SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number: 1-12590
GABLES RESIDENTIAL TRUST
(Exact name of Registrant as specified in its Charter)
MARYLAND 58-2077868
(State of Incorporation) (I.R.S. Employer Identification No.)
2859 Paces Ferry Road, Suite 1450
Atlanta, Georgia 30339
(Address of principal executive offices, including zip code)
(770) 436 - 4600
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Common shares of beneficial interest, par value $0.01 per share,
26,257,995 shares
The number of shares outstanding of each of the registrant's classes
of common stock, as of April 30, 1999
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past (90) days.
(1) (X) YES ( ) NO
(2) (X) YES ( ) NO
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GABLES RESIDENTIAL TRUST
FORM 10 - Q INDEX
Part I - Financial Information Page
Item 1: Financial Statements
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk 25
Part II - Other Information 26
Item 1: Legal Proceedings
Item 2: Changes in Securities
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
Signature 27
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PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
GABLES RESIDENTIAL TRUST
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------ ------
(Unaudited)
<S> <C> <C>
ASSETS:
Real estate assets:
Land .................................................................... $ 226,028 $ 229,960
Buildings ............................................................... 1,209,092 1,218,782
Furniture, fixtures and equipment ....................................... 88,412 87,238
Construction in progress ................................................ 29,029 79,829
Land held for future development ........................................ 59,604 66,152
---------- ----------
Real estate assets before accumulated depreciation ................... 1,612,165 1,681,961
Less: accumulated depreciation ......................................... (149,643) (138,239)
---------- ----------
Net real estate assets ................................................ 1,462,522 1,543,722
Cash and cash equivalents .................................................. 7,903 7,054
Restricted cash ............................................................ 6,597 8,017
Deferred financing costs, net .............................................. 4,449 4,696
Investment in joint ventures ............................................... 15,365 161
Other assets, net .......................................................... 28,421 22,667
---------- ----------
Total assets .......................................................... $ 1,525,257 $ 1,586,317
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable .............................................................. $ 770,218 $ 812,788
Accrued interest payable ................................................... 5,462 6,045
Preferred dividends payable ................................................ 601 545
Real estate taxes payable .................................................. 7,759 16,224
Accounts payable and accrued expenses - construction ....................... 2,301 8,402
Accounts payable and accrued expenses - operating .......................... 11,657 7,094
Security deposits .......................................................... 4,648 4,725
Other liability, net ....................................................... 11,922 11,729
---------- ----------
Total liabilities ..................................................... 814,568 867,552
Minority interest of common unitholders in Operating Partnership ........... 105,996 108,110
Minority interest of Series B preferred unitholders in Operating Partnership 50,192 50,192
Series Z Preferred Shares at $25.00 liquidation preference,
180 shares issued and outstanding ........................................ 4,500 4,500
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; 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,
26,464 and 26,302 shares issued at March 31, 1999 and December 31, 1998,
respectively ..................................................... 265 263
Treasury shares at cost, 140 common shares at March 31, 1999 ............. (3,137) 0
Additional paid-in capital ............................................... 439,491 441,512
Deferred long-term compensation .......................................... (1,618) (812)
Accumulated earnings ..................................................... 0 0
---------- ----------
Total shareholders' equity ............................................ 550,001 555,963
---------- ----------
Total liabilities and shareholders' equity ............................ $ 1,525,257 $ 1,586,317
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated balance sheets.
</FN>
</TABLE>
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GABLES RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
-------- --------
<S> <C> <C>
Rental revenues ................................................... $ 55,537 $ 38,641
Other property revenues ........................................... 2,864 1,789
-------- --------
Total property revenues ...................................... 58,401 40,430
-------- --------
Property management revenues ...................................... 1,265 667
Development revenues, net ......................................... 445 0
Other ............................................................. 331 393
-------- --------
Total other revenues ......................................... 2,041 1,060
-------- --------
Total revenues ............................................... 60,442 41,490
-------- --------
Property operating and maintenance (exclusive of items shown
separately below) ............................................ 20,100 13,630
Real estate asset depreciation and amortization ................... 11,809 7,484
Corporate asset depreciation and amortization ..................... 118 112
Amortization of deferred financing costs .......................... 227 222
Property management - owned ....................................... 1,204 1,076
Property management - third/related party ......................... 862 578
General and administrative ........................................ 1,680 1,060
Severance costs ................................................... 2,000 0
Interest .......................................................... 10,366 6,335
Credit enhancement fees ........................................... 437 121
-------- --------
Total expenses ............................................... 48,803 30,618
-------- --------
Equity in income of joint ventures ................................ 79 75
Interest income ................................................... 120 62
Loss on treasury locks ............................................ 0 (1,811)
-------- --------
Income before gain on sale of real estate assets .................. 11,838 9,198
Gain on sale of real estate assets ................................ 666 0
-------- --------
Income before minority interest ................................... 12,504 9,198
Minority interest of common unitholders in Operating Partnership .. (1,768) (1,059)
Minority interest of preferred unitholders in Operating Partnership (1,078) 0
-------- --------
Net income ........................................................ 9,658 8,139
Dividends to preferred shareholders ............................... (2,443) (2,386)
-------- --------
Net income available to common shareholders ....................... $ 7,215 $ 5,753
======== ========
Weighted average number of common shares outstanding - basic ...... 26,322 22,021
Weighted average number of common shares outstanding - diluted .... 32,801 26,227
Per Common Share Information:
Net income - basic ................................................ $ 0.27 $ 0.26
Net income - diluted .............................................. $ 0.27 $ 0.26
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
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GABLES RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 9,658 $ 8,139
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................... 12,154 7,818
Equity in income of joint ventures ............................... (79) (75)
Minority interest of unitholders in Operating Partnership ........ 2,846 1,059
Gain on sale of real estate assets ............................... (666) 0
Long-term compensation expense ................................... 182 255
Loss on treasury locks ........................................... 0 1,811
Severance costs .................................................. 2,000 0
Amortization of discount on long-term liability .................. 192 0
Operating distributions received from joint ventures ............. 110 99
Change in operating assets and liabilities:
Restricted cash ................................................ 1,594 810
Other assets ................................................... (2,704) (2,588)
Other liabilities, net ......................................... (9,491) (10,361)
-------- --------
Net cash provided by operating activities ................. 15,796 6,967
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and construction of real estate assets .................. (33,502) (31,233)
Long-term land lease payments ....................................... 0 (1,000)
Net proceeds from sale of real estate assets ........................ 19,014 0
Proceeds from contribution of real estate assets to joint venture ... 60,347 0
-------- --------
Net cash provided by (used in) investing activities ............ 45,859 (32,233)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of share options ......................... 29 552
Dividend investment plan contributions .............................. 2,202 18
Treasury share purchases ............................................ (49) 0
Payments of deferred financing costs ................................ (46) (692)
Notes payable proceeds .............................................. 2,500 147,500
Notes payable repayments ............................................ (45,070) (103,745)
Principal escrow deposits ........................................... (174) (174)
Preferred dividends paid ............................................ (2,387) (2,386)
Preferred distributions paid ........................................ (1,078) 0
Common dividends paid ($0.51 and $0.50 per share, respectively) ..... (13,444) (11,036)
Common distributions paid ($0.51 and $0.50 per Unit, respectively) .. (3,289) (2,026)
-------- --------
Net cash (used in) provided by financing activities ............ (60,806) 28,011
-------- --------
Net change in cash and cash equivalents ............................. 849 2,745
Cash and cash equivalents, beginning of period ...................... 7,054 3,179
-------- --------
Cash and cash equivalents, end of period ............................ $ 7,903 $ 5,924
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ......................................... $ 13,636 $ 7,697
Interest capitalized ........................................... 2,687 1,545
-------- --------
Cash paid for interest, net of amounts capitalized ............. $ 10,949 $ 6,152
======== ========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
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. The
Company 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, a Delaware
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 March 31, 1999, the Company was an 80.8% 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 "Management Companies").
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. 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 March 31, 1999, Gables owned 83 completed multifamily apartment
communities comprising 24,412 apartment homes, of which 39 were developed and 44
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 March 31, 1999. Gables also owned one multifamily apartment community
that was under construction at March 31, 1999 that is expected to comprise 231
apartment homes upon completion and an indirect 20% interest in seven apartment
communities that were under construction at March 31, 1999 that are expected to
comprise 2,181 apartment homes upon completion. As of March 31, 1999, Gables
owned parcels of land for the future development of 15 apartment communities
expected to comprise an estimated 3,614 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.
2. COMMON AND PREFERRED EQUITY ACTIVITY
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.
<PAGE>
Page - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
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, the Operating Partnership 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.
Common Share Repurchase Program
- -------------------------------
On March 22, 1999, Gables announced a common share repurchase program pursuant
to which the Company is authorized to purchase up to $50 million of its
outstanding common shares. The Company 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. As of
March 31, 1999, the Company had repurchased 140 common shares for $3,137, of
which $3,088 was accrued at March 31, 1999.
3. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Gables Residential Trust
include the consolidated accounts of Gables Residential Trust and its
subsidiaries (including the Operating Partnership and the Management Companies).
Gables consolidates the financial statements of all entities in which it has a
controlling financial interest as that term is defined under generally accepted
accounting principles ("GAAP") through either majority voting interest or
contractual agreements. 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, can be exchanged for the common shares of the Company on a
one-for-one basis, minority interest of unitholders in the Operating Partnership
is calculated based on the weighted average of common shares and Units
outstanding during the applicable period.
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Page - 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
The accompanying interim unaudited financial statements have been prepared by
Gables' management in accordance with generally accepted accounting principles
("GAAP") for interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normally recurring adjustments) considered necessary for a fair
presentation for these interim periods have been included. The results of
operations for the interim period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the full year. These
financial statements should be read in conjunction with the financial statements
of Gables Residential Trust included in the Gables Residential Trust Form 10-K
for the year ended December 31, 1998.
4. RECENT PORTFOLIO ACQUISITIONS AND JOINT VENTURE
On April 1, 1998, Gables acquired the properties and operations of Trammell Crow
Residential South Florida ("TCR/SF"), which consisted of 15 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. 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 three months ended March 31, 1998 has been prepared assuming the South
Florida Acquisition had been consummated on January 1, 1998. The unaudited pro
forma information (i) includes the historical operating results of the
properties and residential construction and development and third-party
management 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, 1998, or which may be attained in
future periods.
Three Months Ended March 31,
1999 1998
------ ------
Total revenues $60,442 $51,518
Net income available to common shareholders 7,215 4,851
Per common share information:
Net income - basic $0.27 $0.22
Net income - diluted $0.27 $0.22
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 March 31, 1999 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.
On March 26, 1999, Gables entered into a joint venture agreement with an
affiliate of J.P. Morgan Investment Management 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 March 25, 1999, 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
$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. On March 26, 1999, Gables contributed its interests in the seven
development communities to the joint venture in return for (i) cash of $60,347
and (ii) an initial capital account in the joint venture of $15,214. 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.
5. 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:
Three Months
Ended March 31,
1999 1998
-------- -------
BASIC AND DILUTED INCOME AVAILABLE TO
COMMON SHAREHOLDERS (NUMERATOR):
Net income - basic $7,215 $5,753
Minority interest of common unitholders
in Operating Partnership 1,768 1,059
------- -------
Net income - diluted $8,983 $6,812
======= =======
COMMON SHARES (DENOMINATOR):
Average shares outstanding - basic 26,322 22,021
Incremental shares from assumed conversions of:
Stock options 30 150
Outstanding common Units 6,449 4,056
------- -------
Average shares outstanding - diluted 32,801 26,227
======= =======
6. 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 March 31, 1999, Gables had no
items of other comprehensive income.
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.
<PAGE>
Page - 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
7. 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. For the three months ended March 31, 1998, Gables recognized mark to
market losses of $1,811 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.
8. 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 has 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 three months ended March 31, 1999.
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 $38,301 and $26,800 for the
three months ended March 31, 1999 and 1998, 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.
<PAGE>
Page - 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
Gables is a real estate investment trust (a "REIT") focused within the
multifamily industry in the Southwestern and Southeastern region of the United
States (the "Sunbelt" or "Sunbelt Region"). 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, to reduce indebtedness or, in certain
circumstances with appropriate approval from the board of trustees, to
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.
<PAGE>
Page - 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
This report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results or developments
could differ materially from those projected in such statements as a result of
certain factors set forth in the section entitled "Certain Factors Affecting
Future Operating Results" on Page 18 of this Form 10-Q and elsewhere in this
report.
Recent Portfolio Acquisitions
- -----------------------------
On April 1, 1998, Gables acquired the properties and operations of Trammell Crow
Residential South Florida ("TCR/SF"), which consisted of 15 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.
COMMON AND PREFERRED EQUITY ACTIVITY
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 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, the Operating Partnership 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.
<PAGE>
Page - 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
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.
Common Share Repurchase Program
- -------------------------------
On March 22, 1999, Gables announced a common share repurchase program pursuant
to which the Company is authorized to purchase up to $50 million of its
outstanding common shares. The Company 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. As of
March 31, 1999, the Company had repurchased 140 common shares for $3,137, of
which $3,088 was accrued at March 31, 1999.
Shelf Registration Statement
- ----------------------------
On December 3, 1998, the Company and the Operating Partnership 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.
OTHER FINANCING ACTIVITY
Property Sale
- -------------
On March 4, 1999, Gables sold an apartment community located in Atlanta
comprising 213 apartment homes. The net proceeds of $19.0 million were initially
used to paydown outstanding borrowings under the Interim Financing Vehicles.
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 Management 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 March 25, 1999, 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. On March 26, 1999, Gables contributed its interests in the seven
development communities to the joint venture in return for (i) cash of $60,347
and (ii) an initial capital account in the joint venture of $15,214. 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>
Page - 14
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 THREE MONTHS ENDED MARCH 31,
1999 (THE "1999 PERIOD") TO THE THREE MONTHS ENDED MARCH 31, 1998 (THE "1998
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
three months ended March 31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------- ---------- ---------- -----------
$ %
1999 1998 Change Change
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
RENTAL AND OTHER REVENUE:
Same store communities (1) $40,115 $39,228 $887 2.3%
Communities stabilized during the 1999 Period, but not during the 1998 2,171 911 1,260 138.3%
Period (2)
Development and lease-up communities (3) 1,811 0 1,811 ---%
Acquired communities (4) 13,849 291 13,558 4659.1%
Sold communities (5) 455 0 455 ---%
---------- ---------- ---------- -----------
Total property revenues $58,401 $40,430 $17,971 44.4%
---------- ---------- ---------- -----------
PROPERTY OPERATING AND MAINTENANCE EXPENSE (EXCLUSIVE OF DEPRECIATION
AND AMORTIZATION):
Same store communities (1) $13,656 $13,285 $371 2.8%
Communities stabilized during the 1999 Period, but not during the 1998 491 236 255 108.1%
Period (2)
Development and lease-up communities (3) 720 0 720 ---%
Acquired communities (4) 5,076 109 4,967 4556.9%
Sold communities (5) 157 0 157 ---%
---------- ---------- ---------- -----------
Total specified expenses $20,100 $13,630 $6,470 47.5%
---------- ---------- ---------- -----------
Revenues in excess of specified expenses $38,301 $26,800 $11,501 42.9%
---------- ---------- ---------- -----------
Revenues in excess of specified expenses as a percentage of total
property revenues 65.6% 66.3% --- -0.7%
---------- ---------- ---------- -----------
<FN>
(1) Communities which were owned and fully stabilized throughout both the 1999
Period and 1998 Period ("same store").
(2) Communities which were stabilized during all of the 1999 Period, but were
not stabilized during all of the 1998 Period.
(3) Communities in the development and/or lease-up phase which were not fully
stabilized during all or any of the 1999 Period.
(4) Communities which were acquired subsequent to January 1, 1998, including
the 15 communities acquired in April, 1998 in South Florida.
(5) Communities which were sold subsequent to January 1, 1998.
</FN>
</TABLE>
<PAGE>
Page - 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
Total property revenues increased $17,971, or 44.4%, from $40,430 to $58,401 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>
<CAPTION>
Percent
Increase Increase
(Decrease) Occupancy Increase (Decrease)
Number of in Total During the (Decrease) in Total
Number of Apartment Percent Property 1999 in Property
Market Communities Homes of Total Revenues Period Occupancy Revenues
-------- ----------- -------- -------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlanta 20 5,841 33.6% $632 95.1% 0.3% 4.8%
Houston 15 5,633 32.4% 134 92.7% -2.7% 1.0%
Dallas 9 2,085 12.0% 43 91.4% -3.3% 0.8%
Memphis 4 1,454 8.3% 62 90.6% -3.2% 2.2%
Nashville 4 1,166 6.7% -104 91.3% -4.3% -4.5%
Austin 3 680 3.9% 137 94.0% 2.4% 7.7%
San Antonio 2 544 3.1% -17 87.3% -4.6% -1.5%
----- ------ ----- ---- ----- ----- -----
57 17,403 100.0% $887 93.0% -1.7% 2.3%
===== ====== ===== ==== ===== ===== =====
</TABLE>
Communities stabilized during the 1999 Period but not during the 1998 Period:
Increase
Number of in Total Occupancy
Number of Apartment Percent Property During the
Market Communities Homes Of Total Revenues 1999 Period
- ----------- ----------- -------- ---------- -------- ------------
Austin 2 529 65.4% $1,582 89.6%
Orlando 1 280 34.6% 589 100.0%
--- ---- ------ ------ -----
3 809 100.0% $2,171 92.2%
=== ==== ====== ====== =====
Development and lease-up communities:
Increase
Number of in Total Occupancy
Number of Apartment Percent Property During the
Market Communities Homes Of Total Revenues 1999 Period
- ---------- ----------- -------- ---------- -------- ------------
Atlanta 1 386 44.2% $757 74.7%
Houston 1 256 29.3% 522 74.6%
Orlando 1 231 26.5% 532 60.9%
--- ----- ------ ------ ------
3 873 100.0% $1,811 70.8%
=== ===== ====== ====== ======
Other revenues increased $981, or 92.5%, from $1,060 to $2,041 due primarily to
(i) an increase in property management revenues of $598, or 89.7%, from $667 to
$1,265 resulting from a net increase of properties managed by Gables for third
parties as a result of the South Florida Acquisition and (ii) development
revenues, net of $445 in the 1999 Period.
Property operating and maintenance expense (exclusive of depreciation and
amortization) increased $6,470, or 47.5%, from $13,630 to $20,100 due to an
increase in apartment homes resulting from the acquisition and development of
additional communities and an increase for same store communities of 2.8%.
Real estate depreciation and amortization expense increased $4,325, or 57.8%,
from $7,484 to $11,809 due primarily to the acquisition and development of
additional communities.
<PAGE>
Page - 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
Property management expense for owned communities and third party properties on
a combined basis increased $412, or 24.9%, from $1,654 to $2,066 due primarily
to an increase of approximately 14,000 apartment homes managed from 28,000 in
the 1998 Period to 42,000 in the 1999 Period resulting primarily from the South
Florida Acquisition, in addition to inflationary increases in expenses. Gables
allocates property management expenses to both owned communities and third party
properties based on the proportionate share of total apartment homes and units
managed.
General and administrative expense increased $620, or 58.5%, from $1,060 to
$1,680 due primarily to (i) compensation and other costs for new positions
associated with the South Florida Acquisition and (ii) increased compensation
costs.
Severance costs of $2,000 in the 1999 Period represent a charge associated with
Gables' recently announced organizational changes, including the departure of
the chief operating officer.
Interest expense increased $4,031, or 63.6%, from $6,335 to $10,366 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 and property sale
Gables has consummated between periods, the proceeds of which have been
primarily used to reduce indebtedness.
Loss on treasury locks of $1,811 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 and (ii)
subsequently extended in connection with modifications in the projected timing
of the debt.
Gain on sale of real estate assets of $666 in the 1999 Period relates to the
sale of an apartment community located in Atlanta comprising 213 apartment
homes.
LIQUIDITY AND CAPITAL RESOURCES
Gables' net cash provided by operating activities increased from $6,967 for the
three months ended March 31, 1998 to $15,796 for the three months ended March
31, 1999, due to (i) an increase of $7,291 in income (a) before certain non-cash
or non-operating 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, severance costs
and loss on treasury locks and (b) after operating distributions received from
joint ventures, (ii) the change in other liabilities between periods of $870 and
(iii) the change in restricted cash between periods of $784. Such increases were
offset in part by the change in other assets between periods of $116.
For the three months ended March 31, 1999, Gables had $45,859 of net cash
provided by investing activities compared to $32,233 of net cash used in
investing activities for the three months ended March 31, 1998. During the three
months ended March 31, 1999, Gables received cash of (i) $60.3 million in
connection with the contribution of its interests in certain development
communities to the joint venture with J.P. Morgan and (ii) $19.0 million in
connection with the sale of an operating apartment community. During the three
months ended March 31, 1999, Gables expended approximately $30.1 million related
to development expenditures, including related land acquisitions; approximately
$2.2 million related to recurring, non-revenue enhancing, capital expenditures
for operating apartment communities; and approximately $1.2 million related to
non-recurring, renovation/revenue-enhancing expenditures.
For the three months ended March 31, 1999, Gables had $60,806 of net cash used
in financing activities compared to $28,011 of net cash provided by financing
activities for the three months ended March 31, 1998. During the three months
ended March 31, 1999, Gables had net repayments of borrowings of approximately
$42.6 million and had payments of dividends and distributions totaling
approximately $20.2 million. The repayments of borrowings were funded by the net
cash provided by investing activities.
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.
<PAGE>
Page - 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
As of March 31, 1999, Gables had total indebtedness of $770,218, cash and cash
equivalents of $7,903 and principal escrow deposits reflected in restricted cash
of $2,462. Gables' indebtedness has an average of 5.9 years to maturity at March
31, 1999. Excluding monthly principal amortization payments, over the next five
years Gables has the following scheduled debt maturities for indebtedness
outstanding at March 31, 1999:
1999 $10,315
2000 53,583
2001 126,000
2002 82,392
2003 62,676
The debt maturities in 2001 include $71,000 of outstanding indebtedness under
Gables' $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.
Gables' dividends through the first quarter of 1999 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 March 31, 1999, Gables had $71 million in borrowings outstanding under the
facility and, therefore, had $154 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 March 31, 1999, Gables had $10.3 million of
borrowings outstanding under this facility.
<PAGE>
Page - 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
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.
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 March 31, 1999 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 March 31, 1999 would be $1,724,659, $1,637,751 and
$823,183, respectively, if such $112,494 value were reflected.
INFLATION
Substantially all of Gables' leases at the communities are for a term of one
year or less, which may enable Gables to seek increased rents upon renewal of
existing leases or commencement of new leases in times of rising prices. The
short-term nature of these leases generally serves to lessen the impact of cost
increases arising from inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 6 to Consolidated Financial Statements.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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.
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.
<PAGE>
Page - 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
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.
Phase 2 - 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.
Phase 3 - 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.
Phase 4 - 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:
Category Status Actual or Expected Phase 4 Completion Date
- -------- ------ ------------------------------------------
Hardware Complete 3/31/99
Software Complete 3/31/99
Non-IT Working on Phase 4 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
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>
Page - 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
COMPLETED COMMUNITIES IN LEASE-UP AND DEVELOPMENT COMMUNITIES AT MARCH 31, 1999
<TABLE>
<CAPTION>
Actual or Estimated Quarter of
Number of Total Percent at March 31, 1999 ----------------------------------------
Apartment Budgeted --------------------------- Construct. Initial Construct. Stabilized
Community Homes Cost Complete Leased Occupied Start Occupancy End Occupancy
- --------- --------- ------ --------------------------- ------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WHOLLY-OWNED COMPLETED COMMUNITIES IN LEASE-UP:
Atlanta, GA
- -----------
Gables Sugarloaf ...................... 386 $ 28 100% 87% 83% 2 Q 1997 1 Q 1998 4 Q 1998 2 Q 1999
Houston, TX
- -----------
Gables New Territory .................. 256 15 100% 85% 80% 3 Q 1997 2 Q 1998 3 Q 1998 3 Q 1999
---- ----
Lease-up totals ....................... 642 $ 43
---- ----
WHOLLY-OWNED DEVELOPMENT COMMUNITY:
Orlando, FL
- -----------
Gables Celebration .................... 231 $ 27 92% 81% 63% 3 Q 1997 2 Q 1998 2 Q 1999 3 Q 1999
---- ----
CO-INVESTMENT DEVELOPMENT COMMUNITIES (2), (3):
Atlanta, GA
- -----------
Gables Metropolitan I ................. 435 $ 49 36% -- -- 2 Q 1998 3 Q 1999 3 Q 2000 4 Q 2000
Houston, TX
- -----------
Gables Raveneaux ...................... 382 28 42% -- -- 3 Q 1998 2 Q 1999 2 Q 2000 3 Q 2000
Dallas, TX
- ----------
Gables San Raphael .................... 222 17 70% -- -- 3 Q 1998 2 Q 1999 4 Q 1999 1 Q 2000
Gables State Thomas I ................. 290 33 -- -- -- 2 Q 1999 2 Q 2000 1 Q 2001 3 Q 2001
Boca Raton, FL
- --------------
Gables Grande Isle .................... 320 23 -- -- -- 2 Q 1999 1 Q 2000 4 Q 2000 1 Q 2001
Gables Palma Vista .................... 189 23 6% -- -- 1 Q 1999 4 Q 1999 2 Q 2000 4 Q 2000
Gables San Michele II ................. 343 40 36% -- -- 3 Q 1998 2 Q 1999 3 Q 2000 4 Q 2000
------ ----
Co-Investment totals .................. 2,181 $ 213(3)
------ ----
Development totals .................... 2,412 $ 240
====== ====
<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.
(3) Under the terms of the joint venture agreement, Gables is required to fund
20% of the total budgeted costs for these communities.
The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934, as amended. The projections and estimates contained in the table above are
forward-looking statements. These forward-looking statements involve risks and
uncertainties and actual results may differ materially from those projected in
such statements. Risks associated with Gables' development, construction, and
lease-up activities, which could impact the forward-looking statements made,
include: development opportunities may be abandoned; construction costs of a
community may exceed original estimates, possibly making the community
uneconomical; and construction and lease-up may not be completed on schedule,
resulting in increased debt service and construction costs.
</FN>
</TABLE>
<PAGE>
Page - 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
STABILIZED APARTMENT COMMUNITIES AT MARCH 31, 1999
March 31, 1999
Scheduled Rent Per
Number of Mar. 31, 1999----------------------
Community Homes Occupancy Unit Square Foot
- --------- --------- ----------- ---- -----------
HOUSTON, TX
Austin Colony .................. 237 98% $ 880 $ 0.90
Baybrook Village ............... 776 96% 590 0.74
Gables Bradford Place .......... 372 99% 769 0.89
Gables Bradford Pointe ......... 360 97% 664 0.87
Gables Champions ............... 404 91% 823 0.90
Gables CityPlaza ............... 246 95% 912 1.03
Gables Cityscape ............... 252 94% 937 1.10
Gables CityWalk/Waterford Square 317 97% 922 1.14
Gables Edgewater ............... 292 91% 838 0.95
Gables Meyer Park .............. 345 92% 889 1.03
Gables of First Colony ......... 324 92% 933 0.94
Gables Piney Point ............. 246 93% 965 1.04
Gables Pin Oak Green ........... 582 92% 984 0.96
Gables Pin Oak Park ............ 477 92% 1,010 0.99
Gables River Oaks .............. 228 97% 1,409 1.16
Lions Head ..................... 277 90% 765 0.91
Metropolitan Uptown (JV)........ 318 93% 1,032 1.13
Rivercrest I ................... 140 90% 744 0.88
Rivercrest II .................. 140 86% 742 0.88
Westhollow Park ................ 412 90% 668 0.74
Windmill Landing ............... 259 93% 704 0.81
------ ----- ----- -----
7,004 93% 849 0.94
------ ----- ----- -----
ATLANTA, GA
Briarcliff Gables .............. 104 99% 1,097 0.88
Buckhead Gables ................ 162 99% 823 1.09
Dunwoody Gables ................ 311 98% 834 0.89
Gables Cinnamon Ridge .......... 200 96% 685 0.71
Gables Cityscape ............... 192 98% 843 1.02
Gables Mill .................... 438 98% 825 0.89
Gables Northcliff .............. 82 98% 1,187 0.76
Gables Over Peachtree .......... 263 97% 1,040 1.14
Gables Vinings ................. 315 98% 979 0.92
Gables Walk .................... 310 95% 1,042 0.88
Gables Wood Arbor .............. 140 96% 721 0.79
Gables Wood Crossing ........... 268 95% 732 0.76
Gables Wood Glen ............... 380 92% 720 0.73
Gables Wood Knoll .............. 312 97% 721 0.72
Lakes at Indian Creek .......... 603 93% 624 0.68
Rock Springs Estates ........... 295 92% 933 0.92
Roswell Gables I ............... 384 97% 875 0.80
Roswell Gables II .............. 284 97% 875 0.74
Spalding Gables ................ 252 96% 872 0.88
Wildwood Gables ................ 546 97% 868 0.76
------ ----- ----- ------
5,841 96% 838 0.83
------ ----- ----- ------
BOCA RATON, FL
Boca Place ..................... 180 94% 855 0.87
Cotton Bay ..................... 444 97% 698 0.71
Hampton Lakes .................. 300 95% 756 0.71
Hampton Place .................. 368 96% 721 0.75
Kings Colony ................... 480 96% 753 0.85
Mahogany Bay ................... 328 98% 754 0.75
Mizner on the Green ............ 246 94% 1,564 1.24
San Michele .................... 249 97% 1,395 1.04
<PAGE>
Page - 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
STABILIZED APARTMENT COMMUNITIES AT MARCH 31, 1999
(continued from previous page)
March 31, 1999
Scheduled Rent Per
Number of Mar. 31, 1999----------------------
Community Homes Occupancy Unit Square Foot
- --------- --------- ----------- ---- -----------
BOCA RATON, FL (cont.)
San Remo ......................... 180 91% $1,228 $0.67
Town Colony ...................... 172 100% 822 0.96
Vinings at Boynton Beach I ....... 252 97% 856 0.71
Vinings at Boynton Beach II ...... 296 98% 899 0.74
Vinings at Hampton Village ....... 168 95% 802 0.66
Vinings at Town Place ............ 312 98% 822 0.99
Vinings at Wellington ............ 222 93% 993 0.74
------ ---- ----- ------
4,197 96% 894 0.82
------ ---- ----- ------
DALLAS, TX
Arborstone ....................... 536 99% 511 0.71
Gables at Pearl Street ........... 108 97% 1,438 1.32
Gables CityPlace ................. 232 91% 1,439 1.37
Gables Green Oaks ................ 300 86% 839 0.88
Gables Mirabella ................. 126 98% 1,274 1.40
Gables Preston ................... 126 83% 1,067 0.97
Gables Spring Park ............... 188 93% 943 0.89
Gables Turtle Creek .............. 150 89% 1,326 1.32
Gables Valley Ranch .............. 319 94% 949 0.93
------ ---- ------ ------
2,085 93% 954 1.01
------ ---- ------ ------
MEMPHIS, TN
Arbors of Harbortown (JV)......... 345 93% 847 0.86
Gables Cordova ................... 464 93% 704 0.75
Gables Germantown ................ 252 94% 935 0.80
Gables Quail Ridge ............... 238 93% 917 0.77
Gables Stonebridge ............... 500 91% 695 0.79
------ ---- ----- ------
1,799 93% 789 0.79
------ ---- ----- ------
AUSTIN, TX
Gables at the Terrace ............ 308 91% 1,043 1.10
Gables Bluffstone ................ 256 95% 1,057 1.07
Gables Central Park .............. 273 88% 1,176 1.25
Gables Great Hills ............... 276 97% 819 0.99
Gables Park Mesa ................. 148 97% 1,115 1.02
Gables Town Lake ................. 256 92% 1,195 1.28
------ ---- ------ ------
1,517 93% 1,061 1.12
------ ---- ------ ------
NASHVILLE, TN
Brentwood Gables ................. 254 93% 881 0.78
Gables Hendersonville ............ 364 92% 681 0.72
Gables Hickory Hollow I ......... 272 92% 662 0.73
Gables Hickory Hollow II ......... 276 92% 662 0.70
------ ---- ------ ------
1,166 92% 715 0.73
------ ---- ------ ------
SAN ANTONIO, TX
Gables Colonnade I ............... 312 87% 801 0.88
Gables Wall Street ............... 232 90% 810 0.85
------ ---- ------ ------
544 88% 804 0.87
------ ---- ------ ------
ORLANDO, FL
The Commons at Little Lake Bryan I 280 100% --(A) --(A)
------ ---- ------ ------
280 100% -- --
------ ---- ------ ------
TOTALS ........................ 24,433 94% $ 865 $ 0.88
====== ==== ====== ======
(A) This property 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.
<PAGE>
Page - 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
PORTFOLIO INDEBTEDNESS AND INTEREST RATE PROTECTION AGREEMENT SUMMARIES AT MARCH
31, 1999
PORTFOLIO INDEBTEDNESS SUMMARY
Percentage Interest Total Years to
Type of Indebtedness Balance of Total Rate (A) Rate (B) Maturity
- -------------------- ------- -------- -------- -------- --------
Fixed-rate:
Secured notes ............... $125,069 16.2% 7.80% 7.80% 9.00
Unsecured notes ............. 323,194 42.0% 7.20% 7.20% 4.45
Tax-exempt .................. 90,570 11.8% 6.15% 6.32% 8.42
-------- ----- ----- ----- -----
Total fixed-rate ....... $538,833 70.0% 7.16% 7.19% 6.17
-------- ----- ----- ----- -----
Tax-exempt variable-rate .... $150,070 19.5% 3.00% 3.99% 7.19
-------- ----- ----- ----- -----
Unsecured credit facilities . $ 81,315 10.5% 5.67% 5.67% 1.80
-------- ----- ----- ----- -----
Total portfolio debt (C), (D) $770,218 100.0% 6.19% 6.41% 5.91
======== ===== ===== ===== =====
(A) Interest Rate represents the weighted average interest rate incurred on the
indebtedness, exclusive of deferred financing cost amortization and credit
enhancement fees, as applicable.
(B) Total Rate represents the Interest Rate (A) plus credit enhancement fees,
as applicable.
(C) Interest associated with construction activities is capitalized as a cost
of development and does not impact current earnings. The qualifying
construction expenditures at March 31, 1999 for purposes of interest
capitalization were $93,722.
(D) Excludes (i) $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 and (ii) $2.8 million of construction loan
indebtedness related to a joint venture in which Gables owns a 20%
interest.
INTEREST RATE PROTECTION AGREEMENT SUMMARY
Notional Effective Termination
Description of Agreement Amount Rate Date Date
- ------------------------ -------- ------ -------- ------
LIBOR, 30-day-"Rate Swap" $44,530 5.35%(E) 08/30/96 08/30/99(F)
LIBOR, 30-day-"Rate Swap" $25,000 5.76%(E) 02/27/98 02/27/00(G)
LIBOR, 30-day-"Rate Swap" $40,000 4.79%(E) 11/30/98 09/29/00
(E) The 30-day LIBOR rate in effect at March 31, 1999 was 4.94%.
(F) 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.
(G) 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>
Page - 24
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:
Three Months
Ended March 31,
1999 1998
-------- --------
Net income available to common shareholders $7,215 $5,753
Minority interest of common unitholders in
Operating Partnership 1,768 1,059
Non-recurring severance costs (a) 2,000 0
Non-recurring loss on treasury locks (b) 0 1,811
Amortization of loss on extension of used treasury
locks (45) (4)
Gain on sale of real estate assets (666) 0
Real estate asset depreciation:
Wholly-owned real estate assets 11,809 7,484
Joint venture real estate assets 58 56
------ ------
Total 11,867 7,540
------ ------
FUNDS FROM OPERATIONS - BASIC $22,139 $16,159
------ ------
Amortization of discount on long-term liability (c) 192 0
------ ------
FUNDS FROM OPERATIONS - DILUTED $22,331 $16,159
------ ------
Capital expenditures for operating apartment
communities:
Carpet 839 443
Roofing 20 16
Exterior painting 0 0
Appliances 109 48
Other additions and improvements 1,267 617
------ -------
Total 2,235 1,124
------ -------
ADJUSTED FUNDS FROM OPERATIONS - DILUTED $20,096 $15,035
====== =======
AVERAGE SHARES AND UNITS OUTSTANDING - BASIC 32,771 26,077
====== =======
AVERAGE SHARES AND UNITS OUTSTANDING - DILUTED (c) 33,345 26,227
====== =======
<PAGE>
Page - 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Amounts)
- --------------------------------------------------------------------------------
(a) Severance costs of $2,000 for the three months ended March 31, 1999
represent a charge associated with Gables' recently announced
organizational changes, including the departure of the chief operating
officer. The NAREIT definition of FFO disregards significant non-recurring
events that materially distort the comparative measurement of FFO over
time. Gables believes that such organizational changes that resulted in the
charge are unusual and non-recurring in nature. Gables also believes that
other organizational changes could arise in the future that could result in
similar charges. Gables believes that these severance costs materially
distort the comparative measurement of FFO over time and, therefore, they
have been disregarded in the calculation of FFO pursuant to the NAREIT
definition of FFO.
(b) Loss on treasury locks of $1,811 for the three months ended March 31, 1998
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 and (ii) subsequently extended in connection with
modifications in the projected timing of the debt offering as a result of
unanticipated capital transactions, including the South Florida
Acquisition. The NAREIT definition of FFO disregards significant
non-recurring events that materially distort the comparative measurement of
FFO 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 specific series of events and circumstances that resulted in
the loss of hedge accounting for these treasury locks is unusual and
non-recurring in nature. Gables also believes that different events and
circumstances could arise in the future that could result in similar
losses. Gables believes that these losses materially distort the
comparative measurement of FFO over time and, therefore, they have been
disregarded in the calculation of FFO pursuant to the NAREIT definition of
FFO.
(c) 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.
ITEM 3. 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.
Refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1998 for detailed disclosure about quantitative and qualitative disclosures
about market risk. Quantitative and qualitative disclosures about market risk
have not materially changed since December 31, 1998.
<PAGE>
Page - 26
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 * Financial Data Schedule
- ---------------------
*Filed herewith
(b) Reports on Form 8-K
(i) Amendment No. 2 to the Form 8-K dated April 1, 1998 on
Form 8-K/A was filed with the Securities and Exchange
Commission on March 8, 1999.
(ii) A Form 8-K dated March 8, 1999 was filed with the
Securities and Exchange Commission to supplement pro
forma financial information included in the Form 8-K
dated April 1, 1998 filed in connection with the South
Florida Acquisition.
<PAGE>
Page - 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 1999 GABLES RESIDENTIAL TRUST
/s/ Marvin R. Banks, Jr.
--------------------------
Marvin R. Banks, Jr.
Senior Vice President and Chief
Financial Officer
(Authorized Officer of the Registrant
and Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF GABLES RESIDENTIAL TRUST FOR THE THREE MONTHS ENDED MARCH
31, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,500
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,612,165
<DEPRECIATION> 149,643
<TOTAL-ASSETS> 1,525,257
<CURRENT-LIABILITIES> 0
<BONDS> 770,218
4,500
115,000
<COMMON> 265
<OTHER-SE> 435,001
<TOTAL-LIABILITY-AND-EQUITY> 1,525,257
<SALES> 0
<TOTAL-REVENUES> 60,442
<CGS> 0
<TOTAL-COSTS> 37,773
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,030
<INCOME-PRETAX> 9,658
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,658
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,215
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
