<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
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.)
309 EAST MOREHEAD STREET
SUITE 200
CHARLOTTE, NORTH CAROLINA 28202
(Address of principal executive offices) (Zip code)
</TABLE>
(704) 334-3000
(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.
26,400,114 shares outstanding as of November 7, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
SUMMIT PROPERTIES INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 (Unaudited)............................. 3
Consolidated Statements of Earnings for the three and nine
months ended September 30, 2000 and 1999 (Unaudited)...... 4
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2000 (Unaudited)............... 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (Unaudited)............. 6
Notes to Consolidated Financial Statements (Unaudited)...... 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 3 Quantitative and Qualitative Disclosures about Market
Risk...................................................... 27
PART II OTHER INFORMATION
Item 2 Changes in Securities....................................... 28
Item 6 Exhibits and Reports on Form 8-K............................ 28
Signatures.................................................. 29
</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,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Real estate assets:
Land and land improvements................................ $ 183,786 $ 174,615
Buildings and building improvements....................... 955,966 893,179
Furniture, fixtures and equipment......................... 73,800 68,437
---------- ----------
1,213,552 1,136,231
Less: accumulated depreciation............................ (143,633) (129,620)
---------- ----------
Operating real estate assets...................... 1,069,919 1,006,611
Construction in progress.................................. 177,272 148,587
---------- ----------
Net real estate assets............................ 1,247,191 1,155,198
Cash and cash equivalents................................... 2,799 4,130
Restricted cash............................................. 39,848 40,080
Investments in Summit Management Company, real estate joint
ventures and other investments............................ 916 583
Deferred financing costs, net............................... 7,882 6,657
Notes receivable............................................ 8,041 3,268
Other assets................................................ 8,063 7,497
---------- ----------
Total assets................................................ $1,314,740 $1,217,413
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable............................................. $ 743,412 $ 649,632
Accounts payable and accrued expenses..................... 26,563 25,626
Dividends and distributions payable....................... 13,439 12,984
Accrued interest payable.................................. 4,600 7,018
Security deposits and prepaid rents....................... 4,022 3,850
---------- ----------
Total liabilities................................. 792,036 699,110
---------- ----------
Commitments and contingencies
Minority interest of common unitholders in Operating
Partnership............................................... 54,867 54,698
Minority interest of preferred unitholders in Operating
Partnership............................................... 136,261 136,270
Stockholders' equity:
Preferred stock, $.01 par value -- 25,000,000 shares
authorized, no shares issued and outstanding.......... -- --
Common stock, $.01 par value -- 100,000,000 shares
authorized, 26,353,703 and 26,374,446 shares issued
and outstanding in 2000 and 1999, respectively........ 264 264
Additional paid-in capital............................. 413,228 412,874
Accumulated deficit.................................... (68,091) (80,555)
Employee notes receivable.............................. (12,717) (4,861)
Unamortized restricted stock compensation.............. (1,108) (387)
---------- ----------
Total stockholders' equity........................ 331,576 327,335
---------- ----------
Total liabilities and stockholders' equity.................. $1,314,740 $1,217,413
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental............................................ $ 44,653 $ 41,623 $ 128,257 $ 122,437
Other property income............................. 3,442 2,923 9,555 7,847
Interest.......................................... 665 380 2,404 2,213
Other income...................................... 155 84 468 217
----------- ----------- ----------- -----------
Total revenues........................... 48,915 45,010 140,684 132,714
----------- ----------- ----------- -----------
Expenses:
Property operating and maintenance:
Personnel.................................... 3,542 3,507 9,661 9,940
Advertising and promotion.................... 739 680 1,987 1,930
Utilities.................................... 2,290 2,236 6,426 6,363
Building repairs and maintenance............. 2,183 2,313 6,295 6,438
Real estate taxes and insurance.............. 4,982 4,114 14,285 13,146
Depreciation................................. 9,626 8,824 27,910 25,682
Property supervision......................... 1,308 1,068 3,766 3,112
Other operating expenses..................... 751 683 2,112 2,191
----------- ----------- ----------- -----------
Total property operating and maintenance
expense................................ 25,421 23,425 72,442 68,802
Interest.......................................... 10,089 8,988 28,544 28,963
Amortization of financing costs................... 256 249 731 744
General and administrative........................ 1,058 870 3,020 2,912
Loss on equity investments:
Summit Management Company.................... 123 354 685 961
Real estate joint ventures................... 249 12 397 26
----------- ----------- ----------- -----------
Total expenses........................... 37,196 33,898 105,819 102,408
----------- ----------- ----------- -----------
Income before gain on sale of real estate assets,
minority interest of common unitholders in Operating
Partnership, dividends to preferred unitholders in
Operating Partnership and extraordinary items....... 11,719 11,112 34,865 30,306
Gain on sale of real estate assets.................... 21,346 2,487 29,232 8,793
----------- ----------- ----------- -----------
Income before minority interest of common unitholders
in Operating Partnership, dividends to preferred
Unitholders in Operating Partnership and
extraordinary items................................. 33,065 13,599 64,097 39,099
Minority interest of common unitholders in Operating
Partnership......................................... (4,211) (1,571) (7,703) (4,843)
Dividends to preferred unitholders in Operating
Partnership......................................... (3,105) (2,276) (9,315) (3,593)
----------- ----------- ----------- -----------
Income before extraordinary items..................... 25,749 9,752 47,079 30,663
Extraordinary items................................... (111) -- (111) --
----------- ----------- ----------- -----------
Net income............................................ $ 25,638 $ 9,752 $ 46,968 $ 30,663
=========== =========== =========== ===========
Per share data:
Income before extraordinary items -- basic........ $ 0.98 $ 0.35 $ 1.79 $ 1.09
=========== =========== =========== ===========
Income before extraordinary items -- diluted...... $ 0.97 $ 0.35 $ 1.78 $ 1.09
=========== =========== =========== ===========
Net income -- basic............................... $ 0.97 $ 0.35 $ 1.78 $ 1.09
=========== =========== =========== ===========
Net income -- diluted............................. $ 0.97 $ 0.35 $ 1.77 $ 1.09
=========== =========== =========== ===========
Dividends declared on common stock................ $ 0.44 $ 0.42 $ 1.31 $ 1.25
=========== =========== =========== ===========
Weighted average shares -- basic.................. 26,296,521 27,484,627 26,322,037 28,065,166
=========== =========== =========== ===========
Weighted average shares -- diluted................ 26,566,942 27,549,780 26,493,993 28,094,143
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
UNAMORTIZED
ADDITIONAL RESTRICTED EMPLOYEE
COMMON PAID-IN ACCUMULATED STOCK NOTES
STOCK CAPITAL DEFICIT COMPENSATION RECEIVABLE TOTAL
------ ---------- ----------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999...... $264 $412,874 $(80,555) $ (387) $ (4,861) $327,335
Dividends..................... (34,504) (34,504)
Proceeds from dividend
reinvestment and stock
purchase plans............. 2 3,991 3,993
Repurchase of common stock.... (4) (8,020) (8,024)
Conversion of common units to
shares..................... 875 875
Exercise of stock options..... 1 1,509 1,510
Issuance of restricted stock
grants..................... 1 1,333 (1,334) --
Net down of restricted stock
grants..................... (116) (116)
Amortization of restricted
stock grants............... 613 613
Adjustment for minority
interest of common
unitholders in Operating
Partnership................ 1,354 1,354
Issuance of employee notes
receivable................. (9,472) (9,472)
Repayment of notes receivable
through stock redemption... (572) 572 --
Repayment of employee notes
receivable................. 1,044 1,044
Net income.................... 46,968 46,968
---- -------- -------- ------- -------- --------
Balance, September 30, 2000..... $264 $413,228 $(68,091) $(1,108) $(12,717) $331,576
==== ======== ======== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 46,968 $ 30,663
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest of common unitholders in Operating
Partnership......................................... 7,703 4,843
Loss on equity investments........................... 1,082 987
Gain on sale of real estate assets................... (29,232) (8,793)
Extraordinary items.................................. 111 --
Depreciation and amortization........................ 29,229 26,248
Increase in restricted cash.......................... (2,627) (3,807)
Increase in other assets............................. (1,478) (1,278)
Decrease in accrued interest payable................. (2,418) (2,203)
Increase (decrease) in accounts payable and accrued
expenses............................................ 7 (6,723)
Increase in security deposits and prepaid rents...... 302 11
--------- ---------
Net cash provided by operating activities......... 49,647 39,948
--------- ---------
Cash flows from investing activities:
Increase in notes receivable........................... (4,773) --
Construction of real estate assets and land
acquisitions, net of payables......................... (122,251) (94,089)
Purchase of communities................................ (33,127) --
Proceeds from sale of communities...................... 83,677 96,246
Capitalized interest................................... (7,594) (5,383)
Recurring capital expenditures......................... (4,006) (5,083)
Non-recurring capital expenditures, net of payables.... (1,957) (3,916)
--------- ---------
Net cash used in investing activities............. (90,031) (12,225)
--------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit.......... 57,175 (111,508)
Borrowings on unsecured bonds, net of debt issuance
costs................................................. 9,545 24,638
Proceeds from issuance of mortgage debt................ 47,912 --
Repayments of mortgage debt............................ (7,175) (3,833)
Repayments of tax exempt bonds......................... (885) (920)
Repayments of unsecured notes.......................... (15,000) --
Net proceeds from dividend reinvestment and stock
purchase plans........................................ 3,993 14,615
Dividends and distributions to common unitholders...... (39,811) (40,177)
Exercise of stock options.............................. 1,510 182
Decrease in advance proceeds from direct stock purchase
plan.................................................. -- (9,474)
Issuance of preferred units in Operating Partnership... -- 136,342
Repurchase of common stock............................. (8,024) (34,614)
Acquisition of minority interest....................... (1,759) --
Repayments of employee notes receivable................ 1,044 --
Increase in employee notes receivable.................. (9,472) (2,562)
--------- ---------
Net cash provided by (used in) financing
activities...................................... 39,053 (27,311)
--------- ---------
Net (decrease) increase in cash and cash equivalents........ (1,331) 412
Cash and cash equivalents, beginning of period.............. 4,130 2,837
--------- ---------
Cash and cash equivalents, end of period.................... $ 2,799 $ 3,249
========= =========
Supplemental disclosure of cash flow information --
Cash paid for interest, net of capitalized interest....... $ 30,962 $ 31,166
========= =========
</TABLE>
See notes to consolidated financial statements
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 three and
nine months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the full year. These financial statements
should be read in conjunction with the Company's December 31, 1999 audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K.
The Company conducts substantially all of its business through Summit Properties
Partnership, L.P. (the "Operating Partnership"). The Company is sole general
partner and majority owner of the Operating Partnership.
COMPREHENSIVE INCOME -- Comprehensive income is the same as net income for all
periods presented.
DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES -- On January 1, 2001, the Company
is required to adopt Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for other hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure these instruments at fair value. The Company is
currently assessing the impact, if any, that the adoption of SFAS 133 will have
on the Company's financial statements.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1999
financial statements to conform to the 2000 presentation.
BUSINESS SEGMENTS -- The Company reports as a single business segment with
activities related to the operation, development and acquisition of "Class A"
luxury apartments located primarily in the southeastern, southwestern and
mid-atlantic United States. The Company develops apartments solely for its own
use and does not perform development activities for third parties.
2. REAL ESTATE JOINT VENTURES
The Company obtained a 25% interest in a joint venture named Station Hill, LLC,
a North Carolina limited liability company ("Station Hill"), the membership of
which is comprised of the Company and a wholly owned subsidiary of a major
financial services company, in exchange for the contribution of two communities
in December 1998. Station Hill also owns, and the Company thereby holds a 25%
interest in, five apartment communities that were previously 100% owned by the
Company. These five communities were sold by the Company to Hollow Creek, LLC on
December 16, 1998 and were concurrently contributed to Station Hill by Hollow
Creek, LLC for a 75% joint venture interest. The Company's initial investment in
Station Hill was reduced to zero when the Company eliminated the portion of the
gain on disposal related to the percentage of joint venture ownership interest
retained. Station Hill is accounted for on the equity method of accounting.
7
<PAGE> 8
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
The following is a condensed balance sheet and income statement for Station Hill
as of and for the nine months ended September 30, 2000 and 1999 (in thousands).
The balance sheet and income statement set forth below reflect the financial
position and operations of Station Hill in its entirety, not only the Company's
interest therein.
<TABLE>
<CAPTION>
BALANCE SHEET
-----------------
SEPTEMBER 30,
-----------------
2000 1999
------- -------
<S> <C> <C>
Net real estate assets...................................... $87,493 $89,866
Cash and cash equivalents................................... 2,176 2,468
Other assets................................................ 408 430
------- -------
Total assets...................................... $90,077 $92,764
======= =======
Mortgages payable........................................... $68,863 $69,652
Other liabilities........................................... 1,448 1,452
Partners' capital........................................... 19,766 21,660
------- -------
Total liabilities and partners' capital........... $90,077 $92,764
======= =======
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENT
------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------- -------
<S> <C> <C>
Revenues.................................................... $9,267 $8,871
Expenses:
Property operating..................................... 3,331 3,208
Interest............................................... 3,474 3,513
Depreciation and amortization.......................... 2,256 2,232
------ ------
Total expenses.................................... 9,061 8,953
------ ------
Net income (loss)........................................... $ 206 $ (82)
====== ======
</TABLE>
The Company currently owns a 49% interest in a joint venture ("Joint Venture
Project"), which is developing an apartment community. The Joint Venture Project
is still under construction and has had limited operating activity thus far. The
construction costs have been funded through a loan to the joint venture from an
unrelated third party equal to 100% of the construction costs. During the
construction period, in lieu of equity contributions to the joint venture, the
Company has under certain circumstances, subsequent to demand by the third party
lender, 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 joint venture at the end
of the construction and lease-up period. The Company has the right to purchase
its joint venture partner's interest in the joint venture for a period of six
months after the project becomes stabilized. If the Operating Partnership does
not exercise its option with respect to the Joint Venture Project, it will be
required to make a capital contribution of 25% of the project's total
construction loan amount, as such capital contribution may have been previously
reduced as described above. The balance sheet and income statement information
for the Joint Venture Project is not material.
The Company formerly owned a 49% interest in each of two joint ventures, which
developed apartment communities. The Company purchased its joint venture
partner's interest in each of these two joint ventures on August 1, 2000. See
footnote 3 below for further information on the purchase of these two
communities. The two former joint venture projects were accounted for under the
equity method of accounting until August 1, 2000 and, therefore, the operating
results of such communities are presented in "Loss on equity investments: Real
estate joint ventures" in the Company's consolidated statements of earnings.
8
<PAGE> 9
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
3. COMMUNITY ACQUISITIONS AND DISPOSITIONS
On August 1, 2000, the Company purchased its joint venture partner's interest in
each of two communities, Summit Shiloh (182 apartment homes) and Summit
Sweetwater (308 apartment homes), for an aggregate purchase price of
approximately $36 million. The Company formerly owned a 49% interest in separate
joint ventures which developed such communities prior to the acquisitions. The
acquisitions were primarily financed with the issuance of 96,455 common units of
limited partnership interest in the Operating Partnership ("Common Units") in
the aggregate valued at approximately $2.2 million and the payment of
approximately $33.7 million in cash in the aggregate. The following summary of
selected unaudited pro forma results of operations presents information as if
the purchase of the Company's joint venture partner's interest in Summit
Sweetwater and Summit Shiloh had occurred at the beginning of each period
presented. The pro forma information is provided for informational purposes only
and is not indicative of results that would have occurred or which may occur in
the future (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................. $49,337 $45,309 $131,195 $133,026
Income before extraordinary items............... $25,907 $ 9,664 $ 46,423 $ 30,471
Net income...................................... $25,796 $ 9,664 $ 46,312 $ 30,471
Income before extraordinary items per share:
Basic...................................... $ 0.99 $ 0.35 $ 1.76 $ 1.09
Diluted.................................... $ 0.98 $ 0.35 $ 1.75 $ 1.08
Net income per share:
Basic...................................... $ 0.98 $ 0.35 $ 1.76 $ 1.09
Diluted.................................... $ 0.97 $ 0.35 $ 1.75 $ 1.08
</TABLE>
On March 28, 2000, the Company sold an apartment community located in Hickory,
North Carolina, formerly known as Summit Creekside (118 apartment homes) for
$5.8 million. The disposition of Summit Creekside resulted in the recognition of
a gain on sale of $2.0 million. The net proceeds of $5.8 million were placed
into escrow with a qualified intermediary in accordance with like-kind exchange
income tax rules and regulations and are expected to be used to fund future
development communities.
On May 24, 2000, the Company sold two apartment communities, formerly known as
Summit Eastchester (172 apartment homes) located in High Point, North Carolina,
and Summit Sherwood (190 apartment homes) located in Winston-Salem, North
Carolina, for $16.1 million in the aggregate. The disposition of these two
communities resulted in the recognition of a gain on sale of $5.7 million in the
aggregate. The aggregate net proceeds of $15.9 million were placed into escrow
with a qualified intermediary in accordance with like-kind exchange income tax
rules and regulations and are expected to be used to fund future development
communities.
On September 21, 2000, the Company sold an apartment community located in
Indianapolis, Indiana, formerly known as Summit River Crossing (314 apartment
homes) for $24.8 million. The disposition of Summit River Crossing resulted in
the recognition of a gain on sale of $7.3 million. The net proceeds of $24.3
million were used to reduce the balance outstanding under the Company's
unsecured credit facility (as hereinafter defined).
On September 27, 2000, the Company sold two apartment communities, formerly
known as Summit Blue Ash (242 apartment homes) and Summit Park (317 apartment
homes), both located in Cincinnati, Ohio for $34.5 million in the aggregate. The
disposition of these two communities resulted in the recognition of a gain on
sale of $14.1 million in the aggregate. The aggregate net proceeds of $34.3
million were placed into escrow with a qualified intermediary in accordance with
like-kind exchange income tax rules and regulations and are expected to be used
to fund future development communities.
9
<PAGE> 10
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
4. MORTGAGES RECEIVABLE
Mortgages receivable consist of three promissory notes with interest rates
ranging from 7.50% to 9.15% and various maturity dates ranging through December
2005. One of these three mortgages, with a balance of approximately $2.8
million, was repaid on October 18, 2000.
5. NOTES PAYABLE
On September 26, 2000, the Company obtained a new syndicated unsecured revolving
line of credit (the "Unsecured Credit Facility") in the amount of $225 million
which replaced the Company's existing $200 million unsecured credit facility.
The Unsecured Credit Facility has a three year term with annual extension
options and bears interest at LIBOR + 100 basis points based on the Company's
current credit rating of BBB- by Standard & Poor's Rating Services and Baa3 by
Moody's Investors Service. The spread component of the interest rate will adjust
downward in the event the Company obtains an upgrade in its unsecured debt
rating. The Unsecured Credit Facility also provides a bid option sub-facility
equal to a maximum of fifty percent of the total facility ($112.5 million). This
sub-facility provides the Company with the option to place borrowings in a fixed
LIBOR contract up to 180 days. The Unsecured Credit Facility is repayable
monthly on an interest only basis with principal due at maturity. The balance
outstanding under the Unsecured Credit Facility was $136.5 million at September
30, 2000.
On May 29, 1998, the Company established a program for the sale by the Operating
Partnership 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"). The
Operating Partnership issued Medium-Term Notes with an aggregate principal
amount of $80 million in connection with the MTN Program as follows: (i) on July
28, 1998, the Company sold $30 million of notes which are due on July 30, 2001
and bear interest at 6.75% per year; (ii) on October 5, 1998, the Operating
Partnership sold $25 million of notes (6.71%) which matured and were repaid on
October 5, 2000; and (iii) on March 18, 1999, the Operating Partnership sold $25
million of notes which are due on March 16, 2009 and bear interest at 7.59% per
year.
On April 20, 2000, the Company commenced a new program for the sale by the
Operating Partnership of up to $250 million aggregate principal amount of
Medium-Term Notes due nine months or more from the date of issuance. The new
program was established under the Company's and the Operating Partnership's
existing shelf registration statement. The Medium-Term Notes may be issued by
the Operating Partnership from time to time in the future subject to market
conditions and other factors. On July 19, 2000, the Operating Partnership issued
Medium-Term Notes with an aggregate principal amount of $10 million which are
due on July 19, 2010 and bear interest at 8.50% per year. On October 20, 2000,
the Operating Partnership issued Medium-Term Notes with an aggregate principal
amount of $17 million which are due on October 20, 2003 and bear interest at
7.87% per year.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
While the Company has historically had limited involvement with derivative
financial instruments, the Company may utilize such instruments in certain
situations to hedge interest rate exposure by modifying the interest rate
characteristics of related balance sheet instruments and prospective financing
transactions. The Company does not utilize derivative financial instruments for
trading purposes. On September 16, 1999, the Company entered into an interest
rate swap agreement with a notional amount of $30 million, relating to $30
million of unsecured notes issued by the Operating Partnership which carry a
fixed interest rate of 6.625% per annum (the "Fixed Rate"). Under the interest
rate swap agreement, through the maturity date of such notes of December 15,
2003, (i) the Company has agreed to pay to the counterparty the interest that
would have been incurred on the $30 million principal amount of the notes at a
floating interest rate of LIBOR plus 11 basis points (the "Floating Rate"), and
10
<PAGE> 11
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
(ii) the counterparty has agreed to pay to the Company the interest incurred on
the same principal amount at the Fixed Rate. The Floating Rate at September 30,
2000 was 6.77%.
7. RESTRICTED STOCK
During the nine months ended September 30, 2000 and 1999, the Company granted
72,805 and 23,331 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 awarded during these nine months in 2000 and 1999
totaled approximately $1.3 million and $398,000, respectively, which has been
recorded as unamortized restricted stock compensation and is shown as a separate
component of stockholders' equity. Unearned compensation related to these
restricted stock grants is being amortized to compensation cost over the vesting
periods which range from three to five years.
In January 1998, the Company agreed to award certain key employees of the
Company shares of restricted stock, par value $.01 per share ("Common Stock")
under the Company's Performance Stock Award Plan. The number of shares of
restricted stock to be granted to the key employees is based upon the Company's
average annual return to shareholders (share appreciation and distributions)
from the date of the award to the third anniversary of the award. The number of
shares to be granted under the Performance Stock Award Plan ranges from none (in
the event the Company achieves less than an 11% average annual return) to
106,538 (in the event the Company achieves a 15% or greater average annual
return to shareholders). The starting stock price for the purposes of
calculating appreciation was $21.375, the fair market value of the Company's
Common Stock at the date of award ($19.87 for one executive officer of the
Company). One half of any restricted stock granted under the Performance Stock
Award Plan will vest on January 1, 2001, 25% will vest on January 1, 2002 and
the remaining 25% will vest on January 1, 2003.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the nine months ended September
30, 2000 and 1999 are as follows:
A. The Company accrued dividends and distributions payable in the amounts
of $13.4 million and $13.1 million at September 30, 2000 and 1999,
respectively.
B. The Company issued 72,805 and 23,331 shares of restricted stock valued
at approximately $1.3 million and $398,000 during the nine months ended
September 30, 2000 and 1999, respectively.
C. The Company issued 43,545 shares of Common Stock in exchange for 43,545
Common Units during the nine months ended September 30, 2000. The value
of these shares of Common Stock was approximately $875,000.
D. The Company sold six communities and three communities during the nine
months ended September 30, 2000 and 1999, respectively, receiving
aggregate net proceeds of $80.3 million and $13.3 million, respectively.
The net proceeds of five of the six communities sold in 2000 and all of
the communities sold during 1999 were placed in escrow with a qualified
intermediary in accordance with like-kind exchange income tax rules and
regulations. Such proceeds are shown on the balance sheet as "Restricted
cash" and will be used to fund the future development of communities.
The respective purchasers of two of the communities sold in 1999 assumed
the related outstanding debt balances associated with such communities
of $14.8 million in the aggregate.
E. The Company purchased its joint venture partner's interest in each of
two communities during the nine months ended September 30, 2000 at an
aggregate purchase price of approximately $36 million. The acquisitions
were primarily financed with the issuance of 96,455 Common Units in the
aggregate valued
11
<PAGE> 12
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
at approximately $2.2 million as well as the payment of approximately
$33.7 million in cash in the aggregate.
9. MINORITY INTEREST
Minority interest of common unitholders consists of the following at September
30, 2000 and December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Minority interest of common unitholders in Operating
Partnership............................................... $55,327 $55,065
Minority interest of one operating community................ (460) (367)
------- -------
$54,867 $54,698
======= =======
</TABLE>
As of September 30, 2000, there were 30,749,410 Common Units outstanding, of
which 26,353,703, or 85.7%, were owned by the Company and 4,395,707, or 14.3%,
were owned by other partners (including certain officers and directors of the
Company).
Proceeds from shares of Common Stock issued by the Company are contributed to
the Operating Partnership for an equivalent number of Common Units. Total Common
Stock issued by the Company and the proceeds therefrom contributed to the
Operating Partnership for an equivalent number of Common Units was 325,000 and
873,000 shares valued at $5.5 million ($16.92 per share average) and $15.3
million ($17.58 per share average) for the nine months ended September 30, 2000
and 1999, respectively. No individual transaction significantly changed the
Company's ownership percentage in the Operating Partnership. The Company's
ownership percentage in the Operating Partnership was 85.7% and 85.6% as of
September 30, 2000 and December 31, 1999, respectively.
The Company issued 96,455 Common Units valued at approximately $2.2 million in
connection with the purchase by the Company of its joint venture partner's
interest in each of two communities during the nine months ended September 30,
2000.
Under certain circumstances, as required by the holders of Common Units, the
Company can issue shares of Common Stock in exchange for Common Units owned by
other partners on a one-for-one basis or may purchase Common Units for cash.
Shares of Common Stock exchanged for Common Units are valued based upon the
market price per share of the Company's Common Stock at the date of the
exchange. During the nine month period ended September 30, 2000, 43,545 Common
Units valued at approximately $875,000 in the aggregate were exchanged for
shares of Common Stock and 93,945 Common Units were exchanged for cash of
approximately $1.8 million in the aggregate. No Common Units were exchanged for
Common Stock or cash during the nine month period ended September 30, 1999.
10. COMMITMENTS
The estimated cost to complete seven development projects currently under
construction was approximately $80.1 million at September 30, 2000. Anticipated
construction completion dates of the projects range from the fourth quarter of
2000 to the first quarter of 2002.
On January 19, 2000, the Operating Partnership entered into a Real Estate
Purchase Agreement (the "Agreement") with a third-party real estate developer
(the "Developer"). Under the terms of the Agreement, the Operating Partnership
has agreed to purchase upon completion a "Class A" mixed-use community, which
will be called Summit Brickell, and will be located in Miami, Florida. The
Operating Partnership expects to close on the purchase of Summit Brickell during
the second half of 2002 following its completion and lease-up. The final
purchase price will be determined based on actual construction costs plus a
bonus to the developer based on the capitalized income of the property at the
time of purchase. The purchase price is expected to be approximately
12
<PAGE> 13
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
$50.5 million. The purchase of Summit Brickell by the Operating Partnership is
subject to customary closing conditions. The Operating Partnership has issued a
letter of credit ("LOC") in the amount of approximately $13.0 million, which
will serve as a credit enhancement to the Developer's construction loan. In the
event that any amount under the LOC is drawn upon, the Operating Partnership
shall be treated as having issued a loan to the Developer in the amount of such
draw. Any such loan will accrue interest at a rate of eighteen percent (18%) per
annum.
11. EARNINGS PER SHARE
The only difference between "basic" and "diluted" weighted average shares is the
dilutive effect of the Company's stock options outstanding (270,421 and 171,956
shares added to weighted shares outstanding for the three and nine months ended
September 30, 2000, respectively, and 65,153 and 28,977 shares added to weighted
shares outstanding for the three and nine months ended September 30, 1999,
respectively).
12. PRIVATE PLACEMENT OF PREFERRED UNITS
On April 29, 1999, the Operating Partnership completed a private placement of
3.4 million of its 8.95% Series B Cumulative Redeemable Perpetual Preferred
Units (the "Series B Preferred Units") to two institutional investors at a price
of $25.00 per unit. The net proceeds of approximately $83 million were used to
repay amounts then outstanding under the Company's unsecured credit facility.
The Series B Preferred Units may be exchanged by the holders into shares of
8.95% Series B Cumulative Redeemable Perpetual Preferred Stock of the Company
("Series B Preferred Shares") on a one-for-one basis. Holders of the Series B
Preferred Units may exercise their exchange right (a) at any time on or after
April 29, 2009, (b) at any time if full quarterly distributions are not made for
six quarters, or (c) upon the occurrence of specified events related to the
treatment of the Operating Partnership or the Series B Preferred Units for
federal income tax purposes. The Operating Partnership may redeem the Series B
Preferred Units at any time on or after April 29, 2004 for cash at a redemption
price equal to the redeemed holder's capital account (initially $25.00 per
unit), plus all accumulated, accrued and unpaid distributions or dividends. In
lieu of cash, the Operating Partnership may elect to deliver Series B Preferred
Shares on a one-for-one basis, plus an amount equal to all accumulated, accrued
and unpaid distributions or dividends. The Series B Preferred Units have no
stated maturity, are not subject to any sinking fund or mandatory redemption and
are not convertible into any other securities of the Company or the Operating
Partnership. Distributions on the Series B Preferred Units are cumulative from
the date of original issuance and are payable quarterly at the rate of 8.95% per
annum of the $25.00 original capital contribution. The Operating Partnership
made distributions to the holders of the Series B Preferred Units in the
aggregate amount of approximately $5.1 million during 1999 and in the aggregate
amount of approximately $5.7 million during the nine months ended September 30,
2000.
On September 3, 1999, the Operating Partnership completed a private placement of
2.2 million of its 8.75% Series C Cumulative Redeemable Perpetual Preferred
Units (the "Series C Preferred Units") to an institutional investor at a price
of $25.00 per unit. The net proceeds of approximately $54 million were used to
repay amounts then outstanding under the Company's unsecured credit facility.
The Series C Preferred Units may be exchanged by the holder into shares of 8.75%
Series C Cumulative Redeemable Perpetual Preferred Stock of the Company ("Series
C Preferred Shares") on a one-for-one basis. The holder of the Series C
Preferred Units may exercise its exchange right (a) at any time on or after
September 3, 2009, (b) at any time if full quarterly distributions are not made
for six quarters, (c) upon the occurrence of specified events related to the
treatment of the Operating Partnership or the Series C Preferred Units for
federal income tax purposes, or (d) at any time that such institutional
investor's holdings in the Operating Partnership exceed 18% of the total profits
of or capital interests in the Operating Partnership for a taxable year. The
Operating Partnership may redeem the Series C Preferred Units at any time on or
after September 3, 2004 for cash at a redemption price equal to the redeemed
holder's capital account (initially $25.00 per unit), plus all accumulated,
accrued and unpaid distributions or dividends.
13
<PAGE> 14
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
--------------------------------------------------------------------------------
The Series C Preferred Units have no stated maturity, are not subject to any
sinking fund or mandatory redemption and are not convertible into any other
securities of the Company or the Operating Partnership. Distributions on the
Series C Preferred Units are cumulative from the date of original issuance and
are payable quarterly at the rate of 8.75% per annum of the $25.00 original
capital contribution. The Operating Partnership made distributions to the holder
of the Series C Preferred Units in the aggregate amount of approximately $1.5
million during 1999 and in the aggregate amount of approximately $3.7 million
during the nine months ended September 30, 2000.
13. COMMON STOCK REPURCHASE PROGRAM
On May 11, 1999, the Board of Directors of the Company authorized a common stock
repurchase program pursuant to which the Company was authorized to purchase up
to an aggregate of $50 million of currently issued and outstanding Common Stock
of the Company (the "$50 Million Program"). All repurchases have been made on
the open market at prevailing prices or in privately negotiated transactions.
During the three month period ended March 31, 2000, the Company completed the
$50 Million Program by repurchasing 131,900 shares of Common Stock for an
aggregate purchase price, including commissions, of approximately $2.5 million,
or an average price of $18.88 per share. In total, the Company repurchased 2.5
million shares of Common Stock under the $50 Million Program for an aggregate
purchase price, including commissions, of approximately $50 million, or an
average price of $19.63 per share.
On March 12, 2000, the Board of Directors of the Company authorized a new common
stock repurchase program pursuant to which the Company is authorized to purchase
up to an aggregate of $25 million of currently issued and outstanding Common
Stock of the Company (the "$25 Million Program"). All repurchases have and will
be made on the open market at prevailing prices or in privately negotiated
transactions. This authority may be exercised from time to time and in such
amounts as market conditions warrant. During the nine months ended September 30,
2000, the Company repurchased 279,400 shares of Common Stock under the $25
Million Program for an aggregate purchase price, including commissions, of
approximately $5.5 million, or an average price of $19.80 per share.
14
<PAGE> 15
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, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, without limitation,
statements relating to the operating performance of fully stabilized Communities
(as defined below), the development, acquisition or disposition of properties,
anticipated construction completion and lease-up dates, and estimated
development costs. You can identify forward-looking statements by the use of the
words "believe," "expect," "anticipate," "intend," "estimate," "assume" and
other similar expressions which predict or indicate future events and trends and
which do not relate to historical matters. You should not rely on forward-
looking statements, because they involve known and unknown risks, uncertainties
and other factors, some of which are beyond the control of the Company. These
risks, uncertainties and other factors may cause the actual results, performance
or achievements of the Company to be materially different from the anticipated
future results, performance or achievements expressed or implied by 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: 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, uncertainties associated with the Company's
development activities, the failure to close planned acquisitions in a timely
manner or at all, the failure of acquisitions to yield expected results,
construction delays due to unavailability of materials, weather conditions or
other delays, the failure to sell properties being marketed for sale on
favorable terms, in a timely manner or at all, competition, supply and demand
for apartment communities in the Company's current and proposed market areas,
changes in generally accepted accounting principles or policies and guidelines
applicable to REITs, and those factors discussed in the section entitled
"Development Activity -- Certain Factors Affecting the Performance of
Development Communities" on page 26 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 changes in the
number of apartment homes due to development and acquisition of new Communities
or the disposition of Communities. Where appropriate, comparisons are made on a
"fully stabilized Communities," "stabilized development Communities",
"acquisition Communities", "Communities in lease-up" and "disposition
Communities" 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 which the Company has acquired is
deemed "fully stabilized" when owned by the Company for one year or more as of
the beginning of the current year. A Community which the Company has developed
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. All Communities information presented is before real
estate depreciation and amortization expense. Communities' average physical
occupancy presented 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.
Average monthly rental revenue presented represents the average monthly net
rental revenue per occupied apartment home. The Company's methodology for
calculating average physical occupancy and average monthly rental revenue may
differ from the methodology used by other apartment companies and, accordingly,
may not be comparable to such other apartment companies.
15
<PAGE> 16
Results of Operations for the Three and Nine Months Ended September 30, 2000
and 1999
For the three and nine months ended September 30, 2000, income before gain on
sale of real estate assets, minority interest of common unitholders in the
Operating Partnership, distributions to preferred unitholders in the Operating
Partnership and extraordinary items increased $607,000 and $4.6 million,
respectively, to $11.7 million and $34.9 million, respectively, from the three
and nine months ended September 30, 1999 primarily due to increased property
operating income generated by the Company's portfolio of Communities.
OPERATING PERFORMANCE OF THE COMPANY'S PORTFOLIO OF COMMUNITIES
The operating performance of the Communities for the three and nine months ended
September 30, 2000 and 1999 is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Property revenues:
Fully stabilized communities....... $26,539 $25,366 4.6% $ 77,978 $ 74,933 4.1%
Stabilized development
communities..................... 14,197 12,762 11.2% 41,295 34,121 21.0%
Acquisition communities............ 894 -- 100.0% 894 -- 100.0%
Communities in lease-up............ 4,587 1,557 194.6% 10,509 4,575 129.7%
Communities sold................... 1,878 4,861 -61.4% 7,136 16,655 -57.2%
------- ------- -------- --------
Total property revenues.............. 48,095 44,546 8.0% 137,812 130,284 5.8%
------- ------- -------- --------
Property operating and maintenance
expense:
Fully stabilized communities....... 8,805 8,414 4.6% 25,512 24,841 2.7%
Stabilized development
communities..................... 4,384 3,738 17.3% 12,417 10,330 20.2%
Acquisition communities............ 289 -- 100.0% 289 -- 100.0%
Communities in lease-up............ 1,607 632 154.3% 3,868 1,809 113.8%
Communities sold................... 710 1,817 -60.9% 2,446 6,140 -60.2%
------- ------- -------- --------
Total property operating and
maintenance expense................ 15,795 14,601 8.2% 44,532 43,120 3.3%
------- ------- -------- --------
Property operating income............ $32,300 $29,945 7.9% $ 93,280 $ 87,164 7.0%
======= ======= ======== ========
Apartment homes, end of period....... 18,094 17,685 2.3% 18,094 17,685 2.3%
======= ======= ======== ========
</TABLE>
A summary of the Company's apartment homes (excluding joint ventures) for the
nine months ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Apartment homes at January 1................................ 17,673 18,001
Developments which began rental operations during the
period.................................................... 1,284 280
Apartment homes acquired.................................... 490 --
Sale of apartment homes..................................... (1,353) (596)
------ ------
Apartment homes at September 30............................. 18,094 17,685
====== ======
</TABLE>
16
<PAGE> 17
OPERATING PERFORMANCE OF THE COMPANY'S FULLY STABILIZED COMMUNITIES
The operating performance of the Communities stabilized prior to January 1, 1998
in each of the three and nine months ended September 30, 2000 and 1999 is
summarized below (dollars in thousands except average monthly rental revenue):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Property revenues:
Rental revenues...................... $24,733 $23,693 4.4% $72,707 $70,454 3.2%
Other property revenues.............. 1,806 1,673 7.9% 5,271 4,479 17.7%
------- ------- ------- -------
Total property revenues................ 26,539 25,366 4.6% 77,978 74,933 4.1%
------- ------- ------- -------
Property operating and maintenance
expense:
Personnel............................ 1,885 1,927 -2.2% 5,211 5,521 -5.6%
Advertising and promotion............ 334 345 -3.2% 1,001 988 1.3%
Utilities............................ 1,206 1,191 1.3% 3,493 3,382 3.3%
Building repairs and maintenance..... 1,324 1,379 -4.0% 3,856 3,895 -1.0%
Real estate taxes and insurance...... 2,885 2,545 13.4% 8,531 7,905 7.9%
Property supervision................. 744 627 18.7% 2,174 1,856 17.1%
Other operating expense.............. 427 400 6.8% 1,246 1,294 -3.7%
------- ------- ------- -------
Total property operating and
maintenance expense.................. 8,805 8,414 4.6% 25,512 24,841 2.7%
------- ------- ------- -------
Property operating income.............. $17,734 $16,952 4.6% $52,466 $50,092 4.7%
======= ======= ======= =======
Average physical occupancy............. 95.6% 93.9% 1.8% 94.7% 93.7% 1.1%
======= ======= ======= =======
Average monthly rental revenue......... $ 886 $ 863 2.7% $ 878 $ 860 2.1%
======= ======= ======= =======
Number of apartment homes.............. 9,959 9,959 9,959 9,959
======= ======= ======= =======
</TABLE>
The increase in property revenues from fully stabilized Communities was
primarily the result of increases in average rental rates as well as increased
revenues from sources other than rental revenues, such as cable and water
sub-meter revenues. The higher revenues were primarily generated in the
Company's Washington, D.C., Austin, Texas, San Antonio, Texas, and Southeast
Florida markets. Property supervision costs increased as a result of an increase
in the property management fee charged by Summit Management Company (the
"Management Company") from 2.50% to 2.75% for the nine month period ended
September 30, 2000. This is the first increase in the amount charged by the
Management Company for its services since the Company's initial public offering
in 1994. For the nine months ended September 30, 2000, the increase in property
supervision costs was offset by cost savings related primarily to personnel,
building repairs and maintenance and other operating expenses. As a percentage
of total property revenues, total property operating and maintenance expenses
remained stable at 33.0% for the nine-month period ended September 30, 2000 as
compared to the same period in 1999.
17
<PAGE> 18
OPERATING PERFORMANCE OF THE COMPANY'S STABILIZED DEVELOPMENT COMMUNITIES
The Company had fourteen development Communities (Summit Ballantyne, Summit
Sedgebrook, Summit Governor's Village, Summit Lake, Summit Norcroft II, Summit
Stonefield, Summit Russett, Summit Westwood, Summit Plantation II, Summit New
Albany, Summit Fair Lakes, Summit Doral, Summit Las Palmas and Summit Camino
Real) which were stabilized during the entire nine months ended September 30,
2000 but were stabilized subsequent to January 1, 1998. The operating
performance of these fourteen Communities for the three and nine months ended
September 30, 2000 and 1999 is summarized below (dollars in thousands except
average monthly rental revenue):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Property revenues:
Rental revenues........................ $13,170 $11,935 $38,416 $32,095
Other property revenue................. 1,027 827 2,879 2,026
------- ------- ------- -------
Total property revenues........... 14,197 12,762 41,295 34,121
Property operating and maintenance
expense................................... 4,384 3,738 12,417 10,330
------- ------- ------- -------
Property operating income................... $ 9,813 $ 9,024 $28,878 $23,791
======= ======= ======= =======
Average physical occupancy.................. 95.3% 91.2% 94.1% 82.9%
======= ======= ======= =======
Average monthly rental revenue.............. $ 957 $ 950 $ 945 $ 890
======= ======= ======= =======
Number of apartment homes................... 4,885 4,885 4,885 4,885
======= ======= ======= =======
</TABLE>
The unleveraged yield on investment for the stabilized development Communities,
defined as property operating income for the three and nine months ended
September 30, 2000 on an annualized basis over total development cost, was
10.52% and 10.72%, respectively.
OPERATING PERFORMANCE OF THE COMPANY'S ACQUISITION COMMUNITIES
The Company's acquisition Communities consist of Summit Sweetwater and Summit
Shiloh, which were both purchased on August 1, 2000. The purchase was primarily
financed with the issuance of 96,455 Common Units in the aggregate valued at
approximately $2.2 million and the payment of approximately $33.7 million in
cash in the aggregate. There were no Community acquisitions during the nine
months ended September 30, 1999. The operating performance of the two
acquisition communities for the three and nine months ended September 30, 2000
and 1999 is summarized below (dollars in thousands except average monthly rental
revenue):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------ ----- ------ -----
<S> <C> <C> <C> <C>
Property revenues:
Rental revenues............................ $ 827 $ -- $ 827 $ --
Other property revenue..................... 67 -- 67 --
----- ---- ----- ----
Total property revenues............... 894 -- 894 --
Property operating and maintenance expense...... 289 -- 289 --
----- ---- ----- ----
Property operating income....................... $ 605 $ -- $ 605 $ --
===== ==== ===== ====
Average physical occupancy...................... 93.1% 0.0% 93.1% 0.0%
===== ==== ===== ====
Average monthly rental revenue.................. $ 912 $ -- $ 912 $ --
===== ==== ===== ====
Number of apartment homes....................... 490 -- 490 --
===== ==== ===== ====
</TABLE>
18
<PAGE> 19
OPERATING PERFORMANCE OF THE COMPANY'S COMMUNITIES IN LEASE-UP
The Company had eleven Communities in lease-up during the nine months ended
September 30, 2000. Nine of the eleven Communities in lease-up are new
developments and two of the Communities in lease-up are existing Communities
that are undergoing major renovations. A Community in lease-up is defined as one
that has commenced rental operations but was not stabilized as of the beginning
of the current year. A summary of the nine development Communities in lease-up
as of September 30, 2000 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
TOTAL ACTUAL/ % LEASED
NUMBER OF ACTUAL/ ANTICIPATED ACTUAL/ Q3 2000 AS OF
APARTMENT ESTIMATED CONSTRUCTION ANTICIPATED AVERAGE SEPTEMBER 30,
COMMUNITY HOMES COSTS COMPLETION STABILIZATION OCCUPANCY 2000
--------- --------- --------- ------------ ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Summit New Albany II -- Columbus,
OH................................. 127 $ 9,414 Q1 2000 Q3 2000 95.2% 93.7%
Summit Largo -- Largo, MD............ 219 18,366 Q1 2000 Q3 2000 98.0% 99.1%
Summit Hunter's Creek -- Orlando,
FL................................. 270 20,044 Q1 2000 Q4 2000 81.7% 91.5%
Summit Deer Creek -- Atlanta, GA..... 292 22,056 Q2 2000 Q1 2000 91.3% 99.0%
Summit Ashburn Farm -- Loudon County,
VA................................. 162 14,618 Q3 2000 Q1 2001 85.5% 100.0%
Reunion Park by Summit -- Raleigh,
NC................................. 248 14,736 Q1 2001 Q3 2001 54.3% 92.7%
Summit Russett II -- Laurel, MD
(1)................................ 112 9,900 Q4 2000 Q1 2001 2.0% 34.8%
Summit Grandview -- Charlotte, NC
(1)................................ 266 45,500 Q4 2000 Q4 2001 4.0% 39.5%
Summit Deerfield -- Cincinnati, OH
(1)................................ 498 41,500 Q3 2001 Q2 2002 5.7% 13.7%
----- --------
2,194 $196,134
===== ========
</TABLE>
---------------
(1) The related assets of such Communities are included in the Construction in
Progress category at September 30, 2000.
In addition to the Communities listed in the table above, Summit Fairview
located in Charlotte, North Carolina (135 apartment homes) and Summit Lenox
located in Atlanta, Georgia (431 apartment homes) are existing Communities of
the Company which were recently, or are currently, undergoing major renovations.
The renovations include upgrades of the interior of the apartment homes (new
cabinets, fixtures and other interior upgrades), upgrades to the parking lots
and landscaping, as well as exterior painting of buildings. The renovations
require that certain apartment homes be unavailable for rental over the course
of the renovation. The operations of Summit Fairview and Summit Lenox are
included in lease-up Communities results due to the renovation work. The
renovation work at Summit Fairview was substantially complete by the end of the
second quarter of 2000 and the renovation work at Summit Lenox is expected to be
completed by the end of the fourth quarter of 2000.
All Communities listed above were in lease-up during the three and nine months
ended September 30, 2000. Only Summit Lenox and Summit Fairview had operating
activity during the three and nine months ended September 30, 1999. The
operating performance of the lease-up Communities for the three and nine months
ended September 30, 2000 and 1999 is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Property revenues:
Rental revenues.............................. $4,176 $1,483 $9,647 $4,361
Other property revenue....................... 411 74 862 214
------ ------ ------ ------
Total property revenues................. 4,587 1,557 10,509 4,575
Property operating and maintenance expense........ 1,607 632 3,868 1,809
------ ------ ------ ------
Property operating income......................... $2,980 $ 925 $6,641 $2,766
====== ====== ====== ======
Number of apartment homes......................... 2,760 566 2,760 566
====== ====== ====== ======
</TABLE>
19
<PAGE> 20
OPERATING PERFORMANCE OF THE COMPANY'S DISPOSITION COMMUNITIES
Disposition communities consist of the former Summit Creekside, Summit
Eastchester, Summit Sherwood, Summit River Crossing, Summit Blue Ash and Summit
Park communities, all of which were sold during the first nine months of 2000
(the "2000 Dispositions"). The 1999 dispositions consist of the 2000
Dispositions as well as the following communities sold during 1999 (referred to
herein using former community names): Summit Hampton, Summit Oak, Summit Beacon
Ridge, Summit McIntosh, Summit Perico, Summit Heron's Run and Summit Eastridge.
The operating performance of these communities is summarized below (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------ -------
<S> <C> <C> <C> <C>
Property revenues:
Rental revenues......................... $1,745 $4,512 $6,660 $15,527
Other property revenue.................. 133 349 476 1,128
------ ------ ------ -------
Total property revenues............ 1,878 4,861 7,136 16,655
------ ------ ------ -------
Property operating and maintenance expense... 710 1,817 2,446 6,140
------ ------ ------ -------
Property operating income.................... $1,168 $3,044 $4,690 $10,515
====== ====== ====== =======
Number of apartment homes.................... 1,353 2,871 1,353 2,871
====== ====== ====== =======
</TABLE>
OPERATING PERFORMANCE OF SUMMIT MANAGEMENT COMPANY
The operating performance of the Management Company and its wholly-owned
subsidiary, Summit Apartment Builders, Inc. (the "Construction Company"), for
the three and nine months ended September 30, 2000 and 1999 is summarized below
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
REIT management fee revenue.............. $1,477 $1,299 $4,292 $3,702
Third party management fee revenue....... 279 313 829 966
Construction revenue..................... 496 453 2,085 1,286
Gain on sale of land..................... -- -- 238 --
Other revenue............................ 99 281 234 553
------ ------ ------ ------
Total revenue....................... 2,351 2,346 7,678 6,507
------ ------ ------ ------
Expenses:
Operating Expenses....................... 2,237 2,484 7,276 6,810
Depreciation............................. 86 70 257 213
Amortization............................. 76 71 227 220
Interest................................. 75 75 603 225
------ ------ ------ ------
Total expenses...................... 2,474 2,700 8,363 7,468
------ ------ ------ ------
Net loss of Summit Management
Company........................... $ (123) $ (354) $ (685) $ (961)
====== ====== ====== ======
</TABLE>
The increase in operating revenue for the three and nine month periods was
primarily the result of an increase in the management fee charged to the
Company's Communities from 2.50% to 2.75% and higher revenues from increased
construction activity at the Construction Company. The increase in the
management fee is the first increase since the Company's initial public offering
in 1994. The Management Company sold a parcel of land in Raleigh, North Carolina
on February 29, 2000 for $5.4 million that resulted in a gain on sale of
$238,000. The increase in operating expenses for the nine month period was a
result of increased construction activities and increased personnel at the
Management Company in order to better support the Company's growth objectives,
including improving the operating performance of its stabilized Communities. The
increase in interest expense for the nine month period resulted from an
inter-company loan which was repaid during the first quarter of 2000.
20
<PAGE> 21
Property management revenues included $279,000 and $313,000 of property
management fees from third parties for the three months ended September 30, 2000
and 1999, respectively, and $829,000 and $966,000 for the nine months ended
September 30, 2000 and 1999, respectively. Property management fees from third
parties as a percentage of total property management revenues were 15.9% and
19.4% for the three months ended September 30, 2000 and 1999, respectively, and
16.2% and 20.7% for the nine months ended September 30, 2000 and 1999,
respectively.
All of the Construction Company's revenues are from contracts with the Company.
OTHER INCOME AND EXPENSES
Interest expense increased by approximately $1.1 million for the three months
ended September 30, 2000 and decreased by approximately $419,000 for the nine
months ended September 30, 2000, each as compared with the same periods in 1999.
The differences were primarily the result of changes in the Company's average
indebtedness outstanding and average interest rate. Average indebtedness
outstanding decreased $6.4 million for the three months ended September 30, 2000
as compared to the same period in 1999. Average indebtedness outstanding
decreased $6.2 million for the nine months ended September 30, 2000 compared to
the same period in 1999. These declines were partially offset by an increase in
the effective interest rate from 6.55% to 7.01% for the three months ended
September 30, 2000 as compared to the same period in 1999 and from 6.55% to
7.03% for the nine months ended September 30, 2000 as compared to the same
period in 1999.
Depreciation expense increased $802,000 and $2.2 million, or 9.1% and 8.7%, for
the three and nine months ended September 30, 2000, respectively, compared with
the similar periods in 1999, primarily due to depreciation on recently developed
Communities offset by a reduction in depreciation related to Communities sold.
General and administrative expenses increased $188,000 and $108,000, or 21.6%
and 3.7%, for the three and nine months ended September 30, 2000, respectively,
as compared to the same periods in 1999. As a percentage of total revenues,
general and administrative expenses were 2.2% and 1.9% for the three months
ended September 30, 2000 and 1999, respectively, and 2.1% and 2.2% for the nine
months ended September 30, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's net cash provided by operating activities increased to $49.6
million for the nine months ended September 30, 2000 from $39.9 million for the
same period in 1999, primarily due to a $6.7 million decrease in the net cash
used in accounts payable and accrued expenses within operating activities
($7,000 increase for the nine months ended September 30, 2000 as compared to a
$6.7 million decrease for the nine months ended September 30, 1999) and a $1.2
million decrease in net restricted cash used in operating activities ($2.6
million increase for the nine months ended September 30, 2000 as compared to a
$3.8 million increase for the nine months ended September 30, 1999). The
decrease in accounts payable and accrued expenses was due to the timing of
payments and the increase in restricted cash was due to deposits placed into
mortgage reserve escrows as well as interest income earned on restricted cash
accounts during the nine months ended September 30, 2000.
Net cash used in investing activities was $90.0 million and $12.2 million for
the nine months ended September 30, 2000 and 1999, respectively. The change was
due to the decrease in proceeds from the sale of Communities as well as the use
of cash to partially fund the acquisition of two communities in August 2000.
Property sale proceeds from five of the six communities sold in 2000 and all of
the communities sold in 1999 were placed in escrow in accordance with like-kind
exchange income tax rules and regulations. Proceeds from the sale of Communities
represent funds expended from these like-kind exchange escrows. In the event the
proceeds from these property sales are not fully invested in qualified like-kind
property during the required time period, a special distribution may be made or
company level tax may be incurred. The increase in mortgages receivable was due
to the acceptance of a promissory note in June 2000 in connection with the
acquisition of a development site in Atlanta, Georgia.
21
<PAGE> 22
Net cash provided by financing activities was $39.1 million for the nine months
ended September 30, 2000 while net cash used in financing activities was $27.3
million for the same period in 1999. The change was primarily due to a change in
net repayments on the Company's existing unsecured credit facility of $168.7
million ($57.2 million net borrowings for the nine months ended September 30,
2000 as compared to $111.5 million repayments for the same period in 1999), the
repayment of an unsecured note in the amount of $15.0 million, a decrease in net
borrowings on unsecured bonds of $15.1 million, a decrease in net proceeds from
preferred units in the Operating Partnership of $136.3 million due to the
absence of issuances of preferred units during the nine months ended September
30, 2000 and an increase in proceeds from mortgage debt due to $48.3 million of
mortgage debt obtained during June 2000.
The ratio of earnings to fixed charges was 2.02 for the nine months ended
September 30, 2000 as compared to 1.78 for the nine months ended September 30,
1999.
The Company has elected to be taxed as a Real Estate Investment Trust 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% (90% effective for tax years
beginning after December 31, 2000) 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, 2000 totaled $743.4
million. This amount includes approximately $304.4 million of fixed rate
conventional mortgages, $37.5 million of variable rate tax-exempt bonds, $261.0
million of fixed rate unsecured notes, $4.0 million of tax-exempt fixed rate
mortgages, and $136.5 million under the Unsecured Credit Facility (as defined
below).
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 Unsecured Credit Facility (as defined below). 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 cash flow, from proceeds received from the
disposition of certain Communities and, in connection with the acquisition of
land or improved property, through the issuance of Common Units.
Credit Facility
On September 26, 2000, the Company obtained a new syndicated unsecured line of
credit (the "Unsecured Credit Facility") in the amount of $225 million. The
Unsecured Credit Facility provides the Company with funds available for new
development, acquisitions and general working capital purposes. The Unsecured
Credit Facility has a three-year term, expiring on September 26, 2003, with
annual extension options available with the consent of the lenders and will
initially bear interest at LIBOR+100 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 of an
upgrade of the Company's unsecured credit rating. The Unsecured Credit Facility
also provides a bid option sub-facility equal to a maximum of fifty percent of
the total facility ($112.5 million). This sub-facility provides the Company with
the option to place borrowings in a fixed LIBOR contract up to 180 days. The
balance outstanding under the Unsecured Credit Facility was $136.5 million at
September 30, 2000.
Medium Term Notes
On May 29, 1998, the Company established a program for the sale by the Operating
Partnership 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"). The
Operating Partnership issued Medium-Term Notes with an aggregate principal
amount of $80 million in connection with the MTN Program as follows: (i) on July
28, 1998, the Company sold $30 million of notes which are due on July 30, 2001
and bear interest at 6.75% per year; (ii) on October 5, 1998,
22
<PAGE> 23
the Operating Partnership sold $25 million of notes (6.71%) which matured and
were repaid on October 5, 2000; and (iii) on March 18, 1999, the Operating
Partnership sold $25 million of notes which are due on March 16, 2009 and bear
interest at 7.59% per year.
On April 20, 2000, the Company commenced a new program for the sale by the
Operating Partnership of up to $250 million aggregate principal amount of
Medium-Term Notes due nine months or more from the date of issuance. The new
program was established under the Company's and the Operating Partnership's
existing shelf registration statement. On July 19, 2000, the Operating
Partnership issued Medium-Term Notes with an aggregate principal amount of $10
million which are due on July 19, 2010 and bear interest at 8.50% per year. On
October 20, 2000, the Operating Partnership issued Medium-Term Notes with an
aggregate principal amount of $17 million which are due on October 20, 2003 and
bear interest at 7.87% per year.
Private Placement of Preferred Units
On April 29, 1999, the Operating Partnership completed a private placement of
3.4 million of its 8.95% Series B Cumulative Redeemable Perpetual Preferred
Units (the "Series B Preferred Units") to two institutional investors at a price
of $25.00 per unit. The net proceeds of approximately $83 million were used to
repay amounts then outstanding under the Company's unsecured credit facility.
The Series B Preferred Units may be exchanged by the holders into shares of
8.95% Series B Cumulative Redeemable Perpetual Preferred Stock of the Company
("Series B Preferred Shares") on a one-for-one basis. Holders of the Series B
Preferred Units may exercise their exchange right (a) at any time on or after
April 29, 2009, (b) at any time if full quarterly distributions are not made for
six quarters, or (c) upon the occurrence of specified events related to the
treatment of the Operating Partnership or the Series B Preferred Units for
federal income tax purposes. The Operating Partnership may redeem the Series B
Preferred Units at any time on or after April 29, 2004 for cash at a redemption
price equal to the redeemed holder's capital account (initially $25.00 per
unit), plus all accumulated, accrued and unpaid distributions or dividends. In
lieu of cash, the Operating Partnership may elect to deliver Series B Preferred
Shares on a one-for-one basis, plus an amount equal to all accumulated, accrued
and unpaid distributions or dividends. The Series B Preferred Units have no
stated maturity, are not subject to any sinking fund or mandatory redemption and
are not convertible into any other securities of the Company or the Operating
Partnership. Distributions on the Series B Preferred Units are cumulative from
the date of original issuance and are payable quarterly at the rate of 8.95% per
annum of the $25.00 original capital contribution. The Operating Partnership
made distributions to the holders of the Series B Preferred Units in the
aggregate amount of approximately $5.1 million during the year ended December
31, 1999 and in the aggregate amount of approximately $5.7 million during the
nine months ended September 30, 2000.
On September 3, 1999, the Operating Partnership completed a private placement of
2.2 million of its 8.75% Series C Cumulative Redeemable Perpetual Preferred
Units (the "Series C Preferred Units") to an institutional investor at a price
of $25.00 per unit. The net proceeds of approximately $54 million were used to
repay amounts then outstanding under the Company's unsecured credit facility.
The Series C Preferred Units may be exchanged by the holder into shares of 8.75%
Series C Cumulative Redeemable Perpetual Preferred Stock of the Company ("Series
C Preferred Shares") on a one-for-one basis. The holder of the Series C
Preferred Units may exercise its exchange right (a) at any time on or after
September 3, 2009, (b) at any time if full quarterly distributions are not made
for six quarters, (c) upon the occurrence of specified events related to the
treatment of the Operating Partnership or the Series C Preferred Units for
federal income tax purposes, or (d) at any time that such institutional
investor's holdings in the Operating Partnership exceed 18% of the total profits
of or capital interests in the Operating Partnership for a taxable year. The
Operating Partnership may redeem the Series C Preferred Units at any time on or
after September 3, 2004 for cash at a redemption price equal to the redeemed
holder's capital account (initially $25.00 per unit), plus all accumulated,
accrued and unpaid distributions or dividends. The Series C Preferred Units have
no stated maturity, are not subject to any sinking fund or mandatory redemption
and are not convertible into any other securities of the Company or the
Operating Partnership. Distributions on the Series C Preferred Units are
cumulative from the date of original issuance and are payable quarterly at the
rate of 8.75% per annum of the $25.00 original capital contribution. The
Operating Partnership made distributions to the holder of the Series C Preferred
Units in the aggregate amount of approximately $1.5
23
<PAGE> 24
million during the year ended December 31, 1999 and in the aggregate amount of
approximately $3.7 million during the nine months ended September 30, 2000.
Common Stock Repurchase Program
On May 11, 1999, the Board of Directors of the Company authorized a common stock
repurchase program pursuant to which the Company was authorized to purchase up
to an aggregate of $50 million of currently issued and outstanding Common Stock
of the Company (the "$50 Million Program"). All repurchases have been made on
the open market at prevailing prices or in privately negotiated transactions.
During the three month period ended March 31, 2000, the Company completed the
$50 Million Program by repurchasing 131,900 shares of Common Stock for an
aggregate purchase price, including commissions, of approximately $2.5 million,
or an average price of $18.88 per share. In total, the Company repurchased 2.5
million shares of common stock under the $50 Million Program for an aggregate
purchase price, including commissions, of approximately $50 million, or an
average price of $19.63 per share.
On March 12, 2000, the Board of Directors of the Company authorized a new common
stock repurchase program pursuant to which the Company is authorized to purchase
up to an aggregate of $25 million of currently issued and outstanding Common
Stock of the Company (the "$25 Million Program"). All repurchases have and will
be made on the open market at prevailing prices or in privately negotiated
transactions. This authority may be exercised from time to time and in such
amounts as market conditions warrant. During the nine months ended September 30,
2000, the Company repurchased 279,400 shares of Common Stock under the $25
Million Program for an aggregate purchase price, including commissions, of
approximately $5.5 million, or an average price of $19.80 per share.
Employee Loan Program
The Board of Directors of the Company believes that ownership of the Company's
Common Stock by executive officers and certain other qualified employees of the
Company and its subsidiaries will better align the interests of such officers
and employees with the interests of the stockholders of the Company. To this
end, the Board of Directors approved and the Company instituted a loan program
whereby the Company may lend amounts to or on behalf of certain of the Company's
executive officers and key employees to (i) finance the purchase of Common Stock
on the open market at then-current market prices; (ii) finance an employee's
payment of the exercise price of one or more stock options to purchase shares of
Common Stock granted to such employee; or (iii) finance the annual tax liability
or other expenses of an executive officer related to the vesting of shares of
Common Stock which constitute a portion of a restricted stock award granted to
such executive officer. The Company has amended the terms of the loan program
from time to time since its inception in 1997. In December 1999, the Board of
Directors increased the maximum aggregate amounts that may be loaned to
executive officers and other key employees of the Company and its subsidiaries.
The $7.9 million increase in employee notes receivable from December 31, 1999 to
September 30, 2000 represents loans extended to certain executive officers and
key employees of the Company under the loan program. The relevant officer or
employee has executed a Promissory Note and Security Agreement ("Note") related
to each loan extended by the Company during 2000. Such ten-year Notes bear
interest at the applicable federal rate as established by the Internal Revenue
Service, are full recourse to the officers and employees and are collateralized
by the shares of Common Stock which are the subject of the loans.
Performance Stock Award Plan
In January 1998, the Company agreed to award certain key employees of the
Company shares of restricted under the Company's Performance Stock Award Plan.
The number of shares of restricted stock to be granted to the key employees is
based upon the Company's average annual return to shareholders (share
appreciation and distributions) from the date of the award to the third
anniversary of the award. The number of shares to be granted under the
Performance Stock Award Plan ranges from none (in the event the Company achieves
less than an 11% average annual return) to 106,538 (in the event the Company
achieves a 15% or greater average annual return to shareholders). The starting
stock price for the purposes of calculating appreciation was $21.375, the fair
market value of the Company's Common Stock at the date of award ($19.87 for one
executive officer of the Company).
24
<PAGE> 25
One half of any restricted stock granted under the Performance Stock Award Plan
will vest on January 1, 2001, 25% will vest on January 1, 2002 and the remaining
25% will vest on January 1, 2003.
COMMUNITY DISPOSITIONS AND ACQUISITIONS
On March 28, 2000, the Company sold an apartment community located in Hickory,
North Carolina, formerly known as Summit Creekside (118 apartment homes) for
$5.8 million. The disposition of Summit Creekside resulted in the recognition of
a gain on sale of $2.0 million. The net proceeds of $5.8 million were placed
into escrow with a qualified intermediary in accordance with like-kind exchange
income tax rules and regulations and are expected to be used to fund future
development communities.
On May 24, 2000, the Company sold two apartment communities, formerly known as
Summit Eastchester (172 apartment homes) located in High Point, North Carolina,
and Summit Sherwood (190 apartment homes) located in Winston-Salem, North
Carolina, for $16.1 million in the aggregate. The disposition of these two
communities resulted in the recognition of a gain on sale of $5.7 million in the
aggregate. The aggregate net proceeds of $15.9 million were placed into escrow
with a qualified intermediary in accordance with like-kind exchange income tax
rules and regulations and are expected to be used to fund future development
communities.
On August 1, 2000, the Company exercised its option to purchase its joint
venture partner's interest in each of two Communities, Summit Shiloh (182
apartment homes) and Summit Sweetwater (308 apartment homes), for an aggregate
purchase price of approximately $36 million. The acquisition was primarily
financed with the issuance of 96,455 Common Units in the aggregate valued at
approximately $2.2 million, and the payment of approximately $33.7 million in
cash in the aggregate.
On September 21, 2000, the Company sold an apartment community located in
Indianapolis, Indiana, formerly known as Summit River Crossing (314 apartment
homes) for $24.8 million. The disposition of Summit River Crossing resulted in
the recognition of a gain on sale of $7.3 million. The net proceeds of $24.3
million were used to reduce the balance outstanding under the Company's
unsecured credit facility.
On September 27, 2000, the Company sold two apartment communities located in
Cincinnati, Ohio, formerly known as Summit Blue Ash (242 apartment homes) and
Summit Park (317 apartment homes), for $34.5 million in the aggregate. The
disposition of these two communities resulted in the recognition of a gain on
sale of $14.1 million in the aggregate. The aggregate net proceeds of $34.3
million were placed into escrow with a qualified intermediary in accordance with
like-kind exchange income tax rules and regulations and are expected to be used
to fund future development communities.
DEVELOPMENT ACTIVITY
The Company's construction in progress at September 30, 2000 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 Grandview -- Charlotte, NC (1).............. 266 $ 45,500 $ 43,218 $ 2,282 Q4 2000
Summit Russett II -- Laurel, MD (1)................ 112 9,900 9,126 774 Q4 2000
Summit Deerfield -- Cincinnati, OH (1)............. 498 41,500 30,870 10,630 Q3 2001
Summit Crest -- Raleigh, NC........................ 438 30,700 14,379 16,321 Q3 2001
Summit Overlook -- Raleigh, NC..................... 320 25,500 9,793 15,707 Q3 2001
Summit Peachtree City -- Atlanta, GA............... 399 31,500 15,038 16,462 Q4 2001
Summit Grand Parc -- Washington, DC................ 105 29,400 11,487 17,913 Q1 2002
Other development and construction costs (2)....... -- -- 43,361 --
----- -------- -------- -------
2,138 $214,000 $177,272 $80,089
===== ======== ======== =======
</TABLE>
---------------
(1) These communities were in lease-up at September 30, 2000.
(2) Consists primarily of land held for development and other pre-development
costs.
25
<PAGE> 26
Estimated costs to complete the development Communities represent substantially
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. However, 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 costs or
liabilities 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 twelve 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, or is
not available on favorable terms, or other circumstances arise which may 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.
FUNDS FROM OPERATIONS
The Company considers funds from operations ("FFO") to be an appropriate measure
of performance of an equity REIT. The Company computes FFO in accordance with
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO, as defined by NAREIT, represents net income (loss)
excluding gains or losses from sales of property, plus depreciation of real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures, all determined on a consistent basis in accordance with generally
accepted accounting principles ("GAAP"). Funds Available for Distribution
("FAD") is defined as FFO less capital expenditures funded by operations
(recurring capital expenditures). The Company's methodology for calculating FFO
and FAD may differ from the methodology for calculating FFO and FAD utilized by
other real estate companies, and accordingly, may not be comparable to other
real estate companies. FFO and FAD do not represent amounts available for
management's discretionary use because of needed capital expenditures or
expansion, debt service obligations, property acquisitions, development,
dividends and distributions or other commitments and uncertainties. FFO and FAD
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 FFO and FAD 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.
26
<PAGE> 27
Funds from Operations and Funds Available for Distribution for the three and
nine months ended September 30, 2000 and 1999 are calculated as follows (dollars
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income.................................. $ 25,638 $ 9,752 $ 46,968 $ 30,663
Extraordinary items......................... 111 -- 111 --
Minority interest of common unitholders in
Operating Partnership..................... 4,211 1,571 7,703 4,843
Gain on sale of real estate assets.......... (21,346) (2,487) (29,232) (8,793)
Gain on sale of real estate
assets -- Management Company.............. -- -- (238) --
----------- ----------- ----------- -----------
Adjusted net income.................... 8,614 8,836 25,312 26,713
Depreciation:
Real estate assets..................... 9,563 8,797 27,741 25,602
Real estate joint ventures............. 578 184 1,176 550
----------- ----------- ----------- -----------
Funds from Operations....................... 18,755 17,817 54,229 52,865
Recurring capital expenditures (1)..... (1,729) (1,899) (4,006) (5,083)
----------- ----------- ----------- -----------
Funds Available for Distribution............ $ 17,026 $ 15,918 $ 50,223 $ 47,782
=========== =========== =========== ===========
Non-recurring capital expenditures (1) (2).. $ 1,562 $ 1,630 $ 1,957 $ 3,916
=========== =========== =========== ===========
Cash Flow Provided By (Used In):
Operating activities................... $ 16,267 $ 12,188 $ 49,647 $ 39,948
Investing activities................... (55,137) (17,312) (90,031) (12,225)
Financing activities................... 38,718 4,987 39,053 (27,311)
=========== =========== =========== ===========
Weighted average shares and units
outstanding -- diluted.................... 30,935,031 31,986,522 30,839,406 32,530,885
=========== =========== =========== ===========
</TABLE>
---------------
(1) Recurring capital expenditures are expected to be funded from operations and
consist primarily of interior painting, carpets, 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, therefore, are not
included in the calculation of Funds Available for Distribution.
(2) Non-recurring capital expenditures for the nine months ended September 30,
2000 and 1999 primarily consist of: $1.2 million and $2.3 million for major
renovations in 2000 and 1999, respectively; $53,000 and $526,000 for access
gates and security fences in 2000 and 1999, respectively; and $81,000 and
$1.0 million in other revenue enhancement expenditures in 2000 and 1999,
respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's market risk since the filing
of the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
27
<PAGE> 28
PART II
ITEM 2. CHANGES IN SECURITIES
During the nine months ended September 30, 2000, the Company issued to limited
partners of the Operating Partnership 43,545 shares of Common Stock in exchange
for the corresponding number of Common Units. Such shares of the Company's
Common Stock were issued in reliance upon 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 the information obtained by the
Company in connection with 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
<TABLE>
<C> <S>
*10.1 Amended and Restated Credit Agreement, dated as of September
26, 2000, by and among the Operating Partnership, the
Company, the banks listed therein, and First Union National
Bank, as Administrative Agent.
*10.2 8.50% Medium-Term Note due on July 19, 2010 in the principal
amount of $10,000,000 issued by the Operating Partnership on
July 19, 2000.
*10.3 Promissory Note and Security Agreement dated August 1, 2000
evidencing a loan in the principal amount of $99,973.12 to
Michael L. Schwarz for the purpose of purchasing shares of
the Company's Common Stock.
*10.4 Employment Agreement, dated as of March 1, 2000, by and
between the Company and Robert R. Kilroy
*10.5 Executive Severance Agreement, dated as of March 1, 2000, by
and between the Company and Robert R. Kilroy
*10.6 Noncompetition Agreement, dated as of March 1, 2000, by and
among the Company, Summit Management Company and Robert R.
Kilroy
*10.7 Indemnification Agreement, dated as of March 1, 2000, by and
among the Company, the Operating Partnership and Robert R.
Kilroy (the form of indemnification agreement with Mr.
Kilroy is incorporated herein by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999, File No. 1-12792)
*10.8 Promissory Notes and Security Agreements, dated various
dates from May 17, 2000 through August 1, 2000, evidencing
loans in the aggregate amount of $949,819.62 to Robert R.
Kilroy for the purpose of purchasing shares of Common Stock
of the Company.
*12.1 Statement Regarding Calculation of Ratio of Earnings to
Fixed Charges for the Nine Months ended September 30, 2000.
*27.1 Financial Data Schedule--Nine Months ended September 30,
2000 (for SEC use only)
</TABLE>
---------------
* Filed herewith
(b) Reports on Form 8-K
None
28
<PAGE> 29
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 10, 2000 /s/ WILLIAM F. PAULSEN
-------------------------------------------- --------------------------------------------
(Date) William F. Paulsen,
Chief Executive Officer
November 10, 2000 /s/ MICHAEL L. SCHWARZ
-------------------------------------------- --------------------------------------------
(Date) Michael L. Schwarz,
Executive Vice President and
Chief Financial Officer
</TABLE>
29
