UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended: Commission File Number: 1-12358
September 30, 1998
COLONIAL PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Alabama 59-7007599
(State of organization) (IRS Employer
Identification Number)
2101 Sixth Avenue North 35203
Suite 750 (Zip Code)
Birmingham, Alabama
(Address of principal executive offices)
(205) 250-8700
(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 ___
As of November 6, 1998, Colonial Properties Trust had 26,054,634 Common
Shares of Beneficial Interest outstanding.
<PAGE>
COLONIAL PROPERTIES TRUST
INDEX TO FORM 10-Q
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income for the
Three Months and for the Nine Months Ended September 30, 4
1998 and 1997
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Report of Independent Accountants 10
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 2. Changes in Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT 18
Page 2
<PAGE>
<TABLE>
COLONIAL PROPERTIES TRUST
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
____________________
<CAPTION>
September 30, 1998
(Unaudited) December 31, 1997
----------- -----------
ASSETS
<S> <C> <C>
Land, buildings, and equipment, net ................................$ 1,586,099 $ 1,268,432
Undeveloped land and construction in progress ...................... 89,275 98,555
Cash and equivalents ............................................... 2,889 4,531
Restricted cash .................................................... 2,887 2,665
Accounts receivable, net ........................................... 8,552 7,301
Prepaid expenses ................................................... 2,825 3,164
Deferred debt and lease costs, net ................................. 6,805 6,901
Other assets ....................................................... 7,072 5,529
----------- -----------
$ 1,706,404 $ 1,397,078
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes and mortgages payable ........................................$ 855,292 $ 702,044
Accounts payable ................................................... 7,800 15,026
Accrued interest ................................................... 10,379 6,526
Accrued expenses ................................................... 15,883 2,814
Tenant deposits .................................................... 4,197 3,715
Unearned rent ...................................................... 3,567 2,253
----------- -----------
Total liabilities ............................................. 897,118 732,378
----------- -----------
Minority interest .................................................. 198,606 174,281
----------- -----------
Preferred shares of beneficial interest, $.01 par value,
10,000,000 shares authorized; 5,000,000 shares
issued and outstanding at September 30, 1998 and
December 31, 1997, respectively .............................. 50 50
Common shares of beneficial interest, $.01 par value,
65,000,000 shares authorized; 26,045,402 and 21,152,754
shares issued and outstanding at September 30, 1998 and
December 31, 1997, respectively ............................... 260 212
Additional paid-in capital ......................................... 659,629 524,605
Cumulative earnings ................................................ 116,148 82,716
Cumulative distributions ........................................... (165,074) (116,768)
Deferred compensation on restricted shares ......................... (333) (396)
----------- -----------
Total shareholders' equity .................................... 610,680 490,419
----------- -----------
$ 1,706,404 $ 1,397,078
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
Page 3
<PAGE>
<TABLE>
COLONIAL PROPERTIES TRUST
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share data)
_____________________
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------- --------- --------- ---------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenue:
<S> <C> <C> <C> <C>
Minimum rent ..........................................$ 54,664 $ 40,150 $ 150,669 $ 109,910
Percentage rent ....................................... 551 214 1,993 906
Tenant recoveries ..................................... 8,171 4,386 22,409 11,592
Other ................................................. 4,796 2,729 10,753 7,064
--------- --------- --------- ---------
Total revenue ...................................... 68,182 47,479 185,824 129,472
--------- --------- --------- ---------
Property operating expenses:
General operating expenses ............................ 5,838 3,393 14,543 9,010
Salaries and benefits ................................. 3,191 2,781 9,065 7,468
Repairs and maintenance ............................... 6,837 5,180 17,931 13,204
Taxes, licenses, and insurance ........................ 6,099 4,055 16,035 11,489
General and administrative ................................. 2,207 1,508 6,124 4,272
Depreciation ............................................... 11,942 8,372 32,897 22,426
Amortization ............................................... 528 162 1,208 888
--------- --------- --------- ---------
Total operating expenses ........................... 36,642 25,451 97,803 68,757
--------- --------- --------- ---------
Income from operations ............................. 31,540 22,028 88,021 60,715
--------- --------- --------- ---------
Other income (expense):
Interest expense ...................................... (13,917) (10,934) (38,108) (28,796)
Income (loss) from unconsolidated subsidiaries ........ (343) 104 (1,309) 130
Gains (losses) from sales of property ................. (16) -0- 17 (1)
Minority interest in consolidated operating property .. (62) (64) (62) (179)
--------- --------- --------- ---------
Total other expense ................................ (14,338) (10,894) (39,462) (28,846)
--------- --------- --------- ---------
Income before extraordinary item and
minority interest in CRLP .......................... 17,202 11,134 48,559 31,869
Extraordinary loss from early extinguishment of debt ....... (1) (2,927) (401) (3,408)
--------- --------- --------- ---------
Income before minority interest in CRLP ............ 17,201 8,207 48,158 28,461
Minority interest in income of CRLP ........................ 5,125 2,531 14,726 8,832
--------- --------- --------- ---------
Net income .........................................$ 12,076 $ 5,676 $ 33,432 $ 19,629
Dividends to preferred shareholders ........................ (2,735) -0- (8,203) -0-
--------- --------- --------- ---------
Net income available to common shareholders ...........$ 9,341 $ 5,676 $ 25,229 $ 19,629
========= ========= ========= =========
Net income per common share - basic and diluted ............$ 0.36 $ 0.28 $ 1.04 $ 1.01
========= ========= ========= =========
Weighted average common shares outstanding ................. 26,000 20,372 24,148 19,414
========= ========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
Page 4
<PAGE>
<TABLE>
COLONIAL PROPERTIES TRUST
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
___________________
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net income .............................................. $ 33,432 $ 19,629
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ......................... 34,105 23,314
(Income) loss from unconsolidated subsidiaries ........ 1,309 (130)
Minority interest ..................................... 14,788 9,011
Other ................................................. 927 3,807
Decrease (increase) in:
Restricted cash ....................................... (222) (381)
Accounts receivable ................................... (1,822) (692)
Prepaid expenses ...................................... 342 1,039
Other assets .......................................... (3,697) 69
Increase (decrease) in:
Accounts payable ...................................... (7,226) (12,240)
Accrued interest ...................................... 3,853 957
Accrued expenses and other ............................ 10,999 5,519
--------- ---------
Net cash provided by operating activities ......... 86,788 49,902
--------- ---------
Cash flows from investing activities:
Acquisition of properties ................................ (225,627) (113,400)
Development expenditures ................................. (68,547) (68,450)
Tenant improvements ...................................... (2,702) (1,289)
Capital expenditures ..................................... (12,388) (8,052)
Proceeds from sales of property, net of selling costs .... 908 -0-
Distributions from unconsolidated subsidiaries ........... 142 670
Capital contributions to unconsolidated subsidiaries ..... (22) (141)
--------- ---------
Net cash used in investing activities ............. (308,236) (190,662)
--------- ---------
Cash flows from financing activities:
Proceeds from common stock issuances, net of expenses paid 132,205 93,003
Principal reductions of debt ............................. (47,156) (101,589)
Proceeds from additional borrowings ...................... 198,976 175,246
Net change in revolving credit balances .................. (6,152) 21,211
Dividends paid to common and preferred shareholders ...... (48,306) (30,824)
Distributions to minority partners in CRLP ............... (16,288) (13,272)
Payment of mortgage financing cost ....................... (311) (1,334)
Other, net ............................................... 6,838 (1,769)
--------- ---------
Net cash provided by financing activities ......... 219,806 140,672
--------- ---------
Decrease in cash and equivalents .................. (1,642) (88)
Cash and equivalents, beginning of period ..................... 4,531 3,342
--------- ---------
Cash and equivalents, end of period ........................... $ 2,889 $ 3,254
========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
Page 5
<PAGE>
COLONIAL PROPERTIES TRUST
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
Note 1 -- Basis of Presentation
The accompanying unaudited consolidated condensed financial statements of
Colonial Properties Trust (the "Company") have been prepared by management in
accordance with generally accepted accounting principles for interim financial
reporting and in conjunction with the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the information included in the
Company's Annual Report as filed with the Securities and Exchange Commission on
Form 10-K for the year ended December 31, 1997, and with the information filed
with the Securities and Exchange Commission on Forms 10-Q for the quarters ended
March 31, 1998 and June 30, 1998. The December 31, 1997 balance sheet data
presented herein was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting principles.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which is effective for years
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and, in
accordance with the provisions of this Statement the Company will adopt the new
requirements retroactively in 1998.
Note 2 -- Acquisitions
River Hills I--On July 1, 1998, the Company acquired River Hills I, a
248-unit phase of the River Hills apartment complex on approximately 30 acres of
land in Tampa, Florida. The multifamily community was developed in 1985 and was
90% leased at the time of acquisition. The purchase price of $8.5 million was
funded through an advance on the Company's unsecured line of credit. The average
unit size is 907 square feet with average unit market rent of $549 per month.
Haverhill Apartments--On July 1, 1998, the Company acquired a 79.8%
interest in Haverhill Apartments, a 322-unit apartment complex on approximately
19 acres of land in San Antonio, Texas. The multifamily community was developed
in 1998 and was 90% leased at the time of acquisition. The purchase price of
$17.2 million was funded through an advance on the Company's unsecured line of
credit. The average unit size is 1,019 square feet with average unit market rent
of $857 per month. The remaining 20.2% ownership in this property is reflected
as "minority interest in consolidated operating property" in the Company's
statement of income, and is included in "minority interest" on the Company's
balance sheet and statement of cash flows.
Page 6
<PAGE>
Mansell Overlook 200 and Shoppes at Mansell--On July 1, 1998, the Company
completed the final phase of its merger with certain affiliates of Johnson
Development Company, LLC. The final phase included Mansell Overlook 200, a
six-story office building containing 163,000 square feet of space, and the
Shoppes at Mansell, a 21,000 square foot community shopping center.
Mansell Overlook 200 was developed in 1997 and was 95% occupied at the
time of the merger. This part of the merger, valued at $27.7 million, was funded
through the issuance of 396,365 limited partnership units in Colonial Realty
Limited Partnership valued at $11.7 million, and an advance on the Company's
unsecured line of credit.
The Shoppes at Mansell was also developed in 1997 and was 95% occupied at
the time of the merger. The merger of Shoppes at Mansell, valued at $3.7
million, was funded through the issuance of 76,809 limited partnership units in
Colonial Realty Limited Partnership valued at $2.3 million, and an advance on
the Company's unsecured line of credit.
Shades Brook Building--On July 13, 1998, the Company acquired the Shades
Brook Building, a three-story office building containing 35,000 square feet of
space in Birmingham, Alabama. Shades Brook was acquired for a total purchase
price of $3.1 million, which was financed through the issuance of 28,492 limited
partnership units in Colonial Realty Limited Partnership valued at $871,000, and
an advance on the Company's unsecured line of credit. Shades Brook was built in
1979 and was 93% occupied at the time of acquisition.
Concourse Center--On July 23, 1998, the Company acquired Concourse Center,
an office park comprised of four multi-tenant buildings in Tampa, Florida
totaling 290,000 square feet of leasable area. The purchase price of $30.1
million was financed through an advance on the Company's unsecured line of
credit. Concourse Center was built between 1981 and 1985 and was 99% occupied at
the time of acquisition.
In The Pines Apartments--On July 30, 1998, the Company acquired In The
Pines, a 256-unit multifamily apartment community on approximately 22 acres of
land in Augusta, Georgia. The community was developed in 1970 and 1988, and was
98% leased at the time of acquisition. The purchase price of $8.8 million was
funded through an advance on the Company's unsecured line of credit. The average
unit size is 993 square feet with average unit market rent of $671 per month.
Note 3 -- Increase in Revolving Credit Agreement
On July 10, 1998, the Company increased the borrowing capacity under its
unsecured line of credit from $200 million to $250 million. The credit facility,
which is used by the Company primarily to finance additional property
investments, bears interest at a rate ranging between 80 and 135 basis points
above LIBOR. The credit facility is renewable in July 2000 with approval of all
parties involved and provides for a two-year amortization in the event of
non-renewal.
Note 4 -- Debt Offering
On July 14, 1998, the Company completed a $175 million public offering of
unsecured senior notes by Colonial Realty Limited Partnership, its operating
partnership. The securities, which mature in July 2007, bear a coupon rate of
7.0%, and were priced to yield an effective rate of 7.09% over the nine-year
term. The Company used the net proceeds of the offering to repay a portion of
the outstanding balance on its unsecured line of credit.
Page 7
<PAGE>
Note 5 -- Net Income Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
(Amounts in thousands,
except per share data)
-----------------------------------------
Three Three Nine Nine
Months Months
Ended Ended Months Months
September September Ended Ended
30, 30, September September
30, 30,
1998 1997 1998 1997
-------- -------- -------- --------
Numerator:
Numerator for basic and
diluted net income per
share - net income $ 9,341 $ 5,676 $ 25,229 $ 19,629
available to common
shareholders
======== ======== ======== ========
Denominator:
Denominator for basic
net income per share -
weighted average common 26,000 20,372 24,148 19,414
shares
Effect of dilutive
securities:
Trustee and employee 44 46 44 46
stock options
-------- -------- -------- --------
Denominator for diluted
net income per share -
adjusted weighted 26,044 20,418 24,192 19,460
average common shares
======== ======== ======== ========
Basic and diluted net $ .36 $ .28 $ 1.04 $ 1.01
income per share
======== ======== ======== ========
Options to purchase 55,000 Common Shares at a weighted average exercise price of
$29.45 per share were outstanding during 1998 but were not included in the
computation of diluted net income per share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive.
Page 8
<PAGE>
Note 6 -- Pro Forma Information (Unaudited)
The following unaudited pro forma operating results for the Company have
been presented as if the 1997 and 1998 equity and debt offerings and the 1997
and 1998 property acquisitions and dispositions had occurred on January 1, 1997.
Unaudited pro forma financial information is presented for informational
purposes only and may not be indicative of what the actual results of operations
of the Company would have been had the events occurred as of January 1, 1997,
nor does it purport to represent the results of operations for future periods.
(Amounts in
thousands,
except per share
data)
---------------------
Nine Months Ended
September 30,
1998 1997
-------- ---------
Revenues $ 199,162 $ 177,526
======== =========
Income before minority interest and $ 51,078 $ 52,866
preferred dividends
======== =========
Net income available to common $ 28,150 $ 29,422
shareholders
======== =========
Net income per share - basic and $ 1.08 $ 1.13
diluted
======== =========
The pro forma information includes the operations of the properties acquired and
disposed in 1997, as discussed in the Company's 1997 Form 10-K, the properties
acquired in 1998 through September 30, as discussed in the Company's Forms 10-Q
for the quarters ended March 31, 1998 and June 30, 1998, and the properties
acquired in the third quarter 1998, as discussed in Note 2 above.
Note 7 -- Subsequent Events
Quarterly Distribution
On October 22, 1998, a cash distribution was declared to shareholders of
the Company and partners of Colonial Realty Limited Partnership in the amount of
$0.55 per share and per unit, respectively, totaling $20.1 million. The
distribution was declared to shareholders of record as of November 2, 1998, and
was paid on November 9, 1998.
Shareholder Rights Plan
On October 22, 1998, the Company's Board of Trustees adopted a Shareholder
Rights Plan in which preferred share purchase rights were granted as a
distribution at the rate of one right for each common share held of record as of
the close of business on November 2, 1998. Each right will initially entitle the
holder thereof to purchase 1/10,000th of a preferred share. One ten-thousandth
of a preferred share is intended to be approximately the economic equivalent of
one common share. The rights will expire at the close of business on November 1,
2008. At the time of adoption of the rights plan, the rights are neither
exercisable nor traded separately from the common shares. The rights will be
exercisable only if a person or group in the future becomes the beneficial owner
of 15% or more of the common shares or announces a tender or exchange offer
which would result in its ownership of 15% or more of the common shares.
Page 9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Colonial Properties Trust:
We have reviewed the accompanying consolidated condensed balance sheet of
Colonial Properties Trust (the "Company") as of September 30, 1998, and the
related consolidated condensed statements of income for the three-month and
nine-month periods ended September 30, 1998 and 1997, and the consolidated
condensed statements of cash flows for the nine-month periods ended September
30, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
January 19, 1998, except for Note 14, as to which the date is February 17, 1998,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
condensed balance sheet as of December 31, 1997, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Birmingham, Alabama
October 19, 1998
Page 10
<PAGE>
COLONIAL PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Colonial Properties Trust (Colonial or the Company) is engaged in the
ownership, development, management, and leasing of multifamily communities,
retail malls and shopping centers, and office buildings. Colonial is organized
as a real estate investment trust (REIT) and owns and operates properties in
nine states in the Sunbelt region of the United States. As of September 30,
1998, Colonial's real estate portfolio consisted of 47 multifamily communities,
38 retail properties, and 17 office properties.
As of September 30, 1998, Colonial was one of the largest diversified
REITs in the United States. Consistent with its diversified strategy, Colonial
manages its business with three separate and distinct operating divisions:
Multifamily, Retail, and Office. Each division has an Executive Vice President
that oversees growth and operations and has a separate management team that is
responsible for acquiring, developing, and leasing properties within each
division. This structure allows Colonial to utilize specialized management
personnel for each operating division. Although these divisions operate
independently from one another, constant communication among the Executive Vice
Presidents provides the Company with synergy allowing it to take advantage of a
variety of investment opportunities.
The following discussion should be read in conjunction with management's
discussion and analysis of financial condition and results of operations and all
of the other information appearing in the Company's 1997 Annual Report as filed
with the Securities and Exchange Commission on Form 10-K and with the financial
statements included therein and the notes thereto. As used herein, the terms
"Colonial" and "the Company" include Colonial Properties Trust, and one or more
of its subsidiaries including, among others, Colonial Realty Limited Partnership
(CRLP).
Any statement contained in this report which is not a historical fact, or
which might be otherwise considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as, and should be
considered, a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Examples of forward-looking statements
include the Company's anticipated sources and amounts of financing and the
timing, cost and expected results of the Company's Year 2000 compliance program.
Forward-looking statements are based upon assumptions and opinions concerning a
variety of known and unknown risks, including but not limited to changes in
market conditions, the supply and demand for leasable real estate, interest
rates, increased competition, changes in governmental regulations, and national
and local economic conditions generally, as well as other risks more completely
described in the Company's prospectuses and annual reports filed with the
Securities and Exchange Commission. If any of these assumptions or opinions
prove incorrect, any forward-looking statements made on the basis of such
assumptions or opinions may also prove materially incorrect in one or more
respects.
Page 11
<PAGE>
Results of Operations -- Three Months Ended September 30, 1998 and 1997
Revenue -- Total revenue increased by $20.7 million, or 43.6%, for the
third quarter of 1998 when compared to the third quarter of 1997. The majority
of this increase, $18.0 million, represents revenues generated by properties
acquired or developed during 1998 and the second half of 1997, net of revenues
from properties disposed of in 1997. The remaining increase primarily relates to
increases in rental rates at existing properties.
Operating Expenses -- Total operating expenses increased by $11.2 million,
or 44.0%, for the third quarter of 1998 when compared to the third quarter of
1997. The majority of this increase, $9.2 million, relates to additional
operating expenses associated with properties that were acquired or developed
during 1998 and the second half of 1997, net of operating expenses associated
with properties disposed of in 1997. The remaining increase primarily relates to
increases in operating expenses at existing properties.
Other Income and Expense -- Interest expense increased by $3.0 million, or
27.3%, for the third quarter of 1998 when compared to the third quarter of 1997.
The increase in interest expense is primarily attributable to the assumption of
acquisition-related debt, and the increased usage of the Company's revolving
credit agreement in conjunction with the financing of acquisitions and
developments.
Results of Operations -- Nine Months Ended September 30, 1998 and 1997
Revenue -- Total revenue increased by $56.4 million, or 43.5%, for the nine
months ended September 30, 1998 when compared to the nine months ended September
30, 1997. The majority of this increase, $50.0 million, represents revenues
generated by properties acquired or developed during 1998 and 1997, net of
revenues from properties disposed of in 1997. The remaining increase primarily
relates to increases in rental rates at existing properties.
Operating Expenses -- Total operating expenses increased by $29.0 million,
or 42.2%, for the nine months ended September 30, 1998 when compared to the nine
months ended September 30, 1997. The majority of this increase, $24.1 million,
relates to additional operating expenses associated with properties that were
acquired or developed during 1998 and 1997, net of operating expenses associated
with properties disposed of in 1997. The remaining increase primarily relates to
increases in operating expenses at existing properties and overall increases in
corporate overhead and personnel costs associated with the Company's continued
growth.
Other Income and Expense -- Interest expense increased by $9.3 million, or
32.3%, for the nine months ended September 30, 1998 when compared to the nine
months ended September 30, 1997. The increase in interest expense is primarily
attributable to the assumption of acquisition-related debt, and the increased
usage of the Company's revolving credit agreement in conjunction with the
financing of acquisitions and developments.
Liquidity and Capital Resources
During the third quarter of 1998, the Company invested $134.3 million in
the acquisition and development of properties. The Company financed this growth
through net proceeds from public offerings of debt totaling $172.5 million
during the third quarter (as discussed below), advances on its bank line of
credit, and cash from operations. As of September 30, 1998, the Company had one
bank line of credit with a balance outstanding of $110.9 million. On July 10,
1998, the Company increased its line of credit to provide for total borrowings
of up to $250 million. The increased line, which is used by the Company
primarily to finance property acquisitions and development, bears interest at a
rate ranging between LIBOR plus 80 to LIBOR plus 135 basis points, expires in
July 2000, and provides for a two-year amortization in the event of non-renewal.
Page 12
<PAGE>
On July 14, 1998, the Company completed a $175 million public offering of
unsecured senior notes by Colonial Realty Limited Partnership, its operating
partnership. The securities, which mature in July 2007, bear a coupon rate of
7.0%, and were priced to yield an effective rate of 7.09% over the nine-year
term. The Company used the net proceeds of the offering of $172.5 million to
repay a portion of the outstanding balance on its unsecured line of credit.
Management intends to replace significant borrowings that may accumulate
under the bank line of credit with funds generated from the sale of additional
equity securities and/or permanent financing, as market conditions permit.
Management believes that these potential sources of funds, along with the
possibility of issuing limited partnership units of Colonial Realty Limited
Partnership in exchange for properties, will provide the Company with the means
to finance additional acquisitions. Management anticipates that its net cash
provided by operations and its existing cash balances will provide the necessary
funds on a short- and long-term basis to cover its operating expenses, interest
expense on outstanding indebtedness, recurring capital expenditures, and
dividends to shareholders in accordance with Internal Revenue Code requirements
applicable to real estate investment trusts.
Year 2000 Issue
The Company utilizes management information systems and software
technology that may be affected by Year 2000 issues throughout its businesses.
The "Year 2000" problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19,"
but may not properly recognize the year 2000. If a computer system or software
application used by the Company or a third party dealing with the Company fails
because of the inability of the system or application to properly read the year
"2000," the results could conceivably have a material adverse effect on the
Company.
As a real estate owner, developer and manager, the Company's major
exposure for Year 2000 problems is the inability of automated systems (e.g.,
elevators, HVAC systems, and security access systems) at properties to function
properly on January 1, 2000. The Company has no internally generated programmed
software coding to correct, as substantially all of the software utilized by the
Company is purchased or licensed from external providers.
The Company has authorized the use of internal and external resources to
ensure that all automated systems are Year 2000 compliant. The Company has
developed a cross-functional task force, comprised of senior management, MIS
personnel, internal audit personnel, and all lines of business to address the
Year 2000 issue. Weekly meetings are held to ensure the commitments set forth by
the task force are met. The task force has been charged with minimizing the
impact of Year 2000 problems on internal operations and transactions that
involve the Company's customers, suppliers, or strategic business partners. This
is being achieved through a four-step process:
I. Awareness
II. Assessment
III. Validation
IV. Implementation
The Awareness Phase was the first step in addressing the Year 2000 issue. The
Awareness Phase included a definition of the problem, notification of key
personnel, implementation of the plan, and development of the task force to
address the issues.
Page 13
<PAGE>
The Assessment Phase was an evaluation of the size and complexity of the issues
surrounding Year 2000. This included communications with all divisional
management teams, who conducted inventories of potential internal Year 2000
compliance problems. A second component of the Assessment Phase was the
evaluation of the effect that customers', vendors', and strategic business
partners' compliance problems would have on the Company.
The Validation Phase includes the testing of the systems and components for Year
2000 compliance. The Company, along with external resources, have jointly tested
and identified all hardware and software applications that will need to be
upgraded to ensure Year 2000 compliancy. Based on the results of the evaluations
in the Awareness Phase, the Company decided to obtain written confirmation of
compliance from vendors of the previously identified potential problems. The
Company also decided to confirm compliance with vendors of other key products
and services as well as compliance of certain customers' ability to comply with
leases.
The Implementation Phase includes performing upgrades on all information
technology systems (e.g., personal computers, printers and software
applications) to ensure Year 2000 compliancy.
The Company has completed the first two phases of the plan and is
currently working internally and with external vendors on the final two phases.
The hardware and software testing and upgrades that are part of the
Implementation Phase are expected to be completed by year-end 1998.
The Year 2000 costs incurred by the Company through September 30, 1998,
totaled approximately $727,000, the majority of which was related to hardware
and software costs. This amount does not include the implicit costs associated
with the reallocation of internal staff hours to Year 2000 project related
efforts. At this time, management currently estimates additional Year 2000
compliance costs at between $75,000 and $100,000. This estimate is based on
management's current assessment of the Company's state of Year 2000 readiness,
and there can be no assurance that management's assessment of its compliance
requirements and the cost of corrective measures will not change s the Company
proceeds with the Validation and Implementation Phases. The Company anticipates
all phases of the plan to address the Year 2000 problem to be implemented by
mid-year 1999.
The Company's assessment of its readiness for the Year 2000 and the cost
and timing of bringing its systems into compliance has not caused the Company to
believe that the Year 2000 problem will have a material adverse effect on the
Company's financial condition or results of operations. The Company is
continually assessing the extent of Year 2000 compliance, by the Company and
third parties on whose systems the Company may depend, and the Company plans to
address compliance issues as they arise. Because the Company has not, at this
time, identified any significant problems that do not appear remediable through
current compliance efforts, the Company has not developed a comprehensive
contingency plan. However, if the Company identifies significant risks related
to its Year 2000 compliance or if the Company's progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.
Page 14
<PAGE>
Funds from Operations
The Company considers Funds From Operations ("FFO") a widely accepted and
appropriate measure of performance for an equity REIT that provides a relevant
basis for comparison among REITs. FFO, as defined by the National Association of
Real Estate Investment Trusts (NAREIT), means income (loss) before minority
interest (determined in accordance with GAAP), excluding gains (losses) from
debt restructuring and sales of property, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and joint
ventures. FFO is presented to assist investors in analyzing the performance of
the Company. The Company's method of calculating FFO may be different from
methods used by other REITs and, accordingly, may not be comparable to such
other REITs. FFO (i) does not represent cash flows from operations as defined by
GAAP, (ii) is not indicative of cash available to fund all cash flow needs and
liquidity, including its ability to make distributions, and (iii) should not be
considered as an alternative to net income (as determined in accordance with
GAAP) for purposes of evaluating the Company's operating performance. The
Company's FFO for the third quarter of 1998 and 1997 and nine months ended
September 30, 1998 and 1997 was computed as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
(in thousands) 1998 1997 1998 1997
- ---------------------------------------------- -------- --------- ---------
Net income available to common $9,341 $5,676 $25,229 $19,629
shareholders
Adjustments:
Minority interest in CRLP 5,125 2,531 14,726 8,832
Real estate depreciation and 12,117 8,451 33,104 22,720
amortization (1)
(Gains) losses from sales of 16 -0- (17) 4
property (1)
Debt prepayment penalties 1 2,927 401 3,408
- ---------------------------------------------- -------- --------- ---------
Funds From Operations $ 26,600 $19,585 $ 73,443 $ 54,593
- ---------------------------------------------- -------- --------- ---------
(1) Includes pro-rata share of adjustments for subsidiaries.
Page 15
<PAGE>
COLONIAL PROPERTIES TRUST
PART II -- OTHER INFORMATION
Item 2. Changes in Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
15. Letter re: Unaudited Interim Financial Information
27. Financial Data Schedule (EDGAR Version Only)
(b) Reports on Form 8-K
Form 8-K dated July 8, 1998, reported certain property acquisitions
during 1998 up to July 8, 1998, under Item 5, "Other Events."
Page 16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
COLONIAL PROPERTIES TRUST
Date: November 13, 1998 /s/ Howard B. Nelson, Jr.
-------------------------------------
Howard B. Nelson, Jr.
Chief Financial Officer
(Duly Authorized Officer
and Principal Financial Officer)
Date: November 13, 1998 /s/ Kenneth E. Howell
-------------------------------------
Kenneth E. Howell
Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
Page 17
<PAGE>
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D. C. 20549
Re: Colonial Properties Trust
(File No. 1-12358)
Registrations on Form S-8
Registrations on Form S-3
We are aware that our report dated October 19, 1998 on our review of interim
financial information of Colonial Properties Trust for the three-month and
nine-month periods ended September 30, 1998 and 1997 and included in the
Company's quarterly report on Form 10-Q for the quarters then ended, is
incorporated by reference in the registration statements on Form S-8 related to
certain restricted shares and stock options filed on September 29, 1994, Form
S-8 related to the Employee Share Option and Restricted Share Plan filed on
September 29, 1994; Form S-3 related to the Shelf Registration filed on November
20, 1997; Form S-3 related to the Dividend Reinvestment Plan filed on April 11,
1995, as amended; Form S-8 related to the registration of common stock issuable
under the Colonial Properties Trust 401(K)/Profit-Sharing Plan filed on October
15, 1996; Form S-8 related to the Employee Share Purchase Plan filed on May 15,
1997; Form S-8 related to the Non-employee Trustee Share Plan filed on May 15,
1997; Form S-8 related to changes to the First Amended and Restated Employee
Share Option and Restricted Share Plan and the Non-employee Trustee Share Option
Plan filed on May 15, 1997; and Form S-8 related to the Second Amended and
Restated Employee Share Option and Restricted Share Plan filed on July 31, 1998.
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not
be considered a part of the registration statement prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Birmingham, Alabama
November 13, 1998
Page 18
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