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 June 30, 1999
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
(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 August 2, 1999, there
were 25,286,678 shares of Common Stock, $0.01, par value outstanding.
WALDEN RESIDENTIAL PROPERTIES, INC.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998 . . . . . . . . . . . . .2
Condensed Consolidated Statements of Income for the
Three Months and Six Months Ended June 30, 1999
and 1998 (Unaudited). . . . . . . . . . . . . . . . . . . .3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 (Unaudited) . . . 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . .6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures about Market Risks. 22
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 23
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . 23
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 23
Item 4. Submission of Matters to a Vote of Security Holders. . . . .23
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 24
PART 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS (Unaudited)
Real estate assets, at cost
Land . . . . . . . . . . . . . . . . . . . . . $ 164,119 $ 170,347
Buildings and improvements . . . . . . . . . . 1,331,369 1,360,816
------------ -----------
1,495,488 1,531,163
Less: Accumulated depreciation . . . . . . (150,875) (128,765)
------------ -----------
1,344,613 1,402,398
Construction in progress . . . . . . . . . . . . 20,818 29,322
Real estate assets held for sale . . . . . . . . 30,169 7,162
Rent and other receivables ($1.5 million due from related
party) . . . . . . . . . . . . . . . . . . . . . 8,001 6,765
Prepaid assets . . . . . . . . . . . . . . . . . 6,633 6,055
Deferred financing costs, net. . . . . . . . . . 44,599 46,070
Cash and cash equivalents. . . . . . . . . . . . 7,647 9,292
Investment in real estate ventures . . . . . . . 49,958 18,000
Other assets . . . . . . . . . . . . . . . . . . 4,212 3,121
Restricted cash:
Escrow deposits. . . . . . . . . . . . . . . . 16,900 21,568
Additional collateral on loans . . . . . . . . 3,201 2,520
---------- ----------
Total assets. . . . . . . . . . . . . . . . $1,536,751 $1,552,273
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable . . . . . . . . . . . . $ 459,405 $ 461,867
Secured credit facility. . . . . . . . . . . . 249,650 250,000
Unsecured credit facility. . . . . . . . . . . 91,000 95,000
Other unsecured loans. . . . . . . . . . . . . 10,000 --
Accrued real estate taxes. . . . . . . . . . . 14,131 22,869
Accounts payable . . . . . . . . . . . . . . . 12,527 13,564
Accrued expenses and other liabilities . . . . . . . . 29,955 28,102
Preferred distribution payable to minority interests 391 391
---------- ----------
Total liabilities . . . . . . . . . . . . . 867,059 871,793
Commitments and contingencies (Note 8)
Minority interests . . . . . . . . . . . . . . . 108,620 147,277
Stockholders' equity:
Preferred stock. . . . . . . . . . . . . . . . 73 70
Common stock . . . . . . . . . . . . . . . . . 253 236
Additional paid in capital . . . . . . . . . . 662,892 620,006
Notes receivable for stock purchases . . . . . . . . . (8,445) (6,410)
Deferred compensation on Restricted Stock. . . . . . . (1,460) (1,108)
Distributions in excess of net income. . . . . . . . . (92,241) (79,591)
----------- ----------
Total stockholders' equity. . . . . . . . . 561,072 533,203
----------- ----------
Total liabilities and stockholders' equity . . . $1,536,751 $1,552,273
=========== ==========
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 Six Months Ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Rental income. . . . . . . . . . . . . $66,450 $66,650 $132,580 $132,557
Other property income . . . . . . . . 3,060 2,742 5,776 5,288
Equity income from joint ventures . . 762 -- 1,652 --
Management fee and other income. . . 302 -- 495 --
Interest income. . . . . . . . . . . . 564 363 1,109 724
-------- ------- ------- -------
Total revenues. . . . . . . . . . . 71,138 69,755 141,612 138,569
-------- ------- ------- -------
EXPENSES
Property operating and maintenance 21,505 23,249 43,042 45,761
Real estate taxes. . . . . . . . . . . 7,236 6,950 14,302 13,898
General and administrative . . . . . . 2,794 2,866 5,837 5,701
Unusual charges (Note 6) . . . . . . . -- -- 1,728 --
Interest . . . . . . . . . . . . . . . 15,337 13,374 30,184 26,688
Amortization . . . . . . . . . . . . . 741 252 1,359 485
Depreciation . . . . . . . . . . . . . 17,398 14,701 32,912 29,035
-------- ------- -------- --------
Total expenses. . . . . . . . . . . 65,011 61,392 129,364 121,568
-------- ------- -------- --------
Operating income . . . . . . . . . . . 6,127 8,363 12,248 17,001
Gain on disposition of real property 10,177 -- 10,177 --
-------- ------- -------- --------
Income before extraordinary item and
income allocated to minority interests 16,304 8,363 22,425 17,001
Extraordinary loss on debt extinguishment (215) (80) (215) (104)
-------- ------- -------- --------
Income before income allocated to
minority interests. . . . . . . . . . 16,089 8,283 22,210 16,897
Income allocated to minority interests (2,247) (2,769) (3,180) (5,667)
-------- ------- -------- --------
Net income . . . . . . . . . . . . . . 13,842 5,514 19,030 11,230
Preferred distributions. . . . . . . . . (4,128) (3,280) (8,201) (6,560)
-------- ------- -------- --------
Net income available to common
stockholders. . . . . . . . . . . . . $ 9,714 $ 2,234 $10,829 $ 4,670
======== ======= ======= ========
Basic and diluted net income per share $ 0.39 $ 0.12 $ 0.44 $ 0.25
======== ======= ======= ========
Basic weighted average number of
common shares outstanding . . . . . . 24,846 18,488 24,476 18,384
======== ======= ======= ========
Diluted weighted average number of
common shares and common share
equivalents outstanding . . . . . . . 24,846 18,632 24,476 18,554
======== ======= ======= ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Six Months Ended
June 30,
------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $19,030 $11,230
Adjustments to reconcile net income to net cash provided by
operating activities:
Income allocated to minority interest. . . . . . . . . . . 3,180 5,667
Depreciation and amortization. . . . . . . . . . . . . . . 34,271 29,520
Amortization of deferred compensation on restricted stock. 183 123
Amortization of prepaid interest expense . . . . . . . . . 1,780 608
Extraordinary loss on debt extinguishment. . . . . . . . . 215 104
Gain on disposition of real property . . . . . . . . . . . (10,177) --
Net effect of changes in operating accounts:
Escrow deposits . . . . . . . . . . . . . . . . . . . . 4,668 (7,213)
Receivables, prepaids, and other assets . . . . . . . . (3,454) (3,009)
Accrued real estate taxes . . . . . . . . . . . . . . . (8,738) (4,357)
Accounts payable. . . . . . . . . . . . . . . . . . . . 781 (3,848)
Other liabilities . . . . . . . . . . . . . . . . . . . 1,853 2,736
------- -------
Net cash provided by operating activities . . . . . . . 43,592 31,561
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate assets . . . . . . . . . . . . . . -- (5,082)
Real estate asset additions. . . . . . . . . . . . . . . . (29,431) (20,207)
Proceeds from disposition of real estate assets. . . . . . 46,232 --
Collection of construction loan receivable . . . . . . . . 2,327 --
Cash paid for investment in real estate venture. . . . . . (31,958) --
------- --------
Net cash used in investing activities . . . . . . . . (12,830) (25,289)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance, net of issuance cost . . . . 4,141 12,402
Purchase of the Company's common stock . . . . . . . . . . -- (14,002)
Purchase of minority interest securities . . . . . . . . . -- (130)
Distributions paid on common and preferred stock and
minority interest. . . . . . . . . . . . . . . . . . . . . (37,322) (37,306)
Proceeds from mortgage notes payable, other unsecured loan, and
credit facility . . . . . . . . . . . . . . . . . . . . 95,000 172,903
Payment of mortgage notes payable, other unsecured loan, and credit
facility. . . . . . . . . . . . . . . . . . . . . . . . (89,000) (137,155)
Payment of financing costs . . . . . . . . . . . . . . . . (1,733) (3,240)
Additional collateral on loans . . . . . . . . . . . . . . (681) (330)
Principal reductions of debt . . . . . . . . . . . . . . . (2,812) (2,647)
------- --------
Net cash used in financing activities . . . . . . . . (32,407) (9,505)
------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . (1,645) (3,233)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . 9,292 9,757
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . $ 7,647 $ 6,524
======= ========
</TABLE>
<TABLE>
<CAPTION>
WALDEN RESIDENTIAL PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . $29,133 $23,671
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Accrued real estate asset additions. . . . . . . . . . . . . . . . . $ 1,840 $ 1,722
======= ========
Mortgages assumed. . . . . . . . . . . . . . . . . . . . . . . . . .. $ -- $ 10,806
======= ========
Notes receivable for stock purchases, net of retirements . . . . . .. $ 2,035 $ 3,560
======= ========
Deferred compensation on restricted stock, net of cancellations . . . $ 535 $ 136
======= ========
Conversion of minority interest securities to common and preferred ..
stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $36,192 $ --
======= ========
Distribution payable to minority interest holders. . . . . . . . . $ 391 $ 391
======= ========
Minority interest securities issued. . . . . . . . . . . . . . . . . $ -- $ 505
======= ========
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") was formed on
September 29, 1993 as a Maryland Corporation. The Company is a Dallas, Texas
based equity real estate investment trust ("REIT"), as defined under the
Internal Revenue Code of 1986, as amended. On February 9, 1994, the Company
completed an initial public offering ("IPO") of its common stock, which is
listed on the New York Stock Exchange. As of June 30, 1999, the Company owned
144 multifamily properties,containing 40,220 apartment units, primarily in the
Southwest and Southeast regions of the United States. The Company's real estate
assets are operated with the same long-term objectives and therefore are viewed
as a single operating segment.
The accompanying unaudited 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, 1998 and
Form 10-Q for the three months ended March 31, 1999, which were filed with the
Securities and Exchange Commission ("SEC"). The accompanying interim unaudited
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 June 30, 1999 and
the consolidated results of their operations for the three and six months ended
June 30, 1999 and 1998 and the consolidated cash flows for the six months ended
June 30, 1999 and 1998, have been included. The consolidated results of
operations for the three and six months ended June 30, 1999 are not necessarily
indicative of the results for the full year.
As of June 30, 1999, the Company had four apartment properties held for
sale, which were sold on July 22, 1999. Management had determined that the
properties did not match the Company's long-term investment strategies.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (the "Statement"), which
establishes standards for accounting and reporting for derivative financial
instruments. The Statement, as amended, is effective for fiscal years beginning
after June 15, 2000; however, earlier application is permitted. Management is
currently not planning on early adoption of this Statement. The Company expects
the adoption of the provisions of the Statement to result in the Company
presenting a statement of comprehensive income beginning in fiscal year 2001, as
required by SFAS No. 130, " Reporting Comprehensive Income".
2. Dispositions
On June 25, 1999, the Company disposed of one Indiana and five Texas
properties. The six properties, totaling 1,374 units, were sold for
approximately $46.2 million of net proceeds, resulting in a net gain of $10.2
million.
On July 22, 1999, the four properties held for sale as of June 30, 1999,
were sold for approximately $36.5 million of net proceeds, resulting in a gain
of approximately $6.3 million. In addition, an extraordinary loss of
approximately $0.4 million was recorded in connection with the related early
extinguishment of debt.
3. Other Unsecured Loans
On February 26, 1999, the Company entered into a $15 million unsecured
loan with BankBoston, the proceeds of which were used to fund a portion of the
Company's February 1999 investment in GGL Ventures LLC ("GGL") (see Note 4).
In June 1999, the Company repaid $5 million of this note. The remaining loan
bears interest at 8% and matures in August 2001. In connection with the $5
million repayment, the Company recorded an extraordinary loss on debt
extinguishment of $0.2 million, primarily related to the write-off of a portion
of the unamortized loan fee. The remaining fee of $1.3 million will continue to
be amortized over the loan term.
4. Investment in GGL Ventures LLC
On February 26, 1999, the Company made an additional investment of $32
million in preferred membership units of GGL, for a total investment of $50
million as of June 30, 1999. The Company is to receive up to a 12% cumulative
preferred return on its equity investment in GGL depending on the operating net
cash flow of the underlying properties. The Company may receive up to an
additional 6% preferred return on its investment from available cash in
connection with sales or refinancings of GGL assets. The Company has
accounted for its investment in GGL on the equity method, which is reflected in
investment in real estate ventures and equity income from joint ventures in the
accompanying balance sheet and income statement, respectively. $1.7 million of
cumulative return from its investment in GGL has been reported in the Company's
statement of income for the six months ended June 30, 1999. The following table
summarizes the net assets and operations of GGL as of June 30, 1999
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance Sheet:
Real estate assets, net $ 275,317
Other assets 13,217
---------
Total assets $ 288,534
=========
Mortgage notes payable $ 210,689
Accounts payable and other liabilities 10,849
Venturers' preferred capital - the Company 49,958
Venturers' capital - other members 17,038
---------
Total liabilities and venturers' capital $ 288,534
=========
Income Statement:
Revenues $ 14,859
Expenses 15,475
---------
Net loss $ (616)
=========
In connection with this transaction, the Company formed WGGL Corporation
("WGGL"), a wholly owned subsidiary, to manage the properties purchased by GGL.
WGGL receives a monthly management fee equal to 3.5% of the gross receipts of
the properties (approximately $408,000 of management fee income was recorded
for the six months ended June 30, 1999).
5. Minority Interests and Stockholders' Equity
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.
During 1999, Common OP Units of 1,264,437 and Preferred OP Units of 279,140 were
converted into the same number of shares of the Company's common stock and
9.00% redeemable preferred stock, respectively, leaving 4,483,932 Common OP
Units and 435,300 Preferred OP Units outstanding at June 30, 1999. All OP Unit
securities have been recorded as minority interests in the accompanying
balance sheets.
Restricted Stock
In February 1997, the Company adopted a Long-Term Incentive Plan to attract
and retain individuals to serve as directors and officers of the Company.
Pursuant to this plan, the Company issued 26,564 restricted shares of common
stock ("Restricted Stock") effective Februray 4, 1999, for $0.01 per share to
its six outside directors and eight officers of the Company. The shares issued
vest ratably over periods ranging from one to three years. Deferred
compensation on 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. In April 1999, an additional
4,000 shares of Restricted Stock were issued to an officer of the Company for
$0.01 per share, which vest ratably over five years. During the six months
ended June 30, 1999, restricted shares of 2,246 were canceled due to the
departure of an officer of the Company.
Notes Receivable for Stock Purchases
During 1998, the Company implemented a 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 to the officer or key employee. 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 then current interest rate under its
unsecured credit facility. The loan is secured by a pledge of the shares of
common stock purchased pursuant to such loan.
On March 1, 1999, the Company issued loans to 18 officers and key employees
under the stock purchase loan program in the amount of approximately $2.2
million, bearing interest at 7.0%. Such loans related to the issuance of
148,723 shares of the Company's common stock, at $16.69 per share (the
closing price of the common stock on the New York Stock Exchange for the
previous trading day).
Stock Options
On April 15, 1999, the Company issued 277,000 stock options to certain
officers and key employees at an exercise price of $17.50 per share. These
options vest ratably over four years and expire in ten years.
Associate Stock Purchase Plan
During 1998, the Company adopted an Associate Stock Purchase Plan. This
plan allows Company employees to purchase shares of the Company's common
stock at a 15% discount, up to $25,000 annually. During 1999, 1,958 shares of
the Company's common stock were purchased by employees at an average price of
$15.79 per share.
Distributions
In March and June 1999, the Company paid distributions of $15.7 million
and $16.0 million respectively, to stockholders of record on February 18, 1999
and May 18, 1999, respectively. The common stockholders were paid $0.4825 per
share, the 9.16% convertible redeemable preferred stockholders were paid $0.5725
per share, the 9.20% senior preferred stockholders were paid $0.575 per share,
and the 9.00% redeemable preferred stockholders were paid $0.5625 per share.
In March and June 1999, the Company paid distributions of $2.6 million and
$2.5 million, respectively, on the Common OP Units (which represented $0.4825
per unit) and $0.3 million and $0.2 million, respectively, on the Preferred OP
Units (which represented $0.5625 per unit).
6. Unusual Charges
The unusual charges included in the accompanying financial statements
consist of $1.4 million of costs related to the closing of the Houston corporate
office and the elimination of 40 staff positions; and $319,000 of costs related
primarily to professional fees incurred in connection with a significant
portfolio acquisition which was abandoned in March 1999.
7. 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.
</TABLE>
<TABLE>
<CAPTION>
The following table presents information necessary to calculate basic and
diluted net income per share for the three months and six months ended June 30,
1999 and 1998 (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income for Basic and Diluted Computation:
Income before extraordinary item and income
allocated to minority interests . . . . $16,304 $ 8,363 $22,425 $17,001
Extraordinary loss on debt extinguishment (215) (80) (215) (104)
------- ------- ------- -------
Income before income allocated to minority
interests. . . . . . . . . . . . . 16,089 8,283 22,210 16,897
Income allocated to minority interests (2,247) (2,769) (3,180) (5,667)
------- ------- ------- -------
Net income. . . . . . . . . . . . . . 13,842 5,514 19,030 11,230
Preferred distributions . . . . . . . (4,128) (3,280) (8,201) (6,560)
Net income available to common stockholders
(basic and diluted net income per share
computation) . . . . . . . . . . . $ 9,714 $ 2,234 $10,829 $ 4,670
======= ======= ======= =======
Basic Net Income per Share:
Before extraordinary item, less preferred
distributions. . . . . . . . . . . $ 0.40 $ 0.13 $ 0.45 $ 0.26
Extraordinary loss on debt extinguishment (0.01) (0.01) (0.01) (0.01)
------- ------- -------- -------
Net income available to common stockholders $ 0.39 $ 0.12 $ 0.44 $ 0.25
======= ======= ======== =======
Diluted Net Income per Share:
Before extraordinary item, less preferred
distributions. . . . . . . . . . . $ 0.40 $ 0.13 $ 0.45 $ 0.26
Extraordinary loss on debt extinguishment (0.01) (0.01) (0.01) (0.01)
------- ------- -------- --------
Net income available to common stockholders $ 0.39 $ 0.12 $ 0.44 $ 0.25
======= ======= ======== ========
Weighted Average Number of Shares Outstanding (a):
Basic . . . . . . . . . . . . . . . . 24,846 18,488 24,476 18,384
Dilutive effect of outstanding options -- 144 -- 170
-------- ------- -------- --------
Diluted . . . . . . . . . . . . . . . 24,846 18,632 24,476 18,554
======= ======= --------- --------
(a) Excludes the convertible preferred shares, warrants, Common OP Units
(see Note 5) and 2,131,750 stock options, which are not dilutive at
June 30, 1999.
</TABLE>
8. Commitments and Contingencies
In March 1999, the Company entered into an agreement with The Spanos
Corporation ("Spanos") whereby Spanos would develop, and the Company would later
purchase, a 324-unit apartment property in Sarasota, Florida. The Company is
committed to purchase 100% of the property for approximately $24 million upon
completion of construction and achievement of 80% occupancy at rental rates
equal to or greater than $865 per unit. The closing date of the purchase is
anticipated to be in the second quarter of 2000.
In February 1998, the Company signed a joint venture agreement with The
Grupe Company ("Grupe") to purchase, for approximately $47 million, two
Sacramento area properties which will consist of 616 apartment units. Under
the terms of the joint venture, Grupe will build and lease-up the two properties
before the Company purchases 100% of both properties from the joint venture.
The purchase is anticipated to occur sometime in late 1999. The Company has
guaranteed the construction loan related to these two properties ($31.2 million
balance at June 30, 1999).
In July 1998, the Company entered into an agreement to loan to The
Greystone Group, Inc. ("Greystone"), an unrelated third-party, amounts necessary
to purchase and develop a parcel of land in Chandler (Phoenix), Arizona.
In March 1999, Greystone obtained a construction loan commitment for $16.6
million, which requires a $1 million guarantee by the Company. Upon the
closing of this construction loan in March 1999, the Company's loan to Greystone
was reduced to $4.8 million. The Company also entered into a purchase agreement
with Greystone in November 1998, whereby Greystone will construct a 272-unit
apartment community on the respective land. The Company is committed to
purchase the property for approximately $21.3 million upon completion of
construction and the achievement of specified targeted occupancy levels,
anticipated to occur sometime in mid-2000.
In August 1998, the Company entered into an agreement with Allied Realty
Services, Inc. ("Allied") whereby Allied will construct and the Company will
later purchase a 192-unit apartment property located in Houston, Texas, adjacent
to a 168-unit apartment property purchased by the Company in August 1998. The
Company is committed to purchase 100% of the property for approximately $11.3
million upon completion of construction and achievement of targeted occupancy
levels, anticipated to occur sometime in mid-2000.
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.
The 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, 1998. 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
six months ended June 30, 1999 and 1998 and the condensed consolidated balance
sheet data of the Company as of June 30, 1999 and December 31, 1998.
The changes in revenues and expenses related to property operations during
the three and six months ended June 30, 1999 and 1998 are primarily the result
of the increased rental rates achieved and decreased operating and maintenance
expenses. 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.
<TABLE>
<CAPTION>
The financial and operating data provided on page 14 is supplemental
information to all financial statements included elsewhere in this Form 10-Q.
Such supplemental information is unaudited, except for the balance sheet data as
of December 31, 1998.
SUPPLEMENTAL FINANCIAL AND OPERATING DATA
(In thousands, except per share and property data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING DATA
Revenues
Rental income. . . . . . . . . . . $66,450 $66,650 $132,580 $132,557
Other property income. . . . . . . 3,060 2,742 5,776 5,288
Equity income from joint ventures 762 -- 1,652 --
Management fee and other income . 302 -- 495 --
Interest income. . . . . . . . . . 564 363 1,109 724
-------- ------- ------- --------
Total revenues . . . . . . . . 71,138 69,755 141,612 138,569
------- ------- ------- --------
Expenses
Property operating and maintenance 21,505 23,249 43,042 45,761
Real estate taxes. . . . . . . . . 7,236 6,950 14,302 13,898
General and administrative . . . . 2,794 2,866 5,837 5,701
Unusual charges. . . . . . . . . . -- -- 1,728 --
Interest . . . . . . . . . . . . . 15,337 13,374 30,184 26,688
Amortization . . . . . . . . . . . 741 252 1,359 485
Depreciation . . . . . . . . . . . 17,398 14,701 32,912 29,035
------ ------ ------- ---------
Total expenses . . . . . . . . . 65,011 61,392 129,364 121,568
------ ------ ------- ---------
Operating income . . . . . . . . . 6,127 8,363 12,248 17,001
Gain on disposition of real
property . . . . . . . . . . 10,177 -- 10,177 --
------ ------ ------- ---------
Income before extraordinary item and
income allocated to minority interests 16,304 8,363 22,425 17,001
Extraordinary loss on debt extinguishment (215) (80) (215) (104)
------ ------- ------- ---------
Income before income allocated to
minority interest . . . . . . . . . . 16,089 8,283 22,210 16,897
Income allocated to minority interests (2,247) (2,769) (3,180) (5,667)
------ ------ ------ ---------
Net income . . . . . . . . . . . . . . . 13,842 5,514 19,030 11,230
Preferred distributions. . . . . . . . . (4,128) (3,280) (8,201) (6,560)
------ ------ ------ ---------
Net income available to common
stockholders. . . . . . . . . . . . . $ 9,714 $ 2,234 $10,829 $ 4,670
======= ======= ======= =========
Distribution per share of common stock. . $0.4825 $0.4825 $ 0.965 $ 0.965
======= ======== ======== =========
Basic weighted average number of
common shares outstanding . . . . . . 24,846 18,488 24,476 18,384
======= ======= ======== =========
- ----------------------------------------------------------------------------------------------------------
PROPERTY DATA
Total properties (at end of period). . . . 144 156 144 156
Total units (at end of period) . . . . . . 40,220 42,858 40,220 42,858
Total units (weighted average) . . . . . . 41,503 42,858 41,548 42,758
Weighted average monthly property
revenue per unit . . . . . . . . . . .$ 558 $ 540 $ 555 $ 537
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
BALANCE SHEET DATA
Real estate assets, at cost (including real estate
held for sale) . . . . . . . . . . . . . . . . . . . . . . $1,546,475 $1,567,647
Mortgage notes payable, credit facilities, and other
unsecured loans . .. . . . . . . . . . . . . . . . . . .. 810,055 806,867
Minority interests . . . . . . . . . . . . . . . . . . . . 108,620 147,277
Stockholders' equity . . . . . . . . . . . . . . . . . . . . 561,072 533,203
</TABLE>
Comparison of Three Months and Six Months Ended June 30, 1999 to Three Months
- -----------------------------------------------------------------------------
and Six Months Ended June 30, 1998
- -----------------------------------
The weighted average number of units owned for the second quarter of 1999
decreased by 1,355 units, or 3.2% from 42,858 units for the second quarter of
1998 to 41,503 units for the second quarter of 1999 as a result of the sale of
six properties in June 1999. The portfolio had an average physical occupancy of
93.0% and 92.8% for the second quarter of 1998 and 1999, respectively.
The weighted average number of units owned for the six months ended June
30, 1999, decreased by 1,210 units, or 2.8% from 42,758 units for the first six
months of 1998 to 41,548 units for the first six months of 1999 as a result of
the disposition of properties. Total units owned at June 30, 1998 and 1999 were
42,858 and 40,220, respectively. The portfolio had an average physical
occupancy of 93.1% and 92.8% for the first six months of 1998 and 1999,
respectively.
<TABLE>
<CAPTION>
The Company owned 139 properties with 39,122 units throughout both periods
in 1999 and 1998 ("same store"). A summary of the historical operating
performance for "same store" properties is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1999 1998 % Change 1999 1998 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Rental and other property revenue (in thousands) . . . . $65,658 $63,528 3.4% $130,558 $126,589 3.1%
Property operating expenses (in thousands) (1) . . . .. 27,068 27,369 (1.1%) 53,960 54,243 (0.5%)
------- ------- -------- --------
Property operating income (in thousands) . . . . . . . . $38,590 $36,159 6.7% $ 76,598 $ 72,346 5.9%
======= ======= ======== ========
Average physical occupancy . . . . . . . . . . . . . . 93.1% 93.0% N/A 93.0% 93.2% N/A
======= ======= ======== ========
Average monthly revenue per unit . . . . . . . . . . . . $ 559 $ 541 3.4% $ 556 $ 539 3.1%
======= ======= ======== ========
Average annualized property operating and
maintenance expenses per unit . . . . . .. . . . . . $ 2,080 $ 2,150 (3.3%) $ 2,080 $ 2,124 (2.1%)
======= ======= ======== ========
Average annualized real estate taxes per unit . . . . . $ 688 $ 648 6.2% $ 678 $ 649 4.5%
======= ======= ======== ========
Operating expense ratio. . . . . . . . . . . . . . . . 41.2% 43.1% N/A 41.3% 42.8% N/A
======= ====== ======== ========
(1) Consists of property operating and maintenance and real estate tax expenses.
</TABLE>
<TABLE>
<CAPTION>
The operating performance of properties not owned throughout both periods
in 1999 and 1998 is summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental and other property revenue (in thousands) . . . . . $3,852 $5,864 $7,798 $11,256
Property operating expenses (in thousands) (1). . . . . . 1,673 2,830 3,384 5,416
------ ------ ------ -------
Property operating income (in thousands). . . . . . . . . $2,179 $3,034 4,414 $ 5,840
====== ====== ====== =======
Weighted average number of units . . . . . . . . . . . . . 2,381 3,736 2,426 3,636
====== ====== ====== =======
Average physical occupancy . . . . . . . . . . . . . . . 90.2% 93.5% 90.3% 93.0%
====== ====== ====== ========
Average monthly revenue per unit . . . . . . .. . . . . . $ 539 $ 523 $ 536 $ 516
====== ====== ====== ========
Average annualized property operating and
maintenance expenses per unit. . . . . . .. . . . . . . . $1,955 $2,377 $1,937 $ 2,320
====== ====== ======= ========
Average annualized real estate taxes per unit . . . . . . . $ 858 $ 654 $ 853 $ 659
====== ====== ======= ========
Operating expense ratio. . . . . . . . . . . . . . . . . .. 43.4% 48.3% 43.4% 48.1%
====== ====== ======= ========
(1) Consists of property operating and maintenance and real estate tax expenses.
</TABLE>
Equity income from joint ventures and management fees and other income
recorded in 1999 are primarily due to a preferred return and management fees
received from GGL Ventures LLC ("GGL"), in which the Company invested in
December 1998.
Interest income increased $201,000 for the second quarter of 1999, or
55.4%, from $363,000 for the second quarter of 1998 to $564,000 for the second
quarter of 1999. Interest income increased $385,000, or 53.2%, for the first
six months of 1999, from $724,000 to $1,109,000 for the first six months of
1998 and 1999, respectively. The increased interest income is primarily due
to increased interest income recorded on officer stock loans and escrow accounts
held with lenders.
General and administrative expenses decreased $72,000 for the second
quarter of 1999, or 2.5%, from $2,866,000 for the second quarter of 1998 to
$2,794,000 for the second quarter of 1999 (representing a per unit increase of
$2, or 0.7%, on an annualized basis). This decrease is primarily due to
decreased employee bonus expenses and decreased office expense due to the
closing of the Company's Houston corporate office on March 31, 1999, offset by
increased costs incurred for third party consulting services in the second
quarter of 1999. General and administrative expenses increased $136,000
for the first six months of 1999, or 2.4%, from $5,701,000 for the first six
months of 1998 to $5,837,000 for the first six months of 1999 (representing a
per unit increase of $14, or 5.2%, on an annualized basis). This increase
is primarily due to increased costs incurred for third party consulting
services in the second quarter of 1999 and increased costs for corporate
office space resulting from relocating the Dallas corporate office in May
1998.
The $1.7 million of unusual charges in 1999 resulted from $1.4 million
of costs related to the closing of the Company's Houston corporate office and
reductions in staff; and $319,000 of costs primarily related to professional
fees incurred in connection with a significant property portfolio acquisition
which was abandoned in March 1999.
Interest expense increased $1,963,000 for the second quarter of 1999, or
14.7%, from $13,374,000 for the second quarter of 1998 to $15,337,000 for the
second quarter of 1999. Interest expense increased $3,496,000 for the first
six months of 1999, or 13.1%, from $26,688,000 for the first six months of 1998
to $30,184,000 for the first six months of 1998. The increased interest expense
is primarily due to additional indebtedness incurred during 1998 for capital
expenditures and financing costs related to debt refinanced during the fourth
quarter of 1998.
Amortization expense increased $489,000 for the second quarter of 1999, or
194.0%, from $252,000 for the second quarter of 1998 to $741,000 for the second
quarter of 1999. Amortization expense increased $874,000 for the six months
ended June 30, 1999, or 180.2%, from $485,000 to $1,359,000 for the first six
months of 1998 and 1999, respectively. Increased amortization expense is
primarily due to financing costs associated with debt which the Company
refinanced during the fourth quarter of 1998.
Depreciation expense increased $2,697,000 for the second quarter of 1999,
or 18.3%, from $14,701,000 for the second quarter of 1998 to $17,398,000 for the
second quarter of 1999. Depreciation expense increased $3,877,000 for the
first six months of 1999, or 13.4%, from $29,035,000 for the first six months of
1998 to $32,912,000 for the first six months of 1999. The increased
depreciation expense is due to increased capital improvements on existing
properties, primarily from the Company's repositioning program.
The $10.2 million gain on disposition of real property resulted from the
sale of six properties in June 1999.
The $215,000 extraordinary loss on debt extinguishment in 1999 is due to
prepayment penalties and the write off of unamortized loan costs associated with
the repayment of $5.0 million on the Company's unsecured loan (see Note 3 to the
condensed consolidated financial statements.)
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 debt during the first and second
quarter of 1998.
Liquidity and Capital Resources
The Company intends to maintain what it believes is a conservative capital
structure by: (i) maintaining an interest coverage ratio (operating income
before interest expense, depreciation and amortization to interest expense) of
2.5 times or greater, (ii) managing interest exposure by obtaining fixed rate
debt and contractually fixing all or portions of variable rate debt with
interest rate swap or cap agreements, (iii) obtaining unsecured indebtedness
when possible, and (iv) staggering principal maturities when possible.
For the six months ended June 30, 1999, the Company had cash flows from
operating activities of $43.6 million, proceeds from the disposition of real
estate assets of $46.2 million, net proceeds from an unsecured loan and the
unsecured credit facility (the "Credit Facility") of $5.6 million, net proceeds
from its associate stock loan program and dividend reinvestment plan of $4.1
million, and proceeds from a construction loan funding of $2.3 million. These
funds were primarily used during 1999 to fund $37.3 million of distributions
to stockholders and minority interest holders, a $32 million investment in GGL,
$29.4 million of capital improvements to properties, $2.5 million of principal
payments on existing debt, and $1.7 million of financing costs. The activity
resulted in a reduction of cash and cash equivalents of $1.6 million.
Net cash provided by operating activities increased $12.0 million for the
first six months of 1999 compared to the same period in 1998, primarily due to
an increase in reported tax payments from escrow accounts, increases in
reimbursements from reserve and replacement escrows, and increased interest
income.
Net cash used in investing activities was $12.8 million for the first six
months of 1999, compared to $25.3 million for the year ago period. This
difference primarily relates to $46.2 million of net cash proceeds received from
the disposition of six properties in June 1999, offset by a $9.2 million
increase in cash paid for real estate asset additions and the Company's $32
million investment in GGL in 1999.
Net cash used in financing activities was $32.4 million for the first six
months of 1999, compared $9.5 million for the same period in 1998. The
reduction in cash used in financing activities resulted primarily from a
reduction in cash proceeds from net borrowings of $29.7 million and a reduction
in stock issuances of $8.3 million, offset by a $14.0 million reduction in cash
used to purchase the Company's common stock.
The Company's principal demands for short-term liquidity are: ongoing
maintenance and repairs to its properties, capital improvements to its
properties, monthly debt service payments on indebtedness, distributions to
stockholders and minority interest holders, property acquisitions, and
development. The Company anticipates that its cash provided by operating
activities will be adequate to meet debt service and distribution obligations
for the remainder of 1999. The Company anticipates spending $12.6 million
during the remainder of 1999 for capital expenditures. In addition, the Company
has a commitment to fund $5 million to GGL.
The Company has entered into various agreements to purchase five apartment
properties, upon the completion of their construction and lease-up phase, at an
aggregate cost of $103.6 million. The purchases are anticipated to occur in
late 1999 and during the first six months of 2000 and will be funded through the
assumption of existing construction loans, secured financing or borrowings under
the Credit Facility. Approximately $45 million of assumable existing
construction loans have scheduled maturities in 2001.
On July 22, 1999, the Company sold four properties and received net
proceeds of approximately $36.5 million. The net proceeds were used to retire
$7.5 million of secured debt and $28.6 million of the unsecured credit
facility. In addition, on August 5, 1999, the Company eliminated the
encumbrance on four other properties by repaying secured debt of $14.9 million.
The Company has a $150 million Credit Facility, which expires in February
2001. The Credit Facility has been used to finance property acquisitions,
including capital improvements, and to meet short-term liquidity requirements.
The availability of funds to the Company under the Credit Facility is subject,
however, to certain borrowing base and other customary covenants. As of August
5, 1999, the Company's borrowing capacity was approximately $120.3 million, of
which $75.0 million had been borrowed.
As of August 5, 1999, the Company had outstanding indebtedness in the
aggregate principal amount of $771.3 million, consisting of fixed rate debt of
$638.3 million ($180.5 million of which is fixed through interest rate swap
agreements) and variable rate debt of $133.0 million. The weighted average
interest rate on the Company's outstanding indebtedness at August 5, 1999 was
approximately 7.4%.
The Company expects to meets its long-term liquidity requirements, such as
refinancing mortgages, including construction loans assumed related to new
property developments, property acquisitions and capital improvements on
property acquisitions, through long-term borrowings, both secured and
unsecured, proceeds from property dispositions, and the issuance of debt or
equity securities.
The Company's ability to acquire additional properties is dependent upon
its ability to sell properties or obtain equity or debt financing. Currently,
the Company's borrowing capacity under its Credit Facility is insufficient to
acquire properties due to its short-term commitments to purchase development
properties. As a result, the Company does not anticipate acquiring properties
in 1999 or contracting development properties unless it is able to sell
additional properties. Any future acquisitions which the Company finances with
debt are expected to generate cash flow adequate to service the associated
indebtedness.
Funds from Operations
- -----------------------
Based on the guidelines established by the National Association of Real
Estate Investment Trusts ("NAREIT") and Real Estate Investment Trust ("REIT")
industry standards, management believes funds from operations, or "FFO", is an
appropriate measure of the performance of an equity REIT. FFO is generally
calculated by excluding from net income any gains or losses from debt
restructurings and sales of property and adding back any depreciation of real
estate assets. In addition, extraordinary or unusual items that are non-
recurring events which would materially distort the comparative measure of FFO
are typically excluded. Management believes FFO helps to evaluate its
operations by determining its ability to incur and service debt and to make
capital expenditures. By adding depreciation expense back to net income, FFO
presents a more accurate picture of the Company's operating cash flows. In
evaluating FFO and the trends it depicts, consideration should be given to the
major factors affecting FFO. Growth in FFO results from increases in revenues
or decreases in related operating expenses. FFO does not represent cash
generated from operating 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 as an indication of performance or as an
alternative to cash flow as a measure of liquidity. The Company's
calculation of diluted FFO includes FFO allocated to minority interests and
assumes the conversion of all convertible securities, including minority
interest securities. This calculation may differ from the FFO calculation
used by other REITs and, accordingly, may not be comparable to similar
entitled items reported by other REITs.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Funds from operations:
Net income before income allocated to minority
interests . . . . . . . . . . . . . . $16,089 $ 8,283 $22,210 $ 16,897
Preferred distributions (1) . . . . . . .. (4,402) (4,405) (8,805) (8,810)
Distributions on convertible preferred stock (2) 978 980 1,956 1,960
Unusual charges . . . . . . . . . . . -- -- 1,728 --
Extraordinary loss on debt extinguishment 215 80 215 104
Depreciation of real estate assets 17,132 14,560 32,401 28,779
Gain on disposition of real property` (10,177) -- (10,177) --
-------- ------- ------- --------
Funds from operations-diluted . . . . . . $19,835 $19,498 $39,528 $ 38,930
======== ======= ======= ========
Cash flows provided by (used in):
Operating activities . . . . . . . . $ 23,577 $ 23,201 $43,592 $ 31,561
Investing activities. . . . . . . . . 34,019 (12,394) (12,830) (25,289)
Financing activities. . . . . . . . . (57,092) (12,271) (32,407) (9,505)
(1) Includes distributions on the preferred operating partnership units ($330
and $274 for the first and second quarter of 1999, respectively, and
$1,125 per quarter for 1998).
(2) Distributions on convertible preferred stock are added back in computing funds
from operations-diluted since the conversion to common shares has been
assumed.
</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 a company's operations. This
problem is commonly referred to as the "Year 2000" issue.
The Company has identified three primary information technology systems
which are vulnerable to the Year 2000 issue:
(1) General Ledger/Accounts Payable Systems. A new general
ledger/accounts payable system was installed in October 1998 which
has been warranted to be Year 2000 compliant.
(2) Payroll. Payroll processing was converted to a new third-party
payroll vendor in April 1999, who has warranted their system to be
Year 2000 compliant.
(3) On-Site Accounting. The on-site accounting and rent roll
activities are processed using AMSI software, which has been warranted
to be Year 2000 compliant.
While all three of the above vendors have warranted their packages to be
Year 2000 compliant, the systems have been or will be individually tested to
ensure compliance pursuant to the Company's "Disaster Recovery and Year 2000
Compliance Testing Plan."
The Company has also identified certain on-site, non-information
technology systems that may be Year 2000 sensitive and has requested each of the
related vendors to certify that their systems are Year 2000 compliant. The table
below summarizes non-information technology systems and the percentage of
properties that have received written or verbal representation from vendors that
their systems are Year 2000 compliant.
access gates 75%
alarms 16%
sprinklers/irrigation systems 52%
HVAC/boilers/thermostats 70%
utilities 33%
The identification phase is expected to be completed and the repair or
replacement of any vulnerable systems begun by the middle of the third quarter
of 1999. The cost to repair or replace any Year 2000 vulnerable non-information
technology systems is not expected to exceed $500,000.
The Company has also identified those vendors it believes could have an
impact on either site or corporate day-to-day operations. These vendors include
financial institutions, insurance companies and strategic suppliers, such as
maintenance supplies, etc. We have requested these vendors to certify in
writing that their internal systems are Year 2000 compliant. As of June 30,
1999, the response rate from Company-wide vendors is approximately 65%, with
approximately 25% of those responding indicating that they are Year 2000
compliant. The remaining vendors are working toward Year 2000 compliance.
Vendors that are identified as critical to operations and who can not assure
Year 2000 compliance by September 30, 1999 will not be used, if an acceptable
alternative vendor or strategy is available.
In the event of a complete failure of the Company's information technology
systems, the Company would be able to continue the affected functions either
manually or through the use of non-Year 2000 affected systems. The primary
costs associated with such a necessity would be (1) increased time delays
associated with posting of information, and (2) increased personnel to manually
process the information. Increased costs associated with such personnel is not
expected to exceed $1 million.
The Company does not currently have a contingency plan in place. Now that
it has preliminary responses from vendors, the Company will develop a formal
contingency plan by the end of the third quarter of 1999.
The cost of Year 2000 compliance and the estimated date of completion of
necessary modifications are based on the Company's best estimates, which were
derived from various assumptions of future events, including the continued
availability of resources, third party modification plans and other factors.
However, there is no guarantee these estimates will be achieved and actual
results could differ materially from those anticipated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in risk factors from those
previously reported in the Company's Form 10-K for the year ended December 31,
1998. The Company is exposed to market risk primarily due to fluctuations in
interest rates. The Company's policy has been to utilize long-term debt to
finance its long-term assets. The Company utilizes both fixed rate and variable
rate long-term debt. As debt matures, there is inherent rollover risk as it is
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's future financing requirements.
The Company does not enter into derivative financial instrument
transactions for trading or other speculative purposes; however, management has
reduced the net exposure of interest rate fluctuations on its variable rate debt
by utilizing derivative financial instruments. In order to minimize interest
rate risk, management utilizes long-term fixed rate debt and enters into swap
agreements on its variable rate long-term debt and enters into interest rate cap
agreements on its variable rate tax exempt debt. Management believes that
exposure to interest rate fluctuations on its variable rate Credit Facility is
manageable, as the outstanding balance from time to time will be reduced with
long-term debt or proceeds from real estate asset sales. As of June 30, 1999,
a 10% adverse change in interest rates on the Credit Facility, which bears
interest at LIBOR plus 1.875%, would result in an annual increase in interest
expense of approximately $0.5 million.
The Company has entered into three interest rate swap agreements to reduce
its exposure to changes in interest expense related to changes in market
interest rates. At any point in time these interest rate swap agreements may
not be fully effective since the quarterly payments due from or payable to the
counterparty are based on the LIBOR index, and the actual interest is based
upon the imputed interest rate on 90-day mortgage-backed securities.
Therefore, at any given time, a change in interest rates could result in either
an increase or decrease in the Company's interest expense. The Company also
has entered into six rate cap agreements on its tax exempt variable rate debt
to hedge against significant increases in tax exempt interest rates.
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
------------------------------
None.
Item 2. Changes in Securities
-----------------------------------
None.
Item 3. Defaults Upon Senior Securities
--------------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
(a) The Company's Annual Meeting of Stockholders was held on June 2,
1999.
(b) (1) The stockholders elected four Directors nominated by the
Board of Directors:
<TABLE>
<CAPTION>
Affirmative Abstentions
---------- -----------
<S> <C> <C>
Marshall B. Edwards 20,696,509 114,220
Robert L. Honstein 20,680,882 129,847
Arch K. Jacobson 20,687,516 123,213
Louis G. Munin 20,680,242 130,487
(2) The stockholders ratified the appointment of
Deloitte & Touche LLP as independent
auditors of the Company for the year ended
December 31, 1999:
</TABLE>
Affirmative Negative Abstentions
----------- --------- ----------
20,717,332 40,004 53,393
Item 5. Other Information
-----------------------------
None.
Item 6. 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
None.
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 August 5, 1999
Michael A. Masterson
/ s / Marshall B. Edwards President, Chief Executive Officer August 5, 1999
- -----------------------------
Marshall B. Edwards and Director (Principal Executive Officer)
/ s / Mark S. Dillinger Executive Vice President, Chief August 5, 1999
- ---------------------------
Mark S. Dillinger Financial Officer and Director
(Principal Financial and Accounting Officer)
</TABLE>
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>
<CAPTION>
WALDEN RESIDENTIAL PROPERTIES, INC.
COMPUTATION OF NET RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED DISTRIBUTIONS
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before extraordinary item and income
allocated to minority interests . . . . . . . . . . . . . . $16,304 $ 8,363 $22,425 $17,001
Add:
Interest on indebtedness . . . . . . . . . . . . . . . . 15,337 13,374 30,184 26,688
Amortization . . . . . . . . . . . . . . . . . . . . . . 741 252 1,359 485
------- -------- ------- -------
Earnings . . . . . . . . . . . . . . . . . . . . . . . $32,382 $ 21,989 $53,968 $44,174
======= ======== ======= =======
Fixed charges and preferred distributions:
Interest on indebtedness . . . . . . . . . . . . . . . . $15,337 $ 13,374 $30,184 $26,688
Amortization . . . . . . . . . . . . . . . . . . . . . . 741 252 1,359 485
------- -------- ------- -------
Fixed charges . . . . . . . . . . . . . . . . . . . . 16,078 13,626 31,543 27,173
Add:
Preferred distributions (1) . . . . . . . . . . . . . 4,793 4,796 9,587 9,592
------- -------- ------- -------
Combined fixed charges and
preferred distributions . . . . .. . . . . . . . $20,871 $ 18,422 $41,130 $36,765
======= ======== ======= =======
Ratio of earnings to fixed charges . . . . . . . . . . . . . 2.01x 1.61x 1.71x 1.63x
Ratio of earnings to fixed charges and
preferred distributions . . . . . . . . . . . . . . . . . 1.55x 1.19x 1.31x 1.20x
(1) Includes dividends on preferred stock and preferred distributions to minority interest holders.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,647
<SECURITIES> 0
<RECEIVABLES> 8,001
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,495,488
<DEPRECIATION> 150,875
<TOTAL-ASSETS> 1,536,751
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
73
<COMMON> 253
<OTHER-SE> 560,746
<TOTAL-LIABILITY-AND-EQUITY> 1,536,751
<SALES> 0
<TOTAL-REVENUES> 138,356
<CGS> 0
<TOTAL-COSTS> 57,344
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,184
<INCOME-PRETAX> 12,248
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,248
<DISCONTINUED> 0
<EXTRAORDINARY> (215)
<CHANGES> 0
<NET-INCOME> 10,829
<EPS-BASIC> .44
<EPS-DILUTED> .44
</TABLE>
