<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period Ended JUNE 30, 1996.
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____.
Commission File Number: 1-12478
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 - 18,477,451 shares as of August 8, 1996.
<PAGE> 2
IRVINE APARTMENT COMMUNITIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I FINANCIAL INFORMATION
The Company hereby amends and restates with this Form
10-Q/A its Quarterly Report for the six months ended
June 30, 1996 on Form 10-Q, dated August 13, 1996.
The principal changes from the Form 10-Q, dated
August 13, 1996 are as follows:
-- Management's Discussion and Analysis and related
Selected Operating Data have been modified eliminating
the presentation of "operating expenses", "net
operating income" and "gross operating margin" and
separately disclosing the significant changes in
property expenses and real estate taxes.
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 1
Consolidated Statements of Operations for the six months
and three months ended June 30, 1996 and 1995 2
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 1996 and 1995 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
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>
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PART I - FINANCIAL INFORMATION
ITEM 1.
Irvine Apartment Communities, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands, except per share amounts) 1996 1995
===========================================================================================================================
(unaudited)
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land $ 173,166 $ 163,169
Buildings and improvements 825,361 768,737
- ---------------------------------------------------------------------------------------------------------------------------
998,527 931,906
Accumulated depreciation (205,601) (192,106)
- ---------------------------------------------------------------------------------------------------------------------------
792,926 739,800
Under development, including land 37,898 73,727
- ---------------------------------------------------------------------------------------------------------------------------
830,824 813,527
Cash and cash equivalents 4,290 4,392
Restricted cash 1,659 1,181
Deferred financing costs 21,494 22,814
Other assets 10,268 11,316
- ---------------------------------------------------------------------------------------------------------------------------
$ 868,535 $ 853,230
===========================================================================================================================
LIABILITIES
Mortgages and notes payable
Line of credit $ 43,000 $ 22,000
Tax-exempt mortgage bond financings 330,956 332,602
Conventional mortgage financings 135,938 136,960
Mortgage notes payable to The Irvine Company 51,624 52,011
Tax-exempt assessment district debt 21,873 19,713
- ---------------------------------------------------------------------------------------------------------------------------
583,391 563,286
Accounts payable and accrued liabilities 22,691 20,254
Security deposits 5,763 5,124
- ---------------------------------------------------------------------------------------------------------------------------
611,845 588,664
MINORITY INTEREST 104,994 109,133
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;
16,987 shares and 16,975 shares issued and outstanding, respectively 170 170
Excess stock, par value $0.01 per share; 160,000 shares authorized;
no shares issued or outstanding
Additional paid-in capital 170,961 170,747
Retained earnings (deficit) (19,435) (15,484)
- ---------------------------------------------------------------------------------------------------------------------------
151,696 155,433
- ---------------------------------------------------------------------------------------------------------------------------
$ 868,535 $ 853,230
===========================================================================================================================
</TABLE>
Note: The balance sheet at December 31, 1995 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.
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Irvine Apartment Communities, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
----------------------------- -----------------------------
(unaudited, in thousands, except per share amounts) 1996 1995 1996 1995
========================================================================================================================
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 74,430 $ 64,597 $ 38,012 $ 32,515
Other income 1,440 1,040 872 574
Interest income 186 117 83 81
- ------------------------------------------------------------------------------------------------------------------------
76,056 65,754 38,967 33,170
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property expenses 16,212 15,311 8,407 7,819
Real estate taxes 6,695 5,940 3,326 2,951
Property management fees 2,168 1,883 1,105 955
Interest expense, net 15,092 12,669 7,790 6,192
Amortization of deferred financing costs 1,320 7,051 658 2,976
Depreciation and amortization 13,557 10,911 6,939 5,524
General and administrative 3,168 2,924 1,586 1,495
- ------------------------------------------------------------------------------------------------------------------------
58,212 56,689 29,811 27,912
- ------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST 17,844 9,065 9,156 5,258
Extraordinary item - charge related to debt extinguishment 23,427 23,427
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST IN INCOME 17,844 (14,362) 9,156 (18,169)
Minority interest in income (loss) 9,739 (15,681) 4,998 (17,386)
========================================================================================================================
NET INCOME (LOSS) $ 8,105 $ 1,319 $ 4,158 ($ 783)
========================================================================================================================
SHARE DATA:
Weighted average number of shares outstanding 16,981 11,800 16,986 11,800
Income after minority interest and before
extraordinary item per share $ 0.48 $ 0.38 $ 0.24 $ 0.11
Net income per share $ 0.48 $ 0.11 $ 0.24 ($ 0.07)
Cash dividends declared and paid per share $ 0.710 $ 0.680 $ 0.355 $ 0.340
========================================================================================================================
</TABLE>
See accompanying notes.
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Irvine Apartment Communities, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Six Months Ended June 30,
(unaudited, in thousands, except per share amounts) 1996 1995
====================================================================================================================================
<S> <C> <C>
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Balance at beginning of period $170 $118
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $170 $118
====================================================================================================================================
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period $170,747 $87,345
Proceeds from dividend reinvestment and additional cash investment plans 14
Stock awards issued 200
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $170,961 $87,345
====================================================================================================================================
RETAINED EARNINGS (DEFICIT)
Balance at beginning of period ($15,484) ($5,710)
Net income 8,105 1,319
Distributions to shareholders (12,056) (8,024)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of period ($19,435) ($12,415)
====================================================================================================================================
====================================================================================================================================
TOTAL SHAREHOLDERS' EQUITY $151,696 $75,048
====================================================================================================================================
SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 16,975 11,800
Additional shares issued under the dividend reinvestment and additional cash investment plans 2
Stock awards issued 10
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of period 16,987 11,800
====================================================================================================================================
</TABLE>
See accompanying notes.
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Irvine Apartment Communities, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
(unaudited, in thousands) 1996 1995
===================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $8,105 $1,319
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary item - charge related to debt extinguishment 23,427
Amortization of deferred financing costs 1,320 7,051
Depreciation and amortization 13,557 10,911
Minority interest in income (loss) 9,739 (15,681)
Increase (decrease) in cash attributable to changes in assets and
liabilities:
Restricted cash (478) (51)
Other assets 965 (3,828)
Accounts payable and accrued liabilities 1,841 2,665
Security deposits 639 281
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 35,688 26,094
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets (1,892) (1,455)
Investment in real estate assets, net of construction payables (24,653) (65,831)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (26,545) (67,286)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit 54,900 88,544
Payments on lines of credit (33,900) (23,400)
Proceeds from tax-exempt mortgage bond financings 334,190
Payments on tax-exempt mortgage bond financings (1,646) (326,938)
Principal payments on mortgage notes payable (1,130) (1,043)
Principal payments on notes payable to The Irvine Company (387) (365)
Principal payments and refinancing on assessment district liens (611) (105)
Deferred financing costs (9,237)
Proceeds from dividend reinvestment and additional cash investment plans 77
Distributions to The Irvine Company (14,492) (12,658)
Distributions to shareholders (12,056) (8,024)
- --------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (9,245) 40,964
- --------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (102) (228)
Cash and Cash Equivalents at Beginning of Period 4,392 3,468
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,290 $3,240
====================================================================================================================
Supplemental Disclosure of Cash Flow Information
Interest paid, net of amounts capitalized $15,087 $11,200
Tax-exempt assessment district debt assumed $2,771 $4,184
====================================================================================================================
</TABLE>
See accompanying notes.
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IRVINE APARTMENT COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Irvine Apartment Communities, Inc. (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 operates as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
At June 30, 1996 the Company had a 45.4% 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 (the "Limited Partner")
transferred 42 apartment communities and a 99% interest in a limited partnership
which owned one apartment community to the Operating Partnership. At June 30,
1996, The Irvine Company had a 54.6% 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 is a self-administered equity REIT engaged in the operation and
development of apartment communities in Orange County, California. As of June
30, 1996 the Operating Partnership owned 50 properties containing 13,411
operating apartment units and had 657 units under construction (collectively,
the "Properties"). 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.
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 and six months ended June 30, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996.
These financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1995.
Certain amounts in the 1995 financial statements have been reclassified to
conform with financial statement presentations in 1995.
NOTE 2 - EQUITY
Shelf Registration Statement: On May 8, 1995 the Company filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $250 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 statement for general corporate
purposes, including the development of new apartment communities, acquisitions
and the
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repayment of existing debt. As discussed in the Annual Report on Form 10-K/A for
the year ended December 31, 1995, on August 8, 1995, common stock totaling $89.3
million was sold under the shelf registration. Pursuant to the shelf
registration statement, on July 3, 1996 the Company completed the sale of 1.49
million shares of common stock at $20.125 per share. The proceeds from this
offering of $30.0 million, together with proceeds from the sale of newly issued
limited partnership units to The Irvine Company (see Note 3), totaled $60.0
million. Proceeds were used to repay $43 million indebtedness outstanding under
the revolving line of credit and the remaining proceeds will be used to fund
ongoing development programs and for general corporate purposes. Following the
completion of the transaction on July 3, 1996, the Company had a 45.7% general
partnership interest and The Irvine Company had a 54.3% limited partnership
interest in the Operating Partnership. Current availability under the shelf
registration statement is $130.7 million.
The Company paid cash dividends of $0.355 per common share on February 29, 1996
and May 31, 1996. On July 30, 1996, the Company declared a cash dividend of
$0.365 per common share that is payable on August 30, 1996.
The computation of primary earnings per share is based on a weighted average of
16,981,342 shares of common stock outstanding during the six months ended June
30, 1996. 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 37,397,047 for the
six months ended June 30, 1996.
NOTE 3 - CERTAIN TRANSACTIONS WITH RELATED PARTIES
Included in general and administrative expenses are charges from the Limited
Partner pursuant to an administrative service agreement covering services for
risk management, income taxes and other services of $53,000 for the first six
months of 1996 and $25,000 for the three months ended June 30, 1996. The amounts
for the corresponding periods in 1995 were $53,000 and $23,000, respectively. In
addition, the Company incurred rent totaling $155,000 in the first half of 1996
and $78,000 in the three months ended June 30, 1996 related to leases with the
Limited Partner that expire in 1996 and 1998. These amounts for the
corresponding periods in 1995 were $108,000 and $59,000, respectively. For the
six months ended June 30, 1996 the Limited Partner contributed $42,000, or the
maximum allowable under the dividend reinvestment and additional cash investment
plan.
In March 1996 the Company acquired a land site for $3.3 million from The Irvine
Company for the development of 227 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 as discussed in the Annual Report on Form 10-K/A for the
year ended December 31, 1995. As partial financing for the acquisition of the
site, the Company elected to assume $2.8 million in tax-exempt assessment
district debt. This debt represents a lien on the property resulting from debt
issued by municipal government authorities to finance the construction of
infrastructure. The debt obligations are repaid through annual assessments. The
balance of the purchase price was paid through the issuance of 28,358 additional
limited partnership units in the Operating Partnership to The Irvine Company.
On July 29, 1996 the Company acquired a land site for $3.5 million from The
Irvine Company for the development of 245 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
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the Land Rights Agreement as discussed in the Annual Report on Form 10-K/A for
the year ended December 31, 1995. Of the purchase price, $2.4 million was paid
through the issuance of 115,544 additional limited partnership units in the
Operating Partnership to The Irvine Company.
Concurrent with the Company's common stock offering on July 3, 1996 (see Note
2), The Irvine Company, pursuant to its rights under the Operating Partnership
agreement, purchased 1.49 million limited partnership units at a price equal to
the public offering price of $20.125 per common share of stock, or a total of
$30.0 million. These units 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 $170,000 and $113,000 in the first half of 1996 and the
three months ended June 30, 1996, respectively. Interest and fees for the
corresponding periods in 1995 were $140,000 and $102,000, respectively.
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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/A for the year ended
December 31, 1995.
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 JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995.
The Company's income before extraordinary item and minority interest was $9.2
million for the three months ended June 30, 1996, up from $5.3 million for the
same period of 1995. The improvement was due to the contribution of newly
delivered rental units from the Company's development program, as well as cost
reductions in property expenses within its stabilized portfolio.
OPERATING REVENUES (rental and other property income) increased to $38.9 million
in the second quarter of 1996, up from $33.1 million in the same period of 1995.
Operating revenues rose largely as a result of the contribution of newly
delivered rental units from five properties in their lease-up phase. These new
units added $5.7 million to operating revenues in the second quarter of 1996
compared to $0.5 million in the second quarter of 1995. Within the Company's
stabilized portfolio, operating revenues for the period increased 1.9% from the
second quarter of 1995, as a result of improvement in average monthly rental
rates, higher non-rental income, and a rise in physical occupancy to 95.2% from
94.6% in the second quarter of 1995. Average monthly rental rates increased to
$1,001 in the second quarter of 1996 from $992 in the year-earlier quarter.
PROPERTY EXPENSES increased to $8.4 million in the second quarter of 1996 from
$7.8 million in the second quarter of 1995. This increase reflects the added
expenses of newly delivered rental units from five lease-up properties. Property
expenses in the stabilized portfolio decreased by $0.3 million to $7.3 million
in the second quarter of 1996 from $7.6 million a year ago. Over the past two
years, the Company has achieved sustained reductions in its per unit property
expenses through aggressive bidding of external service and purchase contracts
and a series of initiatives to enhance the efficiency of customer service and
property maintenance operations. In the second quarter of 1996, average monthly
property expenses per unit, within the Company's stabilized portfolio decreased
to $216 from $224 in the second quarter of 1995. Lease-up properties added $1.1
million to property expenses in 1996 compared to $0.2 million in the same period
of 1995.
REAL ESTATE TAXES increased in 1996 due to the addition of rental units in
lease-up properties, partially offset by a small reduction in assessed values.
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NET INTEREST EXPENSE increased to $7.8 million in the second quarter of 1996
from $6.2 million in the second quarter of 1995. The increase was largely due to
a lower level of capitalized interest resulting from decreased construction
activity. 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 second quarter of 1996 and 1995 were
approximately $33.5 million and $97.0 million, respectively. Interest
capitalized totaled $0.7 million in the second quarter of 1996 compared to $1.9
million in the second quarter of 1995. Interest incurred was $8.5 million in the
second quarter of 1996 compared to $8.1 million in the second quarter of 1995.
AMORTIZATION OF DEFERRED FINANCING COSTS decreased to $0.7 million in the second
quarter of 1996 from $3.0 million in the second quarter of 1995. In May 1995,
the company refinanced all of its tax-exempt mortgage debt and eliminated the
related deferred financing costs through an extraordinary charge of $23.4
million.
DEPRECIATION AND AMORTIZATION EXPENSE increased to $6.9 million in the second
quarter of 1996, up from $5.5 million in the second quarter of 1995. This
increase reflects the completion and delivery of newly developed rental units
from the Company's lease-up properties.
GENERAL AND ADMINISTRATIVE EXPENSE modestly increased to $1.6 million in the
second quarter of 1996, up from $1.5 million in the second quarter of 1995 as a
result of increased staff.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995.
The Company's income before extraordinary item and minority interest was $17.8
million in the first half of 1996, up from $9.1 million in the first half of
1995. The Company's financial results improved in the first half of 1996 due
to the contribution of newly delivered rental units from its development
program, as well as cost reductions in property expenses.
OPERATING REVENUES (rental and other property income) increased to $75.9 million
in the first half of 1996, up from $65.6 million in the first half of 1995.
Operating revenues rose largely as a result of the contribution of newly
delivered rental units from five properties in their lease-up phase. These new
units added $10.2 million to operating revenues in the first half of 1996
compared to $0.6 million in the same period of 1995. Within the Company's
stabilized portfolio, operating revenues increased 1.0% in the first half of
1996, as modest increases in rental rates and other income were largely offset
by a decline in average physical occupancy to 94.7% from 94.9% in the first half
of 1995. Average monthly rental rates increased 0.9% to $1,001 in the first half
of 1996, up from $992 in the year-earlier period.
PROPERTY EXPENSES increased to $16.2 million in the first half of 1996 from
$15.4 million in the first half of 1995. This increase reflects the added
expenses of newly delivered rental units from five lease-up properties.
Property expenses in the stabilized portfolio decreased by $0.7 million to
$14.4 million in 1996 from $15.1 million in the
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first half of 1995. Over the past two years, the Company has achieved sustained
reductions in its per-unit property expenses through aggressive bidding of
external service and purchase contracts and a series of initiatives to enhance
the efficiency of customer service and property maintenance operations. In the
first half of 1996, average monthly property expenses per rental unit, within
the Company's stabilized portfolio decreased to $212 from $221 in the first
half of 1995. Lease-up properties added $1.8 million to property expenses in
1996 compared to $0.3 million in the same period of 1995.
REAL ESTATE TAXES totaled $6.7 million in the first half of 1996 and $5.9
million in the first half of 1995. These taxes increased in 1996 due to the
addition of rental units from lease-up properties, partially offset by a small
reduction in assessed values.
NET INTEREST EXPENSE increased to $15.1 million in the first half of 1996 from
$12.7 million in the first half of 1995. The increase was largely due to a lower
level of capitalized interest from decreased construction activity. The Company
capitalizes interest on projects actively under development using qualifying
asset balances and applicable weighted average interest rates. The average
monthly qualifying asset balance for projects under development in the first
half of 1996 and 1995 were approximately $42.9 million and $85.7 million,
respectively. Interest capitalized totaled $1.6 million in 1996 compared to $3.5
million in the first half of 1995. Interest incurred was $16.7 million in the
first half of 1996 compared to $16.2 million in the first half of 1995 primarily
due to higher average interest costs on the Company's tax-exempt debt, offset by
a lower average level of credit line borrowings.
AMORTIZATION OF DEFERRED FINANCING COSTS decreased to $1.3 million in the first
half of 1996 from $7.1 million in the first half of 1995. In May 1995, the
Company refinanced all of its tax-exempt mortgage debt and eliminated the
related deferred financing costs through an extraordinary charge of $23.4
million.
DEPRECIATION AND AMORTIZATION EXPENSE increased to $13.6 million in the first
half of 1996, up from $10.9 million in the first half of 1995. This increase
reflected the completion and delivery of newly developed rental units from the
Company's lease-up properties.
GENERAL AND ADMINISTRATIVE EXPENSE modestly increased to $3.2 million in the
first half of 1996, up from $2.9 million in the first half of 1995 as a result
of increased staff.
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 possible 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. The Operating Partnership has a
$175 million unsecured credit facility. The facility is used primarily to
finance an ongoing rental property development program. Availability under the
credit facility increased from $132 million on June 30, 1996 to $175 million on
July 31, 1996. On July 1, 1996, the revolving credit agreement was amended to
reduce the interest rate to Eurodollar plus 1.5%.
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ADDITIONAL EQUITY: Pursuant to the Company's shelf registration statement, on
July 3, 1996 the Company completed the sale of 1.49 million shares of common
stock at $20.125 per share. The proceeds from this offering of $30.0 million,
together with proceeds from the sale of newly issued limited partnership units
to The Irvine Company (see Note 3 to financial statements), totaled $60.0
million. Proceeds were used to repay $43 million of indebtedness outstanding
under the revolving line of credit and the remaining proceeds will be used to
fund ongoing development programs and for general corporate purposes. Current
availability under the shelf registration statement is approximately $130.7
million.
<TABLE>
<CAPTION>
DEBT STRUCTURE AT JUNE 30, 1996
DEBT WEIGHTED PRO FORMA (1)
BALANCE AVERAGE DEBT BALANCE
(IN MILLIONS) INTEREST RATE (IN MILLIONS)
- -------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed rate debt
Conventional mortgage financings $135.9 6.45% $135.9
Mortgage notes payable to The Irvine Company 51.6 5.75% 51.6
Tax-exempt mortgage bond financings 331.0 5.72% 331.0
Tax-exempt assessment district debt 5.6 6.27% 5.6
- -------------------------------------------------- ------ ------ ------
Total fixed rate debt 524.1 5.92% 524.1
- -------------------------------------------------- ------ ------ ------
Variable rate debt
Line of credit 43.0 7.32%
Tax-exempt assessment district debt 16.3 4.58% 16.3
- -------------------------------------------------- ------ ------ ------
Total variable rate debt 59.3 6.57% 16.3
- -------------------------------------------------- ------ ------ ------
Total debt $583.4 5.98% $540.4
- -------------------------------------------------- ------ ------ ------
</TABLE>
(1) Pro forma assumes the July 3, 1996 additional equity transaction took
place on June 30, 1996.
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 6.44% at June 30, 1996.
OPERATING ACTIVITIES: Cash flow provided by operating activities was $35.7
million for the first half of 1996 and $26.1 million for the first half of 1995.
Cash provided by operating activities increased in 1996 primarily due to higher
revenues.
INVESTING ACTIVITIES: Cash flow used in investing activities was $26.5 million
and $67.3 million in the first six months of 1996 and 1995, respectively. This
decrease resulted from a reduction in development activity as construction on
five apartment communities begun in 1994 neared completion (see Capital
Expenditures below.)
FINANCING ACTIVITIES: Cash flow (used in) provided by financing activities was
($9.2) million and $41.0 million in the first six months of 1996 and 1995,
respectively. Net borrowings from lines of credit decreased to $21.0 million in
1996 from $65.1 million in 1995.
Page 11
<PAGE> 14
CAPITAL EXPENDITURES
CAPITAL REPLACEMENTS ON STABILIZED PROPERTIES: Expenditures for capital
replacements totaled $1.9 million and $1.5 million in the first half of 1996 and
1995, respectively. Average capital replacements per unit for stabilized
properties were $167 and $128 per unit in the first half of 1996 and 1995,
respectively. Expenditures for capital replacements during 1996 are expected to
be similar to 1995 levels. The Company has a policy of capitalizing expenditures
related to new assets, acquisitions, the material enhancement of the value of an
existing asset, or the substantial extension of an existing asset's useful life.
Capital replacements were as follows:
<TABLE>
<CAPTION>
TOTAL
SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS) PER UNIT
- ---------------------------------------------- -------------- --------
<S> <C> <C>
Carpet replacements $ 675 $ 60
Exterior painting, siding and stucco 71 6
Upgrades, renovations and major building items 344 30
Appliances, water heaters and air conditioning 338 30
Roofing, concrete and pavement 171 15
Equipment and other 293 26
- ---------------------------------------------- ------ ----
Total $1,892 $167
- ---------------------------------------------- ------ ----
</TABLE>
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. At June 30, 1996, capital expenditures on apartment
communities the Company began constructing in 1994 had been substantially
completed. In 1995 and 1996, the Company began construction on three additional
apartment communities (Baypointe, Santa Maria and The Colony) that will require
total expenditures of approximately $100 million, of which $25 million had been
incurred at June 30, 1996. The Company expects to start two additional
communities in 1996. Initial funding for these developments is expected to come
from the $60 million of equity raised on July 3, 1996 (as discussed on page 11),
and from the Company's $175 million unsecured revolving credit facility.
Page 12
<PAGE> 15
1994 STARTS - LEASE-UP INFORMATION
Status at June 30, 1996
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
TOTAL UNITS PERCENTAGE UNITS OF DELIVERED UNITS OF DELIVERED
APARTMENT COMMUNITY UNITS DELIVERED DELIVERED OCCUPIED UNITS OCCUPIED LEASED UNITS LEASED
- -------------------------- ----- --------- ---------- -------- -------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Villa Coronado 513 513 100% 455 89% 494 96%
Santa Rosa 368 368 100% 346 94% 354 96%
Santa Clara 378 378 100% 353 93% 373 99%
Rancho Monterey 436 413 95% 341 83% 372 90%
Newport Ridge 512 405 79% 365 90% 415 102%
- -------------------------- ----- ----- ----- ----- ----- ----- -----
Total 2,207 2,077 94% 1,860 90% 2,008 97%
- -------------------------- ----- ----- ----- ----- ----- ----- -----
</TABLE>
Villa Coronado, Santa Rosa and Santa Clara reached stabilized occupancy on July
31, 1996. The remaining two communities are expected to reach stabilized
occupancy by year-end.
1995/1996 STARTS - NEW DEVELOPMENT
Status at June 30, 1996
<TABLE>
<CAPTION>
ACTUAL OR TOTAL
ESTIMATED ESTIMATED
ESTIMATED COMMENCEMENT COSTS
APARTMENT COMMUNITY VILLAGE, CITY UNITS OF CONSTRUCTION (IN MILLIONS)
- --------------- ----------------------------- --------- --------------- -------------
<S> <C> <C> <C>
Baypointe Newport North, Newport Beach 300 11/95 $ 33
Santa Maria Westpark II, Irvine 227 3/96 25
The Colony Newport Center, Newport Beach 245 7/96 42
Santa Rosa II Westpark II, Irvine 205 4Q '96 25
Rancho Santa Fe Tustin Ranch, Tustin 317 4Q '96 37
- --------------- ----------------------------- ----- ------ ----
Total 1,294 $162
- --------------- ----------------------------- ----- ------ ----
</TABLE>
First delivery of apartment units at Baypointe and Santa Maria are expected
later this year.
THE TIMING OF FUTURE COMMENCEMENT OF CONSTRUCTION, NUMBER OF UNITS, AND
ESTIMATED COSTS OF APARTMENT COMMUNITIES THAT ARE IN DEVELOPMENT OR ARE EXPECTED
TO BE DEVELOPED 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, NUMBER
OF UNITS, OR ESTIMATES SET FORTH IN THE FOREGOING TABLE WILL NOT VARY
SUBSTANTIALLY FROM ACTUAL RESULTS. THE COMPANY HAS MADE NO COMMITMENTS TO
BUILD THE SANTA ROSA II OR RANCHO SANTA FE AND NO ASSURANCE CAN BE MADE THAT
SUCH PROPERTIES WILL BE ACQUIRED OR BUILT.
Page 13
<PAGE> 16
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 considers funds from operations ("FFO") as a useful measure of
performance of 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 use this definition of FFO. FFO should be
examined in conjunction with net income as presented in the Company's
consolidated financial statements and footnotes 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.
Page 14
<PAGE> 17
CALCULATION OF FFO AND RECONCILIATION TO THE "OLD" DEFINITION OF FFO (a)
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- -----------------------------
1996 1995 1996 1995
========================================================================================================================
<S> <C> <C> <C> <C>
Net income (loss) $ 8,105 $1,319 $4,158 $(783)
Minority interest 9,739 (15,681) 4,998 (17,386)
Extraordinary item 23,427 23,427
Depreciation and amortization of real estate assets 13,495 10,887 6,893 5,512
- ------------------------------------------------------------------------------------------------------------------------
FFO (a) 31,339 19,952 16,049 10,770
- ------------------------------------------------------------------------------------------------------------------------
Amortization of deferred financing costs related to
adjustment of interest rates to market at IPO:
Tax-exempt debt 5,123 2,054
Conventional debt 1,051 1,189 524 595
Amortization of loan origination and other costs 269 739 134 327
Depreciation and amortization of non-real estate assets 62 24 46 12
- ------------------------------------------------------------------------------------------------------------------------
1,382 7,075 704 2,988
- ------------------------------------------------------------------------------------------------------------------------
"OLD" FFO (a) $32,721 $27,027 $16,753 $13,758
- ------------------------------------------------------------------------------------------------------------------------
Average shares outstanding (b) 37,397 30,474 37,411 30,583
========================================================================================================================
</TABLE>
Footnotes:
(a) Funds from Operations (FFO) is calculated according to the new NAREIT
definition which the Company adopted in 1996. "Old" FFO assumes a
calculation methodology used by NAREIT through 1995.
(b) Assumes conversion into common stock of Operating Partnership units.
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 footnotes thereto
included in the Annual Report on Form 10-K/A for the year ended December 31,
1995. Operating results for the three months and six months ended June 30, 1996
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
Page 15
<PAGE> 18
IRVINE APARTMENT COMMUNITIES, INC.
SELECTED OPERATING DATA
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1996 1995 1996 1995
=============================================================================================================================
<S> <C> <C> <C> <C>
UNIT DATA
- -----------------------------------------------------------------------------------------------------------------------------
Average rentable units during the period 13,176 11,469 13,323 11,536
Rentable units at the end of the period 13,411 11,768 13,411 11,768
Average units in stabilized properties during the period 11,334 11,334 11,334 11,334
- -----------------------------------------------------------------------------------------------------------------------------
STABILIZED COMMUNITIES - FINANCIAL DATA(a)
- -----------------------------------------------------------------------------------------------------------------------------
Average physical occupancy 94.7% 94.9% 95.2% 94.6%
Average economic occupancy (rental revenue divided by gross
scheduled rent (b)) 94.1% 94.6% 94.7% 94.6%
Average monthly gross scheduled rent per unit $1,001 $992 $1,001 $992
Rental and other income - in thousands $65,705 $65,050 $33,210 $32,592
- -----------------------------------------------------------------------------------------------------------------------------
LEASE-UP COMMUNITIES - FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Rental and other income - in thousands $10,165 $587 $5,674 $497
Units delivered in the period 635 410 227 289
Cumulative units delivered at the end of the period 2,077 434 2,077 434
Units occupied at the end of the period 1,860 246 1,860 246
Average units occupied during the period 1,475 86 1,647 146
=============================================================================================================================
</TABLE>
Footnotes:
(a) Financial results are for stabilized communities which include 43
properties totaling 11,334 units for comparable periods of 1996 and 1995.
(b) Gross scheduled rent represents rental revenue plus vacant units at
market rent.
Page 16
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGE IN SECURITIES.
On April 30, 1996, the Company's shareholders approved changing of the
Company's state of incorporation from Delaware to Maryland. This
reincorporation was accomplished through a merger (the "Merger") of
Irvine Apartment Communities, Inc., a Delaware corporation, with and
into the Company, with the Company being the surviving corporation. The
Merger was consummated on May 2, 1996. As a result of the Merger, the
Company adopted new Articles of Incorporation and Amended Bylaws.
For a more complete description of the Merger and its effects,
reference is made (i) to pages 8-17 of the Company's Proxy Statement
for the Annual Meeting of Shareholders held on April 30, 1996, filed as
exhibit 22 to the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1995 and (ii) to pages 2-17 of the Company's
Registration Statement on Form 8-B, filed with the Securities and
Exchange Commission on April 30, 1996.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
On April 30, 1996 at the Annual Meeting of Shareholders, three
directors were re-elected to the Board of Directors for a three-year
term to expire at the 1999 Annual Meeting of Shareholders. Shareholders
voted to elect all three nominees, voting as follows:
<TABLE>
<CAPTION>
Total Vote For Total Vote Withheld
Each Director From Each Director
-------------- -------------------
<S> <C> <C>
Donald Bren 13,907,834 83,544
John F. Grundhofer 13,907,404 83,974
Bowen H. McCoy 13,940,894 50,484
</TABLE>
Also at the 1996 Annual Meeting of Shareholders, shareholders approved
the Company's reincorporation in the state of Maryland, with 9,414,784
shares voting in favor of the reincorporation and 527,344 shares voting
against the reincorporation. A more complete description of the
reincorporation is included in Item 2 above. In addition, shareholders
approved the Company's 1996 Long-Term Stock Incentive Plan, with
6,201,937 shares voting in favor of the 1996 Long-Term Stock Incentive
Plan and 3,514,571 shares voting against such plan.
Page 17
<PAGE> 20
ITEM 5. OTHER INFORMATION.
On May 2, 1996, the Company changed its state of incorporation from
Delaware to Maryland. This reincorporation was accomplished via the
Merger. For a more complete description of the Merger, see Item 2
above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
2.1 Agreement and Plan of Merger dated as of March 20, 1996 between the
Company and Irvine Apartment Communities, Inc., a Delaware corporation
(incorporated by reference to Exhibit 2.1 of the Company's Registration
Statement on Form 8-B, filed with the Securities and Exchange
Commission on April 30, 1996 (the "Form 8-B"))
3.1 Articles of Amendment and Restatement of the Company (incorporated by
reference to Exhibit 3.1 of the Form 8-B)
3.1.1 Articles of Merger dated May 2, 1996 between the Company and the
Delaware Company (incorporated by reference to Exhibit 14 of Amendment
No. 5 to Schedule 13D filed on July 15, 1996 by The Irvine Company, TIC
Investment Company A, TIC Investment Company C and Donald L. Bren)
3.2 Amended Bylaws of the Company (incorporated by reference to Exhibit 3.1
of the Form 8-B)
10.1.4 Amendment No. 4 to the Agreement of Limited Partnership of Irvine
Apartment Communities, L.P. (the "Operating Partnership Agreement")
(incorporated by reference to Exhibit 10.1.4 of the Form 8-B)
10.1.5 Amendment No. 5 to the Operating Partnership Agreement (incorporated by
reference to Exhibit 10.1.5 of the Form 8-B)
10.4 Miscellaneous Rights Agreement among the Company and the persons named
therein (incorporated by reference to Exhibit 10.4 of the Form 8-B)
10.6.3 Amendment No. 3 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.3 of the Form 8-B)
10.14 Irvine Apartment Communities, Inc. 1996 Long-Term Stock Incentive Plan
(incorporated by reference to Exhibit 10.14 of the Form 8-B)
27 Financial Data Schedule (only included in electronically-filed
document)
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three
months ended June 30, 1996.
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: February 11, 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 and Controller
(Principal Accounting Officer)
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF IRVINE APARTMENT COMMUNITIES, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,290
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 998,527
<DEPRECIATION> 205,601
<TOTAL-ASSETS> 868,535
<CURRENT-LIABILITIES> 0
<BONDS> 583,391
0
0
<COMMON> 170
<OTHER-SE> 151,526
<TOTAL-LIABILITY-AND-EQUITY> 868,535
<SALES> 0
<TOTAL-REVENUES> 76,056
<CGS> 0
<TOTAL-COSTS> 25,075
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,092
<INCOME-PRETAX> 17,844
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,105
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
