SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 1-11224
SOUTH WEST PROPERTY TRUST INC.
(Exact name of registrant as specified in its charter)
Maryland 75-2434995
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
5949 Sherry Lane, Suite 1400, Dallas, Texas 75225-8010
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (214) 369-1995
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 ___.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of November 1, 1996: 20,717,187 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental operations........................... $ 21,165 $ 17,997 $ 60,398 $ 51,789
Other income................................ 299 511 682 1,172
------- ------ ------- ------
21,464 18,508 61,080 52,961
Expenses:
Property operating expenses................. 9,651 9,185 27,220 24,882
General and administrative.................. 409 270 1,342 1,438
Depreciation and amortization............... 3,552 3,036 10,200 8,685
Interest.................................... 3,633 2,642 9,990 8,217
------- ------ ------- ------
17,245 15,133 48,752 43,222
Operating income................................ 4,219 3,375 12,328 9,739
Minority interest in net income of consolidated
partnerships................................ (2) (8)
Gain on sale of real estate assets.............. 10 10
------- ------ ------- ------
Net income...................................... $ 4,219 $ 3,383 $ 12,328 $ 9,741
======= ====== ======= ======
Per share:
Net income.................................. $ .20 $ .18 $ .60 $ .54
======= ====== ======= ======
Weighted average number of shares outstanding. 20,705 19,362 20,659 18,050
======= ====== ======= ========
</TABLE>
See accompanying notes.
2
<PAGE>
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Real estate investments:
Property............................................................ $ 397,682 $ 356,278
Less accumulated depreciation....................................... (79,632) (69,584)
-------- --------
318,050 286,694
Construction in progress............................................ 73,598 69,436
-------- --------
391,648 356,130
Cash and cash equivalents............................................... 5,666 2,406
Cash reserved for additions to property, including $1,408 and
$2,413 of restricted cash in 1996 and 1995, respectively............ 5,075 4,643
Escrow deposits......................................................... 5,441 6,708
Deferred charges, less accumulated amortization of $2,500
and $1,664 in 1996 and 1995, respectively........................... 5,973 4,448
Other assets, net....................................................... 2,606 3,830
-------- -------
$ 416,409 $ 378,165
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable.................................................. $ 107,868 $ 129,286
Construction loans payable.............................................. 53,656 32,256
Revolving line of credit................................................ 56,600 16,500
Accounts payable and accrued expenses................................... 8,495 9,104
Dividends payable....................................................... 5,375 5,112
Accrued interest........................................................ 824 557
Tenant security deposits................................................ 1,891 1,878
-------- --------
234,709 194,693
-------- -------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued and outstanding..........................
Common stock, $.01 par value; 50,000,000 shares authorized, 20,587,453 and
20,319,405 shares issued and outstanding
in 1996 and 1995, respectively................................... 205 203
Paid-in capital..................................................... 233,145 231,208
Accumulated deficit................................................. ( 51,650) ( 47,939)
-------- --------
Total stockholders' equity....................................... 181,700 183,472
-------- -------
$ 416,409 $ 378,165
========= ========
</TABLE>
See accompanying notes.
3
<PAGE>
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share data)
<TABLE>
<CAPTION>
Common Stock Total
------------ Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
For the Nine Months ended September 30, 1996
- --------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996........................ 20,319,405 $203 $ 231,208 $ (47,939) $ 183,472
Net income.................................. 12,328 12,328
Sale of common stock........................ 117,559 1 1,528 1,529
Exercise of options for common stock, net
of stock tendered in payment............. 150,489 1 1,559 1,560
Notes receivable from common stock
options exercised........................ (1,150) (1,150)
Common stock dividends declared,
$.78 per share........................... (16,039) (16,039)
----------- -- ------- ------ ------
Balance, September 30, 1996.................... 20,587,453 $ 205 $ 233,145 $ (51,650) $ 181,700
=========== ==== ======== ======= ========
For the Nine Months ended September 30, 1995
- --------------------------------------------
(unaudited)
Balance, January 1, 1995........................ 16,182,019 $ 161 $ 188,665 $ (41,974) $ 146,852
Net income.................................. 9,741 9,741
Repurchase common stock..................... (115,000) (1) (1,508) (1,509)
Sale of common stock, net of offering costs. 2,703,386 30 30,473 30,503
Exercise of options for common stock, net
of stock tendered in payment............. 169,033 2 1,816 1,818
Notes receivable from common stock options
exercised................................ (1,772) (1,772)
Conversion of debentures to common stock.... 464,000 5 4,532 4,537
Common stock dividends declared,
$.75 per share........................... (13,904) (13,904)
----------- -- ------- ------- -------
Balance, September 30, 1995.................... 19,403,438 $ 197 $ 222,206 $ (46,137) $ 176,266
=========== === ======== ======== ========
For the Year Ended December 31, 1995
- ------------------------------------
Balance, January 1, 1995........................ 16,182,019 $ 161 $ 188,665 $ (41,974) $ 146,852
Net income.................................. 13,031 13,031
Repurchase common stock..................... (115,000) (1) (1,508) (1,509)
Sale of common stock, net of offering costs 2,711,853 27 30,648 30,675
Exercise of options for common stock, net
of stock tendered in payment............. 189,033 2 2,036 2,038
Notes receivable from common stock
options exercised........................ (1,945) (1,945)
Conversion of debentures to common stock.... 1,351,500 14 13,312 13,326
Common stock dividends declared,
$1.00 per share.......................... (18,996) (18,996)
----------- --- ------- ------- -------
Balance, December 31, 1995...................... 20,319,405 $ 203 $ 231,208 $ (47,939) $ 183,472
=========== === ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows provided by operating activities:
Cash received from rental operations................................ $ 60,494 $ 52,046
Cash received from other sources.................................... 584 1,173
Operating expenses paid............................................. (26,884) (25,005)
Interest paid....................................................... (8,886) (7,802)
------- -------
Net cash provided by operating activities........................ 25,308 20,412
------- -------
Cash flows used in investing activities:
Proceeds from sale of real estate................................... 2,814
Cost of construction in progress.................................... (37,016) (45,821)
Proceeds from mortgage notes receivable............................. 6,279
Purchase of additional partnership interests........................ (1,593)
Purchase of property................................................ (3,024)
Additions to properties............................................. (8,550) (4,293)
Additions to capital improvement reserves........................... (432) (592)
Insurance claim reimbursements (advances)........................... 66 (248)
Receipts on mortgage notes receivable............................... 108
Prepaid acquisition costs........................................... (214)
------- -------
Net cash used in investing activities............................ (45,932) (46,584)
------- -------
Cash flows provided by financing activities:
Revolving line of credit draws...................................... 40,100 20,300
Revolving line of credit payments................................... (35,000)
Cash received from construction loans............................... 21,401 27,999
Cash received from mortgage notes................................... 1,000
Repayment of mortgage loans......................................... (19,566)
Mortgage principal payments......................................... (1,852) (1,760)
Payment of loan costs............................................... (2,362) (83)
Repurchase of common stock.......................................... (1,509)
Payment of stock offering costs..................................... (1,597)
Cash distributions.................................................. (15,776) (12,643)
Proceeds from exercise of options, net of stock retired
and stockholder notes............................................ 410 46
Proceeds from issuance of common stock.............................. 1,529 32,100
------- -------
Net cash provided by financing activities........................ 23,884 28,853
------- -------
Net increase in cash and cash equivalents............................... 3,260 2,681
Cash and cash equivalents at beginning of period........................ 2,406 1,334
------- -------
Cash and cash equivalents at end of period.............................. $ 5,666 $ 4,015
======= =======
</TABLE>
See accompanying notes.
5
<PAGE>
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income.......................................................... $ 12,328 $ 9,741
Depreciation of real estate assets.................................. 9,952 8,433
Depreciation and amortization of other assets....................... 248 252
Amortization of loan costs.......................................... 836 752
Interest forfeited by debentureholders upon conversion.............. 48
Amortization of note receivable discount............................ (17)
Gain on sale of real estate assets.................................. (10)
Minority interest in income of consolidated partnerships............ 8
Decrease in other assets............................................ 1,007 662
Decrease in escrow deposits......................................... 1,267 83
Increase (decrease) in accounts payable and accrued expenses........ (610) 655
Increase (decrease) in accrued interest............................. 267 (379)
Increase in tenant security deposits................................ 13 184
------ ------
Net cash provided by operations..................................... $ 25,308 $ 20,412
======= =======
Supplemental disclosure of non-cash financing activity for the nine months ended
September 30, 1996:
Exercise of 200,315 options to purchase common stock as follows -
Options exercised................................................................. $ 2,349
Shares retired.................................................................... (789)
Notes receivable.................................................................. (1,150)
----------
Cash received.................................................................. $ 410
===========
Supplemental disclosure of non-cash investing and financing activities for the
nine months ended September 30, 1995:
Conversion of debentures into 464,000 shares of common stock as follows -
Principal amount of debentures converted.......................................... $ 4,640
Accrued interest forfeited by debenture holders upon conversion................... 48
Unamortized debenture issue costs reclassified to equity.......................... (151)
----------
$ 4,537
===========
Exercise of 255,000 options to purchase common stock as follows -
Options exercised................................................................. $ 2,895
Shares retired.................................................................... (1,077)
Notes receivable.................................................................. (1,772)
----------
Cash received.................................................................. $ 46
===========
In connection with the acquisition of the Foxfire Phase I Apartments, the
Company assumed first lien mortgage debt and other liabilities as
follows:
Fair value of property acquired................................................ $ 5,154
Mortgage debt assumed.......................................................... (2,798)
Tenant security deposits, property tax, accrued interest
and other assets and liabilities assumed................................... 77
----------
$ 2,433
===========
</TABLE>
See accompanying notes.
6
<PAGE>
SOUTH WEST PROPERTY TRUST INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The consolidated financial statements included herein have been prepared in
accordance with Securities and Exchange Commission Regulations and therefore do
not include all disclosures required under generally accepted accounting
principles. Reference is made to the consolidated financial statements filed
with Form 10-K for the year ended December 31, 1995 with respect to significant
accounting and financial reporting policies as well as other pertinent
information of South West Property Trust Inc. ("SWP" or the "Company"). The
consolidated financial statements reflect all adjustments which are, in the
opinion of management, of a normal recurring nature and necessary for a fair
statement of the results for the interim periods. Interim results of operations
are not necessarily indicative of the results to be expected for the full year.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and presentation - The consolidated financial statements
include the accounts of the Company, its wholly owned corporate subsidiaries and
partnerships in which the Company owns at least a 50% controlling interest. The
portion of net income from consolidated properties attributable to persons
holding minority interests in these consolidated properties is presented as a
single line item deduction from the Company's operating income in the income
statements. Investments in partnerships in which the Company owns less than a
50% interest are accounted for on the equity method. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Earnings per share - Earnings per share is based on the net income or loss
attributable to the common stock and the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding during the
periods presented. Earnings per share for the three and nine months ended
September 30, 1996 was based on 20,705,317 and 20,658,738 weighted average
shares outstanding during each of the periods, respectively. Earnings per share
for the three and nine months ended September 30, 1995 was based on 19,361,939
and 18,049,572 weighted average shares outstanding during each of the periods,
respectively. The number of shares assumed outstanding related to options to
purchase common stock has been calculated by application of the treasury stock
method.
Cash and cash equivalents - Cash and cash equivalents consist primarily of
cash in demand deposits and money market accounts and short-term commercial
paper carried at cost, which approximates fair value. Highly liquid debt
instruments purchased with a maturity of three months or less are considered to
be cash equivalents.
Cash reserved for additions to property - The Company has set aside cash
reserves in the amount of $3,667,000 to provide for the payment of recurring
replacements to certain of its properties. In addition, reserves in the amount
of $1,408,000 are being held in escrow by trustees and certain mortgage holders
for recurring replacements to the properties which secure the first mortgage
financing in the original principal amount of $100,000,000 (the "REMIC
Financing") and two other first mortgages. The carrying amount of these deposits
approximates their fair value.
NOTE 2 - CONSTRUCTION OF PROPERTIES
In September 1996, the Company acquired, for approximately $1,250,000, a
parcel of land adjacent to the Oak Forest Apartments in Lewisville, Texas, and
has commenced construction of 260 additional apartment units. The Company had
arranged for a construction loan for approximately 70% of the estimated project
costs at a rate of LIBOR plus 185 basis points. However, given the status of the
pending merger (see Note 5), SWP has decided not to close on this loan at this
time. The Company will fund the initial 30% of the estimated project costs.
7
<PAGE>
Below is a summary of the construction in progress activity for the three and
nine months ended September 30, 1996:
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Balance at beginning of period................... $ 93,483 $ 69,436
Additions to construction in progress............ 12,969 37,016
Completion of construction in progress and
reclass to real estate assets................ (32,854) (32,854)
------- -------
Ending balance at September 30, 1996............. $ 73,598 $ 73,598
======== ========
</TABLE>
NOTE 3 - NOTES PAYABLE
Mortgage loans payable at September 30, 1996 carry a weighted average
interest rate of 7.82% and have a weighted average maturity of 5.03 years. The
Company has an overall interest coverage ratio for the three and nine months
ended September 30, 1996, of 3.14 and 3.26, respectively.
<TABLE>
<CAPTION>
Balance
Interest Due or Original Balance at Due at
Rate Call Date Amount Sep 30, 1996 Maturity
---- --------- ------ ------------ --------
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS PAYABLE:
First Mortgage REMIC Financing.......... 7.01% 12/10/00 $ 50,000 $ 46,638 $ 39,953
First Mortgage REMIC Financing.......... 8.50% 02/10/01 50,000 47,733 41,735
Turtle Creek............................ 8.50% 10/01/99 5,248 5,071 4,891
High Ridge.............................. 8.50% 01/01/00 4,865 4,664 4,517
Foxfire - Dallas........................ COFI + 2.75% 07/01/25 3,800 3,762 0
------- ------- --------
Total mortgage loans................ $ 113,913 $ 107,868 $ 91,096
======= ======= ========
CONSTRUCTION LOANS PAYABLE:
Promontory Pointe....................... LIBOR + 2.25% 01/31/97 $ 19,800 $ 19,540
Ashley Oaks Phase II.................... LIBOR + 2.25% 06/30/97 7,354 7,117
Sierra Palms............................ LIBOR + 2.25% 12/29/96 12,402 10,423
Copper Mill............................. LIBOR + 2.00% 04/13/97 10,700 9,369
Providence Court........................ LIBOR + 2.00% 03/12/98 18,250 7,207
------- --------
Total construction loans............ $ 68,506 $ 53,656
======= ========
REVOLVING LINE OF CREDIT: LIBOR + 1.50% 03/15/97 $ 65,050 $ 56,600
======= ========
</TABLE>
A portion of the construction costs of the Company's development program
are financed with construction loans. As of September 30, 1996, the Company has
construction loan commitments of $68,506,000, which bear interest at rates
ranging from LIBOR plus 2% to LIBOR plus 2.25%. These construction loans, by
their terms, generally may be extended by the Company for up to three years. In
October 1996, the Company extended the maturity of the construction loan secured
by the Promontory Pointe Apartments from September 30, 1996 to January 31, 1997.
8
<PAGE>
In September 1994, the Company obtained a revolving line of credit in the
maximum amount of up to $75,000,000. The line of credit has a maturity date of
March 1997, followed by an amortization period of two years. The interest rate
on the line of credit is LIBOR plus 1.5%.
At September 30, 1996, the Company had an interest rate swap agreement with
a notional amount of $73,314,000. The Company has entered into the interest rate
swap agreement to convert floating rate liabilities to fixed rate liabilities.
The agreement fixes the interest rate on this amount of the Company's variable
rate debt at 7.9% through April 1997.
For the nine months ended September 30, 1996, the Company has capitalized
interest of approximately $2,203,257 related to construction and development of
properties.
NOTE 4 - STOCKHOLDERS' EQUITY
During the first nine months of 1996, the Company accepted notes receivable
totaling $1,150,000 from certain officers, directors and other key employees to
exercise options to purchase common stock. The notes receivable, which mature on
December 31, 2003, are in amounts of up to 80% of the option exercise price and
bear interest at the Applicable Federal Rate (as published by the Internal
Revenue Service) at the date of exercise. Principal in the amount of 50% of the
exercise price will be forgiven ratably over seven years with part of the
forgiveness beginning January 1, 1997 and the remainder beginning January 1,
1998, contingent upon continued service as an officer or director. Options to
purchase 200,315 shares of common stock were exercised, and 49,826 previously
issued shares of common stock were applied (at the market price of such shares
at the date of such application) to the exercise price of the options and were
retired. As of September 30, 1996, the Company had outstanding 20,587,453 shares
of common stock and 1,357,264 options to purchase common stock (of which 422,428
are vested).
In anticipation of the merger between the Company and United Dominion (see
Note 5), the Company has suspended its Dividend Reinvestment and Stock Purchase
Plan, effective as of November 1, 1996. Participant accounts currently reflect
the dividend distributed for the third quarter of 1996 and all voluntary cash
payments invested through October 15, 1996. Society National Bank, as Plan
Agent, has been instructed by the Company to hold any voluntary cash
contributions received after October 15 and prior to November 1 in the Plan
participants' accounts until further notice from the Company regarding
continuation or termination of the Plan, and to immediately return all
additional voluntary cash contributions received after November 1 to the Plan
participants. Although the Plan is suspended with respect to further
investments, Plan participants who wish to withdraw from or terminate their Plan
accounts may continue to do so. If the merger with United Dominion is approved
by the shareholders of United Dominion and by the Company's stockholders and the
merger is consummated effective as of December 31, 1996 as anticipated, the Plan
will be terminated and shares held in the Plan (as well as cash for fractional
shares) will be distributed. United Dominion currently has a dividend
reinvestment plan in which SWP's investors may be eligible to participate in the
event the merger is consummated.
The Company had a total debt to market capitalization of 42.7%. This
percentage was calculated using a share price of $13.875 the closing market
price on September 30, 1996.
The Company declared dividends of $.26 per share of common stock for each
of the quarters ended March 31, June 30 and September 30, 1996.
NOTE 5 - SUBSEQUENT EVENTS
On October 1, 1996, the Company executed a definitive agreement to merge
with United Dominion Realty Trust, Inc. ("United Dominion"), a Richmond,
Virginia based apartment REIT, in a tax free merger. The merger was approved
unanimously by the Board of Directors of both companies. Based upon the closing
stock price of United Dominion on September 30, 1996 ($14.00 per share),
shareholders of the Company will receive approximately $312 million of United
Dominion's common stock. In addition, United Dominion will assume approximately
$249 million of debt and other liabilities, making the total value of the
transaction approximately $561 million. The merger is subject to completion of
due diligence (which was completed on October 31, 1996) and the approval of the
9
<PAGE>
shareholders of both companies. Under the terms of the merger agreement, each
outstanding share of the Company's common stock will be exchanged for 1.0833
shares of United Dominion common stock. The closing price per share during the
pricing period of United Dominion's common stock averaged $13.988. Based on the
exchange ratio, the imputed exchange value to South West shareholders is $15.15
per share. The merger is expected to be effective at the close of business on
December 31, 1996.
On October 31, 1996, the Company repaid the $10,544,000 construction loan
secured by the Sierra Palms Apartments in Chandler, Arizona with funds drawn
from the line of credit and available cash.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Nine months ended September 30, 1996 compared to nine months ended
September 30, 1995 - Rental revenues for the first nine months of 1996 were
$60,398,000, a 17% increase over rental revenues of $51,789,000 for the first
nine months of 1995. This increase was primarily due to an increasing
contribution from development properties and a 4.4% increase in rental rates for
mature apartment communities. The development properties contributed
approximately 15% of the year-to-date revenues. Other income was $682,000 for
the first nine months of 1996, compared to $1,172,000 for the first nine months
of 1995. The decrease in other income was primarily the result of the repayment
of the Company's mortgage notes receivable during 1995 and receipt in 1995 of
excess insurance proceeds. Total revenues were $61,080,000 for the first nine
months of 1996 compared to $52,961,000 for the first nine months of 1995.
The following table summarizes the rental rate growth of the Company's
mature apartments. Mature apartments are defined as those communities that were
acquired prior to January 1995 and held throughout all of 1995 and 1996.
<TABLE>
<CAPTION>
Physical Occupancy
No. of ------------------ Average Rent
Mature 9 Months 9 Months 9 Months Rental Rate
Apartments 1996 1995 1996 Growth
---------- ----------- ------------ ------------------- ----------
<S> <C> <C> <C> <C> <C>
Dallas/Fort Worth 6,787 94.6% 93.5% $485 5.0%
San Antonio 1,141 92.4% 93.4% 474 3.2%
Houston 1,058 90.8% 91.3% 369 5.6%
Austin 517 88.8% 93.9% 460 5.3%
Phoenix 392 93.5% 93.8% 482 4.8%
Little Rock 512 95.2% 94.0% 533 5.9%
Other 1,548 91.6% 93.9% 477 2.7%
------ ---- ---- --- ---
11,955 93.4% 93.4% $474 4.4%
====== ==== ==== === ===
</TABLE>
Operating expenses (property operating expenses plus general and
administrative expenses) were $28,562,000 for the first nine months of 1996,
compared to $26,320,000 for the same period in 1995. This increase was primarily
attributable to operating expenses in 1996 of recently completed development
units and marginally higher operating expenses on the properties that were
operational for all of 1995 and 1996. Total operating expenses as a percentage
of total revenues declined from 50% in the first nine months of 1995 to 47% in
the first nine months of 1996, primarily as the result of higher profit margins
from the Company's completed development units and general and administrative
expenses being spread over a larger number of units.
Additions to property during the first nine months of 1996 were $8,550,000,
compared to $4,293,000 for the first nine months of 1995. Most of the increase
is the result of a strategic decision to spend $7,400,000 in 1996 on
revenue-enhancing or expense-reducing capital improvements. Depreciation and
amortization increased $1,515,000 for the first nine months of 1996 compared to
the first nine months of 1995, as the result of depreciation on completed
construction and capitalized improvements made to the properties.
Interest expense was $9,990,000 for the first nine months of 1996, compared
to $8,217,000 for the first nine months of 1995. This increase was attributable
to increased balances on the construction loans and the line of credit.
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 1996 aggregated $5,666,000,
compared to $2,406,000 at December 31, 1995. In addition, the Company has
accumulated cash reserves of $5,075,000 to fund recurring replacements to its
properties. Estimated annual additions to such reserves increased from $105 per
apartment unit in 1995 to $110 per unit in 1996. The estimate is based on the
expected replacement cost and useful lives of roofs, pools, boilers, parking
lots, exterior painting, signage and clubroom and model apartment furniture.
11
<PAGE>
Management anticipates that cash generated from property operations and cash on
hand will be adequate to fund working capital requirements in the near-term and
for the foreseeable future.
On October 1, 1996, the Company executed a definitive agreement to merge
with United Dominion Realty Trust, Inc. ("United Dominion"), a Richmond,
Virginia based apartment REIT, in a tax free merger. The merger was approved
unanimously by the Board of Directors of both companies. Based upon the closing
stock price of United Dominion on September 30, 1996 ($14.00 per share),
shareholders of the Company will receive approximately $312 million of United
Dominion's common stock. In addition, United Dominion will assume approximately
$249 million of debt and other liabilities, making the total value of the
transaction approximately $561 million. The merger is subject to completion of
due diligence (which was completed on October 31, 1996) and the approval of the
shareholders of both companies. Under the terms of the merger agreement, each
outstanding share of the Company's common stock will be exchanged for 1.0833
shares of United Dominion common stock. The closing price per share during the
pricing period of United Dominion's common stock averaged $13.988. Based on the
exchange ratio, the imputed exchange value to South West shareholders is $15.15
per share. The merger is expected to be effective at the close of business on
December 31, 1996.
In September 1994, the Company obtained a revolving line of credit in the
maximum amount of $75,000,000. The Company can currently draw up to a total of
$65,050,000 on the line of credit, which amount may be increased as additional
properties are added as security for the loan. At September 30, 1996, the
outstanding balance on the line of credit was $56,600,000.
During the first nine months of 1996, the Company drew $40,100,000 on the
line of credit. Such funds were used to repay the mortgage loans secured by the
Oak Forest Apartments and the Sunset Pointe Apartments and to pay construction
costs related to the Company's development program.
During the third quarter of 1996, the Company transferred the costs of its
246-unit Ashley Oaks II apartment community in San Antonio, Texas, and its
320-unit Sierra Palms apartment community in Chandler, Arizona, from
construction in progress to real estate investments. The Company also announced
that it had purchased land adjacent to its recently-completed 436-unit Oak
Forest community in Lewisville, Texas (for approximately $1,250,000), and has
commenced development of a 260-unit second phase that should be completed in
early 1998. The Company had arranged for a construction loan for approximately
70% of the estimated project cost at the rate of LIBOR plus 185 basis points.
However, given the current status of the merger process and United Dominion's
lower borrowing costs, SWP has decided not to close on this loan at this time.
The Company plans to complete two development properties with 698 units and
three additions or substantial modifications to existing properties with 436
units in 1996 and 1997. The total cost of this development program is estimated
to be $67,000,000. The Company has arranged for $28,950,000 of the total
estimated development costs to be funded from construction loans, and has
committed to fund the remaining cost from available funds, draws on the
Company's line of credit or additional construction loans. As of September 30,
1996, the Company had funded $21,243,000 of the remaining $38,050,000
commitment.
SWP plans to spend approximately $7,400,000 in 1996 on revenue enhancing or
expense reducing capital improvements to increase the net operating income
generating capabilities of its existing properties. Funds for these improvements
will come from available funds or draws on the Company's line of credit.
In anticipation of the merger between the Company and United Dominion (see
Note 5), the Company has suspended its Dividend Reinvestment and Stock Purchase
Plan, effective as of November 1, 1996. Participant accounts currently reflect
the dividend distributed for the third quarter of 1996 and all voluntary cash
payments invested through October 15, 1996. Society National Bank, as Plan
Agent, has been instructed by the Company to hold any voluntary cash
contributions received after October 15 and prior to November 1 in the Plan
participants' accounts until further notice from the Company regarding
continuation or termination of the Plan, and to immediately return all
additional voluntary cash contributions received after November 1 to the Plan
participants. Although the Plan is suspended with respect to further
investments, Plan participants who wish to withdraw from or terminate their Plan
accounts may continue to do so. If the merger with United Dominion is approved
by the shareholders of United Dominion and by the Company's stockholders and the
merger is consummated effective as of December 31, 1996 as anticipated, the Plan
will be terminated and shares held in the Plan (as well as cash for fractional
12
<PAGE>
shares) will be distributed. United Dominion currently has a dividend
reinvestment plan in which SWP's investors may be eligible to participate in the
event the merger is consummated.
This quarter SWP launched its home page on the World Wide Web. The Company
will utilize the Internet to communicate SWP's vision, performance, and property
information to its shareholders, future residents, and the financial community.
The SWP web site may be accessed to communicate with the Company, order property
brochures, review financial information and press releases. The site includes
photographs of the Company's properties to view, location maps with phone
numbers and addresses, floor plans and a list of available amenities. Please
visit SWP on the Internet (http://www.realpage.com/swprop). Your comments and
visits are welcome.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No. Description
27 Article 5 Financial Data Schedule for the Three Months
Ended September 30, 1996.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated July 15, 1996, reporting Item 5
Current Report on Form 8-K dated October 1, 1996, reporting Item 5.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH WEST PROPERTY TRUST INC.
By: /s/ LEWIS H. SANDLER
--------------------
Lewis H. Sandler, Executive Vice President,
Secretary, General Counsel and Director
By: /s/ DANIEL M. JONES III
-----------------------
Daniel M. Jones III, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 4, 1996
15
<PAGE>
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<PERIOD-END> SEP-30-1996
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