<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
- --- of the Securities Exchange Act of 1934
For the quarter ended September 30, 1996
or
Transition Report Pursuant to Section 13 or 15(d)
- --- of the Securities Exchange Act of 1934
For the period from to
Commission File Number: 1934 Act File Number: 1-13174
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of registrant as specified in its charter)
Maryland 54-1681655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2345 Crystal Drive
Crystal City, VA 22202
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (703) 920-8500
--------------------
Securities registered pursuant to Section 12(b) of the Act: None
Shares of Common Stock
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of October 31, 1996, there were 9,957,625 Shares of Common Stock of the
Registrant issued and outstanding.
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Pages
-----
<S> <C>
Item 1: Financial Statements
Charles E. Smith Residential Realty, Inc.
Financial Statements as of September 30, 1996 and 1995,
and December 31, 1995, Filed as a Part of This Report
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION 22
SIGNATURES 23
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Rental property, at predecessor cost, net $ 268,540 $ 276,269
Rental property, acquired and developed, net 202,487 138,221
Cash and cash equivalents 3,586 9,478
Tenants' security deposits 3,831 3,634
Escrow funds 6,449 5,371
Investment in and advances to Property Service Businesses
and other 11,364 8,348
Deferred charges, net 18,345 18,782
Other assets 9,211 9,219
---------------- ------------
$ 523,813 $ 469,322
================ ============
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 416,911 $ 413,973
Notes payable 129,736 69,204
Accounts payable and accrued expenses 10,486 12,693
Tenants' security deposits 3,831 3,634
Due to related parties 287 1,441
---------------- ------------
Total liabilities 561,251 500,945
---------------- ------------
Interest of Other Operating Partnership Unitholders - -
Commitments and contingencies
Shareholders' equity
Common stock - $.01 par value; 95,000,000 shares authorized; 9,943,511 and
9,708,123 shares issued and outstanding at September 30, 1996 and
December 31, 1995, respectively 99 97
Additional paid-in capital - includes contributed
deficit of $244,208 (23,971) (26,585)
Retained deficit (13,566) (5,135)
---------------- ------------
Total shareholders' equity (37,438) (31,623)
---------------- ------------
$ 523,813 $ 469,322
================ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Dollars in Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------------------------------------------
1996 1995 1996 1995
--------------- ------------- ------------ -------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
RENTAL PROPERTIES
Revenues $ 42,702 $ 37,251 $ 122,814 $ 106,096
Expenses
Operating 16,621 15,046 48,850 42,054
Real estate taxes 2,658 2,209 7,765 6,335
Depreciation and amortization 4,748 4,067 13,476 11,915
--------------- ------------- ------------ -------------
Total expenses 24,027 21,322 70,091 60,304
--------------- ------------- ------------ -------------
Operating profit - rental properties 18,675 15,929 52,723 45,792
--------------- ------------- ------------ -------------
PROPERTY SERVICE BUSINESSES
Equity in income of Property Service Businesses 1,797 1,994 4,789 4,141
--------------- ------------- ------------ -------------
General & administrative expenses (667) (611) (2,207) (2,034)
Interest income 192 365 726 999
Interest expense (11,206) (9,572) (32,248) (27,193)
--------------- ------------- ------------ -------------
Net income of the Operating Partnership 8,791 8,105 23,783 21,705
Interest of Other Operating Partnership Unitholders 4,818 4,611 13,047 12,459
Distributions in excess of earnings allocated to
Other Operating Partnership Unitholders 1,094 1,249 4,726 5,095
--------------- ------------- ------------ -------------
Net income $ 2,879 $ 2,245 $ 6,010 $ 4,151
=============== ============= ============ =============
Net income per share $ 0.29 $ 0.24 $ 0.61 $ 0.45
=============== ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional Retained
Stock Common Paid-in Earnings
Outstanding (Dollars in Thousands, Except for Per Share Amounts) Stock Capital (Deficit) Total
- ----------- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
Balance, June 29, 1994 $ - $ - $ - $ -
Contribution by Predecessors of assets,
at historical cost, net of liabilities - (244,208) - (244,208)
Proceeds of Offerings,
net of underwriting discount
9,049,667 and offering costs of $15,813 90 201,284 - 201,374
Adjustment for Unit Grants 285 285
Earnings in Excess of Distributions to
Other Operating Partnership Unitholders - - 2,841 2,841
Net income - - 6,532 6,532
Dividends ($0.48 per share) - - (4,344) (4,344)
- ---------- ------- ---------- --------- ----------
9,049,667 Balance, December 31, 1994 90 (42,639) 5,029 (37,520)
Operating Partnership equity
exchanged for acquisitions - 15,491 - 15,491
Conversion of Operating Partnership units
658,456 to common stock 7 (7) - -
Adjustment for Unit Grants - 570 - 570
Net income - - 7,529 7,529
Dividends ($1.915 per share) - - (17,693) (17,693)
- ---------- ------- ---------- --------- ----------
9,708,123 Balance, December 31, 1995 97 (26,585) (5,135) (31,623)
Operating Partnership equity
exchanged for acquisitions - 2,403 - 2,403
Conversion of Operating Partnership units
235,388 to common stock 2 (2) - -
Redemption of Operating Partnership units - (192) - (192)
Adjustment for Unit Grants - 405 - 405
Net income - - 6,010 6,010
Dividends ($1.47 per share) - - (14,441) (14,441)
- --------- ------- ---------- --------- ----------
9,943,511 Balance, September 30, 1996 (Unaudited) $ 99 (23,971) $ (13,566) $ (37,438)
========= ======= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
For the Nine Months
Ended September 30,
-----------------------------------------------
1996 1995
------------------ ---------------------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,010 $ 4,151
Interest of Other Operating Partnership Unitholders 13,047 12,459
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 15,834 14,371
Distributions in excess of earnings allocated to
Other Operating Partnership Unitholders 4,726 5,095
Decrease (increase) in other assets 8 (285)
Decrease in accounts payable and accrued expenses (2,207) (209)
------------------- --------------------
Net cash provided by operating activities 37,418 35,582
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (60,193) (36,285)
Additions to rental property (3,954) (2,592)
Increase (decrease) in related party payables:
Property Service Businesses (635) (9,171)
Affiliates (468) (928)
Predecessor (51) 112
Increase in investment in and advances
to Property Service Businesses and other (3,016) (2,605)
Other (2,797) (784)
------------------- --------------------
Net cash used in investing activities (71,114) (52,253)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITES:
Mortgage debt:
Proceeds 31,095 -
Repayments (31,417) (281)
Lines of credit:
Proceeds from draws 72,600 15,599
Repayments (13,100) -
Proceeds from construction loans 1,032 13,981
Redemption of Operating Partnership units (192) -
Dividends and distributions (32,214) (30,516)
------------------- --------------------
Net cash provided by (used in) financing activities 27,804 (1,217)
------------------- --------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,892) (17,888)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,478 18,350
------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,586 $ 462
=================== ====================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 30,294 $ 26,216
Purchase of properties in exchange for Operating
Partnership units 2,403 13,727
Assumption of debt on acquisition 3,260 30,619
Capitalized interest - 598
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial statements include all of the accounts
of Charles E. Smith Residential Realty, Inc. (the "Company") and Charles E.
Smith Residential Realty L.P. (the "Operating Partnership") and its subsidiary
financing partnerships. The Company consolidates the Operating Partnership due
to the Company's control as sole general partner. All significant intercompany
balances and transactions have been eliminated. The financial information
furnished is unaudited and reflects all normal, recurring adjustments which
management believes are necessary for a fair presentation of financial position
as of September 30, 1996 and the results of operations for the interim periods
ended September 30, 1996 and 1995. Such interim results are not necessarily
indicative of the operating results for a full year. The accompanying financial
statements should be read in conjunction with the audited financial statements
and related footnotes appearing in the Company's Annual Report on Form 10-K. As
discussed in the Form 10-K, 1995 results were restated to reflect a change in
accounting for the Property Service Businesses from the cost to the equity
method in compliance with the Emerging Issues Task Force consensus "Accounting
by a Real Estate Investment Trust for an Investment in a Service Corporation".
As a result, the Company's net income for the three and nine month periods ended
September 30, 1995 decreased by $1.4 million ($0.15 per share) and $5.5 million
($0.61 per share), respectively, while the Operating Partnership's net income
decreased by $325,000 and $986,000, respectively. The change had no effect on
Funds from Operations of the Company or of the Operating Partnership.
The Company, through the Operating Partnership and its subsidiaries, is
engaged in the ownership, operation, management, leasing, acquisition, expansion
and development of real estate properties, primarily residential multifamily
properties. As of September 30, 1996, the Operating Partnership owns 42
existing multifamily properties containing 15,200 apartment units, and owns and
operates two free-standing community retail shopping centers, aggregating
436,000 square feet. Additionally, the Operating Partnership owns substantially
all of the economic interest in entities which provide multifamily and retail
property management, leasing and development services, property renovation,
construction and construction management services, building engineering and
technical services, and financial advisory services (collectively the "Property
Service Businesses"). The Operating Partnership uses the equity method of
accounting for its investment in the Property Service Businesses.
7
<PAGE>
2. ACQUISITIONS
In March, 1996, the Company, through the Operating Partnership, acquired
309 apartment units through the purchase of two properties in northern Virginia.
A 262-unit garden-style community in Reston, Virginia was acquired for
approximately $13.7 million in cash and 22,059 limited partnership units of the
Operating Partnership valued at $0.5 million based on the market price of the
Company's stock on the date of acquisition. A 47-unit community in Old Town,
Alexandria was purchased for approximately $2.8 million in cash.
During the third quarter of 1996, the Company, through the Operating
Partnership, acquired two properties totaling 740 apartment units. A 625-unit
highrise community in Washington, D.C. was acquired in July for approximately
$42 million in cash. In August, a 115-unit apartment community located in
Washington, D.C. was acquired for $5.2 million, based on assumed debt of $3.3
million and an exchange of 79,600 Operating Partnership units valued at the
market price of the Company's stock on the date of acquisition.
As a result of acquisitions and the conversion of units into shares, the
Company's weighted average ownership percentage of the Operating Partnership
increased from 43.2% and 42.6% for the three and nine months ended September 30,
1995, respectively, to 45.3% and 45.1% for the three and nine months ended
September 30, 1996.
3. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1996, the Company implemented SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which provides guidance on the carrying value of long-lived assets.
Implementation of the standard had no effect on the consolidated financial
statements.
On January 1, 1996, the Company also implemented SFAS No. 123, "Accounting
for Stock-Based Compensation," which requires entities to measure compensation
costs related to awards of stock-based compensation using either the fair value
method or the intrinsic value method. The Company has elected to account for
stock-based compensation programs using the intrinsic value method consistent
with existing accounting policies and, therefore, implementation of the standard
had no effect on the consolidated financial statements. Use of the fair value
method would also have had no effect since there were no stock options or grants
issued during 1995 or the nine months ended September 30, 1996.
8
<PAGE>
4. PER SHARE DATA
Earnings per share of the Company for the three and nine months ended
September 30, 1996 is computed based on 9,928,762 and 9,878,421 shares,
respectively, which represents the weighted average number of shares of common
stock and common stock equivalents outstanding during the periods. Weighted
average shares for the three and nine month periods ended September 30, 1995
were 9,396,481 and 9,177,525, respectively. Weighted average Operating
Partnership units not held by the Company were 12,002,644 and 12,005,784,
respectively, for the three and nine month periods ended September 30, 1996, and
12,369,296 and 12,351,557, respectively, for the three and nine months ended
September 30, 1995. Generally, such units may be redeemed for shares of common
stock of the Company on a one-for-one basis, or the cash equivalent thereof, at
the option of the Operating Partnership. However, units issued in connection
with acquisitions of property may be restricted from conversion for up to two
years. Redemptions do not have a dilutive effect. During the three and nine
months ended September 30, 1996, 76,348 and 235,388 units, respectively, were
redeemed for shares of stock.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
accompanying financial statements and notes thereto. The results of operations
for the three and nine months ended September 30, 1996 and 1995 presented in the
Consolidated Statements of Operations and discussed below represent the
operations of Charles E. Smith Residential Realty, Inc. (the "Company"), Charles
E. Smith Residential Realty L.P. (the "Operating Partnership") and its
subsidiary financing partnerships. The Company consolidates the Operating
Partnership due to its control as sole general partner.
FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes", "anticipates", and
"expects" and similar expressions are intended to identify forwarding-looking
statements. Such statements indicate that assumptions have been used that are
subject to a number of risks and uncertainties which could cause actual
financial results or management plans and objectives to differ materially from
those projected or expressed herein, including: the effect of national and
regional economic conditions, particularly with regard to the levels of
multifamily property occupancy and rental growth in the Washington, D.C.
metropolitan area; the registrant's ability to identify and secure additional
properties and sites that meet its criteria for acquisition or development; the
acceptance of the registrant's financing plans by the capital markets, and the
effect of prevailing market interest rates and the pricing of the Company's
stock; and other risks described from time to time in the registrant's filings
with the Securities and Exchange Commission. Given these uncertainties, readers
are cautioned not to place undue reliance on such statements. The registrant
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
RENTAL PROPERTIES
Revenues, expenses and operating income before interest and
general/administrative expenses from the multifamily and retail properties for
the three and nine months ended September 30, 1996 and 1995 were as follows:
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Multifamily Properties - Core
Revenues $ 33,267 $ 32,332 $ 98,845 $ 95,456
Expenses (15,489) (15,311) (46,166) (43,941)
----------- --------- -------- ---------
Operating income before
depreciation and amortization $ 17,778 $ 17,021 $ 52,679 $ 51,515
======== ======== ========= ========
Multifamily Properties -
Acquisitions and development
Revenues $ 6,804 $ 2,046 $ 16,412 $ 2,914
Expenses (2,812) (1,182) (7,590) (1,896)
-------- ------- --------- ----------
Operating income before
depreciation and amortization $ 3,992 $ 864 $ 8,822 $ 1,018
========= ========= ========= =========
Retail Properties
Revenues $ 2,631 $ 2,873 $ 7,557 $ 7,726
Expenses (978) (762) (2,859) (2,552)
---------- ---------- ---------- ----------
Operating income before
depreciation and amortization $ 1,653 $ 2,111 $ 4,698 $ 5,174
========= ========= ======== =========
Total Rental Properties
Revenues $ 42,702 $ 37,251 $ 122,814 $ 106,096
Expenses (19,279) (17,255) (56,615) (48,389)
---------- ---------- ---------- ----------
Operating income before
depreciation and amortization 23,423 19,996 66,199 57,707
Depreciation and amortization (4,748) (4,067) (13,476) (11,915)
---------- ---------- ---------- ----------
Operating income before interest
and general/administrative
expenses $ 18,675 $ 15,929 $ 52,723 $ 45,792
========= ========= ========= =========
</TABLE>
PROPERTY SERVICE BUSINESSES
The Operating Partnership's 99% interest in the revenues, expenses and
operating income before depreciation and amortization from the various Property
Service Businesses for the three and nine months ended September 30, 1996 and
1995 were as follows:
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Multifamily and Retail Property
Management and Other
Revenues $ 2,942 $ 2,437 $ 8,737 $ 7,093
Expenses/1/ (2,338) (1,944) (6,833) (5,777)
---------- ---------- ---------- ----------
Operating income before $ 604 $ 493 $ 1,904 $ 1,316
depreciation and amortization ========= ========= ========= =========
Interior Construction and Renovation
Services
Revenues $ 1,493 $ 1,654 $ 3,788 $ 4,187
Expenses/1/ (1,122) (1,122) (3,473) (3,592)
---------- ---------- ---------- ----------
Operating income before
depreciation and amortization $ 371 $ 532 $ 315 $ 595
========= ========= ========= =========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 10,512 $ 10,162 $ 30,691 $ 29,759
Expenses/1/ (9,480) (9,292) (28,154) (27,318)
---------- ---------- ---------- ----------
Operating income before
depreciation and amortization $ 1,032 $ 870 $ 2,537 $ 2,441
========= ========= ========= =========
Financing Services
Revenues $ 332 $ 574 $ 1,721 $ 1,614
Expenses/1/ (223) (150) (809) (840)
--------- ---------- ---------- ----------
Operating income before
depreciation and amortization $ 109 $ 424 $ 912 $ 774
========= ========= ========= =========
Total Property Services
Revenues $ 15,279 $ 14,827 $ 44,937 $ 42,653
Expenses/1/ (13,163) (12,508) (39,269) (37,527)
---------- ---------- ---------- ----------
Operating income before
depreciation and amortization 2,116 2,319 5,668 5,126
Depreciation and amortization (319) (325) (879) (985)
---------- ---------- ---------- ----------
Equity in income of Property
Service Businesses $ 1,797 $ 1,994 $ 4,789 $ 4,141
========= ========= ========= =========
</TABLE>
/1/ Includes general and administrative costs.
12
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1996 to Three Months Ended
September 30, 1995.
Summary. Net income of the Operating Partnership before interest of
Other Operating Partnership Unitholders increased $0.7 million, or 8.4%, from
$8.1 million for the three months ended September 30, 1995 to $8.8 million for
the three months ended September 30, 1996. Funds from Operations ("FFO") of the
Operating Partnership increased $1.3 million, or 11.2%, from $12.2 million to
$13.5 million, during the same period. Net income of the Company increased from
$2.2 million, or $.24 per share, for the three months ended September 30, 1995
to $2.9 million, or $.29 per share, for the three months ended September 30,
1996. FFO of the Company increased 16.6%, from $5.2 million to $6.1 million
during the same period. The increases in both net income and FFO are
attributable to increases in operating income from the residential properties,
primarily the acquisition and development properties. These increases were
partially offset by increased interest expense and decreased income from the
Property Service Businesses and the retail properties.
Rental Properties. Revenue from rental properties increased $5.5
million, or 14.6%, from $37.2 million for the three months ended September 30,
1995 to $42.7 million for the three months ended September 30, 1996. The ten
acquisition and development properties (defined as properties with less than one
full calendar year of operations after stabilization and consisting of 2,738
apartment units, 309 and 740 of which were added during the first and third
quarters of 1996, respectively) contributed approximately 87%, or $4.8 million,
of the rental revenue increase.
Revenue from the core portfolio increased $0.9 million, or 2.9%, for
the three months ended September 30, 1996 compared to the prior year period with
average monthly revenue per apartment unit increasing from $865 to $890 per
unit. The increase is due primarily to higher market rents offset by slightly
higher vacancy over the prior year quarter. Average economic occupancy for the
core portfolio was 97.2% for the three months ended September 30, 1996 compared
to 97.7% for the comparable prior year quarter. The decrease in occupancy was
not unexpected given the aggressive efforts initiated by management to increase
market rents as well as the implementation during the third quarter of 1996 of
several revenue-enhancing initiatives, including a premium for month-to-month
leases and a move-in fee. The Company also continues to expand and aggressively
market the furnished apartment program. As a result, revenues on this product
increased $0.1 million, or 17%, over the prior year period.
Retail revenues during the three months ended September 30, 1996
decreased $0.2 million, or 8.4%, compared to the three months ended September
30, 1995 reflecting decreased base rents and higher vacancy at the Skyline Mall.
Average occupancy at Skyline Mall declined from 96.4% during the three months
ended September 30, 1995 to 93.3% for the three months ended September 30, 1996
due to several stores remaining vacant during the third quarter. As of October
13
<PAGE>
31, 1996, Skyline Mall was 95.3% leased.
Expenses from rental operations increased $2.0 million, or 11.7%, from
$17.2 million during the three months ended September 30, 1995 to $19.2 million
during the three months ended September 30, 1996 due primarily to the larger
acquisition and development portfolio which contributed $1.6 million, or 81%, of
the increase. Expenses for the core residential portfolio increased $0.2
million, or 1.2%, during the third quarter compared to the prior year. The
increase is primarily due to higher real estate taxes in the Virginia submarkets
which constitute the majority of the portfolio. Assessments averaged 5.5% higher
in 1996 than in 1995 for the Virginia properties while local property tax rates
for Arlington and Fairfax counties increased by 2.1% and 5.9%, respectively. The
Company also incurred higher expenses during the third quarter of 1996 due to
the expanded furnished apartment program and the related marketing and
advertising activities. The increases in expenses were largely offset by utility
savings related to an unseasonably cool summer ($0.5 million), and a credit
earned from a ground lessor in connection with a debt refinancing ($0.2
million).
Property Service Businesses. The Company's 99% equity in the earnings
of the Property Service Businesses decreased from $2.0 million during the third
quarter of 1995 to $1.8 million for the third quarter of 1996 as operating
income (before depreciation and amortization) from the Property Service
Businesses decreased $0.2 million, or 8.8%, from $2.3 million to $2.1 million.
The decrease was primarily due to lower financing services fees as well as lower
revenue and margins on Interior Construction and Renovation Services. These
decreases were partially offset by higher operating income for both Multifamily
and Retail Property Management, and Engineering and Technical Services. The
Company uses the equity method of accounting for investments in the Property
Service Businesses.
During the three months ended September 30, 1996, Interior
Construction and Renovation Services' revenue decreased $0.2 million, or 9.7%,
compared to the prior year quarter due primarily to a shift in the type of
services provided. During the third quarter of 1995, approximately 85% of
revenue was derived from general contracting services provided to affiliated
partnerships and their tenants. During the three months ended September 30,
1996, 71% of revenue was derived from affiliated partnerships and their tenants
while 29% was derived from third party construction management services. As a
result, revenue from affiliated partnerships decreased by $0.2 million during
the period compared to the prior year. Management expects to continue pursuing
third-party construction management work, based on current market conditions.
During the third quarter of 1996, Interior Construction and Renovation Services
was awarded a contract with an agency of the Federal Government to manage an
estimated $55 million, multi-year construction renovation project.
Revenues for Multifamily and Retail Property Management increased $0.5
million, or 20.7%, during the third quarter of 1996 as compared to the
comparable prior year quarter due primarily to retail leasing fees earned on
leases associated with a third-party development project.
14
<PAGE>
Engineering and Technical Services revenue increased $0.4 million, or
3.4%, during the third quarter with a resulting increase of 2.0% in operating
expenses and 18.6% in operating income. Both the higher revenues and costs were
attributable primarily to large repair and replacement projects for affiliated
partnerships as well as additional services provided under contracts for HVAC
operations and preventive maintenance.
Revenue for Financing Services decreased $0.2 million, or 42%, due to
a decrease in refinancings during the quarter. Approximately $13.8 million of
refinancings were closed in the third quarter of 1996 compared to $51 million
during the comparable quarter in the prior year.
Other. General and administrative expenses increased 9.2%, due
primarily to costs incurred in connection with the Company's ongoing acquisition
and development efforts. Interest expense increased $1.6 million, or 17.1%, due
to additional borrowings under the lines of credit for completed acquisitions
and development. Amounts outstanding under lines of credit averaged $115.5
million for the three months ended September 30, 1996 compared to $43.3 million
for the three months ended September 30, 1995. Distributions in excess of
earnings allocated to Other Operating Partnership Unitholders of $1.1 million
and $1.2 million for the three months ended September 30, 1996 and 1995,
respectively, have no effect on FFO and represent regular quarterly
distributions paid to Other Operating Partnership Unitholders in excess of net
income attributed to these unitholders because their partnership interests are
carried at zero on the balance sheet.
Comparison of Nine Months Ended September 30, 1996 to Nine Months Ended
September 30, 1995
Summary. Net income of the Operating Partnership before interest of
Other Operating Partnership Unitholders increased $2.1 million, or 9.6%, from
$21.7 million for the nine months ended September 30, 1995, to $23.8 million for
the nine months ended September 30, 1996. FFO increased $3.6 million, or 10.8%,
during the same period. Net income of the Company increased from $4.2 million,
or $0.45 per share, for the nine months ended September 30, 1995 to $6.0
million, or $0.61 per share, for the nine months ended September 30, 1996. The
increase in both net income and FFO results from increases in operating income
from the rental properties, primarily the acquisition and development
properties, as well as increased income from the Property Service Businesses.
Such increases were partially offset by increases in interest expense and
general and administrative expenses and a decrease in interest income.
Rental Properties. Revenue from rental properties increased $16.7
million, or 15.8%, from $106.1 million for the nine months ended September 30,
1995, to $122.8 million for the nine months ended September 30, 1996. The ten
acquisition and development properties (consisting of 2,738 units), contributed
$13.5 million, or 80.7%, of the rental property revenue increase. (Note that the
two properties purchased in 1994 totaling 627 apartment units were transferred
into the core portfolio on January 1, 1996.) The core portfolio contributed an
increase of $3.4 million,
15
<PAGE>
or 3.6%, in revenue during the nine months ended September 30, 1996 over the
prior year. Average monthly revenue per apartment unit of the core portfolio
increased from $851 to $881 per month for the nine months ended September 30,
1995 and 1996, respectively, due to market rent increases and a slightly
improved occupancy. Average economic occupancy was 97.2% for the nine months
ended September 30, 1996 versus 97.1% for the nine months ended September 30,
1995. Core revenue includes a $0.2 million fee recognized during the first
quarter of 1996 for reimbursement of costs associated with ongoing rental
property operations.
Retail revenues decreased by $0.2 million, or 2.2%, during the nine
months ended September 30, 1996 compared to the prior year due to lower base and
percentage rents as well as higher vacancy at Skyline Mall. In addition, non-
escalatable repairs and maintenance expenses were higher than the prior year.
Expenses from rental operations increased $8.2 million, or 17.0%, from
$48.4 million for the nine months ended September 30, 1995, to $56.6 million for
the nine months ended September 30, 1996. The increases resulted primarily from
the acquisition/development of 2,566 units (subsequent to the first quarter of
1995) which added $5.7 million to operating expenses compared to the prior year
period. The increase of $2.2 million, or 5.1%, in operating expenses for the
core portfolio was primarily due to expected increases in payroll and related
costs as well as higher furnished apartment expenses and related marketing costs
due to the expansion of this product in 1996. In addition, real estate taxes
were significantly higher in 1996 due to increases in rates and assessments.
The substantial increase in utility costs during the first quarter of 1996 due
to the record cold temperatures was substantially offset during the third
quarter due to an unseasonably cool summer. However, snow removal costs in 1996
were substantially higher than in 1995 due to the record snowfall. In addition,
depreciation increased $1.6 million due to the acquisition of the 2,566 units.
Property Service Businesses. The Company's 99% equity in the earnings
of the Property Service Businesses increased $0.6 million, or 15.6%, during the
nine months ended September 30, 1996 compared to the nine months ended September
30, 1995. Operating income before depreciation and amortization increased $0.6
million, or 10.6%, from $5.1 million for the nine months ended September 30,
1995, to $5.7 million for the nine months ended September 30, 1996.
The increase in revenue and operating income for Multifamily and
Retail Property Management results primarily from the impact of a non-recurring
fee of $0.6 million related to the termination of a management agreement with a
hotel owned by a related party. The hotel was sold during the first quarter of
1996. In addition, approximately $0.3 million of leasing fees were earned during
the third quarter of 1996 in connection with retail leases for a third party
development project.
The decrease in revenues and operating income for Interior
Construction and Renovation Services during the nine months ended September 30,
1996 compared to the prior year period
16
<PAGE>
is primarily due to a shift to lower margin, third-party construction management
services compared to higher margin general contracting services provided to
affiliated partnerships.
Operating income from Engineering and Technical Services increased
3.9% due primarily to an increase in third party consulting work.
Revenue from Financing Services increased $0.1 million due primarily
to a refinancing fee earned in connection with the termination of a management
agreement with a hotel owned by a related party which was sold during the first
quarter. Overall, however, refinancings during the nine months ended September
30, 1996 were approximately $10.2 million lower than the comparable prior year
period which offset the termination related finance fee.
Other. General and administrative expenses increased $0.2 million,
or 8.5%, due primarily to legal and other costs incurred in connection with the
Company's ongoing acquisition and development efforts. Interest expense
increased $5.1 million, or 18.6%, due to additional borrowings under the lines
of credit for acquisitions. Distributions in excess of earnings allocated to
Other Operating Partnership Unitholders decreased from $5.1 million during the
nine months ended September 30, 1995 to $4.7 million for the nine months ended
September 30, 1996.
Funds from Operations. Industry analysts generally consider Funds
from Operations ("FFO") an appropriate measure of performance of an equity REIT.
The Company computes FFO as net income (in accordance with generally accepted
accounting principles) excluding gains (or losses) from debt restructuring and
distributions in excess of earnings allocated to Other Operating Partnership
Unitholders, plus depreciation and amortization of real estate related assets,
in accordance with the revised definition adopted by the National Association of
Real Estate Investment Trusts. The Company believes that to facilitate a clear
understanding of its operating results, FFO should be examined in conjunction
with net income as presented in the financial statements and notes thereto
included elsewhere in this report. FFO does not represent cash flow from
operations as defined by generally accepted accounting principles and should not
be considered an alternative to net income as an indicator of the Company's
operating performance, or an alternative to cash flow from operations as a
measure of liquidity or ability to pay dividends.
Funds from Operations for the three and nine months ended September
30, 1996 and 1995 are computed as follows:
17
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
- ----------------------
<S> <C> <C> <C> <C>
Net Income of the Operating
Partnership $ 8,791 $ 8,105 $ 23,783 $ 21,705
Depreciation of Real Property 4,748 4,067 13,476 11,915
-------- -------- --------- ---------
Funds from Operations of the
Operating Partnership 13,539 12,172 37,259 33,620
Interest of Other Operating
Partnership Unitholders 7,418 6,923 20,440 19,288
--------- -------- --------- ---------
Attributable to Shareholders $ 6,121 $ 5,249 $ 16,819 $ 14,332
========= ========= ========= =========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Summary. The Company's primary sources of liquidity are cash flows
from operating activities and proceeds from lines of credit and construction
loans. Secondary sources of liquidity include proceeds from mortgage debt and
issuances of additional shares of stock. A summary of the sources of liquidity
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
(Dollars in Thousands)
Cash from operating
activities $ 37,418 $ 35,582
Proceeds from lines of
credit and construction
loans, net 60,532 29,580
Proceeds from mortgage debt, net 187 ---
</TABLE>
In September 1996, an outstanding mortgage loan of $40.6 million (for
which the Operating Partnership and ground lessor are jointly and severally
liable) was refinanced for a new loan amount of $41 million. The ground lessor
has been allocated $9.9 million of the refinanced loan which bears interest at a
fixed rate of 8.24% and matures in August, 2009. The remaining $31.1
18
<PAGE>
million allocated to the Operating Partnership (Mortgage Pool Four) represents
an increase of $0.2 million over the outstanding allocated balance at the time
of refinancing and is reflected above as net proceeds from mortgage debt.
The primary uses of liquidity are (i) acquisition and development of
rental property, (ii) dividends and distributions, (iii) capital improvements,
and (iv) payment on mortgage debt. A summary of the uses of liquidity are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
(Dollars in Thousands)
Acquisition and development of
rental properties $ 60,193 $ 36,285
Dividends and distributions 32,214 30,516
Capital improvements 3,954 2,592
Principal payments on mortgage debt 509 281
</TABLE>
In March 1996, the Company acquired two apartment properties in
northern Virginia totaling 309 apartment units. The 262-unit garden apartment
complex in Reston, Virginia was acquired for approximately $13.7 million cash,
and an exchange of 22,059 Operating Partnership units valued at $0.5 million
based on the market price of the Company's stock on the date of acquisition.
The 47-unit community in Old Town, Alexandria was acquired for approximately
$2.8 million cash and was purchased to complement the 112-unit apartment project
Boulevard of Old Town which was purchased in April, 1995. The acquisitions were
funded through borrowings against the Company's lines of credit.
During the third quarter of 1996, the Company, through the Operating
Partnership, acquired two properties totaling 740 apartment units. A 625-unit
highrise community in Washington, D.C. was acquired in July for approximately
$42 million in cash funded through borrowings against the lines of credit. In
August, a 115-unit apartment community located in Washington, D.C. was acquired
for $5.2 million based upon assumed debt of $3.3 million and an exchange of
approximately 79,600 Operating Partnership units valued at $1.9 million based on
the market price of the Company's stock on the date of acquisition. These
properties bring the Company's total acquisitions to eleven properties with over
3,000 units acquired since its initial public offering in mid-1994.
Debt
As of September 30, 1996, the Company had mortgage indebtedness and
other borrowings, which carried a weighted average interest rate of 7.8%, as
follows:
19
<PAGE>
<TABLE>
Dollars in % of
Thousands Total
--------- -----
<S> <C> <C>
Long-term mortgage debt
(maturities greater than 1 year)
Fixed rate $399,621 73.1%
Short-term mortgage debt
(maturities less than 1 year)
Variable rate 17,290 3.2%
$100M Acquisition Line of Credit 82,050 15.0%
$83M Acquisition Line of Credit 30,000 5.5%
Construction loan 17,686 3.2%
-------- -----
Total Debt $546,647 100.0%
======== =====
</TABLE>
The Company had $71 million of unused borrowing capacity available on lines
of credit as of September 30, 1996.
As of September 30, 1996, the Company's Debt to Total Market Capitalization
Ratio was 50.7%, based on 9,943,511 shares and 12,055,953 partnership units
outstanding at a stock price of $24.125 The Company's Debt Coverage Ratio for
the three months ended September 30, 1996 was 2.37:1.
Dividends and Distributions
During the nine months ended September 30, 1996, the Company and the
Operating Partnership paid dividends/distributions of $14.4 million, or $1.47
per share/unit. In October 1996, the Company declared a third quarter
dividend/distribution of $0.505 per share/unit, an increase of 3.1% over the
$0.49 dividend paid in each of the first two quarters of 1996.
Other
For the nine months ended September 30, 1996, total capital improvements
were $3.9 million, of which $3.1 million, or $251 per core apartment unit, were
for the core portfolio. Approximately 49% of the capital expenditures on the
core portfolio are considered by management to be revenue generating or economic
improvements, as shown below, which directly affect the Company's ability to
increase rents on specific units. The remaining capital expenditures on the core
portfolio for such items as common area improvements indirectly influence the
Company's ability to increase rents and are considered non-revenue generating. A
summary of core capital expenditures follows:
20
<PAGE>
<TABLE>
<CAPTION>
Total $ Actual # of Average $ Per Average $ Per
Expenditure Type Spent Units Improved Unit Improved Core Unit
- ---------------- -------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Installations/Replacements:
Appliances $ 467.7 984 $ 475 $38
Window treatments 13.7 60 228 1
Carpet 497.0 475 1,046 40
Tile 11.0 12 920 1
Renovations:
Kitchen 286.0 130 2,200 23
Bath 244.9 63 3,887 20
-------- --------
Total revenue generating
improvements $1,520.3 $ 123
Non-revenue generating
improvements 1,603.7 128
-------- --------
Total capital expenditures
- core portfolio $3,124.0 $ 251
======== ========
</TABLE>
21
<PAGE>
PART II
Item 1. Legal Proceedings.
None except as previously reported.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K
None.
22
<PAGE>
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.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
Date: November 13, 1996 By: /s/ Charles R. Hagen
---------------------------------
Charles R. Hagen
Vice President, Chief Financial Officer
and Chief Accounting Officer of
Charles E. Smith Residential Realty,
Inc. (on behalf of the Registrant and
as Principal Financial Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,586
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,280
<PP&E> 660,109
<DEPRECIATION> (189,082)
<TOTAL-ASSETS> 523,813
<CURRENT-LIABILITIES> 14,604
<BONDS> 546,647
0
0
<COMMON> 99
<OTHER-SE> (37,537)
<TOTAL-LIABILITY-AND-EQUITY> 523,813
<SALES> 0
<TOTAL-REVENUES> 122,814
<CGS> 0
<TOTAL-COSTS> 70,091
<OTHER-EXPENSES> 2,207
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,522
<INCOME-PRETAX> 23,783
<INCOME-TAX> 0
<INCOME-CONTINUING> 23,783
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,010
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
</TABLE>
