UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
1-10660
Commission file number ---------------------------------------------
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
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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
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1997 1996
------------ -----------
(Unaudited)
<S> <C> <C>
Real estate assets: (Note 3)
Multifamily apartment complexes, net of
accumulated depreciation $538,936,747 $430,936,889
Retail center, net of accumulated depreciation - 11,064,630
Investments in unconsolidated joint ventures
(Note 4) 20,512,712 36,036,723
Mortgage loans and other loans receivable,
net of purchase discounts (Note 5) 2,309,683 4,094,241
Land and construction-in-progress 5,732,119 4,035,820
Land held for future development 6,154,965 2,331,988
Property held for sale, net of valuation
reserve (Note 3) 16,027,837 30,556,482
------------ ------------
Total real estate assets 589,674,063 519,056,773
Cash and cash equivalents 9,059,234 7,015,953
Mortgage-backed securities, net ("MBS") (Note 6) 7,995,983 9,232,956
Escrows 11,910,915 11,096,213
Deferred charges and other assets 11,596,264 10,940,879
Intangible assets, net of amortization (Note 2) 25,739,272 12,327,039
------------ ------------
Total assets $655,975,731 $569,669,813
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Credit agreements (Note 7) $118,410,000 $136,060,000
Mortgage notes payable (Notes 3 and 7) 179,627,929 149,805,607
Repurchase agreement (Note 7) 8,000,000 9,300,000
Tenant security deposits and prepaid rents 3,577,189 2,443,716
Accrued real estate taxes, other
liabilities and accounts payable 14,081,953 11,797,967
------------ ------------
Total liabilities 323,697,071 309,407,290
------------ ------------
Minority interest in operating partnership (Note 8) 57,898,385 36,608,607
Commitments and Contingencies (Note 8)
Shareholders' equity:
Series 1997-A Convertible Preferred stock,
("Preferred Shares") $0.01 par
value; 60,000,000 shares authorized,
2,737,000 issued (Note 9) 27,370 -
Common stock ("Shares"), $0.01 par value;
140,000,000 Shares authorized and
26,320,336 and 25,899,866 Shares issued,
respectively 263,203 258,998
Additional paid-in capital 292,977,204 239,446,270
Accumulated deficit (16,179,428) (14,308,277)
Loan receivable - officer (Note 11) (964,999) -
Less common stock in treasury
at cost (506,497 Shares) (1,743,075) (1,743,075)
------------ ------------
Total shareholders' equity 274,380,275 223,653,916
------------ ------------
Total liabilities and shareholders' equity $655,975,731 $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
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental $26,785,357 $24,511,073 $76,493,968 $65,106,795
Management fees and
reimbursements (Note 2) 940,321 - 2,208,725 -
Other interest income 418,575 276,112 955,918 722,215
Interest income from MBS 187,879 225,722 592,910 728,979
Interest from mortgage
loans (Note 5) 84,076 320,756 252,579 1,365,527
----------- ----------- ----------- -----------
Total revenue 28,416,208 25,333,663 80,504,100 67,923,516
----------- ----------- ----------- -----------
Expenses:
Property operating 6,616,841 6,511,091 18,545,668 15,495,294
Repairs and maintenance 2,034,623 1,834,648 5,531,085 4,799,347
Real estate taxes 2,445,342 2,120,795 7,163,713 6,436,509
Property management fees to
an affiliate (Notes 2 and 10) 47,466 1,190,521 866,771 3,142,998
Property management operations 1,463,113 319,958 3,618,844 976,764
General and administrative
(Note 2) 1,170,175 946,238 3,321,934 2,581,552
Corporate taxes 80,137 89,648 249,139 263,429
Professional fees 51,712 34,195 156,710 150,787
Interest (Note 7) 5,975,959 5,796,867 17,461,212 14,714,314
Costs associated with the
Advisor Transaction (Note 2) - - 1,200,000 -
Amortization of intangible
assets (Note 2) 3,258,049 336,192 4,784,506 784,448
Depreciation and amortization 8,500,562 7,964,529 24,079,513 20,950,314
Provision for losses on real
estate investments (Note 3) 1,850,000 7,500,000 1,850,000 7,500,000
Non-recurring charges - 287,059 - 287,059
Asset management fees to
an affiliate (Note 10) - - - 392,636
----------- ----------- ----------- -----------
Total expenses 33,493,979 34,931,741 88,829,095 78,475,451
----------- ----------- ----------- -----------
Loss from operations (5,077,771) (9,598,078) (8,324,995) (10,551,935)
Minority interest in
operating partnership 917,013 795,967 1,488,214 857,541
Joint venture net income
(loss), net of minority
interest (Note 4) 110,058 434,503 (308,886) 1,050,508
----------- ----------- ----------- -----------
Loss before gains on sales
and extraordinary item (4,050,700) (8,367,608) (7,145,667) (8,643,886)
Gains on sales of properties,
net of minority interest
(Note 3) - 996,322 5,364,707 996,322
----------- ----------- ----------- -----------
</TABLE>
(Continued)
-3-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Loss before
extraordinary item (4,050,700) (7,371,286) (1,780,960) (7,647,564)
Extraordinary item, net of
minority interest (Note 7) (90,191) (150,781) (90,191) (150,781)
------------ ------------ ------------ -----------
Net loss (4,140,891) (7,522,067) (1,871,151) (7,798,345)
Income allocated to
preferred shareholders (85,531) - (85,531) -
----------- ----------- ----------- -----------
Net loss allocated to
common shareholders (4,226,422) (7,522,067) (1,956,682) (7,798,345)
=========== =========== =========== ===========
Per share:
Loss before
extraordinary item $ (.16) $ (.29) $ (.07) $ (.30)
=========== =========== =========== ===========
Net loss $ (.16) $ (.30) $ (.07) $ (.31)
=========== =========== =========== ===========
Weighted average Shares 25,738,248 25,393,299 25,547,631 25,393,072
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Additional
Series 1997-A Convertible Paid-in
Preferred Stock at par Common Stock at par Capital
---------------------- ------------------------ ----------
No.of Shares Amount No.of Shares Amount
------------ ------ ------------ ------
<S> <C> <C> <C> <C> <C>
Balance,
December 31,
1996 - $ - 25,393,369 $258,998 $239,446,270
Net loss - - - - -
Issuance of
Preferred shares 2,737,000 27,370 - - 65,825,630
Stock option
grants (Note 10) - - - - 16,938
Issuance of
common stock
(Note 10) - - 86,956 870 999,130
Conversion of Units
to common shares - - 332,796 3,328 4,125,505
Stock purchase
loan-net (Note 10) - - - - -
Proceeds from the
exercise of
stock warrants - - 718 7 8,459
Dividends (17,444,728)
--------- ------- ---------- -------- ------------
Balance,
September 30,
1997 2,737,000 $27,370 25,813,839 $263,203 $292,977,204
========= ======= ========== ======== ============
<CAPTION>
Loan Treasury
Accumulated Receivable- Stock
Deficit Officer at cost Total
----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance,
December 31,
1996 $(14,308,277) $ - $(1,743,075) $223,653,916
Net loss (1,871,151) - - (1,871,151)
Issuance of
Preferred shares - - - 65,853,000
Stock option
grants (Note 10) - - - 16,938
Issuance of
common stock
(Note 10) - - - 1,000,000
Conversion of Units
to common shares - - - 4,128,833
Stock purchase
loan-net (Note 10) - (964,999) - (964,999)
Proceeds from the
exercise of
stock warrants - - - 8,466
Dividends - - - (17,444,728)
------------ --------- ----------- ------------
Balance,
September 30,
1997 $(16,179,428) $(964,999) $(1,743,075) $274,380,275
============ ========= =========== ============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
-5-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(1,871,151) $(7,798,345)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,079,513 20,950,314
Amortization of intangible assets and
costs related to workforce acquired 5,984,506 784,448
Provision for losses on real estate investments 1,850,000 7,500,000
Joint venture net (income) loss 308,886 (1,050,509)
Distributions received from joint ventures - 1,050,509
Gains on sales of properties (5,364,707) (996,322)
Non-employee stock option plan 16,938 -
Stock purchase loan forgiveness 35,001 -
Discount amortization (111,764) (398,226)
Minority interest in operating partnership (1,488,214) (857,541)
Write-off of deferred financing costs 36,512 150,781
Amortization of deferred financing costs 1,114,021 679,691
Increase in escrows and other assets (1,918,207) (5,266,280)
Increase in accrued real estate taxes,
other liabilities and accounts payable 2,283,986 3,529,465
Increase in tenant security deposits and
prepaid rents 1,133,473 490,667
----------- -----------
Net cash provided by operating activities 26,088,793 18,768,652
----------- -----------
Investing activities:
Cost to acquire properties (69,954,881) (34,529,783)
Land acquisition and construction in progress (7,332,131) (10,889,164)
Proceeds from sale of properties 38,757,165 11,209,673
Recurring capital expenditures (3,577,568) (2,899,807)
Rehabilitation and non-recurring
capital expenditures (9,688,021) (9,110,896)
Distributions from the sale of joint
venture asset 7,980,345 -
Distributions received from joint ventures
in excess of earnings 1,481,560 1,014,101
Contributions to joint venture (2,584,561) -
Proceeds from the payoff of mortgage loans - 7,016,547
Principal collections on MBS 1,250,097 1,988,719
Principal collections on mortgage loans 1,883,198 750,550
Escrows for construction and replacement (372,692) (5,033,055)
Cost to acquire workforce and intangibles (559,239) (447,679)
----------- -----------
Net cash used for investing activities (42,716,728) (40,930,794)
----------- -----------
Financing activities:
Net proceeds from the issuance of
preferred stock 65,853,000 -
Advances under credit agreements 7,400,000 48,970,000
Payments on credit agreements (25,050,000) -
Payment on repurchase agreement (1,300,000) (1,650,000)
Payment of financing costs (354,509) (985,253)
Principal payments on mortgage notes payable (7,059,652) (8,212,625)
Proceeds from the exercise of stock warrants 8,466 5,884
Dividends (17,444,728) (17,140,367)
Distributions to minority interest (3,381,361) (1,108,570)
----------- -----------
Net cash provided by financing activities 18,671,216 19,879,069
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,043,281 (2,283,072)
Cash and cash equivalents, beginning of period 7,015,953 11,142,710
----------- -----------
Cash and cash equivalents, end of period $ 9,059,234 $ 8,859,638
=========== ===========
</TABLE>
-6-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------------
1997 1996
----------- ------------
<S> <C> <C>
Supplemental disclosure of non-cash financing
and investing activities:
Property contributed by minority
interest $36,298,716 $80,817,180
Cash to minority contributors (1,310,354) (18,796,019)
Debt assumed from minority
contributors (24,588,414) (41,306,073)
----------- -----------
Increase in minority interest
for unrelated parties $10,399,948 $20,715,088
=========== ===========
Units related to intangible
assets acquired (Note 2) $18,837,500 $13,000,000
=========== ===========
Conversion of Units to Shares $ 4,128,833 $ -
=========== ===========
Debt assumed in conjunction with
property acquired via exchange of
joint venture asset $ 5,719,237 $ -
=========== ===========
Properties acquired via exchange of
joint venture asset $ 8,230,763 $ -
=========== ===========
Debt assumed in conjunction with
property acquisition $ 6,574,323 $ -
=========== ===========
Reclassification of construction in progress
to multifamily apartment complexes $ 1,812,855 $ 5,291,353
=========== ===========
</TABLE>
Theaccompanying notes are an integral
part of the financial statements.
-7-
<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 Consolidated 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 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 September 30, 1997 and the results of its operations for the
three and nine months ended September 30, 1997 and 1996 and cash flows
for the nine months ended September 30, 1997 and 1996.
The results of operations for the nine months ended September 30, 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 a company affiliated with certain officers and directors which
provided 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") with a value of approximately $17.6 million.
At the time of the contribution, the Property Manager managed 57
apartment communities, including the Company's 35 assets, and employed
approximately 85 professionals, excluding site employees. As a result
of this transaction, the Company no longer pays management fees and
reimbursements for the management operations of its multifamily
portfolio. In addition, the Company receives management fees and
reimbursements associated with 22 third-party management contracts
acquired. Those contracts are primarily with partnerships affiliated
with certain directors and officers of the Company. The Company
continues 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,
Continued
-8-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
2. Property Manager Transaction - Continued
among other things, a review of the existing contractual arrangements
with a company affiliated with certain officers and directors,
identification of the employees, office space, computer systems and
software, policies and procedures and other business documentation
required.
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 3-year
period.
As a result of communication between the Company and the staff of the
Securities and Exchange Commission ("SEC"), the Company has agreed with
the SEC to adopt a shorter life for the assets acquired related to the
Property Manager and Advisor transactions. Effective with its filings
for the third quarter of 1997, the Company will amortize the intangible
assets acquired on the straight-line basis over 3 years, rather than
the 10 and 15 year lives which was originally adopted. The effect on
income before extraordinary items of this change in accounting estimate
is approximately $2.3 million or $.09 per share as of September 30,
1997.
3. Multifamily and Retail Property
As of September 30, 1997, the Company had investments in 49 properties
in 8 states consisting of 46 multifamily apartment communities having
14,990 units and 3 retail centers with a total of 479,805 square feet
of leasable space. One retail center (160,342 square feet) is owned
through a joint venture investment.
Continued
-9-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. Multifamily and Retail Property - Continued
The following summarizes the carrying value of the Company's
multifamily apartment communities, retail center and property held
for sale (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Land $ 86,073 $ 76,525
Buildings and improvements 485,657 419,932
Appliances, carpeting and equipment 101,469 82,971
-------- --------
Total multifamily and retail property 673,199 579,428
Accumulated depreciation (118,234) (106,870)
-------- --------
$554,965 $472,558
======== ========
</TABLE>
Acquisitions
Year-to-date, the Company has acquired 12 multifamily apartment
communities containing 2,807 apartment units for a total consideration
of approximately $125.0 million. The Company paid cash of approximately
$77.0 million, assumed debt of approximately $37.0 million and issued
Operating Partnership Units with a value of approximately $11.0
million.
On January 1, 1997, the Company acquired Westchester Apartments, a
345-unit apartment community located in Silver Spring, Maryland, for
$16.1 million. The Company paid cash of $856,243, assumed debt of
approximately $11.4 million and issued 388,333 Operating Partnership
Units, 50,000 of which will be issued January, 1998, with a value of
approximately $3.8 million. 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.
On May 13, 1997, in conjunction with the exchange of Brookwood Village,
the Company acquired Polos West Apartments and Sunchase Apartments for
an aggregate price of approximately $13.9 million (See Note 4). Polos
West is a 200-unit garden style apartment community located in Winter
Garden, Florida, a suburb of Orlando. In conjunction with the
acquisition of this asset, the Company assumed $5.7 million in debt
which matures December, 2003. The debt agreement requires monthly
principal and interest payments at a rate of 7.45% along with monthly
real estate tax escrow funding. Sunchase is a 168-unit garden style
apartment community located in Bradenton, Florida.
In the third quarter of 1997, the Company acquired a package of four
multifamily apartment communities from the same seller for
approximately $27.4 million. The Company paid cash of approximately $1
million, assumed debt of approximately $19.8 million and issued 582,930
Operating Partnership Units, 67,660 of which will be issued in January,
1998, with a value of approximately $6.6 million. The mortgage notes
require monthly installments of principal and interest and mature at
various dates through 2023. Interest rates on the notes are at 7.5%.
The apartment communities which were acquired are summarized as
follows:
<TABLE>
<CAPTION>
Date of Number
Property Name Acquisition Location of Units
------------- ----------- --------------------- --------
<S> <C> <C> <C>
The Cove 7/22/97 Glen Burnie, Maryland 181
Lighthouse 7/22/97 Glen Burnie, Maryland 120
Berkshires by the
Chesapeake 7/22/97 Millersville, Maryland 144
Lamplighter 9/22/97 Glen Burnie, Maryland 168
---
613
===
</TABLE>
Continued
-10-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. Multifamily and Retail Property - Continued
On September 26, 1997, the Company acquired four multifamily apartment
communities for an all-cash purchase price of approximately $60.3
million. The Company used a significant portion of the proceeds from
the issuance of 2,737,000 shares of Series 1997-A Convertible Preferred
Stock (the "Preferred Stock") to acquire these properties. The
apartment communities which were acquired are summarized as follows:
Number
Property Name Location of Units
------------- -------- --------
Huntington Lakes Dallas, Texas 405
Huntington Brook Dallas, Texas 320
Huntington Ridge Irving, Texas 232
Sweetwater Ranch Dallas, Texas 312
-----
1,269
=====
On September 29, 1997, the Company acquired Summer Place Apartments for
an all-cash purchase price of $7 million. Summer Place is a 212-unit
apartment community located in Addison, Texas. The Company used a
portion of the proceeds from the Preferred Stock to acquire the
property.
Development
In the first quarter of 1997, the Company completed the construction of
96- units as an additional phase to Brookfield Trace, an existing
apartment 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 September 30, 1997, the Operating
Partnership has invested approximately $5.7 million of construction
costs.
In the first quarter of 1997, the Company purchased a parcel of land in
Greenville, South Carolina for approximately $3.0 million. The Company
also owns two other parcels of land located in Dallas, Texas and
Greenville, South Carolina. Development plans are under consideration
for these sites.
Dispositions
On January 15, 1997, the Company sold Howell Commons Apartments, a
348-unit apartment community located in Greenville, South Carolina for
$13.0 million. The property had a depreciated cost basis of
approximately $6.4 million and resulted in a gain on sale of
approximately $5.4 million, net of minority interest. 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.
It is the intention of the Company to use the proceeds from the sales
of its retail properties and reinvest those proceeds into multifamily
properties.
On March 25, 1997, the Company sold Banks Crossing, a 243,660 square
foot retail center in Fayetteville, Georgia for approximately $13.8
million which was its carrying value.
Continued
-11-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. Multifamily and Retail Property - Continued
On August 6, 1997, the Company sold Crossroads Shopping Center for cash
of $12 million which was its carrying value. Crossroads is a 211,186
square foot retail center located in Atlanta, Georgia.
In December, 1996, the Company sold Greentree Plaza. In accordance with
the purchase and sale agreement, the Operating Partnership, as seller,
was required to escrow funds at closing. During the second quarter of
1997, all conditions of the agreement were satisfied and, as a result,
approximately $59,000, net of minority interest, was recorded as a gain
on sale of properties.
Impairment of Long-Lived Assets
In the third quarter of 1997, the Operating Partnership has recorded a
provision for losses of approximately $1.8 million on Tara Crossing.
The provision represents the difference between the carrying value and
the estimated fair value of the asset less estimated cost to sell. The
Company began actively marketing this asset for sale in the third
quarter of 1997 and has reclassified this asset to assets held for
sale.
4. Investments in Unconsolidated Joint Ventures
The Company holds a 50% interest in the remaining assets of Brookwood
Village Joint Venture and a 50.1% interest in Spring Valley
Partnership. In May, 1997, Brookwood Village Joint Venture exchanged
Brookwood Village, a retail center located in Birmingham, Alabama.
In May 1997, the Company and its joint venture partner exchanged
Brookwood Village for cash and the two multifamily apartment complexes
(Polos West and Sunchase) valued at approximately $32.4 million. Each
joint venture Partner received 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. See Note 3 for information on the two
multifamily properties acquired. Condensed combined financial
statements for the Joint Ventures are as follows:
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Property at cost $ 53,901,744 $114,358,875
Less accumulated depreciation (15,524,853) (40,173,598)
------------ ------------
38,376,891 74,185,277
Other assets 3,368,024 2,774,699
------------ ------------
Total assets $ 41,744,915 $ 76,959,976
============ ============
Liabilities and Partners' Equity
Liabilities $ 655,953 $ 4,858,639
------------ ------------
Partners' equity:
The Company 20,512,712 36,036,723
Joint venture partner 20,576,250 36,064,614
------------ ------------
Total partners' equity 41,088,962 72,101,337
------------ ------------
Total liabilities and partners' equity $ 41,744,915 $ 76,959,976
============ ============
</TABLE>
-12-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
4. Investments in Unconsolidated Joint Ventures - Continued
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue $1,685,345 $3,384,151 $7,531,330 $9,770,685
roperty operating
expenses (823,248) (1,432,364) (3,854,979) (4,582,340)
Depreciation (580,957) (981,893) (2,273,436) (2,904,780)
Provision for loss - - (1,472,096) -
Loss on sale (19,880) - (686,760) -
---------- ---------- ----------- ----------
Net income (loss) $ 261,260 $ 969,894 $ (755,941) $2,283,565
========== ========== =========== ==========
Allocation of
net income (loss):
The Company $ 130,861 $ 485,591 $ (377,012) $1,143,224
Joint venture
partner 130,399 484,303 (378,929) 1,140,341
---------- ---------- ----------- ----------
$ 261,260 $ 969,894 $ (755,941) $2,283,565
========== ========== =========== ==========
</TABLE>
5. Mortgage Loans and Other Loans Receivable
As of September 30, 1997, the Company held one mortgage loan with a
principal balance of approximately $3.0 million and a discount of
$649,000. The mortgage loan is collateralized by a 120-unit apartment
complex in Palm Bay, Florida. The loan receivable, which had a
principal balance of approximately $1.1 million and was personally
guaranteed by an unaffiliated party, was paid off in the third quarter
of 1997.
6. Mortgage-Backed Securities (MBS)
At September 30, 1997, the Company's MBS portfolio had an approximate
market value of approximately $8.3 million and gross unrealized gains
of $323,000 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
portfolio until maturity.
At December 31, 1996, the Company's MBS portfolio had an approximate
market value of $9.8 million against a carrying value of approximately
$9.2 million and gross unrealized gains of $616,000.
Continued
-13-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
7. Credit Agreements and Mortgage Notes Payable
At September 30, 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 September
30, 1997:
<TABLE>
<CAPTION>
Contract Contract
Start End Interest
Borrowings Date Date(a) Rate Amount
---------- -------- -------- -------- -----------
<S> <C> <C> <C> <C>
Revolver 9/02/97 11/02/97 (1) 6.155% $28,965,000
Fixed 11/22/95 11/20/05 6.997% 50,000,000
Fixed 9/20/96 9/20/03 7.540% 13,345,000
-----------
$92,310,000
===========
</TABLE>
The following summarizes the Company's borrowings on the Credit
Agreement with the BankBoston and Mellon Bank as of September 30, 1997:
<TABLE>
<CAPTION>
Contract Contract
Start End Interest
Borrowings Date Date(a) Rate Amount
---------- -------- --------- -------- ---------
<S> <C> <C> <C> <C>
LIBOR contract 5/28/97 10/27/97 (2) 7.1563% $13,000,000
LIBOR contract 6/24/97 10/29/97 (2) 7.1563% 8,700,000
LIBOR contract 3/31/97 10/29/97 (2) 7.1563% 4,400,000
-----------
$26,100,000
===========
</TABLE>
(1) On November 2, 1997, the Company repriced the revolver to a new
maturity of December 3, 1997 at a rate of 7.28% per annum.
(2) On November 10, 1997, the Company paid down these contracts with a
portion of the proceeds from the sale of 10 million shares of
common stock (the "Offering") (See Note 12).
Effective July 16, 1997, the interest rate on the Company's $28.4 million
revolving credit line with BankBoston and Mellon Bank was reduced from 175
basis points over LIBOR to 150 basis points over LIBOR.
The following summarizes the Company's borrowings on the Repurchase
Agreement collateralized by MBS as of September 30, 1997:
<TABLE>
<CAPTION>
Contract Contract
Start End Interest
Date Date(a) Rate Amount
------- -------- -------- ------
<S> <C> <C> <C> <C>
Repurchase Agreement 9/19/97 11/14/97 5.65% $8,000,000
</TABLE>
(a) On November 14, 1997, the Company paid down this borrowing with a
portion of the proceeds from the Offering (See Note 12).
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 September 30, 1997.
Continued
-14-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
7. Credit Agreements and Mortgage Notes Payable - Continued
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 interest rate exposure relative to debt
levels and will execute additional interest rate protection as
circumstances dictate.
On September 30, 1997, the Company paid off a mortgage note
collateralized by Hunters Glen Apartments, a property currently owned
by the Company, which had a principal balance of $5.5 million as of the
payoff date. The mortgage note required interest at a rate of 9% and
had a maturity date of March, 2000. The payoff required a prepayment
premium of $53,679, net of minority interest, and necessitated the
write-off of deferred costs of $36,512, net of minority interest.
Proceeds from the Credit Agreement with BankBoston and Mellon Bank were
used to pay off the debt.
8. Minority Interest
Minority interest in the Operating Partnership consists of the
following at September 30, 1997 (in thousands):
Balance, beginning of year $36,609
Value of Units issued to
Minority Unitholders:
Affiliated parties 18,837
Unrelated parties 10,400
Conversion of Units to Shares (4,129)
Distribution to Unitholders (3,381)
Minority income allocation (438)
-------
Balance at September 30, 1997 $57,898
=======
On March 19, 1997, an additional 109,091 Operating Partnership Units
were issued in conjunction with the March 1, 1996 acquisition 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.
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 an additional 109,091 Units representing $1.2
million in value to BCLP which has been expensed as a cost associated
with the Advisor Transaction. Subsequent to September 30, 1997, the
second Share price benchmark was achieved and the Operating Partnership
issued an additional 100,000 Units representing $1.2 million in value
to BCLP which will be expensed as a cost associated with the Advisor
Transaction in the fourth quarter of 1997.
Continued
-15-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
9. Shareholders' Equity
On September 25, 1997, the Company sold 2,737,000 shares of Series
1997-A Cumulative Preferred stock (the "Preferred Shares"), $.01 par
value, to affiliates of Westbrook Partners, LLC at $25.00 per share and
will pay a preferred dividend of 9%. Holders of Preferred shares are
entitled to receive, if declared by the Board, preferential quarterly
cash dividends. Each Preferred Share is convertible at the option of
the holder beginning September 19, 1998 into 2.1044 shares of Common
Stock, based on a conversion price of $11.88 per share of common stock,
subject to certain adjustments as defined in the agreement. In the
event of the Company's termination as a REIT, each holder of Preferred
Shares will have the right to require the Company to redeem any or all
of such holders Preferred Shares at a redemption price per share equal
to 115% of the sum of the stated value ($25.00) and all accrued and
unpaid dividends.
The terms of the Preferred Shares provide that it will rank prior to
any other series of preferred stock, prior to Common Stock and prior to
any other class or series of capital stock of the Company with respect
to the payment of dividends, the right to redemption and the
distribution preference in the event of a change in ownership or the
liquidation, dissolution or winding up of the Company.
10 . Related Party Transactions
In addition to property management fees, the following is a summary of
fees and reimbursements to an affiliate for the nine months ended
September 30 (in thousands):
1997 1996
----- ------
Costs reimbursements related
to the operation of the
Company's properties $ 231 $1,234
Fees and reimbursements for
administrative services $ 984 $ 513
As a result of the Property Manager transaction as described in Note 2,
the Company no longer reimburses an affiliate for services related to
multifamily property operations.
11. 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. 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.
Continued
-16-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
11. Stock Plans - Continued
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:
Exercise Price
----------------
Options granted, 1996 624,000 $ 9.75 - $10.25
Options granted, 1997 520,300 $10.75 - $11.00
---------
Balance September 30, 1997 1,144,300
=========
Options exercised -
=========
Options available for grant
at September 30, 1997 355,700
=========
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 were 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 granted 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 a change of control of the Company, any then
outstanding principal and interest due shall be forgiven.
12. Subsequent Events
Public Offering
In the fourth quarter of 1997, the Company completed an offering (the
"Offering") of ten million shares of common stock providing net cash
proceeds of approximately $103.2 million. The Company will use the
proceeds to fund $32.1 million to acquire a portfolio of 18 apartment
communities in the greater Baltimore area and the related management
operations of the Questar Companies (the Questar Transaction); to repay
$63 million in variable rate debt and the remainder for general
corporate purposes. The Company has filed a Registration Statement and
Prospectus on October 7, 1997 and a Prospectus Supplement dated
November 4, 1997 describing the Offering.
Acquisition of Properties
In the fourth quarter of 1997, the Company acquired the Questar
Portfolio with a portion of the proceeds from the Offering for
approximately $167 million. The Company paid cash of 2, assumed debt of
approximately $145 and issued Operating Partnership Units with a value
of approximately $20 million.
Dividend Declaration
On November 13, 1997, the Board approved a dividend of $.2325 per share
payable on February 15, 1998 to the shareholders of record on February
1, 1998.
-17-
<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.
At the time of the contribution, the Property Manager managed 57 apartment
communities, including the Company's 35 assets, and employed approximately 85
professionals, excluding site employees. As a result of this transaction, the
Company no longer pays management fees and reimbursements for the management
operations of its multifamily portfolio. In addition, the Company receives
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 continues 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 are amortized over the expected periods to be benefitted (See Note 2 to
the Consolidated Financial Statements for details).
On September 25, 1997, the Company sold 2,737,000 shares of the Company's
Series 1997-A Cumulative Preferred stock (the "Preferred Shares") which provided
net proceeds of approximately $65.9 million (See Note 9 to the Consolidated
Financial Statements).
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 an additional 109,091 Units
representing $1.2 million in value to BCLP which has been expensed as a cost
associated with the Advisor Transaction. Subsequent to September 30, 1997, the
second Share price benchmark was achieved and the Operating Partnership issued
an additional 100,000 Units representing $1.2 million in value to BCLP which
will be expensed as a cost associated with the Advisor Transaction in the fourth
quarter of 1997.
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 and nine months ended September
30, 1997 and 1996.
Net loss for the nine months ending September 30, 1997 decreased by
approximately $5.9 million when compared to the same period in 1996 primarily as
a result of a gain of approximately $5.4 million, net of minority interest, on
the sale of Howell Commons Apartments in January, 1997.
-18-
<PAGE>
Income and Expenses:
Rental income and property operating expenses, including repairs and
maintenance and real estate taxes increased for the three and nine month periods
ended September 30, 1997 primarily due to increased weighted average apartment
units. Rental revenues for the nine months ended September 30, 1997 increased
approximately $11.4 million or 17% over the prior year and property operating
expenses, including repairs and maintenance and real estate taxes, increased
approximately $4.5 million or 17% for the same periods. Average apartment units
increased 21% between 1996 and 1997.
Detail of the Company's apartment unit growth for the nine months ended
September 30, 1997 is set forth below:
1997 1996
---- ----
Apartment Units:
Beginning of period 12,435 9,433
Acquired 2,807 2,817
Sold (348) (223)
Completed developments 96 72
------ ------
End of period 14,990 12,099
====== ======
Weighted Average Units 12,871 10,647
====== ======
Percent increase 21%
Property management operations began in 1997 in conjunction with the
Property Manager transaction as described in Note 2 to the Consolidated
Financial Statements. As a result, the Company incurs expenses for the property
management operations staff which includes salaries, benefits and other overhead
expenses.
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
and nine months ended September 30, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted Average
Debt Outstanding
Fixed Rate $220,694 $177,734 $223,211 $204,351
Variable Rate 72,805 73,540 66,456 96,869
-------- -------- -------- --------
Total $293,499 $251,274 $289,667 $301,220
======== ======== ======== ========
Weighted Average
Interest Rates
Fixed Rate 7.70% 7.65% 7.60% 7.62%
Variable Rate 6.61% 6.67% 6.59% 6.60%
</TABLE>
Depreciation and amortization increased for the three and nine month
periods ending September 30, 1997 compared to 1996 due to an increased property
asset base.
Provision for losses on real estate investments decreased from 1996 to
1997. The Company, as a result of its strategic decision to divest of its retail
investments, has actively marketed the assets for sale and, as a result, has
recorded provisions for losses which represents the difference between carrying
value and estimated fair value less cost to sell (See Note 3 to the Consolidated
Financial Statements for details).
-19-
<PAGE>
Joint venture net income decreased for the three and nine month periods
ending September 30, 1997 compared to 1996 primarily due to the sale of
Brookwood Village in the second quarter of 1997 (See Note 4 to the Consolidated
Financial Statements for details).
Gains on sales of properties represent a $5.4 million gain, net of minority
interest, being recorded in 1997 due to the sale of Howell Commons Apartments in
the first quarter of 1997. In the third quarter of 1996, the Company recognized
a $1 million gain on the sale of Pointe West Apartments.
Extraordinary items, net of minority interest, in both periods represents
costs associated with the retirement of debt. See Note 7 to the Consolidated
Financial Statements.
C. Funds from Operations (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:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Loss from operations $(5,077,771) $(9,598,078) $(8,324,995) $(10,551,935)
Joint venture net operating
income 431,861 977,018 1,840,677 2,597,019
Amortization of
intangible assets 3,258,049 336,192 4,784,506 784,448
Costs associated with
advisor transaction - - 1,200,000 -
Depreciation 8,492,659 7,950,701 24,054,732 20,917,523
Provision for losses 1,850,000 7,500,000 1,850,000 7,500,000
Non-recurring charges - 287,059 - 287,059
Income allocated to
preferred shareholders (85,531) - (85,531) -
---------- ---------- ----------- -----------
Funds from operations $8,869,267 $7,452,892 $25,319,389 $21,534,114
========== ========== =========== ===========
Funds from operations
per share\Unit $ .28 $ .26 $ .81 $ .78
========== ========== =========== ===========
Weighted Average:
Shares 25,738,248 25,393,299 25,547,631 25,393,072
Units 6,080,590 3,280,517 5,630,483 2,241,607
---------- ---------- ---------- ----------
31,818,838 28,673,816 31,178,114 27,634,679
========== ========== ========== ==========
</TABLE>
-20-
<PAGE>
Nine Months Ended
September 30,
---------------------------
1997 1996
------- -------
Cash flows provided by (used for):
Operating activities 26,089,000 18,769,000
Investing activities (42,717,000) (40,931,000)
Financing activities 18,671,000 19,879,000
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>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1997 1996 % Change 1997 1996 % Change
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $16,763 $16,232 3.3% $49,244 $47,826 3.0%
Expenses 6,601 6,639 (0.6)% 19,612 19,936 (1.6)%
------- ------- ------- -------
Net operating income $10,162 $ 9,593 5.9% $29,632 $27,890 6.2%
======= ======= ======= =======
Average occupancy 95.1% 94.9% 93.9% 94.1%
Average monthly rent
per unit $689 $668 $683 $661
</TABLE>
Growth in same-store multifamily revenues was 3.3% for the 1997 third
quarter when compared to the 1996 third quarter. This growth was almost entirely
driven by increases in average rents of 3.0% as well as a modest increase in
occupancies. Year-to-date, revenues are up 3.0% which is a combination of 3.3%
rent growth offset by a slight decline in occupancies.
Expenses for the quarter ended September 30, 1997 and for the nine months
ended September 30, 1997 when compared to the comparable prior year periods are
down 0.6% and 1.6%, respectively.
Same-store Retail Properties
The following summarizes the three retail centers:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1997 1996 % Change 1997 1996 % Change
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $1,447 $1,602 (9.7)% $4,314 $4,632 (6.8)%
Expenses 616 527 17% 1,850 1,712 8.1%
------ ------ ------ ------
Net operating income $ 831 $1,075 (22.7)% $2,464 $2,920 (15.6)%
====== ====== ====== ======
Average occupancy 91.2% 93.0% 92.2% 92.4%
</TABLE>
Same-store net operating income from the retail portfolio dropped $456,000
to $2,464,000 year-to-date when compared to the 1996 nine month period. The drop
in NOI is primarily the result of retenanting at Tara Crossing Shopping Center
in Atlanta, Georgia which, as previously mentioned, is under contract for sale.
D. Liquidity and Capital Resources:
The Company's net cash provided by operating activities increased from
$18.8 million in 1996 to $26 million in 1997 primarily due to increased property
net operating income.
The Company's net cash used for investing activities increased
approximately $1.7 million in 1997 compared to 1996 due to increased net
proceeds from the sale of real estate assets of approximately $27.4 million
offset by cash used in the acquisition of real estate assets increasing
approximately $36.5 million.
-21-
<PAGE>
The Company's net cash provided by financing activities decreased
approximately $1.2 million in 1997 compared to 1996 due to net borrowing
activity on the Company's credit agreements fluctuating by approximately $66.6
million. The Company's decrease in net borrowing activity was significantly
offset by net proceeds of approximately $65.9 million from the sale of Preferred
Shares on September 25, 1997.
Operating cash flows are earmarked for the payment of dividends as well as
capital expenditures of a recurring nature. Debt financing, proceeds from asset
sales and stock offerings have been used to finance acquisitions, development,
and rehabilitation of apartment communities.
In the fourth quarter of 1997, the Company completed an offering (the
"Offering") of ten million shares of common stock providing net cash proceeds of
approximately $103.2 million. The Company will use the proceeds to fund $32.1
million to acquire a portfolio of 18 apartment communities in the greater
Baltimore area and the related management operations of the Questar Companies
(the Questar Transaction); to repay $63 million in variable rate debt and the
remainder for general corporate purposes. The Company has filed a Registration
Statement and Prospectus on October 7, 1997 and a Prospectus Supplement dated
November 4, 1997 describing the Offering.
For the past three years, the Company has paid between 85% and 88% of funds
from operations ("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 14, 1997 the
Board approved a dividend of $.2325 per share payable on November 15, 1997 to
the shareholders of record on November 1, 1997. Dividends paid were $.225 in the
third 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 total
market capitalization was approximately 40% at September 30, 1997. Additionally,
the Company's debt service coverage is 2.3 to 1.
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. As of September 30, 1997, the Company has fixed or hedged debt of 90%
of total debt. As to maturity risk, the Company's debt has weighted average
maturities of approximately 11 years.
The Company has adequate sources of liquidity to meet its current cash flow
requirements including dividends, capital improvements and development underway.
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 96.5% as of September 30, 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
-22-
<PAGE>
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.
F. Forward-Looking Statements
This report may contain forward-looking statements relating to activities
of the Company within the meaning of federal securities laws. Although the
Company believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, there are certain factors that
might cause a difference between actual results and those forward-looking
statements.
G. Recently Issued Accounting Pronouncements
Financial Accounting Standards Board Statement No. 128 ("FAS 128") "Earning
Per Share" is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company intends to adopt the
requirements of this pronouncement in its financial statements for the year
ending December 31, 1997. FAS 128 specifies the computation, presentation and
disclosure requirements for net income per share. FAS 128 also requires the
presentation of diluted net income per share which the Company was not
previously required to present under generally accepted accounting principles.
Financial Accounting Standards Board Statement No. 129 ("FAS 129")
"Disclosure of Information about Capital Structure" is effective for financial
statements issued for periods ending after December 31, 1997. FAS 129
establishes standards for disclosure of information about securities,
liquidation preference of preferred stock and redeemable stock.
Financial Accounting Standards Board Statement No. 130 ("FAS 130")
"Reporting Comprehensive Income" is effective for fiscal years beginning after
December 15, 1997, although earlier application is permitted. The Company
intends to adopt the requirements of this pronouncement in its financial
statements for the year ending December 31, 1998. FAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. FAS 130 requires that all
components of comprehensive income shall be reported in the financial statements
in the period in which they are recognized. Furthermore, a total amount for
comprehensive income shall be displayed in the financial statement where the
components of other comprehensive income are reported. The Company was not
previously required to present comprehensive income or the components thereof in
its financial statements under generally accepted accounting principles.
Financial Accounting Standards Board Statement No. 131 ("FAS 131")
"Disclosures about Segments of and Enterprise and Related Information" is
effective for financial statements issued for periods beginning after December
15, 1997. FAS 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates.
The Company does not believe that the implementation of FAS 128, FAS 129,
FAS 130 or FAS 131 will have a material impact on its financial statements.
-23-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Change in Securities
(a) None
(b) On September 25, 1997, the Company sold 2,737,000 shares
of the Company's Series A Cumulative Preferred Stock,
$.01 par value, and will pay a dividend of 9%. This
stock ranks senior to the Company's Common Stock.
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders Response:
On June 23, 1997, the Company filed a proxy statement with the
Securities and Exchange Commission.
Item 5. Other Information
Response: A prospectus supplement with respect to the Public
Offering was filed on November 5, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Response: None
(b) Reports on Form 8-K
A report on Form 8-K dated October 15, 1997 was filed
which included information regarding Items 1, 2, 5 and 7
on the Form 8-K. Included in Item 7 were financial
statements, pro forma information and exhibits. The
report was filed in connection with the Company's
Private Placement, public offering and pending
acquisition of eighteen multifamily properties in
Baltimore, Maryland.
A report on Form 8-K dated October 15, 1997 was filed
which included information regarding Item 7 on Form 8-K
which included exhibits. The exhibits were filed in
connection with the prospectus supplement to the
prospectus included with the Company's Registration
Statement.
A report on Form 8-K dated October 24, 1997 was filed
which included information regarding Item 5 on Form 8-K.
The report was filed with respect to the Company's press
release dated October 23, 1997.
-24-
<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: November 14, 1997
-25-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 9,059,234
<SECURITIES> 7,995,983
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,246,451<F1>
<PP&E> 707,908,137<F2>
<DEPRECIATION> (118,234,074)
<TOTAL-ASSETS> 655,975,731
<CURRENT-LIABILITIES> 17,659,142
<BONDS> 306,037,929<F3>
0
65,853,000
<COMMON> 208,527,275<F4>
<OTHER-SE> 57,898,385<F5>
<TOTAL-LIABILITY-AND-EQUITY> 655,975,731
<SALES> 0
<TOTAL-REVENUES> 80,504,100
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 70,188,555<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,461,212
<INCOME-PRETAX> (7,145,667)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,145,667)
<DISCONTINUED> 5,364,707<F7>
<EXTRAORDINARY> (90,191)
<CHANGES> 0
<NET-INCOME> (1,956,682)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
<FN>
<F1>-INCLUDES ESCROWS, GOODWILL, DEFERRED CHARGES AND OTHER ASSETS.
<F2>-INCLUDES COST OF APARTMENT COMPLEXES AND RETAIL CENTERS AS WELL AS
INVESTMENT IN JOINT VENTURES, MORTGAGE LOANS RECEIVABLE AND LAND AND
CONSTRUCTION IN PROGRESS.
<F3>-INCLUDES CREDIT AGREEMENTS, MORTGAGE NOTES AND REPURCHASE AGREEMENTS.
<F4>-INCLUDES PAR VALUE OF COMMON STOCK, PAID IN CAPITAL, RETAINED EARNINGS LESS
COMMON STOCK IN TREASURY.
<F5>-REPRESENTS MINORITY INTEREST.
<F6>-INCLUDES JOINT VENTURE NET LOSS OF $308,886 AND MINORITY INTEREST SHARE
OF NET LOSS OF 1,488,214.
<F7>-REPRESENTS GAIN ON SALE OF PROPERTIES.
</FN>
</TABLE>
