<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
X Quarterly Report Pursuant to Section 13 of 15(d)
--- of the Securities Exchange Act of 1934
For the quarter ended June 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 August 8, 1996, there were 9,879,663 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 June 30, 1996, and
December 31, 1995, Filed as a Part of This Report
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholder's 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 21
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>
June 30, 1996 December 31, 1995
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, at predecessor cost, net $ 270,429 $ 276,269
Rental property, acquired and developed, net 155,376 138,221
Cash and cash equivalents 4,084 9,478
Tenants' security deposits 3,613 3,634
Escrow funds 7,021 5,371
Investment in and advances to Property Service Businesses
and other 11,439 8,348
Deferred charges, net 18,494 18,782
Other assets 9,543 9,219
----------------- -----------------
$ 479,999 $ 469,322
================= =================
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 413,621 $ 413,973
Notes payable 87,136 69,204
Accounts payable and accrued expenses 12,672 12,693
Tenants' security deposits 3,613 3,634
Due to related parties 255 1,441
----------------- -----------------
Total liabilities 517,297 500,945
----------------- -----------------
Interest of Other Operating Partnership Unitholders -- --
Commitments and Contingencies
Shareholders' equity
Common stock - $.01 par value; 95,000,000 shares
authorized; 9,867,163 and 9,708,123 shares issued
and outstanding at June 30, 1996 and
December 31, 1995, respectively 99 97
Additional paid-in capital - includes contributed
deficit of $244,208 (25,789) (26,585)
Retained deficit (11,608) (5,135)
----------------- -----------------
Total shareholders' equity (37,298) (31,623)
----------------- -----------------
$ 479,999 $ 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 Six Months
Ended June 30, Ended June 30,
---------------------------- --------------------------
1996 1995 1996 1995
------------- ----------- ----------- -----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
RENTAL PROPERTIES
Revenues $ 40,571 $ 34,743 $ 80,112 $ 68,845
Expenses
Operating 15,557 13,464 32,229 27,008
Real estate taxes 2,665 2,098 5,107 4,126
Depreciation and amortization 4,336 3,918 8,728 7,848
------------- ----------- ----------- -----------
Total expenses 22,558 19,480 46,064 38,982
------------- ----------- ----------- -----------
Operating profit - rental properties 18,013 15,263 34,048 29,863
------------- ----------- ----------- -----------
PROPERTY SERVICE BUSINESSES
Equity in income of Property Service Businesses 1,444 1,586 2,992 2,147
------------- ----------- ----------- -----------
General & administrative expenses (795) (770) (1,540) (1,423)
Interest income 265 326 534 634
Interest expense (10,631) (8,958) (21,042) (17,621)
------------- ----------- ----------- -----------
Net income of the Operating Partnership 8,296 7,447 14,992 13,600
Interest of Other Operating Partnership Unitholders 4,542 4,303 8,229 7,848
Distributions in excess of earnings allocated to
Other Operating Partnership Unitholders 1,364 1,583 3,632 3,846
------------- ----------- ----------- -----------
Net income $ 2,390 $ 1,561 $ 3,131 $ 1,906
============= =========== =========== ===========
Net income per share $ 0.24 $ 0.17 $ 0.32 $ 0.21
============= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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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 - 513 - 513
Conversion of Operating Partnership units
159,040 to common stock 2 (2) - -
Adjustment for Unit Grants - 285 - 285
Net income - - 3,131 3,131
Dividends ($0.98 per share) - - (9,604) (9,604)
- ---------- ----------- ----------- ----------- ----------
9,867,163 Balance, June 30, 1996 (Unaudited) $ 99 $ (25,789) $ (11,608) $ (37,298)
========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part or these statements.
5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
For the Six Months
Ended June 30,
---------------------------------------
1996 1995
---------------- ----------------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,131 $ 1,906
Interest of Other Operating Partnership Unitholders 8,229 7,848
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 10,289 9,454
Distributions in excess of earnings allocated to
Other Operating Partnership Unitholders 3,632 3,846
Increase in other assets 676 150
(Decrease) increase in accounts payable and accrued expenses (21) 743
---------------- ----------------
Net cash provided by operating activities 25,936 23,947
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (17,144) (13,616)
Additions to rental property (2,248) (2,636)
Decrease in related party payables:
Property Service Businesses (886) (10,455)
Predecessor (300)
Increase in investment in and advances
to Property Service Businesses and other (3,091) (208)
Other (3,776) (446)
---------------- ----------------
Net cash used in investing activities (27,445) (27,361)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITES:
Repayments of mortgage debt (352) (159)
Lines of credit:
Proceeds from draws 30,000 14,725
Repayments (13,100) (7,000)
Proceeds from construction loans 1,032 11,385
Dividends and distributions to shareholders and
predecessor partners (21,465) (20,290)
---------------- ----------------
Net cash used in financing activities (3,885) (1,366)
---------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,394) (4,780)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,478 18,350
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,084 $ 13,570
================ ================
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 19,764 $ 16,636
Purchase of property in exchange for Operating
Partnership units 513 13,727
Capitalized interest -- 471
</TABLE>
The accompanying notes are an integral part of these statement.
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 June 30, 1996 and the results of operations for the interim periods ended
June 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 six months ended June 30,
1995 decreased by $1.7 million ($0.19 per share) and $4.1 million ($0.46 per
share), respectively, while the Operating Partnership's net income decreased by
$335,000 and $660,000, 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 June 30, 1996, the Operating Partnership owns 40 existing
multifamily properties containing 14,460 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, interior construction and
renovation, 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.
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
7
<PAGE>
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.
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 42.2% and 42.3% for the three and six months ended June 30,
1995, respectively, to 45.3% and 45.1% for the three and six months ended June
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 six months ended June 30, 1996.
4. PER SHARE DATA
Earnings per share of the Company for the three and six months ended June
30, 1996 is computed based on 9,906,982 and 9,864,608 shares, respectively,
which represents the weighted average number of shares of common stock and
common stock equivalents outstanding during the period. Weighted average shares
for the three and six month periods ended June 30, 1995 were 9,068,427 and
9,066,322, respectively. Weighted average Operating Partnership units not held
by the Company were 11,976,778 and 12,007,373, respectively, for the three and
six month periods ended June 30, 1996, and 12,385,863 and 12,342,542,
respectively, for the three and six months ended June 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 Company. 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 six months ended June 30, 1996, 21,437 and 159,040 units,
respectively, were redeemed for shares of stock.
8
<PAGE>
5. SUBSEQUENT EVENTS
Subsequent to June 30, 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 on July 30, 1996 for
approximately $42 million in cash. On August 2, 1996, 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 approximately 78,800 Operating
Partnership units valued at $24 per unit, based on the market price of the
Company's stock on the date of acquisition.
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 six months ended June 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 six months ended June 30, 1996 and 1995 were as follows:
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Multifamily Properties - Core
Revenues $ 32,843 $ 31,667 $ 65,578 $ 63,124
Expenses (14,770) (14,081) (30,677) (28,630)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 18,073 $ 17,586 $ 34,901 $ 34,494
======== ======== ======== ========
Multifamily Properties -
Acquisitions and development
Revenues $ 5,244 $ 620 $ 9,608 $ 868
Expenses (2,519) (527) (4,778) (714)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 2,725 $ 93 $ 4,830 $ 154
======== ======== ======== ========
Retail Properties
Revenues $ 2,484 $ 2,456 $ 4,926 $ 4,853
Expenses (933) (954) (1,881) (1,790)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 1,551 $ 1,502 $ 3,045 $ 3,063
======== ======== ======== ========
Total Rental Properties
Revenues $ 40,571 $ 34,743 $ 80,112 $ 68,845
Expenses (18,222) (15,562) (37,336) (31,134)
-------- -------- -------- --------
Operating income before
depreciation and amortization 22,349 19,181 42,776 37,711
Depreciation and amortization (4,336) (3,918) (8,728) (7,848)
-------- -------- -------- --------
Operating income before interest
and general/administrative
expenses $ 18,013 $ 15,263 $ 34,048 $ 29,863
======== ======== ======== ========
</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 six months ended June 30, 1996 and 1995
were as follows:
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Multifamily and Retail
Property
Management and Other
Revenues $ 2,688 $ 2,347 $ 5,795 $ 4,656
Expenses/1/ (2,303) (1,886) (4,495) (3,833)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 385 $ 461 $ 1,300 $ 823
========= ========= ========= ========
Interior Construction and Renovation
Services
Revenues $ 1,264 $ 1,404 $ 2,295 $ 2,533
Expenses/1/ (1,184) (1,201) (2,351) (2,470)
-------- -------- -------- --------
Operating income (loss) before
depreciation and amortization $ 80 $ 203 $ (56) $ 63
========= ========= ========= ========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 10,500 $ 9,571 $ 20,179 $ 19,597
Expenses/1/ (9,648) (8,753) (18,674) (18,026)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 852 $ 818 $ 1,505 $ 1,571
========= ========= ========= ========
Financing Services
Revenues $ 720 $ 805 $ 1,389 $ 1,040
Expenses/1/ (299) (366) (586) (690)
-------- -------- -------- --------
Operating income before
depreciation and amortization $ 421 $ 439 $ 803 $ 350
========= ========= ========= ========
Total Property Services
Revenues $ 15,172 $ 14,127 $ 29,658 $ 27,826
Expenses/1/ (13,434) (12,206) (26,106) (25,019)
-------- -------- -------- --------
Operating income before
depreciation and amortization 1,738 1,921 3,552 2,807
Depreciation and amortization (294) (335) (560) (660)
-------- -------- -------- --------
Equity in income of Property
Service Businesses $ 1,444 $ 1,586 $ 2,992 $ 2,147
========= ========= ========= ========
</TABLE>
/1/ Includes general and administrative costs.
12
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 1996 to Three Months Ended June 30,
1995.
Summary. Net income of the Operating Partnership before interest of Other
Operating Partnership Unitholders increased $0.9 million, or 11.4%, from $7.4
million for the three months ended June 30, 1995 to $8.3 million for the three
months ended June 30, 1996. Funds from Operations ("FFO") of the Operating
Partnership increased $1.3 million, or 11.1%, from $11.3 million to $12.6
million, during the same period. Net income of the Company increased from $1.6
million, or $.17 per share, for the three months ended June 30, 1995 to $2.4
million, or $.24 per share, for the three months ended June 30, 1996. FFO of the
Company increased 19%, from $4.8 million to $5.7 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 a decrease in Property Service Business income.
Rental Properties. Revenue from rental properties increased $5.9 million, or
16.8%, from $34.7 million for the three months ended June 30, 1995 to $40.6
million for the three months ended June 30, 1996. The eight acquisition and
development properties (defined as properties with less than one full calendar
year of operations after stabilization and consisting of 1,998 apartment units,
309 of which were added during the first quarter of 1996) contributed nearly
80%, or $4.6 million, of the rental revenue increase. This reflects the
acquisition/development of five properties (1,195 units) subsequent to the
second quarter of 1995.
Revenue from the core portfolio increased $1.2 million, or 3.7%, for the
three months ended June 30, 1996 compared to the prior year period with average
monthly revenue per apartment unit increasing from $847 to $878 per unit. The
balance of the increase in revenue is due primarily to higher market rents and
significantly improved vacancy over the prior year quarter. Average economic
occupancy for the core portfolio was 97.4% for the three months ended June 30,
1996 compared to 96.5% for the comparable prior year quarter. The increase in
occupancy reflects enhanced and targeted marketing and advertising programs
implemented by management during the second quarter of 1995 in response to
softening demand at that time in certain submarkets of Virginia and Washington,
D.C.
Retail revenues during the three months ended June 30, 1996 increased
slightly (1.1%) compared to the three months ended June 30, 1995 reflecting no
significant changes in occupancy or rental rates for the retail portfolio.
Expenses from rental operations increased $2.6 million, or 17.1%, from $15.6
million during the three months ended June 30, 1995 to $18.2 million during the
three months ended June 30, 1996 due primarily to the larger acquisition and
development portfolio which contributed $1.8 million, or 73%, of the increase.
Expenses for the core portfolio increased $.7 million, or 4.9%, during the
second quarter compared to the prior year due in part to higher real estate
taxes in the
13
<PAGE>
Virginia submarkets. The 1996 real estate tax assessments on Virginia
properties, which constitute the majority of the portfolio, averaged 5.5% higher
than 1995 assessments while local property tax rates for Arlington and Fairfax
counties increased by 2.1% and 5.9%, respectively. The Company also incurred
additional expenses related to higher than expected repair and maintenance costs
for pools and grounds due to an unseasonably cold winter season.
Property Service Businesses. The Company's 99% equity in the earnings of the
Property Service Businesses decreased from $1.6 million during the second
quarter of 1995 to $1.4 million for the second quarter of 1996 as operating
income before depreciation and amortization from the Property Service Businesses
decreased $.2 million, or 9.5%, from $1.9 million to $1.7 million. The decrease
was primarily due to lower revenue and margins on work performed by the Interior
Construction and Renovation group as well as increased expenses for Multifamily
and Retail Property Management. The Company uses the equity method of accounting
for investments in the Property Service Businesses.
During the three months ended June 30, 1996, Interior Construction and
Renovation Services revenue decreased $0.1 million, or 10%, compared to the
prior year quarter due to a combination of a shift in the timing of several
large renovation projects for affiliated partnerships owning office buildings to
the third and fourth quarters, and an increase in third party construction
management services which carry lower margins. Third party revenue increased
from $0.2 million during the three months ended June 30, 1995 to $0.3 million
during the three months ended June 30, 1996.
Revenues for Multifamily and Retail Property Management increased $0.3
million, or 14.5%, during the second quarter of 1996 as compared to the
comparable prior year quarter due primarily to additional management fees earned
from an additional third party management contract and on the Company's
residential portfolio. Expenses increased primarily due to additional staffing
needs related to the expanded portfolio and the associated support costs.
Engineering and Technical Services revenue increased $.9 million, or 9.7%,
during the second quarter with a resulting increase of 10.2% in operating
expenses and 4.2% in operating income. Both the higher revenues and costs were
attributable primarily to four new third party contracts for operation of HVAC
systems, as well as several large HVAC repair and replacement projects for
affiliated partnerships.
Revenue for Financing Services decreased $0.1 million, or 10%, due to the
acceleration of a refinancing in the first quarter of 1996 rather than the
second quarter. The impact, however, was mitigated by a decrease in operating
expenses. Approximately $74.1 million of refinancings were closed in the second
quarter of 1996 compared to $78.2 million during the comparable quarter in the
prior year.
Other. General and administrative expenses increased 3.2%, due primarily to
legal and other costs incurred in connection with the Company's ongoing
acquisition and development efforts. Interest expense increased $1.7 million, or
18.7%, due to additional borrowings under the line
14
<PAGE>
of credit for completed acquisitions and development. Amounts outstanding under
lines of credit averaged $69,450 for the three months ended June 30, 1996
compared to $29,013 for the three months ended June 30, 1995. Distributions in
excess of earnings allocated to Other Operating Partnership Unitholders of $1.4
million and $1.6 million for the three months ended June 30, 1996 and 1995 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 Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995
Summary. Net income of the Operating Partnership before interest of Other
Operating Partnership Unitholders increased $1.4 million, or 10.2%, from $13.6
million for the six months ended June 30, 1995, to $15.0 million for the six
months ended June 30, 1996. FFO increased $2.3 million, or 10.6%, during the
same period. Net income of the Company increased from $1.9 million, or $0.21 per
share, for the six months ended June 30, 1995 to $3.1 million, or $0.32 per
share, for the six months ended June 30, 1996. The increase in both net income
and FFO results from increases in operating income from the rental properties,
primarily the acquisitions 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.
Rental Properties. Revenue from rental properties increased $11.3 million, or
16.4%, from $68.8 million for the six months ended June 30, 1995, to $80.1
million for the six months ended June 30, 1996. The eight acquisition and
development properties (consisting of 1,998 units), contributed $8.7 million, or
78%, of the rental property revenue increase. Two properties purchased in 1994
totaling 627 apartment units were transferred into the core portfolio on January
1, 1996. Average monthly revenue per apartment unit of the core portfolio
increased 3.9% from $844 per month for the six months ended June 30, 1995, to
$877 per month for the six months ended June 30, 1996 due to market rent
increases and improved occupancy. Average economic occupancy was 97.2% for the
six months ended June 30, 1996 versus 96.7% for the six months ended June 30,
1995. In addition, the Company recognized a $0.2 million fee during the first
quarter of 1996 for reimbursement of costs associated with ongoing rental
property operations. Together, these factors resulted in a $2.5 million, or
3.9%, increase in revenue from the core properties for the six months ended June
30, 1996 compared to the six months ended June 30, 1995.
Retail revenues increased slightly (1.5%) with no significant changes in
occupancy or rental rates.
Expenses from rental operations increased $6.2 million, or 19.9%, from $31.1
million for the six months ended June 30, 1995, to $37.3 million for the six
months ended June 30, 1996. The increases resulted primarily from the
acquisition/development of 1,826 units (subsequent to the first quarter of 1995)
which added $4.1 million to operating expenses compared to the prior year
15
<PAGE>
period. The increase of $2.0 million in operating expenses for the core
portfolio was primarily due to the record cold temperatures and snowfall
experienced in the Washington, D.C. region during the first quarter of 1996.
This was primarily due to higher operating expenses for snow removal and
utilities, particularly fuel consumption, at the residential properties. In
addition, depreciation increased $0.9 million due to the acquisition of the
1,826 units.
Property Service Businesses. The Company's 99% equity in the earnings of the
Property Service Businesses increased $0.8 million, or 39.4%, during the six
months ended June 30, 1996 compared to the six months ended June 30, 1995.
Operating income before depreciation and amortization increased $0.7 million, or
26.5%, from $2.8 million for the six months ended June 30, 1995, to $3.6 million
for the six months ended June 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.
The decrease in revenues and operating income for Interior Construction and
Renovation Services during the six months ended June 30, 1996 compared to the
comparable prior year is primarily due to a shift to lower margin, third party
construction management services compared to higher margin renovation services
provided to affiliated partnerships.
Operating income from Engineering and Technical Services declined 4.2%
despite a 3% increase in revenue due primarily to an increase in lower margin
third party consulting work, a decrease in HVAC projects, and the adverse impact
of severe winter weather during the first quarter.
Revenue from Financing Services increased $.3 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. In addition, refinancings during the six months ended June 30, 1996
were approximately $27 million higher than the comparable prior year period.
Other. General and administrative expenses increased $.1 million, or 8.2%,
due to legal and other costs incurred in connection with the Company's ongoing
acquisition and development efforts. Interest expense increased $3.4 million, or
19.4%, due to additional borrowings under the lines of credit for acquisitions.
Distributions in excess of earnings allocated to Other Operating Partnership
Unitholders decreased from $3.8 million during the six months ended June 30,
1995 to $3.6 million for the six months ended June 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
16
<PAGE>
(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 as an alternative to
net income as an indicator of the Company's operating performance, or as an
alternative to cash flow from operations as a measure of liquidity or ability to
pay dividends.
Funds from Operations for the three and six months ended June 30, 1996 and
1995 are computed as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
- ----------------------
<S> <C> <C> <C> <C>
Net Income of the Operating
Partnership $ 8,296 $ 7,447 $ 14,992 $ 13,600
Depreciation of Real Property 4,336 3,918 8,728 7,848
-------- -------- -------- --------
Funds from Operations of the
Operating Partnership 12,632 11,365 23,720 21,448
Interest of Other Operating
Partnership Unitholders 6,913 6,561 13,022 12,365
-------- -------- -------- --------
Attributable to Shareholders $ 5,719 $ 4,804 $ 10,698 $ 9,083
======== ======== ======== ========
</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:
17
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
(Dollars in Thousands)
Cash from operating
activities $ 25,936 $ 23,947
Proceeds from lines of
credit and construction
loans, net 17,932 19,083
</TABLE>
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>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
(Dollars in Thousands)
Acquisition and development of
rental properties $ 17,144 $ 13,616
Dividends and distributions 21,465 20,290
Capital improvements 2,248 2,636
Principal payments on mortgage debt 352 159
</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.
Subsequent to June 30, 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 on July 30, 1996 for approximately
$42 million in cash funded through borrowings against the lines of credit. On
August 2, 1996, a 115-unit apartment community located in
18
<PAGE>
Washington, D.C. was acquired for $5.2 million based upon assumed debt of $3.3
million and an exchange of approximately 78,800 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 June 30, 1996, the Company had mortgage indebtedness and borrowings
under the lines of credit and construction loan as follows:
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
--------- -----
<S> <C> <C>
Long-term mortgage debt
(maturities greater than 1 year)
Fixed rate $ 365,321 72.9%
Variable rate - -
Short-term mortgage debt
(maturities less than 1 year)
Fixed rate 30,966 6.2%
Variable rate 17,334 3.5%
$100M Acquisition Line of Credit 39,450 7.9%
$83M Acquisition Line of Credit 30,000 6.0%
Construction loan 17,686 3.5%
--------- ------
Total Debt $ 500,757 100.0%
========= ======
</TABLE>
As of June 30, 1996, the Company's Debt to Total Market Capitalization Ratio
was 48.7%, based on 9,867,163 shares and 12,068,458 partnership units
outstanding at a stock price of $24.00. The Company's Debt Coverage Ratio for
the three months ended June 30, 1996 was 2.37:1.
Dividends and Distributions
During the six months ended June 30, 1996, the Company and the Operating
Partnership paid dividends/distributions of $21.5 million, or $.49 per
share/unit, representing an annual rate of $1.96 per share/unit.
19
<PAGE>
Other
For the six months ended June 30, 1996, total capital improvements were $2.2
million, of which $1.7 million, or $136 per core apartment unit, were for the
core portfolio. Approximately 45% 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 55% of 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:
<TABLE>
<CAPTION>
Total $ Actual # of Average $ Per Average $ Per
Expenditure Type Spent Units Improved Units Improved Core unit
- ---------------- ----- -------------- -------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Replacements:
Appliances $ 251.0 458 $ 548 $ 20
Window treatments 7.1 13 546 1
Carpet 297.4 266 1,118 24
Tile 6.1 8 763 1
Renovations:
Kitchen 80.3 44 1,825 6
Bath 117.1 30 3,903 9
--------- ---------
Total revenue generating
improvements 759.0 61
Non-revenue generating
improvements 934.7 75
--------- ---------
Total capital expenditures
- core $ 1,693.7 $ 136
========= =========
</TABLE>
20
<PAGE>
PART II
Item 1. Legal Proceedings.
Regarding the suit filed against Smith Realty Company on November 8,
1995, alleging sexual harassment and employment discrimination based on
sexual preference pursuant to Title VII of the Civil Rights Act of 1964,
the company's motion for summary judgment was granted in full on June 7,
1996, resulting in a dismissal of all claims. On June 20, 1996, the
plaintiff appealed to the United States Court of Appeals for the Fourth
Circuit for a review of the judgment, and such request is not expected to
be considered until early 1997. The Company reaffirms its belief that an
adverse outcome in the remaining litigation would not have a material
adverse impact on the Company's financial condition or results of
operations.
The Company previously reported on two lawsuits brought in 1994 by Alder
Branch Realty Limited Partnership, a limited partner in Plaza Associates
Limited Partnership ("Plaza") and Tower Associates Limited Partnership
("Tower"), whose multifamily properties are currently being managed by
Smith Realty Company ("SRC"), one of the Company's Property Service
Businesses: one against Robert H. Smith, as a general partner of Plaza
and Tower, and its managing agent, Charles E. Smith Management, Inc.
("CES"), whose residential management business was purchased by the
Operating Partnership in the Formation Transactions; and the other,
purporting to be a class action, against Ernest A. Gerardi, Jr., and
Messrs. Smith and Kogod, present or former officers of CES. These suits
allege breaches of fiducuary duties by the general partners and the
payment of unfair and excessive management fees. Because the Company did
and does not believe that the outcome of the suits will jeopardize the
continued management of Plaza's and Tower's multifamily properties by SRC
or have a material impact on other properties which are managed by SRC
but which did not participate in the Formation Transactions, or that an
adverse outcome in such litigation would have a material adverse effect
on the Company's financial condition or results of operations, the
Company previously stated that it would no longer report on these
proceedings in its filings with the Commission. On May 31, 1996, however,
Alder Branch Limited Partnership filed a similar lawsuit against the
Company and the Operating Partnership, as well as two of the three
general partners of Tower, alleging the payment of unfair and excessive
management fees and breaches of fiduciary duties by the named general
partners of Tower. The suit seeks the restitution of fees paid to SRC by
Tower, a rescission of the management agreement, and compensatory and
punitive damages in unspecified amounts. The defendants in the latest
action have filed a motion to dismiss with prejudice all counts against
the Company and the Operating Partnership, which is scheduled to be heard
on September 6, 1996. The Company believes that it is highly unlikely
that the relief demanded in this lawsuit will be granted, but that even
an adverse outcome in such litigation would not have a material adverse
effect on the Company's financial condition or results of operations. If
a recovery against the Company were granted, it would be entitled to
reimbursement from Robert H. Smith and Robert P. Kogod under a
previously-delivered indemnity agreement.
21
<PAGE>
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
The regular Annual Meeting of the Registrant was held on May 20, 1996. At
this Annual Meeting, incumbent Directors Fred J. Brinkman and Robert P.
Kogod were re-elected to the Board of Directors for terms ending in in
1999; Directors Fred J. Brinkman, Ernest A. Gerardi, Jr., Charles B. Gill,
Robert P. Kogod, Mandell J. Ourisman, Robert H. Smith, and Mallory Walker
continued their terms in office. The shareholders also voted at this Annual
Meeting to ratify the Board of Directors' appointment of Arthur Andersen
LLP as the independent auditors of the Registrant for the fiscal year
ending December 31, 1996. The votes cast at this Annual Meeting were as
follows:
Election of Fred J. Brinkman: FOR- 8,450,720 shares
WITHHELD- 7,962 shares
Election of Robert P. Kogod: FOR- 8,450,820 shares
WITHHELD- 7,862 shares
Ratification of Appointment of FOR- 8,444,575 shares
Arthur Andersen LLP AGAINST- 6,160 shares
ABSTAINING- 7,947 shares
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K
A Current Report of the Company on Form 8-K was filed on August 13,
1996, describing and presenting financial statements for real estate
properties acquired by the Company during the current fiscal year.
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: August 12, 1996 By: /s/ Anthony J. LoPinto
-----------------------------------------------
Anthony J. LoPinto
Executive Vice President, Chief
Financial Officer and Treasurer 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,084
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,634
<PP&E> 607,019
<DEPRECIATION> (181,214)
<TOTAL-ASSETS> 479,999
<CURRENT-LIABILITIES> 16,540
<BONDS> 500,757
0
0
<COMMON> 99
<OTHER-SE> (37,397)
<TOTAL-LIABILITY-AND-EQUITY> 479,999
<SALES> 0
<TOTAL-REVENUES> 80,112
<CGS> 0
<TOTAL-COSTS> 46,064
<OTHER-EXPENSES> 1,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,508
<INCOME-PRETAX> 14,992
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,992
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,131
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
