<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<TABLE>
<C> <S>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
</TABLE>
COMMISSION FILE NUMBER 1-12792
---------------------
SUMMIT PROPERTIES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 56-1857807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
212 S. TRYON STREET, SUITE 500, CHARLOTTE, NORTH CAROLINA 28281
(Address of principal executive offices -- zip code)
(704) 334-9905
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
---------------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
25,425,092 shares outstanding as of November 3, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUMMIT PROPERTIES INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 (Unaudited)............................. 3
Consolidated Statements of Earnings for the three months and
nine months ended September 30, 1998 and 1997
(Unaudited)............................................... 4
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1998 (Unaudited)............... 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (Unaudited)............. 6
Notes to Consolidated Financial Statements.................. 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
PART II OTHER INFORMATION
Item 2 Changes in Securities....................................... 27
Item 6 Exhibits and Reports on Form 8-K............................ 27
SIGNATURES........................................................... 28
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMIT PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Real estate assets:
Land and land improvements................................ $ 151,962 $ 133,316
Buildings and improvements................................ 732,246 643,812
Furniture, fixtures and equipment......................... 61,295 53,573
--------- ---------
945,503 830,701
Less: accumulated depreciation............................ (121,631) (105,979)
--------- ---------
Operating real estate assets...................... 823,872 724,722
Construction in progress.................................. 140,604 82,332
--------- ---------
Net real estate assets............................ 964,476 807,054
Cash and cash equivalents................................... 4,823 3,563
Restricted cash............................................. 7,702 3,180
Deferred financing costs, net............................... 7,501 7,378
Other assets................................................ 5,079 4,118
--------- ---------
Total assets................................................ $ 989,581 $ 825,293
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable............................................. $ 601,872 $ 474,673
Accrued interest payable.................................. 3,492 4,916
Accounts payable and accrued expenses..................... 21,244 19,945
Dividends and distributions payable....................... 12,135 11,030
Security deposits and prepaid rents....................... 4,134 3,561
--------- ---------
Total liabilities................................. 642,877 514,125
--------- ---------
Commitments and contingencies
Minority interest........................................... 49,746 45,329
--------- ---------
Stockholders' equity:
Common stock, $.01 par value -- 100,000,000 authorized,
25,420,846 and 23,306,930 shares issued and outstanding
in 1998 and 1997, respectively......................... 254 234
Additional paid-in capital................................ 399,781 361,731
Dividends in excess of accumulated earnings............... (99,721) (95,120)
Unamortized restricted stock compensation................. (836) (1,006)
--------- ---------
299,478 265,839
Less employee notes receivable............................ (2,520) --
--------- ---------
Total stockholders' equity........................ 296,958 265,839
--------- ---------
Total liabilities and stockholders' equity.................. $ 989,581 $ 825,293
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE> 4
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental.................................. $ 35,251 $ 28,240 $ 99,047 $ 80,348
Other property income................... 2,144 1,660 5,733 4,558
Interest................................ 233 97 511 305
Other income............................ 628 71 775 209
----------- ----------- ----------- -----------
Total revenues.................. 38,256 30,068 106,066 85,420
----------- ----------- ----------- -----------
Expenses:
Property operating and maintenance:
Personnel............................ 2,993 2,427 8,103 6,899
Advertising and promotion............ 625 596 1,731 1,418
Utilities............................ 1,619 1,312 4,502 3,623
Building repairs and maintenance..... 2,738 2,326 7,216 6,382
Real estate taxes and insurance...... 3,381 2,573 10,251 8,111
Depreciation......................... 7,373 5,852 20,774 16,463
Property supervision................. 904 701 2,545 2,041
Other operating expenses............. 1,011 797 2,851 2,356
----------- ----------- ----------- -----------
20,644 16,584 57,973 47,293
Interest................................ 8,392 5,790 23,351 15,382
General and administrative.............. 1,190 857 2,726 2,099
Loss (income) in equity investment in
Summit Management Company............ 138 (111) 95 (86)
----------- ----------- ----------- -----------
Total expenses.................. 30,364 23,120 84,145 64,688
----------- ----------- ----------- -----------
Income before gain on sale of real estate
assets, minority interest of unitholders
in Operating Partnership and
extraordinary items..................... 7,892 6,948 21,921 20,732
Gain on sale of real estate assets........ -- -- 8,731 4,366
Minority interest of unitholders in
Operating Partnership................... (1,129) (1,031) (4,439) (3,812)
----------- ----------- ----------- -----------
Income before extraordinary items......... 6,763 5,917 26,213 21,286
Extraordinary items, net of minority
interest of unitholders in Operating
Partnership............................. -- -- (158) --
----------- ----------- ----------- -----------
Net income................................ $ 6,763 $ 5,917 $ 26,055 $ 21,286
=========== =========== =========== ===========
Per share data:
Income before extraordinary
items -- basic and diluted........... $ 0.27 $ 0.25 $ 1.06 $ 0.92
=========== =========== =========== ===========
Net income -- basic and diluted......... $ 0.27 $ 0.25 $ 1.06 $ 0.92
=========== =========== =========== ===========
Dividends declared...................... $ 0.41 $ 0.40 $ 1.23 $ 1.19
=========== =========== =========== ===========
Weighted average common
shares -- basic...................... 25,269,269 23,238,204 24,635,658 23,080,703
=========== =========== =========== ===========
Weighted average common
shares -- diluted.................... 25,274,868 23,273,056 24,652,423 23,113,222
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE> 5
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DIVIDENDS IN UNAMORTIZED
ADDITIONAL EXCESS OF RESTRICTED EMPLOYEE
COMMON PAID IN ACCUMULATED STOCK NOTES
STOCK CAPITAL EARNINGS COMPENSATION RECEIVABLE TOTAL
------ ---------- ------------ ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997...... $234 $361,731 $(95,120) $(1,006) $ -- $265,839
Dividends..................... -- -- (30,656) -- -- (30,656)
Exercise of stock options..... 1 840 -- -- -- 841
Conversion of units to
shares..................... -- 555 -- -- 555
Issuance of restricted stock
grants..................... -- 135 -- (135) -- --
Amortization of restricted
stock grants............... -- -- 305 -- 305
Proceeds from dividend
reinvestment and stock
purchase plans............. 19 36,982 -- -- -- 37,001
Adjustment for minority
interest in Operating
Partnership................ -- (462) -- -- -- (462)
Issuance of employee notes
receivable................. (2,520) (2,520)
Net income.................... -- -- 26,055 -- -- 26,055
---- -------- -------- ------- ------- --------
Balance, September 30, 1998..... $254 $399,781 $(99,721) $ (836) $(2,520) $296,958
==== ======== ======== ======= ======= ========
</TABLE>
See notes to consolidated financial statements (unaudited).
5
<PAGE> 6
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
SEPTEMBER 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 26,055 $ 21,286
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary items.................................... 158 --
(Income) loss on equity method investments............. 95 (86)
Gain on sale of real estate assets..................... (8,731) (4,366)
Depreciation and amortization.......................... 21,778 17,336
Increase in restricted cash............................ (586) (994)
Increase in other assets............................... (775) (699)
Increase (decrease) in accrued interest payable........ (1,439) 1,262
Increase in accounts payable and accrued expenses...... 6,156 4,484
Increase (decrease) in security deposits and prepaid
rents................................................. 301 (104)
Minority interest of unitholders in Operating
Partnership........................................... 4,439 3,812
--------- ---------
Net cash provided by operating activities......... 47,451 41,931
--------- ---------
Cash flows from investing activities:
Construction of real estate assets, net of payables....... (92,946) (68,980)
Purchase of Communities................................... (73,654) (57,749)
Proceeds from sale of a Community, net of escrow funds.... 19,996 9,271
Capitalized interest...................................... (4,352) (4,528)
Recurring capital expenditures............................ (3,372) (2,589)
Non-recurring capital expenditures........................ (3,279) (3,317)
--------- ---------
Net cash used in investing activities............. (157,607) (127,892)
--------- ---------
Cash flows from financing activities:
Net borrowings on line of credit.......................... 103,627 (8,340)
Net borrowings on unsecured bonds......................... 29,510 121,627
Repayments of mortgage debt............................... (14,873) (2,847)
Repayments of tax exempt bonds............................ (945) (910)
Net proceeds from dividend reinvestment and stock purchase
plans.................................................. 30,500 1,760
Dividends and distributions to unitholders................ (34,724) (32,104)
Issuance of stock......................................... -- 6,813
Exercise of stock options................................. 841 738
Costs of shelf registrations.............................. -- (511)
Increase in employee notes................................ (2,520) --
--------- ---------
Net cash provided by financing activities......... 111,416 86,226
--------- ---------
Net increase in cash and cash equivalents................... 1,260 265
Cash and cash equivalents, beginning of period.............. 3,563 3,665
--------- ---------
Cash and cash equivalents, end of period.................... $ 4,823 $ 3,930
========= =========
Supplemental disclosure of cash flow information -- Cash
paid for interest, net of capitalized interest............ $ 24,066 $ 13,359
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
6
<PAGE> 7
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by the
management of Summit Properties Inc. (the "Company") in accordance with
generally accepted accounting principles for interim financial information and
in conformity with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the nine months
ended September 30, 1998 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 Company's December 31, 1997 audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share." This pronouncement
specifies the computation, presentation and disclosure requirements for earnings
per share. The new standard had no impact on the Company's financial statements
as the "basic" and "diluted" earnings per share disclosure required by the
pronouncement were the same as "primary" earnings per share previously reported.
The only difference in "basic" and "diluted" weighted average shares is the
dilutive effect of the Company's stock options outstanding (5,599 and 34,852
shares added to weighted shares outstanding for the three months ended September
30, 1998 and 1997, respectively, and 16,765 and 32,519 shares added to weighted
shares outstanding for the nine months ended September 30, 1998 and 1997,
respectively).
2. ACQUISITIONS, DISPOSITIONS AND COMMITMENTS
During the nine month period ending September 30, 1998, the Company completed
the acquisition of three communities located in Atlanta, Georgia: Summit St.
Clair, purchased effective March 1, 1998, Summit Club at Dunwoody, purchased
effective May 22, 1998, and Summit at Lenox, purchased effective July 8, 1998
(the "1998 Acquisitions"). The 1998 Acquisitions added a total of 1,092
apartment homes to the Company's portfolio at an aggregate purchase price of
$88.3 million.
The 1998 Acquisitions were financed with the issuance of 259,871 units of
limited partnership interest ("Units") in Summit Properties Partnership, L.P.
(the "Operating Partnership") valued at $5.2 million and the assumption of $8.8
million of mortgage debt. The balance of the purchase price was paid in cash.
The following summary of selected unaudited pro forma results of operations
presents information as if the 1998 Acquisitions had occurred as of January 1,
1998 for the 1998 pro-forma information. Pro forma information for the nine
months ended September 30, 1997 presents information as if the Summit at Lenox
acquisition had occurred as of January 1, 1997. Pro forma information for 1997
has not been presented for Summit St. Clair and Summit Club at Dunwoody as they
were under construction during that period and had insignificant operations. The
pro forma information for the nine months ended September 30, 1998 and 1997 is
provided for informational
7
<PAGE> 8
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
- --------------------------------------------------------------------------------
purposes only and is not indicative of results that would have occurred or which
may occur in the future (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Total revenues.................................. $ 110,234 $ 88,683
=========== ===========
Income before gain on sale of real estate
assets, minority interest of unitholders in
Operating Partnership and extraordinary
items......................................... $ 21,192 $ 19,812
=========== ===========
Net income...................................... $ 25,340 $ 20,506
=========== ===========
Net income per share -- basic and diluted....... $ 1.03 $ 0.89
=========== ===========
Weighted average shares -- basic................ 24,635,658 23,080,703
=========== ===========
Weighted average shares -- diluted.............. 24,652,423 23,113,222
=========== ===========
</TABLE>
On May 18, 1998, the Company sold a community in Brandon, Florida formerly known
as Summit Providence for net proceeds of $23.9 million. A gain on the sale of
$8.7 million was recognized in the second quarter of 1998. Proceeds from the
sale were used to partially fund the acquisition of Summit Club at Dunwoody.
The Company has nine development projects currently under construction with a
total estimated cost of $161.7 million. The estimated cost to complete these
projects is $51.0 million.
3. REAL ESTATE JOINT VENTURES
The Company owns a 49% interest in each of two joint ventures. Each joint
venture is developing an apartment community which will be accounted for under
the equity method of accounting. The projects are both under construction and
had no operations as of September 30, 1998. The construction costs will be
funded primarily through individual loans to each joint venture from unrelated
third parties equal to 100% of the construction costs. During the construction
period, in lieu of contributing equity to each of the respective joint ventures,
the Company has under certain circumstances, subsequent to demand by the third
party lenders, agreed to make contributions which would reduce the respective
construction loan by an amount not to exceed 25% of the total construction loan
amount. Any such contribution would be deemed to be all or a portion of the
equity required to be contributed by the Company to the respective joint venture
at the end of the construction and lease up period. The Company has the right to
purchase it's joint venture partner interest after the projects are complete.
The following is a condensed balance sheet for the projects at September 30,
1998:
<TABLE>
<S> <C>
Cash........................................................ $ 16,098
Construction in progress.................................... 4,234,571
----------
Total assets...................................... $4,250,669
==========
Construction liabilities payable............................ $ 628,694
Construction loan payable................................... 3,611,975
Partner's capital........................................... 10,000
----------
Total liabilities and partners' capital........... $4,250,669
==========
</TABLE>
8
<PAGE> 9
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
- --------------------------------------------------------------------------------
4. NOTES PAYABLE
Line of Credit
The Company obtained a new syndicated unsecured line of credit (the "Unsecured
Credit Facility") in the amount of $175 million in March 1998 which replaced the
existing $150 million credit facility. The Unsecured Credit Facility provides
funds for new development, acquisitions and general working capital purposes.
The Unsecured Credit Facility has a three year term with two one-year extension
options and will initially bear interest at LIBOR + 90 basis points based upon
the Company's current credit rating of BBB- by Standard & Poor's Rating Services
and Baa3 by Moody's Investors Service. The interest rate will be reduced in the
event an upgrade of the Company's unsecured credit rating is obtained. The
Unsecured Credit Facility also provides a bid option sub-facility equal to a
maximum of fifty percent of the total facility ($87.5 million). This
sub-facility provides the Company with the option to place borrowings in a fixed
LIBOR contract up to 180 days.
Mortgage Notes
On September 23, 1998, the Company consolidated and renewed two mortgage loans
which had a $147.2 million balance. The original loans matured in February 2001
($118.3 million at 5.88%) and December 2005 ($28.9 million at 7.71%). The
consolidation and renewal combined the two mortgage loans into one loan at an
interest rate equal to the weighted average interest rate of the two previous
mortgage loans (6.24%) up to February 2001. As of February 2001, the rate of
interest on the loan will increase to 6.76% until the loan matures in October of
2008.
Medium-Term Notes
The Company has established a program for the sale of up to $95 million
aggregate principal amount of Medium-Term Notes due nine months or more from the
date of issuance (the "MTN Program"). On July 28, 1998, the Company sold $30
million of notes under the MTN Program. Such notes are due on July 30, 2001 and
bear interest at 6.75% per year. On October 5, 1998, the Company sold $25
million of notes under the MTN Program. Such notes are due on October 5, 2000
and bear interest at 6.71% per year. Proceeds from the notes issued in both July
and October of 1998 were used to reduce the Unsecured Credit Facility.
5. RESTRICTED STOCK
In the nine months ended September 30, 1998 and 1997, the Company granted 6,592
and 26,528 shares, respectively, of restricted stock to employees under the
Company's 1994 Stock Option and Incentive Plan. The market value of the
restricted stock grants in 1998 and 1997 totaled $135,000 and $570,000,
respectively, which has been recorded as unamortized restricted stock
compensation and is shown as a separate component of stockholders' equity.
Unearned compensation is being amortized to expense over the vesting period
which ranges from three to five years.
9
<PAGE> 10
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
- --------------------------------------------------------------------------------
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the nine months ended September
30, 1998 and 1997 are as follows:
A. The Company purchased the 1998 Acquisitions by issuing 259,871 Units,
assuming a mortgage note, assuming certain liabilities and the payment
of cash. The recording of the purchase is summarized as follows (in
thousands):
<TABLE>
<S> <C>
Fixed assets.............................................. $88,298
Current liabilities assumed............................... (681)
Value of Units issued..................................... (5,213)
Mortgage note assumed..................................... (8,750)
-------
Cash invested..................................... $73,654
=======
</TABLE>
B. The Company sold a community on May 18, 1998 for net proceeds of
approximately $23.9 million. The proceeds of the sale were put in escrow
in accordance with like-kind exchange rules and regulations. On May 22,
1998, $17.6 million of the escrow was used to fund the acquisition of an
apartment community (see Note 2). On July 24, 1998, $2.4 million of the
escrow was used to fund the acquisition of land for development. The
remaining $3.9 million held in escrow is shown in the balance sheet
caption "Restricted Cash" and will be used to fund the acquisition of
other like-kind property.
C. In the nine months ended September 30, 1997, the Company purchased four
communities (Summit Mayfaire, Summit Portofino, Summit Sand Lake and
Summit Windsor II). The Company completed the purchase of the four
Communities by assuming debt, issuing 194,495 Units, issuing 243,608
shares of Common Stock, assuming certain liabilities and current assets,
and the payment of cash. The recording of the purchase is summarized as
follows (in thousands):
<TABLE>
<S> <C>
Fixed assets................................................ $ 82,898
Other assets................................................ 30
Debt assumed................................................ (15,226)
Current liabilities assumed................................. (1,081)
Value of Units issued....................................... (3,939)
Value of Common Stock issued................................ (4,933)
--------
Cash invested..................................... $ 57,749
========
</TABLE>
D. The Company accrued a dividend and distribution payable in the amount of
$12.1 million and $10.9 million at September 30, 1998 and 1997,
respectively.
E. The Company issued 6,592 and 26,528 shares of restricted stock valued at
$135,000 and $570,000 during the nine months ended September 30, 1998
and 1997, respectively.
7. CHANGES IN OWNERSHIP OF OPERATING PARTNERSHIP
As of September 30, 1998, there were 29,679,038 Units outstanding, of which
25,420,846, or 85.7% were owned by the Company and 4,258,192, or 14.3% were
owned by other partners (including certain officers and directors of the
Company). Minority interest of unitholders in the Operating Partnership is
calculated at the balance sheet date based upon the percentage of Units
outstanding owned by partners other than the Company to the total number of
Units outstanding. Minority interest of unitholders in Operating Partnership
earnings is calculated based on the weighted average Units outstanding during
the period.
10
<PAGE> 11
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
- --------------------------------------------------------------------------------
Proceeds from Common Stock issued by the Company are contributed to the
Operating Partnership for an equivalent number of Units. The following is a
summary of significant Units issued and the Company's ownership percentage
before and after each transaction for the nine months ended September 30, 1998
and 1997:
<TABLE>
<CAPTION>
COMPANY'S OWNERSHIP
AS A PERCENTAGE OF THE
NET OPERATING PARTNERSHIP
NUMBER OF PRICE PER DOLLAR ----------------------
DATE DESCRIPTION UNITS UNIT VALUE BEFORE AFTER
- ---- ----------- --------- --------- ---------- ---------- ---------
<C> <S> <C> <C> <C> <C> <C>
1997 Issuance of stock.............. 315,029 $21.62 $6,812,500 84.81% 84.99%
1997 Summit Sand Lake purchase...... 438,103 20.25 8,871,581 85.02 84.54
1998 Issuance of stock.............. 316,749 20.52 6,500,000 85.32 85.49
1998 Issuance of stock.............. 331,058 19.63 6,500,000 85.52 85.69
1998 Summit St. Clair purchase...... 119,000 20.29 2,414,272 85.75 85.39
1998 Issuance of stock.............. 256,345 19.50 5,000,000 85.41 85.54
1998 Summit at Dunwoody purchase.... 140,871 19.87 2,798,961 85.62 85.20
1998 Issuance of stock.............. 400,002 18.75 7,501,590 85.26 85.46
</TABLE>
Units issued for the property purchases were valued based upon the market value
of the Company's Common Stock at the date of issuance as the Units can be
exchanged for shares on a one-to-one basis. In addition, of the 438,103 Units
issued for the Summit Sand Lake purchase, 243,608 Units were issued to the
Company in exchange for the Company issuing 243,608 shares of Common Stock to
the seller of Summit Sand Lake.
In addition to the amounts in the above table, the Company issued shares of
Common Stock in exchange for Units owned by other partners on a one-for-one
basis. An aggregate of 28,993 shares and 187,691 shares were issued for Units
during the nine months ended September 30, 1998 and 1997, respectively. The
shares exchanged were valued based upon the market value of the Company's Common
Stock at the date of exchange and had an aggregate value of $554,992 and $3.8
million for the nine months ended September 30, 1998 and 1997, respectively.
The Company issued additional stock under its dividend reinvestment and stock
purchase plans which is not included in the above table as the individual
transaction amounts did not significantly change the Company's ownership
percentage. An aggregate of 624,683 and 84,090 shares valued at $11.6 million
and $1.8 million were issued in 1998 and 1997, respectively.
8. NOTES RECEIVABLE FROM EMPLOYEES
On September 8, 1997, the Board of Directors approved a Statement of Company
Policy, which has subsequently been amended and restated by the Board, on loans
to executive officers and certain key employees relating to purchases of Common
Stock (the "Loan Program"). Pursuant to the Loan Program, the Company may lend
amounts to certain of the Company's executive officers and certain of it's key
employees for one or more of the following purposes: (i) to finance the purchase
of Common Stock (a) by certain executive officers on the open market at the
then-current market prices and (b) by other eligible employees through the
Company's 1996 Non-Qualified Employee Stock Purchase Plan; (ii) to finance an
executive officer's or key employee's payment of the exercise price of one or
more stock options to purchase shares of Common Stock granted to such employees
under the Company's 1994 Stock Option Plan; or (iii) to finance the annual tax
liability of certain executive officers related to the vesting of shares of
Common Stock which constitute a portion of a restricted stock award granted to
such employees under the 1994 Stock Option Plan. The maximum aggregate amount
the Company may loan to an executive officer is determined on a case-by-case
basis by the Board of Directors or the Compensation Committee thereof, and the
maximum aggregate amount the Company may loan to a qualified employee is
$100,000. Shares of Common Stock which are the subject of a loan serve as
collateral for the note until the note has been paid in full. Each note bears
interest at the applicable federal rate, as established by the
11
<PAGE> 12
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
- --------------------------------------------------------------------------------
Internal Revenue Service in effect on the date of the note. The notes are
payable through the application to the outstanding loan balance of all dividends
and distributions related to the collateral stock, first to interest, with the
remainder, if any, to outstanding principal. Each note becomes due and payable
in full on the tenth anniversary of the respective note. As of September 30,
1998, the Company had issued loans in the net amount of $2,520,000.
9. EXTRAORDINARY ITEMS
The extraordinary items in the nine months ended September 30, 1998 resulted
from the write-off of deferred financing cost in conjunction with the
replacement by the Company of its prior credit facility with the Unsecured
Credit Facility and prepayment penalties on four mortgage notes which were
repaid during the period. The extraordinary items are net of $27,000 which was
allocated to the minority interest of unitholders in the Operating Partnership,
calculated on the weighted average number of Units outstanding.
10. SUBSEQUENT EVENTS
On October 23, 1998, the Company sold a community in Atlanta, Georgia formerly
known as Summit Springs for $17.5 million. The Company will recognize a gain of
approximately $6.0 million on the sale. Proceeds from the sale will be used to
fund future development.
On November 4, 1998, the Company acquired a portfolio of multifamily properties
in Texas (the "Ewing Portfolio") through a merger with Ewing Industries, a
private developer of luxury apartment homes. The Ewing Portfolio consists of
2,465 apartment homes in seven communities located in Dallas, Austin and San
Antonio. The acquisition of the Ewing Portfolio was effected pursuant to an
Agreement and Plan of Reorganization dated as of October 31, 1998 (the "Merger
Agreement") among the Company, affiliates of the Company (including the Summit
Properties Partnership L.P.), Ewing Industries, Inc., an Ohio corporation
("Ewing Industries"), affiliates of Ewing, and their respective partners,
shareholders and members (together with Ewing Industries, "Ewing"). Pursuant to
the Merger Agreement, the acquisition was funded through (i) the issuance to
Ewing of 1,008,987 shares of common stock of the Company (each, a "Share") and
141,921 units of Summit Properties Partnership L.P. (each, a "Unit"), valued at
$18.50 per Share and per Unit (or $21,291,801 in the aggregate), (ii) the
assumption of $79,851,773 in long-term fixed-rate mortgage indebtedness, (iii)
the payment of $50,598,397 in cash and (iv) receipt of $2,516,868 of credit for
customary prorations and reserves. A portion of the consideration is deferred
until stabilization of one community which is currently in lease-up. The current
estimate of the additional consideration to be paid at such time is (i)
1,030,009 Shares and 36,629 Units valued at $18.50 per Share and per Unit (or
$19,732,803 in the aggregate), and (ii) cash in the amount of $1,314,144. The
Company filed a Current Report on Form 8-K with the Securities and Exchange
Commission on November 13, 1998 in connection with the acquisition of the Ewing
Portfolio.
On November 12, 1998, the Company sold a community located in Winston Salem,
North Carolina formerly known as Summit Old Town for approximately $7.5 million.
The Company expects to recognize a gain on the sale. Proceeds from the sale will
be used to fund future development.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including without limitation statements relating to the
operating performance of stabilized communities, to development activities of
the Company and to the implementation of the Company's plan to address Year 2000
issues. The Company intends such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the Private
Securities Reform Act of 1995, and is including this statement for purposes of
complying with these safe harbor provisions. Forward-looking statements, which
are based on certain assumptions and describe future plans, strategies and
expectations of the Company are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Although the Company
believes that the expectations reflected in such forward-looking statements are
based on reasonable assumptions, the Company's actual results and performance of
stabilized and development Communities and the actual costs, progress and
expenses with respect to its plan to address Year 2000 issues could differ
materially from those set forth in the forward-looking statements. Factors which
could have a material adverse effect on the operations and future prospects of
the Company include, but are not limited to, changes in: economic conditions
generally and the real estate market specifically, legislative/regulatory
changes (including changes to laws governing the taxation of real estate
investment trusts ("REITs")), availability of capital, interest rates,
construction delays due to unavailability of materials, weather conditions or
other delays, competition, supply and demand for apartment communities in the
Company's current and proposed market areas, expenses of or delays in the
identification and upgrade or replacement by the Company of its non-Year 2000
compliant computer information systems and computer systems that do not relate
to information technology, but include embedded technology, the Year 2000
compliance of vendors (including vendors of the Company's computer information
systems) or third party service providers (including the Company's primary bank
and payroll processor), generally accepted accounting principles, policies and
guidelines applicable to REITs, and those factors discussed in the last
paragraph under the heading "Operating Performance of the Company's Fully
Stabilized Communities," in the section entitled "Development
Activity -- Certain Factors Affecting the Performance of Development
Communities" and in the section entitled "Year 2000" on pages 15, 22 and 23
respectively, of this Form 10-Q. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
The following discussion should be read in conjunction with the Consolidated
Financial Statements of Summit Properties Inc. and the Notes thereto appearing
elsewhere herein.
HISTORICAL RESULTS OF OPERATIONS
The Company's net income is generated primarily from operations of its apartment
communities (the "Communities"). The changes in operating results from period to
period reflect changes in existing Community performance and increases in the
number of apartment homes due to development and acquisition of new Communities.
Where appropriate, comparisons are made on a "fully stabilized Communities,"
"acquisition Communities," "stabilized development Communities" and "Communities
in lease-up" basis in order to adjust for changes in the number of apartment
homes. A Community is deemed to be "stabilized" when it has attained a physical
occupancy level of at least 93%. A Community is deemed "fully stabilized" when
stabilized for the two prior years as of the beginning of the current year. A
Community is deemed to be a "stabilized development" when stabilized as of the
beginning of the current year but not the entire two prior years.
13
<PAGE> 14
Results of Operations for the Three and Nine Months Ended September 30, 1998
and 1997
For the three and nine months ended September 30, 1998, income before gain on
sale of real estate assets, minority interest and extraordinary items increased
$944,000 and $1,189,000, respectively, to approximately $7.9 million and $21.9
million, respectively, from the three and nine months ended September 30, 1997.
OPERATING PERFORMANCE OF THE COMPANY'S PORTFOLIO OF COMMUNITIES
The operating performance of the Communities for the three and nine months ended
September 30, 1998 and 1997 is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Property revenues:
Stabilized communities...... $21,664 $20,839 4.0% $ 63,240 $61,912 2.1%
Acquisition communities..... 6,095 2,428 151.0 14,042 5,697 146.5
Stabilized development
communities.............. 5,564 5,170 7.6 16,401 13,647 20.2
Communities in lease-up..... 4,072 611 566.4 9,725 640 1419.5
Communities sold............ -- 852 100.0 1,372 3,010 (54.4)
------- ------- -------- -------
Total property revenues....... 37,395 29,900 25.1 104,780 84,906 23.4
------- ------- -------- -------
Property operating and
maintenance expense:(1)
Stabilized communities...... 8,016 7,809 2.7 23,383 23,141 1.0
Acquisition communities..... 2,135 835 155.7 4,684 1,893 147.4
Stabilized development
communities.............. 1,804 1,477 22.1 5,366 4,230 26.9
Communities in lease-up..... 1,316 241 446.1 3,232 306 956.2
Communities sold............ -- 370 100.0 534 1,260 (57.6)
------- ------- -------- -------
Total property operating and
maintenance expense......... 13,271 10,732 23.7 37,199 30,830 20.7
------- ------- -------- -------
Property operating income..... $24,124 $19,168 25.9 $ 67,581 $54,076 25.0
======= ======= ======== =======
Apartment homes, end of
period...................... 16,695 14,734 13.3 16,695 14,734 13.3
======= ======= ======== =======
</TABLE>
- ---------------
(1) Before real estate depreciation expense.
A summary of the Company's apartment homes for the nine months ended September
30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Apartment homes at the beginning of period.................. 14,980 12,454
Acquisitions................................................ 1,092 1,188
Developments which began rental operations during the
period.................................................... 1,067 1,306
Sale of apartment homes..................................... (444) (214)
------ ------
Apartment homes at the end of the period.................... 16,695 14,734
====== ======
</TABLE>
14
<PAGE> 15
OPERATING PERFORMANCE OF THE COMPANY'S FULLY STABILIZED COMMUNITIES
The operating performance of the 46 Communities stabilized since January 1, 1996
in each of the three and nine months ended September 30, 1998 and 1997,
respectively, are summarized below (dollars in thousands except average monthly
rental revenue):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Property revenues:
Rental........................... $20,531 $19,855 3.4% $60,022 $59,000 1.7%
Other............................ 1,133 984 15.1 3,218 2,912 10.5
------- ------- ------- -------
Total property revenues... 21,664 20,839 4.0 63,240 61,912 2.1
------- ------- ------- -------
Property operating and maintenance
expense(1):
Personnel........................ 1,812 1,744 3.9 5,126 5,242 (2.2)
Advertising and promotion........ 323 319 1.3 929 830 11.9
Utilities........................ 969 945 2.5 2,824 2,713 4.1
Building repairs and
maintenance.................... 1,850 1,817 1.8 5,070 5,136 (1.3)
Real estate taxes and
insurance...................... 1,916 1,896 1.1 6,030 5,927 1.7
Property supervision............. 532 518 2.7 1,563 1,548 1.0
Other operating expense.......... 614 570 7.7 1,841 1,745 5.5
------- ------- ------- -------
Total property operating
and maintenance
expense................. 8,016 7,809 2.7 23,383 23,141 1.0
------- ------- ------- -------
Property operating income.......... $13,648 $13,030 4.7 $39,857 $38,771 2.8
======= ======= ======= =======
Average physical occupancy(2)...... 94.6% 93.8% 0.8 93.0% 93.4% (0.4)
======= ======= ======= =======
Average monthly rental
revenue(3)....................... $ 757 $ 729 3.9 $ 750 $ 726 3.4
======= ======= ======= =======
Number of apartment homes.......... 9,834 9,834 9,834 9,834
======= ======= ======= =======
</TABLE>
- ---------------
(1) Before real estate depreciation expense.
(2) Average physical occupancy is defined as the number of apartment homes
occupied divided by the total number of apartment homes contained in the
Communities, expressed as a percentage. Average physical occupancy has been
calculated using the average of the occupancy that existed on Sunday during
each week of the period.
(3) Represents the average monthly net rental revenue per occupied apartment
home.
The increase in rental revenue from fully stabilized Communities for the third
quarter and first nine months of 1998 compared to 1997 was primarily the result
of increases in average rental rates. As a percentage of total property revenue,
property operating and maintenance expenses decreased for the three month period
from 37.5% in 1997 to 37.0% in 1998 and for the nine month period from 37.4% in
1997 to 37.0% in 1998.
The 4.0% and 2.1% rates of growth in property revenues were higher than the 1.4%
and 1.8% rates of growth in property revenues achieved from the third quarter of
1997 compared to third quarter 1996 and the first nine months of 1997 compared
to the first nine months of 1996, respectively. The property revenue growth
rates were higher primarily as a result of increasingly strong economies in many
of the markets in which the Company operates. This higher growth rate was
especially noticeable in the Sarasota, Florida markets. The Company expects
property revenue growth rates for the remainder of 1998 to be similar to the
first nine months of 1998 due to the continued strength of the local economies
in which the Company operates, balanced by the continuing increase in the supply
of new multi-family communities. The Company believes its expectations with
respect to property revenue growth are based on reasonable assumptions as to
future economic conditions and the quantity of competitive multi-family
communities in the markets in which the Company does business. However, there
can be no assurance that actual results will not differ from these assumptions,
which could result in lower property revenue.
15
<PAGE> 16
OPERATING PERFORMANCE OF THE COMPANY'S ACQUISITION COMMUNITIES
Acquisition Communities consist of Summit Fair Oaks, Summit Portofino, Summit
Sand Lake and Summit Windsor II acquired in 1997 (1,290 apartment homes) and
Summit St. Clair, Summit Club at Dunwoody and Summit at Lenox acquired in 1998
(1,092 apartment homes). Summit Portofino and Summit Sand Lake were acquired in
the first quarter of 1997 and Summit Windsor II and Summit Fair Oaks were
acquired in the third and fourth quarters of 1997, respectively. Summit St.
Clair, Summit Club at Dunwoody and Summit at Lenox were acquired in the first,
second and third quarters of 1998, respectively. Summit Mayfaire was purchased
effective January 1, 1997 and therefore is included in stabilized Communities.
The operations of these Communities for the three and nine months ended
September 30, 1998 and 1997 are summarized as follows (dollars in thousands
except average monthly rental revenue):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- ------------------
1998 1997 1998 1997
------- ------- ------- ------
<S> <C> <C> <C> <C>
Property revenues:
Rental revenues........................... $5,776 $2,236 $13,310 $5,279
Other property revenue.................... 319 192 732 418
------ ------ ------- ------
Total property revenues..................... 6,095 2,428 14,042 5,697
------ ------ ------- ------
Property operating and maintenance
expense(1)................................ 2,135 835 4,684 1,893
------ ------ ------- ------
Property operating income................... $3,960 $1,593 $ 9,358 $3,804
====== ====== ======= ======
Average physical occupancy(2)............... 95.2% 93.4% 94.9% 93.4%
====== ====== ======= ======
Average monthly rental revenue(3)........... $ 894 $ 809 $ 884 $ 809
====== ====== ======= ======
Number of apartment homes................... 2,382 1,044 2,382 1,044
====== ====== ======= ======
</TABLE>
- ---------------
(1) Before real estate depreciation expense.
(2) Average physical occupancy is defined as the number of apartment homes
occupied divided by the total number of apartment homes contained in the
Communities, expressed as a percentage. Average physical occupancy has been
calculated using the average of the occupancy that existed on Sunday during
each week of the period.
(3) Represents the average monthly net rental revenue per occupied apartment
home.
The unleveraged yield on investment for the acquisition Communities, defined as
property operating income for the three and nine months ended September 30, 1998
on an annualized basis over total acquisition cost, was 9.14% and 9.12%,
respectively.
16
<PAGE> 17
OPERATING PERFORMANCE OF THE COMPANY'S STABILIZED DEVELOPMENT COMMUNITIES
The Company had seven development Communities (Summit Aventura, Summit Hill II,
Summit Green, Summit River Crossing, Summit Fairways, Summit on the River and
Summit Russett) which were stabilized during the entire three and nine months
ended September 30, 1998 but were stabilized subsequent to January 1, 1996. The
operating performance of these seven Communities for the three and nine months
ended September 30, 1998 and 1997 is summarized below (dollars in thousands
except average monthly rental revenue):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Property revenues:
Rental revenues.......................... $5,139 $4,813 $15,301 $12,715
Other property revenue................... 425 357 1,100 932
------ ------ ------- -------
Total property revenues.................... 5,564 5,170 16,401 13,647
------ ------ ------- -------
Property operating and maintenance
expense(1)............................... 1,804 1,477 5,366 4,230
------ ------ ------- -------
Property operating income.................. $3,760 $3,693 $11,035 $ 9,417
====== ====== ======= =======
Average physical occupancy(2).............. 93.5% 88.7% 92.6% 78.9%
====== ====== ======= =======
Average monthly rental revenue(3).......... $ 897 $ 865 $ 890 $ 864
====== ====== ======= =======
Number of apartment homes.................. 2,106 2,106 2,106 2,106
====== ====== ======= =======
</TABLE>
- ---------------
(1) Before real estate depreciation expense.
(2) Average physical occupancy is defined as the number of apartment homes
occupied divided by the total number of apartment homes contained in the
Communities, expressed as a percentage. Average physical occupancy has been
calculated using the average of the occupancy that existed on Sunday during
each week of the period.
(3) Represents the average monthly net rental revenue per occupied apartment
home.
The unleveraged yield on investment for the stabilized development Communities,
defined as property operating income for the three and nine months ended
September 30, 1998 on an annualized basis over total development cost, was
10.53% and 10.22%, respectively.
17
<PAGE> 18
OPERATING PERFORMANCE OF THE COMPANY'S COMMUNITIES IN LEASE-UP
The Company had twelve Communities in lease-up during the nine months ended
September 30, 1998. A Community in lease-up is defined as one which has
commenced rental operations but was not stabilized as of the beginning of the
current year. A summary of the twelve Communities in lease-up as of September
30, 1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
TOTAL ACTUAL/ HOMES % LEASED
NUMBER OF ACTUAL/ ANTICIPATED ACTUAL/ COMPLETED Q3 1998 AS OF
APARTMENT ESTIMATED CONSTRUCTION ANTICIPATED AT SEPT. 30, AVERAGE SEPT. 30,
COMMUNITY HOMES COST COMPLETION STABILIZATION 1998 OCCUPANCY 1998
--------- ---------- --------- -------------- --------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Summit Norcroft II........... 54 3,500 Q4 1997 Q1 1998 54 95.08% 96.30%
Summit Stonefield............ 216 $ 19,650 Q1 1998 Q1 1998 216 98.50 100.00
Summit Ballantyne I.......... 246 16,380 Q4 1997 Q3 1998 246 92.12 92.70
Summit Sedgebrook I.......... 248 16,330 Q4 1997 Q3 1998 248 94.55 96.40
Summit Plantation II......... 240 21,240 Q4 1997 Q3 1998 240 96.16 100.00
Summit Lake I................ 302 20,170 Q2 1998 Q3 1998 302 90.62 99.30
Summit Ballantyne II(1)...... 154 10,100 Q4 1998 Q1 1999 126 33.82 60.40
Summit Fair Lakes I(1)....... 370 32,900 Q1 1999 Q2 1999 92 15.12 42.20
Summit Governor's
Village(1)................. 242 16,700 Q1 1999 Q2 1999 125 22.02 43.40
Summit New Albany I(1)....... 301 22,600 Q1 1999 Q3 1999 135 17.51 42.20
Summit Doral(1).............. 260 22,800 Q2 1999 Q3 1999 6 0.00 0.00
Summit Westwood(1)........... 354 24,400 Q3 1999 Q4 1999 32 0.00 5.60
----- --------
2,933 $223,270
===== ========
</TABLE>
- ---------------
(1) These properties are included in the Construction in Progress category at
September 30, 1998.
OPERATING PERFORMANCE OF SUMMIT MANAGEMENT COMPANY
The operating performance of Summit Management Company (the "Management
Company") and its wholly-owned subsidiary, Summit Apartment Builders Inc. (the
"Construction Company"), for the three and nine months ended September 30, 1998
and 1997 is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue............................................... $1,609 $1,604 $4,664 $4,502
Expenses:
Operating........................................... 1,539 1,292 4,140 3,821
Depreciation........................................ 61 48 179 144
Amortization........................................ 72 78 215 226
Interest............................................ 75 75 225 225
------ ------ ------ ------
Total expenses.............................. 1,747 1,493 4,759 4,416
------ ------ ------ ------
Net income (loss) of Summit Management Company........ $ (138) $ 111 $ (95) $ 86
====== ====== ====== ======
</TABLE>
The increase in revenue for the nine month period was primarily a result of
higher revenues from managing the Company's communities offset by lower revenues
for managing third party communities.
Total average third party apartment homes under management were 2,965 and 4,769
at September 30, 1998 and 1997, respectively. The decrease was primarily due to
the termination of two of the Management Company's contracts which provided for
the management of six apartment communities. The contracts were terminated as a
result of a change in ownership of the apartment communities. Property
management fees include $276,000 and $415,000 of fees from third parties for the
three months ended September 30, 1998 and 1997, respectively, and $934,000 and
$1.3 million of fees from third parties for the nine months ended September 30,
1998 and 1997, respectively. Property management fees from third parties as a
percentage of total property management revenues
18
<PAGE> 19
were 14.6% and 25.9% for the three months ended September 30, 1998 and 1997,
respectively, and 18.6% and 28.9% for the nine months ended September 30, 1998
and 1997, respectively. The Company expects third party management revenue as a
percentage of total property management revenues to continue to decline as
revenues from the Company's Communities continue to increase.
All of the Construction Company's revenues are from contracts with the Company.
OTHER INCOME AND EXPENSES
Interest expense, including amortization of deferred financing costs, increased
by $2.6 million and $8.0 million for the three and nine months ended September
30, 1998, respectively. This increase was primarily the result of an increase in
the Company's average indebtedness outstanding. Average indebtedness outstanding
and effective interest cost increased $162.3 million and .05% (6.74% to 6.79%)
for the three months ended September 30, 1998 and $149.8 million and .10% (6.64%
to 6.74%) for the nine months ended September 30, 1998.
Other income increased from $71,000 to $628,000 for the three months ended
September 30, 1998 primarily as the result of an incentive fee earned in
connection with a property that the Company had developed and managed for a
third party.
Depreciation expense increased $1.5 million and $4.3 million or 26.0% and 26.2%
for the three and nine months ended September 30, 1998, respectively, primarily
due to depreciation on recently acquired or developed Communities.
General and administrative expenses increased $333,000 and $627,000 or 38.9% and
29.9% for the three and nine months ended September 30, 1998, primarily due to
expenses related to the Company's overall growth. As a percentage of revenues,
general and administrative expenses were 3.1% and 2.9% for the three months
ended September 30, 1998 and 1997, and 2.6% and 2.5% for the nine months ended
September 30, 1998 and 1997, respectively.
EXTRAORDINARY ITEMS
The extraordinary items in the nine months ended September 30, 1998 resulted
from the write-off of deferred financing cost in conjunction with the
replacement by the Company of its prior credit facility with the Unsecured
Credit Facility (as hereafter defined) and prepayment penalties on four mortgage
notes which were repaid during the period.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's net cash provided by operating activities increased from $41.9
million for the nine months ended September 30, 1997 to $47.5 million for the
same period in 1998, primarily due to a $13.5 million increase in property
operating income offset by a $10.7 million increase in interest paid. The
increase in interest paid was primarily due to an increase in the average
indebtedness outstanding.
Net cash used in investing activities increased from $127.9 million for the nine
months ended September 30, 1997 to $157.6 million for the same period in 1998
due to an increase in the acquisition of Communities, an increase in the
construction of Communities and higher recurring capital expenditures primarily
due to an increase in apartment homes owned, partially offset by higher proceeds
from the sale of a Community. In 1998 the Company acquired three apartment
Communities containing 1,092 apartment homes for a total cost of $88.3 million
which included the issuance of $5.2 million of Units and the assumption of $8.7
million in mortgage debt. In addition, the Company funded $97.3 million in
development costs and $6.7 million in capital improvements in 1998. The Company
had a total net cash proceeds of $23.9 million from the sale of an apartment
community, which was deposited with a qualified intermediary. Approximately
$20.0 million of these funds were used to fund the purchase of a Community and
land. The remaining $3.9 million in proceeds from the sale were being held in
escrow in accordance with like-kind exchange rules and regulations.
19
<PAGE> 20
Net cash provided by financing activities increased from $86.2 million for the
nine months ended September 30, 1997 to $111.4 million for the same period in
1998, primarily due to an increase in equity proceeds from the Company's
dividend reinvestment and stock purchase plans and an increase in net borrowings
from the Company's credit facility offset by a higher repayment of debt, lower
borrowings on unsecured bonds, the issuance of notes receivable from employees,
the payment of higher dividends and distributions to unitholders and a decrease
in stock issuances. Financing activities in 1998 included $103.6 million in net
borrowings from the Company's credit facility and $30.5 million in net proceeds
from the Company's dividend reinvestment and stock purchase plans. Dividend
reinvestment and stock purchase proceeds increased from 1997 primarily due to
the replacement of the prior dividend reinvestment plan with a dividend
reinvestment and stock purchase plan which allows direct stock purchases by
shareholders and non-shareholders. These cash inflows were offset by $34.7
million of dividends and distributions and the repayment of mortgage debt of
$14.9 million. Mortgage debt repayment included $11.9 million for the prepayment
of four mortgage notes.
The ratio of earnings to fixed charges was 1.94 for the nine months ended
September 30, 1998 compared to 2.02 for the nine months ended September 30,
1997. The decrease is primarily due to increased interest charges as discussed
in "Historical Results of Operations -- Other Income and Expenses" above offset
by an increase in the gain on real estate assets.
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under Sections 856 and 860 of the Internal Revenue Code of 1986, as amended.
REITs are subject to a number of organizational and operational requirements,
including a requirement that they currently distribute 95% of their ordinary
taxable income. As a REIT, the Company generally will not be subject to federal
income tax on net income.
The Company's outstanding indebtedness at September 30, 1998 totaled $601.9
million. This amount includes approximately $198.8 million in fixed rate
conventional mortgages, $51.9 million of variable rate tax-exempt bonds, $216.0
million of unsecured notes, $9.2 million of tax-exempt fixed rate loans, and
$126.0 million under the Unsecured Credit Facility (as hereinafter defined).
The Company repaid four mortgage notes with a balance of $11.9 million during
the first quarter of 1998. The mortgage notes had an 8% interest rate and were
repaid from the borrowings under the Company's credit facility.
The Company expects to meet its short-term liquidity requirements (i.e.,
liquidity requirements arising within 12 months) including recurring capital
expenditures relating to maintaining its existing properties, generally through
its working capital, net cash provided by operating activities and borrowings
under its line of credit. The Company considers its cash provided by operating
activities to be adequate to meet operating requirements and payments of
dividends and distributions. The Company expects to meet its long-term liquidity
requirements (i.e., liquidity requirements arising after 12 months), such as
scheduled mortgage debt maturities, property acquisitions, financing of
construction and development activities and other non-recurring capital
improvements, through the issuance of unsecured notes and equity securities,
from undistributed Funds from Operations (see page 25), from proceeds received
from the disposition of certain properties, and in connection with the
acquisition of land or improved property, and through the issuance of units of
limited partnership interest ("Units") of Summit Properties Partnership, L.P.
(the "Operating Partnership").
Line of Credit
The Company obtained a new syndicated unsecured line of credit (the "Unsecured
Credit Facility") in the amount of $175 million in March 1998 which replaced the
existing $150 million credit facility. The Unsecured Credit Facility provides
funds for new development, acquisitions and general working capital purposes.
The Unsecured Credit Facility has a three year term with two one-year extension
options and will initially bear interest at LIBOR + 90 basis points based upon
the Company's current credit rating of BBB- by Standard & Poor's Rating Services
and Baa3 by Moody's Investors Service. The interest rate will be reduced in the
event an upgrade of the Company's unsecured credit rating is obtained. The
Unsecured Credit Facility also provides a bid option sub-facility equal to a
maximum of fifty percent of the total facility ($87.5 million). This
sub-facility provides the Company with the option to place borrowings in a fixed
LIBOR contract up to 180 days.
20
<PAGE> 21
Mortgage Notes
On September 23, 1998, the Company consolidated and renewed two mortgage loans
which had a $147.2 million balance. The original loans matured in February 2001
($118.3 million at 5.88%) and December 2005 ($28.9 million at 7.71%). The
consolidation and renewal combined the two mortgage loans into one loan at an
interest rate equal to the weighted average interest rate of the two previous
mortgage loans (6.24%) up to February 2001. As of February 2001, the rate of
interest on the loan will increase to 6.76% until the loan matures in October of
2008.
Medium-Term Notes
The Company has established a program for the sale of up to $95 million
aggregate principal amount of Medium-Term Notes due nine months or more from the
date of issuance (the "MTN Program"). On July 28, 1998, the Company sold $30
million of notes under the MTN Program. Such notes are due on July 30, 2001 and
bear interest at 6.75% per year. On October 5, 1998, the Company sold $25
million of notes under the MTN Program. Such notes are due on October 5, 2000
and bear interest at 6.71% per year. Proceeds from the notes issued in both July
and October of 1998 were used to reduce the Unsecured Credit Facility.
ACQUISITIONS AND DISPOSITION
During the nine month period ending September 30, 1998, the Company completed
the acquisition of three communities located in Atlanta, Georgia: Summit St.
Clair, purchased effective March 1, 1998, Summit Club at Dunwoody, purchased on
May 22, 1998, and Summit at Lenox, purchased effective July 8, 1998 (the "1998
Acquisitions"). The 1998 Acquisitions added a total of 1,092 apartment homes to
the Company's portfolio at an aggregate purchase price of $88.3 million.
The 1998 Acquisitions were financed with the issuance of 259,871 Units valued at
$5.2 million and the assumption of $8.8 million of mortgage debt. The balance of
the purchase price was paid in cash.
On May 18, 1998, the Company sold a community in Brandon, Florida formerly known
as Summit Providence for net proceeds of $23.9 million. A gain on the sale of
$8.7 million was recognized. Proceeds from the sale were used to partially fund
the acquisition of Summit Club at Dunwoody.
On October 23, 1998, the Company sold a community in Atlanta, Georgia formerly
known as Summit Springs for $17.5 million. The Company will recognize a gain of
approximately $6.0 million on the sale. Proceeds from the sale will be used to
fund future development.
On November 4, 1998, the Company acquired a portfolio of multifamily properties
in Texas (the "Ewing Portfolio") through a merger with Ewing Industries, a
private developer of luxury apartment homes. The Ewing Portfolio consists of
2,465 apartment homes in seven communities located in Dallas, Austin and San
Antonio. The acquisition of the Ewing Portfolio was effected pursuant to an
Agreement and Plan of Reorganization dated as of October 31, 1998 (the "Merger
Agreement") among the Company, affiliates of the Company (including the Summit
Properties Partnership L.P.), Ewing Industries, Inc., an Ohio corporation
("Ewing Industries"), affiliates of Ewing, and their respective partners,
shareholders and members (together with Ewing Industries, "Ewing"). Pursuant to
the Merger Agreement, the acquisition was funded through (i) the issuance to
Ewing of 1,008,987 shares of common stock of the Company (each, a "Share") and
141,921 units of Summit Properties Partnership L.P. (each, a "Unit"), valued at
$18.50 per Share and per Unit (or $21,291,801 in the aggregate), (ii) the
assumption of $79,851,773 in long-term fixed-rate mortgage indebtedness, (iii)
the payment of $50,598,397 in cash and (iv) receipt of $2,516,868 of credit for
customary prorations and reserves. A portion of the consideration is deferred
until stabilization of one community which is currently in lease-up. The current
estimate of the additional consideration to be paid at such time is (i)
1,030,009 Shares and 36,629 Units valued at $18.50 per Share and per Unit (or
$19,732,803 in the aggregate), and (ii) cash in the amount of $1,314,144. The
Company filed a Current Report on Form 8-K with the Securities and Exchange
Commission on November 13, 1998 in connection with the acquisition of the Ewing
Portfolio.
21
<PAGE> 22
On November 12, 1998, the Company sold a community located in Winston Salem,
North Carolina formerly known as Summit Old Town for approximately $7.5 million.
The Company expects to recognize a gain on the sale. Proceeds from the sale will
be used to fund future development.
DEVELOPMENT ACTIVITY
The Company's construction in progress at September 30, 1998 is summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
TOTAL ESTIMATED ANTICIPATED
APARTMENT ESTIMATED COST TO COST TO CONSTRUCTION
COMMUNITY HOMES COSTS DATE COMPLETE COMPLETION
- --------- --------- --------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Summit Doral -- Miami, FL(2)............... 260 $ 22,800 $ 11,564 $11,236 Q2 1999
Summit Westwood -- Raleigh, NC(2).......... 354 24,400 13,574 10,826 Q3 1999
Summit Fair Lakes I -- Fairfax, VA(2)...... 370 32,900 27,324 5,576 Q1 1999
Summit Fair Lakes II -- Fairfax, VA........ 160 14,200 5,519 8,681 Q3 1999
Summit New Albany I -- Columbus, OH(2)..... 301 22,600 20,878 1,722 Q1 1999
Summit Governor's Village -- Chapel Hill,
NC(2).................................... 242 16,700 15,435 1,265 Q1 1999
Summit Ballantyne II -- Charlotte, NC(2)... 154 10,100 9,576 524 Q4 1998
Summit Lake II -- Raleigh, NC.............. 144 10,200 4,564 5,636 Q2 1999
Summit Sedgebrook II -- Charlotte, NC...... 120 7,800 2,167 5,633 Q3 1999
----- -------- -------- -------
2,105 $161,700 110,601 $51,099
===== ======== =======
Other development and construction
costs(1)................................. 30,003
--------
$140,604
========
</TABLE>
- ---------------
(1) Consists primarily of land held for development and other predevelopment
costs.
(2) These communities were in lease-up at September 30, 1998.
Estimated costs to complete the development communities represent all of the
Company's material commitments for capital expenditures.
Certain Factors Affecting the Performance of Development Communities
The Company is optimistic about the operating prospects of the Communities under
construction even with the increased supply of newly constructed apartment homes
of comparable quality in many of its markets. As with any development community,
there are uncertainties and risks associated with the development of the
Communities described above. While the Company has prepared development budgets
and has estimated completion and stabilization target dates based on what it
believes are reasonable assumptions in light of current conditions, there can be
no assurance that actual costs will not exceed current budgets or that the
Company will not experience construction delays due to the unavailability of
materials, weather conditions or other events.
Other development risks include the possibility of incurring additional cost or
liability resulting from defects in construction material and the possibility
that financing may not be available on favorable terms, or at all, to pursue or
complete development activities. Similarly, market conditions at the time these
Communities become available for leasing will affect the rental rates that may
be charged and the period of time necessary to achieve stabilization, which
could make one or more of the development Communities unprofitable or result in
achieving stabilization later than currently anticipated. In addition, the
Company is conducting feasibility and other pre-development work for eight
Communities. The Company could abandon the development of any one or more of
these potential Communities in the event that it determines that market
conditions do not support development, financing is not available on favorable
terms or other circumstances prevent development. Similarly, there can be no
assurance that if the Company does pursue one or more of these potential
Communities that it will be able to complete construction within the currently
estimated development budgets or that construction can be started at the time
currently anticipated.
22
<PAGE> 23
YEAR 2000
The Securities and Exchange Commission has asked all public companies to provide
disclosure regarding their Year 2000 readiness. The term "Year 2000 issue" is a
general term used to describe various problems that may result from the improper
processing by computer systems of dates after 1999. These problems arise from
the inability of some hardware and software to distinguish dates before the year
2000 from dates in and after the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations. The Year 2000
issue affects virtually all companies and all organizations.
The Company's efforts to address its Year 2000 issues are focused in the
following three areas: (i) reviewing and taking any necessary steps to attempt
to correct the Company's computer information systems (i.e., software
applications and hardware platforms), (ii) evaluating and making any necessary
modifications to other computer systems that do not relate to information
technology but include embedded technology, such as telecommunications,
security, HVAC, elevator, fire and safety systems, and (iii) communicating with
certain significant third-party service providers to determine whether there
will be any interruption in their systems that could affect the Company.
The Company's State of Readiness
The Company has developed a four phase plan to address its Year 2000 issues (its
"Year 2000 Plan"). The four phases are (i) Awareness, (ii) Assessment, (iii)
Remediation and (iv) Testing.
Awareness
The Company has made the relevant employees, including its property managers,
aware of the Year 2000 issue and collected information from such employees
regarding systems that the Company anticipates may be affected. Management will
oversee the Company's progress with respect to the implementation of its Year
2000 Plan. In addition, the Year 2000 Plan will be subject to review of the
Audit Committee of the Board of Directors.
Assessment
The Company has substantially completed an assessment of its standard computer
information systems and is now taking the further necessary steps to make its
core computer information systems, in those situations in which the Company is
required to do so, Year 2000 compliant. See "Remediation" below. The Company is
in the process of attempting to obtain written verification from vendors to the
effect that the Company's other (i.e., non-core) standard computer information
systems acquired from such vendors correctly distinguish dates before the year
2000 from dates in and after the year 2000. The Company expects that it will
request such verifications, or a commitment from the relevant vendor to provide
a solution, by no later than December 31, 1998
In addition, the Company is currently evaluating and assessing its other
computer systems that do not relate to information technology but include
embedded technology, such as telecommunications, security, HVAC, elevator, fire
and safety systems, and expects that its assessment will be completed by the
second quarter of 1999. The Company is aware that such systems contain embedded
chips that are difficult to identify and test and may require complete
replacement because they cannot be repaired. Failure of the Company to identify
or remediate any embedded chips (either on an individual or aggregate basis) on
which significant business operations depend, such as phone systems, could have
a material adverse impact on the Company's business, financial condition and
results of operations.
The Company rents apartments in its Communities to individuals and does not have
a single customer or group of customers who rents a significant number of
apartments. The Company's primary purchases are building-related products (e.g.,
carpets, paint and blinds) and services (e.g., lawn care services), all of which
are available from numerous suppliers. The Company's primary financial service
providers are its primary bank and payroll processor. The primary bank has
provided written verification to the Company that it will be Year 2000 compliant
and the payroll processor has a Year 2000 upgrade available. The Company will
implement this upgrade in the first quarter of 1999. For the foregoing reasons,
the Company does not believe that there is a significant risk related to the
failure of residents, vendors or third-party goods or service providers to
prepare for the Year 2000;
23
<PAGE> 24
however, the costs and timing of third-party Year 2000 compliance is not within
the Company's control and no assurances can be given with respect to the cost or
timing of such efforts or the potential effects of any failure to comply.
Remediation
The Company's primary uses of software systems are its corporate accounting and
property on-site software. The Company's corporate accounting system is widely
used in the real estate industry. A version upgrade, installed in the second
quarter of 1998, is designed to be Year 2000 compliant. The Company completed
the replacement of its current property on-site software in October 1998 with a
new software system that is also designed to be Year 2000 compliant. This new
software is also widely used in the real estate industry. The Company has
received written verification from the vendors of each of the corporate
accounting and on-site systems that the relevant software is Year 2000
compliant. The Company had previously planned both the upgrade of the corporate
accounting system and implementation of the new property on-site system, and
such changes would have been undertaken without regard to Year 2000 remediation
issues. Accordingly, the Company has not deferred any planned information or
software projects due to such Year 2000 projects, and the Company is not
treating the costs of the above-referenced changes as Year 2000-related
expenses.
Testing
To attempt to confirm that its computer systems are Year 2000 compliant, the
Company expects to perform limited testing of its computer information systems
and its other computer systems that do not relate to information technology but
include embedded technology; however, unless Year 2000 issues arise in the
course of its limited testing, the Company will rely on the written verification
received from each vendor of its computer systems that the relevant system is
Year 2000 compliant. Nevertheless, there can be no assurance that the computer
systems on which the Company's business relies will correctly distinguish dates
before the year 2000 from dates in and after the year 2000. Any such failures
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company currently anticipates that
testing will commence no later than November 1998 and expects that its testing
will be complete by March 31, 1999.
Costs to Address the Company's Year 2000 Issues
Based on current information from its review to date, the Company budgeted
$500,000 for the cost of repairing, updating and replacing its standard computer
information systems. The primary component of the cost was replacing the
property on-site software. Because the Company's Year 2000 assessment is ongoing
and additional funds may be required as a result of future findings, the
Company's current budget amounts may increase as a result of unanticipated
delays or preparedness issues. While the Company's efforts to address its Year
2000 issues will involve additional costs, the Company believes, based on
available information, that these costs will not have a material adverse effect
on its business, financial condition or results of operations. The Company
expects to fund the costs of addressing the Year 2000 issue from cash flows
resulting from operations. While the Company believes that it will be Year 2000
compliant by December 31, 1999, if these efforts are not completed on time, or
if the costs associated with updating or replacing the Company's computer
systems exceeds the Company's estimates, the Year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Presented by Year 2000 Issues
The Company is still in the process of evaluating potential disruptions or
complications that might result from Year 2000-related problems; however, at
this time the Company has not identified any specific business functions that
are likely to suffer material disruption as a result of Year-2000 related
events. It is possible, however, that the Company may identify business
functions in the future that are specifically at risk of Year 2000 disruption.
The absence of any such determination as of the date of this report represents
only the Company's current status of evaluating potential Year-2000 related
problems and facts presently known to the Company, and should not be construed
to mean that here is no risk of Year-2000 related disruption. Moreover, due to
the unique and pervasive nature of the Year 2000 issue, it is not possible to
anticipate each of the wide variety of Year 2000 events,
24
<PAGE> 25
particularly outside of the Company, that might arise in a worst case scenario
which might have a material adverse impact on the Company's business, financial
condition and results of operations.
The Company's Contingency Plans
The Company intends to develop contingency plans for significant business risks
identified by the Company that might result from Year-2000 related events.
Because the Company has not yet identified any specific business function that
will be materially at risk of significant Year-2000 related disruptions, and
because a full assessment of the Company's risk from potential Year 2000
failures is still in process, the Company has not yet developed detailed
contingency plans specific to Year 2000 problems. In the event that the Company
concludes that one or more contingency plans are required, development of such
contingency plans is currently scheduled to occur no later than June 30, 1999 or
as otherwise appropriate.
Year 2000 Information and Readiness Disclosure Act
The Company supports the exchange of information relating to the Year 2000 issue
and designates the foregoing information as the Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
Information set forth herein regarding the Year 2000 compliance of non-Company
products and services are "republications" under the Year 2000 Information and
Readiness Disclosure Act and are based on information supplied by other
companies about the products and services they offer. The Company has not
independently verified the contents of these republications and takes no
responsibility for the accuracy or completeness of information contained in such
republications.
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of Governors of
NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of property, plus
real estate related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. The Company computes Funds from
Operations in accordance with the standards established by the White Paper,
which may differ from the methodology for calculating Funds from Operations
utilized by other equity REITs, and, accordingly, may not be comparable to such
other REITs. Funds Available for Distribution is defined as Funds from
Operations less capital expenditures funded by operations (recurring capital
expenditures). The Company's methodology for calculating Funds Available for
Distribution may differ from the methodology for calculating Funds Available for
Distribution utilized by other REITs, and accordingly, may not be comparable to
other REITs. Funds from Operations and Funds Available for Distribution do not
represent amounts available for management's discretionary use because of needed
capital replacement or expansion, debt service obligations, property
acquisitions, development, dividends and distributions or other commitments and
uncertainties. Funds from Operations and Funds Available for Distribution should
not be considered as alternatives to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash flows
from operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor are they indicative of funds available to fund the
Company's cash needs, including its ability to make dividends/distributions. The
Company believes Funds from Operations and Funds Available for Distribution are
helpful to investors as measures of the performance of the Company because,
along with cash flows from operating activities, financing activities and
investing activities, they provide investors with an understanding of the
ability of the Company to incur and service debt and make capital expenditures.
25
<PAGE> 26
Funds from Operations and Funds Available for Distribution for the three and
nine months ended September 30, 1998 and 1997 are calculated as follows (dollars
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before extraordinary items... $ 6,763 $ 5,917 $ 26,213 $ 21,286
Gain on sale of real estate
assets............................ -- -- (8,731) (4,366)
Minority interest of Unitholders in
Operating Partnership............. 1,129 1,031 4,439 3,812
Depreciation from real estate
assets............................ 7,338 5,843 20,701 16,436
----------- ----------- ----------- -----------
Funds from Operations............... 15,230 12,791 42,622 37,168
Recurring capital expenditures(1)... (611) (1,118) (3,372) (2,589)
----------- ----------- ----------- -----------
Funds Available for Distribution.... $ 14,619 $ 11,673 $ 39,250 $ 34,579
=========== =========== =========== ===========
Non-recurring Capital
Expenditures(2)................... $ 1,792 $ 1,170 $ 3,279 $ 3,317
=========== =========== =========== ===========
Cash Flow Provided By (Used In):
Operating Activities.............. $ 17,367 $ 14,770 $ 47,451 $ 41,931
Investing Activities.............. (62,499) (41,356) (157,607) (127,892)
Financing Activities.............. 47,568 25,170 111,416 86,226
Weighted average shares and units
outstanding -- basic.............. 29,462,433 27,334,464 28,808,330 27,220,199
=========== =========== =========== ===========
Weighted average shares and units
outstanding -- diluted............ 29,468,032 27,369,316 28,825,095 27,252,718
=========== =========== =========== ===========
</TABLE>
- ---------------
(1) Recurring capital expenditures are expected to be funded from operations and
consist primarily of exterior painting, new appliances, vinyl, blinds, tile,
and wallpaper. In contrast, non-recurring capital expenditures, such as
major improvements, new garages and access gates, are expected to be funded
by financing activities and are therefore not included in the calculation of
Funds Available for Distribution. The increase in recurring capital
expenditures for the nine months ended September 30, 1998 compared to 1997
was primarily due to the increase in the number of apartment homes owned.
Other changes are primarily due to the timing of capital improvement
projects. The Company expects capital expenditures for the year 1998 on a
per unit basis to be equal to or less than 1997.
(2) Non-recurring capital expenditures include major renovations in the amount
of $442,000 in 1998 and $2.6 million in 1997; $765,000 and $19,000 for water
meters in 1998 and 1997, respectively; $21,000 and $71,000 for new signage
in 1998 and 1997, respectively; $223,000 for fitness center and key controls
in 1998; $421,000 and $203,000 for access gates and security fences in 1998
and 1997, respectively; $170,000 and $233,000 for construction of garages in
1998 and 1997, respectively and $191,000 for improvements at Summit Norcroft
I done in conjunction with development of Summit Norcroft II in 1998.
26
<PAGE> 27
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 21, 1998 the Company issued to a limited partner of the Operating
Partnership 7,613 shares of Common Stock. Such shares of the Company's Common
Stock were issued in reliance on an exemption from registration under Section
4(2) of the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder. In light of information obtained by the Company in
connection with each such transaction, management of the Company believes that
the Company may rely on such exemption.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 -- 6.71% Medium-Term Note due on October 5, 2000 in principal amount of
$25,000,000 issued by Summit Properties Partnership, L.P. on October 5,
1998 (Incorporated by reference to Exhibit 10.1 of Summit Properties
Partnership, L.P.'s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998, File No. 000-22411).
10.2 -- Promissory Note, dated as of August 5, 1998, evidencing a loan of
$961,000 to Steven R. LeBlanc for the purpose of purchasing shares of
Common Stock of Summit Properties Inc. (filed herewith).
12.1 -- Statement Regarding Calculation of Ratio of Earnings to Fixed Charges
for the Three and Nine Months ended September 30, 1998 (filed herewith).
27.1 -- Financial Data Schedule -- Nine Months ended September 30, 1998 (for SEC
use only) (filed herewith).
27.2 -- Revised Financial Data Schedule -- Nine Months ended September 30, 1997
(for SEC use only) (filed herewith).
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities and Exchange
Commission on November 13, 1998 in connection with the purchase of the Ewing
portfolio on November 4, 1998. Financial statements were not included in such
Form 8-K; however financial statements will be filed by amendment of the Form
8-K as soon as practicable, but in no event later than 60 days after the Form
8-K is filed.
27
<PAGE> 28
SIGNATURES
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.
<TABLE>
<S> <C>
SUMMIT PROPERTIES INC.
November 13, 1998 /s/ WILLIAM F. PAULSEN
- ------------------------------------------ --------------------------------------------------------
(Date) William F. Paulsen,
President and Chief Executive Officer
November 13, 1998 /s/ MICHAEL L. SCHWARZ
- ------------------------------------------ --------------------------------------------------------
(Date) Michael L. Schwarz,
Executive Vice President and Chief Financial Officer
</TABLE>
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<C> <C> <S>
10.1 -- 6.71% Medium-Term Note due on October 5, 2000 in principal
amount of $25,000,000 issued by Summit Properties
Partnership, L.P. on October 5, 1998 (Incorporated by
reference to Exhibit 10.1 of Summit Properties Partnership,
L.P.'s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998, File No. 000-22411).
10.2 -- Promissory Note, dated as of August 5, 1998, evidencing a
loan of $961,000 to Steven R. LeBlanc for the purpose of
purchasing shares of Common Stock of Summit Properties Inc.
(filed herewith).
12.1 -- Statement Regarding Calculation of Ratio of Earnings to
Fixed Charges for the Three and Nine Months ended September
30, 1998 (filed herewith).
27.1 -- Financial Data Schedule -- Nine Months ended September 30,
1998 (for SEC use only) (filed herewith).
27.2 -- Revised Financial Data Schedule -- Nine Months ended
September 30, 1997 (for SEC use only) (filed herewith).
</TABLE>
29
<PAGE> 1
EXHIBIT 10.2
PROMISSORY NOTE AND SECURITY AGREEMENT
$ 960,577.50 AUGUST 5, 1998
FOR VALUE RECEIVED, Executive who resides at 2308 Oakmeade Drive,
Charlotte, North Carolina, 28270, (hereinafter referred to as the "Employee")
hereby promises to pay to the order of Summit Properties Inc., a Maryland
corporation with its principal place of business at 212 South Tryon Street,
Suite 500, Charlotte, North Carolina (hereinafter referred to as the
"Company"), the principal amount of $960,577.50 together with interest thereon
as provided below subject to the terms and conditions set forth herein.
1. Purpose and Authority. This Promissory Note and Security Agreement
(the "Note") is entered into for the purpose of financing the Employee's
purchase of shares of common stock, par value $0.01 per share, of the Company
("Common Stock") pursuant to and subject to the terms and conditions of (i) the
Company's Statement of Company Policy on Loans to Executive Officers and
Qualified Employees to Purchase the Company Stock as adopted by the Board of
Directors of the Company on September 8, 1997, as amended from time to time,
and (ii) the Company's 1994 Stock Option and Incentive Plan, as amended from
time to time.
2. Security. The Employee hereby grants the Company a security interest
in any and all shares of Common Stock purchased by the Employee with the
proceeds of this Note (hereinafter referred to as the "Collateral Stock") and
in any and all distributions and dividends which may from time to time be, paid
or payable on the Collateral Stock (each, a "Distribution"). Employee agrees
to take all such actions and execute all such documents as may from time to
time be reasonably requested by the Company to perfect and maintain the
validity and priority of any security interest granted to the Company pursuant
to this Note. Employee also agrees that a carbon, photographic or other
reproduction of this Promissory Note and Security Agreement may be filed as a
financing statement to the extent that the Company determines that such filing
is necessary for the Company to establish or maintain its security interest in
the Collateral Stock. The Employee shall cause the Collateral Stock to be
delivered to the Company and the Company may retain possession of the
Collateral Stock until such time as the Note has been paid in full.
3. Payment. All Distributions received by the Employee in cash shall be
applied toward repayment of this Note. The Employee agrees that the Company
may establish and institute any procedure that it deems necessary or advisable
to ensure that each such Distribution shall be applied toward repayment of this
Note, including without limitation, the placement of a restrictive legend on
any check representing a Distribution. Each such payment shall first be
applied to the payment of interest accrued as of the date of such payment and
the remainder thereof, if any, shall then be applied to the payment of
outstanding principal. The Note will bear interest at the rate provided in
Section 4 hereof. The entire principal balance and all accrued and unpaid
interest and other charges as may be due hereunder shall be due and payable on
or before the tenth anniversary of the date of this Note (the "Maturity Date").
<PAGE> 2
4. Interest. Interest on this Note will be computed on a simple interest
basis and will accrue on the unpaid principal balance due under the Note until
maturity, whether by reason of Default (as defined below) and acceleration,
lapse of time or otherwise ("Maturity"), at the rate of Five and 57/100 percent
(5.57%) per annum. Prior to Maturity interest shall be payable solely from
Distributions.
5. Prepayment. The Employee may prepay the whole or any part of the
principal amount of this Note from time to time without premium or penalty.
6. Default. (a) The occurrence of any of the following events and the
expiration of the applicable cure period without such event having been cured,
shall constitute a Default under this Note:
(i) the failure by the Employee to deliver or cause to be delivered
the Collateral Stock to the Company within three business days after the
purchase of any Collateral Stock;
(ii) retention by the Employee of any Distribution, which retention
continues for a period of ten (10) days;
(iii) the failure by the Employee to pay the entire outstanding
balance of this Note and all accrued interest within one hundred and
twenty (120) days after termination of the Employee's employment with the
Company; or
(iv) the failure by the Employee to pay the entire outstanding
balance of this Note and all accrued interest on or before the
Maturity Date.
(b) Upon the occurrence of a Default under this Note, the outstanding
principal balance hereof, together with all reasonable costs of collection
and/or enforcement of the Note, including reasonable attorney's fees, shall at
the option of the Company become immediately due and payable.
(c) If the Employee is in Default hereunder, the Company may, except as
otherwise provided herein, exercise the rights and remedies accorded a secured
party by the Uniform Commercial Code as enacted in the State of Maryland.
7. Notice and Cure Periods. Notwithstanding any term or provision to the
contrary in this Note or any other document or instrument evidencing or
securing the loan (collectively the "Loan Documents"), Employee shall have
thirty (30) days following written notice to the Employee of Employee's default
under any provision of the Loan Documents, including, without limitation, the
Note, in which to cure any such default before the Company may exercise any
remedies for said default as provided in this Note or any other Loan Documents.
2
<PAGE> 3
8. Personal Liability. Except in the case of fraud, willful
misrepresentation or retention of a Distribution by Employee, the Company
agrees that the Employee's personal liability on this Note shall be limited to
Ninety Six Thousand Fifty Seven and 75/100 Dollars ($96,057.75) due hereunder
for any deficiency which may arise upon a foreclosure and sale or other
disposition of the Collateral Stock; provided that, this provision shall not
diminish in any way the powers of the Company to foreclose on the Collateral
Stock and to apply the full value of the Collateral Stock and all related
Distributions to the amount outstanding under this Note in the event of a
Default.
9. Modification. Neither this Note nor any provision hereof may be
modified, altered, or amended in any manner or form except by an agreement in
writing, executed by a duly authorized officer of the Company and the Employee,
which writing shall make specific reference hereto.
10. Transfer by Employee. Employee will not sell, assign, transfer or
otherwise dispose of, directly or indirectly, nor grant any option with respect
to, or pledge or grant any security interest in or otherwise encumber any of
the Collateral Stock or any interest therein, except for the security interest
provided for in this Note.
11. Severability. If for any reason any provision or provisions hereof
are determined to be invalid, unenforceable or contrary to any existing or
future law, such invalidity or unenforceability shall not impair the operation
or affect those portions of this Note which are valid.
12. Usury, etc. All agreements between the Employee and the Company are
hereby expressly limited so that in no contingency or event whatsoever, whether
by reason Maturity of the indebtedness or otherwise, shall the amount paid or
agreed to be paid to the holder for the use, forbearance or detention of the
indebtedness evidenced hereby exceed the maximum amount which the holder is
permitted to receive under applicable law. If, from any circumstances
whatsoever, fulfillment of any provision of this Note, at the time performance
of such provision shall be due, shall involve payments exceeding such amount,
then the obligation to be fulfilled shall automatically be reduced to the limit
of such maximum amount, and if from any circumstances the holder should ever
receive as interest an amount which would exceed such maximum amount, such
amount which would be excessive interest shall be applied to the reduction of
the principal balance evidenced hereby and not to the payment of interest. As
used herein, the term "applicable law" shall mean the law in effect as of the
date hereof; provided, however, that in the event that there is a change in the
law which results in a higher permissible rate of interest, then this Note
shall be governed by such new law as of its effective date. This provision
shall control every other provision of this Note.
13. Valuation: Manner of Disposition. Employee acknowledges and agrees
that the Company may not be able to effect a public sale of the Collateral
Stock and, accordingly, agrees that in the event of any sale, collection,
realization or other disposition of or upon the Collateral Stock by the
Company, in lieu of such public sale, the Company may transfer all or any
portion of the Collateral Stock to itself and apply the value of such shares
(at a price per share equal to the average of the daily high and low sales
prices, computed to three decimal
3
<PAGE> 4
places, of the Company's stock as reported on the New York Stock Exchange (the
"NYSE") for the ten (10) days on which the NYSE is open and for which trades in
the Company stock are reported immediately preceding the date of such action by
the Company or, if one or more of such days is not a day on which the NYSE is
open or the Company's stock is not traded on the NYSE for the ten (10) days
immediately preceding said action for which the trades are reported) to the
amounts due under or in connection with this Note.
14. Governing Law. The execution, delivery and performance of this Note
shall be governed by, construed, and enforced in accordance with the laws of
the State of Maryland.
15. Waivers. The failure of the Company at any time to exercise any
option or right hereunder shall not constitute a waiver of the Company's right
to exercise such option or right at any other time.
[Remainder of page intentionally left blank]
4
<PAGE> 5
IN WITNESS WHEREOF, this Note has been executed and delivered as a sealed
instrument as of the date first set forth above.
/s/ STEVEN R. LEBLANC
-----------------------------------
Steven R. LeBlanc
Executed, sealed and
delivered in the
presence of:
/s/ JOHN C. MOORE
- ------------------------------------
Name of Witness:
5
<PAGE> 1
EXHIBIT 12.1
SUMMIT PROPERTIES INC.
CALCULATION OF RATIOS OF EARNINGS TO FIXED CHARGES
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(Dollars In Thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
------------ ------------
<S> <C> <C>
Funds from operations before fixed charges:
Income (loss) before minority interest of
unitholders in Operating Partnership and
extraordinary items $ 7,892 $30,652
Interest:
Expense incurred 8,181 22,627
Amortization of deferred financing costs 211 724
======= =======
Total $16,284 $54,003
======= =======
Fixed charges:
Interest expense $ 8,181 $22,627
Interest capitalized 1,723 4,352
Rental fixed charges 32 105
Amortization of deferred financing costs 211 724
======= =======
Total $10,147 $27,808
======= =======
Ratio of earnings to fixed charges 1.60 1.94
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,823
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,086,107
<DEPRECIATION> 121,631
<TOTAL-ASSETS> 989,581
<CURRENT-LIABILITIES> 0
<BONDS> 601,872
0
0
<COMMON> 254
<OTHER-SE> 346,450
<TOTAL-LIABILITY-AND-EQUITY> 989,581
<SALES> 104,780
<TOTAL-REVENUES> 106,066
<CGS> 0
<TOTAL-COSTS> 37,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,351
<INCOME-PRETAX> 30,652
<INCOME-TAX> 0
<INCOME-CONTINUING> 30,652
<DISCONTINUED> 0
<EXTRAORDINARY> (158)
<CHANGES> 0
<NET-INCOME> 26,055
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,930
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 865,256
<DEPRECIATION> 99,789
<TOTAL-ASSETS> 786,210
<CURRENT-LIABILITIES> 0
<BONDS> 438,094
0
0
<COMMON> 233
<OTHER-SE> 313,173
<TOTAL-LIABILITY-AND-EQUITY> 786,210
<SALES> 84,906
<TOTAL-REVENUES> 85,420
<CGS> 0
<TOTAL-COSTS> 30,744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,382
<INCOME-PRETAX> 25,098
<INCOME-TAX> 0
<INCOME-CONTINUING> 25,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,286
<EPS-PRIMARY> .92
<EPS-DILUTED> .92
</TABLE>
