UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THEx
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 1-10660
Berkshire Realty Company, Inc.
Delaware 04-3086485
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
470 Atlantic Avenue, Boston, Massachusetts 02210
(Address of principal executive offices) (Zip Code)
(617) 423-2233
(Registrant's telephone number, including area code)
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
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
Real estate assets: (Note 3)
Multi-family apartment complexes, net of
<S> <C> <C>
accumulated depreciation $412,431,447 $324,752,425
Retail centers, net of accumulated depreciation 58,491,690 59,708,271
Investments in unconsolidated joint ventures
<PAGE>
(Note 4) 41,043,637 41,689,843
Mortgage loans and other loans receivable,
net of purchase discounts (Note 5) 12,790,158 19,964,524
Land and construction in progress 10,553,531 3,744,124
Total real estate assets 535,310,463 449,859,187
Cash and cash equivalents 9,311,219 11,142,710
Mortgage-backed securities, net ("MBS") (Note 6) 10,033,424 11,576,326
Escrows 11,366,777 3,872,826
Deferred charges and other assets 11,587,913 10,517,138
Goodwill (Note 2) 12,999,423 -
Total assets $590,609,219 $486,968,187
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Credit agreements (Note 7) $135,110,000 $ 95,140,000
Mortgage notes payable (Note 3) 145,953,603 105,200,620
Repurchase agreements (Note 7) 9,700,000 10,950,000
Tenant security deposits, prepaid rents
and escrows held 2,569,203 2,043,792
Accrued real estate taxes, insurance and
other liabilities 10,055,525 7,845,744
Total liabilities 303,388,331 221,180,156
Minority Interest in Operating Partnership (Note 2) 38,134,997 5,000,414
Commitments and Contingencies (Note 8)
Shareholders' equity:
Preferred stock, $0.01 par value; 60,000,000
shares authorized, none issued - -
Common stock ("Shares"), $0.01 par value;
140,000,000 Shares authorized and
25,899,487 and 25,899,449 Shares issued,
respectively 258,995 258,994
Additional paid-in capital 250,846,249 262,271,698
Retained earnings (deficit) (276,278) -
Less common stock in treasury at cost
(506,497 Shares) (1,743,075) (1,743,075)
Total shareholders' equity 249,085,891 260,787,617
Total liabilities and shareholders' equity $590,609,219 $486,968,187
Revenue:
Rental $21,230,613 $16,989,564 $40,595,722 $34,386,179
Interest from mortgage
loans (Note 5) 459,974 560,312 1,044,771 932,954
Joint venture net income
<PAGE>
(Note 4) 230,879 388,628 657,633 802,878
Interest income from MBS 241,721 296,118 503,257 598,972
Other interest income 228,344 326,524 446,103 466,216
Total revenue 22,391,531 18,561,146 43,247,486 37,187,199
Expenses:
Property operating (including
reimbursements to affiliates
of $371,632, $420,544,
$774,167 and $624,472
respectively) 4,946,932 4,572,711 9,641,009 8,853,890
Repairs and maintenance 1,625,657 1,221,936 2,964,699 2,347,678
Real estate taxes 2,082,528 1,780,970 4,315,714 3,689,987
Property management fees to an
affiliate 1,062,123 845,793 1,952,477 1,690,475
Depreciation and amortization 7,176,732 5,165,616 13,434,041 10,422,088
General and administrative
(including fees and reim-
bursements to affiliates of
$251,953, $187,910, $316,729
and $355,992 respectively)
(Note 2) 1,107,411 159,711 1,635,314 451,315
Interest (Note 7) 4,722,601 3,808,992 8,917,447 7,570,390
Corporate taxes 92,781 (145,002) 173,781 (145,007)
Professional fees 72,150 49,646 116,592 228,248
Asset management fees to an
affiliate (Note 2) - 408,252 392,636 764,150
Total expenses 22,888,915 17,868,625 43,543,710 35,873,214
Income (loss) from operations (497,384) 692,521 (296,224) 1,313,985
Gains on sales of
properties and payoff of
mortgage loans - 4,147,174 - 9,337,291
Income (loss) before non-
recurring charges, minority
interest and extraordinary item (497,384) 4,839,695 (296,224) 10,651,276
Non-recurring charges - (1,727,768) - (1,727,768)
Minority interest 27,321 (60,265) 19,946 (60,265)
Net income (loss) before
extraordinary item (470,063) 3,051,662 (276,278) 8,863,243
</TABLE>
The accompanying notes are an
integral part of the financial statements.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(Unaudited)
<S> <C> <C> <C> <C>
Costs associated with the
refinancing of debt - (253,500) - (253,500)
Net income (loss) $ (470,063) $ 2,798,162 $ (276,278) $ 8,609,743
Per share:
Income (loss) before
extraordinary item $ (.02) $ .12 $ (.01) $ .35
Net income (loss) $ (.02) $ .11 $ (.01) $ .34
Weighted average Shares 25,392,962 25,391,426 25,392,957 25,392,380
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY
<TABLE>
For the Six Months Ended June 30, 1996
<CAPTION>
Common Additional Retained Treasury
Stock Paid-in Earnings/ Stock
at Par Capital (Deficit) at Cost Total
<S> <C> <C> <C> <C> <C>
Balance,
December 31,
1995 $258,994 $262,271,698 $ - $(1,743,075) $260,787,617
Net loss - - (276,278) - (276,278)
Proceeds from
the exercise of
stock warrants 1 1,415 - - 1,416
Dividends - (11,426,864) - - (11,426,864)
Balance,
June 30,
1996 $258,995 $250,846,249 $(276,278) $(1,743,075) $249,085,891
</TABLE>
The accompanying notes are an
integral part of the financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
For the Six Months
Ended June 30,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net income $ (276,278) $ 8,609,743
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 12,985,785 10,422,088
Amortization of goodwill 448,256 -
Joint venture net income (657,633) (802,878)
Distributions received from joint ventures 1,303,839 1,296,678
<PAGE>
Gains on sales of properties and
payoff of mortgage loans - (9,337,291)
Discount amortization (312,691) (306,307)
Amortization of deferred financing costs 476,700 718,661
Increase in operating escrows and other
assets (3,138,717) (631,850)
Decrease in accrued real estate taxes,
insurance and other liabilities 2,209,781 890,354
Increase (decrease) in tenant security
deposits prepaid rents and escrows held 525,411 (217,417)
Minority interest in operating partnership (19,946) 60,265
Net cash provided by operating
activities 13,544,507 10,702,046
Investing activities:
Costs to acquire properties (29,165,091) (9,727,502)
Construction in progress (8,320,463) (11,044,134)
Rehabilitation and non-recurring capital (5,083,604) (3,718,106)
Recurring capital expenditures (1,769,914) (1,867,540)
Proceeds from sale of properties - 47,519,778
Costs to acquire mortgage loans - (17,594,284)
Proceeds from the payoff of mortgage loans - 6,596,112
Principal collections on MBS 1,555,517 684,596
Principal collections on mortgage loans 7,474,442 91,374
Escrows for construction and replacement (5,066,460) 2,120,518
Cost to acquire advisory services business (447,679) -
Net cash (used for) provided by
investing activities (40,823,252) 13,060,812
Financing activities:
Payment of financing costs (855,218) (1,352,162)
Proceeds from repurchase agreement - 350,000
Payment on repurchase agreement (1,250,000) (500,000)
Proceeds from credit agreement 39,970,000 9,000,000
Repayment of credit agreement - (19,000,000)
Proceeds from mortgage notes payable - 17,800,000
Principal payments on mortgage notes payable (553,090) (419,915)
Proceeds from the exercise of stock warrants 1,416 6,751
Dividends (11,426,864) (11,172,718)
Distribution to minority interest (438,990) -
Contribution from minority interest - 5,000
Net cash (used for) provided by
financing activities 25,447,254 (5,283,044)
Net (decrease) increase in cash and cash
equivalents (1,831,491) 18,479,814
Cash and cash equivalents, beginning of period 11,142,710 10,492,330
Cash and cash equivalents, end of period $ 9,311,219 $28,972,144
Supplemental cash flow disclosure:
Cash paid for interest during period $ 9,289,261 $ 8,360,716
Interest capitalized during period $ 247,552 $ 517,771
Supplemental disclosure of non-cash investing
activities:
Property contributed by minority interest $80,695,611 $10,500,000
Cash to minority contributors (18,796,019) -
<PAGE>
Debt assumed (41,306,073) (5,417,735)
Increase in minority interest $20,593,519 $ 5,082,265
Reclassification of construction in progress to
multi-family apartment complexes $ 1,511,055 $ -
Advisory Services Business contributed by
minority interest $13,000,000 $ -
</TABLE>
The accompanying notes are an integral
part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
These financial statements reflect the consolidated financial position,
results of operations, changes in shareholders' equity and cash flows
of the Company, its subsidiaries and the Operating Partnership
(collectively the "Company") using historical cost of assets,
liabilities and results of operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this report on
Form 10-Q pursuant to the Rules and Regulations of the Securities and
Exchange Commission. In the opinion of management, the disclosures
contained in this report are adequate to make the information presented
not misleading. See Notes to the Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1995 for additional information relevant to significant accounting
policies followed by the Company.
In the opinion of the management, the accompanying unaudited financial
statements reflect all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the Company's financial position
as of June 30, 1996 and the results of its operations for the three and
six months ended June 30, 1996 and 1995 and cash flows for the six
months ended June 30, 1996 and 1995.
The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results which may be expected for the
full year. See Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this report.
2. Acquisition of Advisory Services Business
On February 28, 1996, the Board of Directors, acting on the
recommendation of a Special Committee comprised of the Independent
Directors, approved the acquisition via contribution of the advisory
and development services business ("Advisor Transaction") of The
Berkshire Companies Limited Partnership in exchange for 1,300,000 newly
issued Units of the Operating Partnership.
The contribution was completed on March 1, 1996. As of that date, all
charges and expenses associated with the Advisory Services Agreement
ceased and the Company became a "self-administered" REIT. The Company
began incurring general and administrative expenses for its acquired
<PAGE>
management staff including salaries, benefits, and other overhead
expenses. The Company will outsource with affiliated companies of
certain directors and officers for certain administrative services such
as shareholder relations, computer systems and support, and human
resources. Property management services will continue to be performed
by Berkshire Property Management, an affiliated company of certain
directors and officers.
In conjunction with the Advisor Transaction, additional Units, up to a
total $7.2 million in value, may be issued to the contributor during a
six-year period if certain Share price benchmarks are achieved. The
benchmarks are achieved if the share price is equal to or greater than
the benchmarks for any fifteen days during any twenty consecutive
trading days. There are six Share price benchmarks beginning at $11.00
and increasing every $1.00 up to a maximum of $16.00. Upon
satisfaction of each benchmark, the contributor will receive Units
equal to $1.2 million based on the benchmark price.
The Advisor Transaction was accounted for under the purchase method.
The value of the transaction was based on 1,300,000 units at a share
price of $10, or $13,000,000 which was recorded as goodwill and is
being amortized on a straight-line method over a 10-year period. Also,
legal fees and professional services expenses associated with the
Advisor Transaction have been capitalized and will be amortized over
the same 10-year period.
3. Multi-Family and Retail Property
As of June 30, 1996, the Company had investments in 41 properties in 10
states consisting of 34 apartment communities having 11,975 units and 7
retail centers with a total of 1,663,817 square feet of leasable space.
Two retail centers (788,808 square feet) are owned through joint
venture investments.
The following summarizes the carrying value of the Company's multi-
family apartment complexes and retail centers, (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Land $ 77,094 $ 67,976
Buildings and improvements 414,757 337,790
Appliances, carpeting and equipment 69,680 56,336
Total multi-family and retail property 561,531 462,102
Accumulated depreciation (90,608) (77,641)
$470,923 $384,461
</TABLE>
Acquisitions
On May 14, 1996 the Company acquired The Point Apartments, a 1,119-
unit high-rise apartment community located in Silver Springs,
Maryland, an asset majority-owned by certain Directors and Officers
of the REIT. The Company acquired the property for $52.3 million in
exchange for 1.6 million of Operating Partnership Units to be issued
over three years and the assumption of $35.5 million of non-recourse
indebtedness on the property. The debt has a fixed rate of 7 5/8%
and matures in 2029. Under the terms of the contribution agreement,
<PAGE>
the Company may not sell The Point Apartments for a period of five
years following the closing date. The transaction was accounted for
on the Consolidated Balance Sheet by calculating the present value
of the 443,000 Units to be issued on January 2, 1997 and the 100,000
units to be issued on January 2, 1998. The minority interest on the
Statement of Operations will be calculated only on the units
actually issued.
Also in the second quarter, the Company completed the acquisition of
five additional multi-family communities for a total of 1,422 units.
The properties are located in Dallas and Fort Worth, Texas. One
asset (318 units) was purchased with cash from an unrelated seller
for a purchase price of $8.7 million. The four remaining assets
(1,104 units) were acquired as a package from another unrelated
seller for a purchase price of $28.7 million which was acquired with
the assumption of $5.8 million in debt, $4.1 million in Operating
Partnership Units and the remainder in cash.
Information on the five apartment communities are as follows:
<TABLE>
<CAPTION>
Number of
Name Units Location
<S> <C> <C> <C>
Golf Side Apartments 402 Haltom City (Fort Worth), Texas
Benchmark Apartments 250 Irving, Texas
Pleasant Wood Apartments 208 Dallas, Texas
Providence Apartments 244 Dallas, Texas
Prescott Place Apartments 318 Mesquite (Dallas), Texas
</TABLE>
Development
The Company is progressing with the construction of Huntington Chase
II, a 72-unit development project which is an additional phase to an
existing property owned by the Company in Norcross, Georgia. The
project is expected to be completed in the third quarter of 1996 and
will cost approximately $4.7 million. As of June 30, 1996 the
project has incurred $4.1 million of construction costs.
The Company is also building 96-units as an additional phase to
Brookfield Trace, an existing community in Mauldin (Greenville),
South Carolina. The phase is expected to cost approximately $6.6
million when completed. As of June 30, 1996, the project has
incurred $2.6 million of construction costs.
The Company also owns three parcels of land located in Durham, North
Carolina, Dallas, Texas and Greenville, South Carolina. The Company
plans to begin construction of a 296-unit apartment community on the
Durham site in 1996.
4. Investments in Unconsolidated Joint Ventures
The Company holds a 50% interest in the Brookwood Village Joint
Venture and a 50.1% interest in Spring Valley Partnership.
Condensed combined financial statements for the Joint Ventures are
as follows:
<TABLE>
CONDENSED COMBINED BALANCE SHEETS
ASSETS
June 30, December 31,
1996 1995
<S> <C> <C>
Property at cost $112,328,520 $108,888,115
Less accumulated depreciation (29,171,339) (27,248,453)
83,157,181 81,639,662
Other assets 2,453,478 2,034,197
Total assets $ 85,610,659 $ 83,673,859
Liabilities and Partners Equity
Liabilities $ 495,827 $ 267,707
Partners' equity:
The Company 41,043,637 41,689,843
Joint venture partner 44,071,195 41,716,309
Total partners' equity 85,114,832 83,406,152
Total liabilities and partners' equity $ 85,610,659 $ 83,673,859
</TABLE>
<TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues $2,982,265 $3,107,990 $6,386,534 $ 6,260,367
Property operating
expenses (1,556,636) (1,367,263) (3,149,976) (2,748,616)
Depreciation (964,604) (964,563) (1,922,887) (1,907,983)
Net income $ 461,025 $ 776,164 $1,313,671 $ 1,603,768
Allocation of net
income:
The Company $ 230,879 $ 388,628 $ 657,633 $ 802,878
Joint venture
partner 230,146 387,536 656,038 800,890
$ 461,025 $ 776,164 $1,313,671 $ 1,603,768
</TABLE>
5. Mortgage Loans and Other Loans Receivable
As of June 30, 1996, the Company held two mortgage loans with an
aggregate principal balance of approximately $11,412,000 and a
promissory note with a principal balance of approximately $2,320,000.
One of the mortgage loans is collateralized by a 212-unit apartment
complex in Miami, Florida and the other mortgage loan is collateralized
<PAGE>
by a 120-unit apartment complex in Palm Bay, Florida.
In May 1996, a mortgage loan receivable was paid off for $7,016,547
which was the principal balance as of the payoff date. The loan was
collaterized by a 185-unit apartment complex in Miami, Florida.
6. MBS
At June 30, 1996, the Company's MBS portfolio had an approximate market
value of $10,599,000 and gross unrealized gains of $565,000 with
maturity dates ranging from 2008 to 2021. Weighted average yield on the
portfolio is $9.1%.
At December 31, 1995, the Company's MBS portfolio had a market value of
$12,372,000 against a carrying value of $11,576,326 and gross unrealized
gains of $796,000. The Company does not expect to realize these gains
as it has the intention and ability to hold the MBS until maturity.
7. Debt Agreements
At June 30, 1996, the Company has two lines of credit to provide for
future acquisitions, development and general business obligations. The
Company also had in effect a Repurchase Agreement to provide for short-
term borrowings.
The following summarizes the Company's borrowings on the Master Credit
Facility with the Federal National Mortgage Association as of June 30,
1996:
<TABLE>
Contract Contract
Start End Interest
Date Date(a) Rate Amount
<S> <C> <C> <C> <C>
Credit Facility - Revolver 07/03/96 12/03/96 6.190% $ 7,225,000
Credit Facility - Revolver 06/03/96 09/03/96 6.530% 13,345,000
Credit Facility - Revolver 07/03/96 12/03/96 6.125% 19,400,000
Credit Facility - Revolver 06/03/96 09/03/96 5.7945% 8,140,000
Credit Facility - Fixed 11/22/95 11/20/05 6.997% 50,000,000
$98,110,000
</TABLE>
The following summarizes the Company's borrowings on the Credit
Agreement with the Bank of Boston and Mellon Bank as of June 30, 1996:
<TABLE>
Contract Contract
Start End Interest
Date Date(a) Rate Amount
<S> <C> <C> <C> <C>
Credit Agreement 06/26/96 08/26/96 7.25% $20,000,000
Credit Agreement 07/01/96 08/01/96(b)7.25% 17,000,000
$37,000,000
</TABLE>
The following summarizes the Company's borrowings on the
Repurchase Agreement with CS First Boston as of June 30, 1996:
<TABLE>
Contract Contract
Start End Interest
Date Date(a) Rate Amount
<S> <C> <C> <C> <C>
Repurchase 06/21/96 09/19/96 5.6% $9,700,000
<PAGE>
</TABLE>
(a) On the Contract End Date, borrowings outstanding under
revolvers are repriced at the then current interest rates.
(b) Subsequent to June 30, 1996, the Company renewed the balance at
an interest rate of 7.4375%.
The Credit Agreement and the Master Credit Facility require the Company
to maintain certain debt service coverage ratios, liquidity and
collateral coverages as further defined in the loan documents, all of
which were met on June 30,1996.
In 1995 the Company entered into a five-year interest rate swap contract
with a bank as counterparty. Under the swap arrangement, the Company
will pay 6.06% on a $40 million notional amount and will receive LIBOR
(based on 90 day contracts). The swap arrangement is intended to
protect the Company from significant interest rate exposure on its
anticipated revolving facilities. The current swap amount will cover
floating rate debt under revolvers in the near term. The Company will
continually reassess its rate exposure relative to debt levels and will
execute additional interest rate protection as circumstances dictate.
8. Stock Option Plan
On May 2, 1996, the shareholders approved the 1996 Stock Option Plan
which provides for grants to non-employed directors and discretionary
awards of stock options to key employees and consultants of the Company.
Awards will be administered by the Compensation Committee which is
comprised of two independent directors appointed by the Board of
Directors. The purpose of the plan is to stimulate efforts of key
employees and consultants on behalf of the Company and to attract and
retain the best available personnel for service as directors. There are
1,500,000 Shares of common stock authorized for non-qualified and
incentive stock option grants under the 1996 Plan. The plan will
continue in effect until all Shares of stock subject to options have
been acquired or until May 1, 2001, whichever is earlier. However,
unexercised options will continue in affect after the termination of the
plan.
The Company has adopted Financial Accounting Standard 123, Accounting
for Stock-Based Compensation . The Company will measure the
compensation cost of the plan by using the disclosure method of
accounting. Information regarding the Company s Stock Option Plan is
summarized below:
<TABLE>
1996 Stock Option Exercise
Plan Price
<S> <C> <C>
Options granted,
inception of Plan 835,000 $9.75 - $10.25
Options exercised -
Options canceled -
Options expired -
Balance June 30, 1996 835,000
Options available to grant at
June 30, 1996 665,000
</TABLE>
9. Impairment of Long-Lived Assets
<PAGE>
Effective 1996, the Company adopted Financial Accounting Standard 121,
"Accounting for the Impairment of Long-Lived Assets". The investments in
properties are carried at cost less accumulated depreciation unless the
Company believes there is an impairment in value, in which case a
provision to write down investments in properties to fair value will be
charged against income. At this time, the Company does not believe that
any assets of the Company are impaired.
10. Subsequent Events
On July 31, 1996, the Company acquired Hunters Glen Apartments for a
purchase price of $10,000,000. Hunter s Glen is a 276-unit residential
apartment community located in Plano, Texas. In conjunction with this
transaction, the Company assumed a $5.6 million mortgage at a 9%
interest rate which matures March 1, 2000.
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A. Overview:
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere
herein.
On February 28, 1996, the Board of Directors, acting on the
recommendation of a Special Committee comprised of the Independent
Directors, approved the acquisition via contribution of the advisory and
development services business ("Advisor Transaction") of The Berkshire
Companies Limited Partnership in exchange for 1,300,000 newly issued Units
of the Operating Partnership.
The contribution was completed on March 1, 1996. As of that date, all
charges and expenses associated with the Advisory Services Agreement ceased
and the Company became a "self-administered" REIT. The Company began
incurring general and administrative expenses for its acquired management
staff including salaries, benefits, and other overhead expenses. The
Company will outsource with affiliated companies of certain directors and
officers for certain administrative services such as shareholder relations,
computer systems and support, and human resources. Property management
services will continue to be performed by Berkshire Property Management, an
affiliated company of certain directors and officers.
In conjunction with the Advisor Transaction, additional Units, up to a
total $7.2 million in value, may be issued to the contributor during a six-
year period if certain Share price benchmarks are achieved. (See Notes to
Consolidated financial statements for details.)
The Advisor Transaction was accounted for under the purchase method.
The value of the transaction was based on 1,300,000 units at a share price
<PAGE>
of $10, or $13,000,000 which is being recorded as goodwill and being
amortized on a straight-line method over a 10-year period. Also, legal
fees and professional services expenses associated with the Advisor
Transaction will be amortized over the same 10-year period.
B. Results of Operations:
The results of operations from period to period are impacted by
acquisition and disposition activity within the portfolio. Comparisons
will be made with respect to the overall portfolio and constant properties.
The following analysis compares the results of operations for the six and
three months ended June 30, 1996 and 1995.
Net income decreased by $8.8 million for the six month period primarily
as a result of a $9.3 gain on the sale of six multi-family properties or
1,345 apartment units and the payoff of two mortgage loans receivable in
1995. Net income decreased by $3.2 million for the quarter ended June 30,
1996 as a result of a $4.1 million gain on the sale of three multi-family
properties or 809 units in the second quarter of 1995.
Rental income increased $6.2 million or 18%. Overall, the increase is
partially the result of higher weighted average apartment units owned in
1996. The weighted average number of units increased by 1,043, from 8,824
units in 1995 to 9,867 in 1996. Also, growth in revenues from same-store
apartment communities increased approximately 8% year-to-date when compared
to 1995. Rent growth accounted for 4.6% of the increase and higher
occupancies accounted for the remainder.
For the second quarter, rental revenues increased $4.2 million or 25%
for the same reasons discussed in the year-to-date comparison. The
weighted average number of units increased by 1,477 in 1996 along with
growth in revenues from same-store apartment communities increasing
approximately 8% when compared to the second quarter of 1995.
Property operating expenses increased $787,119 for the six month period.
Overall, the increase was the result of higher weighted average units in
1996. Also, in 1995, the Company recognized one-time savings in insurance
and general and administrative expenses which lowered 1995 expenses.
Repairs and maintenance increased $403,721 and $617,021 for the three
and six months ended June 30, 1996 due to higher weighted average apartment
units.
Real estate taxes increased $625,727 due to higher weighted average
apartment units owned in 1996.
Asset management fees were eliminated effective March 1, 1996 in
conjunction with the Advisor Transaction. On that date, the Company
assumed the Agreement, thereby eliminating all Advisory fees (see
Overview).
Depreciation and amortization increased 29% and 39% for the six month
and three month periods, respectively, due to a higher property asset base
in 1996.
General and administrative expenses increased for both the three and six
months ended June 30, 1996 compared to the same periods in 1995 as a result
of becoming self-administered on March 1, 1996. These costs include
employee salaries along with various administrative and office related
expenses.
<PAGE>
Corporate taxes increased in 1996 due to a one-time reduction in 1995
for taxes pertaining to 1994. Corporate taxes are expected to remain
stable for 1996.
Interest expense increased $1.3 million and $1 million for the six month
and three month period, respectively due to higher average borrowings under
the Credit Agreements and permanent financings. The following table
summarizes the weighted average debt and interest expense for the three and
six months ended June 30, 1996 and 1995:
<TABLE>
Six Months ended Three Months ended
June 30, June 30,
1996 1995 1996 1995
(Dollars in thousands)
<S> <C> <C> <C> <C>
Weighted average debt outstanding:
Fixed Rate $164,326 $86,665 $175,242 $85,129
Variable rate $ 62,280 $94,703 $ 68,469 $98,711
Weighted average interest rates:
Fixed rate 7.55% 8.17% 7.42% 8.07%
Variable rate 6.76% 7.70% 6.66% 7.29%
</TABLE>
Gain on sales of properties and payoff of mortgage loans decreased for
the six month period in 1996 due to a $9.3 million gain on the sales of six
apartment complexes consisting of 1,345 units in 1995. The remainder of
the gain in 1995 was the result of the payoff of two mortgages that the
Company had previously purchased at a discount.
For the second quarter, gains on sales of properties and payoff of
mortgage loans decreased $4.1 million due to the sale of three multi-family
properties or 809 units in the second quarter of 1995.
C. Funds from Operations:
Industry analysts generally consider Funds from Operations (FFO) to be
an appropriate measure of the performance of an equity REIT. The Company
believes that in order to facilitate a clear understanding of the operating
results of the Company, FFO should be analyzed in conjunction with the net
income as presented in the consolidated financial statements included
elsewhere in this report. FFO is determined in accordance with a
resolution adopted by the Board of Governors of the National Association of
Real Estate Investment Trusts, Inc. (NAREIT), and is defined as net income
(loss) (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales
of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. FFO is calculated for the
periods presented as follows (dollars in thousands):
<TABLE>
Six Months Ended June 30, 1996 compared to Six Months Ended June 30, 1995
Six Months ended June 30,
1996 1995
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ (276) $ 8,610
Depreciation (including depreciation
related to joint ventures and
minority interest) 13,023 11,352
Amortization of goodwill 448 -
Gains of sale of investments and
payoff of mortgage loans receivable - (9,337)
<PAGE>
Non-recurring charges 1,728
Costs Associated with the refinance of
debt 253
Funds from operations $ 13,195 $ 12,606
Weighted average shares outstanding 25,392,957 25,392,380
For the six months ended June 30, 1996 FFO was $13,195,000 or $0.52 per
share, versus $12,606,000 or $.50 per share for the six months ended June 30,
1995.
</TABLE>
Same-store Multi-family Communities
<TABLE>
Six Months Ended June 30,
<S> <C> <C> <C>
Change 1996 1995 %
Revenues $25,065 $23,198 8.05%
Expenses 12,040 11,364 5.95%
Net operating income $13,025 $11,834 10.06%
Average occupancy 94.1% 91.3%
Average monthly rent
Per unit $ 633 $ 605
</TABLE>
FFO for the same-store communities increased approximately 10% in the
first six months of 1996 compared to 1995. Growth in same-store multi-
family revenues was approximately 8% year-to-date when compared to the
prior year period. Rent growth accounted for 4.6% of the increase and
higher occupancies contributed to the remainder. Occupancy at June 30,
1996 was 96%.
Expenses grew 6% year-to-date when compared to the prior year. In 1995,
the Company recorded one-time expense savings in insurance and general and
administrative expenses. Adjusting for these non-recurring savings,
expenses year-to-date have increased only 4.7% from the prior year.
Same-store Retail Properties
<TABLE>
Six Months Ended June 30,
1996 1995 %Change
<S> <C> <C> <C>
Revenues $7,118 $6,965 2.20%
Expenses (1) 2,587 2,323 11.37%
Net operating income $4,531 $4,642 (2.39)%
Average occupancy 94.7% 95.6%
</TABLE>
FFO for same-store retail decreased approximately 2% in the first six
months of 1996 compared to 1995. Same-store retail revenues grew slightly
in the six months ended June 30, 1996 when compared to the same period in
1995. Average occupancies have decreased in both periods as a result of
tenant losses in three retail assets and the closing of 10,000 square feet
of commercial office space at another property. The former office space
will be replaced with additional retail space that is currently in lease-
up.
Expenses are up as a result of increased real estate taxes and
inordinate snow removal expenses. Most of these expenses will be billed
back to tenants and are accrued in revenues. However, these accruals are
somewhat offset by the occupancy losses. Occupancy at June 30, 1996 was
93.8%.
<PAGE>
D. Acquisitions and Development:
In 1996, the Company completed the acquisition of six multi-family
communities for a total of 2,541 units. The first acquisition, The Point
Apartments, is a 1,119 unit high-rise property in Silver Springs, Maryland.
The property was contributed by a related party for $52.3 million. The
Company assumed $35.5 million in 30-year fixed financing at 7.58% and
issued non-voting Operating Partnership (OP) Units in exchange for the
asset. First year stabilized yield after an additional $11 million in
rehabilitation costs is expected to be 9.5%.
The second acquisition include five multi-family communities in Dallas
and Fort Worth, Texas. One asset (318 units) was purchased with cash from
an unrelated seller for $8.7 million and is expected to generate a 10.1%
yield upon stabilization. The four remaining assets (1,104 units) were
purchased as a package from another unrelated seller for $28.7 million
which was acquired with the assumption of $5.8 million in debt, $4.1
million in Operating Partnership Units and the remainder in cash. An
additional asset (336 units) in the package will be closed later this year
at a price of $10.25 million with the assumption of $6.4 million in bond
financing, the issuance of $1.3 million in OP units and cash. The
stabilized unleveraged yield on this package is expected to be 10%.
During the second quarter, the Company stabilized its development
properties in Raleigh, North Carolina (272 units) and Atlanta, Georgia (112
units). The properties are yielding 10.6% on development costs and are 94%
occupied with average rents of $743 per unit. An additional 168 units will
be completed this year for a cost of $11.3 million which are additional
phases to two existing properties. The Company is expecting to begin at
least one additional new development this year.
E. Liquidity and Capital Resources:
Historically, operations, debt financing and sales of assets have been
the sources of capital employed by the Company. Operating cash flows are
earmarked for the payment of dividends as well as capital expenditures of a
recurring nature. Debt financing and proceeds from asset sales has been
used to finance acquisitions, development, and rehabilitation of apartment
communities.
E. Liquidity and Capital Resources: - Continued
The Company's policy is to pay dividends to investors as a percentage of
Funds from Operations ("FFO"). For the past three years, the Company has
paid between 85% and 88% of FFO in dividends, retaining the rest for
recurring capital expenditures and working capital. The Company expects to
increase both FFO and dividends in the future but will strive to gradually
reduce the payout ratio so as to utilize some internally generated funds
for growth. On August 1, 1996 the Board approved a dividend of $.225 per
share payable on November 15, 1996 to the shareholders of record on
November 1, 1996. Dividends paid were $.225 in the second quarters of 1995
and 1996.
The Company has a policy to maintain leverage at or below 50% of
reasonably estimated fair value of assets. By employing moderate leverage
ratios, the Company can continue to generate sufficient cash flows to
operate its business as well as sustain dividends to shareholders. Debt as
a percentage of fair value of real estate assets as estimated by management
was approximately 43% at June 30, 1996. Additionally, the Company s debt
service coverage is 2.5 to 1.
<PAGE>
In 1995 the Company successfully completed the restructuring of its
balance sheet from mostly variable short-term debt to fixed rate long-term
debt and has taken advantage of very favorable interest rates over the
past two years. With regard to the variable rate debt, the Company entered
into a five year fixed interest rate swap agreement in 1995 with a bank for
a $40 million notional contract, thereby fixing variable rate exposure on
that amount at 6.06%. The swap arrangement is intended to protect the
Company from significant interest rate exposure on its anticipated
borrowing levels under revolvers in the near term. The Company will
continually reassess its rate exposure relative to debt levels and will
execute additional interest rate protection as circumstances dictate.
The Company conservatively manages both interest rate risk and maturity
risk. Through the use of the swap, the Company has hedged interest rate
risk on approximately 42% of its variable rate debt as of June 30, 1996 and
has 19% of total indebtedness as unhedged variable rate debt.
The Company has adequate sources of liquidity to meet its current cash
flow requirements including dividends, capital improvements as well as
planned acquisitions.
F. Business Conditions/Risks:
The Company believes that favorable economic conditions exist in
substantially all of its real estate markets. For the Company's stabilized
apartment communities, physical occupancy was 96% as of June 30, 1996 which
is at or above current market occupancies. In addition, the Company
continues to maintain competitive rental rates. The Company's management
team achieves this by superior service combined with well-maintained assets
which sets the Company apart from its competition. Through this management
effort, the Company expects to realize solid performances from the real
estate assets and to continue its favorable rental conditions, however, no
assurances can be made in this regard.
The Company's real estate investments are subject to some seasonal
fluctuations resulting from changes in utility consumption and seasonal
maintenance expenditures. Future performance of the Company may be
impacted by unpredictable factors which include general and local economic
and real estate market conditions, variable interest rates, environmental
concerns, energy costs, government regulations and federal and state income
tax laws. The requirements for compliance with federal, state and local
regulations to date have not had an adverse effect on the Company's
operations, and no adverse effects are anticipated in the future.
The Company is also involved in other legal actions and claims in the
ordinary course of its business. It is the opinion of management and its
legal counsel, that such litigation and claims should be resolved without
material effect on the Company's financial position.
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Change in Securities
Response: None
<PAGE>
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Response: None
(b) Reports on Form 8-K
Date Event Reported Financial
Statements
May 29, 1996 Property Acquisition None
July 29, 1996 Property Acquisition Yes
SIGNATURE
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.
Berkshire Realty Company, Inc.
(Registrant)
BY: /s/Marianne Pritchard
Marianne Pritchard, Senior
Vice President and Chief
Financial Officer of
Berkshire Realty Company,
Inc.
<PAGE>
DATE: August 14, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,311,219
<SECURITIES> 22,823,582<F1>
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 76,997,750<F2>
<PP&E> 572,085,037
<DEPRECIATION> (90,608,369)
<TOTAL-ASSETS> 590,609,219
<CURRENT-LIABILITIES> 341,523,328<F3>
<BONDS> 0
0
0
<COMMON> 249,085,891<F4>
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 590,609,219
<SALES> 0
<TOTAL-REVENUES> 43,247,486
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,626,263<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,917,447
<INCOME-PRETAX> (296,224)
<INCOME-TAX> 0
<INCOME-CONTINUING> (296,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 19,946<F6>
<CHANGES> 0
<NET-INCOME> (276,278)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES MORTGAGE LOANS AND OTHER LAONS OF $12,790,158 AND MORTGAGE-BAKCED
SECURITIES ("MBS") OF $10,033,424.
<F2>INCLUDES INVESTMENTS IN UNCOLSOLIDATED JOINT VENTRUES OF $41,043,637 AND
GOODWILL OF $12,999,423 AND OTHER ASSETS AND ESCROWS OF $22,954,690.
<F3>INCLUDES MORTGAGE NOTES PAYABLE OF $145,953,603 AND CREDIT AGREEMENTS OF
$135,110,000.
<F4>INCLUDES COMMON STOCK AT PAR OF $258,995 PLUS ADDITIONAL PAID-IN CAPITAL LESS
COMMON STOCK IN TREASURY OF $1,743,075 LESS RETAINED EARINGS/DEFICIT OF
276,278.
<F5>INCLUDES DEPRECIATION OF $13,434,041.
<F6>REPRESENTS MINORITY INTEREST.
</FN>
</TABLE>
