<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period Ended March 31, 1997.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
---------------- --------------
Commission File Number: 1-12478
IRVINE APARTMENT COMMUNITIES, INC.
-----------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Maryland 33-0698698
------------------------ ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
550 Newport Center Drive, Suite 300, Newport Beach, California, 92660
---------------------------------------------------------------------
(Address of principal executive offices)
(714) 720-5500
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
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 time as required), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common Stock, $0.01 Par Value -
19,783,121 shares as of April 25, 1997.
================================================================================
<PAGE> 2
IRVINE APARTMENT COMMUNITIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 1
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996 2
Consolidated Statements of Changes in Shareholders' Equity
for the three months ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Shareholders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1.
Irvine Apartment Communities, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands, except per share amounts) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land $ 178,808 $ 176,070
Buildings and improvements 868,352 849,924
- ---------------------------------------------------------------------------------------------------------------
1,047,160 1,025,994
Accumulated depreciation (225,890) (219,193)
- ---------------------------------------------------------------------------------------------------------------
821,270 806,801
Under development, including land 74,925 58,241
- ---------------------------------------------------------------------------------------------------------------
896,195 865,042
Cash and cash equivalents 30,283 3,205
Restricted cash 1,459 1,376
Deferred financing costs, net 19,537 20,187
Other assets 13,287 11,188
- ---------------------------------------------------------------------------------------------------------------
$ 960,761 $ 900,998
===============================================================================================================
LIABILITIES
Mortgages and notes payable
Line of credit $ 16,000
Tax-exempt mortgage bond financings $ 328,372 329,248
Conventional mortgage financings 134,150 134,761
Mortgage notes payable to The Irvine Company 51,023 51,227
Tax-exempt assessment district debt 21,793 21,828
- ---------------------------------------------------------------------------------------------------------------
535,338 553,064
Accounts payable and accrued liabilities 22,355 21,496
Security deposits 6,412 6,094
- ---------------------------------------------------------------------------------------------------------------
564,105 580,654
MINORITY INTEREST 186,362 140,327
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share; 10,000 shares authorized;
no shares issued or outstanding
Common stock, par value $0.01 per share; 150,000 shares authorized;
19,783 shares and 18,556 shares issued and outstanding, respectively 198 186
Excess stock, par value $0.01 per share; 160,000 shares authorized;
no shares issued or outstanding
Additional paid-in capital 233,048 202,116
Retained earnings (deficit) (22,952) (22,285)
- ---------------------------------------------------------------------------------------------------------------
210,294 180,017
- ---------------------------------------------------------------------------------------------------------------
$ 960,761 $ 900,998
===============================================================================================================
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
Page 1
<PAGE> 4
Irvine Apartment Communities, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited, in thousands, except per share amounts) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Rental income $42,092 $36,418
Other income 940 568
Interest income 248 103
- -------------------------------------------------------------------------------------
43,280 37,089
- -------------------------------------------------------------------------------------
EXPENSES
Property expenses 9,186 7,805
Real estate taxes 3,465 3,369
Property management fees 1,215 1,063
Interest expense, net 6,861 7,302
Amortization of deferred financing costs 649 662
Depreciation and amortization 6,751 6,618
General and administrative 1,634 1,582
- -------------------------------------------------------------------------------------
29,761 28,401
- -------------------------------------------------------------------------------------
Income before Minority Interest in Income 13,519 8,688
Minority interest in income 7,408 4,741
- -------------------------------------------------------------------------------------
NET INCOME $ 6,111 $ 3,947
=====================================================================================
SHARE DATA:
Weighted average number of shares outstanding 19,096 16,977
Net income per share $ 0.32 $ 0.23
Cash distributions declared and paid per share $ 0.365 $ 0.355
=====================================================================================
</TABLE>
See accompanying notes.
Page 2
<PAGE> 5
Irvine Apartment Communities, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited, in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Balance at beginning of period $ 186 $ 170
Net proceeds from common stock offering 11
Proceeds from stock options exercised 1
- --------------------------------------------------------------------------------------------------
Balance at end of period $ 198 $ 170
==================================================================================================
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period $ 202,116 $ 170,747
Net proceeds from dividend reinvestment and
additional cash investment plan 110
Proceeds from stock options exercised 1,022
Stock awards issued 241 200
Net proceeds from common stock offering 29,559
- --------------------------------------------------------------------------------------------------
Balance at end of period $ 233,048 $ 170,947
==================================================================================================
RETAINED EARNINGS (DEFICIT)
Balance at beginning of period $ (22,285) $ (15,484)
Net income 6,111 3,947
Distributions to shareholders (6,778) (6,026)
- --------------------------------------------------------------------------------------------------
Balance at end of period $ (22,952) $ (17,563)
==================================================================================================
==================================================================================================
TOTAL SHAREHOLDERS' EQUITY $ 210,294 $ 153,554
==================================================================================================
SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 18,556 16,975
Additional shares issued under the dividend
reinvestment and additional cash investment plan 5
Stock options exercised 63
Stock awards issued 9 10
Additional shares issued under common stock offering 1,150
- --------------------------------------------------------------------------------------------------
Balance at end of period 19,783 16,985
==================================================================================================
</TABLE>
See accompanying notes.
Page 3
<PAGE> 6
Irvine Apartment Communities, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited, in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,111 $ 3,947
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs 649 662
Depreciation and amortization 6,751 6,618
Minority interest in income 7,408 4,741
Increase (decrease) in cash attributable to changes in assets and liabilities:
Restricted cash (83) (4)
Other assets (2,178) (131)
Accounts payable and accrued liabilities 2,225 3,268
Security deposits 318 281
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 21,201 19,382
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets (473) (634)
Investment in real estate assets, net of construction payables (28,493) (13,193)
- ------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (28,966) (13,827)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit 5,000 26,100
Payments on lines of credit (21,000) (18,100)
Payments on tax-exempt mortgage bond financings (876) (816)
Principal payments (848) (784)
Proceeds from dividend reinvestment and additional cash investment plans 299
Proceeds from stock options exercised 1,023
Contributions from The Irvine Company 36,333
Proceeds from common stock offerings 29,969
Distributions to limited partner (28)
Distributions to The Irvine Company (8,251) (7,241)
Distributions to shareholders (6,778) (6,026)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 34,843 (6,867)
- ------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,078 (1,312)
Cash and Cash Equivalents at Beginning of Period 3,205 4,392
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,283 $ 3,080
============================================================================================================
Supplemental Disclosure of Cash Flow Information
Interest paid, net of amounts capitalized $ 6,974 $ 7,399
Tax-exempt assessment district debt assumed $ 0 $ 2,771
============================================================================================================
</TABLE>
See accompanying notes.
Page 4
<PAGE> 7
IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE AND UNIT AMOUNTS)
NOTE 1 - ORGANIZATION
Irvine Apartment Communities, Inc. (the "Company") operates as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
At March 31, 1997 the Company had a 45.1% general partnership interest in and
was the sole managing general partner of Irvine Apartment Communities, L.P. (the
"Operating Partnership") which began operations as of December 8, 1993, the date
of the Company's initial public offering of common stock (the "Offering"). In
connection with the Offering, The Irvine Company transferred 42 apartment
communities and a 99% interest in a limited partnership which owned one
apartment community to the Operating Partnership. At March 31, 1997, The Irvine
Company had a 54.7% limited partnership interest in the Operating Partnership.
On February 4, 1997, the Operating Partnership acquired the assets of Thompson
Residential Company, Inc. (see Note 4). The purchase price was paid by the
issuance of 74,523 limited partnership units in the Operating Partnership. At
March 31, 1997, Thompson Residential Company, Inc. had a 0.2% limited
partnership interest in the Operating Partnership. The Operating Partnership's
management and operating decisions are under the unilateral control of the
Company. The Company was incorporated in Delaware on September 10, 1993. On May
2, 1996, the Company changed its state of incorporation from Delaware to
Maryland.
The Company is a self-administered equity REIT engaged in the operation and
development of apartment communities in Orange County, California and beginning
in 1997, other locations in California. The Company utilizes independent third
party property management and construction management firms. As of March 31,
1997 the Operating Partnership owned 53 apartment communities on the Irvine
Ranch representing 13,843 operating apartment units and 993 units under
construction (collectively, the "Properties"). The Company broke ground on its
first "off-Ranch" apartment community, located in Northern California's Silicon
Valley, in May 1997. Until July 31, 2020, the Company has the exclusive right,
but not the obligation, to acquire land from The Irvine Company for development
of additional apartment communities on the Irvine Ranch.
Certain amounts in the 1996 financial statements have been reclassified to
conform with financial statements presentations in 1997.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. These financial
statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
Page 5
<PAGE> 8
NOTE 3 - MINORITY INTEREST AND SHAREHOLDERS' EQUITY
On February 20, 1997 the Company sold, pursuant to its shelf registration
statement filed on May 8, 1995, 1.15 million shares of common stock at $27.50
per share. Concurrently, The Irvine Company (see Note 5), pursuant to its rights
under the Operating Partnership Agreement, purchased 1.39 million additional
limited partnership units at $26.06 per unit (which is equal to the public
offering price of the common stock less an amount equivalent to the underwriting
discount) which are exchangeable for common stock on a one for one basis,
subject to adjustment and certain limitations. The proceeds from the two
transactions totaled $66 million and were used to repay all indebtedness
outstanding under the revolving line of credit, and will be used for general
corporate purposes, including ongoing development activities on and off the
Irvine Ranch. Availability under the shelf registration statement filed on May
8, 1995 was approximately $99 million at March 31, 1997.
Subsequent Event: On May 14 1997 the Company filed a shelf registration
statement with the Securities and Exchange Commission providing for the issuance
from time to time of up to $350 million of common stock, preferred stock, debt
securities, and warrants to purchase common stock, preferred stock and debt
securities. The Company plans to use the proceeds raised from any securities
issued under the shelf registration for general corporate purposes, including
the development of new apartment communities, acquisitions and the repayment of
existing debt. Concurrently, the Operating Partnership filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $350 million of debt securities. The
Operating Partnership plans to use the proceeds raised from any securities
issued under the shelf registration for general corporate purposes, including
the development of new apartment communities, acquisitions and the repayment of
existing debt.
The Company paid cash distributions of $0.365 per common share on February 28,
1997. On April 25, 1997 the Company declared a cash dividend of $0.365 per
common share that is payable on May 30, 1997. During the first quarter of 1996,
the Company paid a cash dividend of $0.355 per common share.
The computation of primary earnings per share is based on a weighted average of
19,095,586 shares of common stock outstanding during the three months ended
March 31, 1997. The weighted average number of shares excludes the effect of the
conversion of Operating Partnership units into shares. Such a conversion would
increase the weighted average number of shares outstanding to 42,230,056 for the
three months ended March 31, 1997.
Reconciliation of Operating Partnership Units Outstanding
<TABLE>
<CAPTION>
(in thousands) Three Months Ended March 31, 1997 Three Months Ended March 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
The Irvine The Irvine
Company Company Other Total Company Company Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period 18,556 22,292 40,848 16,975 20,397 37,372
Stock awards issued and options exercised 72 72 10 10
Dividend reinvestment plan 5 7 12
Common stock offering and related cash
contribution from The Irvine Company 1,150 1,394 2,544
Acquisition of Thompson Residential assets 75 75
Contributions of property by The Irvine Company
313 313 28 28
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of period 19,783 24,006 75 43,864 16,985 20,425 37,410
- ------------------------------------------------------------------------------------------------------------------------
Ownership interest at end of period 45.1% 54.7% 0.2% 100% 45.4% 54.6% 100%
========================================================================================================================
</TABLE>
Page 6
<PAGE> 9
The following tables represent a reconciliation of the minority interest
balances and the computation of the minority interest in income.
Reconciliation of Minority Interest
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $140,327 $109,133
Minority interest in income 7,408 4,741
Distributions (8,279) (7,241)
Cash contributions 38,333
Contributions of property 8,408 572
Contributions under dividend reinvestment plan 165
- -----------------------------------------------------------------------------------------
Balance at end of period $186,362 $107,205
=========================================================================================
</TABLE>
Computation of Minority Interest in Income
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Income before minority interest $13,519 $ 8,688
Income allocated to the Company based on its
ownership interest (6,111) (3,947)
- -----------------------------------------------------------------------------------------
Minority interest in income $7,408 $ 4,741
=========================================================================================
</TABLE>
NOTE 4 - ACQUISITION OF THOMPSON RESIDENTIAL ASSETS
On February 4, 1997, the Operating Partnership acquired for $2 million the
assets of Thompson Residential Company, Inc. ("TRC"), a privately held, Northern
California-based multi-family development company. Included in the purchase were
options to purchase three development sites located in Northern California's
Silicon Valley. The purchase price was paid by the issuance of 74,523 limited
partnership units in the Operating Partnership, exchangeable for common stock of
the Company, with the price per unit based on the average closing price of the
Company's common stock for the 10 trading days preceding the acquisition's
closing date. In addition, TRC may be paid up to an additional $2 million in
cash or limited partnership units if the apartment community achieves certain
performance targets. The three senior real estate executives at TRC have also
joined the Company with primary responsibility for the Company's California
operations outside of the Irvine Ranch.
NOTE 5 - CERTAIN TRANSACTIONS WITH RELATED PARTIES
Included in general and administrative expenses are charges from The Irvine
Company pursuant to an administrative service agreement covering services for
risk management, income taxes and other services of $29 for the three months
ended March 31, 1997 and $28 for the three months ended March 31, 1996. The
Irvine Company and the Company jointly purchase employee health care insurance
and property and casualty insurance. In addition, the Company incurred rent
totaling $120 and $85 for the three months ended March 31, 1997 and 1996,
respectively, related to leases with The Irvine Company that expire in 1997 and
1998. For the three months
Page 7
<PAGE> 10
ended March 31, 1997 The Irvine Company contributed $164, or the maximum
allowable in connection with stock issuances under the dividend reinvestment
and additional cash investment plan.
On February 10, 1997, the Company acquired a land site for $8.4 million from The
Irvine Company for the development of 316 rental units pursuant to the Land
Rights Agreement between the Company and The Irvine Company. The Company's
board committee of independent directors approved the purchase in accordance
with the Land Rights Agreement. The purchase price was paid through the
issuance of 313,439 additional limited partnership units in the Operating
Partnership to The Irvine Company. Pursuant to the terms of the acquisition, a
portion of the limited partnership units in the Operating Partnership are
subject to forfeiture if the apartment community to be constructed on the site
does not achieve a 10% unleveraged return on costs for the first twelve months
following stabililzed occupancy.
Concurrent with the Company's common stock offering on February 20, 1997 (see
Note 3), The Irvine Company, pursuant to its rights under the Operating
Partnership Agreement, purchased 1.39 million limited partnership units at a
price equal to the public offering price of $26.06 per unit (which is equal to
the public offering price of the common stock less an amount equivalent to the
underwriting discount) which are exchangeable for common stock on a one for one
basis, subject to adjustment and certain limitations.
One of the Company's directors is chairman of a bank which participates in the
Company's line of credit. Based on the bank's percentage participation in the
credit facility, the Company estimates that the amount of interest and fees paid
to the bank totaled $46 and $57 in the first quarter of 1997 and 1996,
respectively.
Page 8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with all the financial
statements appearing elsewhere in this report, as well as the information
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
Certain information set forth below is forward looking and involves various
risks and uncertainties. Such information is based upon a number of estimates
and assumptions that inherently are subject to business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996.
The Company's income before minority interest in income was $13.5 million for
the three months ended March 31, 1997, up from $8.7 million for the same period
of 1996. The improvement was due to the contribution of newly delivered rental
units from its development program, as well as an increase in revenues within
its stabilized portfolio achieved through higher occupancy and higher rental
rates (see Selected Operating Data on page 16).
REVENUE AND EXPENSE DATA
<TABLE>
<CAPTION>
Three Months Ended March 31,
(dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
COMMUNITIES STABILIZED MORE THAN TWO YEARS
Number of communities 43 43
Number of units at end of period 11,334 11,334
Operating revenues $34,502 $32,495
Property expenses $ 7,823 $ 7,071
Real estate taxes $ 2,732 $ 2,823
Property management fees $ 995 $ 940
Depreciation and amortization of real estate assets $ 5,146 $ 5,163
COMMUNITIES STABILIZED LESS THAN TWO YEARS *
Number of communities 5 5
Number of units at end of period 2,207 1,850
Operating revenues $ 7,666 $ 4,491
Property expenses $ 1,174 $ 734
Real estate taxes $ 688 $ 546
Property management fees $ 200 $ 123
Depreciation and amortization of real estate assets $ 1,434 $ 1,439
LEASE-UP COMMUNITIES
Number of communities 2
Number of units at end of period 302
Operating revenues $ 864
Property expenses $ 189
Real estate taxes $ 45
Property management fees $ 20
Depreciation and amortization of real estate assets $ 117
=====================================================================================
</TABLE>
* Represents five communities that began leasing in 1995 and reached stabilized
occupancy (95%) at various dates in 1996.
Page 9
<PAGE> 12
OPERATING REVENUES (rental and other income) increased to $43.0 million in the
first quarter of 1997, up from $37.0 million in the same period of 1996.
Operating revenues rose as a result of higher occupancy and rental rates, and
the contribution of newly delivered rental units from five properties which
achieved stabilization during 1996 and two new lease up communities. In total,
these new units added $8.5 million to operating revenues in the first quarter of
1997 compared to $4.5 million in the first quarter of 1996. Within communities
stabilized more than two years, operating revenues increased 6.2% from the first
quarter of 1996, as a result of improvement in average monthly rental rates,
higher non-rental income, and a rise in physical occupancy to 95.1% from 94.3%.
Average monthly rental rates increased to $1,050 in the first quarter of 1997
from $1,000 in the year-earlier quarter. Healthy job growth in the Company's
marketplace has been a key factor in the upward trend in rental rates.
PROPERTY EXPENSES increased to $9.2 million in the first quarter of 1997 from
$7.8 million in the first quarter of 1996. This increase reflects the added
expenses of newly delivered rental units from five properties which achieved
stabilization during 1996 and two new lease up communities. Property expenses
within communities stabilized more than two years increased by $0.7 million to
$7.8 million in the first quarter of 1997 from $7.1 million a year ago. In the
first quarter of 1997, average monthly property expenses, increased to $230 per
unit from $208 in the first quarter of 1996. This increase is primarily
attributed to unusually low unit property expenses in the first quarter of 1996
and higher insurance costs in the first quarter of 1997. Properties stabilized
less than two years added $1.2 million to property expenses in the first quarter
of 1997 and $0.7 million a year ago. Lease-up properties added $0.2 million to
1997 first quarter property expenses.
REAL ESTATE TAXES totaled $3.5 million in the first quarter of 1997 compared to
$3.4 million in the first quarter of 1996. Taxes increased in the first quarter
of 1996 due to the addition of rental units from lease-up properties, partially
offset by a small reduction in assessed values.
PROPERTY MANAGEMENT FEES increased to $1.2 million in the first quarter of 1997
from $1.1 million a year ago. Management fees increased in the first quarter of
1997 due to the addition of rental units and an increase in revenue from
communities stabilized more than two years.
NET INTEREST EXPENSE decreased to $6.9 million in the first quarter of 1997 from
$7.3 million in the first quarter of 1996. The decrease was largely due to a
lower level of borrowings from the revolver line of credit. The Company
capitalizes interest on projects actively under development using average
qualifying asset balances and applicable weighted average interest rates. The
average monthly qualifying asset balances for projects under development in the
first quarter of 1997 and 1996 were approximately $54.1 million and $52.4
million, respectively. Interest capitalized totaled $1.1 million in the first
quarter of 1997 compared to $1.0 million in the first quarter of 1996. Interest
incurred was $8.0 million in the first quarter of 1997 compared to $8.3 million
in the first quarter of 1996.
AMORTIZATION OF DEFERRED FINANCING COSTS was comparable in the first quarters of
1997 and 1996.
DEPRECIATION AND AMORTIZATION EXPENSE increased to $6.8 million in the first
quarter of 1997, up from $6.6 million in the first quarter of 1996. This
increase reflects the completion and delivery of newly developed rental units
from the Company's lease-up properties.
GENERAL AND ADMINISTRATIVE EXPENSE was comparable in the first quarters of 1997
and 1996.
Page 10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that cash provided by operations will be adequate to meet
both operating requirements and payment of distributions by the Company in
accordance with REIT requirements in both the short and long term.
LIQUIDITY: The Company expects to meet its long-term liquidity requirements,
such as construction, scheduled debt maturities and potential future property
acquisitions, through the issuance or refinancing of long-term debt, borrowings
from financial institutions, or the issuance of additional equity securities of
the Company and/or Operating Partnership units. On February 20, 1997, the
Operating Partnership increased its unsecured credit facility to $250 million.
The facility bears interest at Eurodollar plus 1.5% and is used primarily to
finance an ongoing rental property development program. Availability under the
credit facility was $250 million on March 31, 1997.
ADDITIONAL EQUITY: On February 20, 1997 the Company sold, pursuant to its shelf
registration statement filed on May 8, 1995, 1.15 million shares of common stock
at $27.50 per share. Concurrently, The Irvine Company, pursuant to its rights
under the Operating Partnership Agreement, purchased 1.39 million additional
limited partnership units at $26.06 per unit (which is equal to the public
offering price of the common stock less an amount equivalent to the underwriting
discount) which are exchangeable for common stock on a one for one basis,
subject to adjustment and certain limitations. The proceeds from the two
transactions totaled $66 million and were used to repay all indebtedness
outstanding under the revolving line of credit, and will be used for general
corporate purposes, including development of new apartment communities.
Availability under the shelf registration statement filed on May 8, 1995 was
approximately $99 million as of March 31, 1997.
NEW SHELF REGISTRATION STATEMENTS: On May 14, 1997 the Company filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $350 million of common stock, preferred
stock, debt securities, and warrants to purchase common stock, preferred stock
and debt securities. The Company plans to use the proceeds raised from any
securities issued under the shelf registration for general corporate purposes,
including the development of new apartment communities, acquisitions and the
repayment of existing debt. Concurrently, the Operating Partnership filed a
shelf registration statement with the Securities and Exchange Commission
providing for the issuance from time to time of up to $350 million of debt
securities. The Operating Partnership plans to use the proceeds raised from any
securities issued under the shelf registration for general corporate purposes,
including the development of new apartment communities, acquisitions and the
repayment of existing debt.
DEBT: The Company's conventional and tax-exempt mortgage debt bears interest at
fixed interest rates, or variable rates that have been effectively fixed through
interest rate swap agreements. Interest rates on conventional mortgage debt were
reduced to then-current market rates at the time of the Company's December 1993
initial public offering through interest rate buy-down agreements that are
scheduled to expire at various dates prior to loan maturity. The weighted
average effective interest rate on the Company's debt, including the non-cash
charges of amortization of deferred financing costs, was 6.41% at March 31,
1997. The Company uses interest rate swap agreements to effectively convert its
floating rate tax-exempt mortgage bond financings to a fixed-rate basis, thus
reducing the impact of fluctuations in interest rates on future income. A
buy-down agreement relating to $36.2 million of conventional debt will expire in
September 1997. The interest rate on that loan will increase from 5.82% to 8.3%.
At March 31, 1997, the average fixed interest rate on the tax-exempt mortgage
bond financings, after giving effect to the swap agreements and including all
fees, was 5.86% in the first quarter of 1997.
Page 11
<PAGE> 14
DEBT STRUCTURE AT MARCH 31, 1997
<TABLE>
<CAPTION>
Debt Weighted Average
(dollars in millions) Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed rate debt
Conventional mortgage financings $134.1 6.45%
Mortgage notes payable to The Irvine Company 51.0 5.75%
Tax-exempt mortgage bond financings 328.4 5.86%
Tax-exempt assessment district debt 5.6 6.27%
- ----------------------------------------------------------------------------------------------------------
Total fixed rate debt 519.1 6.01%
- ----------------------------------------------------------------------------------------------------------
Variable rate debt
Tax-exempt assessment district debt 16.2 3.41%
- ----------------------------------------------------------------------------------------------------------
Total variable rate debt 16.2 3.41%
==========================================================================================================
Total debt $535.3 5.93%
==========================================================================================================
</TABLE>
OPERATING ACTIVITIES: Cash flow provided by operating activities was $21.2
million for the first quarter of 1997 and $19.4 million for the first quarter of
1996. Cash provided by operating activities increased in 1997 primarily due to
higher revenues from newly developed apartment units, as well as an increase in
revenues within the Company's stabilized portfolio achieved through higher
occupancy and higher rental rates.
INVESTING ACTIVITIES: Cash flow used in investing activities was $29.0 million
and $13.8 million in the first quarters of 1997 and 1996, respectively. This
increase resulted from increased development activity in the first quarter of
1997 (see Capital Expenditures below).
FINANCING ACTIVITIES: Cash flow provided by (used in) financing activities was
$34.8 million and ($6.9) million in the first quarters of 1997 and 1996,
respectively. The Company received $66 million from the sale of common stock and
partnership units in the first quarter of 1997. These proceeds were used to pay
down borrowings from the lines of credit. Additionally, the Company paid $15.1
million in distributions in the first quarter of 1997 compared to $13.3 million
in the same period of 1996.
DEFERRED FINANCING COSTS
<TABLE>
<CAPTION>
Balance at Weighted Average
(dollars in millions) March 31, 1997 Remaining Term
- ---------------------------------------------------------------------------------
<S> <C> <C>
Interest rate buy-downs on
conventional mortgage financings $ 9.5 9.1 yrs
Loan origination costs and other 10.0 25.8 yrs
- ---------------------------------------------------------------------------------
Total $19.5 17.6 yrs
=================================================================================
</TABLE>
CAPITAL EXPENDITURES
CAPITAL EXPENDITURES ON NEW DEVELOPMENT: The Company's major cash requirements
in the next twelve months are expected to be for the construction of new
apartment communities and possibly for acquisitions of apartment communities.
Currently, the Company has six apartment communities under development
(Baypointe, Santa Maria, The Colony, Santa Rosa II, Santa Fe and Cupertino) that
will require total expenditures of approximately $218.1 million, of which $108.0
million had been incurred at March 31, 1997. The Company broke ground on its
Page 12
<PAGE> 15
first "off-Ranch" apartment community, located in Northern California's Silicon
Valley, in May 1997. Initial funding for these developments is expected to come
from the Company's unused $250 million unsecured revolving credit facility. In
addition, the Company may issue other debt or equity securities as discussed in
the Liquidity section.
LEASE-UP INFORMATION
Status at March 31, 1997
<TABLE>
<CAPTION>
Units
Leased as
Percentage a Percentage
Total Units Percentage Units of Delivered Units of Units
Apartment Community Units Delivered Delivered Occupied Units Occupied Leased Delivered
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Baypointe 300 182 61% 177 97% 218 120%
Santa Maria 227 120 53% 114 95% 135 113%
- --------------------------------------------------------------------------------------------------------------------
Total 527 302 57% 291 96% 353 117%
====================================================================================================================
</TABLE>
CONSTRUCTION INFORMATION
<TABLE>
<CAPTION>
Estimated Total
Commencement Initial Estimated
Commencement of Leasing Stabilized Costs
Apartment Community Village, City Units of Construction Activity Occupancy (in millions)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Baypointe Newport North, Newport Beach 300 11/95 10/96 3Q '97 $ 33.4
Santa Maria Westpark II, Irvine 227 3/96 11/96 3Q '97 24.6
The Colony Newport Center, Newport Beach 245 7/96 4Q '97 1Q '99 42.0
Santa Rosa II Westpark II, Irvine 207 12/96 4Q '97 3Q '98 27.2
Santa Fe Tustin Ranch, Tustin 316 2/97 4Q '97 1Q '99 39.0
Cupertino Cupertino 342 5/97 1Q '98 1Q '99 51.9
- -----------------------------------------------------------------------------------------------------------------------------
Total 1,637 $ 218.1
=============================================================================================================================
</TABLE>
The timing of future commencement of construction and initial stabilized
occupancy and estimated costs of apartment communities that are in development
are only estimates. Actual results will depend on numerous factors, many of
which are beyond the control of the Company. These include the extent and timing
of economic growth in the Company's rental markets; future trends in the pricing
of construction materials and labor; entitlement decisions by local government
authorities; changes in interest rate levels; and other changes in capital
markets. No assurance can be given that the timing, or estimates set forth in
the foregoing table will not vary substantially from actual results.
CAPITAL REPLACEMENTS ON STABILIZED PROPERTIES: Expenditures for capital
replacements totaled $0.5 million and $0.6 million in the first quarters of 1997
and 1996, respectively. Average capital replacements per unit for communities
stabilized more than two years decreased to $40 from $54 in the first quarters
of 1997 and 1996, respectively. Expenditures for capital replacements for the
full year of 1997 are expected to be similar to 1996 levels. The Company has a
policy of capitalizing expenditures related to asset acquisitions, costs which
increase the value of an existing asset, or costs which substantially extend an
existing asset's useful life. Capital replacements were as follows:
Page 13
<PAGE> 16
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
(in thousands, except per unit amounts) Total Per unit
- ------------------------------------------------------------------------------------
<S> <C> <C>
Carpet replacements $283 $25
Exterior painting, siding and stucco 17 1
Upgrades, renovations and major building items 75 7
Appliances, water heaters and air conditioning 37 3
Roofing, concrete and pavement 4 0
Equipment and other 42 4
- ------------------------------------------------------------------------------------
Total $458 $40
====================================================================================
</TABLE>
The Company also plans to incur approximately $5.0 million in capital
expenditures over the next two years at one of its existing apartment
communities, Promontory Point. Management believes that these capital
expenditures will generate additional revenue by enhancing the community's
appeal in the luxury segment of the marketplace.
IRVINE RANCH MASTER PLAN
The Irvine Company is a real estate investment and community development firm
engaged in the long-term development of the Irvine Ranch. The urbanization of
the Irvine Ranch began in the 1960s with the adoption of a comprehensive Master
Plan for future community development which originally constituted a large map
of the Irvine Ranch and a series of supporting maps detailing land uses.
Subsequently, The Irvine Company worked closely with the various local
jurisdictions which govern the Irvine Ranch to adopt general plans for the
future development of their jurisdictions. The Irvine Company's overall Master
Plan was refined to accord with the approved general plans and the residential,
commercial, industrial, environmental and aesthetic balance desired by each
jurisdiction. As a result, today the Master Plan is a compilation of the various
interlocking general plans described above. The Irvine Company continuously
engages in planning activities and the Master Plan refinement process is
ongoing. The Irvine Company works closely with local government representatives,
community residents, the Company and other civic and environmental groups to
obtain the necessary local support and entitlement for its developments. The
goal of the Master Plan was and remains to create innovative urban and suburban
environments through the well-planned, coordinated development of residential
communities and employment centers (which include major business and retail
centers, and research and development and industrial parks) as well as civil,
cultural, recreational, educational and other supportive facilities, all with an
emphasis on improving the quality of life and achieving long-term balanced
regional economic growth.
The Irvine Company's land use planning emphasizes market segmentation in order
to ensure adequate and appropriate allocation of land uses which support
sustained growth for the long term. Through careful planning, design and
marketing, The Irvine Company also promotes compatibility and synergy among
properties of the same type in order to maximize the likelihood of success of
new projects, to preserve and build value for existing projects and to build
sustainable long-term market value for homeowners, local merchants and
employers. In accordance with the Master Plan, The Irvine Company has created
numerous villages which are used as micro-planning areas in an effort to
facilitate the desired segmentation of products.
Each village on the Irvine Ranch has a thematic identity which characterizes the
primary features and attributes of the village and helps to identify the target
market for the village's residential product lines. For example, Tustin Ranch,
in the City of Tustin, is a family-oriented village featuring an 18-hole
championship golf course, athletic fields, jogging, hiking and equestrian
trails. Along the ocean is the village of Newport Coast, an upscale community
featuring ocean views and million-dollar custom built homes. The village of
Westpark, in Irvine,
Page 14
<PAGE> 17
caters to young professionals with growing families and offers the highly
renowned public school system and recreational facilities of the City of Irvine.
IMPACT OF INFLATION
The Company's business is affected by general economic conditions, including the
impact of inflation and interest rates. Substantially all of the Company's
leases allow, at time of renewal, for adjustments in the rent payable
thereunder, and thus may enable the Company to seek increases in rents.
Substantially all leases are for a period of one year or less. The short-term
nature of these leases generally serves to minimize the risk to the Company of
the adverse effects of inflation. For construction, the Company has entered into
various contracts for the development and construction of new apartment
communities. These are fixed-fee contracts and thus partially insulate the
Company from inflationary risk.
FUNDS FROM OPERATIONS
The Company generally considers funds from operations ("FFO") a useful measure
of performance for an equity REIT. The Company computes FFO in accordance with
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO is defined as net income (computed in accordance with
generally accepted accounting principles), excluding gains or losses from debt
restructuring and sales of property, plus depreciation and amortization of real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures. Other REIT's may not consistently use this definition of FFO. FFO
should be considered in conjunction with net income as presented in the
Company's Consolidated Financial Statements and Notes thereto. FFO should not be
considered an alternative to net income as an indication of the Company's
performance and is not indicative of cash available to fund all cash flow needs.
FFO does not represent cash flows from operating, investing or financing
activities as defined by generally accepted accounting principles.
CALCULATION OF FFO
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands, unaudited) 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 6,111 $ 3,947
Add:
Depreciation and amortization of real estate assets 6,697 6,602
Minority interest in income 7,408 4,741
- -----------------------------------------------------------------------------------------
Funds from operations $20,216 $15,290
- -----------------------------------------------------------------------------------------
Weighted average equivalent number of shares outstanding assuming
conversion of Operating Partnership units (see Note 3) 42,230 37,383
=========================================================================================
</TABLE>
SUPPLEMENTAL INFORMATION
The following section provides supplemental operating information. The
information is unaudited and is provided as a supplement to the accompanying
financial statements and management's discussion and analysis. It should be read
in conjunction with the Consolidated Financial Statements and Notes thereto
included herein and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996. Operating results for the three months ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997.
Page 15
<PAGE> 18
Irvine Apartment Communities, Inc.
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited) 1997 1996 Variance
=========================================================================================================
<S> <C> <C> <C>
UNIT DATA
- ---------------------------------------------------------------------------------------------------------
Average rentable units during the period 13,769 13,028 741
Rentable units at the end of the period 13,843 13,184 659
- ---------------------------------------------------------------------------------------------------------
COMMUNITIES STABILIZED MORE THAN TWO YEARS (A)
- ---------------------------------------------------------------------------------------------------------
Average physical occupancy 95.1% 94.3% 0.8%
Average economic occupancy (b) 93.6% 93.4% 0.2%
Average monthly gross scheduled rent per unit $ 1,050 $ 1,000 $ 50
Average monthly rental income per occupied unit $ 1,041 $ 998 $ 43
- ---------------------------------------------------------------------------------------------------------
COMMUNITIES STABILIZED LESS THAN TWO YEARS (C)
- ---------------------------------------------------------------------------------------------------------
Average physical occupancy 94.0% 59.0%
Average economic occupancy (b) 92.3% 56.2%
Average monthly gross scheduled rent per unit $ 1,232 $ 1,189
Average monthly rental income per occupied unit $ 1,219 $ 1,139
- ---------------------------------------------------------------------------------------------------------
LEASE-UP COMMUNITIES (D)
- ---------------------------------------------------------------------------------------------------------
Operating revenues (rental income and other income) - in thousands $ 864
Units delivered in the period 187
Cumulative units delivered at the end of the period 302
Units occupied at the end of the period 291
Average units occupied during the period 204
- ---------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------
Dividends paid per share $ 0.365 $ 0.355
Funds from operations (FFO) payout ratio 76.2% 86.8%
=========================================================================================================
</TABLE>
Footnotes:
(a) Financial results are for 43 properties totaling 11,334 units for
comparable periods of 1997 and 1996.
(b) Rental income divided by rental income plus vacant units at market rent.
(c) Financial results are for five properties totaling 2,207 units that
achieved stabilized occupancy during 1996.
(d) Financial results are for two properties that were in the lease-up phase in
1997.
Page 16
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
During the first quarter of 1997 the Operating Partnership sold to
affiliates of The Irvine Company the following units of limited
partnership interest ("L.P. units") in the Operating Partnership
pursuant to Section 4(2) of the Securities Act of 1933:
1. an aggregate of 6,221 L.P. units were sold in February 1997 for
$163,985 in cash at prices ranging from $26.34 to $26.88 per
L.P. unit, in connection with The Irvine Company's exercise of
its proportional purchase rights with respect to sales of the
Company's common stock pursuant to its Dividend Reinvestment and
Additional Cash Investment Plan.
2. 313,439 L.P. units were issued to The Irvine Company on February
10, 1997 as payment for a land site acquired for $8.4 million.
The number of L.P. units issued was equal to the purchase price
divided by the average of the closing prices of the common stock
for the 10 trading days immediately preceding the closing date
of the acquisition.
3. 1,394,194 L.P. units were sold in February 1997 for $36.3
million in cash, $26.06 per L.P. unit, in connection with The
Irvine Company's exercise of its proportional purchase rights
with respect to the Company's February 20, 1997 common stock
offering.
In addition, the Operating Partnership issued 74,523 L.P. units to TRC
in connection with the acquisition of the assets of TRC. The number of
L.P. units issued was equal to the purchase price divided by the
average of the closing prices of the common stock for the 10 trading
days immediately preceding the closing date of the acquisition.
Each of the foregoing L.P. units is exchangeable for common stock of
the Company on a one-for-one basis, subject to adjustment and certain
limitations set forth in the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
Page 17
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. 27: Financial Data Schedule (only included in
electronically-filed document)
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on February 20, 1997, relating
to the sale of 1.15 million shares of the Company's Common Stock and
The Irvine Company's exercise of its proportional purchase rights by
purchasing 1.394 million limited partnership units in the Operating
Partnership.
Page 18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRVINE APARTMENT COMMUNITIES, INC.
Date: May 14, 1997 By: /s/ JAMES E. MEAD
-------------------------------------------------
James E. Mead
Senior Vice President,
Chief Financial Officer and Secretary
By: /s/ SHAWN HOWIE
------------------------------------------------
Shawn Howie
Vice President, Corporate Finance and Controller
(Principal Accounting Officer)
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 30,283
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,047,160
<DEPRECIATION> 225,890
<TOTAL-ASSETS> 960,761
<CURRENT-LIABILITIES> 0
<BONDS> 535,338
0
0
<COMMON> 198
<OTHER-SE> 210,094
<TOTAL-LIABILITY-AND-EQUITY> 960,761
<SALES> 0
<TOTAL-REVENUES> 43,280
<CGS> 0
<TOTAL-COSTS> 20,617
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,861
<INCOME-PRETAX> 13,519
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,111
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
