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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 June 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 August 1, 1999, there were outstanding 39,832,242 shares of common
stock, no par value, of the registrant.
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<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999 3
and December 31, 1998
Consolidated Statements of Operations - 4
Three months ended June 30, 1999
and June 30, 1998
Six months ended June 30, 1999
and June 30, 1998
Consolidated Statement of Shareholders' Equity- 5
Six months ended June 30, 1999
Consolidated Statements of Cash Flows - 6
Six months ended June 30, 1999
and June 30, 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 11
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures about 16
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
Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ ----------------
<S> <C> <C>
ASSETS
Investment in rental property:
Land $ 86,391,086 $ 87,100,659
Buildings and property improvements 494,424,667 487,972,647
Furniture and fixtures 13,820,715 12,365,052
------------- -------------
594,636,468 587,438,358
Less accumulated depreciation (59,937,973) (48,227,760)
------------- -------------
534,698,495 539,210,598
Cash and cash equivalents 6,030,496 2,590,364
Prepaid expenses 1,492,208 1,372,498
Other assets 9,186,193 9,174,148
------------- -------------
Total Assets $ 551,407,392 $ 552,347,608
============= =============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable $ 205,499,999 $ 201,892,999
Accounts payable 1,200,526 4,301,682
Accrued expenses 5,722,083 2,730,418
Rents received in advance 158,987 506,649
Tenant security deposits 1,455,477 1,729,671
------------- -------------
Total Liabilities 214,037,072 211,161,419
Minority interest of unitholders in operating partnership 1,975,072 2,014,693
Shareholders' equity
Preferred stock, no par value, authorized 25,000,000
shares; issued and outstanding 0 shares -- --
Common stock, no par value, authorized 100,000,000
shares; issued and outstanding 39,623,714 shares
and 39,113,916 shares, respectively 393,081,307 388,131,512
Deferred compensation (85,858) (108,905)
Distributions greater than net income (57,600,201) (48,851,111)
------------- -------------
Total Shareholders' Equity 335,395,248 339,171,496
------------- -------------
Total Liabilities and Shareholders' Equity $ 551,407,392 $ 552,347,608
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Rental income $ 23,955,059 $ 21,871,386 $47,422,150 $ 41,991,821
Other income 2,680,480 850,520 3,741,767 1,692,554
EXPENSES:
Property and maintenance 6,756,501 5,976,007 12,855,388 11,475,532
Taxes and insurance 1,813,692 1,681,144 3,876,058 3,204,993
Property management 545,861 543,061 1,095,229 1,055,380
General and administrative 1,680,931 566,998 2,129,527 923,337
Amortization expense and other depreciation 5,746 14,146 67,145 30,284
Depreciation of rental property 5,907,842 5,006,691 11,710,213 9,690,075
Other 302,945 361,697 600,651 768,656
------------ ------------ ------------ ------------
Total expenses 17,013,518 14,149,744 32,334,211 27,148,257
------------ ------------ ------------ ------------
Income before interest and dividend income (expense) 9,622,021 8,572,162 18,829,706 16,536,118
Interest and dividend income 122,425 128,189 213,299 221,199
Interest expense (3,517,687) (3,187,420) (6,933,135) (6,008,338)
------------ ------------ ------------ ------------
Income before minority interest in operating partnership 6,226,759 5,512,931 12,109,870 10,748,979
Minority interest of unitholders in operating partnership 8,198 -- 58,899 --
------------ ------------ ------------ ------------
Net income $ 6,218,561 $ 5,512,931 $ 12,050,971 $ 10,748,979
============ ============ ============ ============
Basic and diluted earnings per common share $ 0.16 $ 0.15 $ 0.31 $ 0.30
============ ============ ============ ============
Distributions per common share $ 0.27 $ 0.26 $ 0.53 $ 0.51
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<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, 1998 39,113,916 $388,131,512 ($108,905) ($48,851,111) $339,171,496
Net proceeds from the sale of shares -- -- -- -- --
Net income -- -- -- 12,050,971 12,050,971
Cash distributions declared to shareholders ($.53 per share) -- -- -- (20,800,061) (20,800,061)
Exercise of stock options 539 5,390 -- -- 5,390
Amortization of deferred compensation -- -- 23,047 -- 23,047
Shares issued through dividend reinvestment plan 509,259 4,944,405 -- -- 4,944,405
------------- ----------- ------------ ------------- ---------------
Balance at June 30, 1999 39,623,714 $393,081,307 ($85,858) ($57,600,201) $335,395,248
------------- ----------- ------------ ------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 12,050,971 $ 10,748,979
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 11,777,358 9,720,359
Minority interest of unitholders in operating partnership 58,899 --
Amortization of deferred compensation 23,047 10,998
Amortization of Apple Realty Group contract purchase 241,438 463,538
Amortization of deferred financing costs 113,664 106,531
Changes in operating assets and liabilities:
Prepaid expenses (119,710) 291,329
Other assets (434,292) (630,503)
Accounts payable (3,101,156) (1,815,305)
Accrued expenses 2,991,665 2,139,060
Rent received in advance (347,662) (274,199)
Tenant security deposits (274,194) (10,635)
------------ ------------
Net cash provided by operating activities 22,980,028 20,750,152
Cash flow from investing activities:
Acquistions of rental property -- (36,200,620)
Proceeds from the sale of land 764,668 --
Capital improvements (7,962,778) (11,541,946)
------------ ------------
Net cash used in investing activities (7,198,110) (47,742,566)
Cash flow from financing activities:
Proceeds from short-term borrowings 23,887,000 53,883,852
Repayments of short-term borrowings (20,280,000) (43,005,000)
Net proceeds from issuance of shares 4,949,795 33,993,273
Cash distributions to operating partnership unitholders (98,520) --
Cash distributions paid to shareholders (20,800,061) (18,174,819)
------------ ------------
Net cash provided by (used in) financing activities (12,341,786) 26,697,306
Increase (decrease) in cash and cash equivalents 3,440,132 (295,108)
Cash and cash equivalents, beginning of year 2,590,364 4,513,986
------------ ------------
Cash and cash equivalents, end of period $ 6,030,496 $ 4,218,878
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC
Notes to Consolidated Financial Statements (Unaudited)
June 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 six months ended June 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 included in other amortizaton 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) Notes Payable
On June 28, 1999, the Company entered into a loan agreement with a
commercial bank in the amount of $5.5 million to refinance the
Company's $5.5 million unsecured note issued on June 25, 1996. The
note bears interest at LIBOR plus 135 basis points and is due on
September 27, 1999. The Company is currently negotiating a new loan, a
portion of the proceeds of which would repay this $5.5 million
borrowing.
During October, 1998, the Company closed a $25 million unsecured
bridge facility with a commercial bank. The maturity date is October
13, 1999. 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 $25 million. The
Company intends to use a portion of the proceeds of the new loan it is
negotiating to repay this debt.
During July, 1999, the Company increased the unsecured line of credit
$10 million 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.
7
<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,
1999. There were no borrowings under this agreement at June 30, 1999.
(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 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 six months ended June 30, 1999 and 1998
were $1,680,282 and $817,954, respectively.
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 six months ended June 30,1999 and 1998, the
Company received $561,484 and $874,600, respectively, in real estate
commissions under this contract and amortized $241,438 and $463,538 of
the purchase price of this contract.
In April 1997, the Company purchased 417,778 shares of Apple for $3.76
million. This represents approximately 1.4% of the common shares of
Apple outstanding as of June 30, 1999. The Company recognized dividend
income for the six months ended June 30, 1999 and 1998 of $170,030 and
$168,776, respectively, on its investment in Apple.
The income and fees received by the Company from Apple will terminate
upon consummation of the merger described in note (5) below.
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
8
<PAGE>
income.
(4) 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 Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 6,218,561 $12,050,971 $ 5,512,931 $10,748,979
Numerator for basic and
diluted earnings 6,218,561 12,050,971 5,512,931 10,748,979
Denominator:
Denominator for basic
earnings per share-weighted-
average shares 39,569,424 39,443,428 36,894,332 36,301,575
Effect of dilutive securities:
Stock options -- -- 5,651 5,651
---------- ---------- ----------- ----------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 39,569,424 39,443,428 36,899,983 36,307,226
---------- ---------- ----------- ----------
Basic and diluted earnings per
common share $ .16 $ .30 $ 0.15 $ .30
---------- ---------- ----------- ----------
</TABLE>
(5) Subsequent Events
In July 1999, the Company distributed to its shareholders approximately
$10,698,686 (27 cents per share), of which approximately $2,163,475 was
reinvested in the purchase of additional shares of the Company.
On July 23, 1999, the Company completed the acquisition of Apple which
included 29 apartment communities containing 7,503 apartment units. The
acquisition was structured as a merger of Apple into a majority-owned
subsidiary of the Company. The transaction is valued at approximately
$310 million. Under the terms of the merger agreement, each Apple
shareholder will receive .4 of a share of the Company's $25 Series A
Convertible Preferred Stock for each share of Apple common stock. The
Series A Convertible Preferred Stock will have a first year dividend
yield of 8.5%, which will increase to 9% in the second year and 9.5% 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 will assume approximately
$32 million of Apple debt with an average interest rate of
9
<PAGE>
approximately 6.475%. The transaction has been structured as a tax-free
reorganization and will be accounted for under the purchase method of
accounting.
10
<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 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 or the properties, as the case may be, the
possibility that the merger of the Company and Apple will not have the
effect 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
included 29 apartment communities containing 7,503 apartment units. The
acquisition was structured as merger of Apple into a majority-owned
subsidiary of the Company. The transaction is valued at approximately
$310 million. Under the terms of the merger agreement, each Apple
shareholder will receive .4 of a share of the Company's $25 Series A
Convertible Preferred Stock for each share of Apple common stock. The
Series A Convertible Preferred Stock will have a first year dividend
yield of 8.5%, which will increase to 9% in the second year and 9.5% 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 will assume approximately
$32 million of Apple debt with an average interest rate of
approximately 6.475%. The transaction has been structured as a tax-free
reorganization and will be accounted for under the purchase method of
accounting.
11
<PAGE>
Results of Operations
Income and occupancy
The Company's property operations for the six months ended June 30,
1999 include the results of operations from the 58 properties acquired
to date. The increased rental income and operating expenses for the six
and three months ended June 30, 1999 over the same period in 1998 is
primarily due to a full six months of operation of the 7 properties
acquired in 1998.
Substantially all of the Company's income is from the rental operation
of apartment communities. Rental income for the six months increased to
$47 million in 1999 from $42 million in 1998 due to the factors above.
For the second quarter of 1999, the Company's rental income of $24
million was $2 million, or 9.5%, 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 terminate upon consummation of the merger, and
returns on the investment of its cash and cash reserves. In addition,
other income for the second quarter reflects the $1.5 million payment
from Apple to the Company.
Overall economic occupancy for the Company's properties averaged 91%
and 92% for the six months ended June 30, 1999 and 1998, respectively.
For the second quarter of 1999 and 1998, economic occupancy averaged
92% and 93%, respectively. Overall average rental rates for the
portfolio increased 5% from $587 for the six months ended June 30,
1998, to $614 for the six months ended June 30, 1999. For the second
quarter of 1999 and 1998, average rental rates increased 5% from $589
to $618, respectively.
Comparable property operations
On a comparative basis, the 50 properties acquired prior to 1998
provided rental and operating income of $41 million and $27 million,
respectively during the six months ended June 30, 1999 and $39 million
and $25 million for the same period in 1998. This represents an
increase in rental and operating income from the first six months of
1998 compared to the first six months of 1999 of 5% and 6%,
respectively. During the second quarter of 1999 and 1998, these same
community operations provided rental and operating income of $20
million and $13 million and $19 million and $12 million, respectively.
This represents an increase in rental and operating income from the
second quarter of 1998 compared to the second quarter of 1999 of 5% and
7%, respectively.
Expenses
Total expenses for the first six months increased 19% to $32 million in
1999 from $27 million in 1998. For the second quarter of 1999, total
expenses increased to $17 million from $14 million for the same period
in 1998. The increases are due largely to full two quarters of expenses
of the 1998 acquisitions. The operating expense ratio (the ratio of
operating expenses, excluding depreciation, amortization, general and
administrative, and other expenses, to rental income) was 38% and 37%
for both the second quarter and the six month periods in 1999 and 1998,
respectively.
12
<PAGE>
Depreciation expense for the first six months has increased to $11.7
million in 1999 from $9.7 million in 1998. For the second quarter of
1999 and 1998 depreciation expense was $6 million and $5 million,
respectively. The increases are directly attributable to the full two
quarters of depreciation of the 1998 acquisitions.
General and administrative expenses totaled 4% of rental income for the
six months ended June 30, 1999 and 2% for the same period in 1998. For
the second quarter of 1999 and 1998, general and administrative
expenses totaled 7% and 3%, respectively, 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 $43,268 in 1999 and $52,422 in
1998 from the investment of its cash and cash reserves. For the second
quarter of 1999, interest income was $35,944 and $42,962 for the same
period in 1998. Dividend income from the Company's investment in Apple
was $170,030 and $168,776 for the six months ended June 30, 1999 and
1998, respectively. For the second quarter of 1999 and 1998, dividend
income was $86,480 and $85,226, respectively.
The Company incurred interest expense of $6.9 million and $6 million
during the first six months of 1999 and 1998, respectively, associated
with borrowings under its lines of credit. For the second quarter of
1999 and 1998, interest expense was $3.5 million and $3.2 million,
respectively. This is a result of the increased use of its lines of
credit to fund acquisitions.
Income and expense from relationship with Apple Residential Income
Trust
The Company received $1,680,282 and $817,954 for the first six months
of 1999 and 1998, respectively, for advisory and property management
services rendered to Apple. For the second quarter of 1999 and 1998,
the Company received $932,480 and $466,420, respectively for the same
services. The Company received $561,485 and $874,600 for the first six
months of 1999 and 1998, respectively, in real estate commissions
under separate contract and amortized $241,438 as of June 30, 1999 and
$463,538 as of June 30, 1998 of the purchase price of this contract.
During the second quarter of 1999 and 1998, the Company received
$248,000 and $384,100, respectively, in real estate commissions. The
Company amortized $106,640 in the second quarter of 1999 and amortized
$203,573 for the same period in 1998 of the purchase price of the
contract. The fees received by the Company from Apple will terminate
upon consummation of the merger.
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 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.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements
The Company has an ongoing capital expenditure commitment to fund its
renovation program for recently acquired properties. In addition to the
Company's acquisition of Apple, discussed above, the Company is always
assessing potential acquisitions and intends to acquire additional
properties during 1999. However, no material commitments existed on
August 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 will be able to obtain debt financing from a variety
of sources, both secured and unsecured.
The Company capitalized $8 million of improvements to its various
properties during the six months of 1999. It is anticipated that some
$14 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 24% of all
1999 distributions, totaling $4,944,405, 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.
Investment in Apple Residential Income Trust
As of June 30, 1999, the Company owned 417,778 common shares of Apple
representing approximately 1.4% of common shares of Apple outstanding
at June 30, 1999.
Notes payable During June, 1999, the Company obtained a $5.5 million
unsecured loan from a commercial bank. In conjunction with this
agreement, the Company repaid an existing unsecured note of $5.5
million plus interest. The new unsecured note is due on September 27,
1999. The Company is currently negotiating a new loan, a portion of the
proceeds of which would repay this $5.5 million borrowing.
At June 30, 1999, borrowings on the $25 million unsecured bridge
facility were $25 million and the due date is October 13, 1999. The
Company intends to use a portion of the proceeds of the new loan it is
negotiating to repay this debt.
During July, 1999, the Company increased the unsecured line of credit
$10 million to $185 million and extended the due date to July 9, 2002.
At July 30, 1999, borrowings under this agreement were $185 million.
14
<PAGE>
The Company had no outstanding balance on its $5 million general
corporate line of credit at June 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.
There have been no significant changes to the Year 2000 disclosures
included in the 1998 Form 10-K.
Management believes it is devoting the resources necessary to achieve
year 2000 readiness in a timely manner.
15
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 1998. See the
information provided in the Company's Annual Report on Form 10-K under
Item 2-Management's Discussion and Analysis of Financial Condition and
Results of Operations.
16
<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 June 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 5,7 None
March 31, 1999
Form 8-K dated 7(b) Pro Forma Consolidated Statement
April 9, 1999 of Operations for the year ended
December 31, 1998.
17
<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: 8-13-99 BY: /s/ Stanley J. Olander
---------------------------------------
Stanley J. Olander
Vice President and Chief Financial Officer
18
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