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 June 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
-------------- -----------------
Commission file number 1-10660
-------------
Berkshire Realty Company, Inc.
----------------------------------
Delaware 04-3086485
------------------------------ -------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
470 Atlantic Avenue, Boston, Massachusetts 02210
- ------------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
(617) 423-2233
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- -----
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------
ASSETS
June 30, December 31,
1997 1996
------------- -------------
(Unaudited)
Real estate assets: (Note 3)
Multifamily apartment complexes, net of
accumulated depreciation $448,419,496 $430,936,889
Retail center, net of valuation reserve 11,064,630 11,064,630
Investments in unconsolidated joint ventures
(Note 4) 20,537,903 36,036,723
Mortgage loans and other loans receivable,
net of purchase discounts (Note 5) 3,602,458 4,094,241
Land and construction-in-progress 4,128,782 4,035,820
Land held for future development 5,928,082 2,331,988
Property held for sale, net of valuation
reserve (Note 3) 16,799,399 30,556,482
------------ ------------
Total real estate assets 510,480,750 519,056,773
Cash and cash equivalents 8,230,883 7,015,953
Mortgage-backed securities, net ("MBS") (Note 6) 8,352,355 9,232,956
Escrows 11,418,758 11,096,213
Deferred charges and other assets 10,635,014 10,940,879
Acquisition of workforce and intangible assets,
net of accumulated amortization (Note 2) 28,997,321 12,327,039
------------ ------------
Total assets $578,115,081 $569,669,813
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Credit agreements (Note 7) $117,310,000 $136,060,000
Mortgage notes payable (Note 3) 165,897,432 149,805,607
Repurchase agreements (Note 7) 8,300,000 9,300,000
Tenant security deposits and prepaid rents 3,130,174 2,443,716
Accrued real estate taxes, other
liabilities and accounts payable 11,251,438 11,797,967
------------ ------------
Total liabilities 305,889,044 309,407,290
------------ ------------
Minority interest in operating partnership (Note 8) 57,714,929 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
25,987,348 and 25,899,866 Shares issued,
respectively 259,873 258,998
Additional paid-in capital 229,016,179 239,446,270
Retained deficit (12,038,537) (14,308,277)
Loan receivable - officer (Note 10) (983,332) -
Less common stock in treasury at cost
(506,497 Shares) (1,743,075) (1,743,075)
------------ ------------
Total shareholders' equity 214,511,108 223,653,916
------------ ------------
Total liabilities and shareholders' equity $578,115,081 $569,669,813
============ =============
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 Six Months
Ended June 30, Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental $25,153,592 $21,230,613 $49,708,611 $40,595,722
Interest from mortgage
loans (Note 5) 127,350 459,974 168,503 1,044,771
Interest from MBS 197,893 241,721 405,031 503,257
Management fees and
reimbursements (Note 2) 934,938 - 1,268,404 -
Other interest income 271,551 228,344 537,343 446,103
----------- ----------- ----------- -----------
Total revenue 26,685,324 22,160,652 52,087,892 42,589,853
----------- ----------- ----------- -----------
Expenses:
Property operating 5,902,314 4,616,179 11,928,827 8,984,203
Repairs and maintenance 1,851,940 1,625,657 3,496,462 2,964,699
Real estate taxes 2,372,599 2,082,528 4,718,371 4,315,714
Property management fees to
an affiliate (Note 2) 50,445 1,062,123 819,305 1,952,477
Property management
operations (Note 2) 1,491,894 330,753 2,155,731 656,806
General and administrative
(Note 9) 1,079,357 1,107,411 2,151,759 1,635,314
State and corporate
franchise taxes 84,501 92,781 169,002 173,781
Professional fees 58,598 72,150 104,998 116,592
Interest (Note 7) 5,650,857 4,722,601 11,485,253 8,917,447
Costs associated with the
advisor transaction - - 1,200,000 -
Amortization of acquired
workforce and intangible
assets (Note 2) 978,295 336,966 1,526,457 448,256
Depreciation and amortization 7,910,020 6,839,766 15,578,951 12,985,785
Asset management fees to an
affiliate (Note 2) - - - 392,636
----------- ----------- ----------- -----------
Total expenses 27,430,820 22,888,915 55,335,116 43,543,710
----------- ----------- ----------- -----------
Loss from operations (745,496) (728,363) (3,247,224) (953,857)
Minority interest 288,369 53,116 571,201 61,574
Joint venture net income
(loss), net of minority
interest (Note 4) (124,161) 205,084 (418,944) 616,005
----------- ----------- ----------- -----------
Loss before gains on sales (581,288) (470,063) (3,094,967) (276,278)
Gains (loss) on sales of
properties, net of
minority interest (43,995) - 5,364,707 -
----------- ----------- ----------- -----------
</TABLE>
(Continued)
-3-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)
------------------------
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ (625,283) $ (470,063) $ 2,269,740 (276,278)
=========== =========== =========== =========
Per share:
Net income (loss) $ (.02) $ (.02) $ .09 (.01)
=========== =========== =========== ==========
Weighted average Shares 25,480,709 25,392,962 25,450,743 25,392,957
=========== =========== =========== ==========
</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 Six Months Ended June 30, 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 2,269,740 - 2,269,740
Stock option
grants
(Note 10) - - 11,292 - - - 11,292
Issuance of
stock
(Note 10) 86,956 870 999,130 - - - 1,000,000
Stock purchase
loan-net
(Note 10) - - - - (983,332) - (983,332)
Proceeds from
the exercise of
stock warrants 526 5 6,197 - - - 6,202
Dividends - (11,446,710) - - - (11,446,710)
---------- ------- ------------ ------------ --------- ----------- ------------
Balance,
June 30, 1997 25,480,851 $259,873 $229,016,179 $(12,038,537) $(983,332) $(1,743,075) $214,511,108
========== ======== ============ ============ ========= =========== ============
</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 Six Months
Ended June 30,
-----------------------------
1997 1996
----------- ------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 2,269,740 $ (276,278)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 15,578,951 12,985,785
Amortization of intangible assets and
costs related to workforce acquired 2,726,457 448,256
Joint venture net (income) loss 418,944 (616,005)
Distributions received from joint ventures - 1,303,839
Gains on sales of properties (5,364,707) -
Non-employee stock option plan 11,292 -
Stock purchase loan forgiveness 16,668 -
Amortization of discount on mortgage
loans and MBS (74,875) (312,691)
Minority interest in operating partnership (571,201) (61,574)
Amortization of deferred financing costs 721,273 476,700
Increase in operating escrows
and other assets (129,498) (3,138,717)
Increase (decrease) in accrued real estate
taxes, other liabilities and accounts payable (546,529) 2,209,781
Increase in tenant security deposits
and prepaid rents 686,458 525,411
----------- -----------
Net cash provided by operating activities 15,742,973 13,544,507
----------- -----------
Investing activities:
Cost to acquire properties (1,218,197) (29,165,091)
Proceeds from sales of properties 26,715,135 -
Recurring capital expenditures (2,005,817) (1,769,914)
Rehabilitation and non-recurring
capital expenditures (5,309,926) (5,083,604)
Land acquisition and construction in progress (5,501,911) (8,320,463)
Distribution from the sale of joint venture asset 7,980,345 -
Distributions received from joint ventures
in excess of earnings 1,327,252 -
Contributions to joint venture (2,547,413) -
Principal collections on MBS 889,906 1,555,517
Principal collections on mortgage loans 557,353 7,474,442
Escrows for construction and replacement (372,692) (5,066,460)
Cost to acquire workforce and other
intangible assets (559,239) (447,679)
----------- -----------
Net cash provided by (used for)
investing activities 19,954,796 (40,823,252)
----------- -----------
Financing activities:
Repayment on credit agreements (21,750,000) -
Proceeds from credit agreement 3,000,000 39,970,000
Payment on repurchase agreement (1,000,000) (1,250,000)
Payment of financing costs (252,641) (855,218)
Principal payments on mortgage notes payable (987,839) (553,090)
Proceeds from the exercise of stock warrants 6,202 1,416
Dividends (11,446,710) (11,426,864)
Distributions to minority interest (2,051,851) (438,990)
----------- -----------
Net cash (used for) provided by
financing activities (34,482,839) 25,447,254
----------- -----------
</TABLE>
Continued
-6-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
------------------------
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents $ 1,214,930 $(1,831,491)
Cash and cash equivalents, beginning of period 7,015,953 11,142,710
----------- -----------
Cash and cash equivalents, end of period $ 8,230,883 $ 9,311,219
=========== ===========
Supplemental disclosure of non-cash financing
and investing activities:
Property contributed by minority
interest $16,058,716 $80,695,611
Cash to minority contributor (856,243) (18,796,019)
Debt assumed from minority
contributor (11,360,427) (41,306,073)
----------- -----------
Increase in minority interest $ 3,842,046 $20,593,519
=========== ===========
Units issued related to third-party property
management contracts, workforce, and
intangible assets (Note 2) $18,837,500 $13,000,000
=========== ===========
Reclassification of construction in progress
to multifamily apartment complexes $ 1,812,855 $ 1,511,055
=========== ===========
Debt assumed in conjunction with property
acquisition via exchange of
joint venture asset $ 5,719,237 $ -
=========== ===========
Property acquisition via exchange of
joint venture asset $ 8,230,763 $ -
=========== ============
</TABLE>
The accompanying 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 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 June 30, 1997 and the results of its operations for the three and six
months ended June 30, 1997 and 1996 and cash flows for the six months ended
June 30, 1997 and 1996.
The results of operations for the six months ended June 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 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
-8-
<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 June 30, 1997, the Company had investments in 41 properties in 8
states consisting of 37 apartment communities having 12,896 units and 4
retail centers with a total of 690,992 square feet of leasable space. One
retail center (160,342 square feet) is owned through joint venture
investment.
The following summarizes the carrying value of the Company's multifamily
apartment complexes and retail centers, (in thousands):
June 30, December 31,
1997 1996
-------- -----------
Land $ 77,931 $ 76,525
Buildings and improvements 420,801 419,932
Appliances, carpeting and equipment 89,975 82,971
-------- -----------
Total multifamily and retail property 588,707 579,428
Accumulated depreciation (112,423) (106,870)
-------- -----------
$476,284 $472,558
======== ===========
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 approximately $11.4 million and issued Operating
Partnership Units 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.
-9-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
------------------------
3. Multifamily and Retail Property - Continued
-------------------------------
On May 13, 1997, in conjunction with the exchange of Brookwood Village, the
Operating Partnership 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.
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 June 30, 1997, the project has incurred approximately $4.1 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. 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 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 foot
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.
In December, 1996, the Operating Partnership 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 $71,000 was recorded as a gain on sale of properties.
Continued
-10-
<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 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. Condensed combined financial
statements for the Joint Ventures are as follows:
CONDENSED COMBINED BALANCE SHEETS
---------------------------------
Assets
June 30, December 31,
1997 1996
------------ -------------
Property at cost $ 53,830,612 $114,358,875
Less accumulated depreciation (14,943,896) (40,173,598)
------------ ------------
38,886,716 74,185,277
Other assets 2,998,327 2,774,699
------------ ------------
Total assets $ 41,885,043 $ 76,959,976
============ ============
Liabilities and Partners' Equity
Liabilities $ 719,467 $ 4,858,639
------------ ------------
Partners' equity:
The Company 20,537,903 36,036,723
Joint venture partner 20,627,673 36,064,614
------------ ------------
Total partners' equity 41,165,576 72,101,337
------------ ------------
Total liabilities and partners' equity $ 41,885,043 $ 76,959,976
------------ ------------
CONDENSED COMBINED STATEMENTS OF OPERATIONS
-------------------------------------------
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -------------------------
1997 1996 1997 1996
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $2,551,111 $2,982,265 $ 5,845,985 $6,386,534
Property operating
expenses (1,487,826) (1,556,636) (3,031,731) (3,149,976)
Depreciation (711,747) (964,604) (1,692,479) (1,922,887)
Provision for loss - - (1,472,096) -
Loss on sale (666,880) - (666,880) -
---------- ---------- ----------- ----------
Net income $ (315,342) $ 461,025 $(1,017,201) $1,313,671
========== ========== =========== ==========
Allocation of
net income:
The Company $ (157,317) $ 230,879 $ (507,873) $ 657,633
Joint venture
partner (158,025) 230,146 (509,328) 656,038
---------- ---------- ----------- ----------
$ (315,342) $ 461,025 $(1,017,201) $1,313,671
========== ========== =========== ==========
</TABLE>
Continued
-11-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
------------------------
4. Investments in Unconsolidated Joint Ventures - Continued
--------------------------------------------
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.
5. Mortgage Loans and Other Loans Receivable
-----------------------------------------
As of June 30, 1997, the Company held one mortgage loan with a principal
balance of approximately $2,978,000 and a discount of approximately
$682,000 and a promissory note with a principal balance of approximately
$1,306,000. The mortgage loan is collateralized by a 120-unit apartment
complex in Palm Bay, Florida. The promissory note is personally guaranteed
by an unaffiliated party.
6. MBS
---
At June 30, 1997, the Company's MBS portfolio had an approximate market
value of $8,890,000 and gross unrealized gains of $538,000 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. The Company has the
intention and ability to hold these to 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 June 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 June 30,
1997:
Contract Contract
Start End Interest
Borrowings Date Date(a) Rate Amount
---------- -------- -------- -------- ---------
Revolver 6/02/97 9/02/97 6.180% $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
===========
The following summarizes the Company's borrowings on the Credit Agreement
with the BankBoston and Mellon Bank as of June 30, 1997:
Contract Contract
Start End Interest
Borrowings Date Date(a) Rate Amount
---------- -------- --------- -------- ---------
LIBOR contract 4/02/97 7/01/97 (1) 7.5625% $ 3,000,000
LIBOR contract 5/28/97 9/25/97 7.5625% 7,000,000
LIBOR contract 6/24/97 7/24/97 (2) 7.4375% 6,000,000
LIBOR contract 3/31/97 7/29/97 (3) 7.500% 9,000,000
-----------
$25,000,000
===========
Continued
-12-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
------------------------
7. Debt Agreements - Continued
---------------
(1) On July 31, 1997, the Company repriced the LIBOR contract to a new
maturity of August 28, 1997 at a rate of 7.1875% per annum.
(2) On July 24, 1997, the Company repriced the LIBOR contract to a new
maturity of August 26, 1997 at a rate of 7.4375% per annum.
(3) On July 29, 1997, the Company repriced $3 million of this LIBOR
contract to a new maturity of August 29, 1997. The remaining $6
million was repriced to a base rate loan at rate of 8.5% of which $3.3
million was paid down on August 4, 1997.
Effective July 16, 1997, the banks reduced the interest rate on the
Company's $28.4 million revolving credit line with BankBoston and Mellon
Bank 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 with CS First Boston as of June 30, 1997:
Contract Contract
Start End Interest
Date Date(a) Rate Amount
-------- --------- --------- ----------
Repurchase Agreement 5/19/97 9/19/97 5.87% $8,300,000
(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 June 30, 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
June 30, 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 (2,052)
Minority income allocation 479
-------
Balance at June 30, 1997 $57,715
=======
Continued
-13-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
------------------------
8. Minority Interest - Continued
-----------------
On January 1, 1997, 338,333 Operating Partnership Units were issued to an
unrelated party in exchange for Westchester Apartments (See Note 3).
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.
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 could receive
additional Units equal to $1.2 million based on the benchmark price.
9. Related Party Transactions
--------------------------
In addition to property management fees, the following is a summary of fees
and reimbursements to an affiliate for the six months ended June 30:
1997 1996
---- ----
Costs reimbursements related
to the operation of the
Company's properties $221,084 $774,167
Fees and net reimbursements for
administrative services $635,007 $316,729
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. 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
-14-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
------------------------
10. 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 June 30, 1997 1,144,300
=========
Options exercised -
=========
Options available for grant
at June 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.
11. Subsequent Events
-----------------
Property Acquisition
--------------------
On July 29, 1997, the Operating Partnership acquired three town home
apartment communities located near Baltimore in Glen Burnie and
Millersville, Maryland, The three properties were acquired for a total of
$20.9 million comprised of $881,000 in cash, the assumption of $12.3
million in debt at interest rates of 7.5%, and $7.6 million of operating
partnership units. An agreement is in place for the acquisition of a fourth
property from the same seller and is expected to close in the third quarter
for a total of $6.5 million including the assumption of $5.3 million in
debt, cash of approximately $120,000 and operating partnership units of
$1.1 million.
Property Disposition
--------------------
On August 6, 1997, the Operating Partnership sold Crossroads Shopping
Center for cash of $12 million. Crossroads is a 211,186 square foot retail
center located in Atlanta, Georgia.
-15-
<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).
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.
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 six months ended June 30,
1997 and 1996.
Net income for the six months ending June 30, 1997 increased by
approximately $3.5 million when compared to the same period in 1996 primarily as
a result of a gain of approximately $6.4 million on the sale of Howell Commons
Apartments in January, 1997.
Income and Expenses:
--------------------
Rental income and property operating expenses, including repairs and
maintenance and real estate taxes increased for the three and six month periods
ended June 30, 1997 primarily due to increased weighted average apartment units.
Rental revenues for the six months ended June 30, 1997 increased $9.1 million or
35% over the prior year and property operating expenses, including repairs and
maintenance and real estate taxes, increased approximately $3.9 million or 24%
for the same periods. Average apartment units increased 28% between 1996 and
1997.
-16-
<PAGE>
Detail of the Company's apartment unit growth for the six months ended June
30 is set forth below:
1997 1996
---- ----
Apartment Units:
Beginning of period 12,435 9,433
Acquired 713 2,541
Sold (348) -
Completed developments 96 -
------ ------
End of period 12,896 11,974
====== ======
Weighted Average Units 12,638 9,867
====== ======
Percent increase 28% -
Property management operations began in 1997 in conjunction with the
Property Manager transaction effective March 1, 1997. As a result of the
acquisition of the property management business, the Company incurs expenses for
the property management operations staff including salaries, benefits and other
overhead expenses. (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
and six months ended June 30, 1997 and 1996 (dollars in thousands):
Six Months Ended Three Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
Weighted Average
Debt Outstanding
Fixed Rate $219,415 $164,326 $220,764 $175,242
Variable Rate 76,032 62,280 69,600 68,469
-------- -------- -------- --------
Total $295,447 $226,606 $290,364 $243,711
======== ======== ======== ========
Weighted Average
Interest Rates
Fixed Rate 7.74% 7.55% 7.70% 7.42%
Variable Rate 6.62% 6.76% 6.62% 6.66%
Since the first quarter of 1996, fixed rate debt increased primarily due to
debt of $57.7 million which was assumed with the acquisitions of four properties
and the conversion of $13.3 million from variable to fixed rate debt offset by
the pay down of approximately $7.3 million of fixed debt in the third quarter of
1996.
Depreciation and amortization increased for the three and six month periods
ending June 30, 1997 compared to 1996 due to an increased property asset base.
Joint venture net income decreased for the three and six month periods
ending June 30, 1997 compared to 1996 due to a valuation reserve recorded on the
Brookwood Village joint venture in the first quarter of 1997 and a loss on the
sale of Brookwood Village recorded in the second quarter of 1997. (See Note 4 to
the Consolidated Financial Statements for details).
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.
-17-
<PAGE>
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. The Company believes
that in order to facilitate a clear understanding of the operating results of
the Company, FFO should be analyzed in conjunction with the net income as
presented in the consolidated financial statements included elsewhere in this
report. FFO is determined in accordance with a resolution adopted by the Board
of Governors of the National Association of Real Estate Investment Trusts, Inc.
(NAREIT), and is defined as net income (loss) (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures. FFO is
calculated for the periods presented as follows (dollars in thousands):
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1997 1996 1997 1996
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Net income $ (625) $ (470) $ 2,270 $ (276)
Depreciation 7,898 6,824 15,559 12,967
Depreciation related to
joint venture 323 509 758 1,003
Valuation reserve recorded
on joint venture - - 740 -
Loss on sale of joint
venture asset 333 - 333 -
Amortization of intangibles
and costs associated with
workforce acquired 978 337 2,726 448
Minority interest (288) (53) (571) (61)
Gains of sale
of properties 44 - (5,365) -
---------- ---------- ---------- ----------
Funds from operations $ 8,663 $ 7,147 $ 16,450 $ 14,081
========== ========== ========== ==========
Funds from operations
per share $ .27 $ .26 $ .53 $ .52
========== ========== ========== ==========
Cash flows provided
by (used for)
Operating activities 15,754 13,545
Investing activities 19,955 (40,823)
Financing activities (34,483) 25,447
Weighted Average:
Shares 25,480,709 25,392,962 25,450,743 25,392,957
Units 6,004,702 2,455,056 5,401,699 1,716,444
---------- ---------- ---------- ----------
31,485,411 27,848,018 30,852,442 27,109,401
========== ========== ========== ==========
</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>
Quarter Ended June 30, Six Months Ended June 30,
----------------------------- ------------------------------
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $16,457 $15,870 3.7% $32,482 $31,594 2.8%
Expenses 6,500 6,579 (1.2)% 13,012 13,297 (2.1)%
------- ------- ------- -------
Net operating income $ 9,957 $ 9,291 7.2% $19,470 $18,297 6.4%
======= ======= ======= =======
Average occupancy 93.9% 93.7% 93.2% 93.7%
Average monthly rent
per unit $682 $660 $680 $657
</TABLE>
-18-
<PAGE>
C. Funds from Operations:- Continued
---------------------
Same-store Multifamily Communities - Continued
- ----------------------------------
Growth in same-store multifamily revenues was 3.7% for the 1997 second
quarter when compared to the 1996 second quarter. This growth was almost
entirely driven by increases in average rents of 3.3% as well as a modest
increase in occupancies. Year-to-date, revenues are up 2.8% which is a
combination of 3.5% rent growth offset by 0.7% in lower occupancies.
Expenses for the quarter ended June 30, 1997 and for the six months ended
June 30, 1997 when compared to the comparable prior year periods are down 1.2%
and 2.1%, respectively. The reduction in expenses is attributed to lower payroll
expense and maintenance and repairs expenditures.
Same-store Retail Properties
- ----------------------------
The following summarizes the four retail centers:
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1997 1996 % Change 1997 1996 % Change
------ ------ -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Revenues $1,872 $1,874 (0.1)% $3,702 $3,859 (4.1)%
Expenses 703 642 9.6% 1,404 1,363 3.0%
------ ------ ------ ------
Net operating income $1,169 $1,232 (5.1)% $2,298 $2,496 (7.9)%
====== ====== ====== ======
Average occupancy 93.71% 94.29% 94.03% 94.28%
</TABLE>
Same-store net operating income from the retail portfolio dropped $198,000
to $2,298,000 year-to-date when compared to the 1996 six month period. The drop
in NOI is primarily the result of retenanting at Tara Crossing Shopping Center
in Atlanta, Georgia. In late 1996, the Company accepted a buyout from a major
tenant who had discontinued business at the center. The vacant space was then
leased to a high quality tenant at current market rents, which were below those
paid by the prior tenant. By retenanting the center, the Company hopes to
attract additional leasing interest and improve future occupancy. Leasing
efforts are underway.
D. Liquidity and Capital Resources:
-------------------------------
The Company's net cash with respect to investing activities increased
approximately $60.1 million in 1997 compared to 1996 due to net proceeds from
the sale of real estate assets of approximately $34.7 million. In addition, cash
used in the acquisition of real estate assets decreased approximately $27.9
million. The Company's net cash with respect to financing activities decreased
approximately $59.9 million in 1997 compared to 1996 due to net borrowing
activity on the Company's credit agreements fluctuating by approximately $58.7
million.
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 second quarters of 1997 and 1996.
-19-
<PAGE>
D. Liquidity and Capital Resources:- Continued
-------------------------------
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 45% at June
30, 1997. Additionally, the Company's debt service coverage is 2.4 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 June 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 June 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 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.
-20-
<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: On June 23, 1997, the Company filed a proxy statement with
the Securities and Exchange Commission.
Item 5. Other Information
Response: None
Item 6. Exhibits and Reports on Form 8-K
Response: None
-21-
<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: August 14, 1997
-22-
