SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number: 1-12590
GABLES RESIDENTIAL TRUST
(Exact name of Registrant as specified in its Charter)
MARYLAND 58-2077868
(State of Incorporation) (I.R.S. Employer Identification No.)
2859 Paces Ferry Road, Suite 1450
Atlanta, Georgia 30339
(Address of principal executive offices, including zip code)
(770) 436 - 4600
(Registrant's telephone number, including area code)
N/A
(Former name, former address and formal fiscal year,
if changed since last report)
Common shares of beneficial interest, par value $0.01 per share,
19,399,456 shares
The number of shares outstanding of each of the
registrant's classes of common stock,
as of April 30, 1997
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 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.
(1) (X) YES ( ) NO
(2) (X) YES ( ) NO
<PAGE>
GABLES RESIDENTIAL TRUST
FORM 10 - Q INDEX
Part I - Financial Information
- -------------------------------
Item 1: Financial Statements
Consolidated Balance Sheets of Gables Residential Trust as of
March 31, 1997 and December 31, 1996.
Consolidated Statements of Operations of Gables Residential Trust for the
three months ended March 31, 1997 and 1996.
Consolidated Statements of Cash Flows of Gables Residential Trust for the
three months ended March 31, 1997 and 1996.
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II - Other Information
- ---------------------------
Item 1: Legal Proceedings
Item 2: Changes in Securities
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
Signature
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GABLES RESIDENTIAL TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS:
- -------
Real estate assets: (Note 7)
Land ............................................................ $ 109,534 $ 102,762
Buildings ....................................................... 599,708 558,569
Furniture, fixtures and equipment ............................... 47,755 45,830
Construction in progress ........................................ 62,002 74,690
Land held for future development ................................ 2,749 2,749
-------- --------
Real estate assets before accumulated depreciation ........... 821,748 784,600
Less: accumulated depreciation ................................. (78,803) (74,903)
-------- --------
Net real estate assets ........................................ 742,945 709,697
Cash and cash equivalents .......................................... 2,882 4,385
Restricted cash .................................................... 6,185 8,430
Deferred charges, net .............................................. 4,612 5,412
Other assets, net .................................................. 9,411 31,736
-------- --------
Total assets .................................................. $ 766,035 $ 759,660
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------
Notes payable ...................................................... $ 402,613 $ 390,321
Accrued interest payable ........................................... 1,882 1,811
Dividend payable (Note 8) .......................................... 9,506 9,465
Real estate taxes payable .......................................... 3,793 9,785
Accounts payable and accrued expenses - construction ............... 6,598 6,218
Accounts payable and accrued expenses - operating .................. 3,664 5,455
Security deposits .................................................. 1,975 1,968
------- -------
Total liabilities ............................................. 430,031 425,023
------- -------
Minority interest of unitholders in Operating Partnership .......... 53,169 53,143
------- -------
Shareholders' equity:
Common shares, $0.01 par value, 100,000,000 shares authorized,
19,399,147 and 19,317,098 shares issued and outstanding at
March 31, 1997 and December 31, 1996, respectively ............... 194 193
Additional paid-in capital ....................................... 308,207 315,670
Deferred long-term compensation .................................. (1,040) 0
Accumulated earnings (deficit) ................................... (24,526) (34,369)
-------- --------
Total shareholders' equity .................................... 282,835 281,494
-------- --------
Total liabilities and shareholders' equity .................... $ 766,035 $ 759,660
======== ========
<FN>
The accompanying notes are an integral part of these balance sheets.
</FN>
</TABLE>
<PAGE>
<TABLE>
GABLES RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Rental revenues ................................................................ $ 29,483 $ 22,139
Other property revenues ........................................................ 1,338 1,061
-------- --------
Total property revenues ................................................... 30,821 23,200
-------- --------
Property management revenues .................................................. 799 980
Other .......................................................................... 612 262
-------- --------
Total other revenues ...................................................... 1,411 1,242
-------- --------
Total revenues ............................................................ 32,232 24,442
-------- --------
Property operating and maintenance (exclusive of items shown
separately below) ......................................................... 11,058 8,070
Depreciation and amortization .................................................. 5,337 3,732
Amortization of deferred financing costs ....................................... 281 350
Property management - owned (Note 4) ........................................... 828 657
Property management - third party (Note 4) ..................................... 640 769
General and administrative ..................................................... 881 714
Interest ....................................................................... 5,815 3,808
Credit enhancement fees ........................................................ 128 164
-------- --------
Total expenses ............................................................ 24,968 18,264
-------- --------
Income before equity in income of joint ventures and interest income ........... 7,264 6,178
Equity in income of joint ventures ............................................. 66 49
Interest income ................................................................ 122 99
-------- --------
Income before gain on sale of real estate assets ............................... 7,452 6,326
Gain on sale of real estate assets ............................................. 4,858 0
-------- --------
Income before minority interest and extraordinary loss, net .................... 12,310 6,326
Minority interest of unitholders in Operating Partnership ...................... (1,900) (1,126)
-------- --------
Income before extraordinary loss, net .......................................... 10,410 5,200
Extraordinary loss, net of minority interest (Note 5) .......................... (602) (520)
- -------- --------
Net income ..................................................................... $ 9,808 $ 4,680
======== ========
Weighted average number of shares outstanding .................................. 19,328 15,293
======== ========
Per Share Information (Note 6):
Income before extraordinary loss, net .......................................... $ 0.54 $ 0.34
======== ========
Net income ..................................................................... $ 0.51 $ 0.31
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
GABLES RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income ..................................................... $ 9,808 $ 4,680
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 5,618 4,082
Equity in income of joint ventures .......................... (66) (49)
Minority interest of unitholders in Operating Partnership ... 1,900 1,126
Gain on sale of real estate assets .......................... (4,858) 0
Long-term compensation expense .............................. 102 102
Extraordinary loss, net of minority interest ................ 602 520
Change in operating assets and liabilities:
Restricted cash ........................................... 2,416 891
Other assets .............................................. 457 (361)
Other liabilities, net .................................... (7,297) (3,728)
-------- --------
Net cash provided by operating activities ............ 8,682 7,263
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Purchase and construction of real estate assets ................ (23,748) (18,326)
Net proceeds from sale of real estate assets ................... 12,333 0
Distributions received from joint ventures ..................... 63 28
-------- --------
Net cash used in investing activities ..................... (11,352) (18,298)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from share offerings, net of issuance costs ........... 0 20,630
Proceeds from the exercise of share options .................... 249 630
Share Builder Plan contributions ............................... 11 5
Payments of deferred financing costs ........................... (20) (972)
Notes payable proceeds ......................................... 29,237 21,200
Notes payable repayments ....................................... (16,945) (21,409)
Principal escrow deposits ...................................... (171) (192)
Dividends paid ($0.49 and $0.48 per share, respectively) ....... (9,465) (7,288)
Distributions paid ($0.49 and $0.48 per Unit, respectively) .... (1,729) (1,589)
-------- --------
Net cash provided by financing activities ................. 1,167 11,015
-------- --------
Net change in cash and cash equivalents ........................ (1,503) (20)
Cash and cash equivalents, beginning of period ................. 4,385 8,529
-------- --------
Cash and cash equivalents, end of period ....................... $ 2,882 $ 8,509
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest .................................... $ 7,019 $ 4,678
Interest capitalized ...................................... 1,275 1,399
-------- --------
Cash paid for interest, net of amounts capitalized ........ $ 5,744 $ 3,279
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
GABLES RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Dollars In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------
1. ORGANIZATION AND FORMATION OF THE COMPANY
- -- -----------------------------------------
Gables Residential Trust is a self-administered and self-managed real estate
investment trust (a "REIT") formed in 1993 under Maryland law to continue and to
expand the multifamily apartment community management, development,
construction, and acquisition operations of its privately owned predecessor
organization. The term "Gables Residential Group" as used herein refers to the
privately owned predecessor organization prior to the completion of the
Company's initial public offering on January 26, 1994 (the "IPO") and the
concurrent completion of the various transactions that occurred simultaneously
therewith (the "Formation Transactions"). The term "Company" or "Gables" as used
herein means Gables Residential Trust and its subsidiaries on a consolidated
basis (including Gables Realty Limited Partnership and its subsidiaries), or,
where the context so requires, Gables Residential Trust only, and, as the
context may require, their predecessors.
The Company currently engages in the multifamily apartment community management,
development, construction, and acquisition businesses, including the provision
of related brokerage and corporate rental housing services. Substantially all of
these businesses are conducted through Gables Realty Limited Partnership, a
Delaware limited partnership (the "Operating Partnership"). Through its
ownership of Gables GP, Inc. ("GGPI"), a Texas corporation and wholly-owned
subsidiary of the Company that is the sole general partner of the Operating
Partnership, and its ownership of a direct limited partnership interest in the
Operating Partnership, the Company was an 84.6% economic owner of the Operating
Partnership at March 31, 1997 (this structure is commonly referred to as an
umbrella partnership REIT or "UPREIT"). The Company has had certain equity
transactions subsequent to the IPO that have resulted in changes in its
ownership interest in the Operating Partnership, which was 76.0% at the
completion of the IPO (Note 2). The Company's third party management businesses
are conducted through two subsidiaries of the Operating Partnership, Central
Apartment Management, Inc., a Texas corporation, and East Apartment Management,
Inc., a Georgia corporation (each, a "Management Company"). The Management
Companies also provide management services to the communities owned by the
Company.
As of March 31, 1997, Gables owned 48 completed multifamily apartment
communities comprising 14,817 apartment homes, of which 32 were developed and 16
were acquired by the Company, and an indirect 25% general partner interest in
two apartment communities developed by the Company comprising 663 apartment
homes. Four of these completed communities were in the lease-up stage as of
March 31, 1997. The Company owns seven multifamily apartment communities,
expected to comprise 2,025 apartment homes, that are currently under
development. As of March 31, 1997, Gables owned parcels of land for the future
development of three apartment communities expected to comprise 648 apartment
homes. Additionally, Gables has contracts or options to acquire additional
parcels of land. There can be no assurance that the Company will acquire these
land parcels, however it is the Company's intent to develop an apartment
community on each such land parcel, if purchased. The Company is pursuing other
acquisition and development opportunities in the ordinary course of business
which have not yet been, or may never be, put under contract.
Pursuant to the Company's Amended and Restated Declaration of Trust, Gables is
authorized to issue 100,000,000 common shares, 10,000,000 preferred shares, and
51,000,000 excess shares, all of which have a par value of $0.01 per share. To
date, no preferred or excess shares have been issued.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------
2. SECONDARY OFFERINGS AND ISSUANCES OF OPERATING PARTNERSHIP UNITS
- -- ----------------------------------------------------------------
Secondary Offerings -
Since the IPO, the Company has had the following common share offerings:
Number of Net
Closing Date Shares Issued Proceeds
- ------------ ------------- --------
October 7, 1994 444,500 $ 9,876
======= =======
October 31, 1995 4,600,000 $94,364
========= =======
March 25, 1996 879,068 $20,630
September 17, 1996 1,725,000 $38,600
September 27, 1996 1,435,000 $34,254
--------- -------
1996 Totals 4,039,068 $93,484
========= =======
The proceeds from these offerings were generally used (i) to reduce outstanding
indebtedness under interim financing vehicles utilized to fund the Company's
development and acquisition activities and (ii) for general working capital
purposes including funding of future development and acquisition activities.
The Company issued the common shares in its 1995 and 1996 offerings under a $200
million shelf registration statement which is now exhausted. In October, 1996,
Gables filed a new registration statement, covering the registration of up to
$300 million of debt securities, common shares, preferred shares, and warrants
or other rights to purchase common shares or preferred shares.
Issuances of Operating Partnership Units -
- -----------------------------------------
On December 5, 1995, the Company acquired a parcel of land for the development
of an apartment community, financed in part through the issuance of 111,074
minority units of limited partnership interest in the Operating Partnership
("Units").
On July 26, 1996, the Company acquired an apartment community
comprising 500 apartment homes, financed in part through the issuance of 243,787
Units.
3. BASIS OF PRESENTATION
- -- ---------------------
The accompanying consolidated financial statements of Gables Residential Trust
include the consolidated accounts of Gables Residential Trust and its
subsidiaries (including Gables Realty Limited Partnership and its subsidiaries).
As a result of the structure of the business combination, certain partners and
owners of the entities in Gables Residential Group received common shares of the
Company and/or Units in the Operating Partnership. Pursuant to the terms of the
partnership agreement of the Operating Partnership, as of January 26, 1995, the
Operating Partnership became obligated to redeem Units at a unitholder's request
for cash equal to the fair market value of a common share of the Company at the
time of such redemption, provided that the Company at its option may elect to
acquire any such Units presented for redemption for one common share of the
Company. The Company currently intends to acquire such Units for common shares
of the Company rather than to cause the Operating Partnership to redeem such
Units for cash. Purchase accounting was applied to the acquisition of all
non-controlled interests. The acquisition of all other interests was accounted
for as a reorganization of entities under common control and, accordingly, was
reflected at historical cost in a manner similar to that in pooling of interests
accounting.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------
All significant intercompany accounts and transactions have been eliminated in
consolidation. The consolidated financial statements of Gables Residential Trust
have been adjusted for the minority interest of unitholders in the Operating
Partnership. Because Units, if presented for redemption, are likely to be
exchanged for the common shares of the Company on a one-for-one basis, minority
interest of unitholders in the Operating Partnership is calculated based on the
weighted average of common shares and Units outstanding during the applicable
period.
The accompanying interim unaudited financial statements have been prepared by
the Company's management in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and in conjunction with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting only of normally recurring adjustments) considered
necessary for a fair presentation for these interim periods have been included.
The results of operations for the interim period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the full year.
These financial statements should be read in conjunction with the financial
statements of Gables Residential Trust and Gables Residential Group and notes
thereto, included in the Gables Residential Trust Form 10-K for the year ended
December 31, 1996.
4. PROPERTY MANAGEMENT EXPENSES
- -- ----------------------------
The Company manages its owned properties, as well as properties owned by third
parties for which the Company provides management services for a fee. Property
management expenses have been allocated between owned and third party properties
in the accompanying statements of operations based on the proportionate number
of owned and third party apartment homes managed by the Company during the
applicable periods.
5. EXTRAORDINARY LOSS, NET
- -- -----------------------
Extraordinary loss, net for the three months ended March 31, 1997 represents (i)
the write-off of unamortized deferred financing costs and prepaid credit
enhancement fees associated with the defeasance of the tax-exempt bond financing
encumbering the Club Candlewood property that was sold in January, 1997 and (ii)
the write-off of unamortized deferred financing costs associated with the
February 28, 1997 retirement of a conventional mortgage note payable that was
scheduled to mature on September 1, 1997. The extraordinary loss totaling $712
is presented net of the $110 portion of the loss attributable to the minority
interest unitholders in the Operating Partnership.
Extraordinary loss, net of $520 for the three months ended March 31, 1996
represents the write-off of unamortized deferred financing costs totaling $631
associated with the early retirement of the Company's original $175 million
secured revolving credit facility (the "Original Credit Facility"), net of the
$111 portion of the loss attributable to the minority interest unitholders. The
Original Credit Facility that was scheduled to mature in January, 1997, was
refinanced in March, 1996 with a new $175 million unsecured revolving credit
facility (the "New Credit Facility").
6. PER SHARE INFORMATION
- -- ---------------------
Quarterly per share information has been computed based upon the weighted
average number of shares outstanding during the relevant period. The impact of
outstanding share options was less than 3% dilutive in both 1997 and 1996 and,
therefore, the impact on primary earnings per share ("EPS") has not been shown.
In February, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (FAS 128) "Earnings per Share," which
becomes effective for periods ending after December 15, 1997. FAS 128 will
require dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and will require
restatement of all prior period EPS data presented. Under FAS 128, EPS would be
as follows:
March 31, 1997 March 31, 1996
-------------- --------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Income before extraordinary loss, net $0.54 $0.53 $0.34 $0.34
Net income $0.51 $0.50 $0.31 $0.30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------
7. REAL ESTATE ASSETS
- -- ------------------
Real estate assets, before accumulated depreciation, are as follows:
March 31, 1997 December 31, 1996
Basis Units Basis Units
----- ----- ----- -----
Completed properties $756,997 14,817 $707,161 14,581
Properties under development 62,002 2,025 74,690 2,284
Land held for future development 2,749 648 2,749 648
------- ------ -------- ------
Total (a) $821,748 17,490 $784,600 17,513
======== ====== ======== ======
(a) Excludes (i) costs and units attributable to Arbors of Harbortown JV and
Metropolitan Apartments JV as Gables' 25% general partner interests in
these joint ventures are accounted for on the equity method of accounting
and (ii)costs of approximately $3,700 for two prepaid long-term land
leases which are included in other assets in the accompanying balance
sheets.
The change in real estate assets from December 31, 1996 to March 31, 1997
consisted of the following:
Balance at December 31, 1996 $784,600
Acquisitions, including renovation expenditures 21,937
Sale of real estate assets (8,797)
Development costs incurred, including related land acquisitions 23,093
Capital expenditures for completed properties 915
-------
Balance at March 31, 1997 $821,748
========
As discussed in Note 3, purchase accounting was applied to the acquisition of
all non-controlled interests in connection with the IPO and Formation
Transactions. The increase in basis related to such acquisition was $48,090 and
was allocated to the respective property's land and building accounts. The
acquisition of all other interests was accounted for as a reorganization of
entities under common control, and accordingly was reflected at historical cost.
8. DECLARATION OF DIVIDEND
- -- -----------------------
On March 17, 1997, the Operating Partnership committed to distribute $0.49 per
Unit with respect to the period January 1, 1997 through March 31, 1997 to
unitholders of record on March 31, 1997. As a result, the Company simultaneously
declared a dividend payable to shareholders of record on March 31, 1997 and
accrued a dividend payable as of March 31, 1997 of $0.49 per common share or
$9,506. The remaining distribution from the Operating Partnership in the amount
of $1,729 was accrued to minority interest unitholders in the Operating
Partnership. The total distribution of $11,235 was paid on April 14, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- -------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Overview
- --------
Gables is a self-administered and self-managed real estate investment trust
("REIT") focused within the multifamily industry in the Southeastern and
Southwestern United States. Gables' operating performance relies predominantly
on net operating income from its apartment communities. Gables' net operating
income is influenced by operating expenses and rental revenues, which are
affected by the supply and demand dynamics within Gables' markets. Gables'
performance is also affected by the general availability and cost of capital and
by its ability to develop and to acquire additional apartment communities with
returns in excess of its blended cost of equity and debt capital.
Gables owns apartment communities in seven core cities in Georgia, Texas and
Tennessee. The Company recently entered an eighth market, Orlando, Florida,
through an association with a subsidiary of the Walt Disney Company and, in
connection therewith, currently has two communities under development in
Orlando. Within each city, Gables targets specific submarkets for investment.
These submarkets are generally characterized by their proximity to local
employment centers, retail and entertainment venues and traffic arteries. Gables
believes demographic trends (including job, population and household growth) in
its markets in recent years have generally led to favorable demand and supply
dynamics for multifamily communities. However, during any given time period
these demand and supply dynamics may be less favorable in certain of the
Company's markets depending on conditions influencing the specific market.
Portfolio wide occupancy levels have remained high and portfolio wide rental
rates have continued to increase during each of the last several years. Gables
expects portfolio wide rental expenses to increase at a rate slightly ahead of
inflation, and to approximate the increase in property revenues, for the coming
twelve months.
As a result of the aforementioned generally favorable market conditions,
management has been successful in growing the income of the stabilized
properties as well as growing earnings via a combination of new development and
acquisition. Management's extensive experience in new development (including
site selection, zoning, construction and lease-up) and in-depth local presence
affords Gables the opportunity to acquire land and develop new Class A
multifamily communities. In select markets and in certain real estate cycles,
management believes better returns can be generated from new development than
from acquisitions of comparable properties. During other real estate cycles or
in select markets, management will pursue the acquisition of existing apartment
communities, specifically when the returns on investment and the potential for
growth in net operating income are attractive. Additionally, Gables has been
able to acquire distressed or under-managed apartment communities which, through
strategic renovation and repositioning, have generally resulted in superior
returns when compared to traditional acquisitions and new developments.
Management believes Gables' ability to compete with other companies is
significantly enhanced by its in-depth local presence and the strength of its
management, development, acquisition, and construction personnel. In certain
situations, management's evaluation of the growth prospects for a specific asset
may result in a determination to dispose of the asset. In this event, management
would intend to sell the asset and utilize the net proceeds from any such sale
to invest in new assets which are expected to have better growth prospects or to
reduce indebtedness. The Company maintains staffing levels sufficient to meet
the existing construction, acquisition, and leasing activities. If market
conditions warrant, management would anticipate adjusting staffing levels to
mitigate a negative impact on results of operations.
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the accompanying consolidated
financial statements and the notes thereto. This Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results or developments could differ materially from those
projected in such statements as a result of certain factors set forth in the
section entitled "Certain Factors Affecting Future Operating Results" on Page 21
of this Form 10-Q and elsewhere in this report.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- -------------------------------------------------
Formation of Gables and Initial Public Offering
- -----------------------------------------------
Gables Residential Trust was formed in 1993 under Maryland law to continue and
to expand the multifamily apartment community management, development,
construction, and acquisition operations of its privately owned predecessor
organization. The term "Gables Residential Group" as used herein refers to the
privately owned predecessor organization prior to the completion of the
Company's initial public offering in January, 1994 (the "IPO"), and the
concurrent completion of the various transactions that occurred therewith (the
"Formation Transactions"). The term "Company" or "Gables" as used herein means
Gables Residential Trust and its subsidiaries on a consolidated basis (including
Gables Realty Limited Partnership and its subsidiaries), or, where the context
so requires, Gables Residential Trust only, and, as the context may require,
their predecessors. At the completion of the IPO on January 26, 1994, Gables
sold 9,430,000 common shares (including 1,230,000 shares as a result of the
exercise of an over-allotment option by the underwriters) at a price to the
public of $22.50 per share. The net proceeds to Gables from such sale totaled
approximately $190 million, the majority of which were used to reduce
indebtedness and to purchase minority interests in certain property
partnerships.
Secondary Offerings and Issuances of Operating Partnership Units
- -----------------------------------------------------------------
Secondary Offerings -
- ---------------------
Since the IPO, the Company has had the following common share offerings:
Number of Net
Closing Date Shares Issued Proceeds
- ------------ ------------- --------
October 7, 1994 444,500 $9,876
======= ======
October 31, 1995 4,600,000 $94,364
========= =======
March 25, 1996 879,068 $20,630
September 17, 1996 1,725,000 $38,600
September 27, 1996 1,435,000 $34,254
--------- -------
1996 Totals 4,039,068 $93,484
========= =======
The proceeds from these offerings were generally used (i) to reduce outstanding
indebtedness under interim financing vehicles utilized to fund the Company's
development and acquisition activities and (ii) for general working capital
purposes including funding of future development and acquisition activities.
The Company issued the common shares in its 1995 and 1996 offerings under a $200
million shelf registration statement which is now exhausted. In October, 1996,
Gables filed a new registration statement, covering the registration of up to
$300 million of debt securities, common shares, preferred shares, and warrants
or other rights to purchase common shares or preferred shares.
Issuances of Operating Partnership Units -
- ----------------------------------------
On December 5, 1995, the Company acquired a parcel of land for the development
of an apartment community, financed in part through the issuance of 111,074
minority units of limited partnership interest in the Operating Partnership
("Units").
On July 26, 1996, the Company acquired an apartment community comprising 500
apartment homes, financed in part through the issuance of 243,787 Units.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- ------------------------------------------------
Results of Operations
- ---------------------
COMPARISON OF OPERATING RESULTS OF THE COMPANY FOR THE THREE MONTHS ENDED MARCH
31, 1997 (THE "1997 PERIOD") TO THE THREE MONTHS ENDED MARCH 31, 1996 (THE "1996
PERIOD").
The Company's net income is generated primarily from the operation of its
apartment communities. For purposes of evaluating comparative operating
performance, the Company categorizes its operating communities based on the
period each community reaches stabilized occupancy. A community is considered by
the Company to have achieved stabilized occupancy on the earlier to occur of (i)
attainment of 93% physical occupancy or (ii) one year after completion of
construction.
The operating performance for all of the Company's apartment communities
combined for the three months ended March 31, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------- -------- ------- --------
$ %
1997 1996 Change Change
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Rental and other revenue:
- -------------------------
Same store communities (1) $18,060 $17,749 $311 1.8%
Communities stabilized during the 1997 Period, but not during the 1996 Period (2) 5,122 4,136 986 23.8%
Development and lease-up communities (3) 1,864 347 1,517 437.2%
Acquired communities (4) 5,600 0 5,600 ---
Sold communities (5) 175 968 (793) (81.9)%
-------- -------- -------- --------
Total property revenues $30,821 $23,200 $7,621 32.8%
-------- -------- -------- --------
Property operating and maintenance expense (exclusive of depreciation and
amortization):
- --------------
Same store communities (1) $6,578 $6,323 $255 4.0%
Communities stabilized during the 1997 Period, but not during the 1996 Period (2) 1,594 1,196 398 33.3%
Development and lease-up communities (3) 827 108 719 665.7%
Acquired communities (4) 1,944 0 1,944 ---
Sold communities (5) 115 443 (328) (74.0)%
-------- -------- -------- --------
Total specified expenses $11,058 $8,070 $2,988 37.0%
-------- -------- -------- --------
Revenues in excess of specified expenses $19,763 $15,130 $4,633 30.6%
======== ======== ======== ========
Revenues in excess of specified expenses as a percentage of total property 64.1% 65.2% --- (1.1)%
======== ======== ======== ========
revenues
<FN>
(1) Communities which were owned and fully stabilized throughout both the 1997
Period and 1996 Period.
(2) Communities which were completed and fully stabilized during all of
the 1997 Period, but were not completed and fully stabilized during all of
the 1996 Period.
(3) Communities in the development and/or lease-up phase which were not fully
stabilized during all or any of the 1997 Period.
(4) Communities which were acquired subsequent to January 1, 1996.
(5) Communities which were sold subsequent to January 1, 1996.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- ------------------------------------------------
Total property revenues increased $7,621, or 32.8%, from $23,200 to $30,821 due
primarily to increases in the number of apartment homes resulting from the
development and acquisition of additional communities and to increases in rental
rates on communities stabilized throughout both periods ("same store"). Below is
additional information regarding the increases in total property revenues for
three of the five community categories presented in the preceding table:
Same store communities:
<TABLE>
<CAPTION>
Increase Percent
(Decrease) Increase
Number of in Total (Decrease) in Occupancy Increase
Number of Apartment Percent Property Total Property During the (Decrease) in
Market Communities Homes of Total Revenues Revenues 1997 Period Occupancy
- ------ ----------- ----- -------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston 10 3,512 37% $176 2.7% 94.5% 0.4%
Atlanta 11 3,159 33% 166 2.7% 93.3% (1.0)%
Dallas 4 1,089 12% 7 0.3% 92.8% (0.1)%
Nashville 3 912 10% 32 2.0% 96.4% (0.4)%
Memphis 1 464 5% (39) (4.8)% 91.7% (5.2)%
Austin 1 276 3% (31) (5.4)% 87.2% (4.3)%
-------- -------- -------- -------- -------- -------- --------
30 9,412 100% $311 1.8% 93.7% (0.6)%
======== ======== ======== ======== ======== ======== ========
</TABLE>
Communities stabilized during the 1997 Period but not during the 1996 Period:
Increase
(Decrease)
Number of in Total Occupancy
Number of Apartment Percent Property During the
Market Communities Homes of Total Revenues 1997 Period
------ ----------- ----- -------- -------- -----------
Atlanta 2 695 32% $ (17) 92.4%
San Antonio 2 544 25% 222 92.5%
Austin 1 256 12% 223 97.5%
Nashville 1 254 12% 295 95.5%
Houston 1 246 11% 77 96.9%
Dallas 1 188 8% 186 92.4%
-------- -------- -------- -------- --------
8 2,183 100% $986 94.0%
======== ======== ======== ======== ========
Development and lease-up communities:
Increase
Number of In Total Occupancy
Number of Apartment Percent Property During the
Market Communities Homes of Total Revenues 1997 Period
------ ----------- ----- -------- -------- -----------
Atlanta 2 578 35% $ 207 32.0%
Memphis 2 490 30% 748 78.2%
Dallas 1 300 18% 508 63.2%
Austin 1 273 17% 54 7.4%
-------- -------- -------- -------- --------
6 1,641 100% $1,517 45.7%
======== ======== ======== ======== ========
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- ------------------------------------------------
Other revenues increased $169, or 13.6%, from $1,242 to $1,411 due to an
increase in revenues in the 1997 Period related to the provision of certain
ancillary services, offset in part by a decrease in property management revenues
of $181, or 18.5%, from $980 to $799 resulting from a net decrease of properties
managed by Gables for third parties primarily due to these properties being sold
by the owners.
Property operating and maintenance expense (exclusive of depreciation and
amortization) increased $2,988, or 37.0%, from $8,070 to $11,058 due to an
increase in apartment homes resulting from the development and acquisition of
additional communities and an increase in property operating and maintenance
expense for same store communities of 4.0%. The same store increase in operating
expenses represents inflationary increases in expenses and increased marketing
and redecorating expenses in certain of the Company's markets. Gables
anticipates that property operating and maintenance expense for same store
communities will generally increase at a rate slightly ahead of inflation.
Depreciation and amortization expense increased $1,605, or 43.0%, from $3,732 to
$5,337 due primarily to the completion of newly developed communities and
acquisition of other communities.
Property management expense for owned communities and third party properties on
a combined basis increased $42, or 2.9%, from $1,426 to $1,468 due primarily to
inflationary increases in expenses. Gables allocates property management
expenses to both owned communities and third party properties based on the
proportionate share of total apartment homes and units managed.
General and administrative expense increased $167, or 23.4%, from $714 to $881
due primarily to the timing of the recordation of certain expenses.
Interest expense increased $2,007, or 52.7%, from $3,808 to $5,815 due to an
increase in operating debt associated with newly developed or acquired
communities in addition to communities currently in the lease-up phase.
Additionally, interest costs have increased due to the refinancing of certain
variable rate debt to a higher fixed rate cost structure. These increases in
interest expense have been offset in part as a result of the offerings the
Company has consummated between periods, the proceeds of which have been
primarily used to reduce indebtedness.
Gain on sale of real estate assets of $4,858 in the 1997 Period represents the
gain generated in connection with the January, 1997 sale of Club Candlewood, a
community comprised of 486 apartment homes.
Extraordinary loss, net in the 1997 Period represents (i) the write-off of
unamortized deferred financing costs and prepaid credit enhancement fees
associated with the defeasance of the tax-exempt bond financing encumbering the
Club Candlewood property that was sold in January, 1997 and (ii) the write-off
of unamortized deferred financing costs associated with the February 28, 1997
retirement of a conventional mortgage note payable that was scheduled to mature
on September 1, 1997. The extraordinary loss totaling $712 is presented net of
the $110 portion of the loss attributable to the minority interest unitholders
in the Operating Partnership.
Net income increased $5,128, or 109.6%, from $4,680 to $9,808 primarily due to
the reasons discussed above.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- -------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
Gables' net cash provided by operating activities increased from $7,263 for the
three months ended March 31, 1996 to $8,682 for the three months ended March 31,
1997, due to (i) an increase of $2,645 in income before certain non-cash items
including depreciation, amortization, equity in income of joint ventures,
minority interest of unitholders in Operating Partnership, gain on sale of real
estate assets and net extraordinary losses, offset in part by (ii) the change in
other liabilities between periods of $3,569, offset in part by the change in
other assets between periods of $818 and the change in restricted cash between
periods of $1,525.
Gables' net cash used in investing activities decreased from $18,298 for the
three months ended March 31, 1996 to $11,352 for the three months ended March
31, 1997 primarily due to the $12.3 million of net proceeds from the January,
1997 sale of Club Candlewood, offset in part by increased development activities
in 1997 when compared to 1996. During the three months ended March 31, 1997,
Gables expended approximately $22.4 million related to development expenditures,
including related land acquisitions, approximately $0.9 million related to
capital expenditures for operating apartment communities and approximately $0.4
million related to renovation expenditures.
Gables' net cash provided by financing activities decreased from $11,015 for the
three months ended March 31, 1996 to $1,167 for the three months ended March 31,
1997, due primarily to the $12.3 million of net sales proceeds generated from
the January, 1997 sale of Club Candlewood, a community comprised of 486
apartment homes. During the three months ended March 31, 1997, Gables had net
borrowings of $12.3 million which were used in conjunction with the $12.3
million of net sales proceeds primarily to fund Gables' development activities
discussed previously. These proceeds from financing activities were offset in
part by the payment of the fourth quarter 1996 distributions totaling
approximately $11.2 million.
Gables elected to be taxed as a REIT under Section 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its taxable year
ended December 31, 1994. REITs are subject to a number of organization and
operational requirements, including a requirement that they currently distribute
95% of their ordinary taxable income. Provided Gables maintains its
qualification as a REIT, the Company generally will not be subject to Federal
income tax on distributed net income.
As of March 31, 1997, Gables had total indebtedness of $402,613, cash and cash
equivalents of $2,882 and principal escrow deposits reflected in restricted cash
of $1,380. Gables' indebtedness includes $211,866 in conventional fixed-rate
mortgage notes payable secured by individual properties, a $40,000 term loan,
$105,080 in tax-exempt bond indebtedness and $45,667 in borrowings outstanding
under its Credit Facilities. Gables' indebtedness has an average of 7.3 years to
maturity at March 31, 1997. Excluding monthly principal amortization payments,
over the next five years Gables has the following scheduled debt maturities for
indebtedness outstanding at March 31, 1997:
1997 $ 8,667
1998 0
1999 0
2000 81,930
2001 40,000
The debt maturities in 1997 of $8,667 relate to outstanding indebtedness under
the $20 Million Credit Facility which will be extended pursuant to the Company's
unlimited one-year extension options. The debt maturities in 2000 totaling
$81,930 consist of $37,000 of outstanding indebtedness under the $175 Million
Credit Facility and $44,930 of four variable-rate notes payables securing
tax-exempt bonds. These tax-exempt bonds are subject to mandatory redemption on
the termination dates of letters of credit securing the bonds, each of which is
March, 2000. Three of the underlying bond issues mature in December, 2007 and
the fourth underlying bond issue matures in August, 2024. Gables expects to be
able to remarket such bonds on or prior to March, 2000. The $175 Million Credit
Facility has two remaining one-year extension options.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- -------------------------------------------------
Gables' dividends through the first quarter of 1997 have been paid from cash
provided by operating activities. Gables anticipates that dividends will
continue to be paid on a quarterly basis from cash provided by operating
activities.
In January, 1997, the Company sold one of its communities, Club Candlewood,
comprising 486 apartment homes. The net sales proceeds were used to (i) defease
the related tax-exempt bond indebtedness which had a principal balance of $6,975
at December 31, 1996 and (ii) paydown outstanding borrowings under the Company's
Credit Facilities.
On October 1, 1996, Gables invested $21.5 million in an apartment community
comprising 232 apartment homes via a mortgage note receivable. In January, 1997,
Gables acquired the apartment community from the borrower, and the mortgage note
receivable was repaid in full.
Gables has met and expects to continue to meet its short-term liquidity
requirements generally through net cash provided by operations. Gables' net cash
provided by operations has been adequate and Gables believes that it will
continue to be adequate to meet both operating requirements and payment of
dividends in accordance with REIT requirements. The budgeted expenditures for
improvements and renovations to the communities, in addition to monthly
principal amortization payments, are also expected to be funded from net cash
provided by operations. Gables anticipates construction and development
activities and land purchases will be initially funded primarily through
borrowings under its Credit Facilities described below.
Gables expects to meet certain of its long-term liquidity requirements, such as
scheduled debt maturities, repayment of short-term financing of construction and
development activities and possible property acquisitions, through long-term
secured and unsecured borrowings and the issuance of debt securities or
additional equity securities or through the disposition of assets which, in
management's evaluation, may no longer meet the Company's investment
requirements.
$175 Million Credit Facility
- ----------------------------
In conjunction with the IPO, Gables closed a $175 million three-year revolving
credit facility (the "Original Credit Facility") which had an initial maturity
of January, 1997. Borrowings under the Original Credit Facility were recourse to
the Company and bore interest at LIBOR plus 1.90% (reduced from 2.25% in
December, 1994). Additionally, fees associated with letters of credit issued
thereunder for the Company's tax-exempt variable-rate bonds were 1.25% per annum
(reduced from 1.50% in July, 1995).
In March, 1996, Gables closed a new $175 million unsecured revolving credit
facility (the "New Credit Facility" or "$175 Million Credit Facility") that
replaced the Original Credit Facility. Although the New Credit Facility is
unsecured, there are certain designated real estate assets that have escrowed
mortgages. Promptly after the attainment of an investment grade rating by the
Company from both Moody's Investors Service and Standard and Poor's, the
escrowed mortgages will be released. The New Credit Facility has an initial term
of three years and three one-year extension options. The Company recently
exercised the first of its one-year extension options resulting in a maturity
date for the facility of March, 2000. Borrowings bore interest at LIBOR plus
1.50% (reduced from 1.65% in November, 1996) through April, 1997 and letter of
credit fees for the Company's tax-exempt variable-rate bonds are 1.00% per
annum. Subsequent to quarter end, Gables received implied senior unsecured debt
ratings of BBB from Standard and Poor's and Baa2 from Moody's Investors Service
(the "Credit Ratings") and, in connection therewith, Gables' borrowing costs
under the facility have been reduced to LIBOR plus 1.10%. Under the facility, up
to $50 million is available to provide credit enhancements on outstanding
tax-exempt bond issues and all remaining amounts are available for borrowings.
Gables' availability under the facility is limited to the lesser of the total
$175 million commitment or the borrowing base. The borrowing base available
under the New Credit Facility is currently based on the collateral value of the
real estate assets with escrowed mortgages and the debt service coverage ratio
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- -------------------------------------------------
of communities pledged as collateral under other recourse loans. As of March 31,
1997, the Company had approximately $45.8 million of letters of credit issued
under the New Credit Facility and had $37.0 million in borrowings outstanding
thereunder and, therefore, had $88.4 million of remaining capacity on its $171.2
million borrowing base.
$20 Million Credit Facility
- ---------------------------
In November, 1996, Gables closed an unsecured revolving credit facility that
currently provides for up to $20 million in borrowings. This facility has an
initial term of one year and has unlimited one-year extension options.
Borrowings bore interest under this facility at LIBOR plus 1.50% through April,
1997. In April, 1997, Gables' borrowing costs were reduced to LIBOR plus 1.10%
in connection with the attainment of the Credit Ratings. As of March 31, 1997,
the Company had approximately $8.7 million in borrowings outstanding under this
facility.
Restrictive Covenants
- ---------------------
Certain of the Company's debt agreements contain customary representations,
covenants and events of default, including covenants which restrict the ability
of the Operating Partnership to make distributions in excess of stated amounts,
which in turn restricts the discretion of the Company to declare and pay
dividends. In general, during any fiscal year the Operating Partnership may only
distribute up to 95% of the Operating Partnership's consolidated income
available for distribution (as defined in the related agreement) exclusive of
distributions of capital gains for such year. The applicable debt agreements
contain exceptions to these limitations to allow the Operating Partnership to
make any distributions necessary to allow the Company to maintain its status as
a REIT. The Company does not anticipate that this provision will adversely
effect the ability of the Operating Partnership to make distributions or the
Company to declare dividends, as currently anticipated.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- ------------------------------------------------
Completed Communities in Lease-up and Development Communities at March 31, 1997
Gables' current developments and lease-up activities for communities that had
not reached stabilized occupancy as of March 31, 1997 are summarized below:
<TABLE>
<CAPTION>
Actual / Actual / Actual / Actual /
Estimated Total Estimated Estimated Estimated Estimated
Number of Budgeted Percent Quarter Quarter of Quarter Quarter of
Apartment Cost Construction Percent Percent Construction Initial Construction Stabilized
Community Homes (millions) Complete Leased Occupied Commenced Occupancy Ended Occupancy
- --------- ----- ---------- -------- ------- -------- ---------- --------- ----- ---------
(A) (B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMPLETED COMMUNITIES IN LEASE-UP
- ---------------------------------
Atlanta, GA
- -----------
Gables Over Peachtree ........... 263 $ 20.4 100% 84% 83% 1 Q 1995 N/A 2 Q 1996 2 Q 1997
Dallas, TX
- ----------
Gables Green Oaks I ............. 300 16.5 100% 91% 86% 1 Q 1995 1 Q 1996 3 Q 1996 2 Q 1997
Memphis, TN
- -----------
Gables Quail Ridge .............. 238 17.0 100% 82% 70% 1 Q 1995 2 Q 1996 1 Q 1997 2 Q 1997
Gables Germantown ............... 252 19.6 100% 85% 80% 1 Q 1995 2 Q 1996 1 Q 1997 2 Q 1997
-----------------
Totals ........................ 1,053 $ 73.5
-----------------
DEVELOPMENT COMMUNITIES
- -----------------------
Atlanta, GA
- -----------
Gables Vinings .................. 315 $ 24.7 78% 18% 5% 2 Q 1996 1 Q 1997 4 Q 1997 4 Q 1997
Roswell Gables II ............... 284 21.7 53% -- -- 2 Q 1996 2 Q 1997 1 Q 1998 1 Q 1998
Gables at Sugarloaf ............. 386 28.6 -- -- -- 2 Q 1997 1 Q 1998 1 Q 1999 2 Q 1999
Austin, TX
- ----------
Gables Central Park ............. 273 20.6 88% 31% 13% 2 Q 1996 1 Q 1997 3 Q 1997 4 Q 1997
Gables Bluffstone ............... 256 19.9 8% -- -- 1 Q 1997 4 Q 1997 3 Q 1998 4 Q 1998
Orlando, FL
- -----------
Gables at Little Lake Bryan I ... 280 21.7 -- -- -- 2 Q 1997 1 Q 1998 4 Q 1998 1 Q 1999
Gables Celebration .............. 231 21.3 -- -- -- 3 Q 1997 1 Q 1998 4 Q 1998 4 Q 1998
-----------------
Totals ........................ 2,025 $ 158.5
-----------------
<FN>
The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934, as amended. The projections and estimates contained in the table above are
forward-looking statements. These forward- looking statements involve risks and
uncertainties and actual results may differ materially from those projected in
such statements. Risks associated with the Company's development, construction,
and lease-up activities, which could impact the forward-looking statements made,
include: development opportunities may be abandoned; construction costs of a
community may exceed original estimates, possibly making the community
uneconomical; and construction and lease-up may not be completed on schedule,
resulting in increased debt service and construction costs.
- ---------------------------------------------
(A) Total Budgeted Cost includes all capitalized costs incurred and projected to
be incurred to develop the respective community presented in accordance with
generally accepted accounting principles, including land acquisition costs,
construction costs, real estate taxes, interest and loan fees, permits,
professional fees, allocated development overhead, and other regulatory fees.
(B) Stabilized occupancy is defined as the earlier to occur of (i) 93% physical
occupancy or (ii) one year after completion of construction.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- ------------------------------------------------
Stabilized Apartment Communities at March 31, 1997
<TABLE>
<CAPTION>
Number of Scheduled Rent Per
Community Homes Occupancy Unit Square Foot
- --------- ----- --------- ---- -----------
<S> <C> <C> <C> <C>
Houston, TX
- -----------
Baybrook Village ............... 776 93% $ 543 $ 0.68
Gables Bradford Place .......... 372 95% 680 0.79
Gables Bradford Pointe ......... 360 93% 597 0.78
Gables CityPlaza ............... 246 99% 834 0.94
Gables Cityscape ............... 252 97% 842 0.99
Gables CityWalk/Waterford Square 317 98% 833 1.03
Gables Edgewater ............... 292 96% 778 0.88
Gables Meyer Park .............. 345 97% 833 0.97
Gables Piney Point ............. 246 95% 869 0.94
Gables Pin Oak Green ........... 582 96% 940 0.92
Gables Pin Oak Park ............ 477 96% 945 0.93
Gables River Oaks .............. 228 90% 1,293 1.06
Metropolitan Uptown (JV) ....... 318 97% 936 1.03
Rivercrest ..................... 140 97% 691 0.82
Westhollow Park ................ 412 96% 576 0.64
-------- -------- -------- --------
5,363 95% 787 0.88
Atlanta, GA
- -----------
Briarcliff Gables .............. 104 95% 1,060 0.85
Buckhead Gables ................ 162 97% 773 1.02
Dunwoody Gables ................ 311 95% 746 0.80
Gables Cinnamon Ridge .......... 200 98% 624 0.65
Gables Cityscape ............... 192 95% 806 0.97
Gables Wood Arbor .............. 140 95% 674 0.74
Gables Wood Crossing ........... 268 98% 694 0.72
Gables Wood Glen ............... 380 97% 645 0.65
Gables Wood Knoll .............. 312 96% 678 0.68
Lakes at Indian Creek .......... 603 95% 560 0.61
Roswell Gables I ............... 384 97% 840 0.77
Spalding Gables ................ 252 96% 839 0.85
Wildwood Gables ................ 546 97% 805 0.71
-------- -------- -------- --------
3,854 96% 725 0.73
Dallas, TX
- ----------
Arborstone ..................... 536 96% 465 0.65
Gables at Pearl Street ......... 108 97% 1,268 1.16
Gables CityPlace ............... 232 99% 1,224 1.16
Gables Preston ................. 126 94% 1,029 0.94
Gables Spring Park ............. 188 98% 921 0.87
Gables Turtle Creek ............ 150 98% 1,243 1.24
Gables Valley Ranch ............ 319 98% 890 0.87
-------- -------- -------- --------
1,659 97% 870 0.93
Memphis, TN
- -----------
Arbors of Harbortown (JV)....... 345 95% 737 0.75
Gables Cordova ................. 464 95% 646 0.69
Gables Stonebridge ............. 500 94% 634 0.72
-------- -------- -------- --------
1,309 95% 666 0.72
Nashville, TN
- -------------
Brentwood Gables ............... 254 98% 862 0.76
Gables Hendersonville .......... 364 99% 628 0.67
Gables Hickory Hollow I ....... 272 98% 632 0.69
Gables Hickory Hollow II ....... 276 98% 632 0.67
-------- -------- -------- --------
1,166 98% 681 0.70
San Antonio, TX
- ---------------
Gables Colonnade I ............. 312 96% 786 0.86
Gables Wall Street ............. 232 92% 789 0.83
-------- -------- -------- --------
544 94% 788 0.85
Austin, TX
- ----------
Gables Great Hills ............. 276 95% 768 0.93
Gables Town Lake ............... 256 99% 1,027 1.10
-------- -------- -------- --------
532 97% 893 1.01
TOTALS ...................... 14,427 96% $ 765 $ 0.82
======== ======== ======== ========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- ------------------------------------------------
Portfolio Indebtedness Summary and Interest Rate Protection Agreement Summary
A summary of Gables' portfolio indebtedness and interest rate protection
agreements as of March 31, 1997 follows:
Portfolio Indebtedness Summary
- ------------------------------
Percentage Interest Total Years to
Type of Indebtedness Balance of Total Rate(A) Rate(B) Maturity
- -------------------- ------- --------- ------ ------- ---------
Conventional fixed-rate (C) ... $251,866 62.6% 7.89% 7.89% 7.95
Tax-exempt fixed-rate ......... 60,150 14.9% 6.50% 6.62% 11.42
-------- -------- ------- ------- -------
Total fixed-rate ......... $312,016 77.5% 7.62% 7.65% 8.62
-------- -------- ------- ------- -------
Tax-exempt variable-rate ...... $ 44,930 11.2% 3.50% 4.50% 3.00
-------- -------- ------- ------- -------
Credit facilities ............. $ 45,667 11.3% 7.12% 7.12% 2.53
-------- -------- ------- ------- -------
Total portfolio debt (D), (E) . $402,613 100.0% 7.11% 7.24% 7.30
======== ======== ======= ======= =======
(A) Interest Rate represents the weighted average interest rate incurred on
the indebtedness, exclusive of deferred financing cost amortization and credit
enhancement fees, as applicable.
(B) Total Rate represents the Interest Rate (A) plus credit enhancement
fees, as applicable.
(C) Conventional fixed-rate debt includes $40,000 of financing which bears
interest at LIBOR plus a spread of 1.25%. Such financing is effectively fixed at
an all-in rate of 6.60% after the application of $40,000 of the $44,530 interest
rate cap and swap arrangements described below.
(D) Interest associated with construction activities is capitalized as a
cost of development and does not impact current earnings. The qualifying
construction expenditures at March 31, 1997 for purposes of interest
capitalization were $60,720.
(E) Excludes $16.4 million of tax-exempt bonds and $17.0 million of
outstanding conventional indebtedness related to joint ventures in which Gables
owns a 25% interest.
Interest Rate Protection Agreement Summary
Notional Strike/Swap Effective Termination
Description of Agreement Amount Price (F) Date Date
- ------------------------ ------ ------------ ---------- ----------
LIBOR, 30-day-"Rate Cap" $44,530 6.25% 01/27/94 01/30/99
LIBOR, 30-day-"Rate Swap" $44,530 5.35% 08/30/96 08/30/99(G)
LIBOR, 30-day-"Rate Cap" $50,000 6.45% 01/30/97 12/31/97
(F) The 30-day LIBOR rate in effect at month-end was 5.69%.
(G) This arrangement is a knock-out swap agreement which fixes the
Company's underlying 30-day LIBOR rate at 5.35%. The swap terminates upon the
earlier to occur of (i) the termination date or (ii) a rate reset date on which
the 30-day LIBOR rate is 6.26% or higher.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- -------------------------------------------------
Book Value of Assets and Equity
- -------------------------------
The application of historical cost accounting in accordance with GAAP for
Gables' UPREIT structure results in an understatement of total assets and equity
compared to the amounts that would be recorded via the application of purchase
accounting in accordance with GAAP had Gables not been organized as an UPREIT.
Management believes it is imperative to understand this difference when
evaluating the book value of assets and equity. The understatement of basis
related to this difference in organizational structure at March 31, 1997 is
$112,494, exclusive of the effect of depreciation. Accordingly, on a pro forma
basis, the real estate assets before accumulated depreciation, total assets and
total equity plus minority interest as of March 31, 1997 would be $934,242,
$878,529, and $448,498, respectively, if such $112,494 value was reflected.
Inflation
- ---------
Substantially all of the Company's leases at the communities are for a term of
one year or less, which may enable Gables to seek increased rents upon renewal
of existing leases or commencement of new leases in times of rising prices. The
short-term nature of these leases generally serves to lessen the impact of cost
increases arising from inflation.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
This Report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results or developments
could differ materially from those projected in such statements. Certain factors
that might cause such a difference include, but are not limited to, the
following: development opportunities may be abandoned; construction costs of a
community may exceed original estimates; construction and lease-up may not be
completed on schedule, resulting in increased debt service expense and
construction costs and reduced rental revenues; occupancy rates and rents may be
adversely affected by local economic and market conditions; financing may not be
available on favorable terms; the Company's cash flow may be insufficient to
meet required payments of principal and interest; and existing indebtedness may
not be able to be refinanced or the terms of such refinancing may not be as
favorable as the terms of existing indebtedness.
SUPPLEMENTAL DISCUSSION - Funds From Operations and Adjusted
Funds From Operations
- --------------------------------------------------------------------------------
Gables considers funds from operations ("FFO") to be a useful performance
measure of the operating performance of an equity REIT because, together with
net income and cash flows, FFO provides investors with an additional basis to
evaluate the ability of a REIT to incur and service debt and to fund
acquisitions and other capital expenditures. Gables believes that in order to
facilitate a clear understanding of its operating results, FFO should be
examined in conjunction with net income as presented in the financial statements
and data included elsewhere in this report.
FFO is defined as net income in accordance with generally accepted accounting
principles ("GAAP") before (i) minority interest of unitholders in the Operating
Partnership, (ii) extraordinary items, (iii) gains (losses) on the sale of real
estate assets, and (iv) real estate depreciation. Adjusted funds from operations
("AFFO") is defined as FFO less capital expenditures funded by operations. FFO
and AFFO should not be considered as an alternative to net income as an
indicator of Gables' operating performance or as an alternative to cash flows as
a measure of liquidity. FFO does not measure whether cash flow is sufficient to
fund all of Gables' cash needs including principal amortization, capital
expenditures, and distributions to shareholders. Additionally, FFO does not
represent cash flows from operating, investing or financing activities as
defined by GAAP. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" for a
discussion of Gables' cash needs and cash flows.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
- ------------------------------------------------
Reconciliation of Funds From Operations and Adjusted Funds From Operations
A reconciliation of funds from operations and adjusted funds from operations
follows:
For the three months ended
March 31
-----------------------
1997 1996
---- ----
RECONCILIATION:
- ---------------
Net income .............................................. $ 9,808 $ 4,680
Extraordinary loss, net of minority interest ............ 602 520
Minority interest of unitholders in Operating Partnership 1,900 1,126
Gain on sale of real estate assets ...................... (4,858) 0
Real estate asset depreciation:
Wholly-owned real estate assets ...................... 5,233 3,631
Joint venture real estate assets ..................... 55 54
-------- --------
Total ......................................... 5,288 3,685
-------- --------
Funds from operations ................................... $ 12,740 $ 10,011
-------- --------
Capital expenditures for operating apartments:
Carpet ................................................ 371 227
Roofing ............................................... 24 13
Exterior painting ..................................... 0 0
Appliances ............................................ 47 25
Other additions/improvements .......................... 473 374
-------- --------
Total ............................................... 915 639
-------- --------
Adjusted funds from operations .......................... $ 11,825 $ 9,372
======== ========
<PAGE>
Part II - 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
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Form of Restricted Share Award Agreement as signed by the Company and
each of Marcus E. Bromley (with respect to 4,000 Unrestricted Shares and
8,000 Restricted Shares), John T. Rippel (with respect to 3,300 Unrestric-
ted Shares and 6,600 Restricted Shares), William M. Hammond (with respect
to 1,700 Unrestricted Shares and 3,400 Restricted Shares), C. Jordan Clark
(with respect to 3,000 Unrestricted Shares and 6,000 Restricted Shares),
and Marvin R. Banks, Jr. (with respect to 3,000 Unrestricted Shares and
6,000 Restricted Shares).
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 9, 1997
GABLES RESIDENTIAL TRUST
/s/ Marvin R. Banks, Jr.
----------------------------
Marvin R. Banks, Jr.
Vice President and Chief
Financial Officer
(Authorized Officer of the Registrant
and Principal Financial Officer)
<PAGE>
RESTRICTED SHARE AWARD AGREEMENT
UNDER THE GABLES RESIDENTIAL TRUST SECOND
AMENDED AND RESTATED 1994 SHARE OPTION AND INCENTIVE PLAN
Name of Grantee:
No. of Shares:
Purchase Price per Share: $.01 (i.e., par value)
Grant Date: February 21, 1997
Final Acceptance Date: April 22, 1997
[60 days after Grant Date]
Pursuant to the Gables Residential Trust Second Amended and Restated 1994 Share
Option and Incentive Plan (as the same may be hereafter amended, the "Plan"),
and in accordance with authority granted to the undersigned officer pursuant to
a duly adopted resolution of the Committee (as defined in Section 2 of the
Plan), Gables Residential Trust (the "Company") hereby grants a Restricted Share
Award (an "Award") to the Grantee named above.
1. Acceptance of Award.
- -----------------------
The Grantee shall have no rights with respect to this Award unless he or she
shall have accepted this Award prior to the close of business on the Final
Acceptance Date specified above by signing and delivering to the Company a copy
of this Award Agreement.
2. Issuance of Shares
- ---------------------
The Company shall issue the number of Shares set forth above (the "Shares")
promptly after payment by the Grantee to the Company in cash or by check or
other instrument acceptable to the Committee of the Purchase Price per Share
times the number of Shares to be accepted. Upon payment for Shares by the
Grantee, (i) certificates evidencing the Shares that vest immediately pursuant
to Paragraph 4 shall be issued in the name of the Grantee and delivered to the
Grantee, (ii) certificates evidencing the remaining Restricted Shares, as set
forth in Paragraph 3 and Paragraph 4, shall be issued in the name of the Grantee
but delivered to the Company to hold for the benefit of the Grantee, and (iii)
the Grantee's name shall be entered as the shareholder of record on the books of
the Company with respect to all of the Shares. Thereupon, the Grantee shall have
all the rights of a shareholder with respect to the Shares, including voting and
dividend rights, subject, however, to the restrictions and conditions specified
in Paragraph 3 below.
3. Restrictions and Conditions.
- -------------------------------
(a) As set forth in Paragraph 4, upon receipt of Shares hereunder,
two-thirds of such Shares shall be Restricted Shares that are subject to the
restrictions set forth in this Paragraph 3. Such shares shall remain Restricted
Shares until such shares vest pursuant to this Paragraph 3 or Paragraph 4. The
balance of such Shares are unrestricted and shall be deemed vested on the date
of issuance.
(b) As set forth in Paragraph 2, the certificates representing the
Restricted Shares shall be held by the Company for the benefit of the Grantee,
until such time that such shares vest pursuant this Paragraph 3 or Paragraph 4.
Upon each such vesting date, the Company shall promptly deliver to the Grantee a
certificate representing the number of Shares that vest as of such date. The
Company may staple or clip a legend to the effect set forth in Exhibit A hereto
to the certificates representing the Restricted Shares while the Company has
possession of such certificates.
(c) Restricted Shares granted herein may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of by the Grantee prior
to vesting.
(d) If, prior to vesting of the Restricted Shares granted herein, the
Grantee's employment with the Company and its Subsidiaries is voluntarily or
involuntarily terminated, the Company shall have the right to repurchase from
the Grantee or the Grantee's legal representative any unvested Restricted Shares
held by the Company for the benefit of the Grantee at the time of such
termination. Any Restricted Shares so purchased by the Company shall be
purchased for their original purchase price set forth above. The Company must
exercise such right of repurchase by written notice to the Grantee or the
Grantee's legal representative not later than 90 days following such termination
of employment. In the event such right of repurchase is not exercised, all such
Restricted Shares shall vest.
4. Vesting of Restricted Shares.
- -------------------------------
(a) Upon issuance of the Shares in accordance with Paragraph 2, ______ of
such Shares (such amount being equal to one-third of the total number of Shares
granted herein) shall be immediately vested and unrestricted and the remainder
shall be restricted and shall vest in accordance with the following schedule:
Fraction of Number of
Vesting Date Restricted Shares Vesting Restricted Shares Vesting
- -------- ------------------------- ----------------------------
January 1, 1998 1/3 of Total Shares _____
January 1, 1999 1/3 of Total Shares _____
PROVIDED, HOWEVER, that the Committee may at any time accelerate, waive or,
subject to Section 10 of the Plan, amend the vesting schedule specified in this
Paragraph 4. Subsequent to any Vesting Date or Dates set forth above, the Shares
on which all restrictions and conditions have lapsed shall no longer be deemed
Restricted Shares.
(b) If (i) the Grantee's employment with the Company and its Subsidiaries
is involuntarily terminated due to death or Disability (as defined in Section 1
of the Plan) or (ii) there is a Change of Control of the Company (as defined in
Section 12 of the Plan), any restrictions and conditions on Restricted Shares
shall be deemed waived by the Committee, and such shares shall automatically
become fully vested.
5. Dividends.
- -------------
Dividends on Restricted Shares shall be paid immediately to the Grantee.
6. Incorporation of Plan.
- -------------------------
Notwithstanding anything herein to the contrary, this Agreement shall be subject
to and governed by all the terms and conditions of the Plan. Capitalized terms
in this Agreement shall have the meaning specified in the Plan, unless a
different meaning is specified herein.
7. Transferability.
- --------------------
This Agreement is personal to the Grantee, is non-assignable and is not
transferable in any manner, by operation of law or otherwise, other than by will
or the laws of descent and distribution.
8. Tax Withholding.
- -------------------
The Grantee shall, not later than the date as of which the receipt of this Award
becomes a taxable event for Federal income tax purposes, pay to the Company or
make arrangements satisfactory to the Committee for payment of any Federal,
state and local taxes required by law to be withheld on account of such taxable
event.
9. Miscellaneous.
- -----------------
(a) Notice hereunder shall be given to the Company at its principal place
of business, and shall be given to the Grantee at the address set forth below,
or in either case at such other address as one party may subsequently furnish to
the other party in writing.
(b) This Agreement does not confer upon the Grantee any rights with respect
to continuance of employment by the Company or any Subsidiary.
(c) Pursuant to Section 10 of the Plan, the Committee may at any time amend
or cancel any portion of this Award, but no such action may be taken which
adversely affects the Grantee's rights under this Agreement without the
Grantee's consent.
GABLES RESIDENTIAL TRUST
By: ________________________________________
Name:
Title:
The foregoing Agreement is hereby accepted and the terms and conditions thereof
hereby agreed to by the undersigned.
Dated: _________________________________________
Grantee's Signature
Grantee's name and address:
____________________________________________
____________________________________________
Receipt of Certificates by Grantee
----------------------------------
Shares; ______ (date); ____ (initials)
Shares; ______ (date); ____ (initials)
Shares; ______ (date); ____ (initials)
<PAGE>
EXHIBIT A
---------
Legend to be stapled or clipped to certificates representing Restricted Shares
while such shares are in the possession of the Company prior to vesting:
"The Shares represented by the attached certificate are subject to a Restricted
Share Award Agreement between the registered holder thereof and the issuer and
pursuant thereto are subject to forfeiture and restrictions on transfer. This
attachment shall only be removed by a duly authorized officer of the issuer."
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GABLES RESIDENTIAL TRUST FOR THE THREE MONTHS
ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000913782
<NAME> GABLES RESIDENTIAL TRUST
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 9,067
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 821,748
<DEPRECIATION> 78,803
<TOTAL-ASSETS> 766,035
<CURRENT-LIABILITIES> 0
<BONDS> 402,613
0
0
<COMMON> 194
<OTHER-SE> 282,641
<TOTAL-LIABILITY-AND-EQUITY> 766,035
<SALES> 0
<TOTAL-REVENUES> 32,232
<CGS> 0
<TOTAL-COSTS> 18,744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,224
<INCOME-PRETAX> 12,310
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,410
<DISCONTINUED> 0
<EXTRAORDINARY> 602
<CHANGES> 0
<NET-INCOME> 9,808
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0
</TABLE>
