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 June 30, 2000
( ) 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,
23,166,202 shares
The number of shares outstanding of each of the registrant's classes of
common stock as of July 31, 2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past (90) days.
(1) (X) YES ( ) NO
(2) (X) YES ( ) NO
<PAGE>
GABLES RESIDENTIAL TRUST
FORM 10 - Q INDEX
Part I Financial Information Page
Item 1: Financial Statements
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for
the three and six months ended
June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999 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 27
Part II Other Information 28
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 29
<PAGE>
Page 3
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GABLES RESIDENTIAL TRUST
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Data)
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Real estate assets:
Land $ 220,298 $ 220,298
Buildings 1,182,667 1,177,628
Furniture, fixtures and equipment 95,837 91,835
Construction in progress 69,502 37,984
Investment in joint ventures 24,982 23,471
Land held for future development 32,091 38,168
------------ ------------
Real estate assets before accumulated depreciation 1,625,377 1,589,384
Less: accumulated depreciation (194,280) (172,247)
------------ ------------
Net real estate assets 1,431,097 1,417,137
Cash and cash equivalents 18,333 7,963
Restricted cash 8,308 8,871
Deferred financing costs, net 3,482 4,007
Other assets, net 40,135 33,386
------------ -----------
Total assets $1,501,355 $1,471,364
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable $ 822,182 $ 755,485
Accrued interest payable 5,907 5,949
Preferred dividends payable 882 770
Real estate taxes payable 13,762 16,824
Accounts payable and accrued expenses - construction 5,336 5,555
Accounts payable and accrued expenses - operating 26,368 11,240
Security deposits 4,474 4,395
Other liability, net - 10,693
------------ ------------
Total liabilities 878,911 810,911
Minority interest of common unitholders in Operating Partnership 101,273 98,994
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
Commitments and contingencies
Shareholders' equity:
Excess shares, $0.01 par value, 51,000 shares authorized - -
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,
26,946 and 26,801 shares issued at June 30, 2000 and
December 31, 1999, respectively 269 268
Additional paid-in capital 443,751 443,094
Treasury shares at cost, 3,798 and 2,131 common shares at
June 30, 2000 and December 31, 1999, respectively (90,731) (50,058)
Deferred long-term compensation (1,810) (1,537)
Accumulated earnings - -
---------- ------------
Total shareholders' equity 466,479 506,767
---------- ------------
Total liabilities and shareholders' equity $1,501,355 $ 1,471,364
========== ============
<FN>
The accompanying notes are an integral part of these consolidated balance sheets.
</FN>
</TABLE>
<PAGE>
Page 4
<TABLE>
<CAPTION>
GABLES RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and Amounts in Thousands, Except Per Share Data)
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues $ 54,295 $ 55,231 $108,693 $110,768
Other property revenues 3,317 3,195 6,260 6,059
--------- --------- -------- --------
Total property revenues 57,612 58,426 114,953 116,827
--------- --------- -------- --------
Property management revenues 1,282 1,288 2,499 2,553
Development revenues, net 831 784 1,527 1,229
Equity in income of joint ventures 125 103 206 182
Interest income 267 219 466 339
Other 516 420 1,508 751
--------- --------- -------- --------
Total other revenues 3,021 2,814 6,206 5,054
--------- --------- -------- --------
Total revenues 60,633 61,240 121,159 121,881
--------- --------- -------- --------
EXPENSES:
Property operating and maintenance
(exclusive of items shown separately below) 18,767 19,531 37,338 39,631
Real estate asset depreciation and amortization 10,947 11,721 21,792 23,530
Property management - owned 1,419 1,214 2,879 2,418
Property management - third party 1,017 916 2,037 1,778
Interest expense and credit enhancement fees 11,518 11,333 22,553 22,136
Amortization of deferred financing costs 201 234 452 461
General and administrative 1,720 1,640 3,889 3,320
Severance costs - - - 2,000
Corporate asset depreciation and amortization 167 134 317 252
--------- --------- -------- --------
Total expenses 45,756 46,723 91,257 95,526
--------- --------- -------- --------
Gain on sale of real estate assets - - - 666
Income before minority interest 14,877 14,517 29,902 27,021
Minority interest of common unitholders in
Operating Partnership (2,475) (2,136) (4,943) (3,904)
Minority interest of preferred unitholders in
Operating Partnership (1,078) (1,078) (2,156) (2,156)
---------- ---------- --------- ---------
Net income 11,324 11,303 22,803 20,961
Dividends to preferred shareholders (2,442) (2,442) (4,885) (4,885)
---------- --------- --------- ---------
Net income available to common shareholders $ 8,882 $ 8,861 $ 17,918 $ 16,076
========== ========= ========= =========
Weighted average number of
common shares outstanding - basic 23,947 26,214 24,213 26,269
Weighted average number of
common shares outstanding - diluted 30,679 32,587 30,930 32,694
PER COMMON SHARE INFORMATION:
Net income - basic $ 0.37 $ 0.34 $ 0.74 $ 0.61
Net income - diluted $ 0.37 $ 0.34 $ 0.74 $ 0.61
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
Page 5
<TABLE>
<CAPTION>
GABLES RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and Amounts in Thousands, Except Per Share Data)
Six Months Ended June 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,803 $ 20,961
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 22,561 24,243
Equity in income of joint ventures (206) (182)
Minority interest of unitholders in Operating Partnership 7,099 6,060
Gain on sale of real estate assets - (666)
Long-term compensation expense 580 430
Amortization of discount on long-term liability - 356
Operating distributions received from joint ventures 601 147
Change in operating assets and liabilities:
Restricted cash 929 751
Other assets (422) (1,157)
Other liabilities, net (482) 2,710
--------- ---------
Net cash provided by operating activities 53,463 53,653
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and construction of real estate assets (40,639) (44,078)
Net proceeds from sale of real estate assets - 19,014
Investment in joint ventures (1,906) (2,929)
Proceeds from contribution of real estate assets to joint venture - 60,347
--------- ---------
Net cash (used in) provided by investing activities (42,545) 32,354
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of share options 1,283 388
Share Builder Plan contributions - 4,653
Treasury share purchases and Unit redemptions (28,549) (12,453)
Payments of deferred financing costs (26) (408)
Notes payable proceeds 71,940 17,426
Notes payable repayments (5,243) (46,798)
Principal escrow deposits (367) (348)
Preferred dividends paid (4,773) (4,773)
Preferred distributions paid (2,156) (2,156)
Common dividends paid ($1.06 and $1.02 per share, respectively) (25,586) (26,775)
Common distributions paid ($1.06 and $1.02 per share, respectively) (7,071) (6,491)
--------- ---------
Net cash used in financing activities (548) (77,735)
--------- ---------
Net change in cash and cash equivalents 10,370 8,272
Cash and cash equivalents, beginning of period 7,963 7,054
--------- ---------
Cash and cash equivalents, end of period $18,333 $15,326
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $25,769 $25,751
Interest capitalized 4,107 4,357
--------- ---------
Cash paid for interest, net of amounts capitalized $21,662 $21,394
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
Unless the context otherwise requires, all references to "we," "our" or
"us" in this report refer collectively to Gables Residential Trust ("Gables"), a
Maryland real estate investment trust ("REIT"), and its subsidiaries, including
Gables Realty Limited Partnership, a Delaware limited partnership, considered as
a single enterprise. Gables GP, Inc., a wholly-owned subsidiary of Gables
Residential Trust, is the sole general partner of Gables Realty Limited
Partnership.
1. ORGANIZATION AND FORMATION
We are a REIT formed in 1993 under Maryland law to continue and expand the
operations of our privately owned predecessor organization. We completed our
initial public offering on January 26, 1994.
We are a fully-integrated real estate company engaged in the multifamily
apartment community management, development, construction, acquisition and
disposition businesses. We also provide related brokerage and corporate rental
housing services. Substantially all of these businesses are conducted through
Gables Realty Limited Partnership (the "Operating Partnership"). We control the
Operating Partnership through Gables GP, Inc. ("Gables GP"), 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 June 30, 2000, we were a 77.6% economic owner of the common equity of the
Operating Partnership. Prior to March 31, 2000, our third party management
businesses were conducted through two subsidiaries of the Operating Partnership,
Central Apartment Management, Inc. and East Apartment Management, Inc. Effective
March 31, 2000, Central Apartment Management, Inc. changed its name to Gables
Residential Services, Inc., and East Apartment Management, Inc. was merged into
Gables Residential Services.
Our limited partnership and indirect general partnership interests in the
Operating Partnership entitle us to share in cash distributions from, and in the
profits and losses of, the Operating Partnership in proportion to our ownership
interest therein and entitles us to vote on all matters requiring a vote of the
limited partners. Generally, the other limited partners of the Operating
Partnership are persons who contributed their direct or indirect interests in
certain properties to the Operating Partnership primarily in connection with the
IPO and the 1998 acquisition of the properties and operations of Trammell Crow
Residential South Florida ("South Florida"). The Operating Partnership is
obligated to redeem each common unit of limited partnership interest ("Unit")
held by a person other than us at the request of the holder for an amount equal
to the fair market value of one of our common shares at the time of such
redemption, provided that we, at our option, may elect to acquire each Unit
presented for redemption for one common share or cash. With each redemption, our
percentage ownership interest in the Operating Partnership will increase. In
addition, whenever we issue common shares or preferred shares, we are obligated
to contribute any net proceeds to the Operating Partnership and the Operating
Partnership is obligated to issue an equivalent number of common or preferred
units, as applicable, to us.
As of June 30, 2000, we owned 79 completed multifamily apartment
communities comprising 23,278 apartment homes, of which 38 were developed and 41
were acquired, an indirect 25% general partner interest in two apartment
communities developed by us comprising 663 apartment homes, and an indirect 20%
interest in an apartment community developed by us comprising 222 apartment
homes. We also owned five multifamily apartment communities under development at
June 30, 2000 that are expected to comprise 1,202 apartment homes upon
completion and an indirect 20% interest in seven apartment communities under
development or in lease-up at June 30, 2000 that are expected to comprise 2,249
apartment homes upon completion. As of June 30, 2000, we owned parcels of land
for the future development of ten apartment communities expected to comprise an
estimated 2,332 apartment homes. There can be no assurance that we will develop
these parcels of land. Additionally, we have contracts or options to acquire
additional parcels of land. There can be no assurance that we will acquire these
land parcels; however, it is our intent to develop an apartment community on
each of these parcels of land, if purchased.
<PAGE>
Page 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
2. COMMON AND PREFERRED EQUITY ACTIVITY
Secondary Common Share Offerings
Since the IPO, we have issued a total of 14,831 common shares in eight
offerings, generating $347,771 in net proceeds which were generally used (1) to
reduce outstanding indebtedness under interim financing vehicles utilized to
fund development and acquisition activities and (2) for general working capital
purposes, including funding of future development and acquisition activities.
Preferred Share Offerings
On July 24, 1997, we issued 4,600 shares of 8.30% Series A Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share). The net
proceeds from this offering of $111.0 million were used to reduce outstanding
indebtedness under interim financing vehicles. The Series A Preferred Shares may
be redeemed at $25.00 per share plus accrued and unpaid dividends on or after
July 24, 2002. The Series A Preferred Shares have no stated maturity, sinking
fund, or mandatory redemption and are not convertible into any other Gables
securities.
On June 18, 1998, we issued 180 shares of 5.0% Series Z Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) in
connection with the acquisition of a parcel of land for future development. The
Series Z Preferred Shares, which are subject to mandatory redemption on June 18,
2018, may be redeemed at any time for $25.00 per share plus accrued and unpaid
dividends. The Series Z Preferred Shares are not subject to any sinking fund or
convertible into any other Gables securities.
Issuances of Common Operating Partnership Units
Since the IPO, the Operating Partnership has issued a total of 4,421 Units
in connection with the South Florida acquisition, the acquisition of other
operating apartment communities, and the acquisition of a parcel of land for
future development. The 4,421 Units issued include 470 Units valued at $10.4
million that were issued on January 1, 2000 related to a deferred portion of the
South Florida acquisition purchase price.
Issuance of Preferred Operating Partnership Units
On November 12, 1998, the Operating Partnership issued 2,000 of its 8.625%
Series B Preferred Units to an institutional investor. The net proceeds from
this issuance of $48.7 million were used to reduce outstanding indebtedness
under interim financing vehicles. We have the option to redeem the Series B
Preferred Units after November 14, 2003. These Units are exchangeable by the
holder into 8.625% Series B Cumulative Redeemable Preferred Shares of Gables on
a one-for-one basis; however, 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 Equity Repurchase Program
In 1999, we announced a common equity repurchase program pursuant to which
we are authorized to purchase up to $100 million of our outstanding common
shares or Units. We have repurchased 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. Units have also been
repurchased for cash upon their presentation for redemption by unitholders. As
of June 30, 2000, we had repurchased 3,798 common shares and 282 Units for a
total of $97,377, of which $14,062 was accrued for unsettled share repurchases
at June 30, 2000.
<PAGE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
3. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
accounts of Gables and its subsidiaries, including the Operating Partnership and
Gables Residential Services. We consolidate the financial statements of all
entities in which we have 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 have been adjusted for the minority interest
of unitholders in the Operating Partnership. Because Units, if presented for
redemption, can be exchanged for Gables common shares on a one-for-one basis,
minority interest of unitholders in the Operating Partnership is calculated
based on the weighted average of common shares and Units outstanding during the
applicable period.
The accompanying interim unaudited financial statements have been prepared
in accordance with 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 our opinion, 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 June 30, 2000 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
included in our Form 10-K for the year ended December 31, 1999.
4. GABLES RESIDENTIAL APARTMENT PORTFOLIO JOINT VENTURE
On March 26, 1999, we entered into a joint venture in which our economic
ownership interest is currently 20%. The business purpose of the joint venture
is to develop, own and operate eight multifamily apartment communities, located
in four of our nine markets. On March 26, 1999, we contributed our interest in
seven of the development communities to the joint venture in return for (1) cash
of $60,347 and (2) an initial capital account in the joint venture of $15,214.
On December 2, 1999, we contributed our interest in the eighth development
community to the joint venture in return for (1) cash of $4,774 and (2) an
increase in the initial capital account in the joint venture of $1,233. As of
the respective contribution dates, we (1) had commenced construction of four of
the communities, (2) owned the land for the future development of three of the
communities, and (3) owned the acquisition right for the land for the future
development of one of the communities. The capital budget for the development of
the eight communities is $238 million and is being funded with 50% equity and
50% debt. The equity component is being funded 80% by the venture partner and
20% by us. Our portion of the equity is being funded through contributions of
cash and property. As of June 30, 2000, we had funded $23.7 million of our
budgeted $23.8 million equity commitment to the joint venture. We serve as the
managing member of the venture and have responsibility for all day-to-day
operating matters. We also serve as the property manager, developer and general
contractor for construction activities.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, Statement of Financial Accounting Standards ("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, as amended by SFAS No. 137 and 138, is effective
for us beginning January 1, 2001. The impact of SFAS No. 133 on our financial
statements will depend on the extent, type and effectiveness of our hedging
activities. SFAS No. 133 could increase volatility in net income and other
comprehensive income.
<PAGE>
Page 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
6. 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 our share option and incentive plan and upon conversion of Units.
The numerator and denominator used for both basic and diluted earnings per share
computations are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------- ------- ------ --------
<S> <C> <C> <C> <C>
Basic and diluted income available to
common shareholders (numerator):
Net income - basic $ 8,882 $ 8,861 $17,918 $16,076
Minority interest of common unitholders
in Operating Partnership 2,475 2,136 4,943 3,904
-------- ------- ------- -------
Net income - diluted $ 11,357 $10,997 $22,861 $19,980
======== ======= ======= =======
Common shares (denominator):
Average shares outstanding - basic 23,947 26,214 24,213 26,269
Incremental shares from assumed conversions of:
Stock options 59 50 38 40
Outstanding common Units 6,670 6,323 6,676 6,385
Other 3 - 3 -
-------- ------- ------- -------
Average shares outstanding - diluted 30,679 32,587 30,930 32,694
======== ======= ======= =======
</TABLE>
7. INTEREST RATE PROTECTION AGREEMENTS
In the ordinary course of business, we are exposed to interest rate risks.
We periodically seek input from third party consultants regarding market
interest rate and credit risk in order to evaluate our interest rate exposure.
In certain situations, we 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. We do 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 indicating an existing derivative instrument no
longer meets the hedge criteria described above, the derivative is marked to
market in the statement of operations.
8. SEGMENT REPORTING
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. Our chief operating decision-maker is our senior
management group.
We own, operate and develop 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. We evaluate the performance of
each of our apartment communities on an individual basis. However, because each
of our apartment communities has similar economic characteristics, residents,
and products and services, our apartment communities have been aggregated into
one reportable segment. This segment comprises 95% of our total revenues for the
three months ended June 30, 2000 and 1999, and 95% and 96% of our total revenues
for the six months ended June 30, 2000 and 1999, respectively.
<PAGE>
Page 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and Amounts in Thousands)
-------------------------------------------------------------------------------
The primary financial measure for our 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 our apartment communities totaled $38,845 and $38,895 for
the three months ended June 30, 2000 and 1999, respectively, and $77,615 and
$77,196 for the six months ended June 30, 2000 and 1999, respectively. All other
segment measurements are disclosed in our consolidated financial statements.
We also provide 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 under current accounting literature.
9. SEVERANCE COSTS
During 1999, we incurred severance costs associated with organizational
changes resulting from management succession directives, including the
resignation of the former chairman and chief executive officer effective January
1, 2000 and the resignation of the former chief operating officer effective May
21, 1999. Included in accounts payable and accrued expenses at December 31, 1999
were accrued severance costs of $1,360 relating to the resignation of the former
chairman and chief executive officer, of which $336 included deferred
compensation related to the accelerated vesting of restricted shares unvested at
the effective date of separation. These accrued severance costs at December 31,
1999 were paid during the first quarter of 2000.
<PAGE>
Page 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a REIT focused within the multifamily industry in markets throughout
the United States that have high job growth and are resilient to economic
downturns. Our operating performance relies predominantly on net operating
income from our apartment communities. Net operating income is determined by
rental revenues and operating expenses, which are affected by the demand and
supply dynamics within our markets. Our performance is also affected by the
general availability and cost of capital and our ability to develop and acquire
additional apartment communities with returns in excess of our blended cost of
capital.
BUSINESS OBJECTIVES AND STRATEGY
Our objective is to increase shareholder value by producing consistent high
quality earnings to sustain dividend growth and annual total returns that exceed
the multifamily sector average. To achieve that objective, we employ a number of
business strategies. First, our long-term investment strategy is research-driven
with the objective of creating a portfolio of high quality assets in
approximately six to eight strategically selected markets that are complementary
through economic diversity and characterized by high job growth and resiliency
to national economic downturns. We believe such a portfolio will provide
predictable growth in operating cash flow on a sustainable basis. Second, we
adhere to a strategy of owning and operating high quality, class AA/A apartment
communities under the Gables brand. We believe that such communities, when
located in highly desirable areas to live and supplemented with high quality
service and amenities, attract the affluent renter-by-choice who is willing to
pay a premium for location preference, superior service and high quality
communities. The resulting portfolio should maintain high levels of occupancy
and rental rates. This, coupled with more predictable operating expenses and
reduced capital expenditure requirements associated with high quality
construction materials, should lead to operating margins that exceed national
averages for the multifamily sector and sustainable growth in operating cash
flow. Third, our aim is to be recognized as the employer of choice within the
industry. Our mission of Taking Care of the Way People Live is a cornerstone of
our strategy, involving innovative human resource practices that we believe will
attract and retain the highest caliber associates. Because of our
long-established presence as a fully integrated apartment management,
development, construction, acquisition and disposition company within our
markets, we have the ability to offer multi-faceted career opportunities among
the various disciplines within the industry. Finally, our capital strategy is to
maximize return on invested capital while maintaining financial flexibility
through a conservative, investment grade credit profile. We judiciously manage
our capital and are able to recycle existing capital through asset dispositions.
We believe the successful execution of these strategies will result in operating
cash flow and dividend growth, producing annual total returns that exceed the
multifamily REIT sector average.
We believe we are well positioned to continue achieving our objectives
because of our long-established presence as a fully integrated real estate
company in our markets. This local market presence creates a competitive
advantage in generating increased cash flow from (1) property operations during
different economic cycles and (2) new investment opportunities that involve site
selection, market information and requests for entitlements and zoning
petitions.
Portfolio-wide occupancy levels have remained high and portfolio-wide
rental rates have continued to increase during each of the last several years.
We expect 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. Our ongoing evaluation of the growth prospects for a specific asset may
result in a determination to dispose of the asset. In that event, we would
intend to sell the asset and utilize the net proceeds from any such sale to
invest in new assets expected to have better growth prospects, reduce
indebtedness or, in certain circumstances with appropriate approval from our
board of trustees, repurchase outstanding common shares. We maintain staffing
levels sufficient to meet existing construction, acquisition, and leasing
activities. If market conditions warrant, we would anticipate adjusting staffing
levels to mitigate a negative impact on results of operations.
<PAGE>
Page 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
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 20 of this Form 10-Q and elsewhere
in this report.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the accompanying
consolidated financial statements and the notes thereto.
COMMON AND PREFERRED EQUITY ACTIVITY
Secondary Common Share Offerings
Since the IPO, we have issued a total of 14,831 common shares in eight
offerings, generating $347,771 in net proceeds which were generally used (1) to
reduce outstanding indebtedness under interim financing vehicles utilized to
fund our development and acquisition activities and (2) for general working
capital purposes, including funding of future development and acquisition
activities.
Preferred Share Offerings
On July 24, 1997, we issued 4,600 shares of 8.30% Series A Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share). The net
proceeds from this offering of $111.0 million were used to reduce outstanding
indebtedness under interim financing vehicles. The Series A Preferred Shares may
be redeemed at $25.00 per share plus accrued and unpaid dividends on or after
July 24, 2002. The Series A Preferred Shares have no stated maturity, sinking
fund, or mandatory redemption and are not convertible into any other Gables
securities.
On June 18, 1998, we issued 180 shares of 5.0% Series Z Cumulative
Redeemable Preferred Shares (liquidation preference $25.00 per share) in
connection with the acquisition of a parcel of land for future development. The
Series Z Preferred Shares, which are subject to mandatory redemption on June 18,
2018, may be redeemed at any time for $25.00 per share plus accrued and unpaid
dividends. The Series Z Preferred Shares are not subject to any sinking fund or
convertible into any other Gables securities.
Issuances of Common Operating Partnership Units
Since the IPO, the Operating Partnership has issued a total of 4,421 Units
in connection with the South Florida acquisition, the acquisition of other
operating apartment communities, and the acquisition of a parcel of land for
future development. The 4,421 Units issued include 470 Units valued at $10.4
million that were issued on January 1, 2000 related to a deferred portion of the
Trammell Crow Residential South Florida acquisition purchase price.
Issuance of Preferred Operating Partnership Units
On November 12, 1998, the Operating Partnership issued 2,000 of its 8.625%
Series B Preferred Units to an institutional investor. The net proceeds from
this issuance of $48.7 million were used to reduce outstanding indebtedness
under interim financing vehicles. We have the option to redeem the Series B
Preferred Units after November 14, 2003. These Units are exchangeable by the
holder into 8.625% Series B Cumulative Redeemable Preferred Shares of Gables on
a one-for-one basis; however, this exchange right is generally not exercisable
until after November 14, 2008. The Series B Preferred Units have no stated
maturity, sinking fund, or mandatory redemption.
<PAGE>
Page 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
Common Equity Repurchase Program
In 1999, we announced a common equity repurchase program pursuant to which
we are authorized to purchase up to $100 million of our outstanding common
shares or Units. We have repurchased 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. Units have also been
repurchased for cash upon their presentation for redemption by unitholders. As
of June 30, 2000, we had repurchased 3,798 common shares and 282 Units for a
total of $97,377, of which $14,062 was accrued for unsettled share repurchases
at June 30, 2000.
Shelf Registration Statement
We have an effective shelf registration statement on file with the
Securities and Exchange Commission providing $500 million of equity capacity and
$300 million of debt capacity. We believe it is prudent to maintain shelf
registration capacity in order to facilitate future capital raising activities.
To date, there have been no issuances under this shelf registration statement.
OTHER FINANCING ACTIVITY
Property Sales
During 1999, we sold three apartment communities located in Atlanta
comprising 676 apartment homes, two apartment communities located in Memphis
comprising 490 apartment homes, one apartment community located in Houston
comprising 412 apartment homes, and an outparcel of land from an existing
development community located in Dallas. The net proceeds from these sales
totaled $96.7 million and were used to pay down outstanding borrowings under
interim financing vehicles and purchase common shares and Units under our common
equity repurchase program.
Gables Residential Apartment Portfolio Joint Venture
On March 26, 1999, we entered into a joint venture in which our economic
ownership interest is currently 20%. The business purpose of the joint venture
is to develop, own and operate eight multifamily apartment communities, located
in four of our nine markets. On March 26, 1999, we contributed our interest in
seven of the development communities to the joint venture in return for (1) cash
of $60,347 and (2) an initial capital account in the joint venture of $15,214.
On December 2, 1999, we contributed our interest in the eighth development
community to the joint venture in return for (1) cash of $4,774 and (2) an
increase in the initial capital account in the joint venture of $1,233. As of
the respective contribution dates, we (1) had commenced construction of four of
the communities, (2) owned the land for the future development of three of the
communities, and (3) owned the acquisition right for the land for the future
development of one of the communities. The capital budget for the development of
the eight communities is $238 million and is being funded with 50% equity and
50% debt. The equity component is being funded 80% by the venture partner and
20% by us. Our portion of the equity is being funded through contributions of
cash and property. As of June 30, 2000, we had funded $23.7 million of our
budgeted $23.8 million equity commitment to the joint venture. We serve as the
managing member of the venture and have responsibility for all day-to-day
operating matters. We also serve as the property manager, developer and general
contractor for construction activities.
<PAGE>
Page 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000
(THE "2000 PERIOD") TO THE THREE MONTHS ENDED JUNE 30, 1999 (THE "1999 PERIOD")
Our net income is generated primarily from the operation of our apartment
communities. For purposes of evaluating comparative operating performance, we
categorize our operating communities based on the period each community reaches
stabilized occupancy. A community is considered to have achieved stabilized
occupancy on the earlier to occur of (1) attainment of 93% physical occupancy or
(2) one year after completion of construction. The operating performance for all
of our apartment communities combined for the three months ended June 30, 2000
and 1999 is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------
$ %
2000 1999 Change Change
------- ------- ------- -------
<S> <C> <C> <C> <C>
RENTAL AND OTHER PROPERTY REVENUES:
Same store communities (1) $54,160 $52,400 $1,760 3.4%
Communities stabilized during the 2000 Period, but not
the 1999 Period (2) 3,408 3,080 328 10.6%
Development and lease-up communities (3) 44 - 44 -
Acquired communities (4) - - - -
Sold communities (5) - 2,946 -2,946 -100.0%
------- ------- ------- -------
Total property revenues $57,612 $58,426 $ -814 -1.4%
------- ------- ------- -------
PROPERTY OPERATING AND MAINTENANCE EXPENSES
(EXCLUSIVE OF DEPRECIATION AND AMORTIZATION):
Same store communities (1) $17,705 $17,311 $ 394 2.3%
Communities stabilized during the 2000 Period, but not
the 1999 Period (2) 1,062 1,003 59 5.9%
Development and lease-up communities (3) - - - -
Acquired communities (4) - - - -
Sold communities (5) - 1,217 -1,217 -100.0%
------- ------- ------- -------
Total specified expenses $18,767 $19,531 $ -764 -3.9%
------- ------- ------- -------
Revenues in excess of specified expenses $38,845 $38,895 $ -50 -0.1%
------- ------- ------- -------
Revenues in excess of specified expenses as a percentage of total
property revenues 67.4% 66.6% - 0.8%
------- ------- ------- -------
<FN>
(1) Communities which were owned and fully stabilized throughout both the 2000 Period and 1999 Period ("same store").
(2) Communities which were stabilized during all of the 2000 Period, but not the 1999 Period.
(3) Communities in the development and/or lease-up phase which were not fully stabilized during all or any of the 2000 Period.
(4) Communities which were acquired subsequent to April 1, 1999.
(5) Communities which were sold subsequent to April 1, 1999.
</FN>
</TABLE>
<PAGE>
Page 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
Total property revenues decreased $814, or 1.4%, from $58,426 to $57,612
due primarily to the sale of five apartment communities during the second half
of 1999 which is offset by an increase in rental rates on communities stabilized
throughout both periods ("same store") and an increase in the number of
apartment homes resulting from the development of additional communities.
Following is additional data regarding the increases in total property revenues
for three of the five community categories presented in the preceding table.
Same store communities:
<TABLE>
<CAPTION>
Number of Occupancy Change Percent
Number of Apartment Percent During the in Change in Change in
Market Communities Homes of Total 2000 Period Occupancy Revenues Revenues
------ ----------- --------- -------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston 19 6,274 28.7% 94.6% 2.5% $ 192 1.3%
Atlanta 18 5,378 24.6% 95.0% -0.2% 443 3.5%
So. Florida 14 3,948 18.1% 94.5% -1.8% 84 0.9%
Dallas 9 2,085 9.5% 95.5% 2.9% 98 1.8%
Austin 6 1,517 6.9% 96.7% 7.0% 670 15.2%
Nashville 4 1,166 5.3% 94.4% 4.4% 126 5.7%
Memphis 2 964 4.4% 94.8% 3.6% 104 5.9%
San Antonio 2 544 2.5% 91.8% 4.0% 44 3.8%
------------ --------- -------- ----------- --------- ---------- ----------
74 21,876 100.0% 94.9% 1.7% $1,761(a) 3.4%
============ ========= ======== =========== ========= ========== ==========
<FN>
(a) The above table excludes The Commons at Little Lake Bryan I, a community comprising 280 apartment homes that is leased
to a single user group pursuant to a triple net master lease. Revenues for The Commons at Little Lake Bryan I
decreased $1, or -0.2%, in the 2000 Period compared to the 1999 Period and occupancy was 100% for both the 2000 Period
and the 1999 Period.
</FN>
</TABLE>
Communities stabilized during the 2000 Period but not during the 1999 Period:
<TABLE>
<CAPTION>
Number of Occupancy Change
Number of Apartment Percent During the in
Market Communities Homes of Total 2000 Period Revenues
------ ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Atlanta 1 386 34.4% 95.6% $ 74
Houston 1 256 22.8% 92.8% 87
So. Florida 1 249 22.2% 92.7% 11
Orlando 1 231 20.6% 89.4% 156
----------- --------- -------- ----------- --------
4 1,122 100.0% 92.7% $ 328
=========== ========= ======== =========== ========
</TABLE>
Development and lease-up communities:
<TABLE>
<CAPTION>
Number of Occupancy Change
Number of Apartment Percent During the in
Market Communities Homes of Total 2000 Period Revenues
------ ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Orlando 1 448 100.0% 100.0%(b) $44
=========== ========= ======== =========== ========
<FN>
(b) This property is leased to a single user group pursuant to a triple net master lease.
</FN>
</TABLE>
Other revenues increased $207, or 7.4%, from $2,814 to $3,021 due primarily
to an increase in income from certain ancillary services and an increase in
development revenues, net.
Property operating and maintenance expense (exclusive of depreciation and
amortization) decreased $764, or 3.9%, from $19,531 to $18,767 due primarily to
the sale of five apartment communities during the second half of 1999. This
decrease is offset by a $394, or 2.3% increase in property operating and
maintenance expense for same store communities. The same store increase
represents increased payroll costs and property taxes offset by reduced
marketing expenses.
Real estate depreciation and amortization expense decreased $774, or 6.6%,
from $11,721 to $10,947 due primarily to the sale of five apartment communities
during the second half of 1999.
<PAGE>
Page 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
Property management expense for owned communities and third party
properties on a combined basis increased $306, or 14.4%, from $2,130 to $2,436
due primarily to (1) increased staffing and equipment support related to our
strategic initiatives for enhanced management information systems, and (2)
inflationary increases in expenses. We allocate property management expenses to
both owned communities and third party properties based on the proportionate
share of total apartment homes managed.
Interest expense and credit enhancement fees increased $185, or 1.6%, from
$11,333 to $11,518 due primarily to higher interest rates and an increase in
operating debt associated with the development of additional communities. These
increases have been offset in part by (1) the sale of five apartment communities
during the second half of 1999, the proceeds of which were partially used to
reduce outstanding indebtedness, and (2) an increase in the amount of interest
capitalized, resulting from increased development activity related to our
wholly-owned development communities.
General and administrative expense increased $80, or 4.9%, from $1,640 to
$1,720 due primarily to (1) an increase in long-term compensation expense and
(2) inflationary increases in expenses.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (THE
"2000 PERIOD") TO THE SIX MONTHS ENDED JUNE 30, 1999 (THE "1999 PERIOD")
Our net income is generated primarily from the operation of our apartment
communities. For purposes of evaluating comparative operating performance, we
categorize our operating communities based on the period each community reaches
stabilized occupancy. A community is considered to have achieved stabilized
occupancy on the earlier to occur of (1) attainment of 93% physical occupancy or
(2) one year after completion of construction. The operating performance for all
of our apartment communities combined for the six months ended June 30, 2000 and
1999 is summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------
$ %
2000 1999 Change Change
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
RENTAL AND OTHER PROPERTY REVENUES:
Same store communities (1) $108,127 $104,600 $ 3,527 3.4%
Communities stabilized during the 2000 Period,
but not the 1999 Period (2) 6,782 5,888 894 15.2%
Development and lease-up communities (3) 44 - 44 -
Acquired communities (4) - - - -
Sold communities (5) - 6,339 -6,339 -100.0%
-------- -------- -------- ----------
Total property revenues $114,953 $116,827 $-1,874 -1.6%
-------- --------- -------- ----------
PROPERTY OPERATING AND MAINTENANCE EXPENSES
(EXCLUSIVE OF DEPRECIATION AND AMORTIZATION):
Same store communities (1) $ 35,240 $ 34,997 $ 243 0.7%
Communities stabilized during the 2000 Period,
but not the 1999 Period (2) 2,098 2,044 54 2.6%
Development and lease-up communities (3) - - - -
Acquired communities (4) - - - -
Sold communities (5) - 2,590 -2,590 -100.0%
-------- -------- -------- ----------
Total specified expenses $ 37,338 $ 39,631 $-2,293 -5.8%
-------- -------- -------- ----------
Revenues in excess of specified expenses $ 77,615 $ 77,196 $ 419 0.5%
-------- -------- -------- ----------
Revenues in excess of specified expenses as a percentage of total
property revenues 67.5% 66.1% - 1.4%
-------- -------- -------- ----------
<FN>
(1) Communities which were owned and fully stabilized throughout both the 2000 Period and 1999 Period ("same store").
(2) Communities which were stabilized during all of the 2000 Period, but not the 1999 Period.
(3) Communities in the development and/or lease-up phase which were not fully stabilized during all or any of the 2000 Period.
(4) Communities which were acquired subsequent to January 1, 1999.
(5) Communities which were sold subsequent to January 1, 1999.
</FN>
</TABLE>
<PAGE>
Page 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
Total property revenues decreased $1,874, or 1.6%, from $116,827 to
$114,953 due primarily to the sale of six apartment communities in 1999 which is
offset by an increase in rental rates on communities stabilized throughout both
periods ("same store") and an increase in the number of apartment homes
resulting from the development of additional communities. Below is additional
data regarding the increases in total property revenues for three of the five
community categories presented in the preceding table:
Same store communities:
<TABLE>
<CAPTION>
Number of Occupancy Change Change Percent
Number of Apartment Percent During the in in Change in
Market Communities Homes of Total 2000 Period Occupancy Revenues Revenues
------ ----------- --------- -------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston 19 6,274 28.7% 95.5% 3.1% $ 393 1.4%
Atlanta 18 5,378 24.6% 94.4% -0.7% 831 3.3%
So. Florida 14 3,948 18.1% 95.0% -0.9% 303 1.5%
Dallas 9 2,085 9.5% 94.8% 2.8% 238 2.2%
Austin 6 1,517 6.9% 96.7% 6.6% 1,213 13.8%
Nashville 4 1,166 5.3% 94.7% 4.0% 235 5.3%
Memphis 2 964 4.4% 96.0% 5.0% 241 6.8%
San Antonio 2 544 2.5% 90.4% 2.9% 68 2.9%
----------- --------- -------- ----------- --------- ----------- -----------
74 21,876 100.0% 95.2% 2.1% $3,522(a) 3.4%
=========== ========= ======== =========== ========= =========== ===========
<FN>
(a) The above table excludes The Commons at Little Lake Bryan I, a community comprising 280 apartment homes that is leased
to a single user group pursuant to a triple net master lease. Revenues for The Commons at Little Lake Bryan I
increased $5, or 0.4%, in the 2000 Period compared to the 1999 Period and occupancy was 100% for both the 2000 Period
and the 1999 Period.
</FN>
Communities stabilized during the 2000 Period but not during the 1999 Period:
Number of Occupancy Change
Number of Apartment Percent During the in
Market Communities Homes of Total 2000 Period Revenues
------ ----------- --------- -------- ----------- --------
Atlanta 1 386 34.4% 95.4% $285
Houston 1 256 22.8% 94.6% 207
So. Florida 1 249 22.2% 93.3% -50
Orlando 1 231 20.6% 91.8% 452
----------- --------- -------- ----------- --------
4 1,122 100.0% 93.7% $894
=========== ========= ======== =========== ========
</TABLE>
Development and lease-up communities:
Number of Occupancy Change
Number of Apartment Percent During the in
Market Communities Homes of Total 2000 Period Revenues
------ ----------- --------- -------- ----------- --------
Orlando 1 448 100.0% 100.0%(b) $ 44
=========== ========= ======== =========== ========
(b) This property is leased to a single user group pursuant to a triple net
master lease.
Other revenues increased $1,152, or 22.8%, from $5,054 to $6,206 due
primarily to a gain on sale of cable equipment to a cable service provider and
an increase in development revenues, net.
<PAGE>
Page 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
Property operating and maintenance expense (exclusive of depreciation and
amortization) decreased $2,293, or 5.8%, from $39,631 to $37,338 due primarily
to the sale of six apartment communities in 1999.
Real estate depreciation and amortization expense decreased $1,738, or
7.4%, from $23,530 to $21,792 due primarily to the sale of six apartment
communities in 1999.
Property management expense for owned communities and third party
properties on a combined basis increased $720, or 17.2%, from $4,196 to $4,916
due primarily to (1) increased staffing and equipment support related to our
strategic initiatives for enhanced management information systems, and (2)
inflationary increases in expenses. We allocate property management expenses to
both owned communities and third party properties based on the proportionate
share of total apartment homes managed.
Interest expense and credit enhancement fees increased $417, or 1.9%, from
$22,136 to $22,553 due primarily to higher interest rates and an increase in
operating debt associated with the development of additional communities. These
increases have been offset in part by the sale of six apartment communities in
1999, the proceeds of which were partially used to reduce outstanding
indebtedness.
General and administrative expense increased $569, or 17.1%, from $3,320 to
$3,889 due primarily to (1) an increase in abandoned real estate pursuit costs,
(2) an increase in long-term compensation expense, and (3) inflationary
increases in expenses.
Severance costs of $2,000 in the 1999 Period represent charges associated
with organizational changes resulting from management succession directives.
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
Net cash provided by operating activities decreased from $53,653 for the
six months ended June 30, 1999 to $53,463 for the six months ended June 30, 2000
due to a change in other liabilities between periods of $3,192. Such decrease
was offset in part by (1) a change in restricted cash between periods of $178,
(2) a change in other assets between periods of $735, and (3) an increase of
$2,089 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, and long-term compensation expense and (b) after operating distributions
received from joint ventures.
We had $42,545 of net cash used in investing activities for the six months
ended June 30, 2000 compared to $32,354 of net cash provided by investing
activities for the six months ended June 30, 1999. During the six months ended
June 30, 2000, we expended $32.3 million related to development expenditures,
including related land acquisitions, $1.9 million related to our investment in
joint ventures, $5.2 million related to recurring, non-revenue enhancing capital
expenditures for operating apartment communities, and $3.1 million related to
non-recurring, renovation/revenue enhancing capital expenditures. During the six
months ended June 30, 1999, we received cash of (1) $60.3 million in connection
with our contribution of interests in certain development communities to the
Gables Residential Apartment Portfolio Joint Venture and (2) $19.0 million in
connection with the sale of an operating apartment community. During the six
months ended June 30, 1999, we expended $36.1 million related to development
expenditures, including related land acquisitions, $2.9 million related to our
investment in joint ventures, $4.8 million related to recurring, non-revenue
enhancing capital expenditures for operating apartment communities, and $3.2
million related to non-recurring, renovation/revenue enhancing capital
expenditures.
<PAGE>
Page 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
We had $548 of net cash used in financing activities for the six months
ended June 30, 2000 compared to $77,735 for the six months ended June 30, 1999.
During the six months ended June 30, 2000, we had payments for dividends and
distributions totaling $39.6 million and payments for treasury share purchases
and Unit redemptions in connection with our common equity repurchase program
totaling $28.5 million. These payments were offset by net borrowings of $66.7
million. During the six months ended June 30, 1999, we had net repayments of
borrowings of $29.4 million, payments for treasury share purchases and Unit
redemptions totaling $12.4 million, and net payments of dividends and
distributions totaling $35.5 million. The repayments of borrowings were funded
by the net cash provided by investing activities.
We have elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. Under current law, a REIT must
distribute at least 95% of its ordinary taxable income. As a result of recently
enacted tax legislation, effective for tax years beginning after December 31,
2000, the distribution requirement has been reduced from 95% to 90% of a REIT's
ordinary taxable income. Provided we maintain our qualification as a REIT, we
generally will not be subject to federal income tax on distributed net income.
The recently enacted tax legislation also alters the requirements for
qualification as a REIT. In particular, the new legislation generally
liberalizes, from the perspective of our historic operations, the asset
diversification requirements applicable to REITs. Effective for tax years
beginning after December 31, 2000, a REIT may own the securities of a "taxable
REIT subsidiary" without limitation on the REIT's voting control over the
subsidiary, provided that not more than 20% of the value of the REIT's total
assets is represented by securities of one or more taxable REIT subsidiaries. A
taxable REIT subsidiary would include a corporation in which we directly or
indirectly own stock and which has elected to be treated as a taxable REIT
subsidiary.
As of June 30, 2000, we had total indebtedness of $822,182, cash and cash
equivalents of $18,333, and principal escrow deposits reflected in restricted
cash of $3,190. Our indebtedness has an average of 4.5 years to maturity at June
30, 2000. The aggregate maturities of notes payable at June 30, 2000 are as
follows:
2000 $ 52,643
2001 108,434
2002 176,280
2003 65,602
2004 79,383
2005 and thereafter 339,840
--------
$822,182
========
The maturities in 2000 include a $50 million unsecured senior note which
matures in October, 2000.
Dividends through the second quarter of 2000 have been paid from cash
provided by operating activities. We anticipate that dividends will continue to
be paid on a quarterly basis from cash provided by operating activities.
We have met and expect to continue to meet our short-term liquidity
requirements generally through net cash provided by operations. Our net cash
provided by operations has been adequate and we believe 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 our communities, in addition to monthly principal
amortization payments, are also expected to be funded from net cash provided by
operations. We anticipate that construction and development activities as well
as land purchases will be initially funded primarily through borrowings under
our credit facilities described below.
We expect to meet certain of our 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 our evaluation, may no longer meet our
investment requirements.
<PAGE>
Page 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
$225 Million Credit Facility
We have a $225 million unsecured revolving credit facility provided by a
consortium of banks. The facility currently has a maturity date of May, 2002
with two one-year extension options. Borrowings under the facility currently
bear interest at our option of LIBOR plus 0.95% or prime minus 0.25%. Such
scheduled interest rates may be adjusted up or down based on changes in our
senior unsecured credit ratings. We may also enter into competitive bid loans
with participating banks for up to $112.5 million at rates below the scheduled
rates. In addition, we pay an annual facility fee equal to 0.15% of the $225
million commitment. Availability under the facility is based on the value of our
unencumbered real estate assets as compared to the amount of our unsecured
indebtedness. As of June 30, 2000, we had $90.0 million in borrowings
outstanding under the facility and, therefore, had $135.0 million of remaining
capacity on the $225 million commitment.
$25 Million Credit Facility
We have a $25 million unsecured revolving credit facility with a bank that
currently bears interest at LIBOR plus 0.95%. We expect to exercise one of our
unlimited one-year extension options prior to the facility's current maturity in
October, 2000. We have $1.0 million in borrowings outstanding under this
facility at June 30, 2000.
$50 Million Borrowing Facility
At December 31, 1999, we had a $25 million unsecured borrowing facility
with a bank. In connection with the extension of the April, 2000 maturity date
to April, 2001, the availability under the facility was increased to $50
million. The interest rate and maturity date related to each draw on this
facility is agreed to by both parties prior to each draw. At June 30, 2000, we
had $49.8 million in borrowings outstanding under this facility at an interest
rate of 7.28%.
Restrictive Covenants
Certain of our 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 our discretion to declare and pay dividends. In general,
during any fiscal year the Operating Partnership may only distribute up to 95%
of its 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 us to
maintain our status as a REIT. We do not anticipate that this provision will
adversely effect the ability of the Operating Partnership to make distributions
or our ability to declare dividends, as currently anticipated.
INFLATION
Substantially all leases at our communities are for a term of one year or
less, which may enable us to seek increased rents upon renewal of existing
leases or commencement of new leases in times of rising prices. The short-term
nature of these leases generally serves to lessen the impact of cost increases
arising from inflation.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This report 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. These
statements include, among other things, statements regarding our intent, belief
or expectations with respect to the following: (1) the declaration or payment of
distributions, (2) potential developments or acquisitions or dispositions of
properties, assets or other entities, (3) our policies regarding investments,
indebtedness, acquisitions, dispositions, financings, conflicts of interest and
other matters, (4) our qualification as a REIT under the Internal Revenue Code,
(5) the real estate markets in which we operate, (6) in general, the
availability of debt and equity financing, interest rates and general economic
conditions, and (7) trends affecting our financial condition or results of
operations.
<PAGE>
Page 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
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 our control and may cause our actual results, performance or
achievements 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: (1) we may abandon or fail to secure development opportunities, (2)
construction costs of a community may exceed original estimates, (3)
construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs and reduced rental
revenues, (4) occupancy rates and market rents may be adversely affected by
local economic and market conditions which are beyond our control, (5) financing
may not be available or may not be available on favorable terms, (6) our cash
flow may be insufficient to meet required payments of principal and interest,
and (7) 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. While forward-looking statements reflect our good faith beliefs,
they are not guarantees of future performance. We disclaim any obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 5 to Consolidated Financial Statements.
<PAGE>
Page 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
COMPLETED COMMUNITIES IN LEASE-UP AND DEVELOPMENT COMMUNITIES AT JUNE 30, 2000
<TABLE>
<CAPTION>
Actual or Estimated Quarter of
Number of Total Percent at June 30, 2000 --------------------------------------------------
Apartment Budgeted -------------------------- Construction Initial Construction Stabilized
Community Homes Cost Complete Leased Occupied Start Occupancy End Occupancy
--------- --------- -------- -------- ------ -------- ------------ --------- ------------ ----------
(millions) (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WHOLLY-OWNED DEVELOPMENT COMMUNITIES:
ORLANDO, FL
Gables Chatham Square 448 $ 37 51% 100% 15% 2 Q 1999 2 Q 2000 4 Q 2001 3 Q 2001
Gables North Village 315 40 31% -- -- 2 Q 1999 4 Q 2000 4 Q 2001 1 Q 2002
ATLANTA, GA
Gables Montclair 183 24 -- -- -- 4 Q 2000 4 Q 2001 1 Q 2002 3 Q 2002
Gables Paces 79 20 -- -- -- 3 Q 2000 3 Q 2001 3 Q 2001 1 Q 2002
DALLAS, TX
Gables State Thomas II 177 36 43% -- -- 4 Q 1999 4 Q 2000 2 Q 2001 4 Q 2001
----- ----
WHOLLY-OWNED TOTALS 1,202 $157
----- ----
CO-INVESTMENT DEVELOPMENT/LEASE-UP COMMUNITIES (2), (3):
BOCA RATON, FL
Gables Crestwood 290 $ 25 38% -- -- 4 Q 1999 3 Q 2000 2 Q 2001 4 Q 2001
Gables Grande Isle 320 23 96% 44% 37% 2 Q 1999 1 Q 2000 4 Q 2000 1 Q 2001
Gables Palma Vista 189 23 100% 80% 70% 1 Q 1999 4 Q 1999 2 Q 2000 4 Q 2000
Gables San Michele II 343 40 100% 97% 85% 3 Q 1998 2 Q 1999 2 Q 2000 4 Q 2000
DALLAS, TX
Gables Ravello 290 33 78% 14% 3% 2 Q 1999 2 Q 2000 1 Q 2001 3 Q 2001
ATLANTA, GA
Gables Metropolitan I 435 49 100% 94% 91% 2 Q 1998 3 Q 1999 2 Q 2000 4 Q 2000
HOUSTON, TX
Gables Raveneaux 382 28 100% 91% 87% 3 Q 1998 2 Q 1999 1 Q 2000 3 Q 2000
----- ----
CO-INVESTMENT TOTALS 2,249 $221 (3)
----- ----
DEVELOPMENT TOTALS 3,451 $378
===== ====
<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 Gables Residential Apartment Portfolio Joint Venture.
(3) Construction loan proceeds are expected to fund 50% of the total budgeted costs. The remaining costs will be funded by capital
contributions to the venture from the venture partner and us in a funding ratio of 80% and 20%, respectively.
</FN>
</TABLE>
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 our 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.
<PAGE>
Page 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
STABILIZED APARTMENT COMMUNITIES AT JUNE 30, 2000
<TABLE>
<CAPTION>
June 30, 2000 Scheduled Rent Per
---------------------------------
Number of June 30, 2000
COMMUNITY Homes Occupancy Unit Square Foot
--------- --------- -------------- -------- -----------
<S> <C> <C> <C> <C>
HOUSTON, TX
Austin Colony 237 96% $ 875 $ 0.90
Baybrook Village 776 96% 594 0.74
Gables Bradford Place 372 98% 720 0.84
Gables Bradford Pointe 360 98% 629 0.82
Gables Champions 404 93% 712 0.78
Gables CityPlaza 246 94% 911 1.03
Gables Cityscape 252 98% 869 1.02
Gables CityWalk/Waterford Square 317 96% 849 1.05
Gables Edgewater 292 96% 776 0.88
Gables Meyer Park 345 97% 855 0.99
Gables New Territory 256 92% 865 0.95
Gables of First Colony 324 97% 908 0.91
Gables Piney Point 246 98% 916 0.99
Gables Pin Oak Green 582 96% 910 0.89
Gables Pin Oak Park 477 96% 952 0.93
Gables River Oaks 228 96% 1,411 1.16
Lions Head 277 95% 721 0.85
Metropolitan Uptown (JV) 318 92% 1,032 1.13
Rivercrest I 140 93% 731 0.87
Rivercrest II 140 91% 720 0.85
Windmill Landing 259 95% 680 0.78
----- ---- ----- ----
6,848 96% 823 0.91
ATLANTA, GA
Briarcliff Gables 104 97% 1,160 0.94
Buckhead Gables 162 97% 874 1.16
Dunwoody Gables 311 99% 864 0.93
Gables Cityscape 192 97% 916 1.10
Gables Mill 438 96% 886 0.95
Gables Northcliff 82 95% 1,247 0.80
Gables Sugarloaf 386 96% 869 0.87
Gables Vinings 315 99% 1,033 0.97
Gables Walk 310 98% 1,080 0.91
Gables Wood Arbor 140 96% 743 0.82
Gables Wood Crossing 268 96% 747 0.78
Gables Wood Glen 380 97% 722 0.73
Gables Wood Knoll 312 96% 768 0.77
Lakes at Indian Creek 603 94% 658 0.72
Rock Springs Estates 295 92% 955 0.94
Roswell Gables I 384 98% 909 0.84
Roswell Gables II 284 98% 909 0.77
Spalding Gables 252 100% 924 0.93
Wildwood Gables 546 97% 898 0.79
----- ---- ----- ----
5,764 97% 871 0.85
SOUTH FL
Boca Place 180 94% 869 0.89
Cotton Bay 444 93% 729 0.74
Hampton Lakes 300 95% 776 0.73
Hampton Place 368 95% 745 0.78
Kings Colony 480 99% 784 0.88
Mahogany Bay 328 90% 801 0.80
</TABLE>
<PAGE>
Page 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
STABILIZED APARTMENT COMMUNITIES AT JUNE 30, 2000
(CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
June 30, 2000 Scheduled Rent Per
---------------------------------
Number of June 30, 2000
COMMUNITY Homes Occupancy Unit Square Foot
--------- --------- -------------- -------- -----------
<S> <C> <C> <C> <C>
SOUTH FL (continued)
Mizner on the Green 246 92% $1,643 $ 1.30
San Michele 249 94% 1,429 1.07
San Remo 180 96% 1,257 0.69
Town Colony 172 90% 851 0.99
Vinings at Boynton Beach I 252 95% 910 0.76
Vinings at Boynton Beach II 296 94% 926 0.77
Vinings at Hampton Village 168 95% 822 0.68
Vinings at Town Place 312 95% 845 1.01
Vinings at Wellington 222 83% 1,033 0.77
----- ---- ------ ------
4,197 94% 928 0.85
DALLAS, TX
Arborstone 536 97% 535 0.75
Gables at Pearl Street 108 95% 1,474 1.35
Gables CityPlace 232 94% 1,355 1.29
Gables Green Oaks 300 98% 833 0.87
Gables Mirabella 126 94% 1,360 1.49
Gables Preston 126 96% 1,067 0.97
Gables San Raphael (JV) 222 96% 945 1.05
Gables Spring Park 188 98% 971 0.92
Gables Turtle Creek 150 95% 1,219 1.21
Gables Valley Ranch 319 97% 965 0.95
----- ---- ------ ------
2,307 96% 953 1.02
AUSTIN, TX
Gables at the Terrace 308 98% 1,144 1.21
Gables Bluffstone 256 98% 1,158 1.18
Gables Central Park 273 99% 1,238 1.31
Gables Great Hills 276 99% 874 1.05
Gables Park Mesa 148 98% 1,165 1.07
Gables Town Lake 256 99% 1,249 1.34
----- ---- ------ ------
1,517 98% 1,134 1.20
MEMPHIS, TN
Arbors of Harbortown (JV) 345 92% 857 0.87
Gables Cordova 464 94% 645 0.69
Gables Stonebridge 500 97% 681 0.77
----- ---- ------ ------
1,309 95% 715 0.77
NASHVILLE, TN
Brentwood Gables 254 96% 850 0.75
Gables Hendersonville 364 96% 654 0.69
Gables Hickory Hollow I 272 96% 657 0.72
Gables Hickory Hollow II 276 95% 673 0.72
----- ---- ------ ------
1,166 96% 702 0.72
SAN ANTONIO, TX
Gables Colonnade I 312 91% 811 0.89
Gables Wall Street 232 92% 816 0.86
----- ---- ------ ------
544 91% 813 0.88
ORLANDO, FL
Gables Celebration 231 86% 1,242 1.07
The Commons at Little Lake Bryan I 280 100% ---- (A) ---- (A)
----- ---- ------ ------
511 94% 1,242 1.07
TOTALS 24,163 96% $ 877 $ 0.89
====== ==== ====== ======
<FN>
(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 our portfolio.
</FN>
</TABLE>
<PAGE>
Page 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
A summary of our portfolio indebtedness and interest rate protection
agreement as of June 30, 2000 follows:
<TABLE>
<CAPTION>
PORTFOLIO INDEBTEDNESS SUMMARY
Percentage Interest Total Years to
Type of Indebtedness Balance of Total Rate (1) Rate (2) Maturity
-------------------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Unsecured fixed-rate senior notes $ 165,000 20.07% 6.71% 6.71% 2.98
Tax-exempt variable-rate loans 150,070 18.25% 4.82% 5.81% 5.94
Unsecured variable-rate credit facilities 140,808 17.13% 7.32% 7.32% 1.17
Secured fixed-rate notes 119,084 14.48% 7.79% 7.79% 7.97
Unsecured fixed-rate notes 116,845 14.21% 8.31% 8.31% 4.12
Tax-exempt fixed-rate loans 90,375 10.99% 5.89% 6.31% 7.14
Unsecured variable-rate term loan 40,000 4.87% 7.48% 7.48% 1.33
--------- ------- ------ ------ -----
Total portfolio debt (3), (4) $ 822,182 100.00% 6.80% 7.03% 4.47
========= ======= ====== ====== =====
<FN>
(1) Interest Rate represents the weighted average interest rate incurred on our indebtedness, exclusive
of deferred financing cost amortization and credit enhancement fees, as applicable.
(2) Total Rate represents the Interest Rate (1) plus credit enhancement fees, as applicable.
(3) Interest associated with construction activities is capitalized as a cost of development and does not
impact current earnings. The qualifying construction expenditures at June 30, 2000 for purposes
of interest capitalization were $128,857.
(4) Excludes (a) $16.4 million of tax-exempt bonds and $18.6 million of outstanding conventional
indebtedness related to joint ventures in which we own a 25% interest and (b) $91.5 million of
construction loan indebtedness related to a joint venture in which we own a 20% interest.
</FN>
</TABLE>
INTEREST RATE PROTECTION AGREEMENT SUMMARY
<TABLE>
<CAPTION>
Notional Effective Termination
Description of Agreement Amount Rate Date Date
------------------------ -------- ---- --------- -----------
<S> <C> <C> <C> <C>
LIBOR, 30-day - "Rate Swap" $ 40,000 4.79 (1) 11/30/98 09/29/00
<FN>
(1) The 30-day LIBOR rate in effect at June 30, 2000 was 6.6844%.
</FN>
</TABLE>
<PAGE>
Page 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
SUPPLEMENTAL DISCUSSION - Funds From Operations and
Adjusted Funds From Operations
We consider 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
distributions and capital expenditures. We believe that in order to facilitate a
clear understanding of our operating results, FFO should be examined in
conjunction with net income as presented in the financial statements and data
included elsewhere in this report. We compute FFO in accordance with standards
established by the National Association of Real Estate Investment Trusts
("NAREIT"). Effective January 1, 2000, NAREIT amended its definition of FFO to
include in FFO all non-recurring items, except those defined as extraordinary
items under GAAP and gains and losses from sales of depreciable operating
property. We are using the amended definition of FFO in reporting our results
for all periods on or after January 1, 2000. In addition, we have restated FFO
reported for prior periods. FFO as defined by NAREIT represents net income
(loss) determined in accordance with GAAP, excluding extraordinary items as
defined under GAAP and gains or losses from sales of depreciable operating
property, plus certain non-cash items such as real estate depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. 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, our FFO is comparable to the FFO of real
estate companies that use the amended 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 alternatives to net
income as indicators of our 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 our 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 our cash needs and cash
flows. A reconciliation of FFO and AFFO follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income available to common shareholders $ 8,882 $ 8,861 $ 17,918 $ 16,076
Minority interest of common unitholders in
Operating Partnership 2,475 2,136 4,943 3,904
Gain on sale of real estate assets - - - (666)
Real estate asset depreciation:
Wholly-owned real estate assets 10,947 11,721 21,792 23,530
Joint venture real estate assets 274 67 501 125
-------- -------- -------- --------
Total depreciation 11,221 11,788 22,293 23,655
-------- -------- -------- --------
FUNDS FROM OPERATIONS - BASIC $ 22,578 $ 22,785 $ 45,154 $ 42,969
-------- -------- -------- --------
Amortization of discount on long-term liability - 164 (a) - 356 (a)
-------- -------- -------- --------
FUNDS FROM OPERATIONS - DILUTED $ 22,578 $ 22,949 $ 45,154 $ 43,325
-------- -------- -------- --------
Recurring, non-revenue enhancing capital expenditures:
Carpet 1,158 1,017 2,050 1,856
Roofing 4 6 32 26
Exterior painting - 18 - 18
Appliances 118 103 239 212
Other additions and improvements 1,434 1,450 2,860 2,717
-------- -------- -------- --------
Total capital expenditures 2,714 2,594 5,181 4,829
-------- -------- -------- --------
ADJUSTED FUNDS FROM OPERATIONS - DILUTED $ 19,864 $ 20,355 $ 39,973 $ 38,496
======== ======== ======== ========
AVERAGE SHARES AND UNITS OUTSTANDING - BASIC 30,617 32,537 30,889 32,654
======== ======== ======== ========
AVERAGE SHARES AND UNITS OUTSTANDING - DILUTED 30,679 33,007 (a) 30,930 33,176 (a)
======== ======== ======== ========
<FN>
(a) This obligation was settled with Units on January 1, 2000. Such Units are excluded from basic shares and Units
outstanding, but are included in the calculation of diluted shares and Units outstanding.
</FN>
</TABLE>
<PAGE>
Page 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Thousands, Except Property and Per Share Data)
-------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our capital structure includes the use of variable rate and fixed rate
indebtedness. As such, we are exposed to the impact of changes in interest
rates. We periodically seek input from third party consultants regarding market
interest rate and credit risk in order to evaluate our interest rate exposure.
In certain situations, we 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. We do not utilize such instruments for
trading or speculative purposes.
We typically refinance maturing debt instruments at then-existing market
interest rates and at terms which may be more or less than the interest rates
and terms on the maturing debt.
Refer to our Annual Report on Form 10-K for the year ended December 31,
1999 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, 1999.
<PAGE>
Page 28
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
We held our annual meeting of shareholders on May 16, 2000.
Our shareholders voted to elect Lauralee E. Martin, Mike E.
Miles and John T. Rippel to serve as Class III Trustees, and
James D. Motta to serve as a Class I Trustee. The three
Class III Trustees were elected to serve until our 2003
annual meeting and until their successors are duly elected
and qualified. The Class I Trustee was elected to serve
until our 2001 annual meeting and until his successor is
duly elected and qualified. The votes cast for, and withheld
from, the election of the aforementioned trustees are listed
below:
Votes Votes
Cast For Withheld From
-------- -------------
Lauralee E. Martin 17,173,661 166,020
Mike E. Miles 17,171,802 167,879
John T. Rippel 16,290,540 1,049,141
James D. Motta 17,132,273 207,408
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 * Financial Data Schedule
-------------------------
* Filed herewith
<PAGE>
Page 29
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: August 10, 2000 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)
