SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
____________________
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 1-12590
GABLES RESIDENTIAL TRUST
(Exact name of Registrant as specified in its charter)
____________________
Maryland 58-2077868
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2859 Paces Ferry Road, Suite 1450
Atlanta, Georgia 30339
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 436-4600
____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
------------------- -----------------------------------------
Common Shares of Beneficial Interest, New York Stock Exchange
par value $0.01 per share
8.30% Series A Cumulative Redeemable New York Stock Exchange
Preferred Shares of Beneficial Interest,
par value $0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
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.
(1) Yes X No (2) Yes X No
---- ---- ---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
-------
As of March 18, 1999, the aggregate market value of the 25,990,919 Common
Shares held by non-affiliates of the Registrant was $571,800,218 based upon the
closing price ($22.00) on the New York Stock Exchange composite tape on such
date. (For this computation, the Registrant has excluded the market value of all
Common Shares reported as beneficially owned by executive officers and trustees
of the Registrant; such exclusion shall not be deemed to constitute an admission
that any such person is an "affiliate" of the Registrant.) As of March 18, 1999,
there were outstanding 26,361,558 Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Company's Proxy Statement relating to
its Annual Meeting of Shareholders to be held May 25, 1999 are incorporated by
reference in Part III, Items 10, 11 and 12.
<PAGE>
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
Item Page
No. No.
- ----- ----
1. Business .............................................................. 1
2. Properties.............................................................. 9
3. Legal Proceedings ...................................................... 14
4. Submission of Matters to a Vote of Security Holders .................... 14
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters... 14
6. Selected Financial and Operating Information ........................... 15
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 18
7.A Quantitative and Qualitative Disclosures About Market Risk.............. 33
8. Financial Statements and Supplementary Data ........................... 34
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .......................................... 34
PART III
10. Directors and Executive Officers of the Registrant ..................... 34
11. Executive Compensation ................................................ 34
12. Security Ownership of Certain Beneficial Owners and Management ........ 34
13. Certain Relationships and Related Transactions ........................ 34
PART IV
14. Exhibits, Financial Statements and Schedule and Reports on Form 8-K .... 34
<PAGE>
1
PART I
ITEM 1. BUSINESS
General
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Gables Residential Trust (the "Company" or "Gables") is one of the largest
owners, operators and developers of multifamily apartment communities in the
Southwestern and Southeastern region of the United States (the "Sunbelt" or
"Sunbelt Region"). The Company is a real estate investment trust (a "REIT")
formed in 1993 under Maryland law to continue and expand the multifamily
apartment community management, development, construction and acquisition
operations of its privately owned predecessor organization. Gables completed its
initial public offering on January 26, 1994 (the "IPO"). Substantially all of
the Company's business is conducted through, and all of the Company's interests
in property are held by or through, Gables Realty Limited Partnership (the
"Operating Partnership"). The Company controls the Operating Partnership through
Gables GP, Inc. ("GGPI"), a wholly-owned subsidiary and the sole general partner
of the Operating Partnership (this structure is commonly referred to as an
umbrella partnership REIT or "UPREIT"). At December 31, 1998, the Company was an
80.3% economic owner of the common equity of the Operating Partnership.
GEOGRAPHIC EXPANSION AND ACQUISITION. On April 1, 1998, Gables acquired the
properties and operations of Trammell Crow Residential South Florida ("TCR/SF"),
which consisted of fifteen multifamily apartment communities containing a total
of 4,197 apartment homes, and all of TCR/SF's residential construction and
development and third party management activities in South Florida
(collectively, the "South Florida Acquisition"). The communities acquired in the
South Florida Acquisition are located in Palm Beach County, Broward County and
Dade County and encompass the metropolitan areas of Palm Beach, Fort Lauderdale
and Miami, respectively. Such locations are collectively referred to herein as
"Boca Raton" or "South Florida." Gables' management believes that the South
Florida Acquisition facilitated the following goals:
- Establishing a growth platform in the South Florida markets by
integrating the existing operating, acquisition, development and
construction personnel of TCR/SF into Gables' existing management
team.
- Allowing Gables to enter into the South Florida markets with a
critical mass of multifamily apartment communities that have internal
earnings growth potential and product quality characteristics
consistent with Gables' existing portfolio.
- Providing further geographic and economic diversification of Gables'
portfolio of multifamily apartment communities, thereby enhancing the
stability of Gables' cash flow.
- Generating a pipeline of acquisition and development opportunities in
the South Florida markets, which are characterized by high job growth
and high barriers to entry.
- Allowing Gables to generate economies of scale by spreading its
corporate overhead costs over a larger portfolio and increasing its
buying power with vendors.
- Producing immediate earnings growth and accelerating long-term
earnings growth.
As of December 31, 1998, Gables owned 84 multifamily apartment communities and
had an indirect 25% interest in two multifamily apartment communities
(collectively, the "Current Communities") located in the following major cities
in Texas, Georgia, Florida and Tennessee: Houston, Dallas, Austin, San Antonio,
Atlanta, Boca Raton, Orlando, Memphis and Nashville (the "Core Markets"). The
Current Communities totaled 25,288 apartment homes and included two multifamily
apartment communities in the final stages of lease-up. Gables also owned five
multifamily apartment communities that were under construction at December 31,
1998 that Gables expects will comprise 1,613 apartment homes upon completion
(collectively, the "Development Communities" and, with the Current Communities,
the "Communities"). Gables also owns sites (the "Undeveloped Sites") on which it
intends to develop seventeen additional multifamily apartment communities that
Gables expects will comprise an estimated 4,093 apartment homes and has rights
(the "Development Rights") to acquire additional sites on which Gables believes
it could develop multifamily apartment communities comprising an estimated 1,570
apartment homes. See "Recent Developments" on page 9 for certain events
occurring subsequent to December 31, 1998.
Gables' executive offices are located at 2859 Paces Ferry Road, in Atlanta,
Georgia 30339 and its telephone number is (770) 436-4600. The Company's common
shares of beneficial interest, par value $0.01 per share ("Common Shares"), are
listed on the New York Stock Exchange (the "NYSE") under the symbol "GBP."
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2
MANAGEMENT STRUCTURE. Gables has been responsible for the development or
acquisition of approximately 50,000 apartment homes since 1982 and its senior
management team has, on average, in excess of fifteen years experience in the
multifamily industry. Gables provides a full range of integrated real estate
services through a staff of approximately 1,350 employees who have experience in
property operations, development, acquisition and construction. Gables maintains
offices in Atlanta, Boca Raton, Houston and Dallas, each with its own fully
integrated organization, including experienced in-house management, development
and acquisition staffs with specific knowledge of the particular markets served.
Gables believes that its competitive strength and growth potential lie in
management's in-depth knowledge of the changing opportunities available in each
local market and in its locally focused management structure, which enables
highly experienced development and acquisition personnel to pursue new
opportunities in each market and highly experienced on-site managers to make the
day-to-day decisions needed to maximize the performance of existing properties.
The finance, accounting and administrative functions for Gables are controlled
by a central staff located in Atlanta.
COMPETITIVE ADVANTAGES. Gables believes that it has several competitive
advantages. These advantages include:
- A fully integrated organization: a fully integrated organization with
a track record of approximately sixteen years in all phases of real
estate property management, development, acquisition, construction,
rehabilitation, financing and marketing.
- Product focus: a portfolio concentration of Class AA/A apartment
communities that are targeted toward the lifestyle renter, are located
primarily in in-fill locations and master-planned communities, and
include garden, townhome and higher density apartment communities.
- Local presence in multiple markets: an established local presence in
each of its markets, which Gables serves through an experienced staff
with superior knowledge of local markets and a culture which provides
incentives for outstanding performance at all levels.
- Geographic diversification: an established market presence in nine
major markets in the Sunbelt Region that are geographically
independent, rely on diverse economic foundations, and during the past
several years have shown job growth substantially above national
averages.
- Service-oriented philosophy: a service-oriented philosophy which
focuses on offering extensive resident amenities and services in
quality apartment homes to increase occupancy and rental rates and
reduce resident turnover.
The Operating Partnership
- -------------------------
The Operating Partnership is the entity through which the Company conducts
substantially all of its business and owns (either directly or through
subsidiaries) all of its assets. As of December 31, 1998, the Company held
directly, or indirectly through GGPI, 80.3% of the Operating Partnership's
common units of limited and general partnership. This structure is commonly
referred to as an umbrella partnership REIT or UPREIT. Through GGPI, a
wholly-owned subsidiary of the Company and the sole general partner of the
Operating Partnership, the Company controls the Operating Partnership. The board
of directors of GGPI, the members of which are the same as the members of the
Board of Trustees of the Company, manages the affairs of the Operating
Partnership by directing the affairs of the general partner of the Operating
Partnership. The Company's limited partner and indirect general partner
interests in the Operating Partnership entitle it to share in cash distributions
from, and in the profits and losses of, the Operating Partnership in proportion
to its economic interest therein and entitle the Company to vote on all matters
requiring a vote of the limited partners.
Generally, the other limited partners of the Operating Partnership are persons
who contributed their direct or indirect interests in certain properties to the
Operating Partnership primarily in connection with the IPO and the South Florida
Acquisition. The Operating Partnership is obligated to redeem each common unit
of limited partnership interest ("Unit") held by a person other than the
Company, at the request of the holder thereof, for cash equal to the fair market
value of a Common Share at the time of such redemption, provided that the
Company at its option may elect to acquire any such Unit presented for
redemption for one Common Share or cash. The Company presently anticipates that
it will elect to issue Common Shares to acquire Units presented for redemption,
rather than paying cash. With each such redemption the Company's percentage
ownership interest in the Operating Partnership will increase. In addition,
whenever the Company issues Common Shares or preferred shares, the Company is
obligated to contribute any net proceeds therefrom to the Operating Partnership
and the Operating Partnership is obligated to issue an equivalent number of
common or preferred units, as applicable, to the Company.
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3
The Company may cause the Operating Partnership to issue additional Units to
acquire land parcels for the development of apartment communities or operating
apartment communities in transactions that in certain circumstances defer some
or all of the sellers' tax consequences. The Company believes that many
potential sellers of multifamily residential properties have a low tax basis in
their properties and would be more willing to sell the properties in
transactions that defer Federal income taxes. Offering Units instead of cash for
properties may provide potential sellers partial Federal income tax deferral.
The Management Companies
- ------------------------
Gables' management operations with respect to properties in which Gables does
not have an interest are conducted through subsidiaries of the Operating
Partnership (the "Management Companies"). The Management Companies also provide
other services to third parties, including construction, brokerage and corporate
rental housing. Certain of these services are, or may also be, provided by the
Operating Partnership directly, to the extent consistent with the gross income
requirements for REITs under the Internal Revenue Code of 1986, as amended (the
"Code"). To maintain the Company's qualifications as a REIT while realizing
income from its fee management and related service business, the Operating
Partnership owns 100% of the nonvoting common stock (representing 98.99% of the
total equity) of each Management Company and 1% of the voting common stock
(representing .01% of the total equity) of each Management Company. The
nonvoting common stock and voting common stock owned by the Operating
Partnership together represent 99% of the equity interests in each Management
Company. Executive officers of GGPI hold, in the aggregate, the remaining 1% of
the equity in each Management Company, representing 99% of the voting interest
therein. The voting common stock held by such executive officers is subject to a
provision of the by-laws of each Management Company that is designed to ensure
that the stock will be held by officers of GGPI at all times. This bylaw
provision of each Management Company cannot be amended without the vote of 100%
of the outstanding voting common stock of such company.
Brand Name Strategy
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Gables is continuing to pursue a long standing strategy of brand name
development by linking the "Gables" name to its communities. This strategy is
intended to reinforce Gables' reputation and to build recognition of its
multifamily communities as a high quality, recognizable brand. Gables believes
that increased consumer recognition of the "Gables" brand name in each of its
markets has enhanced its ability to attract new residents, increased the
markets' perception of the Communities as high quality residential developments
and enhanced its relationships with local authorities.
Business Objectives and Strategy of Gables
- ------------------------------------------
OVERVIEW. Gables' objective is to increase shareowner value by being a
profitable owner and operator of Class AA/A multifamily apartment communities in
the Sunbelt Region of the United States. To achieve its objective, Gables
employs a number of business strategies. First, Gables adheres to a strategy of
owning and operating Class AA/A apartment communities which should maintain high
levels of occupancy and rental rates. Gables believes that such communities,
when supplemented with high quality services and amenities, attract the affluent
renter-by-choice, who is willing to pay a premium for conscientious service and
high quality communities. Accordingly, Gables' communities possess innovative
architectural designs and numerous amenities and services that Gables believes
are desired by its target customers. Second, Gables seeks to grow cash flow from
operating communities through innovative, proactive property management that
focuses on resident satisfaction and retention, increases in property rents and
occupancy levels, and the control of operating expenses through improved
economies of scale. Third, Gables develops and acquires high-quality apartment
communities in in-fill locations and master-planned communities near major
employment centers in the Sunbelt Region with the objective of achieving
critical mass in the most desirable submarkets. Finally, due to the cyclical
nature of the real estate markets, Gables has adopted an investment strategy
based on a strong local presence and expertise, which it believes will allow for
growth through acquisitions and development (as warranted by underlying market
fundamentals) and will help ensure favorable initial and long-term returns.
Gables believes the successful execution of these operating and investment
strategies will result in operating cash flow growth.
Gables believes that it is well positioned to continue achieving its objective
because of its long-established presence as a fully integrated real estate
management, development, construction and acquisition company in its markets.
Gables believes that its established, local market presence creates a
competitive advantage during different economic cycles in generating increased
cash flow from (i) property operations and (ii) new investment opportunities
that involve local market knowledge, site selection and requests for
entitlements and zoning petitions. Gables' markets are geographically
independent, rely on diverse economic foundations and have experienced
above-average job growth.
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4
PROPERTY OPERATIONS. The property management group operates the Communities to
maximize cash flow and create long- term value. This is achieved by aggressive
marketing and leasing of apartment homes, providing the best possible resident
service and maintaining the Communities to the highest standards. Management
believes that excellent service will distinguish Gables from its competitors and
will retain current residents and attract new prospects. Gables has a service
oriented philosophy which is reinforced through its "College of Career
Development" named Gables University. This comprehensive training system for
Gables' employees is overseen by full-time training coordinators and offers
classes in a variety of different schools, such as the School of Leasing, the
School of People Resources and the School of Maintenance Development.
Additionally, there are "degree" programs which are completed with graduation
ceremonies. Service is also reinforced with quarterly "I Made a Difference"
recognition ceremonies, where personal achievement by associates is acknowledged
by senior management in each of the markets where Gables operates.
Financial and marketing information is collected and distributed through on-site
computer systems at all Communities and effectively summarizes operating and
marketing data critical for making accurate daily decisions. The system also
compiles demographic profile information on prospective and current residents,
allowing Gables to effectively target its customer base.
The property management group is strategically focused on the following
areas:
- EMPLOYEES. Hiring the highest quality associates possible through
extensive screening and proactive recruiting, and encouraging loyalty
and reducing employee turnover by providing outstanding training,
career opportunities and benefit programs. The average tenure for vice
presidents and regional managers of the group is over eight years and
the average tenure of property managers is over six years.
- RESIDENTS. Providing exceptional services to Gables' relatively
affluent residents, who expect a service level commensurate with the
high quality product and resultant high level rents.
- FINANCIAL PERFORMANCE. Maximizing revenues from the Communities by
empowering and encouraging property managers to make decisions
regarding rental rates and implementation of marketing programs to
attract and retain residents; reducing property operating expenses by
continuously evaluating vendors and service contracts, utilizing
volume discount purchasing programs and analyzing tax and utility
expenses; and monitoring overall appearance and appeal of the
Communities by ensuring cleanliness, investing wisely in major capital
expenses and ensuring the quality of the landscaping.
DEVELOPMENT. The development team has extensive experience in the identification
of sites, land planning, product development and construction in the Sunbelt
Region. In evaluating whether to develop an apartment community, the development
team analyzes current demographics and economic data such as household formation
rates, income levels, rental rates and occupancies. Gables relies both on
internal and external market research to determine the current position of the
real estate cycle.
Successful development has been instrumental to the growth of Gables and, since
1982, Gables has developed approximately 30,000 apartment homes. Gables seeks to
develop properties in markets where it discerns a strong demand, which Gables
anticipates will enable it to achieve its targeted initial yields. Gables
expects to continue to focus on the Sunbelt Region which, as a result of job
growth and household formation, has generally experienced high occupancy levels
and rising rents in recent years. The typical submarket where Gables develops
its communities is one where resident profiles, including relatively high income
households, justify the development of Class AA/A multifamily communities
offering extensive resident amenities and services. Fundamental to Gables'
development is its in-house construction group, which allows Gables to act as
its own general contractor, which helps control quality, scheduling and cost. In
addition, Gables' development and construction expertise has enabled it to
develop a variety of multifamily communities, including Class AA/A garden
apartments, townhomes and higher density apartments in a variety of geographic
areas.
ACQUISITION. Gables also focuses its efforts on the acquisition of existing
multifamily communities which management believes are consistent with the
characteristics of its existing portfolio or present opportunities for creating
value, including properties requiring extensive renovations and market
repositioning. Since 1982, Gables has acquired and repositioned communities
comprising a total of approximately 20,000 apartment homes, of which
approximately 3,000 apartment homes were value-added acquisitions which required
substantial redevelopment, repositioning, and strong management skills.
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5
Gables will seek to invest in those properties that management believes are
available at prices below estimated replacement cost, are located in submarkets
with a relatively high income population with close proximity to major
employment centers, and are capable of growth in cash flow through application
of Gables' management ability and strategic capital improvements.
FEE MANAGEMENT BUSINESS AND RELATED SERVICES. As of December 31, 1998, Gables
managed for third parties 53 multifamily communities comprising approximately
17,500 apartment homes. These fee management contracts are maintained with a
total of approximately 27 owners. In addition to contributing modestly to
earnings, engaging in fee management allows Gables to leverage its management
operations costs, provides access to development and acquisition opportunities
and provides Gables with additional market knowledge. In addition to its fee
management business, Gables provides other services through the Management
Companies, including construction and brokerage services and the provision of
corporate rental housing.
Competition
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All of the Communities are located in developed areas that include other
apartment communities. The number of competitive multifamily communities in a
particular area could have a material effect on Gables' ability to lease
apartment homes at the Communities or at any newly developed or acquired
community, as well as on the rents charged. Gables may be competing for
development and acquisition opportunities with others that have greater
resources than Gables (including other REITs). In addition, the Communities must
compete for residents with new and existing homes and condominiums. The home
affordability index in all of Gables' markets is above the national average.
This competitive environment is partially offset by the propensity to rent for
households in Gables' markets which in all cases exceeds the national average.
The fee management business is highly competitive, and Gables faces competition
from a variety of local, regional and national firms. Gables competes against
these firms by stressing the quality and experience of its employees, the
services provided by Gables and the market presence and experience it has
developed over the past fifteen years. Gables may, nevertheless, lose some of
its third party management business, particularly when such properties are sold.
Environmental Matters
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Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws, ordinances and regulations typically impose clean-up responsibility
and liability without regard to whether the owner knew of or caused the presence
of the contaminants, and the liability under such laws has been interpreted to
be joint and several unless the harm is divisible and there is a reasonable
basis for allocation of responsibility. The cost of investigation, remediation
or removal of such substances may be substantial, and the presence of such
substances, or the failure to properly remediate the contamination on such
property, may adversely affect the owner's ability to sell or rent such property
or to borrow using such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. Finally, the owner or operator of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. In connection with the
ownership, operation, management and development of the Communities and other
real properties, Gables may be potentially liable for such damages and costs.
Certain Federal, state and local laws, ordinances and regulations govern the
removal, encapsulation and disturbance of asbestos-containing materials ("ACMs")
when such materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. Such laws, ordinances and
regulations may impose liability for release of ACMs and may provide for third
parties to seek recovery from owners or operators of real properties for
personal injury associated with ACMs. In connection with its ownership,
operation, management and development of the Communities and other real
properties, Gables may be potentially liable for such costs.
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In addition, recent studies have linked radon, a naturally-occurring substance,
to increased risks of lung cancer. While there are currently no state or Federal
requirements regarding the monitoring for, presence of, or exposure to, radon in
indoor air, the U.S. Environmental Protection Agency ("EPA") and the Surgeon
General recommend testing residences for the presence of radon in indoor air,
and the EPA further recommends that concentrations of radon in indoor air be
limited to less than 4 picocuries per liter of air (pCi/L) (the "Recommended
Action Level"). The presence of radon in concentrations equal to or greater than
the Recommended Action Level in a Community may adversely affect Gables' ability
to rent apartment homes in that Community and the market value of the Community.
Finally, recently-enacted Federal legislation will eventually require owners and
landlords of residential housing constructed prior to 1978 to disclose to
potential tenants or purchasers of the Communities any known lead-paint hazards
and will impose treble damages for failure to so notify. In addition, lead-based
paint in any of the Communities may result in lead poisoning in children
residing in that Community if chips or particles of such lead-based paint are
ingested, and Gables may be held liable under state laws for any such injuries
caused by ingestion of lead-based paint by children living at the Communities.
Gables' assessments of the Communities have not revealed any environmental
liability that Gables believes would have a material adverse effect on Gables'
business, assets or results of operations, nor is Gables aware of any such
material environmental liability. Nevertheless, it is possible that Gables'
assessments do not reveal all environmental liabilities or that there are
material environmental liabilities of which Gables is unaware. Moreover, there
can be no assurance that (i) future laws, ordinances or regulations will not
impose any material environmental liability or (ii) the current environmental
condition of the Communities will not be affected by tenants, by the condition
of land or operations in the vicinity of the properties (such as the presence of
underground storage tanks), or by third parties unrelated to Gables.
Gables believes that no ACMs were used in connection with the construction of
the Communities or will be used in connection with future construction by the
Company. Gables' environmental assessments have revealed the presence of
"potentially friable" ACMs at two Current Communities and non-friable ACMs at
four Current Communities. Gables has programs in place to maintain and monitor
ACMs. Gables believes that the Communities are in compliance in all material
respects with all Federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. Gables has not
been notified by any governmental authority, and is not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its present
properties that would involve substantial expenditure, and Gables does not
believe that compliance with applicable environmental laws or regulations will
have a material adverse effect on Gables or its financial condition or results
of operations.
Costs of Compliance with Americans with Disabilities Act and Similar Laws
- -------------------------------------------------------------------------
Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of
public accommodation are required to meet certain Federal requirements related
to access and use by disabled persons. These requirements became effective in
1992. Management of Gables believes that the Communities are substantially in
compliance with present requirements of the ADA, as they apply to multifamily
dwellings. A number of additional Federal, state and local laws exist which also
may require modifications to the Communities, or regulate certain further
renovations thereof, with respect to access thereto by disabled persons. For
example, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment
communities first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the FHAA could result in the imposition of fines
or an award of damages to private litigants. Gables believes that the
Communities that are subject to the FHAA are in compliance with such law.
Additional legislation may impose further burdens or restrictions on owners with
respect to access by disabled persons. The ultimate amount of the cost of
compliance with the ADA or such legislation is not currently ascertainable, and,
while such costs are not expected to have a material effect on Gables, such
costs could be substantial. Limitations or restrictions on the completion of
certain renovations may limit application of Gables' investment strategy in
certain instances or reduce overall returns on Gables' investments.
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Insurance
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Gables carries comprehensive liability, fire, extended coverage and rental loss
insurance with respect to all of the Current Communities, with policy
specifications, insured limits and deductibles customarily carried for similar
properties. Gables carries similar insurance with respect to its other
properties, but with such exceptions as are appropriate given the undeveloped
nature of certain of these properties. There are, however, certain types of
losses (such as losses arising from acts of war) that are not generally insured
because they are either uninsurable or not economically insurable. Should an
uninsured loss or a loss in excess of insured limits occur, Gables could lose
its capital invested in a property, as well as the anticipated future revenues
from such property and would continue to be obligated on any mortgage
indebtedness or other obligations related to the property. Any such loss would
adversely affect Gables.
Employees
- ---------
Gables provides a full range of real estate services through a staff of
approximately 1,350 employees, including an experienced management team. There
are no collective bargaining agreements with any of Gables' employees.
Tax Matters
- -----------
Gables elected to be taxed as a REIT under the Code, commencing with the taxable
year ended December 31, 1994, and intends to maintain its qualification as a
REIT in the future. As a qualified REIT, with limited exceptions, Gables will
not be taxed under Federal and certain state income tax laws at the corporate
level on its net income.
Policies with Respect to Certain Activities
- -------------------------------------------
The following is a discussion of certain investment, financing and other
policies of Gables. These policies have been determined by Gables' Board of
Trustees and may be amended or revised from time to time by the Board of
Trustees without a vote of the shareholders, except that (i) Gables cannot
change its policy of holding its assets and conducting its business only through
the Operating Partnership, the Management Companies and other permitted
subsidiaries without the consent of the holders of Units as provided in the
partnership agreement of the Operating Partnership, (ii) changes in certain
policies with respect to conflicts of interest must be consistent with legal
requirements, and (iii) Gables cannot take any action intended to terminate its
qualification as a REIT without the approval of the holders of two-thirds of the
Common Shares.
INVESTMENT POLICIES. The Company will conduct all its investment activities
through the Operating Partnership and its subsidiaries. Gables' investment
objectives are to provide quarterly cash distributions and achieve long-term
capital appreciation through increases in the value of Gables. Gables may
purchase income-producing multifamily apartments or other types of properties
for long-term investment, expand and improve the communities presently owned or
other properties purchased, or sell such communities or other properties, in
whole or in part, when circumstances warrant. Gables may also participate with
third parties in apartment community ownership, through joint ventures or other
types of co-ownership. Equity investments may be subject to existing mortgage
financing and other indebtedness or such financing or indebtedness as may be
incurred in connection with acquiring or refinancing these investments. Debt
service on such financing or indebtedness will have a priority over the Common
Shares and any distributions thereon.
While Gables emphasizes equity real estate investments in multifamily apartment
communities, it may, in the discretion of the Board of Trustees, invest in other
types of equity real estate investments, mortgages (including participating or
convertible mortgages) and other real estate interests. Gables currently intends
to invest in apartment communities in the Sunbelt Region. However, future
development or investment activities will not be limited to any geographic area
or product type or to a specified percentage of Gables' assets. Gables will not
have any limit on the amount or percent of its assets invested in one property.
Subject to the percentage of ownership limitations and gross income and asset
tests necessary for REIT qualification, Gables also may invest in securities of
other REITs, other entities engaged in real estate activities or securities of
other issuers, including for the purpose of exercising control over such
entities, although it does not presently intend to do so and it has not done so
in the past. Gables may enter into joint ventures or partnerships for the
purpose of obtaining an equity interest in a particular property in accordance
with Gables' investment policies. Such investments may permit Gables to own
interests in larger assets without unduly restricting diversification and,
therefore, add flexibility in structuring its portfolio. Gables will not enter
into a joint venture or partnership to make an investment that would not
otherwise meet its investment policies. Investment in these securities is also
subject to Gables' policy not to be treated as an investment company under the
Investment Company Act of 1940.
<PAGE>
8
FINANCING POLICIES. The debt to total market capitalization ratio of Gables
(i.e., the total consolidated debt of Gables as a percentage of the December 31,
1998 market value of outstanding Common Shares of the Company and Operating
Partnership Units, plus total consolidated debt and preferred shares and units
at liquidation value) was approximately 47% at December 31, 1998. Excluding
construction-related indebtedness, this ratio was 42% at December 31, 1998. This
ratio will fluctuate with changes in the price of the Common Shares (and the
issuance of additional Common Shares, or other forms of shares of beneficial
interest, if any) and differs from the debt to book capitalization ratio, which
is based upon book values. This percentage will increase as Gables uses
financing to continue construction of the Development Communities and to acquire
additional multifamily apartment communities. As the debt to book capitalization
ratio may not reflect the current income potential of a company's assets and
operations, Gables believes that, in most circumstances, the debt to total
market capitalization ratio provides an alternative indication of leverage for a
company whose assets are primarily income-producing real estate and should be
evaluated along with the debt service coverage and underlying components of
Gables' indebtedness.
Gables currently has a policy of incurring debt only if upon such incurrence the
ratio of debt to total market capitalization would be 60% or less. Gables'
Amended and Restated Declaration of Trust and Second Amended and Restated Bylaws
do not, however, limit the amount or percentage of indebtedness that Gables may
incur. In addition, Gables may from time to time modify its debt policy in light
of current economic conditions, relative costs of debt and equity capital,
market values of its Communities, general conditions in the market for debt and
equity securities, fluctuations in the market price of Common Shares, growth
opportunities and other factors. Accordingly, Gables may increase or decrease
its debt to total market capitalization ratio beyond the limits described above.
To the extent that the Board of Trustees decides to obtain additional capital,
Gables may raise such capital through additional equity offerings (including
offerings of senior securities), debt financings or retention of Funds from
Operations (subject to satisfying provisions in the Code, requiring minimum
distributions of net income in order to maintain tax status as a REIT), or a
combination of these methods. Gables presently anticipates that any additional
borrowings would be made through the Operating Partnership, although Gables
might incur indebtedness, the proceeds of which would be reloaned to the
Operating Partnership. Borrowings may be unsecured or may be secured by any or
all of the assets of the Company, the Operating Partnership or any existing or
new property owning partnership and may have full or limited recourse to all or
any portion of the assets of the Company, the Operating Partnership or any
existing or new property owning partnership. Indebtedness incurred by Gables may
be in the form of bank borrowings, tax-exempt bonds, purchase money obligations
to sellers of apartment communities or other properties, publicly or privately
placed debt instruments or financing from institutional investors or other
lenders. The proceeds from any borrowings by Gables may be used for working
capital, to refinance existing indebtedness and to finance acquisitions,
expansions or development of new communities and other properties, and for the
payment of distributions. Gables has not established any limit on the number or
amount of mortgages that may be placed on any single property or on its
portfolio as a whole.
Gables currently has a senior unsecured debt rating of BBB from Standard and
Poor's and Baa2 from Moody's Investors Service. Gables' Series A Preferred
Shares currently have a rating of BBB- from Standard and Poor's and baa3 from
Moody's Investors Service. Gables intends to adhere to financing policies that
will allow it to maintain these investment grade credit ratings.
CONFLICT OF INTEREST POLICIES. As part of their employment agreements, each of
Messrs. Bromley, Rippel, Clark, Banks and Wheeler is bound by a non-competition
covenant with Gables. These non-competition covenants provide that during the
term of employment, and for a period of one year following termination of
employment under certain circumstances, each individual is prohibited from,
directly or indirectly, competing with Gables with respect to any multifamily
apartment residential real estate property development, construction,
acquisition or management activities then undertaken or being considered by
Gables. These employment agreements also contain certain non-solicitation
covenants, whereby each individual subject to such an agreement is prohibited,
during the term of employment and for a period of one year thereafter, from,
directly or indirectly (i) soliciting or inducing any present or future employee
of Gables to accept employment with such individual or any person or entity
associated with such individual, (ii) employing, or causing any person or entity
associated with such individual to employ, any present or future employee of
Gables without providing Gables with prior written notice of such proposed
employment or (iii) either for himself or for any other person or entity,
competing for or soliciting the third party owners with whom Gables has an
existing property management agreement. The employment agreements with Mssrs.
Bromley, Rippel, Clark and Banks terminate on January 1, 2000 but are
automatically extended for additional one-year periods unless notice is given by
Gables or the employee, three months prior to the agreement's expiration, that
the agreement will not be renewed. The employment agreement with Mr. Wheeler
terminates on September 30, 1999, but also provides for automatic one-year
extensions subject to notice of non-renewal.
<PAGE>
9
Gables has adopted a policy that, without the approval of a majority of the
trustees who are neither officers of Gables nor affiliated with Gables, it will
not (i) acquire from or sell to any trustee, officer or employee of Gables, or
any entity in which a trustee, officer or employee of Gables beneficially owns
more than a 1% interest, or acquire from or sell to any affiliate of any of the
foregoing, any of the assets or other property of Gables, (ii) make any loan to
or borrow from any of the foregoing persons or (iii) engage in any other
transaction with any of the foregoing persons.
Recent Developments
- -------------------
On March 4, 1999, Gables sold an apartment community located in Atlanta
comprising 213 apartment homes for $19.3 million.
On March 18, 1999, Gables announced the resignation of John Rippel as President
and Chief Operating Officer effective in May, 1999. Marc Bromley, Chief
Executive Officer, will oversee property operations until the position is
filled.
On March 22, 1999, Gables announced a common share repurchase program pursuant
to which Gables is authorized to purchase up to $50 million of its outstanding
Common Shares. Gables plans to repurchase shares from time to time in open
market and privately negotiated transactions, depending on market prices and
other conditions using proceeds from sales of selected assets.
On March 26, 1999, Gables entered into a joint venture agreement with an
affiliate of J.P. Morgan Investment, Inc. ("J.P. Morgan"). The business purpose
of the venture is to develop, own and operate seven multifamily apartment
communities located in four of Gables' nine markets, which are expected to
comprise 2,181 apartment homes. As of December 31, 1998, Gables (i) had
commenced construction of four of the communities, (ii) owned the land for the
future development of two of the communities and (iii) owned the acquisition
right for the land for the future development of one of the communities. The
capital budget for the development of the seven communities is approximately
$213 million and is anticipated to be funded with 50% debt and 50% equity. The
equity component will be funded 80% by J.P. Morgan and 20% by Gables. Gables'
portion of the equity will be funded through a contribution of cash and
property. Gables will serve as the managing member of the venture and will have
responsibility for all day-to-day operating issues. Gables will also serve as
the general contractor during construction and as the property manager.
ITEM 2. PROPERTIES
As of December 31, 1998, Gables owned or had an interest in 86 Current
Communities, consisting of 25,288 apartment homes, and owned five Development
Communities, consisting of 1,613 apartment homes. The Communities, comprising a
total of 26,901 apartment homes, are located in Texas, Georgia, Florida and
Tennessee. The following table shows the locations of the Communities and the
number of apartment homes in each metropolitan area:
<TABLE>
<CAPTION>
Number of Communities Number of Apartment Homes Percent of
-------------------------- ---------------------------- Total Apt.
Location Current Development Total Current Development Total Homes
- -------- ------- ----------- ----- ------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Houston, TX (1),(2) 22 1 23 7,260 382 7,642 28.4%
Atlanta, GA (3),(2) 22 1 23 6,440 435 6,875 25.6%
Boca Raton, FL (2) 15 1 16 4,197 343 4,540 16.9%
Dallas, TX (2) 9 1 10 2,085 222 2,307 8.6%
Memphis, TN (4) 5 -- 5 1,799 -- 1,799 6.7%
Austin, TX 6 -- 6 1,517 -- 1,517 5.6%
Nashville, TN 4 -- 4 1,166 -- 1,166 4.3%
San Antonio, TX 2 -- 2 544 -- 544 2.0%
Orlando, FL 1 1 2 280 231 511 1.9%
---- ---- ---- ------ ------ ------ -----
Total 86 5 91 25,288 1,613 26,901 100.0%
==== ==== ==== ====== ====== ====== =====
<FN>
(1) Includes a Current Community comprising 318 apartment homes in which Gables
has a 25% general partner interest.
(2) These locations include Development Communities, consisting of an aggregate
1,382 apartment homes that were contributed into the joint venture with
J.P. Morgan in March, 1999. See "Recent Developments" in Item 1.
(3) Includes a Current Community comprising 213 apartment homes that was sold
in March, 1999. See "Recent Developments" in Item 1.
(4) Includes a Current Community comprising 345 apartment homes in which Gables
has a 25% general partner interest.
</FN>
</TABLE>
<PAGE>
10
CURRENT COMMUNITIES. Gables developed 41 Current Communities (consisting of
11,531 apartment homes), and acquired 45 Current Communities (consisting of
13,757 apartment homes). All of the Current Communities are managed and operated
by the Company. The Current Communities typically are two and three story garden
apartments, townhomes and higher-density apartments. As of December 31, 1998,
the Current Communities had an average scheduled monthly rental rate per
apartment home of approximately $863 and, with the exception of two Current
Communities in the final lease-up phase, had a physical occupancy rate of 94%.
The average age of the Current Communities is approximately eight years. Most of
the Communities offer many attractive features designed to enhance their market
appeal, such as vaulted ceilings, fireplaces, dishwashers, disposals,
washer/dryer connections, ice-makers, patios and decks. Recreational facilities
include swimming pools, fitness facilities, playgrounds, picnic areas and tennis
and racquetball courts. In many Communities, Gables makes amenities and services
available to residents, such as aerobic classes, resident social events, dry
cleaning pick up and delivery, and the use of fax, computer and copy equipment.
In-depth market research, including periodic focus groups with residents and
feedback from on-site management personnel, is used to refine and enhance
management services and community design.
DEVELOPMENT COMMUNITIES. The Development Communities have been designed to
generally resemble the Current Communities developed by Gables and to offer
similar amenities. The Development Communities and the recently completed
Current Communities reflect Gables' continuing research of consumer preferences
for upscale multifamily rental housing and incorporate and emphasize garage
parking, increased privacy, high quality interiors and private telephone and
television systems. Certain information regarding Gables' Development
Communities at December 31, 1998 is presented below:
<TABLE>
<CAPTION>
Actual or Estimated Quarter of
Number of Total Percent at December 31, 1998 ---------------------------------
Apartment Budgeted ---------------------------- Const. Initial Const. Stabilized
Community Homes Cost Complete Leased Occupied Start Occupancy End Occupancy
--------- ------- ------- -------- ------ -------- ----- --------- ------- ---------
(millions) (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WHOLLY-OWNED DEVELOPMENT
COMMUNITY:
Orlando, FL
- -----------
Gables Celebration 231 $27 84% 75% 52% 3Q '97 2Q '98 2Q '99 2Q '99
---- ---
CO-INVESTMENT DEVELOPMENT
COMMUNITIES (2):
Atlanta, GA
- -----------
Gables Metropolitan I 435 $49 (3) 16% --- --- 2Q '98 3Q '99 3Q '00 4Q '00
Houston, TX
- -----------
Gables Raveneaux 382 28 (3) 13% --- --- 3Q '98 2Q '99 2Q '00 3Q '00
Dallas, TX
- -----------
Gables San Raphael 222 17 (3) 39% --- --- 3Q '98 2Q '99 4Q '99 1Q '00
Boca Raton, FL
- --------------
Gables San Michelle II 343 40 (3) 9% --- --- 3Q '98 2Q '99 3Q '00 4Q '00
----- ----
Totals 1,382 $134 (3)
===== ====
Grand Totals 1,613 $161
===== ====
<FN>
(1) Stabilized occupancy is defined as the earlier to occur of (i) 93%
occupancy or (ii) one year after completion of construction.
(2) These communities were contributed into the joint venture with J.P. Morgan
in March, 1999. See "Recent Developments" in Item 1.
(3) Under the terms of the joint venture agreement with J.P. Morgan, Gables is
required to fund 10% of the total budgeted costs for these communities. See
"Recent Developments" in Item 1.
</FN>
</TABLE>
<PAGE>
11
UNDEVELOPED SITES. As of December 31, 1998, Gables owned seventeen Undeveloped
Sites and intends to develop multifamily communities at those sites in the
future:
Metropolitan Estimated Number
Undeveloped Sites Area of Apartment Homes
- ----------------- ---------------- ------------------
Gables at Sugarloaf II Atlanta, GA 300
Gables at Sugarloaf III Atlanta, GA 300
Gables Metropolitan II Atlanta, GA 200
Gables Plaza Atlanta, GA 100
Gables Green Oaks II Dallas, TX 200
Gables State Thomas I Dallas, TX 290 (1)
Gables State Thomas II Dallas, TX 123
Gables State Thomas III Dallas, TX 300
Gables State Thomas IV Dallas, TX 300
Gables at Little Lake Bryan II/III Orlando, FL 448
Gables Celebration II Orlando, FL 315
Gables Meyer Park II Houston, TX 296
Gables New Territory II Houston, TX 248
Gables White Oak Houston, TX 186
Gables Colonnade II San Antonio, TX 150
Gables Palma Vista Boca Raton, FL 189 (1)
Gables Quail Ridge II Memphis, TN 148
-----
Total 4,093
=====
(1) Represents an Undeveloped Site that was contributed into the joint venture
with J.P. Morgan in March, 1999. See "Recent Developments" in Item 1.
There can be no assurance of when or if the Undeveloped Sites will be developed.
DEVELOPMENT RIGHTS. As of December 31, 1998, Gables had five Development Rights
which are located in three cities:
Metropolitan Estimated Number
Development Right Area of Apartment Homes
------------------ --------------- --------------------
Gables at Grand Isle Boca Raton, FL 320 (1)
Gables Crestwood Boca Raton, FL 290
Gables Stuart Boca Raton, FL 220
Gables at First Street Austin, TX 400
Gables at Little Lake Bryan IV Orlando, FL 340 (2)
-----
Total 1,570
=====
(1) Represents a Development Right that was contributed into the joint venture
with J.P. Morgan in March, 1999. See "Recent Developments" in Item 1.
(2) Gables has this land parcel under option.
There can be no assurance of when or if the Development Rights will be
exercised.
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 contained in the tables above under the
captions "Development Communities," "Undeveloped Sites" and "Development Rights"
are forward-looking statements. These forward-looking statements involve risks
and uncertainties and actual results may differ materially from those projected
in the forward-looking statements. Risks associated with Gables' development,
construction and land acquisition activities, which could impact the
forward-looking statements made, include: development and acquisition
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. Development of the Undeveloped Sites and the
Development Rights is subject to permits and other governmental approvals, as
well as ongoing business review by Gables of the underlying real estate
fundamentals and the impact on its capital structure. There can be no assurance
that Gables will decide or be able to develop the Undeveloped Sites, to complete
development of all or any of the communities subject to the Development Rights,
or to complete the number of apartment homes shown above.
<PAGE>
12
CURRENT COMMUNITY FEATURES AS OF DECEMBER 31, 1998
--------------------------------------------------
<TABLE>
<CAPTION>
Scheduled Rent
Number of Approximate Year Average @ 12/31/98 Per
Apartment Rentable Total Constructed/ Year Unit Size Occupancy ---------------
Community Name (1) Homes Sq. Ft. (2) Acreage Renovated Acquired (Sq. Ft.) @ 12/31/98 Unit Sq. Ft.
------------------ ----- ----------- ------- --------- -------- --------- ---------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HOUSTON, TX
Austin Colony (3) ........... 237 231,621 11.0 1984 1998 977 98% $880 $0.90
Baybrook Village ............ 776 620,428 26.4 1981 1990 800 96% 584 0.73
Gables Bradford Place ....... 372 320,322 13.3 1991 -- 861 95% 757 0.88
Gables Bradford Pointe (3)... 360 276,417 13.5 1990 -- 768 94% 660 0.86
Gables Champions ............ 404 367,588 29.7 1995 1997 910 87% 824 0.91
Gables CityPlaza ............ 246 217,374 7.5 1995 -- 884 95% 913 1.03
Gables Cityscape (3)......... 252 214,824 6.8 1991 -- 852 94% 937 1.10
Gables CityWalk/Waterford Sq (3) 317 255,823 8.7 1990/85 --/1992 807 96% 920 1.14
Gables Edgewater ............ 292 257,339 12.2 1990 -- 881 90% 837 0.95
Gables Meyer Park ........... 345 297,054 11.0 1993 -- 861 93% 889 1.03
Gables New Territory ........ 256 233,652 15.0 1998 -- 913 -- (4) 868 0.95
Gables of First Colony ...... 324 321,848 13.3 1996 1997 993 91% 933 0.94
Gables Piney Point (3)....... 246 227,880 7.5 1994 -- 926 92% 965 1.04
Gables Pin Oak Green ........ 582 593,478 14.4 1990 1996 1,020 91% 984 0.96
Gables Pin Oak Park ......... 477 486,308 11.9 1992 1996 1,020 91% 1,010 0.99
Gables River Oaks ........... 228 277,908 5.7 1993 1996 1,219 95% 1,404 1.15
Lions Head(3)................ 277 233,796 10.3 1983 1998 844 86% 757 0.90
Metropolitan Uptown (5)...... 318 290,141 8.9 1995 -- 912 92% 1,032 1.13
Rivercrest I (3)............. 140 118,020 5.1 1982 1987 843 91% 744 0.88
Rivercrest II (3)............ 140 118,020 5.0 1983 1998 843 86% 742 0.88
Westhollow Park ............. 412 370,640 18.3 1978-79 1990 900 92% 668 0.74
Windmill Landing (3)......... 259 224,689 9.8 1984 1998 868 94% 699 0.81
------- --------- ----- ----- ---- ----- ------
Totals/ Weighted Averages . 7,260 6,555,170 265.3 903 93% $848 $0.94
======= ========= ===== ===== ==== ===== ======
ATLANTA, GA
Briarcliff Gables ........... 104 128,976 5.2 1995 -- 1,240 99% $1,081 $0.87
Buckhead Gables ............. 162 122,548 3.5 1994(6) 1994 756 98% 817 1.08
Dunwoody Gables(3)........... 311 290,396 10.4 1995 -- 934 98% 834 0.89
Gables at Sugarloaf ......... 386 424,166 29.7 1998 -- 1,099 --(4) 845 0.77
Gables Cinnamon Ridge ....... 200 192,016 14.5 1980 1994 960 98% 685 0.71
Gables Cityscape ............ 192 159,360 5.5 1989 1994 830 97% 833 1.00
Gables Heights (7)........... 213 265,721 17.4 1984/85 1998 1,248 88% 1,254 1.00
Gables Mill ................. 438 406,676 36.1 1988 1997 928 97% 826 0.89
Gables Northcliff (3)........ 82 127,990 12.7 1978 1997 1,561 99% 1,153 0.74
Gables Over Peachtree ....... 263 239,814 (8) 1.4 1996(6) 1995 912 96% 1,039 1.14
Gables Vinings .............. 315 336,735 15.2 1997 -- 1,069 97% 929 0.87
Gables Walk ................. 310 367,226 19.7 1996-97 1997 1,185 91% 1,018 0.86
Gables Wood Arbor (3)........ 140 127,540 9.9 1987 -- 911 95% 699 0.77
Gables Wood Crossing (3)..... 268 257,012 22.3 1985-86 -- 959 97% 735 0.77
Gables Wood Glen (3)......... 380 377,340 23.8 1983 -- 993 88% 687 0.69
Gables Wood Knoll (3)........ 312 311,064 19.6 1984 -- 997 94% 718 0.72
Lakes at Indian Creek (3).... 603 552,384 49.8 1969-72 1993 916 95% 602 0.66
Rock Springs Estates ........ 295 298,302 28.7 1945-92 1997 1,011 95% 934 0.92
Roswell Gables I ............ 384 417,288 28.3 1995 -- 1,087 94% 875 0.81
Roswell Gables II ........... 284 334,268 28.3 1997 -- 1,177 94% 875 0.74
Spalding Gables (3).......... 252 249,333 11.2 1995 -- 989 98% 867 0.88
Wildwood Gables (3).......... 546 619,710 37.9 1992-93(6) 1991 1,135 97% 863 0.76
------ --------- ------ ------- ---- ----- ------
Totals/ Weighted Averages . 6,440 6,605,865 431.1 1,026 95% $ 842 $0.82
====== ========= ====== ======= ==== ===== ======
BOCA RATON, FL
Boca Place (3)............... 180 175,812 9.4 1984 1998 977 94% $ 855 $0.87
Cotton Bay (3)............... 444 436,460 37.6 1986 1998 983 95% 696 0.71
Hampton Lakes (3)............ 300 319,396 11.0 1986 1998 1,065 87% 756 0.71
Hampton Place ............... 368 352,528 14.1 1985 1998 958 92% 721 0.75
Kings Colony (3)............. 480 426,590 18.8 1986 1998 889 96% 751 0.85
Mahogany Bay (3)............. 328 330,928 25.4 1986 1998 1,009 95% 746 0.74
Mizner on the Green ......... 246 311,176 8.9 1996 1998 1,265 91% 1,564 1.24
San Michele ................. 249 332,683 32.4 1998 1998 1,336 96% 1,395 1.04
San Remo .................... 180 329,978 11.8 1995 1998 1,833 90% 1,239 0.68
Town Colony (3).............. 172 147,724 10.0 1985 1998 859 97% 822 0.96
Vinings at Boynton Beach I... 252 302,148 18.0 1996 1998 1,199 95% 842 0.70
Vinings at Boynton Beach II 296 357,653 15.9 1997 1998 1,208 93% 895 0.74
Vinings at Hampton Village(3) 168 202,752 8.6 1988 1998 1,207 92% 802 0.66
Vinings at Town Place ....(3) 312 260,192 13.0 1987 1998 834 94% 822 0.99
Vinings at Wellington ..... 222 297,138 12.7 1998 1998 1,338 94% 991 0.74
------ --------- ----- ------ ----- ----- ------
Totals/ Weighted Averages 4,197 4,583,158 247.6 1,092 93% $ 892 $0.82
====== ========= ===== ====== ===== ===== ======
</TABLE>
<PAGE>
13
CURRENT COMMUNITY FEATURES AS OF DECEMBER 31, 1998
--------------------------------------------------
<TABLE>
<CAPTION>
Scheduled Rent
Number of Approximate Year Average @ 12/31/98 Per
Apartment Rentable Total Constructed/ Year Unit Size Occupancy ---------------
Community Name (1) Homes Sq. Ft. (2) Acreage Renovated Acquired (Sq. Ft.) @ 12/31/98 Unit Sq. Ft.
------------------ ----- ----------- ------- --------- -------- --------- ---------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DALLAS, TX
Arborstone ................ 536 383,360 24.5 1985 1993 715 96% $ 501 $0.70
Gables at Pearl Street .... 108 117,688 3.6 1995 -- 1,090 96% 1,432 1.31
Gables CityPlace .......... 232 244,056 7.1 1995 1997 1,052 94% 1,439 1.37
Gables Green Oaks I ....... 300 286,740 12.8 1996 -- 956 89% 836 0.87
Gables Mirabella .......... 126 114,902 1.4 1996 1997 912 99% 1,266 1.39
Gables Preston ............ 126 138,107 10.6 1995 -- 1,096 90% 1,074 0.98
Gables Spring Park ........ 188 198,178 12.3 1996 -- 1,054 93% 953 0.90
Gables Turtle Creek ....... 150 150,930 3.1 1995 1996 1,006 77% 1,326 1.32
Gables Valley Ranch(3)..... 319 325,534 14.8 1994 -- 1,020 94% 943 0.92
------ ---------- ------- ------ ---- ------ ------
Totals/ Weighted Averages 2,085 1,959,495 90.2 940 93% $ 950 $1.01
====== ========== ======= ====== ==== ====== ======
MEMPHIS, TN
Arbors of Harbortown (5)... 345 341,258 15.0 1991 -- 989 91% $847 $0.86
Gables Cordova (3)......... 464 434,461 32.2 1986 -- 936 92% 704 0.75
Gables Germantown ......... 252 293,012 30.5 1997 -- 1,163 90% 935 0.80
Gables Quail Ridge ........ 238 283,848 20.3 1997 -- 1,193 94% 917 0.77
Gables Stonebridge (3)..... 500 439,646 34.0 1993-96 1996 879 93% 695 0.79
------ ---------- -------- ------ ---- ---- ------
Totals/ Weighted Averages 1,799 1,792,225 132.0 996 92% $789 $0.79
====== ========== ======== ====== ==== ==== ======
NASHVILLE, TN
Brentwood Gables .......... 254 287,594 14.5 1996 -- 1,132 93% $893 $0.79
Gables Hendersonville (3).. 364 342,982 21.0 1991 -- 942 92% 670 0.71
Gables Hickory Hollow I (3) 272 247,322 19.0 1988 -- 909 94% 639 0.70
Gables Hickory Hollow II (3) 276 259,704 18.0 1987 -- 941 94% 639 0.68
------ ---------- -------- ----- ---- ----- ------
Totals/ Weighted Averages 1,166 1,137,602 72.5 976 93% $704 $0.72
====== ========== ======== ===== ==== ===== ======
AUSTIN, TX
Gables at the Terrace ..... 308 292,292 18.6 1998 1998 949 94% $1,043 $1.10
Gables Bluffstone ......... 256 251,904 32.7 1998 -- 984 95% 1,057 1.07
Gables Central Park ....... 273 257,043 6.9 1997 -- 942 94% 1,173 1.25
Gables Great Hills ........ 276 228,930 23.7 1993 -- 829 96% 816 0.98
Gables Park Mesa .......... 148 161,540 24.3 1992 1997 1,091 95% 1,115 1.02
Gables Town Lake .......... 256 239,264 12.0 1996 -- 935 98% 1,195 1.28
------ ---------- -------- ----- ---- ------ ------
Totals/ Weighted Averages 1,517 1,430,973 118.2 943 95% $1,060 $1.12
====== ========== ======== ===== ===== ====== ======
SAN ANTONIO, TX
Gables Colonnade I ........ 312 284,196 12.0 1995 -- 911 91% $801 $0.88
Gables Wall Street ........ 232 220,180 16.2 1996 -- 949 90% 810 0.85
------ ---------- -------- ----- ---- ----- ------
Totals/ Weighted Averages 544 504,376 28.2 927 91% $804 $0.87
====== ========== ======== ===== ==== ===== ======
ORLANDO, FL
Commons at Lake Bryan I ... 280 289,436 16.5 1998 -- 1,034 100% (9) (9)
====== ========== ======== ===== ==== ===== ======
Grand Totals/Weighted Averages ... 25,288 24,858,300 1,401.6 983 94% $863 $0.88
====== ========== ======== ===== ==== ===== ======
<FN>
(1) Except as noted in footnote (5) hereof, Gables holds fee simple title to
each of the communities. Except as noted in footnote (3) and (5) hereof,
the communities are unencumbered.
(2) In the Atlanta and Tennessee markets, rentable area is measured including
any patio or balcony. In the Texas markets, rentable area is measured using
only the heated area. In the Florida markets, rentable area is measured
using only the air conditioned area.
(3) The denoted communities secure indebtedness totaling $366.3 million as of
December 31, 1998.
(4) These communities are in the lease-up stage and as of December 31, 1998
occupancy was as follows: Gables New Territory: 76% and Gables at
Sugarloaf: 69%
(5) Gables holds an indirect 25% general partner interest in these communities.
These communities secure indebtedness totaling $34.2 million at December
31, 1998.
(6) Year renovated; these communities were originally constructed as follows:
Buckhead Gables: 1964; Gables Over Peachtree: 1969-1970; and Wildwood
Gables: 1972.
(7) This community was sold in March, 1999. See "Recent Developments" in Item
1.
(8) This rentable area is exclusive of approximately 18,000 square feet of
rentable commercial space.
(9) This community is leased to a single user group pursuant to a triple net
master lease. Accordingly, scheduled rent data is not reflected as it is
not comparable to the rest of Gables' portfolio.
</FN>
</TABLE>
<PAGE>
14
ITEM 3. LEGAL PROCEEDINGS
Neither Gables nor any of the Communities is presently subject to any material
litigation or, to Gables' knowledge, is any litigation threatened against Gables
or any of the Communities, other than routine actions for negligence or other
claims and administrative proceedings arising in the ordinary course of
business, some of which are expected to be covered by liability insurance and
all of which collectively are not expected to have a material adverse effect on
the business or financial condition of Gables.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares began trading on the NYSE on January 19, 1994, under
the symbol "GBP." The following table sets forth the high and low sales prices
per share of the Common Shares for the periods indicated, as reported by the
NYSE, as well as the Company's quarterly per share dividends to shareholders for
the period indicated.
Dividend
Quarter Ended High Low Declared
- ------------- ------ ----- ------------
March 31, 1997 $28.7500 $25.1250 $0.49
June 30, 1997 26.6250 23.6250 0.49
September 30, 1997 27.5625 25.1250 0.50
December 31, 1997 28.2500 25.5625 0.50
March 31, 1998 28.1250 25.9375 0.50
June 30, 1998 28.0625 26.2500 0.50
September 30, 1998 28.3125 22.0000 0.51
December 31, 1998 26.9375 21.7500 0.51
March 31, 1999 (through March 18, 1999) 24.5000 22.0000 0.51
The Company has determined that, for Federal income tax purposes, approximately
67.6% of the distributions for each of the four quarters of 1998 represented
ordinary dividend income to its shareholders and the remaining 32.4% represented
return of capital to its shareholders.
Distributions are declared at the discretion of the Board of Trustees and will
depend on actual funds from operations of the Company, its financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Trustees may deem
relevant. The Board of Trustees may modify the Company's distribution policy
from time to time.
Certain of Gables' loan 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 loan 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>
15
On March 18, 1999 there were 349 holders of record of the Company's 26,361,558
outstanding Common Shares. This does not include beneficial owners for whom Cede
& Co. or others act as nominee.
The Company has implemented a dividend reinvestment plan under which holders of
Common Shares may elect automatically to reinvest distributions in additional
Common Shares at a 2% discount to the then current market price of Common Shares
and may purchase additional Common Shares for cash (up to $20,000 per quarter)
at 100% of the then current market price.
On October 20, 1998, the Company issued to a limited partner of the Operating
Partnership 226,575 Common Shares (valued at approximately $6.0 million at the
time of issuance) in exchange for 226,575 Units. Such shares were issued in
reliance on an exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder.
On November 12, 1998, the Operating Partnership issued 2,000,000 of its Series B
Preferred Units (the "Series B Units") to an institutional investor at a gross
price of $25.00 per unit, resulting in net proceeds to the Operating Partnership
of approximately $48.7 million. The Series B Units are exchangeable into the
Company's 8.625% Series B Cumulative Redeemable Preferred Shares on a
one-for-one basis. The exchange right is exercisable, in whole but not in part,
at the option of holders of 51% of the Series B Units (i) at any time on or
after November 15, 2008, (ii) at any time if full quarterly distributions shall
not have been made for six quarters, whether or not consecutive, or (iii) upon
the occurrence of certain specified events related to the treatment of the
Series B Units for Federal income tax purposes. The Series B Units were issued
in reliance on an exemption from registration under Section 4(2) of the
Securities Act, and the rules and regulations promulgated thereunder.
On December 9, 1998, the Operating Partnership issued 18,482 Units (valued at
approximately $0.5 million at the time of issuance) in connection with the
April, 1998 acquisition of four apartment communities comprising 913 apartment
homes located in Houston. Such Units were issued in reliance on an exemption
from registration under Section 4(2) of the Securities Act, and the rules and
regulations promulgated thereunder.
Under the terms of the Operating Partnership's agreement of limited partnership,
the Operating Partnership is obligated to redeem each Unit at the request of the
holder thereof for cash equal to the fair market value of a Common Share at the
time of such redemption, provided that the Company at its option may elect to
acquire any such Unit presented for redemption for one Common Share or cash.
ITEM 6. SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected financial and operating information on a
historical basis for the Company and on a combined historical and pro forma
basis for the Company's predecessors as applicable. The following information
should be read in conjunction with all of the financial statements and notes
thereto included elsewhere herein. The consolidated operating information of the
Company for the years ended December 31, 1998, 1997 and 1996 have been derived
from the financial statements audited by Arthur Andersen LLP, independent public
accountants, whose report with respect thereto is included elsewhere herein. The
consolidated operating information of the Company for the year ended December
31, 1995 and for the period from January 26, 1994 to December 31, 1994 and the
combined operating information of the Company's predecessors for the period from
January 1, 1994 to January 25, 1994 has been derived from audited financial
statements not included in such report.
The unaudited selected pro forma financial operating information is presented as
if (i) the IPO and the various related formation transactions occurred as of the
beginning of the period presented and (ii) the Company qualified as a REIT,
distributed all of its taxable income and, therefore, incurred no income tax
expense during the period. The pro forma financial information is not
necessarily indicative of what the actual financial position and results of
operations of the Company would have been as of the date or for the period
indicated, nor does it purport to represent the Company's future financial
position and results of operations.
<PAGE>
16
SELECTED FINANCIAL AND OPERATING INFORMATION
<TABLE>
<CAPTION>
Gables Residential Trust and its Predecessors
---------------------------------------------------------------
Historical
--------------------------------------- Pro Forma Historical
1998 1997 1996 1995 1994 (1) 1994 (2)
-----------------------------------------------------------------
(Unaudited)
(in thousands, except property and per share information)
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Rental revenues ................................................ $199,292 $132,371 $104,543 $72,703 $57,291 $57,201
Other property revenues ........................................ 9,988 6,322 4,928 3,268 2,228 2,225
-------- -------- -------- ------- -------- -------
Total property revenues ................................... 209,280 138,693 109,471 75,971 59,519 59,426
Other revenues ................................................. 7,344 4,745 6,710 5,789 7,350 7,396
-------- -------- -------- ------- -------- -------
Total revenues ............................................ 216,624 143,438 116,181 81,760 66,869 66,822
-------- -------- -------- ------- -------- -------
Property operating and maintenance expenses
(exclusive of items shown separately below) .................. 70,502 47,592 38,693 28,228 22,868 22,847
Depreciation and amortization .................................. 40,650 25,194 18,892 12,669 9,974 9,906
Property management expenses (owned and third party) ........... 7,977 5,696 5,617 5,348 5,603 5,774
General and administrative expenses ............................ 6,242 3,248 3,045 2,869 1,779 1,742
Interest expense and credit enhancement fees ................... 39,974 25,313 21,688 13,798 9,584 10,084
Amortization of deferred financing costs ....................... 984 992 1,348 932 1,057 1,127
-------- -------- -------- ------- -------- -------
Total expenses ............................................ 166,329 108,035 89,283 63,844 50,865 51,480
-------- -------- -------- ------- -------- -------
Equity in income of joint ventures ............................. 359 320 280 64 270 270
Interest income ................................................ 417 371 363 389 268 268
Loss on treasury locks ......................................... (5,637) (1,178) 0 0 0 0
-------- -------- -------- ------- -------- -------
Income before gain on sale of real estate assets ............... 45,434 34,916 27,541 18,369 16,542 15,880
Gain on sale of real estate assets ............................. 0 5,349 0 0 0 0
-------- -------- -------- ------- -------- -------
Income before minority interest and extraordinary loss.......... 45,434 40,265 27,541 18,369 16,542 15,880
Minority interest of common unitholders......................... (7,142) (5,611) (4,640) (4,029) (3,904) (3,768)
Minority interest of preferred unitholders...................... (587) 0 0 0 0 0
-------- -------- -------- ------- -------- -------
Income before extraordinary loss, net .......................... 37,705 34,654 22,901 14,340 12,638 12,112
Extraordinary loss, net of minority interest ................... 0 (602) (520) (784) (148) (148)
-------- -------- -------- ------- -------- -------
Net income ..................................................... 37,705 34,052 22,381 13,556 12,490 11,964
Dividends to preferred shareholders............................. (9,665) (4,163) 0 0 0 0
-------- -------- -------- ------- -------- -------
Net income available to common shareholders..................... $28,040 $29,889 $22,381 $13,556 $12,490 $11,964
======== ======== ======== ======= ======== =======
Weighted average shares outstanding - basic .................... 24,118 19,788 16,788 11,436 10,236 10,243
Weighted average shares outstanding - diluted .................. 30,340 23,591 20,283 14,660 13,452 13,459
PER COMMON SHARE INFORMATION:
Income before extraordinary loss - basic ....................... $1.16 $1.54 $1.36 $1.25 $1.23 $1.19
Net income - basic ............................................. 1.16 1.51 1.33 1.19 1.22 1.18
Income before extraordinary loss - diluted ..................... 1.16 1.53 1.35 1.25 1.23 1.19
Net income - diluted ........................................... 1.16 1.50 1.32 1.18 1.22 1.18
Dividends paid (3) ............................................. 2.02 2.47 1.93 1.83 N/A 1.225
Dividends declared (3) ......................................... 2.02 1.98 1.94 1.86 N/A 1.675
OTHER INFORMATION:
Cash flows provided by operating activities ..................... $90,147 $69,519 $51,629 $29,088 $28,868 $28,868
Cash flows used in investing activities .........................(358,855) (228,969) (213,596) (148,234) (150,534) (150,534)
Cash flows provided by financing activities ..................... 272,583 158,244 157,823 123,619 114,245 114,245
Funds from operations (4)........................................ 80,989 56,866 46,238 30,927 26,313 25,561
Gross operating margin (5)....................................... 66.3% 65.7% 64.7% 62.8% 61.6% 61.6%
Completed communities at year-end ............................... 86 61 48 38 29 29
Apartment homes in completed communities at year-end ............ 25,288 18,479 15,244 11,946 9,785 9,785
Average monthly revenue per apartment home (6)................... $ 780 $ 755 $ 700 $ 620 $ 574 $ 574
BALANCE SHEET INFORMATION:
Real estate, before accumulated depreciation(7)................$1,681,961 $1,056,228 $784,600 $591,233 $437,782 $437,782
Total assets (7)............................................... 1,586,317 981,167 759,660 562,827 416,847 416,847
Total debt ..................................................... 812,788 435,362 390,321 286,259 229,305 229,305
Shareholders' equity, minority/predecessors' interest
and Series Z Preferred Shares.............................. 718,765 513,497 334,637 248,010 161,594 161,594
FUNDS FROM OPERATIONS RECONCILIATION:
Net income available to common shareholders..................... $28,040 $29,889 $22,381 $13,556 $12,490 $11,964
Extraordinary loss, net of minority interest (8)................ 0 602 520 832 148 148
Minority interest of common unitholders......................... 7,142 5,611 4,640 4,029 3,904 3,768
Gain on sale of real estate assets ............................. 0 (5,349) 0 0 0 0
Loss on treasury locks (9)...................................... 5,637 1,178 0 0 0 0
Amortization of loss on used treasury locks .................... (142) 0 0 0 0 0
Real estate depreciation (8).................................... 40,312 24,935 18,697 12,510 9,771 9,681
-------- -------- -------- ------- -------- -------
Funds from operations .......................................... $80,989 $56,866 $46,238 $30,927 $26,313 $25,561
======== ======== ======== ======= ======== =======
<FN>
<PAGE>
17
NOTES TO SELECTED FINANCIAL AND OPERATING INFORMATION
(In Thousands, Except Property and Per Share Information)
(1) The pro forma information reflects adjustments to the historical
information of the Company's predecessors from January 1, 1994 to January
25, 1994 related to the IPO principally for the acquisition of certain
properties and additional expenses associated with reporting as a public
company, reduction of interest expense due to debt repayment and increased
depreciation.
(2) The historical information for the year ended December 31, 1994 represents
the combined historical information of the Company's predecessors from
January 1, 1994 to January 25, 1994 and the consolidated historical
information of the Company from January 26, 1994 to December 31, 1994. The
weighted average number of shares outstanding and the per share information
pertains only to the period from January 26, 1994 to December 31, 1994.
(3) The Company's dividends paid and declared for the year ended December 31,
1994 include the Company's first quarterly dividend of $0.325 per share for
the period January 26, 1994 to March 31, 1994. These dividends were the
equivalent of a $1.80 per share dividend for the year.
(4) 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. Gables
computes FFO in accordance with standards established by the National
Association of Real Estate Investment Trusts ("NAREIT"). FFO as defined by
NAREIT represents net income (loss) determined in accordance with generally
accepted accounting principles ("GAAP"), excluding gains or losses from
sales of assets or debt restructuring, plus certain non-cash items,
primarily real estate depreciation, and after adjustments for
unconsolidated partnerships and joint ventures. In addition, extraordinary
or unusual items, along with significant non-recurring events that
materially distort the comparative measure of FFO are typically disregarded
in its calculation. FFO presented herein is not necessarily comparable to
FFO presented by other real estate companies due to the fact that not all
real estate companies use the same definition. However, Gables' FFO is
comparable to the FFO of real estate companies that use the NAREIT
definition. FFO 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 and
unitholders. Additionally, FFO does not represent cash flows from
operating, investing or financing activities as defined by GAAP. Reference
is made to "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.
(5) Gross operating margin represents (i) total property revenues less property
operating and maintenance expenses (exclusive of real estate depreciation
expense) as a percentage of (ii) total property revenues.
(6) Average monthly revenue per apartment home is equal to the average monthly
rental revenue collected during the period, divided by the average monthly
number of apartment homes occupied during the period.
(7) In an UPREIT structure, the value attributed to Units issued to
controlling, continuing investors is not reflected because such accounting
is not allowed under GAAP. On a pro forma basis, the real estate assets
before accumulated depreciation and total assets as of December 31, 1998
would be $1,794,455 and $1,698,811, respectively, if such value (exclusive
of the effect of depreciation) was reflected.
(8) Reflects extraordinary loss and real estate depreciation for both
wholly-owned communities and joint ventures, as applicable.
(9) This item is disregarded in the calculation of FFO as it represents a
significant non-recurring event that materially distorts the comparative
measurement of Gables' performance over time. While Gables may utilize
derivative financial instruments, such as rate locks, to hedge interest
rate exposure by modifying the interest rate characteristics of prospective
financing transactions, it believes the events and circumstances that
resulted in these losses are non-recurring in nature.
</FN>
</TABLE>
<PAGE>
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Amounts in Thousands, Except Property and Per Share Amounts)
Overview
- --------
Gables is a real estate investment trust (a "REIT") focused within the
multifamily industry in the Sunbelt Region of the 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.
The Company's objective is to increase shareowner value by being a profitable
owner and operator of Class AA/A multifamily apartment communities in the
Sunbelt Region. To achieve its objective, Gables employs a number of business
strategies. First, Gables adheres to a strategy of owning and operating Class
AA/A apartment communities which should maintain high levels of occupancy and
rental rates. Gables believes that such communities, when supplemented with high
quality services and amenities, attract the affluent renter-by-choice, who is
willing to pay a premium for conscientious service and high quality communities.
Accordingly, Gables' communities possess innovative architectural designs and
numerous amenities and services that Gables believes are desirable by its target
customers. Second, Gables seeks to grow cash flow from operating communities
through innovative, proactive property management that focuses on resident
satisfaction and retention, increases in property rents and occupancy levels,
and the control of operating expenses through improved economies of scale.
Third, Gables develops and acquires high-quality apartment communities in
in-fill locations and master-planned communities near major employment centers
in the Sunbelt with the objective of achieving critical mass in the most
desirable submarkets. Finally, due to the cyclical nature of the real estate
markets, Gables has adopted an investment strategy based on strong local
presence and expertise, which it believes will allow for growth through
acquisition and development (as warranted by underlying market fundamentals) and
will help ensure favorable initial and long-term returns. Gables believes the
successful execution of these operating and investment strategies will result in
operating cash flow growth.
Gables believes it is well positioned to continue achieving its objective
because of its long-established presence as a fully integrated real estate
management, development, construction and acquisition company in its markets.
Gables believes that its established, local market presence creates a
competitive advantage in generating increased cash flow from (i) property
operations during different economic cycles and (ii) new investment
opportunities that involve site selection, market information and requests for
entitlements and zoning petitions. Gables' markets are geographically
independent, rely on diverse economic foundations and have experienced
above-average job growth.
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, but less than the increase in property revenues, for the coming
twelve months. 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, reduce indebtedness or, in certain circumstances
with appropriate approval from the board of trustees, repurchase outstanding
common shares. Gables 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 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 the risk
factors set forth in the relevant paragraphs of "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
report.
<PAGE>
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
Recent Portfolio Acquisitions
- -----------------------------
On April 1, 1998, Gables acquired the properties and operations of Trammell Crow
Residential South Florida ("TCR/SF"), which consisted of fifteen multifamily
apartment communities containing a total of 4,197 apartment homes, and all of
TCR/SF's residential construction and development and third party management
activities in South Florida (collectively, the "South Florida Acquisition"). In
consideration for such properties and operations, Gables (i) paid $155.0 million
in cash, (ii) assumed approximately $135.9 million of tax-exempt debt and (iii)
issued approximately 2,348 Units, valued at approximately $64.9 million. The
cash portion of the purchase price was funded through borrowings under Gables'
unsecured credit facilities (the "Credit Facilities"). In addition, up to $12.5
million of the purchase price was deferred by Gables until January 1, 2000, at
which time Gables will issue a number of Units equal in value to such deferred
amount. The acquisition increased the size of Gables' portfolio under management
on April 1, 1998 from approximately 28,000 to 40,000 apartment homes.
In April, 1998, Gables acquired four multifamily apartment communities
comprising a total of 913 apartment homes located in Houston, Texas (the
"Greystone Acquisition"). In connection with such acquisition, Gables assumed
approximately $31.0 million of indebtedness, at fair value, and issued
approximately 665 Units valued at $18.0 million.
Secondary Offerings and Issuances of Operating Partnership Units
- ----------------------------------------------------------------
SECONDARY COMMON SHARE OFFERINGS
Since the IPO, the Company has issued a total of 14,831 common shares in eight
offerings generating $347,771 in net proceeds which were generally used (i) to
reduce outstanding indebtedness under interim financing vehicles utilized to
fund Gables' development and acquisition activities (the "Interim Financing
Vehicles") and (ii) for general working capital purposes including funding of
future development and acquisition activities.
PREFERRED SHARE OFFERINGS
On July 24, 1997, the Company issued 4,600 shares of 8.30% Series A Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) (the
"Series A Preferred Shares"). The net proceeds from this offering of
approximately $111.0 million were used to reduce outstanding indebtedness under
the Interim Financing Vehicles. The Series A Preferred Shares, which may be
redeemed by the Company at $25.00 per share, plus accrued and unpaid dividends,
on or after July 24, 2002, have no stated maturity, sinking fund or mandatory
redemption and are not convertible into any other securities of the Company.
On June 18, 1998, the Company issued 180 shares of 5.0% Series Z Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) (the
"Series Z Preferred Shares") in connection with the acquisition of a parcel of
land for future development. The Series Z Preferred Shares, which may be
redeemed by the Company at $25.00 per share, plus accrued and unpaid dividends,
at any time, are subject to mandatory redemption on June 18, 2018. The Series Z
Preferred Shares are not subject to any sinking fund and are not convertible
into any other securities of the Company.
ISSUANCES OF COMMON OPERATING PARTNERSHIP UNITS
Since the IPO, Gables has issued a total of 3,917 Units in connection with the
South Florida Acquisition, the Greystone Acquisition and the acquisition of
operating apartment communities and a parcel of land for future development.
ISSUANCE OF PREFERRED OPERATING PARTNERSHIP UNITS
On November 12, 1998, the Operating Partnership issued 2,000 of its 8.625%
Series B Preferred Units (the "Series B Preferred Units") to an institutional
investor. The net proceeds from this issuance of approximately $48.7 million
were used to reduce outstanding indebtedness under the Interim Financing
Vehicles. The Series B Preferred Units may be redeemed by the Company at its
option after November 14, 2003 and are exchangeable by the holder into 8.625%
Series B Cumulative Redeemable Preferred Shares of the Company on a one-for-one
basis. This exchange right is generally not exercisable until after November 14,
2008. The Series B Preferred Units have no stated maturity, sinking fund, or
mandatory redemption.
<PAGE>
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF OPERATING RESULTS OF GABLES FOR THE YEAR ENDED DECEMBER 31, 1998
(THE "1998 PERIOD") TO THE YEAR ENDED DECEMBER 31, 1997 (THE "1997 PERIOD").
Gables' net income is generated primarily from the operation of its apartment
communities. For purposes of evaluating comparative operating performance,
Gables categorizes its operating communities based on the period each community
reaches stabilized occupancy. A community is considered by Gables 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 Gables' apartment communities combined for the
years ended December 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------ ----------- ----------- -----------
$ %
1998 1997 Change Change
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
RENTAL AND OTHER REVENUE:
Same store communities (1) $119,156 $114,400 $4,756 4.2%
Communities stabilized during the 1998 Period, but not during the
1997 Period (2) 19,700 15,108 4,592 30.4%
Development and lease-up communities (3) 9,827 1,586 8,241 519.6%
Acquired communities (4) 60,597 7,421 53,176 716.6%
Sold communities (5) 0 178 (178) -100.0%
------------ ----------- ----------- -----------
Total property revenues $209,280 $138,693 $70,587 50.9%
------------ ----------- ----------- -----------
PROPERTY OPERATING AND MAINTENANCE EXPENSE (EXCLUSIVE OF REAL ESTATE
DEPRECIATION AND AMORTIZATION):
Same store communities (1) $40,820 $39,727 $1,093 2.8%
Communities stabilized during the 1998 Period, but not during the
1997 Period (2) 6,539 5,035 1,504 29.9%
Development and lease-up communities (3) 2,220 427 1,793 419.9%
Acquired communities (4) 20,923 2,288 18,635 814.5%
Sold communities (5) 0 115 (115) -100.0%
------------ ----------- ------------ ----------
Total specified expenses $70,502 $47,592 $22,910 48.1%
------------ ----------- ----------- -----------
Revenues in excess of specified expenses $138,778 $91,101 $47,677 52.3%
------------ ----------- ----------- -----------
Revenues in excess of specified expenses as a percentage of total
property revenues 66.3% 65.7% --- 0.6%
------------ ----------- ----------- -----------
<FN>
(1) Communities which were owned and fully stabilized throughout both the 1998
Period and 1997 Period.
(2) Communities which were completed and fully stabilized during all of the
1998 Period, but were not completed and fully stabilized during all of the
1997 Period.
(3) Communities in the development/lease-up phase which were not fully
stabilized during all or any of the 1998 Period.
(4) Communities which were acquired subsequent to January 1, 1997.
(5) Communities which were sold subsequent to January 1, 1997.
</FN>
</TABLE>
<PAGE>
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
Total property revenues increased $70,587, or 50.9%, from $138,693 to $209,280
due primarily to increases in the number of apartment homes resulting from the
acquisition and development 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>
Percent
Increase Increase
(Decrease) (Decrease) Increase
Number of in Total in Total Occupancy (Decrease)
Number of Apartment Percent Property Property During the in
Market Communities Homes of Total Revenues Revenues 1998 Period Occupancy
------ ---------- ----- -------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston 14 5,045 37.7% $2,741 6.3% 94.8% 0.3%
Atlanta 12 3,470 25.9% 708 2.5% 95.8% 0.9%
Dallas 7 1,659 12.4% 942 5.9% 94.0% -0.3%
Nashville 4 1,166 8.7% -178 -1.9% 94.5% -1.5%
Memphis 2 964 7.2% 231 3.4% 94.9% 0.7%
San Antonio 2 544 4.1% 111 2.4% 92.4% -0.5%
Austin 2 532 4.0% 201 3.7% 94.0% -0.2%
----- ------ ----- ------ ----- ----- -----
43 13,380 100.0% $4,756 4.2% 94.8% 0.2%
===== ====== ===== ====== ===== ===== =====
</TABLE>
Communities stabilized during the 1998 Period but not during the 1997 Period:
Increase
Number of in Total Occupancy
Number of Apartment Percent Property During the
Market Communities Homes Of Total Revenues 1998 Period
- ------ ----------- ----- -------- -------- -----------
Atlanta 4 1,246 61.2% $4,024 95.0%
Memphis 2 490 24.1% 509 94.1%
Dallas 1 300 14.7% 59 91.2%
----- ------ ------- ------ -------
7 2,036 100.0% $4,592 94.2%
===== ====== ======= ====== =======
Development and lease-up communities:
Increase
Number of In Total Occupancy
Number of Apartment Percent Property During the
Market Communities Homes Of Total Revenues 1998 Period
- ------ ---------- ----- -------- -------- -----------
Austin 2 529 31.5% $3,569 76.3%
Orlando 2 511 30.4% 2,521 48.7%
Atlanta 1 386 22.9% 1,164 29.5%
Houston 1 256 15.2% 987 34.8%
----- ------ ------- ----- ------
6 1,682 100.0% $8,241 50.8%
===== ====== ======= ===== ======
<PAGE>
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
Other revenues increased $2,599, or 54.8%, from $4,745 to $7,344 due primarily
to an increase in property management revenues of $1,501, or 49.5%, from $3,032
to $4,533 resulting from a net increase in properties managed by Gables for
third parties primarily as a result of the South Florida Acquisition, in
addition to an increase in income from certain ancillary services.
Property operating and maintenance expense (exclusive of depreciation and
amortization) increased $22,910, or 48.1%, from $47,592 to $70,502 due to an
increase in apartment homes resulting from the acquisition and development of
additional communities and an increase in property operating and maintenance
expense for same store communities of 2.8%. The same store increase in operating
expenses represents increased payroll costs, property taxes and maintenance
costs, offset in part by reduced utilities, marketing and insurance expenses.
Real estate asset depreciation and amortization expense increased $15,375, or
62.2%, from $24,712 to $40,087 due primarily to the acquisition and development
of additional communities.
Property management expense for owned communities and third/related party
properties on a combined basis increased $2,281, or 40.0%, from $5,696 to $7,977
due primarily to a net increase of 11,000 apartment homes managed from 27,000 in
the 1997 Period to 38,000 in the 1998 Period resulting primarily from the South
Florida Acquisition, in addition to inflationary increases in expenses and
certain non-recurring expense savings in the 1997 Period. Gables allocates
property management expenses to both owned communities and third/related party
properties based on the proportionate share of total apartment homes and units
managed.
General and administrative expense increased $2,994, or 92.2%, from $3,248 to
$6,242 due primarily to (i) compensation and other costs for new positions
associated with the South Florida Acquisition, (ii) increased compensation costs
and (iii) the expensing of internal costs of identifying and acquiring operating
apartment communities effective March 20, 1998 in accordance with EITF No.
97-11.
Interest expense increased $13,715, or 55.3%, from $24,804 to $38,519 due to an
increase in operating debt associated with the acquisition and development of
additional communities, including the debt assumed in connection with the South
Florida Acquisition and the Greystone Acquisition. These increases in interest
expense have been offset in part as a result of the offerings Gables has
consummated between periods, the proceeds of which have been primarily used to
reduce indebtedness.
Loss on treasury locks of $5,637 in the 1998 Period represents mark to market
losses recorded upon the expiration of the terms of treasury lock agreements
that were (i) entered into in anticipation of a projected debt offering, (ii)
subsequently extended in connection with modifications in the projected timing
of the debt offering and (iii) terminated due to economic conditions affecting
the unsecured debt market.
<PAGE>
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
COMPARISON OF OPERATING RESULTS OF GABLES FOR THE YEAR ENDED DECEMBER 31, 1997
(THE "1997 PERIOD") TO THE YEAR ENDED DECEMBER 31, 1996 (THE "1996 PERIOD").
Gables' net income is generated primarily from the operation of its apartment
communities. For purposes of evaluating comparative operating performance,
Gables categorizes its operating communities based on the period in which each
community reaches stabilized occupancy. A community is considered by Gables 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 Gables' apartment communities combined for the
years ended December 31, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------- ----------- ----------- --------------
$ %
1997 1996 Change Change
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
RENTAL AND OTHER REVENUE:
Same store communities (1) $73,973 $71,983 $1,990 2.8%
Communities stabilized during the 1997 Period, but not during the
1996 Period (2) 20,848 19,220 1,628 8.5%
Development and lease-up communities (3) 13,103 3,920 9,183 234.3%
Acquired communities (4) 30,591 11,009 19,582 177.9%
Sold communities (5) 178 3,339 -3,161 -94.7%
---------- ----------- ----------- ----------
Total property revenues $138,693 $109,471 $29,222 26.7%
---------- ----------- ----------- ----------
PROPERTY OPERATING AND MAINTENANCE EXPENSE (EXCLUSIVE OF REAL ESTATE
DEPRECIATION AND AMORTIZATION):
Same store communities (1) $26,434 $25,637 $797 3.1%
Communities stabilized during the 1997 Period, but not during the
1996 Period (2) 6,360 6,223 137 2.2%
Development and lease-up communities (3) 4,703 1,476 3,227 218.6%
Acquired communities (4) 9,980 3,887 6,093 156.8%
Sold communities (5) 115 1,470 -1,355 -92.2%
----------- ----------- ----------- -----------
Total specified expenses $47,592 $38,693 $8,899 23.0%
----------- ----------- ----------- -----------
Revenues in excess of specified expenses $91,101 $70,778 $20,323 28.7%
----------- ----------- ----------- -----------
Revenues in excess of specified expenses as a percentage of total 65.7% 64.7% --- 1.0%
property 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/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>
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
Total property revenues increased $29,222, or 26.7%, from $109,471 to $138,693
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>
Percent
Increase Increase
(Decrease) (Decrease) Increase
Number of in Total in Total Occupancy (Decrease)
Number of Apartment Percent Property Property During the in
Market Communities Homes of Total Revenues Revenues 1997 Period Occupancy
- ------ ---------- --------- -------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston 10 3,512 37% $1,125 4.3% 94.3% -0.8%
Atlanta 11 3,159 33% 597 2.4% 94.7% 0.1%
Dallas 4 1,089 12% 245 2.8% 94.0% 0.0%
Nashville 3 912 10% -7 -0.1% 95.9% 0.0%
Memphis 1 464 5% 44 1.4% 94.5% 0.0%
Austin 1 276 3% -14 -0.6% 92.3% 0.7%
----- ------ ----- ------ ------- ------- ------
30 9,412 100% $1,990 2.8% 94.5% -0.2%
===== ====== ===== ====== ======= ======= ======
</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% $-45 95.0%
San Antonio 2 544 25% 497 92.9%
Austin 1 256 12% 327 95.6%
Nashville 1 254 12% 338 96.1%
Houston 1 246 11% 205 95.0%
Dallas 1 188 8% 306 93.4%
------ ------- ------ ------ ------
8 2,183 100% $1,628 94.6%
====== ======= ====== ====== ======
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 3 862 40% $2,985 55.5%
Austin 2 529 24% 1,586 42.0%
Memphis 2 490 22% 3,185 84.6%
Dallas 1 300 14% 1,427 87.4%
------ ----- ------ ------- ------
8 2,181 100% $9,183 64.3%
====== ===== ====== ======= ======
<PAGE>
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
Other revenues decreased $1,965, or 29.3%, from $6,710 to $4,745 due to (i) $900
of net revenues generated in the 1996 Period from certain corporate apartment
home leases entered into in connection with the 1996 Olympic games held in
Atlanta, (ii) $557 of interest earned on an investment Gables made in an
apartment community on October 1, 1996 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), and (iii) a decrease in property
management revenues of $839, or 21.7%, from $3,871 to $3,032 resulting from a
net decrease in properties managed by Gables for third parties primarily due to
the sale of such properties by the owners. Such decreases were offset in part by
an increase in revenues in the 1997 Period related to the provision of certain
ancillary services.
Property operating and maintenance expense (exclusive of depreciation and
amortization) increased $8,899, or 23.0%, from $38,693 to $47,592 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 3.1%. The same store increase in operating
expenses represents inflationary increases in expenses and increased marketing
and redecorating expenses in certain of Gables' markets. Such same store
increases have been offset in part by certain decreases in landscape and
utilities costs.
Real estate asset depreciation and amortization expense increased $6,235, or
33.7%, from $18,477 to $24,712 due primarily to the completion of newly
developed communities and acquisition of other communities.
Property management expense for owned communities and third/related party
properties on a combined basis increased $79, or 1.4%, from $5,617 to $5,696 due
primarily to inflationary increases in expenses, offset in part by certain
non-recurring expense savings in the 1997 Period. Gables allocates property
management expenses to both owned communities and third/related party properties
based on the proportionate share of total apartment homes and units managed.
General and administrative expense increased $203, or 6.7%, from $3,045 to
$3,248 due primarily to increases in certain costs associated with increases in
Gables' size and inflationary increases in expenses.
Interest expense increased $3,692, or 17.5%, from $21,112 to $24,804 due to an
increase in operating debt associated with newly developed or acquired
communities in addition to communities currently in the lease-up phase. These
increases in interest expense have been offset in part as a result of the
offerings Gables has consummated between periods, the proceeds of which have
been primarily used to reduce indebtedness.
Loss on treasury locks of $1,178 in the 1997 Period represents mark to market
losses recorded upon the expiration of the term of a treasury lock agreement
that was (i) entered into in anticipation of a projected debt offering and (ii)
subsequently extended in connection with modifications in the projected timing
of the debt offering.
Gain on sale of real estate assets of $5,349 in the 1997 Period represents the
gain generated in connection with (i) the January, 1997 sale of Club Candlewood,
a community comprised of 486 apartment homes and (ii) the July, 1997 sale of 2
acres of Gables' 12-acre Gables Colonnade Phase II land parcel.
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.
<PAGE>
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
Gables' net cash provided by operating activities increased from $69,519 for the
year ended December 31, 1997 to $90,147 for the year ended December 31, 1998,
due to (i) an increase of $31,460 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, long-term compensation expense, loss on treasury locks and net
extraordinary losses and (ii) the change in other liabilities between periods of
$7,771. Such increases were offset in part by (i) the change in restricted cash
between periods of $7,438 and (ii) the change in other assets between periods of
$11,165.
Gables' net cash used in investing activities increased from $228,969 for the
year ended December 31, 1997 to $358,855 for the year ended December 31, 1998,
due primarily to increased acquisition and development activities in 1998 when
compared to 1997, and the net proceeds from the sale of real estate assets in
1997. During the year ended December 31, 1998, Gables expended approximately
$203.3 million related to acquisitions of operating apartment communities,
including those acquired in the South Florida Acquisition; $138.1 million
related to development expenditures, including related land acquisitions;
approximately $8.0 million related to recurring, non-revenue enhancing, capital
expenditures for operating apartment communities; and approximately $8.9 million
related to non-recurring, renovation/revenue-enhancing, capital expenditures.
Gables' net cash provided by financing activities increased from $158,244 for
the year ended December 31, 1997 to $272,583 for the year ended December 31,
1998 due to increased acquisition and development activities. During the year
ended December 31, 1998, Gables had net borrowings of $210.5 million which were
used in conjunction with $136.2 million of proceeds from a common share offering
and the Series B Preferred Unit offering primarily to fund Gables' acquisition
and development activities discussed previously. These proceeds from financing
activities were offset in part by the payment of dividends and distributions
totaling approximately $72.3 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 organizational 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 December 31, 1998, Gables had total indebtedness of $812,788, cash and
cash equivalents of $7,054 and principal escrow deposits reflected in restricted
cash of $2,445. Gables' indebtedness has an average of 5.9 years to maturity at
December 31, 1998. Excluding monthly principal amortization payments, over the
next five years Gables has the following scheduled debt maturities for
indebtedness outstanding at December 31, 1998:
1999 $13,000
2000 53,583
2001 165,000
2002 83,331
2003 62,801
The debt maturities in 2001 include $110,000 of outstanding indebtedness under
the $225 Million Credit Facility which has two one-year extension options. The
debt maturities in 2003 include $44,930 of tax-exempt bond indebtedness
credit-enhanced through a letter of credit facility which has unlimited one-year
extension options. Three of the underlying bond issues mature in December, 2007
and the fourth underlying bond issue matures in August, 2024.
<PAGE>
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
A summary of Gables' portfolio indebtedness and interest rate protection
agreements as of December 31, 1998 follows:
PORTFOLIO INDEBTEDNESS SUMMARY
Percentage Interest Total Years to
Type of Indebtedness Balance of Total Rate(1) Rate(2) Maturity
- -------------------- ---------------- --------------- --------
Fixed-rate:
Secured notes ....................$125,546 15.4% 7.80% 7.80% 9.25
Unsecured notes .................. 323,442 39.8% 7.20% 7.20% 4.70
Tax-exempt ....................... 90,730 11.2% 6.02% 6.32% 8.70
-------- ------ ----- ----- ----
Total fixed-rate ............$539,718 66.4% 7.14% 7.19% 6.43
-------- ------ ----- ----- ----
Tax-exempt variable-rate .........$150,070 18.5% 3.90% 4.88% 7.39
-------- ------ ----- ----- ----
Unsecured credit facilities ......$123,000 15.1% 6.38% 6.38% 2.01
-------- ------ ----- ----- ----
Total portfolio debt (3), (4) ....$812,788 100.0% 6.43% 6.64% 5.94
======== ====== ===== ===== ====
(1) Interest Rate represents the weighted average interest rate incurred on the
indebtedness, exclusive of deferred financing cost amortization and credit
enhancement fees, as applicable.
(2) Total Rate represents the Interest Rate (1) plus credit enhancement fees,
as applicable.
(3) Interest associated with construction activities is capitalized as a cost
of development and does not impact current earnings. The qualifying
construction expenditures at December 31, 1998 for purposes of interest
capitalization were $144,122.
(4) Excludes $16.4 million of tax-exempt bonds and $17.8 million of outstanding
conventional indebtedness related to joint ventures in which Gables owns a
25% interest.
INTEREST RATE PROTECTION AGREEMENT SUMMARY
Notional Strike Effective Termination
Description of Agreement Amount Price Date Date
- ------------------------ --------- ------ --------- ------------
LIBOR, 30-day - "Rate Cap" $44,530 6.25%(5) 01/27/94 01/30/99
LIBOR, 30-day - "Rate Swap" $44,530 5.35%(5) 08/30/96 08/30/99 (6)
LIBOR, 30-day - "Rate Swap" $25,000 5.76%(5) 02/27/98 02/27/00 (7)
LIBOR, 30-day - "Rate Swap" $40,000 4.79%(5) 11/30/98 09/29/00
(5) The 30-day LIBOR rate in effect at December 31, 1998 was 5.63%.
(6) This is a knock-out swap agreement which fixes Gables' 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.
(7) This is a knock-out swap agreement which fixes Gables' underlying 30-day
LIBOR rate at 5.76%. 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 6.70% or higher.
<PAGE>
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
Gables' dividends through the fourth quarter of 1998 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.
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, the issuance of debt securities or equity
securities, private equity investments in the form of joint ventures, or through
the disposition of assets which, in management's evaluation, may no longer meet
Gables' investment requirements.
$225 MILLION CREDIT FACILITY
In March, 1996, Gables closed a $175 million unsecured revolving credit
facility. In May, 1998, the $175 million commitment level was increased to $225
million and the maturity date was extended to May, 2001 with two one-year
extension options. Gables' availability under the facility is limited to the
lesser of the total $225 million commitment or the borrowing base. The borrowing
base available under the facility is based on the value of Gables' unencumbered
real estate assets as compared to the amount of Gables' unsecured indebtedness.
As of December 31, 1998, Gables had $110.0 million in borrowings outstanding
under the facility and, therefore, had $115.0 million of remaining capacity on
the $225 million available commitment. Borrowings currently bear interest at
LIBOR plus 0.80%. Additionally, a competitive bid option feature is in place for
up to 50% of the total commitment.
$25 MILLION CREDIT FACILITY
In November, 1996, Gables closed an unsecured revolving credit facility that
currently provides for up to $25 million in borrowings. This facility has an
initial term of one year and has unlimited one-year extension options. Gables
has exercised two of its one-year extension options resulting in a maturity date
for the facility of October, 1999. Borrowings currently bear interest under this
facility at LIBOR plus 0.80%. As of December 31, 1998, Gables had no borrowings
outstanding under this facility.
RESTRICTIVE COVENANTS
Certain of Gables' 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.
Gables 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.
SHELF REGISTRATION STATEMENT
On December 3, 1998, Gables filed a shelf registration statement with the
Securities and Exchange Commission to add an additional $500 million of equity
capacity and an additional $300 million of debt capacity. Gables believes it is
prudent to maintain shelf registration capacity in order to facilitate future
capital raising activities.
<PAGE>
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
PROPERTY SALE
On March 4, 1999, Gables sold an apartment community located in Atlanta
comprising 213 apartment homes for $19.3 million. The net proceeds were
initially used to paydown outstanding borrowings under Gables' Credit
Facilities.
COMMON SHARE REPURCHASE PROGRAM
On March 22, 1999, Gables announced a common share repurchase program pursuant
to which Gables is authorized to purchase up to $50 million of its outstanding
common shares. Gables plans to repurchase shares from time to time in open
market and privately negotiated transactions, depending on market prices and
other conditions, using proceeds from sales of selected assets.
JOINT VENTURE WITH J.P. MORGAN
On March 26, 1999, Gables entered into a joint venture agreement with an
affiliate of J.P. Morgan Investment, Inc. ("J.P. Morgan"). The business purpose
of the venture is to develop, own and operate seven multifamily apartment
communities located in four of Gables' nine markets, which are expected to
comprise 2,181 apartment homes. As of December 31, 1998, Gables (i) had
commenced construction of four of the communities, (ii) owned the land for the
future development of two of the communities and (iii) owned the acquisition
right for the land for the future development of one of the communities. The
capital budget for the development of the seven communities is approximately
$213 million and is anticipated to be funded with 50% debt and 50% equity. The
equity component will be funded 80% by J.P. Morgan and 20% by Gables. Gables'
portion of the equity will be funded through a contribution of cash and
property. Gables will serve as the managing member of the venture and will have
responsibility for all day-to-day operating issues. Gables will also serve as
the general contractor during construction and as the property manager.
Inflation
- ---------
Substantially all of Gables' leases at its 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.
Book Value of Assets and Shareholders' Equity
- ---------------------------------------------
The application of historical cost accounting in accordance with generally
accepted accounting principles ("GAAP") for Gables' UPREIT structure results in
an understatement of total assets and shareholders' 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 shareholders' equity. The understatement of basis related to
this difference in organizational structure at December 31, 1998 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
shareholders' equity plus minority interest and Series Z Preferred Shares at
liquidation value as of December 31, 1998 would be $1,794,455, $1,698,811, and
$831,259, respectively, if such $112,494 value were reflected.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
This report 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. The words "believe," "expect," "anticipate,"
"intend," "estimate," "assume" and other similar expressions which are
predictions of or indicate future events and trends and which do not relate
solely to historical matters identify forward-looking statements. Reliance
should not be placed on forward-looking statements because they involve known
and unknown risks, uncertainties and other factors, which are in some cases
beyond the control of Gables and may cause the actual results, performance or
achievements of Gables to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements.
<PAGE>
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
Factors that might cause such a difference include, but are not limited to, the
following: Gables may abandon or fail to secure development opportunities;
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 market rents may be adversely affected by local economic and market
conditions which are beyond management's control; financing may not be
available, or may not be available on favorable terms; Gables' cash flow may be
insufficient to meet required payments of principal and interest; and existing
indebtedness may mature in an unfavorable credit environment, preventing such
indebtedness from being refinanced, or, if financed, causing such refinancing to
occur on terms that are not as favorable as the terms of existing indebtedness.
Recent Accounting Pronouncements
- --------------------------------
See Note 4 to Consolidated Financial Statements.
Year 2000 Compliance
- --------------------
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act of
1998.
The Year 2000 issue occurs when business application software or embedded
microcontrollers use two digits to specify the year, rather than four.
Therefore, on January 1, 2000, unless corrections are made, most computers with
time-sensitive software programs will recognize the year as "00" and may assume
that the year is "1900". This could result in a system failure or
miscalculations which could result in disruptions of normal business operations.
The Year 2000 issue can also affect embedded microcontrollers in non-computer
equipment such as elevators, HVAC and security systems. Gables is in the process
of assessing the impact of the Year 2000 issue on its computer systems
(hardware), software and other equipment with embedded microcontrollers
(non-IT). Gables' Year 2000 Project is divided into four phases, as described
below:
Phase 1- Inventory assessment: Identify all equipment that could potentially be
affected by the Year 2000 issue. Equipment is divided into three
categories: hardware, software and non-IT.
Phase2 - Contact vendors and third-party service providers: Contact the vendors
and third-party service providers that maintain and/or support the
equipment identified in Phase I to obtain a Year 2000 compliance
certification.
Phase3 - Determine scope of non-compliance: Based on vendor response and
in-house testing, assemble a list of items that will not be compliant and
prioritize the items to be either replaced or retrofitted.
Phase4 - Implementation, identification of alternative solutions and testing:
Replace or retrofit items that are not Year 2000 compliant, identify and
implement alternative solutions to items that cannot be replaced or
retrofitted, and perform testing thereof.
Gables' progress is described by category in the following table:
Actual or Expected
Category Status Phase 4 Completion Date
-------- ------ -----------------------
Hardware Complete 3/31/99
Software Complete 3/31/99
Non-IT Working on Phase 3 5/31/99
Gables' costs of addressing the Year 2000 issue have not been, and are not
expected to be, material and will relate primarily to costs of upgrading older
equipment, in addition to personnel resource allocation. However, no estimates
can be made as to the potential adverse impact resulting from the failure of
third party service providers and vendors to prepare for the Year 2000 issue.
Gables has included banks and utilities in its vendor survey, as their services
are considered to be mission-critical to its business function. As with other
vendors, Gables is attempting to attain compliance certification from these
vendors to assure that there will be no business interruption to its customers.
<PAGE>
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
on January 1, 2000. Based on vendor response and in-house testing, Gables will
develop specific contingency plans, if necessary. In addition, Gables will
design a general contingency plan to be implemented in the event of
unanticipated equipment and systems failures. However, there can be no assurance
that such plan will be adequate or that failures or delays by third parties in
achieving Year 2000 compliance will not result in material business
interruptions, loss of revenues or other adverse effects.
The discussion above regarding Gables' Year 2000 Project 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. Gables' assessment of the impact of the Year 2000 issue may prove to
be inaccurate due to a number of factors which cannot be determined with
certainty, including the receipt of inaccurate compliance certifications from
third party vendors, inaccurate testing or assessments by Gables' personnel of
its equipment or systems, and inaccurate projections by Gables of the cost of
remediation and/or replacement of affected equipment and systems. A failure by
Gables to adequately remediate or replace affected equipment or systems due to
the factors cited above or for other reasons, a material increase in the actual
cost of such remediation or replacement, or a failure by a third party vendor to
remediate Year 2000 problems in systems that are vital to the operation of
Gables' properties or financial systems, could cause a material disruption to
its business and adversely affect its results of operations and financial
condition.
<PAGE>
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
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. Gables computes FFO in accordance
with standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO as defined by NAREIT represents net income (loss)
determined in accordance with GAAP, excluding gains or losses from sales of
assets or debt restructuring, plus certain non-cash items, primarily real estate
depreciation, and after adjustments for unconsolidated partnerships and joint
ventures. In addition, extraordinary or unusual items, along with significant
non-recurring events that materially distort the comparative measure of FFO are
typically disregarded in its calculation. FFO presented herein is not
necessarily comparable to FFO presented by other real estate companies due to
the fact that not all real estate companies use the same definition. However,
Gables' FFO is comparable to the FFO of real estate companies that use the
NAREIT definition. Adjusted funds from operations ("AFFO") is defined as FFO
less recurring, non-revenue enhancing, capital expenditures. FFO and AFFO should
not be considered as alternatives to net income as indicators of Gables'
operating performance or as alternatives to cash flows as measures 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 and unitholders. Additionally, FFO does not represent cash flows
from operating, investing or financing activities as defined by GAAP. Reference
is made to "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. A reconciliation of FFO and AFFO follows:
Years ended December 31,
1998 1997
------ ------
Net income available to common shareholders $28,040 $29,889
Extraordinary loss, net of minority interest 0 602
Minority interest of common unitholders in Operating 7,142 5,611
Partnership
Loss on treasury locks (a) 5,637 1,178
Amortization of loss on extension of used treasury locks (142) 0
Gain on sale of real estate assets 0 (5,349)
Real estate asset depreciation:
Wholly-owned real estate assets 40,087 24,712
Joint venture real estate assets 225 223
-------- --------
Total 40,312 24,935
-------- --------
FUNDS FROM OPERATIONS - BASIC $80,989 $56,866
-------- --------
Amortization of discount on long-term liability (b) 576 0
-------- --------
FUNDS FROM OPERATIONS - DILUTED $81,565 $56,866
-------- --------
Capital expenditures for operating apartment communities:
Carpet $3,092 $1,860
Roofing 246 139
Exterior painting 0 283
Appliances 394 204
Other additions and improvements 4,223 2,392
------- -------
Total $7,955 $4,878
------- -------
ADJUSTED FUNDS FROM OPERATIONS - DILUTED $73,610 $51,988
------- -------
AVERAGE COMMON SHARES AND UNITS OUTSTANDING - BASIC 30,212 23,441
------- -------
AVERAGE COMMON SHARES AND UNITS OUTSTANDING - DILUTED 30,679 23,591
------- -------
(a) This item is disregarded in the calculation of FFO as it represents a
significant non-recurring event that materially distorts the comparative
measurement of Gables' performance over time. While Gables may utilize
derivative financial instruments, such as rate locks, to hedge interest
rate exposure by modifying the interest rate characteristics of prospective
financing transactions, it believes the events and circumstances that
resulted in these losses are non-recurring in nature.
(b) This obligation will be settled with Units. Such Units are excluded from
basic shares and Units outstanding, but are included in the calculation of
diluted shares and Units outstanding.
<PAGE>
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- ------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gables' capital structure includes the use of variable rate and fixed rate
indebtedness. As such, Gables is exposed to the impact of changes in interest
rates. Gables' senior management periodically seeks input from third party
consultants regarding market interest rate and credit risk in order to evaluate
its interest rate exposure. In certain situations, Gables may utilize derivative
financial instruments, in the form of rate caps, rate swaps or rate locks, to
hedge interest rate exposure by modifying the interest rate characteristics of
related balance sheet instruments and prospective financing transactions. Gables
does not utilize such instruments for trading or speculative purposes.
Gables typically refinances maturing debt instruments at then-existing market
interest rates and terms which may be more or less than the interest rates and
terms on the maturing debt.
The following table provides information about Gables' derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates and should be read in conjunction with the Notes to Consolidated
Financial Statements. For debt obligations, the table presents principal cash
flows and related weighted-average interest rates in effect at December 31, 1998
by expected maturity dates. For interest rate swaps and the interest rate cap,
the table presents the notional amounts and related weighted-average pay rates
by fiscal year of maturity.
<TABLE>
Expected Year of Maturity
------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
------ ------ ------ ------ ------ ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT:
Fixed-rate ............... $ 3,144 $ 56,912 $ 58,599 $ 86,280 $ 20,671 $ 314,112 $ 539,718 $ 539,718
Average interest rate .... 7.84% 6.73% 6.24% 8.28% 7.53% 7.04% 7.14%
Tax-exempt variable rate . $ 0 $ 0 $ 0 $ 0 $ 44,930 $ 105,140 $ 150,070 $ 150,070
Average interest rate .... 4.10% 3.81% 3.90%
Credit facilities ........ $ 13,000 $ 0 $ 110,000 $ 0 $ 0 $ 0 $ 123,000 $ 123,000
Average interest rate .... 6.00% 6.43% 6.38%
Total debt ............... $ 16,144 $ 56,912 $ 168,599 $ 86,280 $ 65,601 $ 419,252 $ 812,788 $ 812,788
Average interest rate .... 6.36% 6.73% 6.36% 8.28% 5.18% 6.23% 6.43%
INTEREST RATE SWAPS:
Pay fixed/receive variable $ 44,530 $ 65,000 $ 0 $ 0 $ 0 $ 0 $ 109,530 ($ 161)
Average pay rate ......... 5.35% 5.16% 5.24%
Receive rate ............. LIBOR LIBOR LIBOR
INTEREST RATE CAP:
Pay fixed/receive variable $ 44,530 $ 0 $ 0 $ 0 $ 0 $ 0 $ 44,530 $ 0
Maximum pay rate ......... 6.25% 6.25%
Receive rate ............. LIBOR LIBOR
</TABLE>
Gables estimates that the fair value of its debt approximates carrying value
based upon its effective current borrowing rate for issuance of debt with
similar terms and remaining maturities.
<PAGE>
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed under Item 14(a) and
filed as part of this report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Directors and Executive Officers of the
Registrant required by Item 10 shall be included in the Proxy Statement to be
filed relating to the 1999 Annual Meeting of the Registrant's Shareholders and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning Executive Compensation required by Item 11 shall be
included in the Proxy Statement to be filed relating to the 1999 Annual Meeting
of the Registrant's Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning Security Ownership of Certain Beneficial Owners and
Management required by Item 12 shall be included in the Proxy Statement to be
filed relating to the 1999 Annual Meeting of the Registrant's Shareholders and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE AND REPORTS ON FORM 8-K
14(a)(1)and (2) Financial Statements and Schedule
The financial statements and schedule listed below are filed as part of this
annual report on the pages indicated.
Report of Independent Public Accountants 39
Consolidated Balance Sheets as of December 31, 1998 and December 31,
1997 40
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996 41
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996 42
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 43
Notes to Consolidated Financial Statements 44
Schedule III - Real Estate Investments and Accumulated Depreciation as
of December 31, 1998 59
14(a)(3) Exhibits
Certain of the exhibits required by Item 601 of Regulation S-K have been filed
with previous reports by the Registrant or the Operating Partnership (File No.
000-22683) and are incorporated herein by reference to the filing in the
corresponding numbered footnote.
<PAGE>
35
Exhibit No. Description
- ----------- -----------
3.1 (i)(a) --- Amended and Restated Declaration of Trust of the Company (1)
3.1 (i)(b) --- Articles of Amendment to the Company's Amended and Restated
Declaration of Trust (2)
3.1 (i)(c) --- Articles Supplementary to the Company's Amended and Restated
Declaration of Trust creating the 8.30% Series A Cumulative
Redeemable Preferred Shares (3)
3.1 (i)(d) --- Articles Supplementary to the Company's Amended and Restated
Declaration of Trust creating the 5.00% Series Z Cumulative
Redeemable Preferred Shares (2)
3.1 (i)(e) --- Articles Supplementary to the Company's Amended and Restated
Declaration of Trust creating the 8.625% Series B Cumulative
Redeemable Preferred Shares (4)
3.1 (ii)(a) --- Second Amended and Restated Bylaws of the Company (5)
4.1 --- Indenture, dated as of March 23, 1998, between the Operating
Partnership and First Union National Bank (6)
4.2 --- Supplemental Indenture No. 1, dated March 23, 1998, between
the Operating Partnership and First Union National Bank (6)
4.3 --- The Operating Partnership 6.80% Senior Note due 2005 (6)
4.4 --- Supplemental Indenture No. 2, dated September 30,1998 between
the Operating Partnership and First Union National Bank (7)
4.5 --- The Operating Partnership 6.55% Senior Note due 2000 (7)
4.6 --- Supplemental Indenture No. 3, dated October 8, 1998, between
the Operating Partnership and First Union National Bank (8)
4.7 --- The Operating Partnership 6.60% Senior Note due 2001 (8)
10.1 --- Fourth Amended and Restated Agreement of Limited Partnership
of the Operating Partnership (4)
10.2 --- Registration Rights and Lock-Up Agreement by and among the
Company and the persons named therein (9)
10.3 --- Articles of Incorporation of East Apartment Management,
Inc.(9)
10.4 --- Bylaws of East Apartment Management, Inc. (9)
10.5 --- Articles of Incorporation of Central Apartment Management,
Inc. (9)
10.6 --- Bylaws of Central Apartment Management, Inc. (9)
10.7 --- Articles of Incorporation of Gables GP, Inc. (9)
10.8 --- Bylaws of Gables GP, Inc. (9)
10.9 * --- Fourth Amended and Restated 1994 Share Option and Incentive
Plan
10.10 * --- Form of Employment Agreement as signed by the Company and
each of Marcus E. Bromley (Chairman of the Board of Trustees
and Chief Executive Officer; 1999 base salary of $325,000),
John T. Rippel (President and Chief Operating Officer; 1999
base salary of $275,000), C. Jordan Clark (Senior Vice
President and Chief Investment Officer; 1999 base salary of
$250,000), and Marvin R. Banks, Jr. (Senior Vice President
and Chief Financial Officer; 1999 base salary of $225,000)
10.11 --- Employment Agreement between the Company and Chris D. Wheeler
dated March 16, 1998 (10)
10.12 --- Severance Agreement between the Company and William M.
Hammond dated February 10, 1998 (11)
10.13 --- Form of Indemnification Agreement as signed by the Company
and each of Marcus E. Bromley, John T. Rippel, C. Jordan
Clark, Marvin R. Banks, Jr., David M. Holland, Lauralee E.
Martin, John W. McIntyre, Chris D. Wheeler and D. Raymond
Riddle (9)
10.14 --- Interest rate protection agreement (notional amount of
$44,530,000)between the Operating Partnership and NationsBank
of North Carolina, N.A. dated January 25, 1994 (12)
10.15 --- Interest rate protection agreement (notional amount of
$44,530,000) between the Operating Partnership and First
Union National Bank of Georgia, dated August 21, 1996 (13)
10.16 --- Interest rate protection agreement (notional amount of
$25,000,000) between the Operating Partnership and First
Union National Bank of Georgia, dated as of May 23, 1997 (14)
10.17 --- Forward Treasury Lock Agreement(notional amount of
$75,000,000) between the Operating Partnership and J.P.
Morgan Securities, Inc. dated as of September 22, 1997 (14)
10.18 --- Forward Treasury Lock Agreement (notional amount of
$75,000,000) between the Operating Partnership and J.P.
Morgan Securities, Inc. dated as of September 22, 1997 and
amended on December 17, 1997 (11)
<PAGE>
36
Exhibit No. Description
- ----------- -----------
10.19 --- Forward Treasury Lock Agreement (notional amount of
$75,000,000) between the Operating Partnership and J.P.
Morgan Securities, Inc. dated as of September 22, 1997 and
amended on February 11, 1998 (11)
10.20 --- Forward Treasury Lock Agreement (notional amount of
$25,000,000) between the Operating Partnership and J.P.
Morgan Securities, Inc. dated as of December 17, 1997 (11)
10.21 --- Forward Treasury Lock Agreement (notional amount of
$25,000,000) between the Operating Partnership and J.P.
Morgan Securities, Inc. dated as of December 17, 1997 and
amended on February 11, 1998 (11)
10.22 --- Forward Treasury Lock Agreement (notional amount of
$50,000,000) between Gables Realty Limited Partnership and
J.P. Morgan Securities Inc., dated as of September 22, 1997
and amended on May 28, 1998 (2)
10.23 --- Forward Treasury Lock Agreement (notional amount of
$50,000,000) between Gables Realty Limited Partnership and
J.P. Morgan Securities Inc., dated as of September 22, 1997
and amended on July 24, 1998 (2)
10.24 --- Forward Treasury Lock Agreement (notional amount of
$50,000,000) between Gables Realty Limited Partnership and
J.P. Morgan Securities Inc., dated as of September 22, 1997
and amended on August 19, 1998 (15)
10.25 --- Forward Treasury Lock Agreement (notional amount of
$50,000,000) between Gables Realty Limited Partnership and
J.P. Morgan Securities Inc., dated as of September 22, 1997
and amended on September 30, 1998 (15)
10.26 --- Interest Rate Swap Agreement (notional amount of $40,000,000)
between Gables Realty Limited Partnership and Morgan Guaranty
Trust Company of New York, dated as of September 28, 1998(15)
10.27 --- Loan Agreement, Conversion and Note Agreement, Security Deed
Note and Deed of Trust Notes between Teachers Insurance and
Annuity Association of America ("lender") and the Operating
Partnership and the Tennessee Partnership (collectively, the
borrower)for a $130,689,000 loan, dated December 29, 1995(16)
10.28 --- First Amendment to Conversion and Note Agreement effective
December 30, 1996 between the Operating Partnership, the
Tennessee Partnership, the Company and Teachers Insurance and
Annuity Association of America (14)
10.29 --- Second Amendment to Conversion and Note Agreement effective
August 13, 1997 between the Operating Partnership, the
Tennessee Partnership, the Company and Teachers Insurance and
Annuity Association of America (14)
10.30 --- Unsecured Note No. 1 for $86,346,000 date August 13, 1997
between the Operating Partnership, the Tennessee Partnership
and Teachers Insurance and Annuity Association of America(14)
10.31 --- Unsecured Note No. 2 for $29,681,000 dated August 13, 1997
between the Operating Partnership, the Tennessee Partnership
and Teachers Insurance and Annuity Association of America(14)
10.32 --- $225,000,000 Amended and Restated Credit Agreement dated as
of May 13,1998 by and among Gables Realty Limited Partnership
(as Borrower) and Wachovia Bank, N.A., First Union National
Bank, Chase Bank of Texas, National Association, PNC Bank,
National Association, Guaranty Federal Bank, F.S.B., AmSouth
Bank of Alabama and Commerzbank AG, Atlanta Agency
(collectively, as lenders) and Wachovia Bank, N.A. (as Agent)
(2)
10.33 --- Promissory Note dated November 29, 1994 for a $53,000,000
mortgage loan from the Northwestern Mutual Life Insurance
Company to the Operating Partnership (12)
10.34 --- Contribution Agreement with an effective date of March 16,
1998 between the Company, the Operating Partnership and
specified representatives of Trammell Crow Residential("TCR")
executed in connection with the Company's April 1, 1998
acquisition of the properties and operations of TCR-South
Florida (17)
10.35 --- Amendment No. 1 to Contribution Agreement dated April 1, 1998
(18)
21.1 * --- Schedule of Subsidiaries of the Company
23.1 * --- Consent of Arthur Andersen LLP
27.1 * --- Financial Data Schedule for the fiscal year ended December
31, 1998
___________
* Filed herewith
<PAGE>
37
(1) The Company's Registration Statement on Form S-11 (File No. 33-70570), as
amended.
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(3) The Company's Current Report on Form 8-K dated July 24, 1997.
(4) The Company's Current Report on Form 8-K dated November 12, 1998.
(5) The Company's Registration Statement on Form 8-A/A-2.
(6) The Operating Partnership's Current Report on Form 8-K dated March 23,
1998.
(7) The Operating Partnership's Current Report on Form 8-K dated October 5,
1998.
(8) The Operating Partnership's Current Report on Form 8-K dated October 8,
1998.
(9) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1993.
(10) The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(11) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
(12) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1994.
(13) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
(14) The Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(15) The Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.
(16) The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
(17) The Company's Current Report on Form 8-K dated March 16, 1998.
(18) The Company's Current Report on Form 8-K dated April 1, 1998, as amended.
The registrant's proxy statement is to be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1998 (the end of the
fiscal year covered by this Annual Report on Form 10-K).
14(b) Reports on Form 8-K
(i) A Form 8-K dated October 5, 1998 was filed with the Securities and
Exchange Commission with the underwriting agreement, indenture and other
related items executed in connection with the Operating Partnership's
issuance of $50 million of 6.55% Senior Unsecured Notes due October, 2000.
(ii) A Form 8-K dated October 8, 1998 was filed with the Securities and
Exchange Commission with the underwriting agreement, indenture and other
related items executed in connection with the Operating Partnership's
issuance of $15 million of 6.60% Senior Unsecured Notes due October, 2001.
(iii) A Form 8-K dated November 12, 1998 was filed with the Securities and
Exchange Commission with the Fourth Amended and Restated Agreement of
Limited Partnership of the Operating Partnership and other related items
executed in connection with the Operating Partnership's issuance of
$50 million of Series B Preferred Units.
14(c) Exhibits
See Item 14(a)(3) above.
<PAGE>
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Gables Residential Trust certifies that it has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
GABLES RESIDENTIAL TRUST
By /s/ Marcus E. Bromley
---------------------------------
Marcus E. Bromley, Chairman of the
Board of Trustees and Chief
Executive Officer
March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of Gables Residential Trust
and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Marcus E. Bromley Chairman of the Board of Trustees March 29, 1999
- ----------------------- and Chief Executive Officer
Marcus E. Bromley (Principal Executive Officer)
/s/ Marvin R. Banks, Jr. Chief Financial Officer (Principal March 29, 1999
- ----------------------- Financial Officer and Principal
Marvin R. Banks, Jr. Accounting Officer)
/s/ John T. Rippel President, Chief Operating Officer March 29, 1999
- ----------------------- and Trustee
John T. Rippel
/s/ David M. Holland Trustee March 29, 1999
- -----------------------
David M. Holland
/s/ Lauralee E. Martin Trustee March 29, 1999
- -----------------------
Lauralee E. Martin
/s/ John W. McIntyre Trustee March 29, 1999
- -----------------------
John W. McIntyre
/s/ D. Raymond Riddle Trustee March 29, 1999
- -----------------------
D. Raymond Riddle
/s/ Chris D. Wheeler Trustee March 29, 1999
- -----------------------
Chris D. Wheeler
<PAGE>
39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gables Residential Trust:
We have audited the accompanying consolidated balance sheets of Gables
Residential Trust and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements and schedule are the responsibility of the management of
Gables Residential Trust. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gables Residential
Trust and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 5, 1999
<PAGE>
40
GABLES RESIDENTIAL TRUST
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS:
Real estate assets:
Land .................................................................... $ 229,960 $ 150,894
Buildings ............................................................... 1,218,782 770,305
Furniture, fixtures and equipment ....................................... 87,238 60,015
Construction in progress ................................................ 79,829 53,240
Land held for future development ........................................ 66,152 21,774
---------- ----------
Real estate assets before accumulated depreciation ................... 1,681,961 1,056,228
Less: accumulated depreciation ......................................... (138,239) (98,236)
---------- ----------
Net real estate assets ................................................ 1,543,722 957,992
Cash and cash equivalents .................................................. 7,054 3,179
Restricted cash ............................................................ 8,017 4,498
Deferred financing costs, net of accumulated amortization of $3,946
and $2,735 at December 31, 1998 and 1997, respectively ................... 4,696 4,194
Other assets, net .......................................................... 22,828 11,304
---------- ----------
Total assets .......................................................... $ 1,586,317 $ 981,167
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable .............................................................. $ 812,788 $ 435,362
Accrued interest payable ................................................... 6,045 1,999
Preferred dividends payable ................................................ 545 424
Real estate taxes payable .................................................. 16,224 13,568
Accounts payable and accrued expenses - construction ....................... 8,402 8,505
Accounts payable and accrued expenses - operating .......................... 7,094 5,552
Security deposits .......................................................... 4,725 2,260
Other long-term liability, net ............................................. 11,729 0
---------- ----------
Total liabilities ..................................................... 867,552 467,670
Minority interest of common unitholders in Operating Partnership ........... 108,110 62,059
Minority interest of Series B preferred unitholders in Operating Partnership 50,192 0
Series Z Preferred Shares at $25.00 liquidation preference,
180 shares issued and outstanding at December 31, 1998 ................... 4,500 0
Commitments and contingencies
Shareholders' equity:
Excess shares, $0.01 par value, 51,000 shares authorized ................. 0 0
Preferred shares, $0.01 par value, 20,000 shares authorized,
Series A Preferred Shares at $25.00 liquidation preference,
4,600 shares issued and outstanding at December 31, 1998
and 1997; Series Z Preferred Shares and Series B Preferred
Units, exchangeable into Series B Preferred Shares, reported above ... 115,000 115,000
Common shares, $0.01 par value, 100,000 shares authorized,
26,302 and 21,991 shares issued and outstanding at December
31, 1998 and 1997, respectively ........................................ 263 220
Additional paid-in capital ............................................... 441,512 339,009
Deferred long-term compensation .......................................... (812) (594)
Accumulated earnings (deficit) ........................................... 0 (2,197)
---------- ----------
Total shareholders' equity ............................................ 555,963 451,438
---------- ----------
Total liabilities and shareholders' equity ............................ $ 1,586,317 $ 981,167
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated balance sheets.
</FN>
</TABLE>
<PAGE>
41
GABLES RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Rental revenues ................................................... $ 199,292 $ 132,371 $ 104,543
Other property revenues ........................................... 9,988 6,322 4,928
--------- --------- ---------
Total property revenues ...................................... 209,280 138,693 109,471
--------- --------- ---------
Property management - third party ................................. 3,938 2,173 2,960
Property management - related party ............................... 595 859 911
--------- --------- ---------
Total property management revenues .............................. 4,533 3,032 3,871
Olympic revenues, net ............................................. 0 0 900
Other ............................................................. 2,811 1,713 1,939
--------- --------- ---------
Total other revenues ......................................... 7,344 4,745 6,710
--------- --------- ---------
Total revenues ............................................... 216,624 143,438 116,181
--------- --------- ---------
Property operating and maintenance (exclusive of items shown
separately below) ............................................ 70,502 47,592 38,693
Real estate asset depreciation and amortization ................... 40,087 24,712 18,477
Corporate asset depreciation and amortization ..................... 563 482 415
Amortization of deferred financing costs .......................... 984 992 1,348
Property management - owned ....................................... 4,758 3,364 2,824
Property management - third/related party ......................... 3,219 2,332 2,793
General and administrative ........................................ 6,242 3,248 3,045
Interest .......................................................... 38,519 24,804 21,112
Credit enhancement fees ........................................... 1,455 509 576
--------- --------- ---------
Total expenses ............................................... 166,329 108,035 89,283
--------- --------- ---------
Equity in income of joint ventures ................................ 359 320 280
Interest income ................................................... 417 371 363
Loss on treasury locks ............................................ (5,637) (1,178) 0
--------- --------- ---------
Income before gain on sale of real estate assets .................. 45,434 34,916 27,541
--------- --------- ---------
Gain on sale of real estate assets ................................ 0 5,349 0
Income before minority interest and extraordinary loss, net ....... 45,434 40,265 27,541
Minority interest of common unitholders in Operating Partnership .. (7,142) (5,611) (4,640)
Minority interest of preferred unitholders in Operating Partnership (587) 0 0
--------- --------- ---------
Income before extraordinary loss, net ............................. 37,705 34,654 22,901
Extraordinary loss, net of minority interest ...................... 0 (602) (520)
--------- --------- ---------
Net income ........................................................ 37,705 34,052 22,381
Dividends to preferred shareholders ............................... (9,665) (4,163) 0
--------- --------- ---------
Net income available to common shareholders ....................... $ 28,040 $ 29,889 $ 22,381
========= ========= =========
Weighted average number of common shares outstanding - basic ...... 24,118 19,788 16,788
Weighted average number of common shares outstanding - diluted .... 30,340 23,591 20,283
Per Common Share Information:
Income before extraordinary loss, net - basic ..................... $ 1.16 $ 1.54 $ 1.36
Extraordinary loss, net - basic ................................... $ 0.00 ($ 0.03) ($ 0.03)
Net income - basic ................................................ $ 1.16 $ 1.51 $ 1.33
Income before extraordinary loss, net - diluted ................... $ 1.16 $ 1.53 $ 1.35
Extraordinary loss, net - diluted ................................. $ 0.00 ($ 0.03) ($ 0.03)
Net income - diluted .............................................. $ 1.16 $ 1.50 $ 1.32
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
42
GABLES RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Preferred
Shares at Additional Deferred Accumulated
Liquidation Common Paid-in Long-Term Earnings
Preference Shares Capital Compensation (Deficit) Total
---------- ------ --------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ............................. $ 0 $ 152 $ 255,228 $ 0 ($ 53,070) $ 202,310
Proceeds of 4,039 share offerings, net of
$3,302 underwriting discounts and issuance costs .... 0 40 93,444 0 0 93,484
Proceeds from exercise of share options .............. 0 1 1,429 0 0 1,430
Proceeds from Share Builder Plan ..................... 0 0 32 0 0 32
Filing costs for $300,000 shelf registration statement 0 0 (97) 0 0 (97)
Adjustment for minority interest of unitholders in
Operating Partnership for offerings, issuance of
Operating Partnership Units, and other activity ..... 0 0 0 0 (3,680) (3,680)
Net income ........................................... 0 0 0 0 22,381 22,381
Dividends declared and paid ($1.45 per share) ........ 0 0 (24,901) 0 0 (24,901)
Dividends declared ($0.49 per share) ................. 0 0 (9,465) 0 0 (9,465)
-------- ------- -------- ------- ------- --------
Balance, December 31, 1996 ............................. 0 193 315,670 0 (34,369) 281,494
Proceeds of 2,437 share offerings, net of
$3,463 underwriting discounts and issuance costs .... 0 24 62,493 0 0 62,517
Proceeds of 4,600 preferred share offering ........... 115,000 0 (4,009) 0 0 110,991
Proceeds from exercise of share options .............. 0 2 3,119 0 0 3,121
Proceeds from Share Builder Plan ..................... 0 0 61 0 0 61
Issuance of shares for trustee compensation .......... 0 0 25 0 0 25
Issuance of Share Grants ............................. 0 1 1,783 0 0 1,784
Deferred long-term compensation, net ................. 0 0 0 (594) 0 (594)
Adjustment for minority interest of unitholders in
Operating Partnership for offerings, issuance of
Operating Partnership Units, and other activity ..... 0 0 0 0 2,283 2,283
Net income available to common shareholders .......... 0 0 0 0 29,889 29,889
Dividends declared and paid ($1.98 per share) ........ 0 0 (40,133) 0 0 (40,133)
-------- ------- -------- ------- ------- --------
Balance, December 31, 1997 ............................. 115,000 220 339,009 (594) (2,197) 451,438
Proceeds of 3,311 common share offering, net of
$1,861 underwriting discount and issuance costs ..... 0 33 87,497 0 0 87,530
Proceeds from exercise of share options .............. 0 2 3,705 0 0 3,707
Proceeds from Share Builder Plan ..................... 0 2 3,547 0 0 3,549
Issuance of shares for trustee compensation .......... 0 0 40 0 0 40
Issuance of Share Grants ............................. 0 0 1,746 0 0 1,746
Forfeiture of Share Grants ........................... 0 0 (186) 0 0 (186)
Deferred long-term compensation, net ................. 0 0 0 (218) 0 (218)
Adjustment for minority interest of unitholders in
Operating Partnership for offerings, issuance of
Operating Partnership Units, and other activity ..... 0 6 30,648 0 0 30,654
Net income available to common shareholders .......... 0 0 0 0 28,040 28,040
Dividends declared and paid ($2.02 per share) ........ 0 0 (24,494) 0 (25,843) (50,337)
-------- ------- -------- ------- ------- --------
Balance, December 31, 1998 ............................. $ 115,000 $ 263 $ 441,512 ($ 812) $ 0 $ 555,963
======== ======= ======== ======= ======= ========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
43
GABLES RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 37,705 $ 34,052 $ 22,381
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ......................................... 41,634 26,186 20,240
Equity in income of joint ventures .................................... (359) (320) (280)
Minority interest of unitholders in Operating Partnership ............. 7,729 5,611 4,640
Gain on sale of real estate assets .................................... 0 (5,349) 0
Long-term compensation expense ........................................ 1,072 574 408
Loss on treasury locks ................................................ 5,637 1,178 0
Extraordinary loss, net of minority interest .......................... 0 602 520
Amortization of discount on long-term liability ....................... 576 0 0
Change in operating assets and liabilities:
Restricted cash ..................................................... (2,822) 4,616 (2,366)
Other assets ........................................................ (12,220) (1,055) (282)
Other liabilities, net .............................................. 11,195 3,424 6,368
------- ------- -------
Net cash provided by operating activities ...................... 90,147 69,519 51,629
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and construction of real estate assets ....................... (358,263) (241,585) (194,886)
Investment in mortgage note receivable ................................... 0 0 (21,505)
Net proceeds from sale of real estate assets ............................. 0 13,174 3,968
Long-term land lease payments ............................................ (1,000) (1,000) (1,500)
Distributions received from joint ventures ............................... 408 442 327
------- ------- -------
Net cash used in investing activities ............................... (358,855) (228,969) (213,596)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common share offerings, net of issuance costs .............. 87,530 62,517 93,484
Proceeds from preferred share offering, net of issuance costs ............ 0 110,991 0
Proceeds from preferred unit offering, net of issuance costs ............. 48,673 0 0
Proceeds from the exercise of share options .............................. 3,707 3,121 1,430
Share Builder Plan contributions ......................................... 3,549 61 32
Payments of filing costs for shelf registration statement ................ 0 0 (97)
Payments of deferred financing costs ..................................... (1,713) (440) (1,668)
Treasury lock settlement payments ........................................ (6,723) 0 0
Notes payable proceeds ................................................... 538,522 233,849 282,569
Notes payable repayments ................................................. (328,000) (188,808) (178,507)
Principal escrow deposits ................................................ (697) (684) (768)
Preferred dividends paid ................................................. (9,544) (3,739) 0
Preferred distributions paid ............................................. (395) 0 0
Common dividends paid ($2.02, $2.47 and $1.93 per share, respectively) ... (50,337) (49,598) (32,189)
Common distributions paid ($2.02, $2.47 and $1.93 per share, respectively) (11,989) (9,026) (6,463)
------- ------- -------
Net cash provided by financing activities ........................... 272,583 158,244 157,823
------- ------- -------
Net change in cash and cash equivalents .................................. 3,875 (1,206) (4,144)
Cash and cash equivalents, beginning of period ........................... 3,179 4,385 8,529
------- ------- -------
Cash and cash equivalents, end of period ................................. $ 7,054 $ 3,179 $ 4,385
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest .............................................. $ 43,210 $ 29,777 $ 24,749
Interest capitalized ................................................ 8,737 5,161 4,373
------- ------- -------
Cash paid for interest, net of amounts capitalized .................. $ 34,473 $ 24,616 $ 20,376
======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
1. ORGANIZATION AND FORMATION OF THE COMPANY
Gables Residential Trust (the "Company" or "Gables") is a real estate investment
trust (a "REIT") formed in 1993 under Maryland law to continue and expand the
multifamily apartment community management, development, construction, and
acquisition operations of its privately owned predecessor organization. Gables
completed its initial public offering on January 26, 1994 (the "IPO").
Gables 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 (the
"Operating Partnership"). The Company controls the Operating Partnership through
Gables GP, Inc. ("GGPI"), a wholly-owned subsidiary and the sole general partner
of the Operating Partnership (this structure is commonly referred to as an
umbrella partnership REIT or "UPREIT"). At December 31, 1998, the Company was an
80.3% economic owner of the common equity of the Operating Partnership. Gables'
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.
The Company's limited partner and indirect general partner interests in the
Operating Partnership entitle it to share in cash distributions from, and in the
profits and losses of, the Operating Partnership in proportion to its ownership
interest therein and entitle the Company to vote on all matters requiring a vote
of the limited partners. Generally, the other limited partners of the Operating
Partnership are persons who contributed their direct or indirect interests in
certain properties to the Operating Partnership primarily in connection with the
IPO, the South Florida Acquisition and the Greystone Acquisition (as defined
herein). The Operating Partnership is obligated to redeem each common unit of
limited partnership interest ("Unit") held by a person other than the Company,
at the request of the holder thereof, for cash equal to the fair market value of
a share of the Company's common shares at the time of such redemption, provided
that the Company at its option may elect to acquire any such Unit presented for
redemption for one common share or cash. The Company presently anticipates that
it will elect to issue its common shares to acquire Units presented for
redemption, rather than paying cash. With each such redemption the Company's
percentage ownership interest in the Operating Partnership will increase. In
addition, whenever the Company issues common shares or preferred shares, the
Company is obligated to contribute any net proceeds therefrom to the Operating
Partnership and the Operating Partnership is obligated to issue an equivalent
number of common or preferred units, as applicable, to the Company.
As of December 31, 1998, Gables owned 84 completed multifamily apartment
communities comprising 24,625 apartment homes, of which 39 were developed and 45
were acquired by Gables, and an indirect 25% general partner interest in two
apartment communities developed by Gables comprising 663 apartment homes. Two of
the completed communities comprising 642 apartment homes were in the lease-up
stage at December 31, 1998. Gables also owned five multifamily apartment
communities that were under construction at December 31, 1998 that are expected
to comprise 1,613 apartment homes upon completion. As of December 31, 1998,
Gables owned parcels of land for the future development of seventeen apartment
communities expected to comprise an estimated 4,093 apartment homes. There can
be no assurance that Gables will develop such land. Additionally, Gables has
contracts or options to acquire additional parcels of land. There can be no
assurance that Gables will acquire these land parcels, however it is Gables'
intent to develop an apartment community on each such land parcel, if purchased.
See Note 14 for certain events occurring subsequent to December 31, 1998.
2. PORTFOLIO ACQUISITIONS
On April 1, 1998, Gables acquired the properties and operations of Trammell Crow
Residential South Florida ("TCR/SF"), which consisted of fifteen multifamily
apartment communities containing a total of 4,197 apartment homes, and all of
TCR/SF's residential construction and development and third party management
activities in South Florida (collectively, the "South Florida Acquisition"). In
<PAGE>
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
consideration for such properties and operations, Gables (i) paid $155.0 million
in cash, (ii) assumed approximately $135.9 million of tax-exempt debt and (iii)
issued approximately 2,348 Units valued at approximately $64.9 million. In
addition, up to $12.5 million of the purchase price was deferred by Gables until
January 1, 2000, at which time Gables will issue a number of Units equal in
value to such deferred amount. The acquisition increased the size of Gables'
portfolio under management on April 1, 1998 from approximately 28,000 to 40,000
apartment homes.
The South Florida Acquisition has been accounted for under the purchase method
of accounting in accordance with Accounting Principles Board Opinion No. 16.
Accordingly, assets acquired and liabilities assumed have been recorded at their
estimated fair values. The accompanying consolidated statements of operations
include the operating results of TCR/SF since April 1, 1998, the closing date of
the South Florida Acquisition. The following unaudited pro forma information for
the years ended December 31, 1998 and 1997 has been prepared assuming the South
Florida Acquisition had been consummated on January 1, 1997. The unaudited pro
forma information (i) includes the historical operating results of the
properties and activities acquired and (ii) does not purport to be indicative of
the results which actually would have been obtained had the South Florida
Acquisition been consummated on January 1, 1997, or which may be attained in
future periods.
Years Ended December 31,
1998 1997
------- --------
Total revenues $226,652 $180,671
Income available to common shareholders before
extraordinary loss, net 26,948 28,711
Net income available to common shareholders 26,948 28,165
Per common share information:
Income before extraordinary loss, net - basic $1.12 $1.45
Net income - basic $1.12 $1.42
Income before extraordinary loss, net - diluted $1.12 $1.44
Net income - diluted $1.12 $1.41
In April, 1998, Gables acquired four multifamily apartment communities
comprising a total of 913 apartment homes located in Houston, Texas (the
"Greystone Acquisition"). In connection with such acquisition, Gables assumed
approximately $31.0 million of indebtedness, at fair value, and issued
approximately 665 Units valued at approximately $18.0 million. In addition,
Gables has accrued approximately $0.5 million as of December 31, 1998 for a
portion of the purchase price that was deferred by Gables, the payment of which
is contingent upon 1999 economic performance. Gables will issue a number of
Units equal in value to the amount due once determined.
3. SECONDARY OFFERINGS AND ISSUANCES OF OPERATING PARTNERSHIP UNITS
SECONDARY COMMON SHARE OFFERINGS
Since the IPO, the Company has issued a total of 14,831 common shares in eight
offerings generating $347,771 in net proceeds which were generally used (i) to
reduce outstanding indebtedness under interim financing vehicles utilized to
fund Gables' development and acquisition activities (the "Interim Financing
Vehicles") and (ii) for general working capital purposes including funding of
future development and acquisition activities.
PREFERRED SHARE OFFERINGS
On July 24, 1997, the Company issued 4,600 shares of 8.30% Series A Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) (the
"Series A Preferred Shares"). The net proceeds from this offering of
approximately $111.0 million were used to reduce outstanding indebtedness under
<PAGE>
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
the Interim Financing Vehicles. The Series A Preferred Shares, which may be
redeemed by the Company at $25.00 per share, plus accrued and unpaid dividends,
on or after July 24, 2002, have no stated maturity, sinking fund or mandatory
redemption and are not convertible into any other securities of the Company.
On June 18, 1998, the Company issued 180 shares of 5.0% Series Z Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) (the
"Series Z Preferred Shares") in connection with the acquisition of a parcel of
land for future development. The Series Z Preferred Shares, which may be
redeemed by the Company at $25.00 per share, plus accrued and unpaid dividends,
at any time, are subject to mandatory redemption on June 18, 2018. The Series Z
Preferred Shares are not subject to any sinking fund and are not convertible
into any other securities of the Company.
ISSUANCES OF COMMON OPERATING PARTNERSHIP UNITS
Since the IPO, Gables has issued a total of 3,917 Units in connection with the
South Florida Acquisition, the Greystone Acquisition and the acquisition of
operating apartment communities and a parcel of land for future development.
ISSUANCE OF PREFERRED OPERATING PARTNERSHIP UNITS
On November 12, 1998, the Operating Partnership issued 2,000 of its 8.625%
Series B Preferred Units (the "Series B Preferred Units") to an institutional
investor. The net proceeds from this issuance of approximately $48.7 million
were used to reduce outstanding indebtedness under the Interim Financing
Vehicles. The Series B Preferred Units may be redeemed by the Company at its
option after November 14, 2003 and are exchangeable by the holder into 8.625%
Series B Cumulative Redeemable Preferred Shares of the Company on a one-for-one
basis. This exchange right is generally not exercisable until after November 14,
2008. The Series B Preferred Units have no stated maturity, sinking fund, or
mandatory redemption.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Gables engages in the multifamily apartment community management, development,
construction, and acquisition businesses, including the provision of related
brokerage and corporate rental housing services. Gables' operating performance
relies predominantly on net operating income from the multifamily apartment
communities it owns which are located in nine core cities in Texas, Georgia,
Florida and Tennessee.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Gables Residential Trust
include the consolidated accounts of Gables Residential Trust and its
subsidiaries (including the Operating Partnership and its subsidiaries). 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 common unitholders in the Operating Partnership is calculated based
on the weighted average of common shares and Units outstanding during the
applicable period.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 presentation.
<PAGE>
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REAL ESTATE ASSETS AND DEPRECIATION
Real estate assets are stated at the lower of depreciated cost or fair value, if
deemed impaired. The cost of buildings and improvements includes interest,
property taxes, insurance and allocated development overhead incurred during the
construction period. Ordinary repairs and maintenance are expensed as incurred;
major replacements and betterments are capitalized and depreciated over their
useful lives. Depreciation is computed on a straight-line basis over the useful
lives of the real estate assets (buildings and improvements 19-40 years;
furniture, fixtures and equipment 5-10 years).
INVESTMENT IN JOINT VENTURES
Gables' 25% general partner interests in Arbors of Harbortown JV and
Metropolitan Apartments JV are accounted for on the equity method of accounting.
REVENUE RECOGNITION
Rental: Gables leases its residential properties under operating leases with
terms generally equal to one year or less. Rental income is recognized when
earned which materially approximates revenue recognition on a straight-line
basis.
Property management: Gables provides property management services for properties
in which it does not own a controlling interest. Income is recognized when
earned.
Development and construction services: Gables periodically provides development
and construction services for properties in which it does not own a controlling
interest. Income is recognized when earned on a percentage of completion basis.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, all investments purchased with an
original maturity of three months or less are considered to be cash equivalents.
RESTRICTED CASH
Restricted cash is primarily comprised of residential security deposits, tax
escrow funds, repairs and maintenance reserve funds, and principal escrow bond
funds.
DEFERRED FINANCING COSTS AND AMORTIZATION
Deferred financing costs include fees and costs incurred to obtain financing and
are capitalized and amortized over the terms of the related notes payable and
are written off upon the expiration thereof.
<PAGE>
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
INTEREST RATE PROTECTION AGREEMENTS
In the ordinary course of business, Gables is exposed to interest rate risks.
Gables' senior management periodically seeks input from third party consultants
regarding market interest rate and credit risk in order to evaluate its interest
rate exposure. In certain situations, Gables may utilize derivative financial
instruments, in the form of rate caps, rate swaps or rate locks, to hedge
interest rate exposure by modifying the interest rate characteristics of related
balance sheet instruments and prospective financing transactions. Gables does
not utilize such instruments for trading or speculative purposes. Derivatives
used as hedges must be effective at reducing the risk associated with the
exposure being hedged, correlate in nominal amount, rate, and term with the
balance sheet instrument being hedged, and must be designated as a hedge at the
inception of the derivative contract.
Lump sum payments made or received at the inception or settlement of derivative
instruments designated as hedges are capitalized and amortized as an adjustment
to interest expense over the life of the associated balance sheet instrument.
Monthly amounts paid or received under rate cap and rate swap hedge agreements
are recognized as adjustments to interest expense as incurred. In the event that
circumstances arise that indicate that an existing derivative instrument no
longer meets the hedge criteria described above, the derivative is marked to
market in the statement of operations.
In anticipation of a projected seven-year debt offering, Gables entered into two
forward treasury lock agreements in late 1997. The timing and amount of the
projected debt offering was modified several times as a result of unanticipated
capital transactions, including the South Florida Acquisition. The treasury lock
agreements were extended to align with the projected timing of the debt
offering. The treasury lock agreement in place in September, 1998 was terminated
due to certain economic conditions affecting the unsecured debt market. For the
years ended December 31, 1998 and 1997, Gables recognized mark to market losses
of $5,637 and $1,178, respectively, upon the expiration of the original and
extended terms of the treasury lock agreements since the required hedge criteria
no longer existed at those dates.
PROPERTY MANAGEMENT EXPENSES
Gables manages its owned properties, as well as properties owned by third and
related parties for which Gables provides services for a fee. Property
management expenses have been allocated between owned and third/related party
properties in the accompanying statements of operations based on the
proportionate number of owned and third/related party apartment homes managed by
Gables during the applicable periods.
INCOME TAXES
Gables has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), commencing with the taxable year ended December
31, 1994. As a result, Gables generally will not be subject to Federal income
taxation at the corporate level to the extent it distributes annually at least
95% of its REIT taxable income, as defined in the Code, to its shareholders and
satisfies certain other requirements. Accordingly, no provision has been made
for Federal income taxes in the accompanying consolidated financial statements
for the years ended December 31, 1998, 1997 and 1996. Additionally, certain
subsidiaries of Gables, formed to provide management and other services to third
and related parties, are taxed based on reportable income. The tax attributes of
these entities are immaterial to the accompanying consolidated financial
statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Gables adopted SFAS No. 130, "Reporting Comprehensive Income," during 1998. SFAS
No. 130 established standards for reporting and disclosing comprehensive income
(defined as revenues, expenses, gains and losses that under GAAP are not
included in net income) and its components. As of December 31, 1998, Gables had
no items of other comprehensive income.
<PAGE>
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
In June, 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued establishing accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for Gables beginning January 1,
2000. The impact of SFAS No. 133 on Gables' financial statements will depend on
the extent, type and effectiveness of Gables' hedging activities. SFAS No. 133
could increase volatility in net income and other comprehensive income.
5. NOTES PAYABLE
Notes payable consist of the following:
December 31,
1998 1997
-------- --------
Secured conventional fixed-rate $125,546 $ 96,135
Unsecured conventional fixed-rate 323,442 158,526
Tax-exempt fixed-rate 90,730 60,150
-------- --------
Total fixed-rate 539,718 314,811
Tax-exempt variable-rate 150,070 44,930
Unsecured credit facilities 123,000 75,621
--------- ---------
Total notes payable $812,788 $435,362
========= =========
SECURED CONVENTIONAL FIXED-RATE NOTES PAYABLE
At December 31, 1997, the fixed-rate notes payable were comprised of five loans
collateralized by seven apartment communities included in real estate assets. At
December 31, 1997, the interest rates on these notes payable ranged from 7.13%
to 8.77% (weighted average of 8.14%) and the maturity dates ranged from May,
2003 to December, 2009.
In April, 1998, Gables assumed $31,029 of indebtedness, at fair value, in
connection with the Greystone Acquisition.
At December 31, 1998, the fixed-rate notes payable are comprised of nine loans
collateralized by eleven apartment communities included in real estate assets.
At December 31, 1998, the interest rates on these notes payable ranged from
6.75% to 8.77% (weighted average of 7.80%) and the maturity dates ranged from
May, 2003 to December, 2015. Principal amortization payments are required on a
monthly basis for all notes payable based on amortization schedules ranging from
25 to 30 years.
UNSECURED CONVENTIONAL FIXED-RATE NOTES PAYABLE
At December 31, 1997, the unsecured, fixed-rate notes payable were comprised of
four loans. At December 31, 1997, the interest rates on these notes payable
ranged from 6.10% to 8.62% (weighted average of 7.78%) and the maturity dates
ranged from November, 2001 to December, 2007.
In March, 1998, Gables issued $100,000 of senior unsecured notes which bear
interest at 6.80%, were priced to yield 6.84% and mature in March, 2005. In
October, 1998, Gables issued (i) $50,000 of senior unsecured notes which bear
interest at 6.55%, were priced to yield 6.59% and mature in October, 2000 and
(ii) $15,000 of senior unsecured notes which bear interest at 6.60%, were priced
at par and mature in October, 2001.
<PAGE>
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
In November, 1998, Gables acquired a parcel of land and assumed $829 of
indebtedness associated therewith. Such indebtedness bears interest at 5.25%,
requires principal amortization payments over its 20 year term, and has a
maturity of November, 2018.
At December 31, 1998, the unsecured fixed-rate notes payable were comprised of
eight loans. At December 31, 1998, the interest rates on these notes payable
ranged from 5.25% to 8.62% (weighted average of 7.20%) and the maturity dates
ranged from October, 2000 to November, 2018. Principal amortization payments are
required on certain of these loans based on amortization schedules ranging from
20 to 30 years.
TAX-EXEMPT FIXED-RATE NOTES PAYABLE
At December 31, 1998 and 1997, the tax-exempt, fixed-rate indebtedness was
comprised of five and two loans, respectively. One such loan outstanding at
December 31, 1998 and 1997 has a principal balance of $48,365, and is
collateralized by three communities induced for tax-exempt financing and three
additional communities. Principal amortization payments based on a 30 year
amortization schedule are required on a monthly basis. These payments are
retained in an escrow account and are not applied to reduce the outstanding
principal balance of the loan. Principal payments through December 31, 1998 and
1997 are included in restricted cash in the accompanying balance sheets. The
note payable bears interest at 6.38% and matures in August, 2004. The three
underlying tax-exempt bond issues mature in August, 2024. The second loan, with
an outstanding principal balance of $11,630 and $11,785 as of December 31, 1998
and 1997, respectively, represents a tax-exempt bond financing secured by one
apartment community. The bond issue was credit enhanced for an annual fee of
0.60% and bears interest at a weighted average rate of 7.03% on a fixed basis
for 30 years. Gables is required to make monthly escrow payments each year
totaling the annual principal payment due to the bondholders in the month of
January thereafter.
On April 1, 1998, Gables assumed three bond issues totaling $30,735 in
connection with the South Florida Acquisition. Two of the bond issues bear
interest at 4.75% and are enhanced by letters of credit provided by a letter of
credit facility entered into on April 1, 1998 (the "Florida Enhancement
Facility"). The fee for the letters of credit is 1.0% per annum. The Florida
Enhancement Facility has an initial term of 10 years and has three five-year
extension options. The third bond issue bears interest at 5.75% and is not
currently enhanced by a letter of credit. Such bond issue may be refunded and
upon such refunding will be enhanced by the Florida Enhancement Facility. The
Florida Enhancement Facility is collateralized by (i) each apartment community
induced for tax-exempt financing for which a letter of credit is issued and
outstanding thereunder and (ii) two additional communities. The maturity dates
of the three bond issues range from February, 2004 to April, 2009. The bonds do
not require principal amortization payments.
TAX-EXEMPT VARIABLE-RATE NOTES PAYABLE TOTALING $44,930
At December 31, 1998 and 1997, the variable-rate mortgage notes payable securing
tax-exempt bonds totaling $44,930 were comprised of four loans, each of which is
collateralized by an apartment community included in real estate assets. These
bonds bear interest at a variable rate of interest, adjusted weekly based upon a
negotiated rate. The interest rate in effect at December 31, 1998 and 1997 was
4.1% and 4.2%, respectively. Tax-exempt variable rates are, and historically
have been, significantly higher at year-end than during the year. The effective
interest rates were 3.5%, 3.7% and 3.5% for the years ended December 31, 1998,
1997 and 1996, respectively. The bonds are currently enhanced by four letters of
credit provided by a letter of credit facility entered into in October, 1997.
The fee for these letters of credit was 1.5% per annum through June, 1995, 1.25%
per annum through March, 1996, 1.0% through September, 1997 and is currently
0.95% per annum. The letter of credit facility has an initial term of five years
and has unlimited one-year extension options. Gables has exercised the first of
its one-year extension options resulting in a maturity date for the facility of
October, 2003. Three of the underlying bond issues mature in December, 2007 and
the fourth underlying bond issue matures in August, 2024.
<PAGE>
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
TAX-EXEMPT VARIABLE-RATE NOTES PAYABLE TOTALING $105,140
On April 1, 1998, Gables assumed five bond issues totaling $105,140 in
connection with the South Florida Acquisition. At December 31, 1998, the
interest rates on these bonds ranged from 3.45% to 4.05% (weighted average of
3.81%) and the maturity dates of the underlying bond issues ranged from August,
2006 to September, 2008. The effective interest rate for these bonds averaged
3.6% for the period from April 1, 1998 to December 31, 1998. The bonds are
enhanced by letters of credit provided by the Florida Enhancement Facility
described above.
$225 MILLION CREDIT FACILITY
In March, 1996, Gables closed a $175 million unsecured revolving credit
facility. In May, 1998, the $175 million commitment level was increased to $225
million and the maturity date was extended to May, 2001 with two one-year
extension options. Gables' availability under the facility is limited to the
lesser of the total $225 million commitment or the borrowing base. The borrowing
base available under the facility is based on the value of Gables' unencumbered
real estate assets as compared to the amount of Gables' unsecured indebtedness.
Borrowings bore interest at LIBOR plus 1.50% (reduced from 1.65% in November,
1996) through April, 1997. In April, 1997, Gables' borrowing costs under the
facility were reduced to LIBOR plus 1.10% in connection with Gables' attainment
of senior unsecured debt ratings of BBB from Standard and Poor's and Baa2 from
Moody's Investors Service (the "Credit Ratings"). In August, 1997, Gables'
borrowing costs were renegotiated and were reduced to LIBOR plus 0.80%.
Additionally, a competitive bid option was added for up to 50% of the total
commitment. As of December 31, 1998, Gables had $110.0 million in borrowings
outstanding under the facility and, therefore, had $115.0 million of remaining
capacity on the $225.0 million available commitment.
$25 MILLION CREDIT FACILITY
In November, 1996, Gables closed an unsecured revolving credit facility that
currently provides for up to $25 million in borrowings. This facility has an
initial term of one year and has unlimited one-year extension options. Gables
has exercised two of its one-year extension options resulting in a maturity date
for the facility of October, 1999. 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. In August, 1997, Gables' borrowing costs were renegotiated and were
reduced to LIBOR plus 0.80%. As of December 31, 1998, Gables had no borrowings
outstanding under this facility.
$25 MILLION BORROWING FACILITY
At December 31, 1998, Gables had $13.0 million in borrowings outstanding under
this unsecured credit facility at an interest rate of 6.0%. The facility
currently matures on April 28, 1999.
RESTRICTIVE COVENANTS
Certain of Gables' 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.
Gables 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>
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
The tax-exempt bonds contain certain covenants which require a certain
percentage of the apartments in such communities be rented to individuals based
upon income levels specified by U.S. government programs, as defined.
MATURITIES
The aggregate maturities of notes payable at December 31, 1998 are as follows:
1999 $16,144
2000 56,912
2001 168,599
2002 86,280
2003 65,601
2004 and thereafter 419,252
--------
$812,788
========
The debt maturities in 2001 include $110,000 of outstanding indebtedness under
the $225 Million Credit Facility which has two remaining one-year extension
options. The debt maturities in 2003 include $44,930 of tax-exempt bond
indebtedness credit-enhanced through a letter of credit facility which has
unlimited one-year extension options. Three of the underlying bond issues mature
in December, 2007 and the fourth underlying bond issue matures in August, 2024.
JOINT VENTURE INDEBTEDNESS
The Arbors of Harbortown apartment community secures a $16.4 million tax-exempt
bond obligation, which is recourse to Gables up to $1.0 million (this amount is
fully cash-collateralized and is held by the Arbors of Harbortown JV), bears
interest at a variable low-floater rate, has a maturity date of April, 2013, and
is payable in monthly installments of interest only. The credit enhancement for
the bond obligation expires in May, 2001. The Metropolitan Uptown apartment
community secures a conventional fixed-rate loan with $17.8 million outstanding
at December 31, 1998, 25% of which has been guaranteed by Gables. The loan has a
maturity date of December 31, 2002 and bears interest at a rate of 7.18%.
INTEREST RATE PROTECTION AGREEMENTS
Gables has four interest rate protection agreements in place at December 31,
1998, the current terms of which are discussed below:
Notional Strike Effective Termination
Description of Agreement Amount Price Date Date
- ------------------------ --------- ------ --------- ---------
LIBOR, 30-day - "Rate Cap" $44,530 6.25%(a) 01/27/94 01/30/99
LIBOR, 30-day - "Knock-out Rate Swap" 44,530 5.35%(a) 08/30/96 08/30/99 (b)
LIBOR, 30-day - "Knock-out Rate Swap" 25,000 5.76%(a) 02/27/98 02/27/00 (c)
LIBOR, 30-day - "Rate Swap" 40,000 4.79%(a) 11/30/98 09/29/00
(a) The 30-day LIBOR rate in effect at December 31, 1998 was 5.63%.
(b) This agreement fixes Gables' underlying 30-day LIBOR rate at 5.35% and
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.
(c) This agreement fixes Gables' underlying 30-day LIBOR rate at 5.76% and
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 6.70% or higher.
<PAGE>
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
PLEDGED ASSETS
The aggregate net book value at December 31, 1998 of real estate assets pledged
as collateral for indebtedness was $473,336.
6. COMMITMENTS AND CONTINGENCIES
OFFICE LEASES
Gables is party to office operating leases with various terms. Future minimum
lease payments and rent expense for such leases are not material.
CONTINGENCIES
The various entities comprising Gables are subject to various legal proceedings
and claims that arise in the ordinary course of business. These matters are
generally covered by insurance. While the resolution of these matters cannot be
predicted with certainty, management believes that the final outcome of such
matters will not have a material adverse effect on the financial position or
results of operations of Gables.
7. EXTRAORDINARY LOSS, NET
Extraordinary loss, net of $602 for the year ended December 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.
Extraordinary loss, net of $520 for the year ended December 31, 1996 represents
the write-off of unamortized deferred financing costs associated with the early
retirement of a credit facility that was refinanced. The extraordinary loss of
$631 is presented net of the $111 portion of the loss attributable to the
minority interest unitholders.
8. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure about the estimated fair value of financial instruments is based on
pertinent information available to management as of December 31, 1998. Such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date and current estimates of fair value may differ
significantly from the amounts presented herein.
CASH EQUIVALENTS
Gables estimates that the fair value of cash equivalents approximates carrying
value due to the relatively short maturity of these instruments.
NOTES PAYABLE
Gables estimates that the fair value of notes payable approximates carrying
value based upon its effective current borrowing rate for issuance of debt with
similar terms and remaining maturities.
<PAGE>
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
INTEREST RATE PROTECTION AGREEMENTS
The estimated fair value and the net carrying value of the $44,530 interest rate
cap agreement at December 31, 1998 is $0 and $11, respectively. The estimated
fair value of the three interest rate swap agreements is $(161) at December 31,
1998. The estimated fair value for these agreements is based on the value of
cash flows arising in the difference in the strike price per the agreements and
projected LIBOR rates over the remaining term of these agreements.
9. EARNINGS PER SHARE
Basic earnings per share are computed based on net income available to common
shareholders and the weighted average number of common shares outstanding.
Diluted earnings per share reflect the assumed issuance of common shares under
share option and incentive plans and upon conversion of units. The numerator and
denominator used for both basic and diluted earnings per share computations are
as follows:
Years Ended December 31,
1998 1997 1996
---- ---- ----
BASIC AND DILUTED INCOME AVAILABLE TO
COMMON SHAREHOLDERS (NUMERATOR):
Income before extraordinary loss, net - basic $28,040 $30,491 $22,901
Minority interest of common unitholders
in Operating Partnership 7,142 5,611 4,640
------- ------- -------
Income before extraordinary loss, net - diluted $35,182 $36,102 $27,541
======= ======= =======
Net income - basic $28,040 $29,889 $22,381
Minority interest of common unitholders
in Operating Partnership 7,142 5,501 4,529
------- ------- -------
Net income - diluted $35,182 $35,390 $26,910
======= ======= =======
COMMON SHARES (DENOMINATOR):
Average shares outstanding - basic 24,118 19,788 16,788
Incremental shares from assumed conversions of:
Stock options 128 150 89
Outstanding common Units 6,094 3,653 3,406
------- ------- -------
Average shares outstanding - diluted 30,340 23,591 20,283
======= ======= =======
10. SEGMENT REPORTING
Gables adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," during 1998. SFAS No. 131 established standards for
reporting financial and descriptive information about operating segments in
annual financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Gables' chief operating
decision maker is its senior management group.
Gables owns, operates and develops multifamily apartment communities in nine
major markets located in Texas, Georgia, Florida and Tennessee. Such apartment
communities generate rental revenue and other income through the leasing of
apartment homes to a diverse base of residents. Gables evaluates the performance
of each of its apartment communities on an individual basis. However, because
each of the apartment communities have similar economic characteristics,
residents, and products and services, the apartment communities have been
aggregated into one reportable segment. This segment comprises 97% of Gables'
total revenues for the year ended December 31, 1998.
<PAGE>
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
The primary financial measure for Gables' reportable business segment is net
operating income ("NOI"), which represents total property revenues less property
operating and maintenance expenses (as reflected in the accompanying statements
of operations). Accordingly, NOI excludes certain expenses included in the
determination of net income. Current year NOI is compared to prior year NOI and
current year budgeted NOI as a measure of financial performance. The NOI yield
or return on total capitalized costs is an additional measure of financial
performance. NOI from apartment communities totaled $138,778, $91,101 and
$70,778 for the years ended December 31, 1998, 1997 and 1996, respectively. All
other segment measurements are disclosed in Gables' consolidated financial
statements.
Gables also provides management, brokerage, corporate apartment home and
development and construction services to third parties. These operations on an
individual and aggregate basis do not meet the quantitative thresholds for
segment reporting per SFAS No. 131.
11. PROFIT SHARING PLAN
Eligible employees of Gables may participate in a profit sharing plan pursuant
to Section 401(k) of the Internal Revenue Code. Under the plan, employees may
defer a portion of their salary on a pre-tax basis. Gables also has the
discretion to make matching contributions, currently equal to 50% of an
employee's first 4% salary deferral contribution. Expenses under this plan for
the years ended December 31, 1998, 1997 and 1996 were not material.
During January, 1996, the Company added the Gables Residential Trust Stock Fund
(the "Fund") as an investment option for the plan. The Fund is comprised of
common shares of the Company. In connection therewith, 100 common shares were
registered for issuance under the plan. The plan trustee will purchase common
shares of the Company for the Fund, at the direction of the plan investment
committee, either on the open market or directly from the Company.
12. DIVIDENDS AND SHARE BUILDER PLAN
The Company has declared and paid dividends to common shareholders for the years
ended December 31, 1998, 1997 and 1996 as follows:
Per Share Dividends Shareholder Tax Treatment
------------------- -------------------------
First Qtr. to Fourth Return of Ordinary
Year Fourth Qtr. Qtr. Capital Income
- ---- ---------- ---- ------- --------
1998 $2.02 $0.51 (a) 32.4% 67.6%
1997 1.98 0.50 (a) 23.5% 76.5%
1996 1.94 0.49 (b) 29.1% 70.9%
(a) The fourth quarter dividends in 1998 and 1997 were declared and paid in
December 1998 and 1997, respectively.
(b) The fourth quarter dividends for 1996 were declared in December, 1996 and
were paid in January, 1997.
In 1995, the Company implemented its Share Builder Plan, a dividend reinvestment
and share purchase program that provides its shareholders a method, without
brokerage commissions or service charges, of investing cash dividends or
optional cash payments in additional common shares. Under the plan, shareholders
may elect to reinvest dividends in additional common shares at a 2% discount to
the then current market price of common shares and may purchase additional
common shares for cash (up to $20 per quarter) at 100% of the then current
market price.
<PAGE>
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
13. 1994 SHARE OPTION AND INCENTIVE PLAN
The Company adopted the 1994 Share Option and Incentive Plan (the "Plan") to
provide incentives to officers, employees and non-employee trustees. The Plan
provides for the grant of options to purchase a specified number of common
shares ("Options") or the grant of restricted or unrestricted common shares
("Restricted Shares" or "Unrestricted Shares"). Under the Plan, as amended, the
total number of shares available for grant is 9% of the total number of common
shares and Units (other than common shares or Units held by the Company or its
subsidiaries) outstanding at any time and the number of common shares which may
be issued as Restricted Shares or Unrestricted Shares is equal to 50% of the
number of shares available for issuance under the Plan at such time.
To date, Options have been granted in two or more series during each of 1994
through 1998 with an exercise price equal to the fair value of the Company's
common shares on the dates the Options were granted. The Options granted are
generally exercisable in installments over three years beginning one year after
the date of grant. At December 31, 1998, 2,022 common shares are subject to
outstanding Options granted to officers, employees and trustees of the Company,
of which Options to purchase approximately 608 shares are currently exercisable.
The total number of common shares reserved for issuance under the Plan at
December 31, 1998 is 2,948, which is equal to 9% of the total number of common
shares and Units outstanding at that time.
A summary of the Options activity for the years ended December 31, 1998, 1997
and 1996 is as follows:
1998 1997 1996
------ ------ ------
Outstanding at beginning of year 937 904 773
Granted 1,305 235 270
Forfeited (56) (55) (72)
Exercised (164) (147) (67)
----- ----- ----
Outstanding at end of year 2,022 937 904
===== ===== ====
Option prices:
Granted $26.750-$27.625 $25.000-$25.500 $22.750 - $23.000
Forfeited 19.500- 27.625 19.500- 25.500 19.500 - 22.750
Exercised 19.125- 25.500 19.500- 22.750 19.500 - 22.500
Outstanding at end of year 19.125- 27.625 19.125- 25.500 19.125 - 23.000
Gables accounts for stock options issued under the Plan in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized, since all options have been granted with
an exercise price equal to the fair value of the Company's common shares on the
date of grant. Had compensation cost for these plans been determined consistent
with Statement of Financial Accounting Standards No. 123 (FAS 123) "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
1998 1997 1996
------ ------ ------
Net income available to
common shareholders: As Reported $28,040 $29,889 $22,381
Pro Forma 27,607 29,669 22,258
Basic earnings per share: As Reported 1.16 1.51 1.33
Pro Forma 1.14 1.50 1.33
Diluted earnings per share: As Reported 1.16 1.50 1.32
Pro Forma 1.14 1.49 1.32
<PAGE>
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
Because the FAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
The weighted average fair value of options granted is $1.92, $2.14 and $1.91 for
1998, 1997 and 1996, respectively. The fair value of each option grant as of the
date of grant has been estimated using the Black-Scholes option pricing models
with the following weighted-average assumptions for grants in 1998, 1997 and
1996, respectively: risk free interest rates of 4.84%, 6.45% and 6.44%; expected
lives of 6.39, 3.91 and 4.90; dividend yields of 7.55%, 7.99% and 8.43%, and
expected volatility of 18%, 18% and 19%.
Gables has made the following grants of Restricted Shares and Unrestricted
Shares (the "Share Grants") under the Plan:
<TABLE>
<CAPTION>
Number of Number of
Unrestricted Restricted Per Share
Grant Shares Shares Grant
Date Granted Granted Value Vesting Period for Restricted Shares
- ---- ------- ------- ----- ------------------------------------
<S> <C> <C> <C> <C>
2-21-97 23 46 $25.8750 Two equal annual installments beginning 1-1-98
2-12-98 13 40 26.6875 Three equal annual installments beginning 1-1-99
4-01-98 3 9 27.0625 Three equal annual installments beginning 4-1-99
2-09-99 11 34 23.2500 Three equal annual installments beginning 1-1-00
2-09-99 5 9 23.2500 Two equal annual installments beginning 1-1-00
</TABLE>
The value of the Unrestricted Shares granted is accrued as long-term
compensation expense in the year the related service was provided. Upon issuance
of the Share Grants, the value of the shares issued is recorded to the
additional paid-in capital component of shareholders' equity and the value of
the Restricted Shares is recorded to the deferred long-term compensation
component of shareholders' equity. Such deferred compensation is amortized
ratably over the term of the vesting period. During 1998, 7 Restricted Shares
were forfeited and the appropriate adjustments were made to shareholders' equity
and compensation expense.
14. SUBSEQUENT EVENTS (Unaudited as to events occurring subsequent to March 5,
1999)
On March 4, 1999, Gables sold an apartment community located in Atlanta
comprising 213 apartment homes for $19.3 million. The net proceeds were
initially used to paydown outstanding borrowings under Gables' $225 Million
Credit Facility.
On March 22, 1999, Gables announced a common share repurchase program pursuant
to which Gables is authorized to purchase up to $50 million of its outstanding
common shares. Gables plans to repurchase shares from time to time in open
market and privately negotiated transactions, depending on market prices and
other conditions using proceeds from sales of selected assets.
On March 26, 1999, Gables entered into a joint venture agreement with an
affiliate of J.P. Morgan Investment, Inc. ("J.P. Morgan"). The business purpose
of the venture is to develop, own and operate seven multifamily apartment
communities located in four of Gables' nine markets, which are expected to
comprise 2,181 apartment homes. As of December 31, 1998, Gables (i) had
commenced construction of four of the communities, (ii) owned the land for the
future development of two of the communities and (iii) owned the acquisition
right for the land for the future development of one of the communities. The
capital budget for the development of the seven communities is approximately
$213 million and is anticipated to be funded with 50% debt and 50% equity. The
equity component will be funded 80% by J.P. Morgan and 20% by Gables. Gables'
portion of the equity will be funded through a contribution of cash and
property. Gables will serve as the managing member of the venture and will have
responsibility for all day-to-day operating issues. Gables will also serve as
the general contractor during construction and as the property manager.
<PAGE>
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
- ---------------------------------------------------------------
15. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Quarterly financial information for the years ended December 31, 1998 and 1997
is as follows:
Year Ended December 31, 1998
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------
Total revenues $41,490 $56,176 $59,214 $59,744
Gain on sale of real estate assets 0 0 0 0
Loss on treasury locks (1,811) (199) (3,627) 0
Income before extraordinary loss, net 8,139 9,514 8,459 11,593
Extraordinary loss, net of minority interest 0 0 0 0
Net income 8,139 9,514 8,459 11,593
Net income available to common shareholders 5,753 7,120 6,017 9,150
Basic earnings per common share:
Income before extraordinary loss, net 0.26 0.32 0.23 0.35
Net income 0.26 0.32 0.23 0.35
Diluted earnings per common share:
Income before extraordinary loss, net 0.26 0.32 0.23 0.35
Net income 0.26 0.32 0.23 0.35
Year Ended December 31, 1997
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------
Total revenues $32,232 $33,741 $36,893 $40,572
Gain on sale of real estate assets 4,858 0 491 0
Loss on treasury locks 0 0 0 (1,178)
Income before extraordinary loss, net 10,410 6,706 9,235 8,303
Extraordinary loss, net of minority interest (602) 0 0 0
Net income 9,808 6,706 9,235 8,303
Net income available to common shareholders 9,808 6,706 7,460 5,915
Basic earnings per common share:
Income before extraordinary loss, net 0.54 0.34 0.38 0.28
Net income 0.51 0.34 0.38 0.28
Diluted earnings per common share:
Income before extraordinary loss, net 0.53 0.34 0.38 0.28
Net income 0.50 0.34 0.38 0.28
<PAGE>
59
GABLES RESIDENTIAL TRUST Schedule III
Real Estate Investments and Accumulated Depreciation as of December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Costs
Initial Costs Capital- Gross Amount at Which
to Gables ized Carried at Close of Period Year
----------- Subsequent -------------------------- Original Year
Property Type Related Buildings and to Buildings and Accumulated Construction Gables
and Location Encumbrances Land Improvements Acquisition Land Improvements Total Depreciation Complete Acquired
- ------------- ------------ ---- ------------ ------------ ---- -------------- ----- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMPLETED APARTMENT COMMUNITIES: (1) (2)
Houston, TX ........... $75,092 $59,664 $183,231 $124,546 $60,806 $306,635 $367,441 $ 41,173 1981-1998 1987-1998
Atlanta, GA (3)........ 76,629 70,437 114,575 198,350 70,670 312,692 383,362 40,960 1945-1998 1983-1998
Boca Raton, FL ........ 135,875 56,079 302,171 1,926 56,079 304,097 360,176 7,219 1984-1998 1998
Dallas, TX ............ 14,021 16,306 46,050 60,007 16,306 106,057 122,363 10,957 1985-1996 1993-1997
Memphis, TN ........... 29,494 6,708 23,674 60,790 6,708 84,464 91,172 13,034 1986-1997 1985-1996
Nashville, TN ......... 35,235 4,032 0 56,633 4,087 56,578 60,665 16,072 1987-1996 1985-1994
Austin, TX ............ 0 9,988 32,242 58,992 9,988 91,234 101,222 5,164 1992-1998 1992-1998
San Antonio, TX........ 0 2,839 0 25,194 2,839 25,194 28,033 3,021 1995-1996 1994
Orlando, FL ........... 0 2,477 0 19,069 2,477 19,069 21,546 447 1998 1996
-------- --------- -------- --------- --------- --------- --------- --------
Total ................$366,346 $ 228,530 $701,943 $ 605,507 $ 229,960 $1,306,020 $1,535,980 $138,047
-------- --------- -------- --------- --------- --------- ---------- --------
APARTMENT COMMUNITIES UNDER CONSTRUCTION:
Houston, TX (4)........ $ 0 $ 4,233 $ 0 $ 3,467 $ 4,233 $ 3,467 $ 7,700 $ 0 n/a 1998
Atlanta, GA (4)........ 0 8,667 0 7,351 8,667 7,351 16,018 0 n/a 1997
Boca Raton, FL (4)..... 0 19,568 0 5,651 19,568 5,651 25,219 0 n/a 1998
Dallas, TX (4)......... 0 2,800 0 5,494 2,800 5,494 8,294 0 n/a 1997
Orlando, FL ........... 0 3,235 0 19,363 3,235 19,363 22,598 192 n/a 1997
-------- -------- -------- --------- ------- --------- --------- -------
Total .................$ 0 $38,503 $ 0 $ 41,326 $ 38,503 $ 41,326 $ 79,829 $ 192
-------- -------- -------- --------- ------- --------- --------- -------
LAND HELD FOR FUTURE DEVELOPMENT OF APARTMENT COMMUNITIES:
Houston, TX ............$ 0 $ 7,851 $ 0 $ 0 $ 7,851 $ 0 $ 7,851 $ 0 n/a 1998
Atlanta, GA ............ 0 16,765 0 0 16,765 0 16,765 0 n/a 1997-1998
Boca Raton, FL (4)...... 0 2,765 0 0 2,765 0 2,765 0 n/a 1998
Dallas, TX (4).......... 0 27,856 0 0 27,856 0 27,856 0 n/a 1994-1998
Memphis, TN ............ 0 606 0 0 606 0 606 0 n/a 1996
San Antonio, TX ....... 0 1,549 0 (353) 1,196 0 1,196 0 n/a 1994
Orlando, FL ............ 0 9,113 0 0 9,113 0 9,113 0 n/a 1998
-------- -------- -------- --------- -------- --------- --------- -------
Total ..................$ 0 $66,505 $ 0 $ (353) $ 66,152 $0 $ 66,152 $ 0
-------- -------- -------- --------- -------- --------- --------- -------
Grand Totals ..........$366,346 $333,538 $701,943 $646,480 $334,615 $1,347,346 $1,681,961 $138,239
======== ======== ======== ========= ======== ========= ========== =======
<FN>
(1) Depreciation of apartment communities is calculated on a straight line
basis over an estimated useful life ranging from 19 to 40 years for
buildings and improvements and an estimated useful life ranging from 5 to
10 years for furniture, fixtures, and equipment.
(2) The year acquired represents the year Gables acquired a completed community
or the year Gables acquired the land for the development of an apartment
community.
(3) This location includes one apartment community that was sold in March,
1999.
(4) Each denoted location includes an apartment community under construction or
a parcel of land for development of an apartment community, as applicable,
that was contributed into a joint venture in March, 1999, in which Gables
has an ownership interest.
</FN>
</TABLE>
<PAGE>
60
GABLES RESIDENTIAL TRUST Schedule III
Real Estate Investments and Accumulated Depreciation as of December 31, 1998
(Dollars in Thousands)
A summary of activity for real estate investments and accumulated depreciation
is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1998 1997 1996
------ -------- ---------
<S> <C> <C> <C>
REAL ESTATE INVESTMENTS:
Balance, beginning of year ...................................... $ 1,056,228 $ 784,600 $ 591,233
Additions:
Acquisitions, including renovation expenditures ............... 462,237 179,346 128,472
Development costs incurred, including related land acquisitions 155,541 96,551 65,867
Capital expenditures for completed communities ................ 7,955 4,878 3,854
----------- ---------- ----------
Total additions ............................................. 625,733 280,775 198,193
Sales ........................................................... 0 (9,147) (4,826)
----------- ---------- ----------
Balance, end of year ............................................ $ 1,681,961 $ 1,056,228 $ 784,600
=========== ========== ==========
ACCUMULATED DEPRECIATION:
Balance, beginning of year ...................................... $98,236 $74,903 $ 57,343
Depreciation .................................................... 40,003 24,655 18,457
Sales ........................................................... 0 (1,322) (897)
----------- ----------- ----------
Balance, end of year ............................................ $138,239 $98,236 $74,903
=========== =========== ==========
RECONCILIATION OF DEPRECIATION ABOVE TO STATEMENTS OF OPERATIONS:
Depreciation in rollforward of accumulated depreciation.......... $40,003 $24,655 $18,457
Amortization of prepaid land lease payments (1).................. 84 57 20
----------- ----------- ---------
Real estate asset depreciation and amortization
expense reflected in the accompanying statements of operations $40,087 $24,712 $18,477
=========== =========== =========
Notes to table above:
<FN>
(1) Gables has leased two parcels of land pursuant to two long-term land lease
agreements. The prepaid lease payments, net of accumulated amortization, are
included in other assets in the accompanying balance sheets.
</FN>
</TABLE>
GABLES RESIDENTIAL TRUST
FOURTH AMENDED AND RESTATED 1994 SHARE OPTION AND INCENTIVE PLAN*
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Gables Residential Trust 1994 Share Option and
Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and enable
the officers, employees and Trustees of Gables Residential Trust (the "Company")
and its Subsidiaries upon whose judgment, initiative and efforts the Company
largely depends for the successful conduct of its business to acquire a
proprietary interest in the Company. It is anticipated that providing such
persons with a direct stake in the Company's welfare will assure a closer
identification of their interests with those of the Company, thereby stimulating
their efforts on the Company's behalf and strengthening their desire to remain
with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Share Options, Non-Qualified
Share Options, Restricted Share Awards and Unrestricted Share Awards.
"Board" means the Board of Trustees of the Company.
"Cause" means and shall be limited to a vote of the Board of Trustees
resolving that the participant should be dismissed as a result of (i) any
material breach by the participant of any agreement to which the
participant and the Company are parties, (ii) any act (other than
retirement) or omission to act by the participant which may have a material
and adverse effect on the business of the Company or any Subsidiary or on
the participant's ability to perform services for the Company or any
Subsidiary, including, without limitation, the commission of any crime
(other than ordinary traffic violations), or (iii) any material misconduct
or neglect of duties by the participant in connection with the business or
affairs of the Company or any Subsidiary.
"Change of Control" is defined in Section 12.
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" means the Board or any Committee of the Board referred to in
Section 2.
"Disability" means disability as set forth in Section 22(e)(3) of the Code.
"Effective Date" means the date on which the Plan is approved by
shareholders as set forth in Section 14.
"Fair Market Value" on any given date means the last reported sale price at
which the Shares are traded on such date or, if no Shares are traded on
such date, the most recent date on which the Shares were traded, as
reflected on the New York Stock Exchange or, if applicable, any other
national stock exchange on which the Shares are traded. Notwithstanding the
foregoing, the Fair Market Value on the first day of the Company's initial
public offering shall mean the initial public price.
"Incentive Share Option" means any Share Option designated and qualified as
an "incentive stock option" as defined in Section 422 of the Code.
"Independent Trustee" means a member of the Board who is not also an
employee of the Company or any Subsidiary.
"Non-Qualified Share Option" means any Share Option that is not an
Incentive Share Option.
"Option" or "Share Option" means any option to purchase Shares granted
pursuant to Section 5.
"Restricted Share Award" means Awards granted pursuant to Section 6.
"Share" or "Shares" means one or more, respectively, of the Common Shares
of beneficial interest, par value $.01 per share, of the Company, subject
to adjustments pursuant to Section 3.
"Subsidiary" means Gables Realty Limited Partnership, Central Apartment
Management, Inc., East Apartment Management, Inc., Gables Central
Construction, Inc., and Gables East Construction, Inc., and any corporation
or other entity (other than the Company) in any unbroken chain of
corporations or other entities, beginning with the Company if each of the
corporations or entities (other than the last corporation or entity in the
unbroken chain) owns stock or other interests possessing 50% or more of the
economic interest or the total combined voting power of all classes of
stock or other interests in one of the other corporations or entities in
the chain.
"Unit" or "Units" means a unit or units of limited partnership interest in
Gables Realty Limited Partnership, a Delaware limited partnership and the
entity through which the Company principally conducts its business.
"Unrestricted Share Award" means Awards granted pursuant to Section 7.
<PAGE>
SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT
PARTICIPANTS AND DETERMINE AWARDS
(a) COMMITTEE. Prior to the closing of the Company's initial public offering
and the appointment of the Independent Trustees, the Plan shall be
administered by the Board. After the closing of the Company's initial
public offering and the appointment of the Independent Trustees, the Plan
shall be administered by all of the Independent Trustee members of the
Compensation Committee of the Board, or any other committee of not less
than two Independent Trustees performing similar functions, as appointed by
the Board from time to time.
(b) POWERS OF COMMITTEE. The Committee shall have the power and authority to
grant Awards consistent with the terms of the Plan, including the power and
authority:
(i) to select the officers and other employees of the Company and its
Subsidiaries to whom Awards may from time to time be granted;
(ii) to determine the time or times of grant, and the extent, if any, of
Incentive Share Options, Non-Qualified Share Options, Restricted Share
Awards and Unrestricted Share Awards, or any combination of the
foregoing, granted to any one or more participants;
(iii) to determine the number of Shares to be covered by any Award;
(iv) to determine and modify the terms and conditions, including
restrictions, not inconsistent with the terms of the Plan, of any
Award, which terms and conditions may differ among individual Awards
and participants, and to approve the form of written instruments
evidencing the Awards;
(v) to accelerate the exercisability or vesting of all or any portion of
any Award;
(vi) subject to the provisions of Section 5(a)(iii), to extend the period
in which Share Options may be exercised;
(vii)to determine whether, to what extent, and under what circumstances
Shares and other amounts payable with respect to an Award shall be
deferred either automatically or at the election of the participant
and whether and to what extent the Company shall pay or credit amounts
constituting interest (at rates determined by the Committee) or
dividends or deemed dividends on such deferrals; and
(viii) to adopt, alter and repeal such rules, guidelines and practices for
administration of the Plan and for its own acts and proceedings as it
shall deem advisable; to interpret the terms and provisions of the
Plan and any Award (including related written instruments); to make
all determinations it deems advisable for the administration of the
Plan; to decide all disputes arising in connection with the Plan; and
to otherwise supervise the administration of the Plan.
All decisions and interpretations of the Committee shall be binding on all
persons, including the Company and Plan participants.
<PAGE>
SECTION 3. SHARES ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) SHARES ISSUABLE. At any time, the maximum number of Shares issued or
available for issuance under the Plan shall be equal to the sum of (i)
2,952,895 (the "Minimum Shares")1 and (ii) 9% of the positive
difference, if any, of (A) the sum of (x) the total number of Shares
outstanding at such time (which limit shall be determined without
considering as outstanding any Shares that are the subject of any
unexercised options under the Plan or any other option plan of the
Company or any Shares owned by the Company or any of its subsidiaries)
and (y) the total number of Shares issuable upon the exchange of Units
that are outstanding at such time (other than Units owned by the
Company or any of its subsidiaries) over (B) 32,809,949 (the "Base
Amount")2; provided, however, that the maximum number of Shares for
which Incentive Share Options may be granted under the Plan shall not
exceed 2,622,860 Shares (which number represents 9% of such sum as of
May 19, 1998 and which number is subject to adjustment as provided in
paragraph (b) below); provided, further, that at any time the total
number of Shares issued or available for issuance under the Plan in
respect of Restricted Share Awards or Unrestricted Share Awards shall
not exceed 50% of the total number of Shares available for issuance
under the Plan at such time; provided, further, that the number of
Shares for which Share Options may be granted to any one individual
participant during any one calendar year period shall be limited to
200,000 Shares. The Shares underlying any Awards which are forfeited,
cancelled, reacquired by the Company, satisfied without the issuance
of Shares or otherwise terminated (other than by exercise) shall be
added back to the Shares available for issuance under the Plan. Shares
issued under the Plan may be authorized but unissued Shares or Shares
reacquired by the Company.
(b) SHARE DIVIDENDS, MERGERS, ETC. In the event of a share dividend, share
split or similar change in capitalization affecting the Shares, the
Committee shall make appropriate adjustments in (i) the number and
kind of shares or securities on which Awards may thereafter be
granted, (ii) the number and kind of shares remaining subject to
outstanding Awards, and (iii) the option or purchase price in respect
of such shares. In the event of any merger, consolidation, dissolution
or liquidation of the Company or Gables Realty Limited Partnership,
the Committee in its sole discretion may, as to any outstanding
Awards, make such substitution or adjustment in the aggregate number
of shares reserved for issuance under the Plan and the number and
purchase price (if any) of shares subject to such Awards as it may
determine and as may be permitted by the terms of such transaction, or
amend or terminate such Awards upon such terms and conditions as it
shall provide (which, in the case of the termination of the vested
portion of any Award, shall require payment or other consideration
which the Committee deems equitable in the circumstances).
(c) SUBSTITUTE AWARDS. The Committee may grant Awards under the Plan in
substitution for stock and stock based awards held by employees of
another corporation who concurrently become employees of the Company
or a Subsidiary as the result of a merger or consolidation of the
employing corporation with the Company or a Subsidiary or the
acquisition by the Company or a Subsidiary of property or stock of the
employing corporation. The Committee may direct that the substitute
awards be granted on such terms and conditions as the Committee
considers appropriate in the circumstances.
<PAGE>
SECTION 4. ELIGIBILITY
Participants in the Plan will be such full or part-time officers and other
employees of the Company and its Subsidiaries who are responsible for or
contribute to the management, growth or profitability of the Company and its
Subsidiaries and who are selected from time to time by the Committee, in its
sole discretion. Notwithstanding anything to the contrary set forth in the Plan,
Independent Trustees, in addition to their specific rights set forth in the
Plan, are also eligible to participate in the Plan to the same extent as
employees of the Company or any Subsidiary, except that Independent Trustees are
not eligible to receive grants of Incentive Share Options. Accordingly, any
references in the Plan to "employees" of the Company or any Subsidiary shall be
deemed to include the Independent Trustees (except to the extent set forth in
the preceding sentence), and any references to "employment" by the Company shall
also mean, with respect to an Independent Trustee, service as a trustee.
SECTION 5. SHARE OPTIONS
Any Share Option granted under the Plan shall be in such form as the Committee
may from time to time approve.
Share Options granted under the Plan may be either Incentive Share Options or
Non-Qualified Share Options. To the extent that any Option does not qualify as
an Incentive Share Option, it shall constitute a Non-Qualified Share Option.
No Incentive Share Option shall be granted under the Plan after May 18, 2008.
(a) SHARE OPTIONS GRANTED TO EMPLOYEES. The Committee in its discretion
may grant Share Options to employees of the Company or any Subsidiary.
Share Options granted to employees pursuant to this Section 5(a) shall
be subject to the following terms and conditions and shall contain
such additional terms and conditions, not inconsistent with the terms
of the Plan, as the Committee shall deem desirable:
(i) Exercise Price. The exercise price per share for the Shares
covered by a Share Option granted pursuant to this Section 5(a)
shall be determined by the Committee at the time of grant but
shall not be less than 100% of Fair Market Value on the date of
grant. Notwithstanding the foregoing, with respect to
Non-Qualified Share Options which are granted in lieu of cash
bonus, the exercise price per share shall not be less than 50% of
the Fair Market Value on the date of grant. If an employee owns
or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) more than 10% of the
combined voting power of all classes of stock of the Company or
any Subsidiary or parent corporation and an Incentive Share
Option is granted to such employee, the option price of such
Incentive Share Option shall be not less than 110% of Fair Market
Value on the grant date.
(ii) GRANT OF DISCOUNT OPTIONS IN LIEU OF CASH BONUS. Upon the request
of an employee and with the consent of the Committee, such
employee may elect each calendar year to receive a Non-Qualified
Share Option in lieu of cash bonus to which he may become
entitled during the following calendar year pursuant to any other
plan of the Company, but only if such employee makes an
irrevocable election to waive receipt of all or a portion of such
cash bonus. Such election shall be made on or before the date set
by the Committee which date shall be no later than 15 days
preceding January 1 of the calendar year in which the cash bonus
would otherwise be paid. A Non-Qualified Share Option shall be
granted to each employee who made such an irrevocable election on
the date the waived cash bonus would otherwise be paid. The
exercise price per Share Option shall be determined by the
Committee but shall not be less than 50% of the Fair Market Value
of a single Share on the date the Share Option is granted. The
number of Shares subject to the Share Option shall be determined
by dividing the amount of the waived cash bonus by the difference
between the Fair Market Value of a single Share on the date the
Share Option is granted and the exercise price per Share Option.
The Share Option shall be granted for whole number of Shares so
determined; the value of any fractional share shall be paid in
cash. An employee may revoke his election under this Section
5(a)(ii) on a prospective basis at any time.
<PAGE>
(iii)OPTION TERM. The term of each Share Option shall be fixed by the
Committee, but no Incentive Share Option shall be exercisable
more than ten years after the date the option is granted. If an
employee owns or is deemed to own (by reason of the attribution
rules of Section 424(d) of the Code) more than 10% of the
combined voting power of all classes of stock of the Company or
any Subsidiary or parent corporation and an Incentive Share
Option is granted to such employee, the term of such option shall
be no more than five years from the date of grant.
(iv) EXERCISABILITY; RIGHTS OF A SHAREHOLDER. Share Options shall
become vested and exercisable at such time or times, whether or
not in installments, as shall be determined by the Committee at
or after the grant date; provided, however, that Share Options
granted in lieu of cash bonus shall be exercisable immediately.
The Committee may at any time accelerate the exercisability of
all or any portion of any Share Option. An optionee shall have
the rights of a shareholder only as to shares acquired upon the
exercise of a Share Option and not as to unexercised Share
Options.
(v) METHOD OF EXERCISE. Share Options may be exercised in whole or in
part, by giving written notice of exercise to the Company,
specifying the number of shares to be purchased. Payment of the
purchase price may be made by one or more of the following
methods:
(A) In cash, by certified or bank check or other instrument
acceptable to the Committee;
(B) In the form of Shares that are not then subject to
restrictions under any Company plan and that have been
held by the optionee for at least six months, if
permitted by the Committee in its discretion. Such
surrendered Shares shall be valued at Fair Market Value
on the exercise date;
(C) By the optionee delivering to the Company a properly
executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the
Company cash or a check payable and acceptable to the
Company to pay the purchase price; provided that in the
event the optionee chooses to pay the purchase price as
so provided, the optionee and the broker shall comply
with such procedures and enter into such agreements of
indemnity and other agreements as the Committee shall
prescribe as a condition of such payment procedure.
Payment instruments will be received subject to
collection; or
(D) By the optionee delivering to the Company a full
recourse promissory note, provided that the Board or
the Compensation Committee has (i) authorized the loan
of funds to the optionee for the purpose of enabling or
assisting the optionee to effect the exercise of the
optionee's Share Options and (ii) established the terms
of such note. Such promissory note shall, at the
Company's discretion, be accompanied by a pledge
agreement of the Common Shares issued pursuant to the
exercise of such Share Options.
The delivery of certificates representing the Shares to be purchased pursuant to
the exercise of a Share Option will be contingent upon receipt from the optionee
<PAGE>
(or a purchaser acting in his stead in accordance with the provisions of the
Share Option) by the Company of the full purchase price for such Shares and the
fulfillment of any other requirements contained in the Share Option or
applicable provisions of laws.
(vi) NON-TRANSFERABILITY OF OPTIONS. No Share Option shall be
transferable by the optionee otherwise than by will or by the
laws of descent and distribution and all Share Options shall be
exercisable, during the optionee's lifetime, only by the
optionee.
(vii)TERMINATION BY REASON OF DEATH. If any optionee's employment by
the Company and its Subsidiaries terminates by reason of death,
the Share Option may thereafter be exercised, to the extent
exercisable at the date of death, by the legal representative or
legatee of the optionee, for a period of six months (or such
longer period as the Committee shall specify at any time) from
the date of death, or until the expiration of the stated term of
the Option, if earlier.
(viii) TERMINATION BY REASON OF DISABILITY.
(A) Any Share Option held by an optionee whose employment by the
Company and its Subsidiaries has terminated by reason of
Disability may thereafter be exercised, to the extent it was
exercisable at the time of such termination, for a period of
twelve months (or such longer period as the Committee shall
specify at any time) from the date of such termination of
employment, or until the expiration of the stated term of
the Option, if earlier.
(B) The Committee shall have sole authority and discretion to
determine whether a participant's employment has been
terminated by reason of Disability.
(C) Except as otherwise provided by the Committee at the time of
grant, the death of an optionee during a period provided in
this Section 5(a)(viii) for the exercise of a Non-Qualified
Share Option, shall extend such period for six months from
the date of death, subject to termination on the expiration
of the stated term of the Option, if earlier.
(ix) TERMINATION FOR CAUSE. If any optionee's employment by the
Company and its Subsidiaries has been terminated for Cause, any
Share Option held by such optionee shall immediately terminate
and be of no further force and effect; provided, however, that
the Committee may, in its sole discretion, provide that such
Share Option can be exercised for a period of up to 30 days from
the date of termination of employment or until the expiration of
the stated term of the Option, if earlier.
(x) OTHER TERMINATION. Unless otherwise determined by the Committee,
if an optionee's employment by the Company and its Subsidiaries
terminates for any reason other than death, Disability, or for
Cause, any Share Option held by such optionee may thereafter be
exercised, to the extent it was exercisable on the date of
termination of employment, for three months (or such longer
period as the Committee shall specify at any time) from the date
of termination of employment or until the expiration of the
stated term of the Option, if earlier. Notwithstanding the
foregoing, if an Independent Trustee's service as a trustee
terminates for any reason other than for Cause, any Option held
by such Trustee may thereafter be exercised, to the extent it was
exercisable on the date of termination of service, for six months
(or such longer period as the Committee shall specify at any
time) after such Trustee ceases to be a Trustee of the Company or
the specified expiration date, if earlier.
<PAGE>
(xi) ANNUAL LIMIT ON INCENTIVE SHARE OPTIONS. To the extent required
for "incentive stock option" treatment under Section 422 of the
Code, the aggregate Fair Market Value (determined as of the time
of grant) of the Shares with respect to which Incentive Share
Options granted under this Plan and any other plan of the Company
or its Subsidiaries become exercisable for the first time by an
optionee during any calendar year shall not exceed $100,000.
(xii)FORM OF SETTLEMENT. Shares issued upon exercise of a Share Option
shall be free of all restrictions under the Plan, except as
otherwise provided in this Plan.
(b) RELOAD OPTIONS. At the discretion of the Committee, Options granted
under Section 5(a) may include a so-called "reload" feature pursuant
to which an optionee exercising an option by the delivery of a number
of Shares in accordance with Section 5(a)(v)(B) hereof would
automatically be granted an additional Option (with an exercise price
equal to the Fair Market Value of the Share on the date the additional
Option is granted and with the same expiration date as the original
Option being exercised, and with such other terms as the Committee may
provide) to purchase that number of Shares equal to the number
delivered to exercise the original Option.
SECTION 6. RESTRICTED SHARE AWARDS
(a) NATURE OF RESTRICTED SHARE AWARD. The Committee may grant Restricted
Share Awards to any employee of the Company or any Subsidiary. A
Restricted Share Award is an Award entitling the recipient to acquire,
at no cost or for a purchase price determined by the Committee, Shares
subject to such restrictions and conditions as the Committee may
determine at the time of grant ("Restricted Shares"). Conditions may
be based on continuing employment and/or achievement of
pre-established performance goals and objectives.
(b) ACCEPTANCE OF AWARD. A participant who is granted a Restricted Share
Award shall have no rights with respect to such Award unless the
participant shall have accepted the Award within 60 days (or such
shorter date as the Committee may specify) following the award date by
making payment to the Company, if required, by certified or bank check
or other instrument or form of payment acceptable to the Committee in
an amount equal to the specified purchase price, if any, of the Shares
covered by the Award and by executing and delivering to the Company a
written instrument that sets forth the terms and conditions of the
Restricted Shares in such form as the Committee shall determine.
(c) RIGHTS AS A SHAREHOLDER. Upon complying with Section 6(b) above, a
participant shall have all the rights of a shareholder with respect to
the Restricted Shares including voting and dividend rights, subject to
non-transferability restrictions and Company repurchase or forfeiture
rights described in this Section 6 and subject to such other
conditions contained in the written instrument evidencing the
Restricted Share Award. Unless the Committee shall otherwise
determine, certificates evidencing the Restricted Shares shall remain
in the possession of the Company until such Shares are vested as
provided in Section 6(e) below.
(d) RESTRICTIONS. Restricted Shares may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein. In the event of termination of
employment by the Company and its Subsidiaries for any reason
(including death, retirement, Disability, and for Cause), the Company
shall have the right, at the discretion of the Committee, to
repurchase Restricted Shares with respect to which conditions have not
lapsed at their purchase price, or to require forfeiture of such
Shares to the Company if acquired at no cost, from the participant or
the participant's legal representative. The Company must exercise such
right of repurchase or forfeiture not later than the 90th day
following such termination of employment (unless otherwise specified
in the written instrument evidencing the Restricted Share Award).
<PAGE>
(e) VESTING OF RESTRICTED SHARES. The Committee at the time of grant shall
specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which the
non-transferability of the Restricted Shares and the Company's right
of repurchase or forfeiture shall lapse. Subsequent to such date or
dates and/or the attainment of such pre-established performance goals,
objectives and other conditions, the Shares on which all restrictions
have lapsed shall no longer be Restricted Shares and shall be deemed
"vested."
(f) WAIVER, DEFERRAL AND REINVESTMENT OF DIVIDENDS. The written instrument
evidencing the Restricted Share Award may require or permit the
immediate payment, waiver, deferral or investment of dividends paid on
the Restricted Shares.
SECTION 7. UNRESTRICTED SHARE AWARDS
(a) GRANT OR SALE OF UNRESTRICTED SHARES. The Committee may, in its sole
discretion, grant (or sell at a purchase price determined by the
Committee) an Unrestricted Share Award to any employee of the Company
or any Subsidiary which will entitle such employee to receive Shares
free of any restrictions under the Plan ("Unrestricted Shares").
Unrestricted Shares may be granted or sold as described in the
preceding sentence in respect of past services or other valid
consideration, or in lieu of any cash compensation to such employee.
(b) ELECTIONS TO RECEIVE UNRESTRICTED SHARES IN LIEU OF COMPENSATION. Upon
the request of an employee and with the consent of the Committee, each
employee may, pursuant to an irrevocable written election delivered to
the Company no later than the date or dates specified by the
Committee, receive a portion of the cash compensation otherwise due to
him in Unrestricted Shares (valued at Fair Market Value on the date or
dates the cash compensation would otherwise be paid, or on the
effective date of the election, if later).
(c) ELECTIONS TO RECEIVE UNRESTRICTED SHARES IN LIEU OF TRUSTEES' FEES.
Each Independent Trustee may, pursuant to an irrevocable written
election delivered to the Company, receive all or a portion of his
cash trustee's fees in Unrestricted Shares (valued at Fair Market
Value on the date or dates the trustee's fees would otherwise be paid,
or on the effective date of the election, if later).
SECTION 8. TAX WITHHOLDING
(a) PAYMENT BY PARTICIPANT. Each participant shall, no later than the date
as of which the value of an Award or of any Shares or other amounts
received thereunder first becomes includable in the gross income of
the participant for Federal income tax purposes, pay to the Company,
or make arrangements satisfactory to the Committee regarding payment
of any Federal, state, or local taxes of any kind required by law to
be withheld with respect to such income. The Company and its
Subsidiaries shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to
the participant.
(b) PAYMENT IN SHARES. Subject to approval by the Committee, a participant
may elect to have such tax withholding obligation satisfied, in whole
or in part, by (i) authorizing the Company to withhold from of Shares
to be issued pursuant to any Award a number of shares with an
aggregate Fair Market Value (as of the date the withholding is
effected) that would satisfy the withholding amount due, or (ii)
transferring to the Company Shares owned by the participant with an
aggregate Fair Market Value (as of the date the withholding is
effected) that would satisfy the withholding amount due.
<PAGE>
SECTION 9. TRANSFER, LEAVE OF ABSENCE, ETC
For purposes of the Plan, the following events shall not be deemed a termination
of employment:
(a) a transfer to the employment of the Company from a Subsidiary or
from the Company to a Subsidiary, or from one Subsidiary to
another; or
(b) an approved leave of absence for military service or sickness, or
for any other purpose approved by the Company, if the employee's
right to re-employment is guaranteed either by a statute or by
contract or under the policy pursuant to which the leave of
absence was granted or if the Committee otherwise so provides in
writing.
SECTION 10. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the Committee may,
at any time, amend or cancel any outstanding Award (or provide substitute Awards
at the same or reduced exercise or purchase price or with no exercise or
purchase price, but such price, if any, must satisfy the requirements which
would apply to the substitute or amended Award if it were then initially granted
under this Plan) for the purpose of satisfying changes in law or for any other
lawful purpose, but no such action shall adversely affect rights under any
outstanding Award without the holder's consent. To the extent required by the
Code to ensure that Options granted hereunder qualify as Incentive Share Options
and to the extent required by the Act to ensure that Awards and Options granted
under the Plan are exempt under Rule 16b-3 promulgated under the Act, Plan
amendments shall be subject to approval by the Company's shareholders.
SECTION 11. STATUS OF PLAN
With respect to the portion of any Award which has not been exercised and any
payments in cash, Shares or other consideration not received by a participant, a
participant shall have no rights greater than those of a general creditor of the
Company unless the Committee shall otherwise expressly determine in connection
with any Award or Awards. In its sole discretion, the Committee may authorize
the creation of trusts or other arrangements to meet the Company's obligations
to deliver Shares or make payments with respect to Awards hereunder, provided
that the existence of such trusts or other arrangements is consistent with the
provision of the foregoing sentence.
SECTION 12. CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control as defined in this Section 12:
(a) Each outstanding Share Option shall automatically become fully
exercisable notwithstanding any provision to the contrary herein.
(b) Restrictions and conditions on Restricted Share Awards shall
automatically be deemed waived, and the recipients of such Awards
shall become entitled to receipt of the Shares subject to such
Awards unless the Committee shall otherwise expressly provide at
the time of grant.
(c) "Change of Control" shall mean the occurrence of any one of the
following events:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of the
Act (other than the Company, any of its Subsidiaries, any trustee,
fiduciary or other person or entity holding securities under any
employee benefit plan of the Company or any of its Subsidiaries),
together with all "affiliates" and "associates" (as such terms are
defined in Rule 12b-2 under the Act) of such person, shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the
Act), directly or indirectly, of securities of the Company
representing 40% or more of either (A) the combined voting power of
the Company's then outstanding securities having the right to vote in
an election of the Company's Board of Trustees ("Voting Securities")
or (B) the then outstanding Shares of the Company (in either such case
other than as a result of acquisition of securities directly from the
Company); or
<PAGE>
(ii) persons who, as of the date of the closing of the Company's initial
public offering, constitute the Company's Board of Trustees (the
"Incumbent Trustees") cease for any reason, including, without
limitation, as a result of a tender offer, proxy contest, merger or
similar transaction, to constitute at least a majority of the Board,
provided that any person becoming a director of the Company subsequent
to the closing of the Company's initial public offering whose election
or nomination for election was approved by a vote of at least a
majority of the Incumbent Trustees shall, for purposes of this Plan,
be considered an Incumbent Trustee; or
(iii)the shareholders of the Company shall approve (A)any consolidation or
merger of the Company or any Subsidiary where the shareholders of the
Company, immediately prior to the consolidation or merger, would not,
immediately after the consolidation or merger, beneficially own (as
such term is defined in Rule 13d-3 under the Act), directly or
indirectly, shares representing in the aggregate 50% of the voting
shares of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if
any), (B) any sale, lease, exchange or other transfer (in one
transaction or a series of transactions contemplated or arranged by
any party as a single plan) of all or substantially all of the assets
of the Company or (C) any plan or proposal for the liquidation or
dissolution of the Company;
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have
occurred for purposes of the foregoing clause (i) solely as the result of an
acquisition of securities by the Company which, by reducing the number of Shares
or other Voting Securities outstanding, increases (x) the proportionate number
of Shares beneficially owned by any person to 40% or more of the Shares then
outstanding or (y) the proportionate voting power represented by the Voting
Securities beneficially owned by any person to 40% or more of the combined
voting power of all then outstanding Voting Securities; provided, however, that
if any person referred to in clause (x) or (y) of this sentence shall thereafter
become the beneficial owner of any additional Shares or other Voting Securities
(other than pursuant to a share split, stock dividend, or similar transaction),
then a "Change of Control" shall be deemed to have occurred for purposes of the
foregoing clause(i).
SECTION 13. GENERAL PROVISIONS
(a) No Distribution; Compliance with Legal Requirements. The Committee may
require each person acquiring Shares pursuant to an Award to represent
to and agree with the Company in writing that such person is acquiring
the Shares without a view to distribution thereof.
No Shares shall be issued pursuant to an Award until all applicable
securities law and other legal and stock exchange requirements have
been satisfied. The Committee may require the placing of such
stop-orders and restrictive legends on certificates for Shares and
Awards as it deems appropriate.
(b) Delivery of Share Certificates. Delivery of share certificates to
participants under this Plan shall be deemed effected for all purposes
when the Company or a share transfer agent of the Company shall have
delivered such certificates in the United States mail, addressed to
the participant, at the participant's last known address on file with
the Company.
<PAGE>
(c) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or
additional compensation arrangements, including trusts, subject to
shareholder approval if such approval is required; and such
arrangements may be either generally applicable or applicable only in
specific cases. The adoption of the Plan and the grant of Awards do
not confer upon any employee any right to continued employment with
the Company or any Subsidiary.
SECTION 14. EFFECTIVE DATE OF PLAN
The Plan shall become effective upon approval by the holders of a majority of
the Shares of the Company present or represented and entitled to vote at a
meeting of shareholders. Subject to such approval by the shareholders, and to
the requirement that no Shares may be issued hereunder prior to such approval,
Share Options and other Awards may be granted hereunder on and after adoption of
the Plan by the Board.
SECTION 15. GOVERNING LAW
This Plan shall be governed by Maryland law except to the extent such law is
preempted by federal law.
--------
* The 1994 Share Option and Incentive Plan was approved by the Board of
Trustees and the shareholders on January 19, 1994; the first amendment
thereto was approved by the Board of Trustees at a Meeting of the
Board of Trustees on February 20, 1995 and by the shareholders at the
1995 Annual Meeting of Shareholders on May 16, 1995; the second
amendment thereto was approved by the Board of Trustees at a Meeting
of the Board of Trustees on February 6, 1996 and by the shareholders
at the 1996 Annual Meeting of Shareholders on May 14, 1996. At a
Meeting of the Board of Trustees on December 11, 1996, the Board of
Trustees adopted Amendment No. 1 to the Second Amended and Restated
1994 Share Option and Incentive Plan. The Third Amended and Restated
1994 Share Option and Incentive Plan was approved by the Board of
Trustees by a Unanimous Written Consent in Lieu of a Meeting dated
March 16, 1998 and by the shareholders at the 1998 Annual Meeting of
Shareholders on May 19, 1998. The Fourth Amended and Restated 1994
Share Option and Incentive Plan was approved by the Board of Trustees
by a Unanimous Written Consent in Lieu of a Meeting dated March 15,
1999.
1 The Minimum Shares amount is equal to 9% of the Base Amount (discussed
below).
2 The Base Amount is equal to the sum of (i) the total number of Shares
outstanding as of March 15, 1999 (the date the Fourth Amended and
Restated 1994 Share Option and Incentive Plan was approved by the
Board) and (ii) the total number of Shares issuable upon the exchange
of Units that were outstanding at such time (other than Units owned by
the Company or any of its subsidiaries).
<PAGE>
Page-1
FORM OF EMPLOYMENT AGREEMENT
----------------------------
EMPLOYMENT AGREEMENT (this "Agreement") made as of the [INSERT DAY] day of
January, 1999 by and between [INSERT NAME] residing at [INSERT ADDRESS]
(hereinafter referred to as "Employee") and Gables Residential Trust, a Maryland
business trust, with a principal place of business at 2859 Paces Ferry Road,
Suite 1450, Atlanta, Georgia 30339 (hereinafter referred to as the "Company").
1. TERM.
----
The term of this Agreement shall commence on January 1, 1999 (the
"Effective Date") and, unless earlier terminated as provided in Paragraph 8
below, shall terminate one (1) year from the Effective Date (the "Original
Term"). The Original Term shall be extended automatically for additional
one-year periods (each a "Renewal Term"), unless notice that this Agreement will
not be extended is given by either party to the other three (3) months prior to
the expiration of the Original Term or any Renewal Term. (The period of
Employee's employment hereunder within the Original Term and any Renewal Terms
is herein referred to as the "Employment Period".)
2. EMPLOYMENT/DUTIES.
-----------------
(a) During the Employment Period, Employee shall be employed in the
business of the Company and its affiliates. Employee shall serve as a corporate
officer with the title of [INSERT TITLE]. Employee's duties and authority shall
be commensurate with his title and position with the Company.
(b) Employee agrees to his employment as described in this Paragraph 2 and
agrees to devote substantially all of his working time and efforts to the
performance of his duties under this Agreement, except as otherwise approved by
the Board of Trustees of the Company (the "Board of Trustees"); provided that,
nothing herein shall be interpreted to preclude Employee from (i) retaining any
preexisting consulting fee contracts relating to and/or minority interests in
multifamily residential apartment properties or (ii) participating as an officer
or director of, or advisor to, any charitable or other tax exempt organization.
(c) In performing his duties hereunder, Employee shall be available for
reasonable travel as the needs of the business require. Employee shall be based
in the [INSERT LOCATION].
3. COMPENSATION/BENEFITS.
---------------------
In consideration of Employee's services hereunder, the Company shall
provide Employee the following:
<PAGE>
Page-2
(a) Base Salary. The Company shall pay Employee an annual salary of [INSERT
SALARY] during the Employment Period ("Base Salary"). Base Salary shall be
payable in accordance with the Company's normal business practices, but in no
event less frequently than monthly. Employee's Base Salary shall be reviewed no
less frequently than annually by the Company and may be increased but not
decreased during the Employment Period.
(b) Bonuses. At the close of each fiscal year, the Company shall review the
performance of the Company and of Employee during the prior fiscal year, and the
Company may provide Employee with additional compensation as a bonus if the
Board of Trustees, or any compensation committee thereof, in its discretion,
determines that Employee's contribution to the Company warrants such additional
payment and the Company's anticipated financial performance for the present
period permits such payment. The bonuses hereunder shall be paid as a lump sum
not later than thirty (30) days after completion of the audit of the Company's
books for the fiscal year, subject to the Employee's right to defer in his sole
discretion pursuant to separate written agreement with the Company. For purposes
of Paragraph 8(c), the bonus paid in respect of any year (i) shall include cash
bonuses paid in respect of such year, unrestricted share grants made in respect
of such year (valued as of the date of grant) and any restricted shares,
whenever granted, which vested entirely or substantially in respect of service
during such year (including, without limitation, restricted shares which vested
on January 1 of the following year) (valued at the date of vesting), but (ii)
shall not include any restricted share grants made in respect of such year
(unless subsequently vested in respect of such year in accordance with the
preceding clause (i)), option grants made in respect of such year or the
exercise of any options during such year.
(c) Medical Insurance/Physical. During the Employment Period, the Company
shall provide to Employee and Employee's immediate family a comprehensive policy
of health insurance. During the Employment Period, Employee shall be entitled to
a comprehensive annual physical performed, at the expense of the Company, by the
physician or medical group of Employee's choosing.
(d) Life Insurance/Disability Insurance. During the Employment Period, the
Company shall, to the extent reasonably available on customary terms and rates,
(i) provide Employee with term life insurance in a face amount equal to
$1,000,000, and (ii) have Employee covered by reasonably comprehensive
disability insurance or, at Employee's election, otherwise reimburse Employee
for the cost of such a policy in an amount not to exceed $5,000 per year;
provided that such $5,000 amount shall be increased as the age of the Employee
increases for any year during the Employment Period as may be necessary to
maintain the same level of insurance as in effect during the first year of the
Employment Period. Employee agrees to submit to such medical examinations as may
be required in order to secure or maintain such policies of insurance.
(e) Vacations. Employee shall be entitled to reasonable paid vacations in
accordance with the then regular procedures of the Company governing executives,
not to exceed four weeks per annum, in the aggregate.
<PAGE>
Page-3
(f) Office/Secretary. During the Employment Period, Employee shall be
entitled to secretarial services and a private office commensurate with his
title and duties.
(g) Stock and Stock Options. Employee shall be entitled to stock options in
an amount to be determined by the Board of Trustees, or any compensation
committee thereof, in its discretion.
(h) Fringe Benefits. During the Employment Period, the Company shall
provide Employee with professional assistance in tax return preparation and
financial planning not to exceed $1,000 per year of the Employment Period.
(i) Other Benefits. During the Employment Period, the Company shall provide
to Employee such other benefits, including the right to participate in such
retirement or pension plans, as are made generally available to employees of the
Company from time to time.
4. AUTOMOBILE.
----------
The Company shall provide Employee with a monthly car allowance of not less
than $500 per month (adjusted annually for inflation by the greater of five
percent or a factor measured by the increase, if any, in the Consumer Price
Index for Wage Earners and Clerical Workers (U.S. City Average: New York, NY)
(1982-84 = 100), as published by the Bureau of Labor Statistics, for the prior
calendar year), provided that, with Employee's consent, the Company may instead
purchase or lease, and maintain insurance on, an automobile of comparable value
for use by Employee during the Employment Period, which automobile Employee
shall operate and maintain, at his own expense, with the same standard of care
Employee applies to his own property and as may be required under any applicable
lease agreement.
5. EXPENSES/INDEMNIFICATION.
------------------------
(a) During the Employment Period, the Company shall reimburse Employee for
the reasonable business expenses incurred by Employee in the course of
performing his duties for the Company hereunder, including but not limited to
expenses incurred in connection with out-of-town business travels and related
cellular phone usage, upon submission of invoices, vouchers or other appropriate
documentation, as may be required in accordance with the policies in effect from
time to time for executive employees of the Company.
(b) To the full extent permitted by law and subject to the Company's
Amended and Restated Declaration of Trust, as amended from time to time, and
Second Amended and Restated By-Laws, as amended from time to time, the Company
shall indemnify Employee with respect to any actions commenced against Employee
in his capacity as an officer or trustee or former officer or trustee of the
Company, or any affiliate thereof for which he may serve in such capacity, and
the Company shall advance on a timely basis any expenses incurred in defending
such actions. The obligation to indemnify hereunder shall survive the
termination of this Agreement. The Company agrees to use its best efforts to
secure and maintain officers and trustees insurance with respect to Employee.
<PAGE>
Page-4
6. EMPLOYER'S AUTHORITY/POLICIES.
------------------------------
Employee agrees to observe and comply with the rules and regulations of the
Company as adopted by the Board of Trustees respecting the performance of his
duties and to carry out and perform orders, directions and policies communicated
to him from time to time by the Board. Employee agrees to abide by the Company's
insider trading policies and procedures and the Company's Code of Ethics, and
agrees to make annual certifications or affirmations to such effect if requested
by the Company.
7. RECORDS/NONDISCLOSURE/COMPANY POLICIES.
--------------------------------------
(a) General. All records, financial statements and similar documents
obtained, reviewed or compiled by Employee in the course of the performance by
him of services for the Company, whether or not confidential information or
trade secrets, shall be the exclusive property of the Company. Employee shall
have no rights in such documents upon any termination of this Agreement.
(b) Confidential Information. Employee will not disclose to any person or
entity (except as required by applicable law, with the Company's consent or in
connection with the performance of his duties and responsibilities hereunder),
or use for his own benefit or gain, any confidential information of the Company
obtained by him incident to his employment with the Company. The term
"confidential information" includes, without limitation, financial information,
business plans, prospects and opportunities which have been discussed or
considered by the management of the Company but does not include any information
which has become part of the public domain by means other than the Employee's
non-observance of his obligations hereunder. This paragraph shall survive the
termination of this Agreement.
8. TERMINATION/SEVERANCE.
---------------------
(a) At-Will Employment. Employee's employment hereunder is "at will" and,
therefore, may be terminated at any time, with or without cause, at the option
of the Company, subject only to the severance obligations under this Paragraph
8. Upon any termination hereunder, the Employment Period shall expire.
(b) Termination by the Company For Good Reason or Voluntarily by Employee.
If (A) Employee is terminated by the Company for Good Reason (as defined in
Paragraph 8(d) below) or (B) if Employee shall voluntarily terminate his
employment hereunder (but other than by reason of a Force Out (as defined in
Paragraph 8(d) below), and other than pursuant to a Change of Control Event (as
defined in Paragraph 8(d) below)), then the Employment Period shall end and
Employee shall be entitled to receive his Base Salary at the rate provided
pursuant to Paragraph 3(a) for the period up to and including the date on which
such termination shall take effect.
(c) Other Terminations. If (A) Employee's employment is terminated by the
Company without Employee's consent and other than for Good Reason, or (B)
Employee terminates his employment by reason of or at any time following a Force
Out, or (C) Employee's employment is terminated by reason of his death, or (D)
Employee's employment is terminated pursuant to a Change of Control Event,
Employee, or his estate, as the case may be, shall be entitled:
<PAGE>
Page-5
(i) to immediately vest in any outstanding stock options and
grants of restricted shares; and
(ii) to the payment of an amount (the "Severance Amount"), equal
to one times the sum of (x) his Base Salary under
Paragraph 3(a) at the rate then in effect, and (y) the
amount equal to the greater of (1) his bonus received in
respect of the immediately preceding fiscal year under
Paragraph 3(b) or (2) any bonus award that the Board of
Trustees or any committee thereof has approved for any
period that has closed prior to the date of termination but
has not yet been paid.
The Severance Amount shall be paid as a lump sum within fifteen (15) days of
such termination. In the event that any stock option plan or option agreement of
the Company provides terms for the acceleration and/or exercise of options
following a termination of employment that vary from or are otherwise
inconsistent with the foregoing, the Company shall take such actions as may be
necessary to amend such plan or option agreement. Notwithstanding the foregoing,
in the event of a termination by reason of Employee's death, the Severance
Amount shall be zero if the life insurance proceeds payable under
Paragraph (3)(d)(i) equal or exceed $1,000,000. During the remaining term of the
Employment Period (or what would have been the remaining term if Employee's
employment had not been terminated), the Company shall provide Employee with the
benefits described in Paragraph 3(c).
(d) Definitions. For purposes of this Paragraph 8, the following terms
shall have the indicated definitions:
(1) "Change of Control" shall mean the occurrence of any one of the
following events:
(A) any "person," as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended
(the "Act") (other than the Company, any of its Subsidiaries
(as defined below), any trustee, fiduciary or other person
or entity holding securities under any employee benefit plan
of the Company or any of its Subsidiaries), together with
all "affiliates" and "associates" (as such terms are defined
in Rule 12b-2 under the Act) of such person, shall become
the "beneficial owner" (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, of securities
of the Company representing 40% or more of either (i) the
combined voting power of the Company's then outstanding
securities having the right to vote in an election of the
Board of Trustees ("Voting Securities") or (ii) the then
outstanding common shares of beneficial interest, par value
$.01 per share, of the Company ("Shares") (in either such
case other than as a result of acquisition of securities
directly from the Company); or
<PAGE>
Page-6
(B) persons who, as of the date hereof, constitute the Board of
Trustees (the "Incumbent Trustees") cease for any reason,
including, without limitation, as a result of a tender
offer, proxy contest, merger or similar transaction, to
constitute at least a majority of the Board, provided that
any person becoming a trustee of the Company subsequent to
the date hereof whose election or nomination for election
was approved by a vote of at least a majority of the
Incumbent Trustees or was approved by a nominating committee
of the Board shall, for purposes of this Agreement, be
considered an Incumbent Trustee; or
(C) the shareholders of the Company shall approve (i) any
consolidation or merger of the Company or any Subsidiary
where the shareholders of the Company, immediately prior to
the consolidation or merger, would not, immediately after
the consolidation or merger, beneficially own (as such term
is defined in Rule 13d-3 under the Act), directly or
indirectly, shares representing in the aggregate 50% of the
voting shares of the corporation issuing cash or securities
in the consolidation or merger (or of its ultimate parent
corporation, if any), (ii) any sale, lease, exchange or
other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a
single plan) of all or substantially all of the assets of
the Company or (iii) any plan or proposal for the
liquidation or dissolution of the Company;
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to
have occurred for purposes of the foregoing clause (A) solely as the result of
an acquisition of securities by the Company which, by reducing the number of
Shares or other Voting Securities outstanding, increases (x) the proportionate
number of Shares beneficially owned by any person to 40% or more of the Shares
then outstanding or (y) the proportionate voting power represented by the Voting
Securities beneficially owned by any person to 40% or more of the combined
voting power of all then outstanding Voting Securities; provided, however, that
if any person referred to in clause (x) or (y) of this sentence shall thereafter
become the beneficial owner of any additional Shares or other Voting Securities
(other than pursuant to a share split, stock dividend, or similar transaction),
then a "Change of Control" shall be deemed to have occurred for purposes of the
foregoing clause (A).
As used in this definition of "Change of Control," the term "Subsidiary"
means Gables Realty Limited Partnership, Central Apartment Management, Inc.,
East Apartment Management, Inc., Gables Central Construction, Inc., and Gables
East Construction, Inc., and any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities, beginning with
the Company if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
(2) A "Change of Control Event" shall mean any voluntary or
involuntary termination of Employee's employment occurring within six (6)
months following a Change of Control.
<PAGE>
Page-7
(3) A "Force Out" shall be deemed to have occurred in the event of a
material breach by the Company of any obligation under this Agreement,
including but not limited to those under Paragraphs 2 and 3 hereof, or in
the event of a substantial diminution in the duties or responsibilities of
Employee.
(4) "Good Reason" shall mean a finding by the Board of Trustees, that
the Employee has (a) acted with gross negligence or willful misconduct in
connection with the performance of his material duties hereunder, (b)
defaulted in the performance of his material duties hereunder and has not
corrected such action within 15 days of receipt of written notice thereof;
(c) acted against the best interests of the Company or committed a material
act of common law fraud against the Company or its employees, which act in
either event has had a material and adverse impact on the financial affairs
of the Company; (d) been convicted of a felony and such conviction has a
material adverse affect on the interests of the Company; or (e) the
continuing disability of Employee following the expiration of the
Disability Period (as defined in Paragraph 8(e)) under circumstances where
Employee is entitled to benefits payable under the disability insurance
policy of the Company.
(e) Disability. If Employee shall become unable to efficiently perform his
duties hereunder because of any physical or mental disability or illness, he
shall be entitled to his regular compensation until (i) the period of disability
or illness (whether or not the same disability or illness) shall exceed 180
consecutive days during the Employment Period and (ii) the Employee has become
eligible to receive benefits under the applicable disability insurance policy
referred to in Paragraph 3(d)(ii) (the "Disability Period"). This Agreement
thereafter may be terminated by the Company as provided in Paragraph 8(b),
provided that, Employee shall immediately vest in any outstanding options and
stock grants to the same extent as if the termination had been pursuant to
Paragraph 8(c)(C).
(f) Arbitration in the Event of a Dispute Regarding the Nature of
Termination. In the event that the Company terminates Employee's employment for
Good Reason (as defined above), and Employee contends that Good Reason did not
exist, the Company's only obligation shall be to submit such claim to
arbitration before the American Arbitration Association ("AAA"). In such a
proceeding, the only issue before the arbitrator will be whether Employee was in
fact terminated for Good Reason. If the arbitrator determines that Employee was
not terminated for Good Reason, the only remedy that the arbitrator may award is
an amount equal to the Severance Payment specified in Paragraph 8(c), the costs
of arbitration, and Employee's attorneys' fees. If the arbitrator finds that
Employee was terminated for Good Reason, the arbitrator will be without
authority to award Employee anything, and the parties will each be responsible
for their own attorneys' fees, and they will divide the costs of arbitration
equally. Judgment upon the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof. This Paragraph 8(f) shall be specifically
enforceable. Notwithstanding the foregoing, this Paragraph 8(f) shall not
preclude the Company from pursuing a court action for the sole purpose of
obtaining a temporary restraining order or a preliminary injunction in
circumstances in which such relief is appropriate, provided that any other
relief shall be pursued through an arbitration proceeding pursuant to this
Paragraph 8(f).
<PAGE>
Page-8
(g) No Mitigation. Without regard to the reason for the termination of
Employee's employment hereunder, Employee shall be under no obligation to
mitigate damages with respect to such termination under any circumstances and in
the event Employee is employed or receives income from any other source, there
shall be no offset against the amounts due from the Company hereunder.
9. NON-COMPETITION.
---------------
Because Employee's services to the Company are special and because the
Employee has access to the Company's confidential information, Employee
covenants and agrees that if, during the Original Term or any Renewal Term, his
employment is terminated for Good Reason or if he voluntarily terminates his
employment (other than by reason of a Force Out or pursuant to a Change of
Control Event), for a period of twelve months from the date of such termination
he will not, directly or indirectly, either on his own behalf or on behalf of
any business, corporation, partnership, association, agency, or other person or
other entity with which Employee may be associated, or otherwise engage in any
business or undertaking directly competitive with the businesses being carried
on by the Company in respect of any multifamily residential real estate project
undertaken or being considered by the Company at the time of termination without
prior written consent of the Board of Trustees. Restricted activities under this
Paragraph 9 include, but are not limited to, the acquisition, development,
construction, operation, management or leasing of any multifamily residential
real estate project, including contracting or agreeing to do any of the
foregoing or advising or consulting with any person regarding the foregoing.
This Paragraph 9 shall not be interpreted to prevent the Employee from retaining
any interests in multifamily residential apartment properties permitted under
Paragraph 2(b)(i). This Paragraph 9 shall survive the termination of this
Agreement.
10. NON-SOLICITATION.
----------------
During the Original Term or any Renewal Term and for a period of twelve
months from the date of any termination of employment (other than pursuant to a
Change of Control Event), Employee covenants and agrees that Employee (a) will
not, directly or indirectly, solicit or induce any present or future employee of
the Company or any Subsidiary to accept employment with Employee or with any
business, corporation, partnership, association, agency, or other person or
other entity with which Employee may be associated, (b) will not employ or cause
any business, corporation, partnership, association agency, or other person or
entity with which Employee may be associated to employ any present or future
employee of the Company or any Subsidiary without providing the Company with ten
(10) days' prior written notice of such proposed employment and (c) will not,
directly or indirectly, either for himself or for any other business, operation,
corporation, partnership, association, agency, or other person or entity, call
upon, compete for or solicit the third party property owners with whom the
Company or any of its subsidiaries has an existing property management agreement
as of the Effective Date as set forth in any of the schedules to the
Contribution Agreement. This Paragraph 10 shall survive the termination of this
Agreement.
11. LITIGATION AND REGULATORY COOPERATION.
-------------------------------------
During and after the Employee's employment, the Employee shall cooperate
fully with the Company in the defense or prosecution of any claims or actions
now in existence or which may be brought in the future against or on behalf of
the Company which relate to events or occurrences that transpired while the
Employee was employed by the Company. The
<PAGE>
Page-9
Employee's full cooperation in connection with such claims or actions shall
include, but not be limited to, being available to meet with counsel to prepare
for discovery or trial and to act as a witness on behalf of the Company at
mutually convenient times. During or after the Employee's employment, the
Employee also shall cooperate fully with the Company in connection with any
investigation or review of any federal, state or local regulatory authority as
any such investigation or review relates to events or occurrences that
transpired while the Employee was employed by the Company. The Company shall
reimburse the Employee for any reasonable out-of-pocket expenses incurred in
connection with the Employee's performance of obligations pursuant to this
Paragraph 11. This Paragraph 11 shall survive the termination of this Agreement.
If at a time when Employee is no longer employed by the Company he is required
to devote more than one-half (1/2) of a business day to cooperation with the
Company pursuant to this Paragraph 11, the Company shall compensate Employee on
a per diem basis at a daily rate calculated as 1/365th of the Base Salary in
effect pursuant to Paragraph 3(a) as of the time Employee's employment with the
Company terminated.
12. CONFLICTING AGREEMENTS.
-----------------------
Employee hereby represents and warrants that the execution of this
Agreement and the performance of his obligations hereunder will not breach or be
in conflict with any other agreement to which he is a party or is bound, and
that he is not now subject to any covenants against competition or similar
covenants which would affect the performance of his obligations hereunder. The
parties agree that this agreement supersedes and replaces any prior written
employment agreement between the Company and Employee of similar scope and
nature.
13. NOTICES.
-------
Any notice required or permitted hereunder shall be in writing and shall be
deemed sufficient when given by hand or by nationally recognized overnight
courier or by express, registered or certified mail, postage prepaid, return
receipt requested, and addressed to the Company or Employee, as applicable, at
the address indicated above (or to such other address as may be provided by
notice).
14. MISCELLANEOUS.
-------------
This Agreement (i) constitutes the entire agreement between the parties
concerning the subjects hereof and supersedes any and all prior agreements or
understandings, (ii) may not be assigned by Employee without the prior written
consent of the Company, and (iii) may be assigned by the Company and shall be
binding upon, and inure to the benefit of, the Company's successors and assigns.
Headings herein are for convenience of reference only and shall not define,
limit or interpret the contents hereof.
15. AMENDMENT.
---------
This Agreement may be amended, modified or supplemented by the mutual
consent of the parties in writing, but no oral amendment, modification or
supplement shall be effective.
16. SPECIFIC ENFORCEMENT.
---------------------
The provisions of this Agreement are to be specifically enforced if not
performed according to their terms. Without limiting the generality of the
foregoing, the parties acknowledge that the Company would be irreparably damaged
and there would be no adequate remedy at law for Employee's breach of Paragraphs
7, 9 and 10 of this Agreement and, accordingly, Employee hereby consents to the
entry of any temporary restraining
<PAGE>
Page-10
order or preliminary or ex parte injunction, in addition to any other remedies
available at law or in equity, to enforce the provisions thereof. This
Paragraph 14 shall survive the termination of this Agreement.
17. SEVERABILITY.
------------
The provisions of this Agreement are severable. The invalidity of any
provision shall not affect the validity of any other provision.
18. GOVERNING LAW .
-------------
This Agreement shall be construed and regulated in all respects under the
laws of the State of Maryland.
IN WITNESS WHEREOF, this Agreement is entered into as of the date and year
first above written.
GABLES RESIDENTIAL TRUST
By: /s/ Marcus E. Bromley
-----------------------------------
Marcus E. Bromley,
Chief Executive Officer
By: [INSERT NAME]
-----------------------------------
Title: [INSERT TITLE]
SCHEDULE OF SUBSIDIARIES OF GABLES RESIDENTIAL TRUST
Jurisdiction of Other Names Under Which
Subsidiary Organization Subsidiary Does Business
- ---------- -------------- ------------------------
Gables Realty Limited Partnership Delaware None
Gables GP, Inc. Texas None
Central Apartment Management, Inc. Texas Gables Residential Services
and Gables Corporate
Accomodations
East Apartment Management, Inc. Georgia Gables Residential Services
and Gables Corporate
Accomodations
Gables-Tennessee Properties Tennessee None
Gables Central Construction, Inc. Texas None
Gables East Construction, Inc. Georgia None
Candlewood Gen Par, Inc. Georgia None
Candlewood-Indian Creek Limited
Partnership Georgia None
Pin Oak Green Texas None
Pin Oak Park Apartments Texas None
GRT Villas Gen Par, Inc.
(f.k.a. Candle Creek, Inc.) Georgia None
GRT Villas Limited Partnership Texas None
Boca Place Associates, Ltd. Florida None
Boynton Beach I Limited Partnership Florida None
CM Bay Associates Florida None
Hampton Lakes Associates Florida None
Hampton Lakes II Associates Florida None
Hampton Place Joint Venture Florida None
Kings Colony Associates, Ltd. Florida None
Mizner I Limited Partnership Florida None
San Michele Joint Venture Florida None
San Remo Limited Partnership Florida None
TCRDAD Vinings at Boynton Beach II Florida None
TCRDAD Wellington Limited Partnership Florida None
Town Colony Associates Florida None
Town Colony II Associates Florida None
Gables Lions Head Limited Texas None
Gables Rivercrest II Limited Texas None
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in the Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File No. 333-00618, 33-83054 and 333-27177)
and Form S-3 (File Nos. 33-90032, 33-89000, 333-40, 333-13651, 333-30093,
333-41999 and 333-68359).
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF GABLES RESIDENTIAL TRUST FOR THE YEAR ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<CIK> 0000913782
<NAME> Gables Residential Trust
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,071
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,681,961
<DEPRECIATION> 138,239
<TOTAL-ASSETS> 1,586,317
<CURRENT-LIABILITIES> 0
<BONDS> 812,788
4,500
115,000
<COMMON> 263
<OTHER-SE> 440,963
<TOTAL-LIABILITY-AND-EQUITY> 1,586,317
<SALES> 0
<TOTAL-REVENUES> 216,624
<CGS> 0
<TOTAL-COSTS> 125,371
<OTHER-EXPENSES> 5,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,958
<INCOME-PRETAX> 35,769
<INCOME-TAX> 0
<INCOME-CONTINUING> 28,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,040
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
</TABLE>
