UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
------------------------------------------------
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
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Berkshire Realty Company, Inc.
- --------------------------------------------------------------------------------
Delaware 04-3086485
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(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
470 Atlantic Avenue, Boston, Massachusetts 02210
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(Address of principal executive offices) (Zip Code)
(617) 423-2233
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(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
--- ---
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- ------
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-----------
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Real estate assets: (Note 3)
Multifamily apartment complexes, net of
accumulated depreciation $437,820,961 $430,936,889
Retail centers, net of accumulated depreciation 11,064,630 11,064,630
Investments in unconsolidated joint ventures
(Note 4) 37,136,167 36,036,723
Mortgage loans and other loans receivable,
net of purchase discounts (Note 5) 3,852,005 4,094,241
Land and construction-in-progress 2,977,806 4,035,820
Land held for future development 5,682,472 2,331,988
Property held for sale, net of valuation
reserve (Note 3) 16,761,936 30,556,482
------------ ------------
Total real estate assets 515,295,977 519,056,773
Cash and cash equivalents 5,625,006 7,015,953
Mortgage-backed securities, net ("MBS") (Note 6) 8,814,494 9,232,956
Escrows 9,849,489 11,096,213
Deferred charges and other assets 11,671,749 10,940,879
Acquisition of workforce and intangible
assets, net of amortization (Note 2) 31,057,341 12,327,039
------------ ------------
Total assets $582,314,056 $569,669,813
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Credit agreements (Note 7) $120,310,000 $136,060,000
Mortgage notes payable (Note 3) 160,652,123 149,805,607
Repurchase agreements (Note 7) 8,800,000 9,300,000
Tenant security deposits and prepaid rents 3,169,905 2,443,716
Accrued real estate taxes, other
liabilities and accounts payable 8,187,162 11,797,967
------------ ------------
Total liabilities 301,119,190 309,407,290
------------ ------------
Minority interest in operating partnership (Note 8) 59,338,860 36,608,607
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 25,986,966
and 25,899,866 Shares issued, respectively 259,869 258,998
Additional paid-in capital 234,739,218 239,446,270
Retained deficit (10,404,173) (14,308,277)
Loan receivable - officer (Note 10) (995,833) -
Less common stock in treasury at cost
(506,497 Shares) (1,743,075) (1,743,075)
------------ ------------
Total shareholders' equity 221,856,006 223,653,916
------------ ------------
Total liabilities and shareholders' equity $582,314,056 $569,669,813
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------------
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Rental $24,555,019 $19,365,109
Interest from mortgage loans (Note 5) 41,153 584,797
Interest income from MBS 207,138 261,536
Management fees and reimbursements 333,466 -
Other interest income 265,792 217,759
----------- -----------
Total revenue 25,402,568 20,429,201
----------- -----------
Expenses:
Property operating 6,026,513 4,368,024
Repairs and maintenance 1,644,522 1,339,042
Real estate taxes 2,345,772 2,233,186
Property management fees to an
affiliate (Note 9) 768,860 890,354
Property management operations (Note 2) 663,837 326,053
General and administrative (Note 9) 1,072,402 527,903
State and corporate franchise taxes 84,501 81,000
Professional fees 46,400 44,442
Interest (Note 7) 5,834,396 4,194,846
Costs associated with advisor
transaction (Note 8) 1,200,000 -
Amortization of acquired workforce
and intangible assets (Note 2) 548,162 111,290
Depreciation and amortization 7,668,931 6,146,019
Asset management fees to an
affiliate (Note 2) - 392,636
----------- -----------
Total expenses 27,904,296 20,654,795
----------- -----------
Loss from operations (2,501,728) (225,594)
Minority interest 282,832 8,458
Joint venture net income (loss),
net of minority interest (294,783) 410,921
----------- -----------
Income (loss) before gains on sales (2,513,679) 193,785
Gains on sales of properties, net
of minority interest 5,408,702 -
----------- -----------
Net income $ 2,895,023 $ 193,785
=========== ===========
Per share:
Net income $ .11 $ .01
=========== ===========
Weighted average Shares 25,420,444 25,392,952
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
-3-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1997
-----------
<TABLE>
<CAPTION>
Additional Loan Treasury
Paid-in Retained Receivable- Stock
Common Stock at Par Capital Deficit Stockholder at Cost Total
------------------------- ------------ ------------- ----------- ------------ -------------
No. of Shares Amount
------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996 25,393,369 $258,998 $239,446,270 $(14,308,277) - $(1,743,075) $223,653,916
Net income 3,904,104 - 3,904,104
Stock option
grants
(Note 10) - 5,646 - - - 5,646
Issuance of
stock
(Note 10) 86,956 870 999,130 - - - 1,000,000
Stock purchase
loan-net
(Note 10) - - - (995,833) - (995,833)
Proceeds from
the exercise of
stock warrants 144 1 1,697 - - - 1,698
Dividends - (5,713,525) - - - (5,713,525)
---------- ------- ------------ ------------ --------- ----------- ------------
Balance,
March 31, 1997 25,480,469 $259,869 $234,739,218 $(10,404,173) $(995,833) $(1,743,075) $221,856,006
========== ======== ============ ============ ========= =========== ============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
-4-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------------
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net income $ 2,895,023 $ 193,785
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,668,931 6,146,019
Amortization of intangible assets and costs
related to workforce acquired 1,748,162 111,290
Joint venture net income (loss) 294,783 (410,921)
Distributions received from joint ventures - 390,440
Gains on sales of properties (5,408,702) -
Non-employee stock option plan 5,646 -
Stock purchase loan forgiveness 4,167 -
Discount amortization (37,512) (191,143)
Minority interest in operating partnership (282,832) (8,458)
Amortization of deferred financing costs 336,366 176,728
Decrease (increase) in operating escrows
and other assets 328,490 (351,643)
Decrease in accrued real estate taxes,
insurance and other liabilities (3,610,805) (144,133)
Increase in tenant security deposits,
prepaid rents and escrows held 726,189 11,226
----------- -----------
Net cash provided by operating activities 4,667,906 5,923,190
----------- -----------
Investing activities:
Cost to acquire properties (1,092,704) -
Proceeds from sale of properties 26,644,405 -
Recurring capital expenditures (886,948) (645,186)
Rehabilitation and non-recurring
capital expenditures (1,821,668) (1,760,533)
Land acquisition and construction in progress (4,254,775) (1,624,019)
Distributions received from joint ventures
in excess of earnings 700,000 -
Contributions to joint venture (2,150,000) -
Principal collections on MBS 422,932 634,007
Principal collections on mortgage loans 275,278 65,471
Cost to acquire workforce and other
intangible assets (440,964) (354,847)
----------- -----------
Net cash (used for) provided by
investing activities 17,395,556 (3,685,107)
----------- -----------
Financing activities:
Repayment on credit agreements (15,750,000) -
Payment on repurchase agreement (500,000) -
Payment of financing costs (153,726) (207,156)
Principal payments on mortgage notes payable (513,911) (253,686)
Proceeds from the exercise of stock warrants 1,698 968
Dividends (5,713,525) (5,713,431)
Distributions to minority interest (824,945) (120,370)
----------- -----------
Net cash used for financing activities (23,454,409) (6,293,675)
----------- -----------
Net decrease in cash and cash equivalents (1,390,947) (4,055,592)
Cash and cash equivalents, beginning of period 7,015,953 11,142,710
----------- -----------
Cash and cash equivalents, end of period $ 5,625,006 $ 7,087,118
=========== ===========
</TABLE>
Continued
-5-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-----------
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Supplemental cash flow disclosure:
Cash paid for interest during period $ 6,367,925 $ 3,909,886
=========== ===========
Interest capitalized during period $ 145,406 $ 56,694
=========== ===========
Supplemental disclosure of non-cash financing
and investing activities:
Property contributed by minority
interest $16,058,716 $ -
Cash to minority contributor (856,243) -
Debt assumed from minority
contributor (11,360,427) -
----------- -----------
Increase in minority interest $ 3,842,046 $ -
=========== ===========
Units issued related to workforce and
other intangible assets Note 2) $18,837,500 $13,000,000
=========== ===========
Reclassification of construction in progress
to multifamily apartment complexes $ 1,962,305 $ -
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
-6-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------
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, 1996
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 March 31, 1997 and the results of its operations for the three months
ended March 31, 1997 and 1996 and cash flows for the three months ended
March 31, 1997 and 1996.
The results of operations for the three months ended March 31, 1997 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. Property Manager Transaction
----------------------------
On February 26, 1997, the Board of Directors, acting on the recommendation
of a special committee comprised solely of outside directors, approved the
acquisition of the workforce and other assets of the affiliate which
provides multifamily property management services to the Company
("Property Manager"). The Property Manager was contributed on February 28,
1997 in exchange for 1.7 million units of the Operating Partnership
("Units").
The Property Manager manages 57 apartment communities, including the
Company's 35 assets, and employs approximately 85 professionals, excluding
site employees. As a result of this transaction, the Company will no
longer pay management fees and reimbursements for the management
operations of its multifamily portfolio. In addition, the Company will
receive management fees and reimbursements of certain expenses associated
with 22 third-party management contracts primarily with partnerships
affiliated with certain directors and officers of the Company. The Company
will continue to engage an affiliated company to manage its retail assets.
The Board's actions were initiated to maximize shareholder value and to
align the organization of the Company to be consistent with the structure
preferred by institutional investors, rating agencies and market analysts.
The Special Committee retained the services of an investment banking firm
and an independent law firm to identify and evaluate the options available
to the Company to achieve its goal of being self-managed. The process
included, among other things, a review of the existing contractual
arrangements with BCLP, identification of the employees, office space,
computer systems and software, policies and procedures and other business
documentation required.
Continued
-7-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------
2. Property Manager Transaction - Continued
----------------------------
The Board concluded that the most beneficial method of achieving the
strategic objective was to seek the acquisition of BCLP's significant
third-party management contracts, workforce and related assets. The
decision was predicated on the determination that the acquisition (rather
than the assembling of a similar workforce and organization) would provide
the best results to the Company in terms of immediate efficiency of
operations and improved cash flows.
In establishing the consideration to be paid, the Board reviewed
comparable transactions and, after deliberation, the Board approved the
acquisition of the assets of the Property Manager in exchange for 1.7
million Units or a value of $17.6 million.
The value of the assets acquired was determined by evaluating the future
cash flows attributable to the third-party management contracts as well as
the immediate operating efficiencies obtained through the acquisition of a
cohesive assembled workforce. Accordingly, the value of the transaction
was allocated to intangible assets associated with third-party management
contracts and the workforce acquired. The Company recorded intangible
assets of $4.4 million based on discounted cash flows from third-party
property management contracts which is being amortized on a straight-line
method over four years. The value of intangible assets associated with the
workforce acquired, $13.2 million, is being amortized on a straight-line
method over a 10-year period.
3. Multifamily and Retail Property
-------------------------------
As of March 31, 1997, the Company had investments in 40 properties in 9
states consisting of 35 apartment communities having 12,528 units and 5
retail centers with a total of 928,034 square feet of leasable space. Two
retail centers (397,705 square feet) are owned through joint venture
investments.
The following summarizes the carrying value of the Company's multifamily
apartment complexes and retail centers, (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Land $ 76,523 $ 76,525
Buildings and improvements 408,969 419,932
Appliances, carpeting and equipment 84,682 82,971
-------- --------
Total multifamily and retail property 570,174 579,428
Accumulated depreciation (104,527) (106,870)
-------- --------
$465,647 $472,558
======== ========
</TABLE>
Acquisitions
------------
On January 1, 1997, the Operating Partnership acquired Westchester
Apartments, a 345-unit apartment community located in Silver Spring,
Maryland, for $16.1 million. The Operating Partnership paid cash of
$856,243, assumed debt of $11.4 million and issued 388,333 Operating
Partnership Units, 50,000 of which will be issued January 1998. The debt
agreement requires monthly principal and interest payments based on an
interest rate of 8.25% along with monthly funding of real estate tax
escrows.
Continued
-8-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------
3. Multifamily and Retail Property - Continued
-------------------------------
Development
-----------
In the first quarter of 1997, the Company completed the construction of
96-units as an additional phase to Brookfield Trace, an existing community
in Mauldin (Greenville), South Carolina. The phase cost approximately $6.7
million. In 1996, $4.7 million or 72 apartment units was transferred to
multifamily assets on the Consolidated Balance Sheets.
In the fourth quarter of 1996, the Company began construction of Crooked
Creek Apartments, a 296-unit apartment community in Durham, North
Carolina. The project is currently estimated to cost approximately $20.2
million. As of March 31, 1997, the project has incurred $3 million of
construction costs.
In the first quarter of 1997, the Company purchased a parcel of land in
Greenville, South Carolina for $3,030,000. Development plans are currently
under consideration for this site.
The Company also owns two other parcels of land, one of which is located
in Dallas, Texas and the other is located in Greenville, South Carolina.
Development plans are under consideration for these two sites.
Dispositions
------------
On January 15, 1997, the Company sold Howell Commons Apartments, a 348-
unit apartment community located in Greenville, South Carolina for
$13,000,000. The property had a depreciated cost basis of $6,408,033 and
resulted in a gain on sale of $6,432,040. The net proceeds, after the
repayment of indebtedness, was used to paydown short term borrowings and
will ultimately be used for the development of Crooked Creek.
On March 25, 1997, the Company sold Banks Crossing, a 243,660 square feet
retail center in Fayetteville, Georgia for $13,825,000 which was its
carrying value. Proceeds from this sale will be used for the development
of Crooked Creek. The sale of Banks Crossing is consistent with the
Company's plan to sell its retail properties and focus on multifamily
properties.
Continued
-9-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------
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 financial
statements for the Brookwood Village Joint Venture are as follows:
BROOKWOOD VILLAGE JOINT VENTURE
CONDENSED BALANCE SHEET
-----------------------
<TABLE>
<CAPTION>
Assets
March 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
Property at cost $ 60,534,867 $ 60,530,293
Less accumulated depreciation (28,162,866) (26,190,273)
------------ ------------
32,372,001 34,340,020
Other assets 1,172,839 590,927
------------ ------------
Total assets $ 33,544,840 $ 34,930,947
============ ============
Liabilities and Partners' Equity
Liabilities $ 493,110 $ 4,705,144
------------ ------------
Partners' equity:
The Company 16,525,869 15,112,903
Joint venture partner 16,525,861 15,112,900
------------ ------------
Total partners' equity 33,051,730 30,225,803
------------ ------------
Total liabilities and partners' equity $ 33,544,840 $ 34,930,947
============ ============
</TABLE>
BROOKWOOD VILLAGE JOINT VENTURE
CONDENSED STATEMENT OF OPERATIONS
---------------------------------
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------
1997 1996
----------- -------------
<S> <C> <C>
Revenues $ 1,583,382 $ 1,566,287
Property operating expenses (686,859) (652,606)
Depreciation (492,136) (492,868)
Provision for loss (1,480,456) -
----------- -------------
Net income $(1,076,069) $ 420,813
=========== =============
Allocation of net income:
The Company $ (538,034) $ 210,406
Joint venture partner (538,035) 210,407
----------- -------------
$(1,076,069) $ 420,813
=========== =============
</TABLE>
In May 1997, the Company and its joint venture partner exchanged Brookwood
Village for cash and two multifamily apartment complexes totaling
$32,372,220. Each Joint Venture Partner will receive 50% of the fair value
of the assets acquired, with the Company receiving the two multifamily
properties and cash of approximately $8 million. In the first quarter of
1997, Brookwood Village recorded a $1.5 million provision for loss to
adjust for the exchange price.
Continued
-10-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------
5. Mortgage Loans and Other Loans Receivable
-----------------------------------------
As of March 31, 1997, the Company held one mortgage loan with an aggregate
principal balance of approximately $2,998,000 and a promissory note with a
principal balance of approximately $1,569,000. The mortgage loan is
collateralized by a 120-unit apartment complex in Palm Bay, Florida.
6. MBS
---
At March 31, 1997, the Company's MBS portfolio had an approximate market
value of $9,330,000 and gross unrealized gains of $516,000 with maturity
dates ranging from 2008 to 2021. Weighted average yield on the portfolio
is 9.1%. The Company does not expect to realize these gains as it has the
intention and ability to hold the MBS until maturity.
At December 31, 1996, the Company's MBS portfolio had an approximate
market value of $9,849,000 against a carrying value of $9,233,000 and
gross unrealized gains of $616,000.
7. Debt Agreements
---------------
At March 31, 1997, the Company had 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 March 31,
1997:
<TABLE>
<CAPTION>
Contract Contract
Start End Interest
Borrowings Date Date(a) Rate Amount
---------- -------- -------- -------- -----------
<S> <C> <C> <C> <C>
Revolver 3/03/97 6/02/97 6.037% $28,965,000
Fixed 11/22/95 9/20/03 6.997% 50,000,000
Fixed 9/20/96 11/20/05 7.540% 13,345,000
-----------
$92,310,000
===========
</TABLE>
The following summarizes the Company's borrowings on the Credit Agreement
with the Bank of Boston and Mellon Bank as of March 31, 1997:
<TABLE>
<CAPTION>
Contract Contract
Start End Interest
Borrowings Date Date(a) Rate Amount
---------- -------- -------- -------- -----------
<S> <C> <C> <C> <C>
LIBOR contract 3/03/97 4/02/97 (1) 7.1875% $ 3,000,000
LIBOR contract 1/28/97 4/28/97 (2) 7.3125% 10,000,000
LIBOR contract 3/26/97 6/24/97 7.4883% 6,000,000
LIBOR contract 3/31/97 7/29/97 7.500% 9,000,000
-----------
$28,000,000
===========
</TABLE>
(1) On April 2, 1997, the Company repriced the LIBOR contract to a new
maturity of July 1, 1997 at a rate of 7.5625% per annum.
(2) On April 28, 1997, the Company paid down $3,000,000 of the
outstanding LIBOR contract and repriced the remaining principal to
a maturity of May 28, 1997 at a rate of 7.4375% per annum.
Continued
-11-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------
7. Debt Agreements - Continued
---------------
The following summarizes the Company's borrowings on the Repurchase
Agreement with CS First Boston as of March 31, 1997:
<TABLE>
<CAPTION>
Contract Contract
Start End Interest
Date Date(a) Rate Amount
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Repurchase Agreement 1/17/97 5/19/97 5.60% $8,800,000
</TABLE>
(a) On the Contract End Date, borrowings outstanding are repriced at
the then current interest rates.
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 March 31, 1997.
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. Minority Interest
-----------------
Minority interest in the Operating Partnership consists of the following
at March 31, 1997 (in thousands):
Balance, beginning of year $36,609
Value of Units issued to
Minority Unitholders:
Affiliated parties 18,837
Unrelated parties 3,842
Distribution to Unitholders (825)
Minority income (loss allocation) 876
--------
Balance at March 31, 1997 $59,339
=======
On January 1, 1997, 338,333 Operating Partnership Units were issued to an
unrelated party in exchange for Westchester Apartments (See Note 3).
On January 2, 1997, 443,500 Operating Partnership Units were issued to an
affiliated party in conjunction with the acquisition of the Berkshire
Towers (formerly The Point Apartments) on May 14, 1996. These Units were
recorded on the Consolidated Balance Sheet in 1996 by calculating the
present value of the deferred Units.
On March 19, 1997, 109,091 additional Operating Partnership Units were
issued in conjunction with the March 1, 1996 acquisition of the workforce
and other assets of the Company's Advisor ("Advisor Transaction"). The
total value of the additional Units, $1.2 million, has been expensed as a
cost associated with the Advisor Transaction.
Continued
-12-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------
8. Minority Interest - Continued
-----------------
The Units were issued since the share price ("Share") benchmark of $11.00
was 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 in increments of $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 and will be expensed as
a cost associated with the Advisor Transaction.
9. Related Party Transactions
--------------------------
The following is a summary of fees and reimbursements to an affiliate for
the three months ended March 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Costs reimbursements related
to the operation of the
Company's properties $164,308 $402,535
Fees and reimbursements for
administrative services-net $296,191 $ 64,776
</TABLE>
As a result of the Property Manager transaction as described in Note 2,
the Company will no longer reimburse an affiliate for services related to
multifamily property operations.
10. Stock Plans
-----------
Stock Options
-------------
On May 2, 1996, the shareholders approved the 1996 Stock Option Plan which
provides for grants to non-employee directors and discretionary awards of
stock options to key employees 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 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 No. 123, "Accounting
for Stock-Based Compensation". The Company will measure the compensation
cost of the plan by using the intrinsic value based method prescribed by
APB Opinion No. 25 and will make pro forma disclosures regarding the fair
value based method of accounting. Information regarding the Company's
Stock Option Plan for 1996 and 1997 is summarized below:
<TABLE>
<CAPTION>
Exercise Price
--------------
<S> <C> <C>
Options granted, 1996 624,000 $9.75 - $10.25
Options granted, 1997 355,000 $11.00
-------
Balance March 31, 1997 979,000
=======
Options exercised -
=======
Options available for grant
at March 31, 1997 521,000
=======
</TABLE>
-13-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------
10. Stock Plans - Continued
-----------
Stock Purchase Loan
-------------------
On February 28, 1997, the Board of Directors approved a $1 million Stock
Purchase Loan for David Marshall, President and Chief Executive Officer of
the Company. Loan proceeds are to be used to purchase Shares of the
Company's stock. On March 4, 1997, Mr. Marshall purchased 86,956 Shares of
common stock at $11.50 per Share using such proceeds.
The terms of the loan provide for, among other things, an interest rate of
7.8% per year payable quarterly and an annual forgiveness feature of 5% of
the original principal so long as Mr. Marshall is employed. Additional
annual forgiveness of up to another 5% could be forgiven if certain
Company performance measures are met. The maximum forgiveness in any one
year is 10%. If Mr. Marshall terminates his employment, the loan is due
and payable six months from the date of termination. However, in the event
of change of control of the Company, any then outstanding principal and
interest due shall be forgiven.
-14-
<PAGE>
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 26, 1997, the Board of Directors, acting on the recommendation
of a special committee comprised solely of outside directors, approved the
acquisition of the third-party management contracts, workforce and other assets
of an affiliate which provides multifamily property management services to the
Company ("Property Manager"). The Property Manager was contributed on February
28, 1997 in exchange for 1.7 million Operating Partnership Units.
The Property Manager manages 57 apartment communities, including the
Company's 35 assets, and employs approximately 85 professionals, excluding site
employees. As a result of this transaction, the Company will no longer pay
management fees and reimbursements for the management operations of its
multifamily portfolio. In addition, the Company will receive management fees and
reimbursements of certain expenses associated with 22 third-party management
contracts primarily with partnerships affiliated with certain directors and
officers of the Company. The Company will continue to engage an affiliated
company to manage its retail assets.
The acquisition is recorded on the Consolidated Balance Sheet as intangible
assets related to the third-party contracts of $4.4 million and intangible
assets associated with the workforce acquired of $13.2 million. These recorded
amounts will be amortized over the expected periods to be benefitted (See Note 2
to the Consolidated Financial Statements for details).
As reported in the Company's Annual Report on Form 10-K as of December 31,
1996, the Company acquired the workforce and other assets of the Advisor on
March 1, 1996 in exchange for 1.3 million Units in the Operating Partnership.
Additional Units, in $1.2 million increments and up to a total of $7.2 million
in value, may be issued during a six-year period if certain Share price
benchmarks are achieved. On March 19, 1997, the first Share price benchmark was
achieved and the Operating Partnership issued 109,091 Units representing $1.2
million in value to BCLP which has been expensed as a cost associated with the
Advisor Transaction.
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 three months ended March 31, 1997 and
1996.
Net income for the period ending March 31, 1997 increased by $6 million
when compared to the same period in 1996 primarily as a result of a gain on the
sale of Howell Commons Apartments in 1997.
Income and Expenses:
--------------------
Rental income and property operating expenses, including repairs and
maintenance and real estate taxes increased primarily due to increased weighted
average apartment units. Rental revenues for the quarter ended March 31, 1997
increased $5.1 million or 27% over the prior year and property operating
expenses increased $2.1 million or 26% for the same periods. Average apartment
units increased 33% between 1996 and 1997.
-15-
<PAGE>
B. Results of Operations:- Continued
----------------------
Detail of the Company's apartment unit growth as of March 31 is set forth
below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Apartment Units:
Beginning of period 12,435 9,433
Acquired 345 -
Sold (348) -
Completed developments 96 -
------ -----
End of period 12,528 9,433
====== =====
Weighted Average Units 12,549 9,433
====== =====
Percent increase 33% 2%
</TABLE>
Property management operations began in 1997 in conjunction with the
Property Manager transaction (see Note 2 to the Consolidated Financial
Statements for details).
General and administrative expenses increased in 1997 compared to 1996 as a
result of becoming self-administered on March 1, 1996. These costs include
employee salaries and benefits, administrative and office related expenses.
Interest Expense
- ----------------
Interest expense has increased because the Company has largely employed
debt capital for acquisitions and development activities. The following is an
analysis of weighted average debt outstanding and interest rates for the three
months ended March 31 (Dollars in thousands).
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Weighted Average
Debt Outstanding
Fixed Rate $218,049 $155,113
Variable Rate 81,628 56,090
-------- --------
Total $299,677 $211,203
======== ========
Weighted Average
Interest Rates
Fixed Rate 7.71% 7.63%
Variable Rate 6.62% 6.87%
</TABLE>
Since the first quarter of 1996, fixed rate debt increased primarily due to
debt of $52 million which was assumed with the acquisitions of three properties
and the conversion of $13.3 million from variable to fixed rate debt.
Depreciation and amortization increased $1.5 million from 1996 to 1997 due
to an increased property asset base.
Gains on sales of properties of $6.4 million was recorded in 1997 due to
the sale of Howell Commons Apartments in the first quarter of 1997.
-16-
<PAGE>
C. Funds from Operations (FFO)(fully adjusted for operating partnership units):
----------------------------------------------------------------------------
Industry analysts generally consider Funds from Operations, FFO, to be an
appropriate measure of the performance of an equity REIT because, along with
cash flows from operating activities, financing activities and investing
activities; it provides investors with an understanding of the ability of the
Company to incur and service debt and make capital expenditures. However, FFO
should not be considered by the reader as a substitute to net income as an
indicator of the Company's operating performance or to cash flows as a measure
of liquidity. 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 net income as presented in the Consolidated Financial
Statements and information presented elsewhere. FFO is determined in accordance
with a resolution adopted by the Board of Governors of the National Association
of Real Estate Investment Trusts, 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 on real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. The methodology used by the Company when
calculating FFO may differ from that of the other equity REIT's and, therefore,
may not be comparable to such other REIT's. In addition, FFO does not represent
amounts available for management's discretionary use because of needed capital
replacement or expansion, debt service obligations or other commitments. FFO is
calculated for the periods presented as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months ended March 31,
-------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Net income $ 2,895 $ 194
Depreciation (including depreciation
related to joint ventures) 8,836 6,637
Amortization of intangibles and costs
associated with workforce acquired 1,748 111
Minority interest (283) (8)
Gains on sales of properties (5,409) -
----------- ----------
Funds from operations $ 7,787 $ 6,934
=========== ==========
Funds from operations per share $ .26 $ .26
=========== ==========
Cash flows provided by (used for):
Operating activities 4,668 5,923
Investing activities 17,396 (3,685)
Financing activities (23,454) (6,294)
Weighted Average:
Shares 25,420,444 25,392,952
Units 4,810,885 977,832
----------- ----------
30,231,329 26,370,784
=========== ==========
</TABLE>
Same-store Multifamily Communities
- ----------------------------------
The Company defines same-store apartment communities as those that are
fully stabilized for the two most recent years. The operating performance of the
25 communities aggregating 8,467 units which are considered same-store is
summarized below (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1997 1996 %Change
------- ------- -------
<S> <C> <C> <C>
Revenues $16,025 $15,724 1.91%
Expenses 6,528 6,718 (2.82%)
------- -------
Net operating income $ 9,497 $ 9,006 5.44%
======= =======
Average monthly rent per unit $680 $657
Average occupancy 92.5% 93.8%
Total capital expenditures(1) $577 $581
</TABLE>
(1) Represents capital expenditures of a recurring nature which are
appropriately capitalized.
-17-
<PAGE>
C. Funds from Operations:- Continued
---------------------
Same-store Multifamily Communities
- ----------------------------------
FFO for the same-store communities increased 5.4% in the first quarter of
1997 compared to 1996. Growth in same-store multifamily revenues was almost 2%
when compared to the prior year period. Rent growth accounted for most of the
increase but lower occupancies reduced this increase. Occupancy at March 31,
1997 was 94.8%.
Same-store Retail Properties
- ----------------------------
The following summarizes the five retail centers:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1997 1996 %Change
------- ------- -------
<S> <C> <C> <C>
Revenues $ 2,622 $ 2,758 (4.93%)
Expenses 1,041 1,038 .31%
------- -------
Net operating income $ 1,581 $ 1,720 (8.10%)
======= =======
Occupancy 90.6% 94.1%
</TABLE>
As previously reported, the Company continues its efforts to divest itself
of the retail portfolio and reinvest the proceeds in multifamily communities.
The Company has sold two wholly-owned retail centers, Banks Crossing and
Greentree Plaza, and divested of its investment in the Brookwood Village Mall
Joint Venture (See Notes to Consolidated Financial Statements). Proceeds from
these sales are earmarked for acquisitions or development of multifamily assets
which, over time, management believes will generate higher FFO growth.
D. Liquidity and Capital Resources:
--------------------------------
The Company's net cash with respect to investing activities increased
approximately $21 million in 1997 compared to 1996 principally due to net
proceeds of $26.6 million from the sale of real estate assets. The Company's net
cash used in financing activities increased approximately $17.2 million in 1997
compared to 1996 due to the repayment of approximately $15.7 million in
borrowings on the credit agreement with BankBoston and Mellon Bank in the first
quarter of 1997.
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 have been used to finance
acquisitions, development, and rehabilitation of apartment communities.
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 May 13,
1997 the Board approved a dividend increase from $.225 per share to $.2325 per
share payable on August 15, 1997 to the shareholders of record on August 1,
1997. Dividends paid were $.225 in the first quarters of 1997 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 March
31, 1997. Additionally, the Company's debt service coverage is 2.4 to 1.
-18-
<PAGE>
D. Liquidity and Capital Resources:- Continued
--------------------------------
The Company conservatively manages both interest rate risk and maturity
risk. With regard to the interest rate risk, 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 Company will continually reassess its rate exposure relative to debt
levels and will execute additional interest rate protection as circumstances
dictate. Through the use of the swap, the Company has hedged interest rate risk
on approximately 56% of its variable rate debt as of March 31, 1997 and has 11%
of total indebtedness as unhedged variable rate debt. As to maturity risk, the
Company's debt has weighted average maturities of 11 years.
The Company has adequate sources of liquidity to meet its current cash flow
requirements including dividends, capital improvements as well as planned
acquisitions.
E. 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 94.8% as of March 31, 1997 which
is similar to current market occupancies. The Company continues to maintain
competitive rental rates by providing superior services combined with
well-maintained assets which sets the Company apart from its competition.
Through intense asset management efforts, the Company expects to realize solid
performances from the real estate assets, 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 certain 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 or results of operations.
-19-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
-----------
Item 1. Legal Proceedings
Response: None
Item 2. Change in Securities
Response: None
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
Response: None
-20-
<PAGE>
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.
DATE:
-21-
