<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 March 31, 1997
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 May 2, 1997, there were 13,237,735 Shares of Common Stock of the
Registrant issued and outstanding.
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Charles E. Smith Residential Realty, Inc. Financial
Statements as of March 31, 1997 and December 31, 1996,
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 19
SIGNATURES 20
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION> March 31, 1997 December 31, 1996
--------------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Rental property, at predecessor cost, net $ 265,261 $ 267,658
Rental property, acquired and developed, net 330,847 202,435
Cash and cash equivalents 1,221 3,898
Tenants' security deposits 3,515 3,521
Escrow funds 8,761 6,087
Investment in and advances to Property Service Businesses
and other 16,099 10,756
Deferred charges, net 17,268 17,646
Other assets 9,310 10,210
--------------------- ------------------
$ 652,282 $ 522,211
===================== ==================
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C>
Liabilities
Mortgage loans $ 487,778 $ 416,808
Notes payable 57,650 129,736
Accounts payable and accrued expenses 12,772 9,525
Tenants' security deposits 3,515 3,521
-------------------- ------------------
Total liabilities 561,715 559,590
-------------------- ------------------
Minority Interest 45,633 -
Commitments and contingencies
Shareholders' equity
Common stock - $.01 par value; 95,000,000 shares
authorized; 13,232,953 and 9,969,607 shares issued
and outstanding at March 31, 1997 and
December 31, 1996, respectively 133 100
Additional paid-in capital - including contributed
deficit of $244,208 51,512 (23,852)
Retained deficit (6,711) (13,627)
-------------------- ------------------
Total shareholders' equity 44,934 (37,379)
-------------------- ------------------
$ 652,282 $ 522,211
==================== ==================
</TABLE>
The acompanying notes are an integral part of these statements.
3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
(Unaudited)
For the Three Months
Ended March 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
RENTAL PROPERTIES
Revenues $ 44,776 $ 38,837
Expenses
Operating Costs 16,434 15,426
Real estate taxes 2,917 2,442
Depreciation and amortization 4,851 4,392
------------- -------------
Total expenses 24,202 22,260
PROPERTY SERVICE BUSINESSES
Equity in income of Property
Service Businesses 809 1,548
Corporate general and administrative
expenses (1,391) (1,287)
Interest expense (11,427) (10,411)
Interest income 231 269
------------- -------------
Net income of the Operating Partnership 8,796 6,696
Minority Interest (4,613) (3,687)
Distributions in excess of earnings
allocated to Minority Interest -- (2,268)
------------- -------------
Net Income $ 4,183 $ 741
============= =============
Net income per share $ 0.36 $ 0.08
============= =============
</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 Per Share Data) Stock Capital (Deficit) Total
- ----------- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
261,484 to common stock 3 (3) - -
Adjustment for Unit Grants - 333 - 333
Net income - - 10,977 10,977
Dividends ($1.975 per share) - - (19,469) (19,469)
- ---------- -------- ----------- ---------- -----------
9,969,607 Balance, December 31, 1996 100 (23,852) (13,627) (37,379)
Operating Partnership equity
exchanged for acquisitions - 47,129 - 47,129
Proceeds of Offering, net of underwriting
3,105,000 discount and offering costs of $5,136 31 82,937 - 82,968
Conversion of Operating Partnership units
158,346 to common stock 2 (2) - -
Adjustment for Unit Grants - 134 - 134
Adjustment for Minority Interest - (54,871) 7,813 (47,058)
Other - 37 - 37
Net income - - 4,183 4,183
Dividends ($0.505 per share) - - (5,080) (5,080)
- ---------- -------- ----------- ---------- -----------
13,232,953 Balance, March 31, 1997 (unaudited) $ 133 $ 51,512 $ (6,711) $ 44,934
========== ======== =========== ========== ===========
</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 Three Months
Ended March 31,
-----------------------------------------
1997 1996
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 4,183 $ 741
Minority Interest 4,613 3,687
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 5,629 5,164
Distributions in excess of earnings
allocated to Minority Interest - 2,268
Increase in escrow funds (2,674) (1,664)
Decrease (increase) in other assets 875 (98)
Increase (decrease) in accounts payable and accrued expenses 3,247 (982)
----------------- -----------------
Net cash provided by operating activities 15,873 9,116
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (1,811) (17,131)
Additions to rental property (1,696) (824)
Decrease in related party payables:
Property Service Businesses - (589)
Predecessor - (625)
Increase in investment in and advances
to Property Service Businesses and other (5,309) (2,682)
Other 25 (1,000)
----------------- -----------------
Net cash used in investing activities (8,791) (22,851)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to deferred charges (332) (771)
Mortgages:
Proceeds - -
Repayments (9,194) (174)
Notes payable:
Proceeds from draws - 31,032
Repayments (72,086) (13,100)
Net offering proceeds 82,968 -
Dividends and distributions (11,115) (10,725)
----------------- -----------------
Net cash (used in) provided by financing activities (9,759) 6,262
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,677) (7,473)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,898 9,478
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,221 $ 2,005
----------------- -----------------
SUPPLEMENTAL INFORMATION:
Purchase of properties in exchange for Operating
Partnership units $ 47,129 $ 513
Assumption of debt on acquisition 80,164 -
Capitalized interest 8 -
Exercise of unit options 37 -
</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 in management's opinion,
includes all adjustments (consisting only of normal, recurring adjustments),
that are necessary for a fair presentation of financial position as of March 31,
1997 and the results of operations for the interim periods ended March 31, 1997
and 1996. 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.
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 March 31, 1997, the Operating Partnership owned
44 existing multifamily properties containing 17,028 apartment units, and two
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.
2. ACQUISITIONS
The Company, through the Operating Partnership, acquired 1,452
apartment units in February 1997 through the purchase of two high-rise
properties in Crystal City, Virginia. A 540-unit building was acquired for a
total cost of approximately $43.0 million consisting of 307,000 limited
partnership units of the Operating Partnership valued at $8.7 million, assumed
debt of $34.0 million (at fair market value) and acquisition related costs of
approximately $0.3 million. This property is subject to a 5.1% net profits
interest in favor of an unaffiliated third party. A 912-unit building was
purchased for a total cost of approximately $69.8 million consisting of 842,500
limited partnership units of the Operating Partnership valued at $23.9 million,
assumed debt of $45.0 million (at fair market value) and cash of $0.9 million.
7
<PAGE>
In March 1997, the Company acquired a 376-unit property in northwest
Washington, D.C. for a total cost of approximately $16.3 million consisting of
510,700 limited partnership units of the Operating Partnership valued at $14.5
million, assumed debt of $1.2 million, and acquisition related costs of
approximately $0.6 million.
As a result of these acquisitions, the stock offering (see Note 3)
and the conversion of partnership units into shares, the Company's weighted
average ownership percentage of the Operating Partnership increased from 44.9 %
for the three months ended March 31, 1996 to 47.6% for the three months ended
March 31, 1997.
3. STOCK OFFERING
During the first quarter of 1997, the Company completed a follow-on
equity offering and issued 3.1 million shares of common stock (the Offering) at
$28.375 per share totaling $83.0 million, net of underwriting discounts and
other expenses totaling $5.1 million. Net proceeds from the Offering were used
to repay $72.1 million of notes payable and $9 million of mortgage debt and to
fund the property acquisitions.
4. PER SHARE DATA
Earnings per share of the Company for the three months ended March 31,
1997 and 1996 is computed based on 11.5 million and 9.8 million shares,
respectively, which represents the weighted average number of shares and common
stock equivalents outstanding during the periods. Operating Partnership units
not held by the Company (weighted average of 12.6 million and 12.0 million,
respectively, for the quarters ended March 31, 1997 and 1996) may be redeemed at
the Unitholders' sole discretion. At the option of the Company, such redemption
may be made for cash at the then fair value of the Company's stock, or for
shares of common stock of the Company on a one-for-one basis which does not have
a dilutive effect. During the three months ended March 31, 1997, 158,346 units
were redeemed for shares of stock.
5. NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board (the FASB)
issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
(SFAS 128) which requires entities to exclude the effect of potentially dilutive
securities in the calculation of primary earnings per share. The standard will
be effective for interim and annual periods ending after December 15, 1997 and
will require restatement of comparative prior-period data. Had the standard
been implemented during the first quarter of 1997, both current and prior period
earnings per share would have been unchanged. Management does not expect this
standard to have any significant impact upon implementation.
8
<PAGE>
The FASB also issued Statement of Financial Accounting Standard No.
129, "Disclosure of Information About Capital Structure" which expands the
number of companies subject to existing disclosure requirements for securities
other than common stock. The standard will have no impact on the Company since
it already complies with such disclosure requirements.
6. RECLASSIFICATIONS
The Company changed the classification of certain senior management
payroll costs from property operating expenses to corporate general and
administrative expense. Management believes this reclassification more
accurately reflects property operations and is consistent with industry
practice. Amounts for the period ended March 31, 1996 have been reclassified to
conform to the current year's presentation. Had this reclassification not been
made, property operating expenses would have been higher and corporate general
and administrative expenses would have been lower by $0.5 million for each of
the periods ended March 31, 1997 and 1996.
Certain other reclassifications have also been made to the prior year
amounts to conform to the current year's presentation.
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 months ended March 31, 1997 and 1996 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 forward-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 income from the multifamily and retail properties
for the three months ended March 31, 1997 and 1996 were as follows (in
thousands):
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996/(1)/
---- ----
<S> <C> <C>
Multifamily Properties - Core/(2)/
Revenues $ 37,210 $ 36,298
Expenses (16,265) (16,882)
-------- --------
Income before depreciation $ 20,945 $ 19,416
======== ========
Multifamily Properties -
Acquisitions and Development
Revenues $ 5,124 $ 97
Expenses (2,238) (38)
-------- --------
Income before depreciation $ 2,886 $ 59
======== ========
Retail Properties
Revenues $ 2,442 $ 2,442
Expenses (848) (948)
-------- --------
Income before depreciation $ 1,594 $ 1,494
======== ========
Total Rental Properties
Revenues $ 44,776 $ 38,837
Expenses (19,351) (17,868)
Depreciation and amortization (4,851) (4,392)
-------- --------
Income from Rental Properties $ 20,574 $ 16,577
======== ========
</TABLE>
/(1)/ Reclassified for comparison purposes. See Note 6 to the Financial
Statements.
/(2)/ Represents properties owned as of December 31, 1995.
11
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the various Property Service
Businesses for the three months ended March 31, 1997 and 1996 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Multifamily and Retail Property
Management Services
Revenues $ 2,561 $ 3,107
Expenses (2,404) (2,192)
-------- --------
Income before depreciation
and amortization $ 157 $ 915
======== ========
Interior Construction and Renovation
Services
Net fee revenues $ 1,351 $ 1,031
Expenses (1,223) (1,167)
-------- --------
Income before depreciation
and amortization $ 128 $ (136)
======== ========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 12,301 $ 9,679
Expenses (11,273) (9,026)
-------- --------
Income before depreciation
and amortization $ 1,028 $ 653
======== ========
Financing Services
Revenues $ 0 $ 669
Expenses (243) (287)
-------- --------
Income before depreciation
and amortization $ (243) $ 382
======== ========
Total Property Services
Revenues $ 16,213 $ 14,486
Expenses (15,143) (12,672)
Depreciation and amortization (261) (266)
-------- --------
Income from Property
Service Businesses $ 809 $ 1,548
======== ========
</TABLE>
12
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1997 to Three Months Ended March 31,
1996.
Summary. Net income of the Operating Partnership increased $2.1
million, or 31.4%, from $6.7 million for the three months ended March 31, 1996
to $8.8 million for the three months ended March 31, 1997. Funds from Operations
("FFO") of the Operating Partnership increased $2.6 million, or 23.1%, from
$11.0 million to $13.6 million during the same period. Net income of the Company
increased from $0.7 million, or $.08 per share, for the three months ended March
31, 1996 to $4.2 million, or $0.36 per share, for the three months ended March
31, 1997. FFO of the Company increased 30.3%, from $5.0 million to $6.5 million
during the same period. The increases in both net income and FFO are primarily
attributable to the acquisition of six apartment properties during 1996 and the
first quarter of 1997. In addition, income from the core portfolio increased
nearly 8% over the prior year period due to both increased rents and expense
savings. These increases in income were partially offset by higher interest
expense related to the acquisitions as well as decreased income from the
Property Service Businesses. Also, there were no excess distributions to the
Minority Interest during the first quarter which increased the Company's net
income by $2.3 million.
Rental Properties. Revenue from all rental properties increased $5.9
million, or 15.3%, from $38.8 million for the three months ended March 31, 1996
to $44.7 million for the three months ended March 31, 1997. The six acquisition
and development properties (defined as properties acquired or developed
subsequent to December 31, 1995) contributed approximately 85%, or $5.0 million,
of the total rental revenue increase. Three of the acquisitions (comprising
1,002 apartment units) were completed during 1996 and three (comprising 1,828
units) were completed in the first quarter of 1997. The core portfolio
contributed the remaining increase in revenue of $0.9 million, a 2.5% increase
over the prior year period.
Average monthly revenue per core apartment increased from $852 during
the first quarter of 1996 to $874 per unit during the current quarter primarily
due to rent increases initiated during 1996. In addition, revenue-enhancing
initiatives such as the premium for month-to-month leases and the non-refundable
move-in fee generated approximately $0.3 million in revenue over the comparable
prior year period. However, these increases were partially offset by higher than
expected vacancies during January and February, particularly for furnished
apartments at Gateway Place. As a result, net revenues from furnished apartments
were flat and average economic occupancy for the core portfolio was down to
95.9% for the three months ended March 31, 1997 compared to 96.5% for the
comparable prior year quarter. However, aggressive efforts by management brought
occupancy back up to 96.4% in March with substantial improvement in leasing of
furnished apartments.
Retail revenues during the three months ended March 31, 1997 were
unchanged compared to the prior year period primarily due to vacancies which
offset rent increases. Unamortized
13
<PAGE>
deferred rents were written off for one tenant at Skyline Mall and three tenants
at Worldgate Centre who either vacated or declared bankruptcy during the
quarter. Although average occupancy for Skyline Mall was essentially unchanged
compared to the prior year's first quarter, occupancy at Worldgate Centre
declined from 100% to 97.4%, respectively, for the three months ended March 31,
1996 and 1997.
Expenses from all rental operations (including depreciation) increased
$1.9 million, or 8.7%, from $22.3 million during the first quarter of 1996 to
$24.2 million during the current quarter. The six properties in the
acquisition/development portfolio contributed additional depreciation expense of
$0.5 million and other property operating expenses of $2.2 million. These
increases were offset by expense reductions in both the core and retail
portfolios of $0.6 million (3.7%) and $0.1 million (10.6%), respectively. Core
expenses decreased primarily due to a much milder winter in 1997 compared to
1996 resulting in savings of $0.7 million in utility costs which were partially
offset by higher real estate taxes in 1997. Retail expenses at Skyline Mall
decreased in 1997 due to a large maintenance project in 1996 which could not be
passed through to the tenants.
Property Service Businesses. Income from the Property Service
Businesses decreased from $1.5 million during the first quarter of 1996 to $0.8
million for the first quarter of 1997. The decrease was primarily due to the
fact that no financing services fees were earned during the quarter. Also, 1996
results reflect a non-recurring fee of $0.6 million related to the termination
of a management agreement with a hotel owned by a related party. These decreases
were partially offset by higher income for both Engineering and Technical
Services and Interior Construction and Renovation Services. The Company uses the
equity method of accounting for investments in the Property Service Businesses.
During the three months ended March 31, 1997, Interior Construction
and Renovation Services' net fee revenue increased $0.3 million, or 31.0%, with
no significant increase in expenses compared to the prior year quarter. The
revenue increase was due primarily to the addition of several large general
contracting projects for third party clients during the first quarter of 1997
compared to the prior year. Expenses remained relatively unchanged due
partially to the prior year's severe winter weather which resulted in project
delays and higher than usual unbillable labor.
Revenues for Multifamily and Retail Property Management decreased $0.5
million, or 17.6%, during the first quarter of 1997 as compared to the
comparable prior year quarter due primarily to the non-recurring fee of $0.6
million earned in 1996 in connection with the termination of a management
agreement with a hotel owned by a related party.
Engineering and Technical Services revenue increased $2.6 million, or
27.1%, during the first quarter with resulting increases of 24.9% in expenses
and 57.4% in income. Two new contracts for HVAC operations and maintenance as
well as significant additional work under existing
14
<PAGE>
contracts contributed approximately $1.5 million of the increased revenues.
Typically, contract extras earn higher margins than base contract work. The
balance of the revenue increase was generated by several large repair and
replacement projects for affiliated partnerships.
Other. Corporate general and administrative expenses increased 8.1%,
due primarily to write-offs of capitalized costs for terminated acquisition
projects. Interest expense increased $1.0 million, or 9.8%, due to additional
borrowings for completed acquisitions and development.
As a result of the follow-on equity offering completed during the
first quarter of 1997 (see LIQUIDITY AND CAPITAL RESOURCES), the original
Minority Interest deficit created at the initial public offering was
eliminated. Therefore, distributions to the Minority Interest which exceed
allocated earnings are no longer charged to the Company as General Partner of
the Operating Partnership but are charged directly against the Minority
Interest. Distributions in excess of earnings allocated to Minority Interest of
$2.3 million for the three months ended March 31, 1996 have no effect on FFO.
Funds from Operations. Funds from Operations (FFO) is defined under
the revised definition adopted by the National Association of Real Estate
Investment Trusts (NAREIT) as net income (loss) (computed in accordance with
generally accepted accounting principles) excluding gains (or losses) from debt
restructuring, and distributions in excess of earnings allocated to Minority
Interest, plus depreciation/amortization of assets unique to the real estate
industry. Depreciation/amortization of assets not unique to the industry, such
as amortization of deferred financing costs and non-real estate assets, is not
added back. FFO does not represent cash flow from operating activities in
accordance with generally accepted accounting principles (which, unlike Funds
from Operations, generally reflects all cash effects of transactions and other
events in the determination of net income) and should not be considered an
alternative to net income as an indication of the Company's performance or to
cash flow as a measure of liquidity or ability to make distributions. The
Company considers FFO a meaningful, additional measure of operating performance
because it primarily excludes the assumption that the value of real estate
assets diminishes predictably over time, and because industry analysts have
accepted it as a performance measure. Comparison of the Company's presentation
of FFO, using the NAREIT definition, to similarly titled measures for other
REITs may not necessarily be meaningful due to possible differences in the
application of the NAREIT definition used by such REITs.
15
<PAGE>
Funds from Operations for the three months ended March 31, 1997 and
1996 are computed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Net Income of the Operating Partnership $ 8,796 $ 6,696
Depreciation of Real Property 4,851 4,392
------- -------
Funds from Operations of the
Operating Partnership 13,647 11,088
Minority Interest (7,157) (6,106)
------- -------
Attributable to Shareholders $ 6,490 $ 4,982
======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Summary. Net cash flow provided by operating activities increased $6.8
million from $9.1 million for the three months ended March 31, 1996 to $15.9
million for the three months ended March 31, 1997. The increase is a result of
an additional $2.6 million of FFO of the Operating Partnership and an increase
of $4.2 million in accounts payable due primarily to property acquisitions and
accrued real estate taxes.
Net cash flow used by the Company in investing activities was $8.8
million for the three months ended March 31, 1997 versus $22.9 million for the
three months ended March 31, 1996. The decrease of $14.1 million was due
primarily to cash acquisitions made during the first quarter of 1996 versus unit
swap acquisitions during the first quarter of 1997. Partially offsetting the
decrease was additional investments and advances to the Property Service
Businesses of $2.6 million.
Net cash flows used by financing activities was $9.8 million for the
three months ended March 31, 1997 compared to $6.2 million provided by financing
activities in the first quarter of 1996 for a net decrease of $16 million.
During the first quarter of 1997, the Company issued 3.1 million shares of
common stock in an equity offering at $28.375 per share resulting in proceeds of
$83.0 million, net of underwriting discounts and other expenses totaling $5.1
million. In conjunction with this offering, the Company acquired three
properties and repaid $72.1 million on the line of credit and $9.0 million of
mortgage debt. During the three months ended March 31, 1996, however, the
Company had net borrowings on the line of credit of $18 million to fund the
acquisitions made during that quarter. During the three months ended March 31,
1997 and 1996,
16
<PAGE>
the Company and the Operating Partnership paid dividends/distributions of $11.1
million and $10.7 million, respectively, or $ 0.505 and $0.49 per share/unit.
Debt
The Company completed the acquisition of three multifamily properties
during the quarter totaling 1,828 apartment units, for a total cost of $129.1
million consisting of Operating Partnership Units valued at $47.1 million,
assumed debt of $80.2 million and cash of approximately $1.8 million. One of the
properties is subject to a 5.1% net profits interest in favor of an unaffiliated
third party.
As of March 31, 1997, the Company had mortgage indebtedness and other
borrowings, which carried a weighted average interest rate of 8%, as follows:
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
----------- -----
<S> <C> <C>
Long-term mortgage debt
(maturities greater than 1 year)
Fixed rate $479,579 87.9%
Short-term mortgage debt
(maturities less than 1 year)
Variable rate 8,199 1.5%
$100M Acquisition Line of Credit 27,650 5.1%
$83M Acquisition Line of Credit 30,000 5.5%
-------- ----
$545,428 100.0%
======== ======
</TABLE>
The Company had $125.4 million of unused borrowing capacity available
on lines of credit as of March 31, 1997. Amounts outstanding under lines of
credit averaged $90.2 million for the three months ended March 31, 1997 compared
to $60.0 million for the three months ended March 31, 1996. In April 1997, the
Company renegotiated the terms of its existing $100 million line of credit. The
revised line reduces by 38 to 65 basis points the current spread over the London
Interbank Offering Rate (LIBOR), based on the outstanding balance and the value
of the collateral. In addition, maturity has been extended until June 30, 2000
and several covenants in the agreement were modified to provide the Company
greater flexibility.
17
<PAGE>
As of March 31, 1997, the Company's Debt to Total Market
Capitalization Ratio was 42.9%, based on 13.2 million shares and 13.5 million
partnership units outstanding at a stock price of $27.125. The Company's Debt
Coverage Ratio for the three months ended March 31, 1997 was 2.36 to 1.
Capital Expenditures
For the three months ended March 31, 1997, total capital improvements
were $1.7 million, of which $1.5 million, or $106 per core apartment unit, were
for the core portfolio. Approximately 50% of the capital expenditures on the
core portfolio are considered by management to be revenue generating or economic
improvements, as shown below, which the Company believes directly affect its
ability to increase rents. The remaining capital expenditures on the core
portfolio 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 Unit Improved Core Unit
- ---------------- ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
(in thousands)
Installations/Replacements:
Appliances $ 172 298 $ 577 $ 12
Carpet 389 245 1,588 28
Other 27 21 1,286 2
Renovations:
Kitchen 45 21 2,143 3
Bath 116 131 885 8
------ ------
Total revenue generating
improvements 749 53
Non-revenue generating
improvements 755 53
------ ------
Total capital expenditures
- core portfolio $1,504 $ 106
====== ======
</TABLE>
18
<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.
May 14, 1997 By: /s/ W. D. Minami
-------------------------------------------------
W. D. Minami
Senior Vice President and Chief Financial Officer
of Charles E. Smith Residential Realty, Inc.
(on behalf of the Registrant and as Principal
Financial Officer)
20
<PAGE>
PART II
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
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 February
3, 1997, describing and providing certain financial statements for
three real estate properties to be acquired by an affiliate of the
Company.
A Current Report of the Company on Form 8-K was filed on February
21, 1997 describing a registered offering of stock in the Company
and providing in connection therewith the underwriting agreement
and opinion of outside counsel regarding the legality of the
issuance of such stock.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,221
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,276
<PP&E> 790,800
<DEPRECIATION> (194,691)
<TOTAL-ASSETS> 652,282
<CURRENT-LIABILITIES> 16,287
<BONDS> 545,428
0
0
<COMMON> 133
<OTHER-SE> 44,801
<TOTAL-LIABILITY-AND-EQUITY> 652,282
<SALES> 0
<TOTAL-REVENUES> 44,776
<CGS> 0
<TOTAL-COSTS> 24,202
<OTHER-EXPENSES> 1,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,196
<INCOME-PRETAX> 8,796
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,796
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,183
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
