<OTHER-SE> (64,569,880)
<TOTAL-LIABILITY-AND-EQUITY> 867,325,731
<SALES> 0
<TOTAL-REVENUES> 86,264,514
<CGS> 0
<TOTAL-COSTS> 54,854,357
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<NET-INCOME> 15,859,813
<EPS-BASIC> .40
<EPS-DILUTED> .40
<FN>
<F1>Current Assets and Current Liabilities are not separated to conform with
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<F2>Income is from rental income. There are no Sales or Cost of Goods sold.
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