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 June 30, 1996................................
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-11224
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 July 29, 1996: 20,514,533 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
<TABLE>
<CAPTION>
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands except per share amounts)
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental operations........................... $ 20,069 $ 17,170 $ 39,233 $ 33,792
Other income................................ 191 355 383 661
------- ------ ------- ------
20,260 17,525 39,616 34,453
Expenses:
Property operating expenses................. 8,854 8,105 17,569 15,697
General and administrative.................. 505 620 933 1,168
Depreciation and amortization............... 3,382 2,824 6,648 5,649
Interest.................................... 3,349 2,613 6,357 5,575
------- ------ ------- ------
16,090 14,162 31,507 28,089
Operating income................................ 4,170 3,363 8,109 6,364
Minority interest in net income of consolidated
partnerships................................ ( 6)
------- ------ ------- -------
Net income...................................... $ 4,170 $ 3,363 $ 8,109 $ 6,358
======= ====== ======= =======
Per share:
Net income.................................. $ .20 $ .19 $ .39 $ .37
======= ====== ======= ======
Weighted average number of shares outstanding.. 20,645 18,446 20,637 17,383
========== ====== =========== ==============
See accompanying notes.
<PAGE>
<CAPTION>
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Real estate investments:
Property............................................................ $ 361,245 $ 356,278
Less accumulated depreciation....................................... ( 76,163) ( 69,584)
-------- --------
285,082 286,694
Construction in progress............................................ 93,483 69,436
-------- --------
378,565 356,130
Cash and cash equivalents............................................... 6,071 2,406
Cash reserved for additions to property, including $2,577 and
$2,413 of restricted cash in 1996 and 1995, respectively............ 5,150 4,643
Escrow deposits......................................................... 4,348 6,708
Deferred charges, less accumulated amortization of $2,221
and $1,664 in 1996 and 1995, respectively........................... 4,403 4,448
Other assets, net....................................................... 3,116 3,830
-------- -------
$ 401,653 $ 378,165
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable.................................................. $ 108,526 $ 129,286
Construction loans payable.............................................. 44,957 32,256
Revolving line of credit................................................ 51,600 16,500
Accounts payable and accrued expenses................................... 6,298 9,104
Dividends payable....................................................... 5,348 5,112
Accrued interest........................................................ 897 557
Tenant security deposits................................................ 1,915 1,878
-------- --------
219,541 194,693
-------- -------
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, 20,480,339 and
20,319,405 shares issued and outstanding
in 1996 and 1995, respectively................................... 205 203
Paid-in capital..................................................... 232,427 231,208
Accumulated deficit................................................. ( 50,520) ( 47,939)
-------- --------
Total stockholders' equity....................................... 182,112 183,472
-------- -------
$ 401,653 $ 378,165
========= ========
See accompanying notes.
3
<PAGE>
<CAPTION>
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share data)
Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
For the Six Months ended June 30, 1996
(unaudited)
Balance, January 1, 1996........................ 20,319,405 $ 203 $ 231,208 $( 47,939) $ 183,472
Net income.................................. 8,109 8,109
Sale of common stock........................ 83,484 1 1,097 1,098
Exercise of options for common stock, net
of stock tendered in payment............. 77,450 1 791 792
Notes receivable from common stock
options exercised........................ ( 669) ( 669)
Common stock dividends declared,
$.52 per share........................... (10,690) ( 10,690)
----------- -- ------- ------ -------
Balance, June 30, 1996......................... 20,480,339 $ 205 $ 232,427 $( 50,520) $ 182,112
=========== === ======== ======= ========
For the Six Months ended June 30, 1995
(unaudited)
Balance, January 1, 1995........................ 16,182,019 $ 161 $ 188,665 $( 41,974) $ 146,852
Net income.................................. 6,358 6,358
Repurchase common stock..................... ( 115,000) ( 1) ( 1,508) ( 1,509)
Sale of common stock, net of offering costs. 2,700,000 27 30,463 30,490
Exercise of options for common stock, net
of stock tendered in payment............. 145,033 2 1,505 1,507
Notes receivable from common stock options
exercise................................. ( 1,467) ( 1,467)
Conversion of debentures to common stock.... 314,600 3 3,039 3,042
Common stock dividends declared,
$.50 per share........................... ( 8,895) ( 8,895)
----------- -- ------- ------- -------
Balance, June 30, 1995......................... 19,226,652 $ 192 $ 220,697 $( 44,511) $ 176,378
=========== === ======== ======== ========
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
=========== === ======== ======== ========
See accompanying notes.
4
<PAGE>
<CAPTION>
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Six Months
Ended June 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows provided by operating activities:
Cash received from rental operations................................ $ 39,116 $ 34,029
Cash received from other sources.................................... 349 686
Operating expenses paid............................................. ( 18,122) ( 15,419)
Interest paid....................................................... ( 5,460) ( 5,274)
------- -------
Net cash provided by operating activities........................ 15,883 14,022
------- -------
Cash flows used in investing activities:
Cost of construction in progress.................................... ( 24,047) ( 32,911)
Proceeds from mortgage notes receivable............................. 6,279
Purchase of additional partnership interests........................ ( 1,593)
Additions to properties............................................. ( 4,967) ( 2,737)
Additions to capital improvement reserves........................... ( 507) ( 523)
Insurance claim reimbursements (advances)........................... 7 ( 47)
Receipts on mortgage notes receivable............................... 108
------- -------
Net cash used in investing activities............................ ( 29,514) ( 31,424)
------- -------
Cash flows provided by financing activities:
Revolving line of credit draws...................................... 35,100 10,300
Revolving line of credit payments................................... ( 35,000)
Cash received from construction loans............................... 12,701 21,805
Cash received from mortgage notes................................... 1,000
Repayment of mortgage loans......................................... ( 19,566)
Mortgage principal payments......................................... ( 1,194) ( 1,155)
Payment of loan costs............................................... ( 512) ( 85)
Repurchase of common stock.......................................... ( 1,509)
Payment of stock offering costs..................................... ( 1,572)
Cash distributions.................................................. ( 10,454) ( 7,838)
Proceeds from exercise of options, net of stock retired
and stockholder notes............................................ 123 40
Proceeds from issuance of common stock.............................. 1,098 32,062
------- -------
Net cash provided by financing activities........................ 17,296 18,048
------- -------
Net increase in cash and cash equivalents............................... 3,665 646
Cash and cash equivalents at beginning of period........................ 2,406 1,334
------- -------
Cash and cash equivalents at end of period.............................. $ 6,071 $ 1,980
======= =======
See accompanying notes.
5
<PAGE>
<CAPTION>
SOUTH WEST PROPERTY TRUST INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Six Months
Ended June 30,
1996 1995
---- ----
<S> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income.......................................................... $ 8,109 $ 6,358
Depreciation of real estate assets.................................. 6,483 5,488
Depreciation and amortization of other assets....................... 165 161
Amortization of loan costs.......................................... 557 471
Interest forfeited by debentureholders upon conversion.............. 6
Amortization of note receivable discount............................ ( 17)
Minority interest in income of consolidated partnerships............ 6
Decrease in other assets............................................ 638 759
Decrease in escrow deposits......................................... 2,360 1,733
Decrease in accounts payable and accrued expenses................... ( 2,806) ( 887)
Increase (decrease) in accrued interest............................. 340 ( 188)
Increase in tenant security deposits................................ 37 132
------ ------
Net cash provided by operations..................................... $ 15,883 $ 14,022
======= =======
<CAPTION>
Supplemental disclosure of non-cash financing and investing activity for the six
months ended June 30, 1996:
<S> <C>
Exercise of 127,395 options to purchase common stock as follows -
Options exercised.................................................................... $ 1,472
Shares retired....................................................................... ( 680)
Notes receivable..................................................................... ( 669)
------
Cash received..................................................................... $ 123
=======
<CAPTION>
Supplemental disclosure of non-cash financing activities for the six months
ended June 30, 1995:
<S> <C>
Conversion of debentures into 314,600 shares of common stock as follows -
Principal amount of debentures converted............................................. $ 3,146
Accrued interest forfeited by debenture holders upon conversion...................... 6
Unamortized debenture issue costs reclassified to cost of equity..................... ( 110)
------
Increase in stockholders' equity.................................................. $ 3,042
=======
Exercise of 210,000 options to purchase common stock as follows -
Options exercised.................................................................... $ 2,310
Shares retired....................................................................... ( 803)
Notes receivable..................................................................... ( 1,467)
------
Cash received..................................................................... $ 40
=======
</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 six months ended June
30, 1996 was based on 20,644,767 and 20,636,690 weighted average shares
outstanding during each of the periods, respectively. Earnings per share for the
three and six months ended June 30, 1995 was based on 18,446,071 and 17,382,651
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 $2,573,000 to provide for the payment of
recurring replacements to certain of its properties. In addition, reserves in
the amount of $2,577,000 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 - NOTES PAYABLE
Mortgage loans payable at June 30, 1996 carry a weighted average
interest rate of 7.82% and have a weighted average maturity of 5.3 years.
7
<PAGE>
A portion of the construction costs of the Company's development
program are financed with construction loans. The Company presently 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
June 1996, the Company extended the maturity of the construction loan secured by
the Promontory Pointe Apartments from July 1, 1996 to September 30, 1996.
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 June 30, 1996, the Company had an interest rate swap agreement with
a notional amount of $67,718,000. 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 six months ended June 30, 1996, the Company has capitalized
interest of approximately $985,000 related to construction and development of
properties.
NOTE 3 - STOCKHOLDERS' EQUITY
During the first six months of 1996, the Company accepted notes
receivable totaling $669,000 from certain officers and directors to exercise
options to purchase common stock. The notes receivable, which mature on December
31, 2003, are in amounts of 50% 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 will be forgiven ratably over seven years
beginning January 1, 1997, contingent upon continued service as an officer or
director. Options to purchase 127,395 shares of common stock were exercised, and
49,945 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 June 30, 1996, the Company had outstanding
20,480,339 shares of common stock and 1,552,517 options to purchase common stock
(of which 490,098 are vested).
The Company declared dividends of $.26 per share of common stock for the
quarters ended March 31 and June 30, 1996.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Six months ended June 30, 1996 compared to six months ended June 30,
1995 - Rental revenues for the first six months of 1996 were $39,233,000, a 16%
increase over rental revenues of $33,792,000 for the first six months of 1995.
This increase was primarily due to revenues from Oak Forest Apartments, which
was fully operational during the first half of 1996 and the increasing
contribution from the lease-up of the Company's other development properties.
Other income was $383,000 for the first six months of 1996, compared to $661,000
for the first six months of 1995. The decrease in other income is primarily the
result of the repayment of the Company's mortgage notes receivable during 1995.
Total revenues were $39,616,000 for the first six months of 1996 compared to
$34,453,000 for the first six months of 1995.
Operating expenses (property operating expenses plus general and
administrative expenses) were $18,502,000 for the first six months of 1996,
compared to $16,865,000 for the same period in 1995. This increase was primarily
attributable to expenses of recently completed development units and 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
49% in the first six months of 1995 to 47% in the first six 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.
The following table summarizes the percentage increase in revenues and
property operating expenses for the second quarter and first six months of 1996
compared to the same periods of 1995, for the 11,955 completed apartment units
which were owned by the Company for the entire six months ended June 30, 1996
and 1995:
Percentage Increase
1996 over 1995
--------------
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
Revenues from rental operations....... 4% 4%
Property operating expenses........... 2% 5%
---- ----
Net................................... 5% 3%
==== ====
Additions to property during the first six months of 1996 were
$4,967,000, compared to $2,737,000 for the first six months of 1995.
Depreciation and amortization increased $999,000 for the first six months of
1996 compared to the first six months of 1995, as the result of depreciation on
completed construction and capitalized improvements made to the properties.
Interest expense was $6,357,000 for the first six months of 1996,
compared to $5,575,000 for the first six months of 1995. This increase is
attributable to increased balances on the construction loans and the line of
credit.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 1996 aggregated $6,071,000,
compared to $2,406,000 at December 31, 1995. In addition, the Company has
accumulated cash reserves of $5,150,000 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.
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.
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 June 30, 1996, the
outstanding balance on the line of credit was $51,600,000.
9
<PAGE>
During the first half of 1996, the Company drew $35,100,000 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.
The Company plans to complete three new development properties with
1,018 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 $90,000,000. The Company has arranged for $41,352,000
of the estimated development costs to be funded from construction loans, and has
committed to fund the remaining $48,648,000 from available funds, draws on the
Company's line of credit or additional construction loans. As of June 30, 1996,
the Company had funded $26,756,000 of this commitment.
SWP plans to spend approximately $7,500,000 in 1996 on capital
improvements to increase the revenue-generating capabilities of its existing
properties. Funds for these improvements will come from available funds or draws
on the Company's line of credit.
10
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information.
On July 18, 1996, the Company executed a negotiated loan application
for a $60,000,000 permanent first mortgage loan having a fixed interest rate of
7.86%, a 10-year term and a 25-year amortization schedule. A $1,800,000 earnest
money deposit, of which $1,200,000 is refundable upon funding of the loan, was
paid. Loan approval is expected in August 1996 and the funding of the initial
$50,000,000 is anticipated in November 1996. The initial funding will be used to
retire interim financing on the Company's recently completed 460-unit Ashley
Oaks and 596-unit Promontory Pointe communities in San Antonio, Texas, and the
436-unit Phase I of the Oak Forest community in Lewisville (a Dallas suburb),
Texas. The loan is non-recourse to the Company except for certain rent
stabilization and environmental assurances. At any time during the first 42
months of the loan, the Company may convert at least $50,000,000 of the
principal balance to an unsecured, recourse loan, provided the Company has
received an investment grade rating of at least "BBB."
In July 1996, the Company also announced that it had commenced
development of a 260-unit second phase of its Oak Forest community in
Lewisville, Texas. It is expected that Phase II will be completed in April 1998
and that permanent financing will be provided out of the balance of the
$60,000,000 loan.
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 June 30, 1996.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated July 15, 1996, reporting Item 5
11
<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/ DIANA M. LAING
Diana M. Laing, Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: July 31, 1996
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.000
<CASH> 11,221
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 454,728
<DEPRECIATION> 76,163
<TOTAL-ASSETS> 401,653
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 205
<OTHER-SE> 181,907
<TOTAL-LIABILITY-AND-EQUITY> 401,653
<SALES> 20,069
<TOTAL-REVENUES> 20,260
<CGS> 0
<TOTAL-COSTS> 12,741
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,349
<INCOME-PRETAX> 4,170
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,170
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
