UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number: 1-12592
WALDEN RESIDENTIAL PROPERTIES, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 75-2506197
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
5080 Spectrum Drive
Suite 1000 East
Addison, Texas 75001-6410
(Address of principal executive offices)
(972) 788-0510
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of October 28, 1998,
there were 18,112,354 shares of Common Stock, $0.01, par value outstanding.
<PAGE>
WALDEN RESIDENTIAL PROPERTIES, INC.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998(Unaudited)and December 31, 1997. . . .2
Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended September 30,1998
and 1997 (Unaudited). . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1998 and 1997
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . .4
Notes to Condensed Consolidated Financial Statements
(Unaudited). . . . .. . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risks. . . . . . . . . . . . . . . . . . . . 21
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 22
Item 2. Changes in Securities. . . . . . . . . . . . . . . . 22
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . 22
Item 4. Other Information. . . . . . . . . . . . . . . . . . 22
Item 5. Exhibits and Reports on Form 8-K . . . . . . . . . . 22
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land . . . . . . . . . . . . . . . . . . . . . . $ 170,346 $ 173,635
Buildings. . . . . . . . . . . . . . . . . . . . 1,361,739 1,333,978
---------- ---------
1,532,085 1,507,613
Less: Accumulated depreciation . . . . . . . (113,558) (74,584)
---------- ---------
1,418,527 1,433,029
Real estate assets held for sale . . . . . . . . . 34,105 --
Rent and other receivables ($1.5 million related party) 4,567 1,613
Prepaid and other assets . . . . . . . . . . . . . 8,530 6,903
Deferred financing costs, net. . . . . . . . . . . 8,254 6,603
Cash and cash equivalents. . . . . . . . . . . . . 7,641 9,757
Restricted cash:
Escrow deposits. . . . . . . . . . . . . . . . . 13,317 9,047
Additional collateral on loans . . . . . . . . . 2,850 2,520
---------- ---------
Total assets. . . . . . . . . . . . . . . . . $1,497,791 $1,469,472
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable . . . . . . . . . . . . . $ 468,131 $ 428,354
Unsecured term loan. . . . . . . . . . . . . . . 200,000 200,000
Unsecured credit facility. . . . . . . . . . . . 91,500 74,000
Accrued real estate taxes. . . . . . . . . . . . 20,614 22,571
Accounts payable . . . . . . . . . . . . . . . . 10,924 13,648
Accrued expenses and other liabilities. . . . .. 15,598 13,377
Preferred distribution payable to minority interests. . 391 391
---------- ----------
Total liabilities . . . . . . . . . . . . . . 807,158 752,341
Commitments and contingencies (Note 8)
Minority interests . . . . . . . . . . . . . . . . 313,660 321,916
Stockholders' equity:
Preferred stock. . . . . . . . . . . . . . . . . 57 57
Common stock . . . . . . . . . . . . . . . . . . 181 180
Additional paid in capital . . . . . . . . . . . 457,801 456,842
Notes receivable for employee and director stock
purchases. . . . . . . . . . . . . . . . . . . (9,676) (5,263)
Deferred compensation on Restricted Stock (1,354) (1,404)
Distributions in excess of net income. . . . . . (70,036) (55,197)
---------- ----------
Total stockholders' equity. . . . . . . . . . 376,973 395,215
---------- ----------
Total liabilities and stockholders' equity $1,497,791 $1,469,472
========== ==========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share information)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Rental income. . . . . . . . . . . . . $67,731 $34,701 $200,288 $ 99,288
Other property income . . . . . . . 2,924 1,374 8,212 3,979
Interest income. . . . . . . . . . . . 503 424 1,227 1,273
------- ------- -------- --------
Total revenues. . . . . . . . . . . 71,158 36,499 209,727 104,540
EXPENSES
Property operating and maintenance 23,415 12,174 69,176 34,187
Real estate taxes. . . . . . . . . . . 7,047 3,516 20,945 10,077
General and administrative . . . . . . 3,059 1,723 8,760 5,117
Interest . . . . . . . . . . . . . . . 13,848 5,643 40,536 15,764
Amortization . . . . . . . . . . . . . 283 201 768 612
Depreciation . . . . . . . . . . . . . 14,564 7,071 43,599 20,192
------- ------- -------- --------
Total expenses. . . . . . . . . . . 62,216 30,328 183,784 85,949
------- ------- -------- --------
Operating income . . . . . . . . . . . . 8,942 6,171 25,943 18,591
Gain on disposition of real property 6,696 -- 6,696 --
------- ------- -------- --------
Income before extraordinary item and
income allocated to minority interests 15,638 6,171 32,639 18,591
Extraordinary loss on debt extinguishment. . -- -- (104) --
------- ------- -------- --------
Income before income allocated to
minority interests. . . . . . . . . . 15,638 6,171 32,535 18,591
Income allocated to minority interests (5,470) (397) (11,137) (1,197)
------- ------- -------- --------
Net income . . . . . . . . . . . . . . 10,168 5,774 21,398 17,394
Preferred distributions. . . . . . . . . (3,281) (3,282) (9,841) (9,906)
------- ------- -------- -------
Net income available to common
stockholders. . . . . . . . . . . . . $ 6,887 $ 2,492 $ 11,557 $ 7,488
======= ======= ======== =======
Basic net income per share . . . . . . . $ 0.38 $ 0.14 $ 0.63 $ 0.43
======= ======= ======== =======
Diluted net income per share . . . . . . $ 0.38 $ 0.14 $ 0.63 $ 0.43
======= ======= ======== =======
Basic weighted average number of
common shares outstanding . . . . . . 18,077 17,741 18,281 17,468
======= ======= ======== =======
Diluted weighted average number of
common shares and common share
equivalents outstanding . . . . . . . 18,170 17,870 18,425 17,616
======= ======= ======== =======
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 21,398 $ 17,394
Adjustments to reconcile net income to net cash provided by
operating activities:
Income allocated to minority interests . . . . . . . . 11,137 1,197
Depreciation and amortization. . . . . . . . . . . . . 44,367 20,804
Gain on disposition of real property . . . . . . . . . (6,696) --
Extraordinary loss on debt extinguishment. . . . . . . 104 --
Amortization of deferred compensation on restricted stock 186 180
Amortization of prepaid interest expense . . . . . . . 912 --
effect of changes in operating accounts:
Escrow deposits . . . . . . . . . . . . . . . . . . (4,270) (1,150)
Other assets. . . . . . . . . . . . . . . . . . . . (4,976) (8,774)
Accrued real estate taxes . . . . . . . . . . . . . (1,957) 2,618
Accounts payable. . . . . . . . . . . . . . . . . . (3,217) (390)
Other liabilities . . . . . . . . . . . . . . . . . 2,221 541
------- --------
Net cash provided by operating activities 59,209 32,420
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate assets , net of non-cash items below (27,512) (55,013)
Real estate asset additions. . . . . . . . . . . . . . (45,128) (23,182)
Proceeds from disposition of real property . . . . . . 36,667 --
--------- --------
Net cash used in investing activities . . . . . . (35,973) (78,195)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance, net of issuance costs 14,176 25,696
Purchase of the Company's common stock . . . . . . . . (17,773) (6,666)
Purchase of minority interest securities . . . . . . . (335) --
Distributions paid . . . . . . . . . . . . . . . . . . (55,791) (35,637)
Proceeds from mortgage notes payable and credit facility 230,403 53,300
Payment of mortgage notes payable and credit facility (188,155) (13,300)
Payment of financing costs . . . . . . . . . . . . . . (3,435) (97)
Additional collateral on loans . . . . . . . . . . . . (330) --
Principal reductions of debt . . . . . . . . . . . . . (4,112) (2,481)
-------- --------
Net cash provided by (used in) financing activities (25,352) 20,815
NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . (2,116) (24,960)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,757 29,720
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . $ 7,641 $ 4,760
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . $ 37,495 $ 15,360
========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Real estate asset additions. . . . . . . . . . . . . . $ 960 $ 906
======== ========
Mortgages assumed. . . . . . . . . . . . . . . . . . . $ 19,141 $ 6,870
======== ========
Notes receivable for stock purchases . . . . . . . . . $ 4,413 $ --
======== ========
Deferred compensation on restricted stock. . . . . . . $ 136 $ 2,571
======== ========
Distribution payable to minority interest holders $ 391 $ 391
======== ========
Minority interest securities issued. . . . . . . . . . $ 505 $ --
======== ========
Securities issued for purchase of assets . . . . . . . $ -- $ 1,050
======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
WALDEN RESIDENTIAL PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Unaudited Financial Information
Walden Residential Properties, Inc. (the "Company") is a
self-administered and self-managed real estate company operated as a real
estate investment trust, as defined under the Internal Revenue Code of 1986,
as amended. As of September 30, 1998, the Company owned 155 multifamily
properties, containing 42,432 apartment units, located primarily in the
Southwest and Southeast regions of the United States.
The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1997, and Form 10-Q for
the three months ended March 31, 1998, and the six months ended
June 30, 1998, which were filed with the Securities and Exchange
Commission ("SEC"). The accompanying interim unaudited condensed
consolidated financial information has been prepared pursuant to
the rules and regulations of the SEC. Certain information and
footnote disclosures normally included in the annual financial
statements have been condensed or omitted pursuant to rules and
regulations of the SEC. Management believes that the disclosures
contained in this Form 10-Q are adequate to make the information
presented not misleading. In the opinion of management, all
adjustments and eliminations, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial
position of the Company and its subsidiaries as of September 30,
1998 and the consolidated results of their operations for the
three and nine months ended September 30, 1998 and 1997 and
consolidated cash flows for the nine months ended September 30,
1998 and 1997, have been included. The consolidated results of
operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results for the full year.
As of September 30, 1998, the Company had six apartment
properties held for sale. Management has determined that such
properties do not match the Company's long-term investment
strategies (see Note 8).
Comprehensive income is equivalent to net income for the three
and nine months ended September 30, 1998 and 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (the "Statement"),
which establishes standards for accounting and reporting for
derivative instruments. The Statement is effective for periods
beginning after June 15, 1999; however, earlier application is
permitted. Management is currently not planning on early adoption
of this Statement. See Note 4 for a discussion about the current
evaluation of the impact of the Statement on the Company.
<PAGE>
2. Acquisitions and Dispositions
Acquisitions
On February 18, 1998, the Company acquired two apartment
properties with a total of 376 units located in Tampa, Florida for
approximately $15.9 million. The Company funded these acquisitions
by assuming $5.7 million of variable rate, tax-exempt debt maturing
in the year 2007, assuming $5.1 million of 7.35% fixed rate debt
maturing in the year 2005, and borrowing the remaining amount under
the Company's unsecured credit facility. The credit enhancement on
the $5.7 million variable rate debt expires in November 1998 and is
guaranteed by the Company.
On August 11, 1998, the Company acquired a 168-unit apartment
property in Houston, Texas for approximately $9.9 million. The
purchase was funded from cash flows from operations.
On August 21, 1998, the Company purchased a 286-unit apartment
property in Bedford, Texas for approximately $11.0 million. The
purchase price was partially funded by assuming $8.3 million in
variable rate, tax-exempt bond financing. The remaining purchase
price was funded from cash flows from operations.
On August 28, 1998, the Company acquired a 268-unit apartment
property in Houston, Texas. The $9.5 million purchase price was
funded through proceeds from the property dispositions and cash
flows from operations.
Dispositions
On August 26, 1998, the Company disposed of four Dallas/Fort
Worth properties. The four properties, totaling 1,151 units, were
sold for approximately $37.6 million, resulting in a net gain of
approximately $6.7 million.
3. Transactions with Affiliates
On June 22, 1998, the Company acquired the 1% general partner
interest in a limited partnership which owns a 504-unit apartment
property in Austin, Texas. At that time, the Company loaned $1.5
million to the partnership which was used to refinance the first
mortgage indebtedness on the property. The note requires monthly
payments of excess cash flow from the property and matures on
January 1, 2009.
4. Mortgage Notes Payable
During the first nine months of 1998, the Company refinanced
$45.5 million and $12.5 million of the Company's variable rate,
tax-exempt mortgage indebtedness and extended the related mortgage
loan and credit enhancement maturity to February 15, 2028 and
January 15, 2023, respectively.
On March 25, 1998, $78.1 million of conventional fixed-rate
mortgage notes were refinanced with $110.0 million of fixed-rate
debt, of which $80.0 million of such debt bears interest at 6.62%
and matures in March 2007 and the remaining $30.0 million bears
interest at 7.22% and matures in September 2016. Of the excess
financing proceeds, $20 million was used to repay a portion of the
Company's credit facility.
On April 14, 1998, the Company repaid $7.2 million of variable
rate indebtedness related to one property.
In 1997, the Company entered into the forward treasury rate lock
agreements shown below in anticipation of long-term debt financing related
to the new debt incurred in connection with the acquisition of assets and
business of Drever Partners, Inc. and its affiliates on October 1, 1997.
Notional Settlement Reference Reference
Amount Date Yield Treasury
-------- ---------- --------- ---------
(in thousands)
$ 75,000 November 23, 1998 5.8950% 5.750% due 11/30/02
25,000 November 23, 1998 5.9600% 6.125% due 08/15/07
175,000 November 20, 1998 6.5010% 5.625% due 05/15/08
--------
$275,000
========
The Company anticipates extending these forward treasury rate
locks and utilizing them in a $250 million debt financing in
December 1998 and a $25 million debt financing in the first quarter
of 1999. Any costs under these agreements related to refinancing
debt will be amortized to interest expense over the terms of the
related financing; however, if new debt financing is not obtained
upon the extended settlement date, a loss will be recorded to
operations at that time. As of November 3, 1998, the Company had
a cost in unwinding these agreements of approximately $32.4
million.
5. Stockholders' Equity and Minority Interests
Minority Interests
In connection with certain apartment property acquisitions,
certain partnership subsidiaries of the Company have issued Common
Operating Partnership ("OP") Units and Preferred OP Units which are
exchangeable into the Company's common stock and 9.00% redeemable
preferred stock, with detachable warrants, respectively. The
holders of the Preferred OP Units are entitled to receive quarterly
distributions of $0.5625 per unit and the holders of the Common OP
Units are entitled to receive quarterly distributions equal to
those paid on the Company's common stock. A portion of the Common
OP Units that are exchangeable into 810,128 shares of the Company's
common stock are entitled to receive quarterly distributions of a
minimum of $369,000 in the aggregate. All OP Unit securities have
been recorded as minority interests in the accompanying balance
sheets. On June 15, 1998, an additional 20,621 Common OP Units
were issued at a per unit price equal to the market price of the
Company's common stock on such date ($24.50) to adjust the purchase
price of the October 1, 1997 acquisition of the assets and business
of Drever Partners, Inc. and its affiliates. As of September 30,
1998, the Company has purchased 12,237 Common OP Units and 1,696
Preferred OP Units, leaving 11,185,288 Common OP Units and
1,998,213 Preferred OP Units outstanding.
Public Offering
On February 19, 1998, the Company issued 323,232 shares of its
common stock at $23.515 per share for net proceeds of approximately
$7.6 million.
Restricted Stock
In February 1997, the Company adopted a Long-Term Incentive
Plan to attract and retain individuals to serve as directors,
officers and employees of the Company. Pursuant to this plan, the
Company has issued 5,206 restricted shares of common stock
("Restricted Stock") during the nine months ended September 30,
1998, for $0.01 per share to two of its executive officers and its
six outside directors. The shares issued vest ratably over a
three-year and one-year period, respectively. Deferred
compensation on the Restricted Stock was computed based upon the
market value of the shares at the date of issuance. This deferred
compensation is being amortized over the respective vesting
periods.
Notes Receivable for Stock Purchases
On February 17, 1998, the Company implemented a new stock
purchase loan program allowing officers and key employees to
purchase the Company's common stock at current market prices and to
exercise vested stock options with the assistance of loans from the
Company. Under this program, officers and key employees are
eligible to purchase stock on March 1 and September 1 of each year
in an aggregate amount of up to three times their annual salary.
A cash payment of 5% to 15% of the purchase price is required by
the officer or key employee, depending upon the amount of the
purchase, with the remainder loaned on a full recourse basis. Each
loan is evidenced by a note with a five-year term, requiring
quarterly payments of interest only at a fixed interest rate equal
to the Company's current interest rate under its credit facility at
the time the loan is executed. The loan is secured by a pledge of
the shares of common stock purchased by each officer or key
employee pursuant to such loan.
On March 2, 1998, the Company issued loans to 25 officers and
key employees under the stock purchase loan program in the amount
of approximately $3.6 million, bearing interest at 7.0%. Such
loans related to the purchase of 138,692 shares of the Company's
common stock at $24.75 per share (the closing price of the common
stock on the New York Stock Exchange for the previous trading day)
and the exercise of 26,192 common stock options at a stock option
grant price of $19.25 per share.
On September 1, 1998, the Company issued loans to three
officers and seven key employees under the stock purchase loan
program in the amount of approximately $0.9 million, bearing
interest at 7.0%. Such loans related to the purchase of 40,818
shares of common stock at $22.625 (the closing price of the
Company's common stock on the New York Stock Exchange for the
previous trading day).
Shareholder Rights Plan
On March 26, 1998, the Company adopted a shareholder rights
plan (the "Plan") designed to assure that all stockholders receive
fair treatment in the event of a proposed acquisition. The key
provision of the Plan is a mechanism that will distribute, for each
outstanding share of the Company's Common Stock, one right that
becomes exercisable upon the occurrence of certain events.
The Plan entails a dividend of one right for each outstanding
share of the Company's common stock. Each right will entitle the
holder to buy one one-hundredth of a share of a new Series A Junior
Participating Preferred Stock, at an exercise price of $70.00 per
share. The rights will trade with the Company's common stock until
exercisable and will expire on April 20, 2008. The rights will not
be exercisable until ten days following a public announcement that
a person or group has acquired 15% or more of the Company's common
stock or until ten business days after a person or group begins a
tender offer that would result in ownership of 15% or more of the
Company's common stock, subject to certain extensions by the Board.
If either of these events occur, the holder will be eligible to
purchase shares of the Company's common stock at a 50 percent
discount. On April 20, 1998, the Company issued a dividend of one
right for each share of common stock owned by stockholders of
record as of April 7, 1998. Effective April 8, 1998, each share of
the Company's common stock has one right attached to it.
Associate Stock Purchase Plan
Effective April 1, 1998, the Company adopted an Associate
Stock Purchase Plan. This plan allows Company employees to
purchase on a quarterly basis shares of the Company's common stock
at a 15% discount.
Stock Repurchase Program
On June 4, 1998, the Company adopted a new Stock Repurchase
Program. This new program authorizes the Company to purchase up to
2.5 million shares of the Company's common stock. This is in
addition to the prior stock repurchase program, announced July 11,
1997, authorizing the Company to purchase up to 1.0 million shares
of its common stock by December 31, 1998. As of September 30,
1998, the Company has repurchased approximately 1.0 million shares
of its outstanding common stock (0.7 million shares in 1998),
leaving 2.5 million shares authorized for repurchase under both
programs. However, the Company will not repurchase additional
shares under this program if the purchase would cause the total
debt to total market capitalization of the Company to exceed 46%.
Distributions
In March, June, and September 1998, the Company paid
distributions of $12.0 million, $12.3 million, and $12.0 million,
respectively, to stockholders of record on February 18, 1998, May
18, 1998, and August 17, 1998, respectively. The common
stockholders were paid $0.4825 per share; the 9.16% Convertible
Redeemable Preferred Stockholders were paid $0.5725 per share and
the 9.20% Senior Preferred Stockholders were paid $0.575 per share.
The Company paid distributions of $5.4 million on the Common
OP Units (which represented $0.4825 per unit) and $1.1 million on
the Preferred OP Units (which represented $0.5625 per unit) in
March, June, and September, 1998.
6. Net Income per Share of Common Stock
Basic net income per share has been computed by dividing net
income available to common stockholders by the weighted average
number of common shares outstanding. Diluted net income
per share has been computed by dividing net income available to
common stockholders by the weighted average number of common
shares outstanding plus potential dilutive common share
equivalents.
The following table presents information necessary to
calculate basic and diluted net income per share for the three
months and nine months ended September 30, 1998 and 1997 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income for Basic and Diluted Computation:
Income before extraordinary item and income
allocated to minority interests $15,638 $ 6,171 $32,639 $18,591
Extraordinary loss on debt extinguishment -- -- (104) --
------- ------- ------- -------
Income before income allocated to minority
interests . . . . . . . . . . . . . 15,638 6,171 32,535 18,591
Income allocated to minority interests (5,470) (397) (11,137) (1,197)
------- ------- ------- -------
Net income . . . . . . . . . . . . . . 10,168 5,774 21,398 17,394
Preferred distributions. . . . . . . . (3,281) (3,282) (9,841) (9,906)
------- ------- ------- -------
Net income available to common stockholders
(basic and diluted net income per share
computation). . . . . . . . . . . . $ 6,887 $ 2,492 $11,557 $ 7,488
Basic Net Income per Share: ======= ======= ======= =======
Before extraordinary item, less preferred
distributions . . . . . . . . . . . $ 0.38 $ 0.14 $ 0.64 $ 0.43
Extraordinary loss on debt extinguishment -- -- (0.01) --
------- ------- ------- -------
Net income available to common stockholders $ 0.38 $ 0.14 $ 0.63 $ 0.43
Diluted Net Income per Share: ======= ======= ======= =======
Before extraordinary item, less preferred
distributions . . . . . . . . . . . $ 0.38 $ 0.14 $ 0.64 $ 0.43
Extraordinary loss on debt extinguishment -- -- (0.01) --
------- ------- ------- -------
Net income available to common stockholders $ 0.38 $ 0.14 $ 0.63 $ 0.43
Weighted Average Number of Shares Outstanding (a): ======= ======= ======= =======
Basic. . . . . . . . . . . . . . . . . 18,077 17,741 18,281 17,468
Dilutive effect of outstanding options 93 129 144 148
-------- ------- ------- -------
Diluted. . . . . . . . . . . . . . . . 18,170 17,870 18,425 17,616
======== ======= ======= =======
(a) Excludes the convertible preferred shares, warrants, Common OP
Units (see Note 5) and 1,698,750 stock options, which are not dilutive
at September 30, 1998.
</TABLE>
7. Pro Forma Statements of Income
The following unaudited condensed pro forma information for
the nine months ended September 30, 1998 and 1997 was prepared from
the condensed consolidated financial statements of the Company by
adjusting for the effect of the 1997 acquisitions of 21,467
apartment units at a cost of $799.2 million, the 1998 property
acquisitions and dispositions described in Note 2 herein, and debt
incurred in connection with these property acquisitions as if all
of these transactions had occurred on January 1, 1997.
The following information is not necessarily indicative of
what the performance would have been had the Company owned these
properties for the entire period, nor does it purport to represent
future results of operations of the Company. (In thousands, except
per share information.)
<TABLE>
<CAPTION>
Pro Forma
-----------------
Nine Months Ended
September 30,
-----------------
1998 1997
---- ----
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 207,720 $ 199,425
Expenses . . . . . . . . . . . . . . . . . . . . . . . 183,205 183,457
--------- ---------
Income before extraordinary items and income allocated
to minority interests . . . . . . . . . . . . . . . . 24,515 15,968
--------- ---------
Extraordinary loss on debt extinguishment. . . . . . . (104) --
--------- ---------
Income before income allocated to minority interests 24,411 15,968
Income allocated to minority interests . . . . . . . . (8,176) (5,120)
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . 16,235 10,848
Preferred distributions. . . . . . . . . . . . . . . . (9,841) (9,906)
--------- ---------
Net income available to common stockholders. . . . . . $ 6,394 $ 942
========= =========
Basic net income per share . . . . . . . . . . . . . . $ 0.35 $ 0.05
========= =========
Diluted net income per share . . . . . . . . . . . . . $ 0.35 $ 0.05
========= =========
</TABLE>
8. Commitments and Contingencies
On February 27, 1998, the Company entered into a joint venture
agreement with The Grupe Company whereby The Grupe Company will
construct, and the Company will later purchase, two Sacramento,
California area properties with a combined total of 616 apartment
units. The Company is committed to purchase 100% of the properties
for approximately $47 million upon the completion of construction
and the achievement of certain targeted net operating income
amounts. This purchase is anticipated to occur sometime in late
1999.
On July 29, 1998, the Company entered into an agreement to
loan $5.0 million to The Greystone Group, Inc., an unrelated third-party,
to purchase and develop a parcel of land in Chandler,Arizona. The loan
bears an interest rate of LIBOR plus 1.50%, is secured by a mortgage loan
on the property and a guarantee by The Greystone Group, Inc., and is
generally due upon the earlier of completion of construction of the related
apartment project and subsequent purchase by the Company or substitution of
a third-party lender. The Company anticipates entering into a purchase
agreement with The Greystone Group, Inc. in November 1998, whereby The
Greystone Group, Inc. will construct a 272-unit apartment community on the
respective land. The Company will be committed to purchase the property
for approximately $21.3 million upon completion of construction and the
achievement of certain targeted occupancy levels, anticipated to occur
sometime in late 1999.
On August 11, 1998, the Company entered into an agreement with
Allied Realty Services, Inc. (Allied) whereby Allied will
construct and the Company will later purchase a 168-unit apartment
property located in Houston, Texas, adjacent to the 168-unit
apartment property purchased by the Company in August 1998. The
Company is committed to purchase 100% of the property for
approximately $10.5 million upon completion of construction and
achievement of targeted occupancy levels, anticipated to occur
sometime in early 1999.
As of September 30, 1998, the Company had executed contracts
to sell five of its properties held for sale, containing an
aggregate of 838 units, for an aggregate sales price of $28.3
million. The closings are anticipated to occur in November 1998.
9. Subsequent Events
On October 28, 1998, the Company refinanced $5.8 million
of variable rate, tax-exempt mortgage indebtedness related to one
of its properties. In connection with this refinancing, the
Company paid down approximately $0.3 million of the outstanding
loan amount and entered into a five year interest rate swap
agreement with Morgan Guaranty Trust Company on the remaining $5.5
million. This agreement establishes a fixed interest rate of 3.74%
on the $5.5 million indebtedness, thereby decreasing the impact of
changes in interest rates on this debt.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Overview
- --------
This Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, which are
intended to be covered by the safe harbors created therein. These
statements include the plans and objectives of management for
future operations, including plans and objectives relating to
capital expenditures and rehabilitation costs on the properties
owned by the Company. The forward-looking statements included
herein are based on current expectations that involve numerous
risks and uncertainties. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company.
Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Form 10-Q will
prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a
representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
Results of Operations
- ---------------------
The following discussion should be read in conjunction with
the "Supplemental Financial and Operating Data" and all of the
consolidated financial statements and notes thereto included
elsewhere in this Form 10-Q and the Company's Form 10-K for the
year ended December 31, 1997. Such financial statements and
information included in this Form 10-Q have been prepared to
reflect the historical condensed consolidated operations of the
Company for the three and nine months ended September 30, 1998 and
1997, and the condensed consolidated balance sheet data of the
Company as of September 30, 1998 and December 31, 1997.
The changes in revenues and expenses related to property
operations during the three and nine months ended September 30,
1998 and 1997 are primarily the result of the increased number of
apartment units owned due to acquisitions of additional multifamily
properties by the Company, including 78 properties with a total of
18,118 units acquired from Drever Partners, Inc. and its affiliates
on October 1, 1997. Where appropriate, comparisons are made on a
dollars-per-weighted-average-unit basis in order to adjust for
changes in the number of units owned during each period.
The following financial and operating data (see Page 15) is
provided as supplemental information to all financial statements
included elsewhere in this Form 10-Q. Such supplemental
information is unaudited except the balance sheet data as of
December 31, 1997.
<TABLE>
<CAPTION>
<PAGE>
SUPPLEMENTAL FINANCIAL AND OPERATING DATA
(In thousands, except per share and property data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING DATA
Revenues
Rental income . . . . . . . . . . . $67,731 $34,701 $200,288 $ 99,288
Other property income . . . . . . . 2,924 1,374 8,212 3,979
Interest income . . . . . . . . . . 503 424 1,227 1,273
------- ------- -------- --------
Total revenues. . . . . . . . . . 71,158 36,499 209,727 104,540
------- ------- -------- --------
Expenses
Property operating and maintenance 23,415 12,174 69,176 34,187
Real estate taxes . . . . . . . . . 7,047 3,516 20,945 10,077
General and administrative 3,059 1,723 8,760 5,117
Interest. . . . . . . . . . . . . . 13,848 5,643 40,536 15,764
Amortization. . . . . . . . . . . . 283 201 768 612
Depreciation. . . . . . . . . . . . 14,564 7,071 43,599 20,192
------- ------- -------- --------
Total expenses. . . . . . . . . . 62,216 30,328 183,784 85,949
------- ------- -------- --------
Operating Income . . . . . . . . . . . . 8,942 6,171 25,943 18,591
Gain on disposition of real property 6,696 -- 6,696 --
------- ------- -------- --------
Income before extraordinary item and
income allocated to minority interests.. 15,638 6,171 32,639 18,591
Extraordinary loss on debt extinguishment -- -- (104) --
------- ------- -------- --------
Income before income allocated to
minority interests. . . . . . . . . . 15,638 6,171 32,535 18,591
Income allocated to minority interests (5,470) (397) (11,137) (1,197)
------- ------- -------- --------
Net income . . . . . . . . . . . . . . 10,168 5,774 21,398 17,394
Preferred distributions . . . . . . (3,281) (3,282) (9,841) (9,906)
------- ------- -------- --------
Net income available to common
stockholders. . . . . . . . . . . . $ 6,887 $ 2,492 $ 11,557 $ 7,488
======= ======= ======== ========
Distribution per share of common stock $0.4825 $0.4825 $ 1.4475 $ 1.4475
======= ======= ======== ========
Basic weighted average number of
common shares outstanding . . . . . . 18,077 17,741 18,281 17,468
======= ======= ======== ========
PROPERTY DATA
Total properties (at end of period). . . . 155 75 155 75
Total units (at end of period). . . . . .42,432 23,420 42,432 23,420
Total units (weighted average) . . . . . 42,709 23,344 42,742 22,527
Weighted average monthly property
revenue per unit . . . . . . . . . . $ 551 $ 515 $ 542 $ 509
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
BALANCE SHEET DATA
Real estate assets, net (including real estate held for sale). . . $1,452,632 $1,433,029
Mortgage notes payable, credit facility and term loan. . . . . . . 759,631 702,354
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . 313,660 321,916
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 376,973 395,215
</TABLE>
Comparison of Three Months and Nine Months Ended September 30, 1998
- -------------------------------------------------------------------
to Three Months and Nine Months Ended September 30, 1997
- --------------------------------------------------------
The weighted average number of units owned for the third
quarter of 1998 increased by 19,365 units, or 83.0%, from 23,344
units for the third quarter of 1997 to 42,709 units for the third
quarter of 1998 as a result of the acquisition of additional
properties. The portfolio had an average physical occupancy of
93.6% and 94.1% for the third quarter of 1997 and 1998,
respectively.
The weighted average number of units owned for the nine months
ended September 30, 1998, increased by 20,215 units, or 89.7% from
22,527 units for the first nine months of 1997 to 42,742 units for
the first nine months of 1998 as a result of the acquisition of
additional properties. Total units owned at September 30, 1997 and
1998 were 23,420 and 42,432, respectively. The portfolio had an
average physical occupancy of 92.9% and 93.4% for the first nine
months of 1997 and 1998, respectively.
The Company owned 62 properties with 20,400 units throughout
both periods in 1998 and 1997 ("same store"). A summary of the
historical operating performance for "same store" properties is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Rental and other property revenue (in thousands) $32,876 $31,793 3.4 % $ 97,135 $ 94,298 3.0 %
Property operating expenses (in thousands) (1) 14,087 13,710 2.7 % 41,555 40,030 3.8 %
------- ------- -------- --------
Property operating income (in thousands) $18,789 $18,083 3.9 % $ 55,580 $ 54,268 2.4 %
======= ======= ======== ========
Average property occupancy . . . . . . . . . . . . . . 93.1 % 93.6 % N/A 92.3 % 92.8 % N/A
======= ======= ======== ========
Average monthly revenue per unit . . . . . . . . . . . $ 537 $ 519 3.4 % $ 529 $ 514 3.0 %
======= ======= ======== ========
Average annualized property operating and
maintenance expenses per unit . . . . . . . . . . . $ 2,133 $ 2,087 2.2 % $ 2,084 $ 2,021 3.1 %
======= ======= ======== ========
Average annualized real estate taxes per unit $ 629 $ 601 4.7 % $ 632 $ 596 6.0 %
======= ======= ======== ========
Operating expense ratio. . . . . . . . . . . . . . . . . . 42.8 % 43.1 % N/A 42.8 % 42.5 % N/A
======= ======= ======== ========
(1) Consists of property operating and maintenance and real estate tax expenses.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
The operating performance of properties not owned throughout
both periods in 1998 and 1997 is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental and other property revenue (in thousands) $ 37,779 $ 4,282 $111,365 $ 8,969
Property operating expenses (in thousands) (1) 16,375 1,980 48,566 4,234
-------- ------- -------- -------
Property operating income (in thousands) $ 21,404 $ 2,302 $ 62,799 $ 4,735
======== ======= ======== =======
Weighted average number of units . . . . . . 22,309 2,944 22,342 2,127
======== ======= ======== =======
Average physical occupancy . . . . . . . . . 94.9 % 93.5 % 94.5 % 93.0 %
======== ======= ======== =======
Average monthly revenue per unit . . . . . . $ 564 $ 485 $ 554 $ 469
======== ======= ======== =======
Average annualized property operating and
maintenance expenses per unit. . . . . . . $ 2,248 $ 2,079 $ 2,225 $ 2,050
======== ======= ======== =======
Average annualized real estate taxes per unit $ 688 $ 613 $ 673 $ 604
======== ======= ======== =======
Operating expense ratio . . . . . . . . . . 43.3 % 46.2 % 43.6 % 47.2 %
======== ======= ======== =======
(1)Consists of property operating and maintenance and real estate tax expenses.
</TABLE>
General and administrative expenses increased $1,336,000 for
the third quarter of 1998, or 77.5%, from $1,723,000 for the third
quarter of 1997 to $3,059,000 for the third quarter of 1998. This
represented a per unit decrease of $9, or 3.1%, on an annualized
basis. General and administrative expenses increased $3,643,000
for the first nine months of 1998, or 71.2%, from $5,117,000 for
the first nine months of 1997 to $8,760,000 for the first nine
months of 1998. This represents a per unit decrease of $30, or
9.8%, on an annualized basis. This per unit decrease is primarily
due to increased operating efficiencies. The increases in general
and administrative expenses were primarily due to increased
properties owned which resulted in increased salary costs and
occupancy costs for additional corporate and regional office space.
Interest expense increased $8,205,000 for the third quarter of
1998, or 145.4%, from $5,643,000 for the third quarter of 1997 to
$13,848,000 for the second quarter of 1998. Interest expense
increased $24,772,000 for the first nine months of 1998, or 157.1%,
from $15,764,000 for the first nine months of 1997 to $40,536,000
for the first nine months of 1998. The increases were primarily
due to indebtedness incurred in connection with properties acquired
during 1997 and 1998.
Depreciation expense increased $7,493,000 for the third
quarter of 1998, or 106.0%, from $7,071,000 for the third quarter
of 1997 to $14,564,000 for the third quarter of 1998. Depreciation
increased $23,407,000 for the first nine months of 1998, or 115.9%,
from $20,192,000 for the first nine months of 1997 to $43,599,000
for the first nine months of 1998. The increases were due to
depreciation on additional properties acquired and capital
improvements on existing properties.
The $104,000 extraordinary loss on debt extinguishment in 1998
was due to prepayment penalties incurred in connection with the
Company's payoff of a $7.2 million mortgage loan in April 1998, and
the write off of unamortized deferred financing costs related to
the refinancing of certain of the Company's indebtedness during the
first and second quarter of 1998.
Liquidity and Capital Resources
- -------------------------------
The Company's principal demands for liquidity are
distributions to its stockholders, property operating and
maintenance costs, capital improvements to its properties,
acquisitions of properties, interest on indebtedness and debt
repayments.
During the first nine months of 1998, the Company had cash
flows from operating activities of $59.2 million, proceeds from the
sale of four properties of $36.7 million, and proceeds from stock
issuances of $14.2 million, including $4.9 million from its
dividend reinvestment plan. These funds, in addition to $42.2
million of net proceeds from mortgage notes and the Company's
credit facility, were used during the period primarily to pay for
$27.5 million of the total acquisition cost of five apartment
properties (containing 1,098 units), distributions to stockholders
and unit holders of $55.8 million, capital improvements to
properties of $45.1 million, financing costs of $3.4 million,
principal payments of $4.1 million, and the purchase of 731,500
shares of the Company's common stock for $17.8 million. As a
result, the Company had a net decrease in cash of $2.1 million.
The Company has a $150 million unsecured credit facility (the
"Credit Facility"), which expires in February 1999. The Credit
Facility has been used to finance property acquisitions, including
capital improvements, and to meet short-term liquidity
requirements. As of September 30, 1998, the funds available to the
Company under the Credit Facility were $43.6 million, subject to
certain borrowing base and other customary covenants.
Net cash provided by operating activities increased $26.8
million for the first nine months of 1998 compared to the same period
in 1997. Cash flow from operating activities before changes in
operating accounts increased $31.8 million, primarily due to an
increased number of units owned, which was offset by a $5.0 million
decrease in the net effect of changes in operating accounts. The net
decrease in operating accounts resulted primarily from an increase in
the funding of escrow deposits, a decrease in accounts payable, and
an increase in the payment of real estate taxes.
Net cash used in investing activities decreased $42.2 million
for the first nine months of 1998 compared to the same period in
1997, primarily due to proceeds received from the disposition of
properties. During the first nine months of 1998, the Company
received net proceeds of approximately $36.7 million from the
disposition of four properties, containing an aggregate of 1,151
units. The Company purchased 1,098 units and assumed $19.1 million
in mortgage indebtedness in the first nine months of 1998 compared
to purchasing 2,013 units and assuming $6.9 million in mortgage
indebtedness during the same period in 1997; resulting in a
decrease in cash paid for the purchase of real estate assets of
$27.5 million. The net decrease in cash used was partially offset
by a $21.9 million increase in cash paid for real estate asset
additions. During the first nine months of 1998, the Company's
capital expenditures were $45.1 million, compared to $23.2 million
during the same period in 1997. The capital expenditure increase
in 1998 is a result of non-recurring interior upgrades and exterior
enhancements on "same store" properties, non-recurring
rehabilitation costs on acquisition properties, and increased
recurring capital expenditures, including carpet and appliances,
resulting from an increased number of properties.
Net cash provided by financing activities decreased $46.2
million for the first nine months of 1998 compared to the same
period in 1997. The decrease is primarily due to increased
distributions to stockholders and minority interest holders, the
repurchase of 731,500 shares of the Company's common stock for an
aggregate price of $17.8 million in 1998, and an $11.5 million
decrease in proceeds received from the issuance of common stock.
The Company intends to meet its short-term liquidity
requirements, including capital expenditures related to maintenance
and improvements of its properties, through cash flow provided by
operations and when necessary will utilize unused portions of its
Credit Facility to meet working capital needs. Historically, the
cash provided by operating activities has been adequate to meet
both its operating requirements and distribution payments; however,
the Company's current repositioning program will require borrowings
under the Credit Facility to fund capital improvements. These
amounts include certain costs incurred under the repositioning
program and recurring and non-recurring capital expenditures on
properties which have not been placed in the repositioning program,
but where the Company has determined that certain smaller scale
improvement items would be beneficial in enabling the Company to
achieve increased rental rates. During the first nine months of
1998, the Company spent $19.6 million for recurring and non-recurring capital
items, $20.5 million for repositioning and acquisition rehabilitation costs,
and loaned $5.0 million for the development of two apartment properties
(see Note 8 to the accompanying condensed consolidated financial statements).
The Company anticipates incurring $4.2 million for recurring and
non-recurring capital expenditures and $10.3 million for repositioning and
acquisition rehabilitation properties during the remainder of 1998.
The Company expects to meet its long-term liquidity
requirements, such as refinancing mortgage indebtedness and
property acquisitions, including capital improvements on property
acquisitions through long-term borrowings, both secured and
unsecured, and the issuance of debt or equity securities.
As of September 30, 1998, the Company had outstanding
indebtedness in the aggregate principal amount of $759.6 million,
consisting of fixed rate debt of $404.6 million and variable rate
debt of $355.0 million. The weighted average interest rate and
weighted average years to maturity on the Company's outstanding
indebtedness at September 30, 1998 were approximately 7.3% and 7
years, respectively.
The Company's outstanding indebtedness matures as shown in the
following table (in thousands).
Principal Balloon
Year Reduction Payments Total
---- ---------- -------- --------
1998 $ 1,535 $205,750 $207,285
1999 6,336 99,835 106,171
2000 6,779 7,067 13,846
2001 5,770 67,952 73,722
2002 5,879 -- 5,879
2003 5,981 23,207 29,188
Thereafter 99,339 224,201 323,540
--------- -------- --------
Total $ 131,619 $628,012 $759,631
========= ======== ========
<PAGE>
The balloon payment due in 1998 is primarily due to the
Company's $200 million unsecured term loan which matures on
December 15, 1998. The Company anticipates borrowing $250 million in
secured transactions, with terms ranging from five to ten years, to repay
the term loan with any remaining proceeds used to repay the unsecured Credit
Facility. In connection with obtaining secured financing, the Company
anticipates unwinding its forward treasury rate lock agreements
(see Note 4 to the accompanying condensed consolidated financial
statements). The remaining $5.8 million is variable rate, tax-exempt
mortgage indebtedness which was refinanced on October 28,1998
(see Note 9 to the accompanying condensed consolidated financial statements).
The $99.8 million balloon payment in 1999 is primarily due to
the Company's $150 million unsecured Credit Facility ($91.5 million
outstanding at September 30, 1998), which matures on February 9,
1999. The Company is currently negotiating the terms to extend the
maturity of the Credit Facility at least one year.
Funds from Operations
- ---------------------
Management of the Company generally considers funds from
operations ("FFO") an appropriate measure of the performance of an
equity real estate investment trust. FFO is defined as net income
(determined in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation of real estate assets, and
income allocated to minority interests. The Company believes that
in order to facilitate a clear understanding of its operating
results, FFO should be examined in conjunction with net income as
presented herein. FFO does not represent cash generated from
operating, investing and financing activities in accordance with
generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs and cash
distributions. FFO should not be considered as an alternative to
net income (determined in accordance with generally accepted
accounting principles) as an indication of the Company's
performance, or as an alternative to cash flow (determined in
accordance with generally accepted accounting principles) as a
measure of liquidity.
<PAGE>
The Company calculates FFO in a manner consistent with that
recommended by the National Association of Real Estate Investment
Trusts; however, the Company's FFO is not necessarily comparable to
similarly entitled items reported by other REITs. FFO for the
three months and nine months ended September 30, 1998 and 1997 are
as follows (unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Funds from operations:
Net income available to common stockholders $ 6,887 $ 2,492 $11,557 $ 7,488
Preferred distributions (1). . . . . . 980 982 2,940 3,006
Income allocated to minority interests (2) 4,345 397 7,762 1,197
Gain on disposition of real property (6,696) -- (6,696) --
Extraordinary loss on debt extinguishment -- -- 104 --
Depreciation of real estate assets 14,387 7,002 43,166 20,011
------- ------- ------- -------
Funds from operations . . . . . . . $19,903 $10,873 $58,833 $31,702
======= ======= ======= =======
Cash flows provided by (used in):
Operating activities . . . . . . . . . $27,648 $ 9,172 $59,209 $32,420
Investing activities . . . . . . . . . (10,684) (10,898) (35,973) (78,195)
Financing activities . . . . . . . . . (15,847) 668 (25,352) 20,815
(1) Distributions on convertible preferred stock are added back in computing
funds from operations since the conversion to common shares has been
assumed.
(2) Excludes distributions on the preferred operating partnership units, which
are not added back in computing funds from operations ($1,125 per quarter
for 1998).
</TABLE>
Inflation
- ---------
The Company leases apartments under lease terms generally
ranging from six to 12 months. Management believes that such
short-term lease contracts lessen the impact of inflation on the
cost of property operations, as well as allows for the adjustment
of rental rates to market levels as leases expire.
Year 2000 Conversion
- --------------------
Many of the world's computer systems currently record years in
a two-digit format. Such computer systems will be unable to
properly interpret dates beyond the year 1999, which could lead to
disruptions in the Company's operations (commonly referred as the
"Year 2000" issue). The Company has identified three of its
primary systems which are vulnerable to the Year 2000 issue:
(1) General Ledger/Accounts Payable System. The current
system is not Year 2000 compliant. The installation of and
conversion to a new system, which has been warranted to be Year
2000 compliant, was accomplished in October 1998. The cost of the
new system is expected to be approximately $900,000, of which
approximately $675,000 has been incurred to date.
(2) Payroll. The Company processes its payroll through ADP,
an outside payroll vendor. ADP's current payroll processing system
is not Year 2000 compliant, however, ADP does have a software
version that is Year 2000 compliant. The Company is currently
evaluating ADP's Year 2000 compliant software, as well as other
payroll vendors and expects to have selected a software package
which is Year 2000 compliant and have the system converted and
tested by the end of the first quarter of 1999. The cost to
complete the payroll conversion is anticipated to be between
$100,000 and $300,000, depending primarily on whether the Company
continues to use an outside vendor or converts to an in-house
package.
(3) On-Site Accounting. The Company processes its on-site
accounting (rent roll activities) on AMSI. The AMSI version which
the Company currently uses is Year 2000 compliant.
The Company has additionally identified those vendors it
believes could have an impact on its day-to-day operations and has
developed a short questionnaire regarding the vendor's Year 2000
status. These vendors, consisting primarily of financial
institutions, will be contacted before January 1, 1999, to
determine their Year 2000 status.
The Company fully anticipates its internal systems will be
Year 2000 compliant as all systems other than payroll have been
modified or replaced. In the event a new payroll system cannot be
implemented, the Company will continue to use an upgraded, Year
2000 compliant ADP system. In the event a vendor's systems will
not be Year 2000 compliant, the Company will assess the potential
risk and, to the extent it is feasible, transfer its business to
alternate vendors.
The Company will utilize both internal and external resources
to reprogram, replace and test its systems for Year 2000
modifications. The Company anticipates completing the Year 2000
project by the first quarter of 1999. However, there can be no
guarantee that the systems of other companies on which the
Company's systems rely will be timely converted and would not have
an adverse effect on the Company's operations.
The cost of Year 2000 compliance and the estimated date of
completion of necessary modifications is based on the Company's
best estimates, which were derived from various assumptions of
future events, including the continued availability of certain
resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
anticipated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
- ---------------------------------------------------------------------
Not Applicable.
<PAGE>
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Other Information
None.
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
27 Financial Data Schedule
(b) Reports
Form 8-K was filed for the Company's 401(k) Plan on October 15, 1998
to report the change in fiscal year from a year ending on
September 30 to a calendar year basis.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Walden Residential Properties,
Inc. certifies that it has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WALDEN RESIDENTIAL PROPERTIES, INC.
By: / s / Marshall B. Edwards
------------------------------
Marshall B. Edwards
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on
behalf of Walden Residential Properties, Inc. and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/ s /Michael A. Masterson Chairman of the Board of Directors November 12, 1998
- -------------------------
Michael A. Masterson
/ s / Marshall B. Edwards President, Chief Executive Officer
- ------------------------- and Director (Principal Executive Officer) November 12, 1998
Marshall B. Edwards
/ s / Mark S. Dillinger Executive Vice President, Chief
- ------------------------- Financial Officer and Director
Mark S. Dillinger (Principal Financial and Accounting Officer) November 12, 1998
EXHIBIT INDEX
Exhibit No. Description
12.1 Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred
Stock Dividends
27 Financial Data Schedule
</TABLE>
Exhibit 12.1
<TABLE>
<CAPTION>
WALDEN RESIDENTIAL PROPERTIES, INC.
COMPUTATION OF NET RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED DISTRIBUTIONS
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before extraordinary item and income
allocated to minority interest $15,638 $ 6,171 $32,639 $18,591
Add:
Interest on indebtedness . . . . . . . 13,848 5,643 40,536 15,764
Amortization . . . . . . . . . . . . . 283 201 768 612
------- -------- ------- -------
Earnings. . . . . . . . . . . . . . $29,769 $ 12,015 $73,943 $34,967
======= ======== ======= =======
Fixed charges and preferred distributions:
Interest on indebtedness . . . . . . . $13,848 $ 5,643 $40,536 $15,764
Amortization . . . . . . . . . . . . . 283 201 768 612
------- -------- ------- -------
Fixed charges . . . . . . . . . . . 14,131 5,844 41,304 16,376
Add:
Preferred distributions (1) 4,796 3,690 14,388 11,109
Combined fixed charges and ------- -------- ------- -------
preferred distributions $18,927 $ 9,534 $55,692 $27,485
======= ======== ======= =======
Ratio of earnings to fixed charges 2.11x 2.06x 1.79x 2.14x
Ratio of earnings to fixed charges and
preferred distributions. . . . . . . . 1.57x 1.26x 1.33x 1.27x
(1) Includes distributions on preferred stock and preferred
distributions to minority interest holders.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1989
<CASH> 7,641
<SECURITIES> 0
<RECEIVABLES> 4,567
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,532,085
<DEPRECIATION> 113,558
<TOTAL-ASSETS> 1,497,791
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
57
<COMMON> 181
<OTHER-SE> 376,735
<TOTAL-LIABILITY-AND-EQUITY> 1,497,791
<SALES> 0
<TOTAL-REVENUES> 208,500
<CGS> 0
<TOTAL-COSTS> 90,121
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,536
<INCOME-PRETAX> 32,639
<INCOME-TAX> 0
<INCOME-CONTINUING> 32,639
<DISCONTINUED> 0
<EXTRAORDINARY> (104)
<CHANGES> 0
<NET-INCOME> 11,557
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.63
</TABLE>
