<PAGE>
PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-340
SUBJECT TO COMPLETION DATED JANUARY 31, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 7, 1996
2,700,000 SHARES
[LOGO] CHARLES E. SMITH RESIDENTIAL REALTY, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
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Charles E. Smith Residential Realty, Inc. is a self-administered and self-
managed public equity real estate investment trust ("REIT") that is engaged
primarily in the acquisition, development, management and operation of
multifamily properties in the Washington, D.C. metropolitan area. As of
December 31, 1996, the Company owned 41 multifamily apartment communities
containing a total of 15,200 units (the "Multifamily Properties") and two
retail centers containing approximately 436,000 square feet of retail space
(the "Retail Properties"), all located in the Washington, D.C. metropolitan
area. Since its initial public offering ("IPO") in mid-1994, the Company has
increased its multifamily residential portfolio by 3,365 apartment units, or
approximately 28.4%, through acquisitions and development. The Company
currently has pending additional acquisitions totaling 1,828 apartment units as
well as several development projects in various planning stages.
The 2,700,000 shares of Common Stock of the Company offered hereby are being
sold by the Company. After giving effect to this offering, the senior members
of the Company's management and their families will own Common Stock and units
of limited partnership interest in the Operating Partnership which may be
exchanged for Common Stock (the "Operating Partnership Units") representing
approximately 18.3% of the total outstanding equity of the Company on a fully-
converted basis. The Common Stock is listed on the New York Stock Exchange (the
"NYSE") under the symbol "SRW." The last reported sale price for the Common
Stock on the NYSE on January 29, 1997 was $29.00 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE COMMON STOCK.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
</TABLE>
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(1) The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters an option exercisable for 30 days
to purchase up to 405,000 additional shares of Common Stock at the initial
public offering price per share less the underwriting discount, solely to
cover over-allotments, if any. If such option is exercised in full, the
total initial public offering price, underwriting discount and proceeds to
the Company will be $ , $ and $ , respectively. See "Underwriting."
----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York on
or about , 1997 against payment therefor.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEGG MASON WOOD WALKER
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
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The date of this Prospectus Supplement is , 1997.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
*******************************************************************************
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus Supplement and the accompanying Prospectus or
incorporated herein and therein by reference. Unless indicated otherwise, the
information contained in this Prospectus Supplement assumes that the
Underwriters' overallotment option is not exercised. As used herein, the term
"Company" includes Charles E. Smith Residential Realty, Inc., a Maryland
corporation, Charles E. Smith Residential Realty L.P. (the "Operating
Partnership") and/or one or more of its subsidiaries, as appropriate, the term
"Common Stock" refers to the common stock, par value $.01 per share, of the
Company and the offering of Common Stock made hereby is herein referred to as
the "Offering." This Prospectus Supplement and the accompanying Prospectus
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
are discussed in the section entitled "Risk Factors" beginning on page 2 of the
accompanying Prospectus.
THE COMPANY
Charles E. Smith Residential Realty, Inc. is a public equity REIT that is
engaged primarily in the acquisition, development, management and operation of
multifamily properties in the Washington, D.C. metropolitan area. Together with
its subsidiaries, the Company is a fully integrated real estate organization
with in-house acquisition, development, financing, marketing, leasing and
property management expertise. The Company is structured as an umbrella
partnership REIT ("UPREIT"), under which all of the Company's properties (the
"Properties"), property interests, and business assets are owned by, and its
operations are conducted through the Operating Partnership and its
subsidiaries. As of December 31, 1996, the Company owned 41 multifamily
apartment communities containing a total of 15,200 units (the "Multifamily
Properties") and two retail centers containing approximately 436,000 square
feet of retail space (the "Retail Properties").
The Company's primary business is to acquire, develop, own and manage high
quality multifamily properties for income generation and long-term value
appreciation. Since its IPO, the Company has increased its multifamily
portfolio by 3,365 apartment units, or approximately 28.4%, through
acquisitions and development. The Company currently has pending additional
acquisitions totaling 1,828 apartment units as well as several development
projects in various planning stages.
All of the Properties are located in the Washington, D.C. metropolitan area,
which traditionally has been, and which the Company believes will continue to
be, among the strongest regions in the United States for multifamily rental
properties. The region is the country's fifth largest employment market with
more than 2.9 million jobs, according to a report prepared by the U.S. Dept. of
Commerce, Bureau of Economic Analysis, released in mid-1996. The same source
projects that 648,000 jobs will be added in the region over the period from
1993 to 2005, an average increase of over 50,000 jobs annually. This is the
third largest projected employment increase of all U.S. cities.
The multifamily apartment market in the Washington, D.C. metropolitan area
had an average occupancy rate of 96.4% in January 1997 and is forecasted to
have an average occupancy rate between 96.4% and 97.0% in the 1997 to 2001
period, according to surveys and analysis of investment grade apartment
properties conducted by the REIS Reports, Inc. The average occupancy
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rate of the Company's core residential portfolio properties (consisting of all
properties owned by the Company as of December 31, 1994) of 97.0% in 1996
exceeded the reported averages.
The Company is the sole general partner and owned approximately 45% of the
Operating Partnership Units as of December 31, 1996. The other limited partners
of the Operating Partnership are the former limited and general partners of
partnerships that owned the properties, and the former owners of certain
property service businesses, acquired by the Operating Partnership either at
the time of its formation in June 1994 or at various times thereafter. In
addition, the Operating Partnership owns 100% of the nonvoting common stock,
which represents 99% of the total economic interest, of three operating
companies (collectively, the "Property Service Businesses") which provide
property services to the Properties and to multifamily, retail, and office
properties owned by affiliated and other third parties.
The Company and its predecessor have been in operation since 1946. After
giving effect to this Offering, the senior members of the Company's management
and their families will own approximately 18.3% of the total outstanding equity
of the Company (including Common Stock and Operating Partnership Units).
RECENT FINANCIAL PERFORMANCE
The Company reported an increase of $3.5 million, or 17.1%, in consolidated
funds from operations ("FFO") for the year ended December 31, 1996. FFO for
1996 was $23.9 million compared to $20.4 million for the year ended December
31, 1995. FFO is defined 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 holders of
Operating Partnership Units other than the Company (the "Other Operating
Partnership Unitholders"), plus depreciation/amortization of assets unique to
the real estate industry. The Company considers FFO a meaningful measure of the
operating performance of an equity REIT because it is generally recognized by
industry analysts. Net income of the Company increased from $7.5 million, or
$.81 per share, for 1995 to $11.0 million, or $1.11 per share, for 1996. The
weighted average number of shares of Common Stock and Operating Partnership
Units and equivalents outstanding was 21,602,955 and 21,907,632 for the years
ended December 31, 1995 and December 31, 1996, respectively. Revenues from
rental properties increased 14.7%, or $21.4 million, from $144.9 million for
1995 to $166.3 million for 1996.
OPERATING PHILOSOPHY AND GROWTH STRATEGY
The Company's operating philosophy is to provide a quality living experience
for its residents by offering high-quality locations, buildings and amenities,
and caring, responsive service. The Company believes that this will give its
Properties superior appeal to both current and prospective residents, resulting
in high occupancy, premium rents, and low turnover and position the Company to
most effectively achieve its corporate objectives of strong revenue growth and
annual increases in FFO and shareholder value. To achieve these corporate
objectives, the Company is pursuing three primary strategies for growth:
. INCREASE INTERNAL GROWTH--through a broad combination of initiatives
designed to achieve stronger revenue growth and increased organizational
and operational efficiencies.
. INCREASE EXTERNAL GROWTH--through increased acquisition and development
activity, including geographic expansion into additional metropolitan
markets with characteristics that
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will allow the Company to benefit from its competitive advantages in
high-rise property expertise and Operating Partnership Unit exchange
transactions.
. INCREASE FINANCIAL FLEXIBILITY TO FUND GROWTH--through a combination of
additional equity capital, lower payout and debt ratios, and lower cost
credit.
INCREASE INTERNAL GROWTH
The Company seeks to maximize the cash flow from its Properties by
optimizing the trade-off between increasing rental rates and maintaining high
occupancy levels. Consistent with this strategy, the Company maintains above-
market average rental rates and occupancy levels. Rental rate increases are
being augmented by a number of new initiatives. To take advantage of higher
profits generated by furnished apartments over traditional leases the Company
is expanding its furnished rental apartment program, "Smith Corporate Living,"
from approximately 400 units presently to 800 units by the end of 1998. The
Company has also increased revenues by initiating policies such as charging
move-in fees in lieu of refundable security deposits and premiums for month-
to-month leases, which together are expected to result in additional revenues
of at least $1 million in 1997.
The Company has also taken steps to improve organizational and operational
efficiencies. Beginning in November 1996, the Company began to outsource the
cleaning of its Multifamily Properties, thereby reducing on-site staff and
creating a projected annual savings of approximately $700,000. In addition,
outsourcing provides resident managers with more time to focus on residents'
needs, leasing activity and competing properties. The Company has also
realigned senior property management by submarket to enhance decision-making
and to provide more flexibility in adapting its strategies to meet submarket
conditions. The realignment included moving more decision-making
responsibilities to resident managers who are in closer contact with the
residents, thereby permitting a reduction in the number of property management
staff. This change is projected to result in an annual savings of
approximately $300,000. The Company is centralizing its procurement process,
reducing the number of vendors it uses and negotiating partnering
relationships with selected vendors to increase operating and management
efficiencies and reduce costs.
The Company is also pursuing strategic capital investments in its Properties
such as garages, gated communities, fitness/business centers and lobby
renovations as well as potential dispositions that will enable the Company to
achieve higher returns on invested capital.
INCREASE EXTERNAL GROWTH
The Company intends to increase its external growth by expanding both its
acquisition and its development programs. The Company expects to continue to
aggressively pursue its acquisition and development activities in its current
market, and also expand its efforts geographically into additional
metropolitan markets where the Company believes it will have a competitive
advantage as an operator of high-rise and mid-rise metropolitan properties.
The Company believes that its status as a publicly traded REIT conducting
business through the Operating Partnership enhances its ability to acquire
both existing properties and development land, by providing it with the
flexibility to structure transactions that are mutually beneficial to the
Company and the seller. The Company believes that its ability to use Operating
Partnership Units as consideration in acquisitions structured to provide
sellers deferral of current federal income taxation on gains permits it to
make acquisitions that otherwise may not be economically feasible for the
seller. Since its IPO, the Company has acquired 10 Multifamily Properties
containing 3,045 apartment units, of which 1,068 apartment units were
exchanged for Operating Partnership Units, for a total investment
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in acquired properties of approximately $178.0 million. In addition, the
Company has another 1,828 apartment units which it expects to acquire in the
first quarter of 1997 for a combination of equity in the form of Operating
Partnership Units, assumption of debt and a small amount of cash.
ACQUISITION STRATEGY
The Company seeks to acquire properties that are located in established
metropolitan submarkets and that it believes can benefit from the Company's
management expertise, and in many cases from physical renovations and
improvements, to attain improved financial performance. The Company believes
that its experience in acquiring both high-rise and garden style properties
gives it a competitive advantage over other public REITs active in its market
that focus primarily on garden properties. The Company particularly seeks
properties of longer term owners with low or negative basis, where the ability
of the Company to exchange Operating Partnership Units for the property
provides an advantage to the seller. The Company believes that this approach
reduces potential competition, enabling it to charge rents and maintain
occupancy levels that result in higher returns over the long term.
GEOGRAPHIC EXPANSION
In addition to continuing acquisition activities in its current market, the
Company is evaluating and pursuing opportunities in other markets. The
Company's strategy is to acquire both high-rise and garden-style properties or
portfolios with characteristics similar to the Company's portfolio, with an
emphasis on operating companies with existing management capabilities and
operating philosophies similar to the Company's. The Company intends to acquire
well-located, high-quality properties in markets that offer opportunities for
profitable investment because of the strengths of the local economies and the
prospects for long-term growth in excess of industry averages. The Company
believes that such geographic diversification will permit faster portfolio
growth and will reduce the Company's dependence on the economic growth of a
single market.
PENDING ACQUISITIONS
The Company, through the Operating Partnership, has executed agreements to
acquire three properties, containing 1,828 apartment units, for approximately
$129 million (subject to adjustment under certain circumstances) (the "Pending
Acquisitions"), which upon acquisition will result in an increase in the
Company's multifamily portfolio by 44% since the IPO, for a total of 17,028
apartment units. There can be no assurance that any of these acquisitions will
be completed. The Pending Acquisitions are subject to certain conditions, which
include the consent of partners of the partnerships that own the properties,
including Robert H. Smith, a general and limited partner of two of the
partnerships, and Robert P. Kogod, a limited partner of two of the
partnerships. Messrs. Smith and Kogod are Co-Chairmen and Co-CEOs of the
Company. These properties will be acquired through a combination of equity in
the form of Operating Partnership Units, assumption of debt and a small amount
of cash. The acquisition of the Crystal Plaza and Crystal Towers properties
will consolidate the ownership by the Company of all of the Smith-developed
multifamily communities in Crystal City and will increase by 64.4% the number
of apartment units that the Company owns in Crystal City, Virginia.
. CRYSTAL PLAZA. The Company has executed an agreement to acquire Crystal
Plaza, a 540-unit luxury high-rise property located in Crystal City,
Virginia for a total cost of approximately $43.0 million, consisting of
Operating Partnership Units with a value of $8.9 million (subject to
adjustment under certain circumstances), the assumption of $33.0 million of
debt, other acquisition costs and a fair value adjustment to debt. The
property is currently subject to a 5.1% net profits
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interest in favor of an unaffiliated third party. The Company has reached
an agreement in principle to acquire such net profits interest in exchange
for Operating Partnership Units with a value of $0.5 million. In the first
year after acquisition, the Company expects to realize an unleveraged yield
on capitalized costs of 9.15% after estimated recurring capital
expenditures. Messrs. Smith and Kogod and family have a 17.19% interest in
the partnership that owns Crystal Plaza. The average monthly revenue per
apartment unit for Crystal Plaza was $1,105 in 1995 and $1,167 in 1996 and
its average occupancy (calculated beginning on the rent commencement date)
was 98.8% in 1995 and 98.7% in 1996. Crystal Plaza was developed and
managed by the Smith Companies, the predecessor to the Company, with the
same quality standards as the Properties in the Company's portfolio.
. CRYSTAL TOWERS. The Company has executed agreements to acquire Crystal
Towers, a 912-unit luxury high-rise property located in Crystal City,
Virginia for a total cost of approximately $69.7 million, including
consideration of Operating Partnership Units valued at $24.1 million
(subject to adjustment under certain circumstances) the assumption of $46.0
million of debt, approximately $1.6 million in cash and certain acquisition
costs, reduced by a fair value adjustment to debt and the transfer of cash
reserves. In the first year after acquisition, the Company expects to
realize an unleveraged yield on capitalized costs of 9.19% after estimated
recurring capital expenditures. The average monthly revenue per apartment
unit for Crystal Towers was $1,002 in 1995 and $1,047 in 1996 and its
average occupancy was 97.7% in 1995 and 97.6% in 1996. Crystal Tower was
developed and managed by the Smith Companies, with the same quality
standards as the Properties in the Company's portfolio. Messrs. Smith and
Kogod and family have a 4.86% ownership interest in the partnership that
has a 93% ownership interest in Crystal Towers, and the cash purchase of
the remaining 7% of the property will be made pursuant to purchase rights
assigned (at no cost to the Company) from a partnership controlled by
Messrs. Smith and Kogod.
. THE KENMORE. The Company has also executed an agreement to acquire The
Kenmore, a 376-unit property located on Connecticut Avenue in northwest
Washington, D.C., for a total cost of approximately $16.3 million (subject
to adjustment for changes in the market value of Operating Partnership
Units), at an unleveraged yield after estimated recurring capital
expenditures of 9.03%. Completion of this acquisition is subject to a
waiver by the tenants of their right to purchase the property. The Kenmore
will be acquired for a combination of equity in the form of Operating
Partnership Units and the assumption of debt. The Kenmore acquisition will
increase the percentage of the Company's multifamily residential portfolio
in northwest Washington, D.C. to 16.7%.
RECENT ACQUISITIONS
During 1996, the Company, through the Operating Partnership, acquired four
properties containing 1,049 apartment units.
. CHARTER OAK. The Company acquired Charter Oak, a 262-unit garden style
Property in Reston, Virginia in March 1996, for approximately $13.7 million
cash and 22,059 Operating Partnership Units valued at $0.5 million (based
on the market price of the Company's stockon the date of the acquisition).
Charter Oak is located in Virginia's fast growing high-techcorridor along
the Dulles Access Road. The community is adjacent to a golf course, within
walking distance of Reston Town Center (a major retail and office complex)
and is one block from Sallie Mae's new 400,000 square foot headquarters.
More than 80% of the apartment units were renovated by the prior owner
during 1994 and 1995, and the Company is completing the renovation program.
During the fourth quarter of 1996, Charter Oak had an average occupancy of
approximately 97.1% and average monthly rental revenue per apartment unit
of approximately $873.
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. GOVERNOR SPOTSWOOD. In March 1996, the Company acquired Governor
Spotswood (renamed Boulevard of Old Town Phase II), a 47-unit Property in
Old Town, Alexandria for approximately $2.8 million in cash. This
acquisition enables the Company to further enhance operating efficiencies
among its Old Town, Alexandria Properties by combining management with its
sister Property, Boulevard of Old Town, which the Company acquired in 1995.
Built in 1941, this Property was completely renovated by the prior owner
and is adjacent to specialty boutique retailers and first class restaurants
in historic Old Town, Alexandria. During the fourth quarter of 1996,
Governor Spotswood had an average occupancy of approximately 96.2% and
average monthly rental revenue per apartment unit of approximately $798.
. VAN NESS SOUTH. The Company acquired Van Ness South, a 625-unit high-
rise Property in northwest Washington, D.C. in July 1996 for $41.8 million
in cash. The Property is an 11-story, luxury high-rise located within
walking distance of the Van Ness Metrorail station. This Property's
amenities include three levels of underground parking, a large outdoor
swimming pool and a new fitness center. The Company believes that the
proximity of the Van Ness South Property to the Company's nearby high-rise
Properties will result in greater management and marketing efficiencies.
During the fourth quarter of 1996, Van Ness South had an average occupancy
of approximately 98.4% and average monthly rental revenue per apartment
unit of approximately $994.
. 1841 COLUMBIA ROAD. In August of 1996, the Company acquired 1841
Columbia Road, a 115-unit apartment Property located in northwest
Washington, D.C. for $5.3 million, consisting of assumed debt of $3.3
million and 79,600 Operating Partnership Units valued at $2.0 million
(based on the market price of the Company's stock on the date of the
acquisition). The eight-story high-rise is located near the Woodley Park
Metrorail station in Washington, D.C.'s Adams Morgan section. The Property
includes approximately 16,000 square feet of street-level retail space;
among the tenants are a NationsBank branch office and several restaurants.
During the fourth quarter of 1996, the Property had an average occupancy of
approximately 97.5% and average monthly rental revenue per apartment unit
of approximately $600.
DEVELOPMENT PROGRAM
The Company and its predecessor, which commenced operations in 1946, have
been recognized as development leaders in the apartment industry and have
developed their properties for long-term ownership and operation. The Company's
approach to development has been to design and build high quality properties in
advantageous locations for superior long-term performance and appreciation in
value. The Company's development strategy is to seek sites in stronger
submarkets which are infill locations in mature neighborhoods or which offer
unique competitive advantages such as Metrorail access, superior amenities, and
limited land for competing development. The Company believes that this approach
will limit potential competition from other apartment communities and enable it
to obtain rents and occupancy levels that result in higher returns over the
long-term.
The Company believes that development of multifamily properties in its
primary market has the potential to provide investment returns over the long
term that exceed national averages, because this market is projected to have
greater future employment and population growth than most other metropolitan
areas. The Company's development program is anticipated to deliver
approximately 750 apartment units annually in the years ahead in its present
market. In the future, the Company also plans to pursue development in other
geographic markets as its presence in those markets is solidified through
integration of acquisitions.
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RECENT DEVELOPMENT ACTIVITY
The Company has executed a contract to purchase for $9.5 million
approximately 17 acres of land for the development of a 630-unit multi-phase
low and mid-rise apartment community in Springfield, Virginia. The site is
strategically located adjacent to a new Metrorail and commuter rail station and
a regional shopping mall, and offers convenient access to the I-495 Capital
Beltway and I-395, a major route into Washington, D.C. Budgeted costs for this
project are expected to be approximately $59.1 million and construction is
scheduled to commence early in the summer of 1997, as soon as proffer
agreements are concluded with government agencies. In addition, the Company is
currently engaged in pre-development activities on two additional development
sites which are in desirable submarkets. One site is the only remaining zoned
multifamily development site in Reston, Virginia, and the other is an infill
site in northwest Washington, D.C.
In 1994, the Company began construction of Westerly at Worldgate Apartments,
a 320-unit, garden-style, multifamily apartment complex in Fairfax County,
Virginia. The first units were ready for occupancy in the spring of 1995, and
the project was completed in the fourth quarter of 1995. During the second
quarter of 1996, the Westerly at Worldgate reached stabilization with a yield
of approximately 10.4% on capitalized costs of $24.1 million.
INCREASE FINANCIAL FLEXIBILITY
The Company believes that the completion of the Offering and the expected
closing of the non-recourse secured credit facility described below will result
in a more conservative and flexible capital structure, which will lower its
overall cost of capital, enable it to access additional sources of long-term
financing and provide additional liquidity to pursue its growth strategy.
The Company's debt-to-total market capitalization ratio based on the
Company's pro forma debt as of September 30, 1996 (see "Charles E. Smith
Residential Realty, Inc. Pro Forma Consolidated Balance Sheet") and based on
the closing price per share of Common Stock of $29.00 on January 29, 1997, will
be 42.4%. The Company intends to limit its debt-to-total market capitalization
ratio to no greater than 60% at the time of incurrence. Following completion of
the Offering and the Pending Acquisitions, the Company could incur
approximately $584 million of additional debt without exceeding a 60% debt-to-
total market capitalization ratio, based on the closing price per share of
Common Stock of $29.00 on January 29, 1997.
The Company is negotiating a $75 million to $100 million non-recourse secured
credit facility to be used to repay the outstanding balance on the Company's
$100 million line of credit during the first quarter of 1997. This facility may
be either a short-term 3-year variable rate facility based on the London
Interbank Offered Rate ("LIBOR") or a long-term fixed rate facility that will
convert to unsecured at the time the Company receives an investment grade
rating. There can be no assurance that the Company will complete such
financing, or that if such financing is received, it will be on the terms
described above.
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THE OFFERING
Common Stock offered
hereby...................... 2,700,000
Common Stock to be
outstanding after the
Offering(1)................ 12,759,955
Common Stock and Operating
Partnership Units to be
outstanding after the
Offering (2)............... 24,712,756
Use of Proceeds............. For the repayment of certain indebtedness that
will be assumed in the Pending Acquisitions and
other acquisition costs in connection therewith,
the repayment of a portion of the outstanding
indebtedness under certain of the Company's lines
of credit and general corporate purposes.
New York Stock Exchange
Symbol..................... "SRW"
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(1) See "Price Range of Common Stock and Dividend History" herein.
(2) Includes 12,759,955 Operating Partnership Units owned by the Company; does
not include Units to be issued in connection with the Pending Acquisitions
which have a value of approximately $48.3 million (subject to adjustment
under certain circumstances). See "Charles E. Smith Residential Realty,
Inc. Pro Forma Consolidated Financial Statements."
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SELECTED FINANCIAL DATA
The Company's consolidated selected financial and other data are presented
on an historical basis for the nine months ended September 30, 1996 and 1995
and the years ended December 31, 1995 and 1994, and on a pro forma basis for
the nine months ended September 30, 1996 and the year ended December 31, 1995.
The Company's balance sheet data are presented on an historical basis as of
September 30, 1996 and 1995 and December 31, 1995 and 1994 and on a pro forma
basis as of September 30, 1996. Pro forma operating and other data are
presented as if the Offering, the Pending Acquisitions and certain other
transactions described in the Company's pro forma financial statements and
notes thereto included elsewhere herein had been completed as of the beginning
of the periods presented. Pro forma balance sheet data are presented as if the
Offering, the Pending Acquisitions and certain other transactions described in
the pro forma financial statements and notes thereto included elsewhere herein
had been completed on September 30, 1996. See "Charles E. Smith Residential
Realty, Inc. Pro Forma Consolidated Financial Statements."
The selected financial information as of and for the nine months ended
September 30, 1996 and 1995 is derived from unaudited financial statements
that, in the opinion of management, include all adjustments (consisting only
of normal, recurring adjustments) that are necessary for a fair presentation
of financial position and results of operations.
CHARLES E. SMITH RESIDENTIAL REALTY, INC. AND THE SMITH COMPANIES
<TABLE>
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SMITH
CHARLES E. SMITH RESIDENTIAL REALTY, INC. COMPANIES
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NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, HISTORICAL HISTORICAL
---------------------------- -------------------- JUNE 30, JANUARY 1,
HISTORICAL HISTORICAL 1994 TO 1994 TO
PRO FORMA ------------------ PRO FORMA ---------- DECEMBER JUNE 29,
1996(1) 1996 1995 1995(1) 1995 31, 1994 1994
--------- -------- -------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER UNIT/SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Rental properties
Revenues(2)............ $144,701 $122,814 $106,096 $177,218 $144,909 $ 67,391 $ 63,496
Expenses............... 82,391 70,091 60,304 100,464 81,885 38,197 36,039
Equity in income of
Property Service
Businesses............. 4,423 4,789 4,141 6,415 6,868 3,785 2,798
Corporate general &
administrative
expenses............... 2,207 2,207 2,034 2,842 2,842 1,171 1,550
Interest income......... 726 726 999 1,424 1,424 825 970
Interest expense........ 34,950 32,248 27,193 43,093 37,421 17,392 24,798
Income/(loss) before
extraordinary items.... 30,302 23,783 21,705 38,658 31,053 15,241 (10,700)
Net income/(loss) of the
Operating Partnership.. $ 30,302 $ 23,783 $ 21,705 $ 38,658 $ 31,053 $ 15,241 $(25,895)
-------- -------- -------- -------- -------- -------- --------
Net income attributable
to shareholders(5)..... $ 14,520 $ 6,010 $ 4,151 $ 17,810 $ 7,529 $ 6,532
-------- -------- -------- -------- -------- --------
Net income per
share(3)............... $ 1.15 $ 0.61 $ 0.45 $ 1.48 $ 0.81 $ 0.72
OTHER DATA
Funds from
Operations(4):
Net Income of the
Operating Partnership.. $ 30,302 $ 23,783 $ 21,705 $ 38,658 $ 31,053 $ 15,241
Plus
Depreciation and
amortization of rental
property.............. 16,464 13,476 11,915 20,634 16,258 7,738
-------- -------- -------- -------- -------- --------
Funds from Operations of
the Operating
Partnership............ $ 46,766 $ 37,259 $ 33,620 $ 59,292 $ 47,311 $ 22,979
======== ======== ======== ======== ======== ========
Funds from Operations
attributable to
shareholders(5)........ $ 22,401 $ 16,819 $ 14,332 $ 27,334 $ 20,391 $ 9,848
Net cash flows provided
by (used in):
Operating activities... $ 37,418 $ 35,582 $ 51,751 $ 26,341
Investing activities... (71,114) (52,253) (66,995) (34,115)
Financing activities... 27,804 (1,217) 6,372 26,124
Cash dividends per
share.................. $ 1.47 $ 1.425 $ 1.915 $ 0.48
Average residential
occupancy rate(6)...... 97.2% 97.1% 97.2% 97.8%
Average monthly revenue
per apartment unit(7).. $ 881 $ 851 $ 862 $ 845
Number of apartment
units--core portfolio.. 12,462 12,462 11,834 11,834
BALANCE SHEET DATA
Rental properties--
net(8)................. $610,048 $471,027 $391,542 $414,490 $315,213
Total assets............ 661,947 523,813 446,920 469,322 391,189
Mortgage loans.......... 461,443 416,911 414,158 413,973 383,821
Shareholders'
equity/partners'
(deficit)(8)........... 40,386 (37,438) (32,178) (31,623) (37,520)
</TABLE>
S-11
<PAGE>
FOOTNOTES TO SELECTED FINANCIAL DATA
1. Pro forma consolidated financial information as of and for the nine months
ended September 30, 1996 and the year ended December 31, 1995 are presented
as if the Offering (including the Pending Acquisitions and the acquisition
of the Springfield, Virginia development site) and the acquisition of the
properties acquired during 1996 all had occurred by September 30, 1996 for
the pro forma consolidated balance sheet data and at the beginning of the
period presented for the pro forma consolidated operating data for the nine
months ended September 30, 1996 and the year ended December 31, 1995.
2. Includes revenues from the retail properties of $7,557 and $7,726 for the
nine months ended September 30, 1996 and 1995, respectively, and $10,418
and $9,078 for the years ended December 31, 1995 and 1994, respectively.
3. Historical per share amounts are based on weighted average shares
outstanding of 9,878,421 and 9,177,525 for the nine months ended September
30, 1996 and 1995, respectively, and 9,310,929 for the year ended December
31, 1995 and 9,098,504 for the six months ended December 31, 1994,
respectively. Pro forma per share amounts are based on weighted average
shares outstanding of 12,578,421 for the nine months ended September 30,
1996 and 12,010,929 for the year ended December 31, 1995.
4. 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 Other Operating
Partnership Unitholders, 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.
5. Represents the Company's historical pro rata weighted average share of
45.1% and 42.6% for the nine months ended September 30, 1996 and 1995,
respectively, and 43.1% and 42.9% for the year ended December 31, 1995 and
the six months ended December 31, 1994, respectively. The Company's pro
forma pro rata weighted average share is 47.9% for the nine months ended
September 30, 1996 and 46.1% for the year ended December 31, 1995.
6. As used in the table above and elsewhere in this Prospectus Supplement with
respect to the Company's Properties, average occupancy is defined as gross
potential rent less vacancy allowance divided by gross potential rent for
the period, expressed as percentage.
7. Average monthly revenue per apartment unit consists of total residential
property revenue for the core portfolio divided by the respective number of
apartment units divided by the number of months in the period.
8. At the time of the IPO, all rental properties were recorded at predecessor
partners' historical cost basis which is significantly less than current
value and, therefore, results in dilution of shareholders' book value.
Shareholders' equity of $(37,438) and $(32,178) as of September 30, 1996
and 1995, respectively, and $(31,623) and $(37,520) as of December 31, 1995
and 1994, respectively, is net of $(244,208) contribution by predecessors
of assets at historical cost, net of liabilities.
S-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS
The selected financial data and the Company's financial statements included
elsewhere are incorporated by reference in this Prospectus Supplement and in
the accompanying Prospectus. These financial statements include all
adjustments which are, in opinion of management, necessary to reflect a fair
presentation of the results for the interim periods, and all such adjustments
are of a normal, recurring nature.
RESULTS OF OPERATIONS
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 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 corporate 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.
The core portfolio contributed an increase of $3.4 million, 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 (including depreciation) increased $9.8
million, or 16.2%, from $60.3 million for the nine months ended September 30,
1995, to $70.1 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 $7.3 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
S-13
<PAGE>
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 2,566 units.
PROPERTY SERVICE BUSINESSES. Income from 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.
The increase in revenue and 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 income for Interior Construction and Renovation
Services during the nine months ended September 30, 1996 compared to the prior
year period 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.
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. Corporate 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.
FFO. FFO is defined under the revised definition adopted by 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 Other Operating Partnership
Unitholders, 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 FFO, 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.
S-14
<PAGE>
FFO for the nine months ended September 30, 1996 and 1995 are computed as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net Income of the Operating Partnership................... $ 23,783 $ 21,705
Depreciation of Real Property............................. 13,476 11,915
-------- --------
FFO of the Operating Partnership.......................... 37,259 33,620
Interest of Other Operating Partnership Unitholders....... 20,440 19,288
-------- --------
Attributable to Shareholders.............................. $ 16,819 $ 14,332
======== ========
</TABLE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
SUMMARY. Net income of the Operating partnership increased $41.8 million
from a loss in 1994 of $10.7 million to income of $31.1 million due primarily
to consolidation costs of $15.6 million and debt extinguishment costs of $15.2
million in 1994 in conjunction with the IPO. In addition, interest expense was
$4.8 million lower in 1995 due to lower rates achieved through the IPO, and
income from rental properties was $6.4 million higher than 1994 primarily due
to property acquisitions. The Company's share of the 1995 increase in net
income, however, was reduced by a $5.9 million charge for distributions in
excess of earnings allocated to Other Operating Partnership Unitholders. In
analyzing the results for 1994, management has summarized the Company's and
its predecessor's results of operations for 1994.
RENTAL PROPERTIES. Revenue from rental properties increased $14.0 million,
or 10.7%, from $130.9 million for 1994 to $144.9 million for 1995. The
acquisition properties (consisting of 1,996 apartment units, 627 of which were
added in 1994, 172 of which were added in the first quarter of 1995, 631 in
the second quarter of 1995, 348 in the third quarter of 1995, and 218 in the
fourth quarter of 1995), contributed $9.2 million to the rental revenue
increase. The Westerly at Worldgate, a 320-unit garden apartment property
developed by the Company, opened in May, 1995 and was completed in December,
1995. As of December 31, 1995, it was 75.6% occupied and contributed
approximately $.9 million in revenues in 1995. Revenue from the core portfolio
increased $2.4 million, or 2.0%, from 1994 to 1995. The lower than expected
level of core portfolio rental increase was caused by higher economic
vacancies and increased time between vacancy and subsequent lease-up in garden
apartments in certain submarkets of northern Virginia and the southeast
section of the Washington, D.C. submarket, especially in the second quarter of
1995. As a consequence of this slower demand in these submarkets, occupancy in
the core portfolio decreased from 97.8% for 1994 to 97.2% for 1995, and
average monthly revenue per apartment unit increased 2.0%, from $845 in 1994
to $862 in 1995.
Expenses from rental properties (including depreciation) increased $7.6
million, or 10.3%, from $74.2 million for 1994 to $81.9 million for 1995. The
increase resulted primarily from the acquisition of 1,996 units and the
development of 320 units since August 1994 which together added $5.3 million
in operating costs, primarily payroll and utility expenses, as well as
depreciation expense. Expenses from the core residential portfolio increased
$.9 million from $55.0 million for 1994 to $55.9 million for 1995.
PROPERTY SERVICE BUSINESSES. Income from the Property Service Businesses
increased from $6.6 million for 1994 to $6.9 million for 1995.
Income before depreciation/amortization from Interior Construction and
Renovation increased $.4 million compared to 1994 due to increased activity in
tenant build-out and renovation projects at office buildings owned by
affiliated partnerships and by increases in a major third party contract.
S-15
<PAGE>
Income before depreciation/amortization from Financing Services increased
$.4 million in 1995 compared to 1994 due to an increase in finance fee
revenues. Revenue from Financing Services increased $.9 million as $261
million of refinancings were closed in 1995, versus $168 million in 1994, and
an affiliate was billed $.3 million for financial advisory services.
Income before depreciation/amortization from Engineering and Technical
Services decreased $.3 million while revenue increased $3.2 million. These
results are attributed to more HVAC systems operations and preventative
maintenance contracts, which carry lower margins. Additionally, 1994 included
an unusually high level of incremental repair and replacement services for
mechanical and electrical systems associated with third party contracts, which
typically earn higher margins.
OTHER. Corporate general and administrative expenses increased $.1 million
due to fees and expenses incurred in connection with the preparation of the
Company's initial annual report, its filings pursuant to the Exchange Act, the
registration with the SEC of the dividend reinvestment plan, and the Company's
shelf registration.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities increased $1.8 million from
$35.6 million for the nine months ended September 30, 1995 to $37.4 million
for the nine months ended September 30, 1996. The increase is primarily the
result of the increase in net income of the Operating Partnership.
Net cash flow used by the Company in investing activities was $71.1 million
for the nine months ended September 30, 1996 versus $52.2 million for the nine
months ended September 30, 1995. The increase was due primarily to the
increase of $23.9 million in acquisition and development of rental properties.
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 in 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
high-rise 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 $5.3 million based upon assumed debt of $3.3 million and an
exchange of approximately 79,600 Operating Partnership Units valued at $2.0
million based on the market price of the Company's stock on the date of
acquisition. These Properties brought the Company's total acquisitions to ten
properties with over 3,000 units acquired since the IPO.
Net cash flows provided by financing activities was $27.8 million for the
nine months ended September 30, 1996 primarily as a result of net draws of
$59.5 million on the lines of credit (used for acquiring property as discussed
above) net of $32.2 million in 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.
S-16
<PAGE>
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:
<TABLE>
<CAPTION>
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%
$100 million Acquisition Line of Credit.................. 82,050 15.0%
$83 million 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 Operating
Partnership Units outstanding at a Common Stock price of $24.125. The
Company's Debt Coverage Ratio (defined as earnings before interest, taxes,
depreciation and amortization divided by interest expense (excluding
amortization of deferred financing costs)) for the nine months ended
September 30, 1996 was 2.33:1.
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 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.
S-17
<PAGE>
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 portfolio 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:
<TABLE>
<CAPTION>
TOTAL $ ACTUAL # OF AVERAGE $ PER AVERAGE $ PER
EXPENDITURE TYPE SPENT UNITS IMPROVED UNIT IMPROVED CORE UNIT
- ---------------- -------------- -------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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>
S-18
<PAGE>
THE COMPANY
GENERAL
Charles E. Smith Residential Realty, Inc. is a publicly-held equity REIT
that is engaged primarily in the acquisition, development, management and
operation of multifamily properties in the Washington, D.C. metropolitan area.
The Company, together with its subsidiaries, is a fully integrated real estate
organization with in-house acquisition, development, financing, marketing,
leasing and property management expertise. The Company is structured as an
UPREIT, under which all of the Company's properties, property interests, and
business assets are owned by, and its operations are conducted through the
Operating Partnership and its subsidiaries. As of December 31, 1996 the
Company owned 41 multifamily apartment properties containing a total of 15,200
units and two retail centers containing approximately 436,000 square feet of
retail space. The Company's core residential portfolio properties had an
average occupancy rate of 97.0% in 1996.
The Company's operating philosophy is to deliver a quality living experience
to its residents, by providing high-quality locations, buildings and
amenities, and caring, responsive service to residents. The Company believes
that this will lead to superior appeal of its properties to both current and
prospective residents, resulting in high occupancy, premium rents, and low
turnover and positioning the Company to most effectively achieve its corporate
objectives of strong revenue growth and annual increases in FFO and
shareholder value.
PROPERTY MARKETS
All of the Company's Properties are located in the Washington, D.C.
metropolitan area, which traditionally has been, and which the Company
believes will continue to be, among the strongest regions in the United States
for multifamily rental properties and one of the most stable markets compared
to many other markets which encounter significant fluctuations over time. The
region is the country's fifth largest employment market with more than 2.9
million jobs, and is projected to add 648,000 jobs over the period 1993 to
2005, an average increase of over 50,000 jobs annually, according to
projections prepared by the U.S. Dept. of Commerce, Bureau of Economic
Analysis, and released in mid-1996. This is the third largest projected
employment increase of all U.S. cities, as indicated on the following table:
PROJECTED JOB GROWTH FOR MAJOR U.S. CITIES--1993 TO 2005
<TABLE>
<CAPTION>
METRO AREA (MSA) JOB INCREASE RANK PROJECTED JOBS ADDED
---------------- ----------------- --------------------
<S> <C> <C>
Chicago, IL........................... 1 763,000
Los Angeles-Long Beach, CA............ 2 685,000
WASHINGTON, DC-MD-VA.................. 3 648,000
Boston, MA............................ 4 600,000
Atlanta, GA........................... 5 598,000
Orange County, CA..................... 6 525,000
Houston, TX........................... 7 515,000
Dallas, TX............................ 8 486,000
Phoenix-Mesa, AZ...................... 9 469,000
San Diego, CA......................... 10 429,000
</TABLE>
- --------
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis, May, 1996
S-19
<PAGE>
The Washington, D.C. metro area is also projected to have the third largest
population increase of all U.S. cities, as shown in the following table:
PROJECTED POPULATION GROWTH FOR MAJOR U.S. CITIES 1993--2005
<TABLE>
<CAPTION>
PROJECTED TOTAL
METRO AREA (MSA) POPULATION INCREASE RANK(1) POPULATION INCREASE
- ---------------- --------------------------- -------------------
<S> <C> <C>
Riverside-San Bernadino, CA.... 1 928,000
Los Angeles, Long Beach, CA.... 2 927,000
WASHINGTON D.C.-MD, VA......... 3 744,000
Atlanta, GA.................... 4 732,000
Chicago, IL.................... 5 716,000
Houston, TX.................... 6 673,000
Phoenix-Mesa, AZ............... 7 617,000
San Diego, CA.................. 8 595,000
Orange County, CA.............. 9 531,000
Boston, MA, NH................. 10 518,000
</TABLE>
- --------
(1) Reflects rank increase in population by number of people.
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis, May, 1996
A significant factor contributing to the employment and population increases
projected for the Washington, D.C. metropolitan area is the continuing growth
of the technology sector, particularly the information technology segment. The
Washington area is estimated to be similar in number of technology jobs
(256,000) to San Jose/Silicon Valley in California (283,000) and Boston/Route
128 in Massachusetts (311,500), according to a study conducted by The Center
for Regional Analysis, George Mason University, using 1992 data. This study
also concluded that the technology segment in the Washington, D.C. area is
". . . most likely, the fastest growing" of the three regions.
The continuing strength of the technology sector has been a key factor
enabling the region to maintain economic growth despite substantial Federal
Government downsizing over the past three years. Over the period from October
1993 through October 1996 (the most current data available) 127,900 new wage
and salary jobs were added in the region, which more than offset 41,600
Federal government jobs "downsized" over the same period, resulting in a net
job increase of 86,300 jobs over the period, according to data derived by the
governments of the District of Columbia, Maryland and Virginia from data
compiled by the Bureau of Labor Statistics. Economic growth in the Washington
metro area in 1996 was adversely affected by the 1996 Federal budget stalemate
and related government shutdowns; however 24,800 new jobs were added during
the 12 month period October 1995 to October 1996, which offset the loss of
13,200 Federal government jobs during this period resulting in a net job
increase of 11,600. Area economists generally expect that with a more stable
Federal government budget situation the area is likely to return to stronger
economic growth in 1997, according to interviews included in the December 23,
1996 edition of the Washington Post. In recent years employment growth has
been considerably stronger in the Northern Virginia segment of the
metropolitan area (27,100 net increase from October 1995 through October
1996), which is the sector where the majority of the Company's properties are
located (69% of units), and the Company believes that this trend will continue
due to the concentration of technology firms in Northern Virginia.
Demand for multi-family rental apartments continues to be strong in the
Washington, D.C. metropolitan area as evidenced by high occupancy rates.
Annual surveys of approximately 1,000 comparable investment grade apartment
properties conducted annually in the first quarter of the year by the REIS
Reports, Inc. have indicated that the overall market-wide occupancy rates were
96.4% in January 1997, 96.5% in the first quarter of 1996 and 95.9% in the
first quarter of 1995. The average
S-20
<PAGE>
occupancy rate of the Company's core Multifamily Properties was 97.0% in 1996,
which is higher than the overall market average (which was determined on a
physical occupancy basis that typically yields a slightly higher occupancy
percentage than the basis on which the Company's occupancy percentage is
calculated). In a report issued by The REIS Reports, Inc., in December, 1996,
forecasts that in the 1997-2001 period, average annual apartment occupancy in
the Washington metro area will be between 96.4% and 97.0%.
Supply of multifamily properties has been increasing moderately in the
Washington metro area over the past several years and is likely to continue to
do so based on multifamily permit data compiled by the U.S. Census Bureau.
These data show that the numbers of multifamily permits issued in the area
were 5,202 in 1994, 5,952 in 1995, and 7,230 through November 1996. These data
include both for-sale condominium and rental apartment properties and total
annual permit levels remain well below the peak of over 13,000 in 1987. Most
of the new supply of rental apartments is occurring in the outer suburban
areas and does not compete directly with the Company's properties which are
predominantly in the vicinity of and within I-495, the Capital Beltway.
Overall, the Company believes that the anticipated increases in employment
and population projected for the Washington, D.C. area, together with moderate
increases in supply of new rental units in locations competitive with the
Company's Properties, will result in the Company's multifamily rental
submarkets remaining in a strong occupancy position for at least the next 18
to 24 months. The Company believes that these conditions will provide an
opportunity to improve apartment rent levels and investment values, and will
also allow new development opportunities.
S-21
<PAGE>
PROPERTIES
Multifamily Properties
The following table sets forth certain data for each of the Properties in the
Company's multifamily portfolio.
<TABLE>
<CAPTION>
MONTHLY REVENUE
NUMBER OF AVERAGE PER UNIT AVERAGE OCCUPANCY
PROPERTY TYPE/ PROPERTY APARTMENTS SQ. FT. -------------------- -------------------
PROPERTY NAME LOCATION UNITS PER UNIT 1994 1995 1996 1994 1995 1996
-------------- -------- ---------- -------- ------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Core Residential Portfo
lio
(owned at 12/31/94)
High-Rise
Albemarle Washington, D.C. 235 1,097 $1,050 $1,086 $1,126 99.0% 99.0% 99.3%
Calvert-Woodley Washington, D.C. 136 1,001 964 993 1,046 99.8 99.5 99.8
Cleveland House Washington, D.C. 216 894 937 960 1,001 99.1 98.4 98.3
Corcoran House Washington, D.C. 138 464 692 723 757 98.9 99.0 99.5
Courthouse Plaza Arlington, VA 396 772 1,043 1,068 1,134 97.0 98.3 97.8
Crystal House I Arlington, VA 426 917 840 891 933 98.4 97.0 96.7
Crystal House II Arlington, VA 402 938 888 872 905 98.4 96.6 96.3
Crystal Place Arlington, VA 180 894 1,133 1,184 1,210 98.2 98.1 97.6
Crystal Square Arlington, VA 378 1,121 1,027 1,049 1,080 99.3 99.0 98.4
Gateway Place Arlington, VA 162 826 1,871 1,937 2,023 96.0 93.8 93.1
Marbury Plaza Washington, D.C. 672 997 641 628 621 97.0 97.0 95.3
Skyline Towers Fairfax Co., VA 940 1,221 905 922 950 97.4 96.5 97.1
Statesman Washington, D.C. 281 593 682 712 739 98.9 99.3 98.6
2501 Porter Street Washington, D.C. 202 760 1,233 1,311 1,356 98.8 98.3 96.7
Water Park Towers Arlington, VA 360 881 1,382 1,415 1,486 97.8 98.3 97.8
------ ----- ------ ------ ------ ----- ----- -----
Sub-Total/Average 5,124 956 960 983 1,018 98.0 97.6 97.3
Mid-Rise
Berkeley Arlington, VA 138 891 662 677 704 98.4 97.5 97.6
Columbian Stratford Arlington, VA 227 942 672 690 719 97.3 97.7 98.2
Executive Central Arlington, VA 230 903 692 720 749 97.7 97.8 98.8
Executive North Arlington, VA 215 892 718 727 748 97.4 98.0 97.6
Executive South Arlington, VA 266 842 687 705 727 97.2 98.3 98.1
Windsor Towers Arlington, VA 280 1,025 740 734 760 98.4 95.9 96.9
------ ----- ------ ------ ------ ----- ----- -----
Sub-Total/Average 1,356 920 699 712 737 97.7 97.5 97.9
Garden
Bedford Village Fairfax Co., VA 752 1,070 799 813 859 96.6 96.0 96.1
Car Barn Washington, D.C. 196 1,311 774 794 823 96.1 95.4 96.9
Columbia Crossing Arlington, VA 247 976 1,051 1,081 1,116 97.2 98.7 98.2
Concord Village Arlington, VA 531 1,025 728 756 762 94.9 95.5 93.9
Fort Chaplin Washington, DC 549 983 580 589 603 98.6 97.6 96.5
The Manor Montgomery Co., MD 435 999 N/A 712 729 N/A 94.6 95.6
Newport Village Alexandria, VA 937 1,115 802 825 862 98.4 97.5 98.3
Orleans Village Fairfax Co., VA 851 1,061 766 770 787 97.7 96.1 96.9
Oxford Manor Washington, D.C. 227 1,005 648 589 596 97.7 94.7 94.7
Patriot Village Fairfax Co., VA 1,065 1,162 816 828 851 98.5 97.0 96.7
Potomac View Loudoun Co., VA 192 965 N/A 676 708 N/A 96.8 97.8
------ ----- ------ ------ ------ ----- ----- -----
Sub-Total/Average 5,982 1,042 772 776 801 97.6 96.5 96.6
------ ----- ------ ------ ------ ----- ----- -----
Sub-Total/Average 12,462 994 845 854 883 97.8 97.1 97.0
Residential Acquisition/Development
Portfolio
High-Rise
Suburban Tower
(acquired 1/95) Montgomery Co., MD 172 677 N/A N/A 762 N/A N/A 97.4
Connecticut Heights
(acquired 6/95) Washington, D.C. 519 536 N/A N/A 761 N/A N/A 95.9
The Bennington
(acquired 9/95) Arlington, VA 348 804 N/A N/A 986 N/A N/A 97.3
Van Ness South
(acquired 7/96) Washington, D.C. 625 956 N/A N/A N/A N/A N/A N/A
1841 Columbia Road
(acquired 8/96) Washington, D.C. 115 634 N/A N/A N/A N/A N/A N/A
------ ----- ------ ------ ------ ----- ----- -----
Sub-Total/Average 1,779 756 N/A N/A 837 N/A N/A 96.7
Garden
Blvd. of Old Town/
Gov. Spotswood
(acquired 4/95, 3/96) Alexandria, VA 159 603 N/A N/A 723 N/A N/A 96.8
Westerly at Worldgate
(opened 5/95) Fairfax Co., VA 320 921 N/A N/A 1,063 N/A N/A 92.8
Oakwood
(acquired 12/95) Vienna, VA 218 968 N/A N/A 1,001 N/A N/A 93.9
Charter Oak
(acquired 3/96) Reston, VA 262 1,097 N/A N/A N/A N/A N/A N/A
------ ----- ------ ------ ------ ----- ----- -----
Sub-Total/Average 959 927 N/A N/A 966 N/A N/A 93.9
------ ----- ------ ------ ------ ----- ----- -----
Sub-Total/Average 2,738 816 N/A N/A 889 N/A N/A 95.5
------ ----- ------ ------ ------ ----- ----- -----
All Residential
Properties 15,200 962 $ 845 $ 854 $ 884 97.8% 97.1% 96.9%
====== ===== ====== ====== ====== ===== ===== =====
</TABLE>
S-22
<PAGE>
The following table sets forth certain information regarding properties
acquired by the Company since its IPO in 1994.
<TABLE>
<CAPTION>
OP PURCHASE
PROPERTY # OF PROPERTY ACQUIRED TRANSACTION UNITS PRICE
NAME(1) LOCATION UNITS TYPE DATE TYPE ISSUED (000'S)
- -------- -------- ----- -------- -------- ----------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Potomac Loudoun 192 Garden 8/94 Cash $ 8,710
View Co, VA
The Manor Montgomery 435 Garden 8/94 Cash $20,250
Co., MD
Suburban Montgomery 172 High-Rise 1/95 Unit 251,172 $ 6,500
Tower Co., MD Exchange
Boulevard Alexandria, 112 Garden 4/95 Cash $ 5,895
of Old Town VA
Connecticut Washington, 519 High-Rise 6/95 Unit 309,306 $24,900
Heights D.C. Exchange
Debt
Assumption
The Arlington, 348 High-Rise 9/95 Cash/Debt $29,000
Bennington VA Assumption
Oakwood Fairfax, VA 218 Garden 12/95 Cash $16,000
Charter Oak Reston, 262 Garden 3/96 Unit 22,059 $14,250
VA Exchange
Cash
Governor Alexandria, 47 Garden 3/96 Cash $ 2,830
Spotswood VA
Van Ness Washington, 625 High-Rise 7/96 Cash $41,750
South D.C.
1841 Washington, 115 High-Rise 8/96 Unit 79,600 $ 5,260
Columbia D.C. Exchange
Road Debt
Assumption
</TABLE>
- --------
(1) Boulevard of Old Town and Governor Spotswood are being operated as a
single Multifamily Property.
RETAIL PROPERTIES
The Company's two Retail Properties, Skyline Mall and Worldgate Centre, are
enclosed malls containing a total of approximately 436,000 square feet of
retail space.
WORLDGATE CENTRE. Worldgate Centre, a community retail center located in
Herndon, Virginia, is part of a mixed-use development which includes the
Westerly at Worldgate, a 320 unit multifamily development project completed by
the Company in 1995. This Property, located in the highest median income
county in the country, contains the 108,670 square foot Worldgate Athletic
Club, a Loews Cinema, and a mix of approximately 40 other food service,
fashion and specialty retailers and various business and general service
tenants. Worldgate Centre has 230,926 square feet of leasable area and had an
average occupancy rate of 99.8% during 1996. The average gross and base rents
per square foot were $26.45 and $19.57, respectively for 1996. Approximately
17.3% of the leases, based on net rentable area, are scheduled to expire prior
to the year 2001.
S-23
<PAGE>
SKYLINE MALL. Skyline Mall is a two-level, enclosed community retail center
located on Route 7 in Northern Virginia, at the intersection of Fairfax
County, Arlington County, and the City of Alexandria, Virginia. Originally
developed by the Smith Companies (the Company's predecessor), in 1977, it is
part of a mixed-use community which also includes over two million square feet
of office space and over 3,300 high-rise condominium and apartment units
(including Skyline Towers, a 940 unit Multifamily Property owned by the
Company). The Property has 204,914 square feet of leasable area and had an
average occupancy rate of 95.1% in 1996. The average gross and base rents per
square foot were $16.06 and $11.40, respectively for 1996. It contains the
79,920 square foot Skyline Racquet and Health Club, an AMC Cinema and
approximately 40 other stores, including restaurants, fashion and specialty
retailers. Approximately 20.1% of the leases, based on net rentable area, are
scheduled to expire prior to the year 2001.
Both Retail Properties lease health club facilities to entities controlled
by Messrs. Smith and Kogod. The leases expire on December 31, 2015.
PROPERTY SERVICES BUSINESS
The Operating Partnership owns 100% of the nonvoting common stock, which
represents 99% of the total economic interest of the Property Service
Businesses, which provide a range of property services to the Properties on
essentially a cost basis and to third-party clients and affiliated
partnerships on a fee basis as follows:
MULTIFAMILY AND RETAIL PROPERTY MANAGEMENT. The Multifamily and Retail
Property Management Divisions provide property management and leasing services
to the Multifamily and Retail Properties owned by the Operating Partnership
and to third parties, including affiliated entities. In 1996, management
services were provided to 18 third-party owned multifamily properties which
contain approximately 6,400 apartment units (including the Crystal Plaza and
Crystal Towers apartment units) pursuant to contracts that generally provide
for management fees of 4.5% of monthly gross income, and to three retail
properties which contain approximately 293,000 square feet of retail space
pursuant to contracts that provide for management fees of 3% and leasing fees
of 2% of monthly gross income. Of the 21 management agreements, 14 are with
affiliated partnerships and seven are with unaffiliated property owners. One
management agreement was terminated by the Company in January 1997. The
management agreements with affiliated partnerships are for initial terms of
three years or more and the multifamily management agreements with
unaffiliated owners generally have one-year terms. The average term for which
the Company and its predecessors have managed these properties is 20 years
(excluding the Crystal Plaza and Crystal Towers properties).
The Retail Property Management Division was awarded a 5 year contract in
1995 to provide property and development, management and leasing services for
the development, leasing and management of the approximately 600,000 square
foot Potomac Yard Center. The Potomac Yard Center is a "Power Center" retail
development adjacent to Crystal City in Alexandria, Virginia and is expected
to be delivered for occupancy in Fall 1997.
INTERIOR CONSTRUCTION AND RENOVATION. The Interior Construction and
Renovation Division provided oversight to approximately $58 million of
construction activity in 1996 and approximately $45 million in 1995. Services
are provided to the Operating Partnership at cost (including overhead) and at
cost plus a fee to affiliated partnerships and other third parties.
ENGINEERING AND TECHNICAL SERVICES. The Engineering and Technical Services
Division provides on-site building systems operations, maintenance and
inspection to affiliated partnerships at cost, including overhead, and to
third parties at cost, including overhead, plus a fee. Services were provided
to approximately 28 million square feet of facilities in 1996.
S-24
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
The shares of Common Stock are traded on the NYSE under the symbol "SRW".
The following table sets forth the high and low closing sales prices per share
for the periods indicated as reported on the NYSE and the dividends per share
paid by the Company with respect to the periods noted.
<TABLE>
<CAPTION>
CALENDAR PERIOD HIGH LOW DIVIDENDS
- --------------- ------- ------- ---------
<S> <C> <C> <C>
1995:
First Quarter......................................... $25.375 $21.875 $0.475
Second Quarter........................................ 24.250 22.250 0.475
Third Quarter......................................... 24.000 22.500 0.490
Fourth Quarter........................................ 23.750 22.250 0.490
1996:
First Quarter......................................... $24.375 $23.000 $0.490
Second Quarter........................................ 24.125 22.500 0.490
Third Quarter......................................... 24.875 22.875 0.505
Fourth Quarter(1)..................................... 29.875 23.875 0.505
1997:
First Quarter through January 29, 1997................ $29.000 $28.250
</TABLE>
- --------
(1) The dividend for the fourth quarter of 1996 was declared by the Board of
Directors on January 24, 1997 and is payable on February 14, 1997 to
holders of record of Common Stock on February 5, 1997. Purchasers in this
Offering will not receive the fourth quarter dividend.
The Company, in order to qualify as a REIT, is required to make
distributions (other than capital gain distributions) to its stockholders in
amounts at least equal to (i) the sum of (A) 95% of its "REIT taxable income"
(computed without regard to the dividends paid deduction and its net capital
gain) and (B) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of non-cash income. The
Company's distribution strategy is to increase dividends annually by a
conservative percentage, thereby lowering the payout ratio and permitting the
Company to retain funds for investments and future capital expenditures.
Actual distributions by the Company will be at the discretion of the Board of
Directors and will depend on the actual operating results of the Company and
such other factors as the Board of Directors deems relevant.
For Federal income tax purposes, distributions may consist of ordinary
income, capital gains, nontaxable return of capital or a combination thereof.
Distributions that exceed the Company's current and accumulated earnings and
profits (calculated for tax purposes) constitute a return of capital rather
than a dividend and reduce the stockholder's basis in his or her shares of
Common Stock. To the extent that a distribution exceeds both current and
accumulated earnings and profits and the stockholder's basis in his or her
shares, it will generally be treated as gain from the sale or exchange of that
stockholder's shares. The Company annually notifies stockholders of the
taxability of distributions paid during the preceding year. The Company has
determined that 36% of the distributions paid with respect to 1996 represented
return of capital.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (based on $29.00 per share, the last reported sale price on the
NYSE on January 29, 1997) are estimated to be approximately $74.2 million
(approximately $85.3 million if the Underwriters' over-allotment option is
exercised in full) before deducting expenses payable by the Company estimated
at $ . The Company intends to use the net proceeds to repay $33.0 million of
indebtedness that will be assumed in the Pending Acquisitions (which bears
interest at 9.89% and matures on July 15, 1998) and to pay other acquisition
costs in connection therewith, to repay a portion of the amounts outstanding
under the Company's secured lines of credit, which had a weighted average
interest rate of 7.2% per annum for 1996, and for general corporate purposes.
S-25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and on a pro forma basis to give effect to (1) the issuance
of the shares of Common Stock offered hereby and the use of the proceeds
therefrom and (ii) the Pending Acquisitions.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage loans(1).................................. $ 416,911 $ 461,443
Notes payable(2)................................... 129,736 101,171
----------- -----------
Total debt....................................... 546,647 562,614
----------- -----------
Interest of Other Operating Partnership
Unitholders(3)...................................... -- 43,898
----------- -----------
Shareholders' equity:
Common Stock: $.01 par value, 95,000,000 shares
authorized; 9,943,511 shares and 12,575,090 shares
issued and outstanding............................ 99 126
Additional paid-in capital......................... (23,971) 53,826
Retained deficit................................... (13,566) (13,566)
----------- -----------
Total stockholders' equity....................... (37,438) 40,386
----------- -----------
Total capitalization........................... $ 509,209 $ 646,898
=========== ===========
</TABLE>
- --------
(1) The pro forma balance reflects the assumption of $78,332 in mortgage loans
in connection with the Pending Acquisitions and the paydown of $33,800.
(2) The pro forma balance reflects a repayment of borrowings under the
Company's lines of credit with a portion of the net proceeds from the
Offering.
(3) As of September 30, 1996, the interest of Other Operating Partnership
Unitholders was a deficit of approximately $21.0 million. In accordance
with generally accepted accounting principles, this deficit was charged to
shareholders' equity. Consequently, the first $37.4 million in equity
raised in the Offering is used to restore the $21.0 million deficit
related to the interest of Other Operating Partnership Unitholders and the
remaining deficit of approximately $16.4 million in shareholders' equity.
The remaining equity raised in the Offering and the equity value of the
Operating Partnership Units issued in connection with the acquisitions of
Crystal Towers, Crystal Plaza and The Kenmore are then allocated between
the Company and the Other Operating Partnership Unitholders based on their
relative ownership percentages of the Operating Partnership after
adjusting for the issuance of the shares of Common Stock in the Offering
and Operating Partnership Units issued for the acquisitions.
S-26
<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
directors, executive officers and certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES HELD
- ---- --- --------------------------
<S> <C> <C>
Robert H. Smith......... 68 Co-Chief Executive Officer and Co-Chairman of the Board
Robert P. Kogod......... 65 Co-Chief Executive Officer and Co-Chairman of the Board
Ernest A. Gerardi, Jr... 61 President, Chief Operating Officer and Director
Robert D. Zimet......... 58 Senior Vice President, General Counsel and Secretary
Wesley Denn Minami(1)... 40 Senior Vice President and Chief Financial Officer
Roger L. Weeks.......... 55 Senior Vice President--Residential
Matthew B. McCormick.... 36 Senior Vice President--Retail
Alfred G. Neely......... 51 Senior Vice President--Development
Charles R. Hagen........ 47 Chief Accounting Officer
Fred J. Brinkman........ 68 Director
Mandell J. Ourisman..... 70 Director
Mallory Walker.......... 57 Director
Charles B. Gill......... 58 Director
</TABLE>
- --------
(1) Mr. Minami's employment with the Company will commence effective February
3, 1997.
After giving effect to the Offering, the senior members of the Company's
management and their families will own 18.3% of the total outstanding equity
of the Company or approximately $130.8 million of the aggregate market value
of the Company's outstanding Common Stock on a fully-converted basis, based on
the last reported sale price of the Common Stock on the NYSE on January 29,
1997.
S-27
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement and the
related Pricing Agreement (collectively, the "Underwriting Agreement"), the
Company has agreed to sell to each of the Underwriters named below, and each
of the Underwriters has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co................................................
Donaldson, Lufkin & Jenrette Securities Corporation................
Legg Mason Wood Walker, Incorporated...............................
Prudential Securities Incorporated.................................
---------
Total............................................................ 2,700,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares of Common
Stock offered hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the price set forth on the cover page of this
Prospectus Supplement, and in part to certain securities dealers at such price
less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time
be varied by the Underwriters.
The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus Supplement to purchase up to an
aggregate of 405,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise their over-allotment option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
2,700,000 shares of Common Stock offered hereby.
The Company has agreed that during the period beginning from the date of
this Prospectus Supplement and continuing to and including the date 90 days
after the date of this Prospectus Supplement, not to sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities of the
Company that are substantially similar to the shares of Common Stock, or any
other security convertible into or exchangeable for, or represent the right to
receive, shares of Common Stock or any such similar securities, except for (i)
shares of Common Stock issuable pursuant to employee stock option plans
existing on, or upon the conversion of convertible or exchangeable securities
existing on, or upon the conversion of convertible or exchangeable securities
outstanding as of, the date of this Prospectus Supplement, and (ii) shares of
Common Stock issuable upon the exchange of Operating Partnership Units or for
the issuance of Operating Partnership Units (which may be exchangeable for
Common Stock no earlier than 90 days after the date of this Prospectus
Supplement), without the prior written consent of the Underwriters.
The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
Certain of the Underwriters and their affiliates have from time to time
performed, and may continue to perform in the future, various investment
banking and commercial banking services for the Company, for which customary
compensation has been received.
S-28
<PAGE>
As of January 6, 1997, Prudential Insurance, an affiliate of Prudential
Securities Incorporated, had a loan outstanding to the Company in the amount
of $41.0 million (bearing interest at 8.24% per annum), in addition to
substantial loans outstanding to entities affiliated with Messrs. Smith and
Kogod which will not be repaid with the proceeds from the Offering. Prudential
Insurance also has a loan outstanding to Plaza Associates, which bears
interest at 9.89%, matures on July 15, 1998 and is secured by all of the
assets of Plaza Associates, including the Crystal Plaza property that the
Company expects to acquire. The Company will assume approximately $33.0
million of such debt in connection with the Crystal Plaza acquisition. The
Company intends to repay such indebtedness from the proceeds of the Offering.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock pursuant to this
Prospectus Supplement will be passed upon for the Company by Hogan & Hartson
L.L.P., Washington, D.C., and for the Underwriters by Sullivan & Cromwell, New
York, New York. Sullivan & Cromwell will rely upon the opinion of Hogan &
Hartson L.L.P. as to matters of Maryland law. Certain tax matters described
under "Federal Income Tax Considerations" in the accompanying Prospectus have
been passed upon for the Company by Hogan & Hartson L.L.P.
S-29
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements as of September
30, 1996 and for the nine months ended September 30, 1996 and the year ended
December 31, 1995 are presented as if the Offering (including the assets to be
acquired) and the acquisitions of the properties acquired during 1996 (the
"1996 Acquisitions") all had occurred by September 30, 1996 for the pro forma
consolidated balance sheet and at the beginning of the periods for the pro
forma consolidated statements of operations for the nine months ended
September 30, 1996 and the year ended December 31, 1995. The assets to be
acquired include Crystal Plaza, Crystal Towers, The Kenmore and 17 acres of
land for development located in Springfield, Virginia.
The pro forma consolidated financial statements are not necessarily
indicative of what the Company's actual financial position would have been or
the actual results of operations of the Company would have been assuming the
completion of the Offering (including the assets to be acquired) and had the
1996 Acquisitions occurred by September 30, 1996 for the pro forma
consolidated balance sheet and at the beginning of the period for the pro
forma consolidated statements of operations, nor do the pro forma consolidated
financial statements purport to represent the Company's financial position or
results of operations at any future date or for any future period.
S-30
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Rental property, at predecessor cost, net... $268,540 -- $268,540
Rental property, acquired and developed,
net........................................ 202,487 43,480 (B) 341,508
69,673 (C)
16,328 (D)
9,540 (E)
Cash and cash equivalents................... 3,586 73,405 (A) 1,354
(375)(C)
(1,610)(C)
(73,405)(A)
(247)(D)
Tenants' security deposits.................. 3,831 445 (G) 4,276
Escrow funds................................ 6,449 900 (C) 7,349
Investment in and advances to Property
Service Businesses and other .............. 11,364 -- 11,364
Deferred charges, net....................... 18,345 -- 18,345
Other assets................................ 9,211 -- 9,211
-------- --------
Total assets............................ $523,813 $661,947
======== ========
LIABILITIES AND EQUITY
Liabilities
Mortgage loans............................ $416,911 33,800 (B) $461,443
44,532 (C)
(33,800)(A)
(1,200)(D)
1,200 (D)
Notes payable............................. 129,736 (39,305)(A) 101,171
1,200 (D)
9,540 (E)
Accounts payable and accrued expenses..... 10,486 -- 10,486
Tenants' security deposits................ 3,831 445 (G) 4,276
Due to related parties.................... 287 -- 287
-------- --------
Total liabilities....................... 561,251 577,663
-------- --------
Interest of Other Operating Partnership
Unitholders................................ -- 9,380 (B) 43,898
-------- --------
24,056 (C)
(4,419)(F)
14,881 (D)
Shareholders' Equity
Common stock.............................. 99 27 (A) 126
Additional paid-in capital................ (23,971) 73,378 (A) 53,826
4,419 (F)
Retained deficit.......................... (13,566) (13,566)
-------- --------
Total shareholders' equity.............. (37,438) 40,386
-------- --------
Total liabilities and equity.............. $523,813 $661,947
======== ========
</TABLE>
S-31
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE/UNIT AMOUNTS)
(A) Sale of 2,700,000 shares of Common Stock in the Offering ($29.00 share
price)
<TABLE>
<S> <C>
Proceeds from Offering............................................ $78,300
Costs associated with Offering.................................... (4,895)
-------
Net proceeds.................................................. $73,405
=======
Repayment of mortgage loans....................................... $33,800
Repayment of notes payable........................................ 39,305
Payment of Crystal Plaza acquisition costs........................ 300
-------
Total use of proceeds......................................... $73,405
=======
Par value of common stock issued.................................. $ 27
Additional paid in capital........................................ $73,378
-------
$73,405
=======
(B) Acquisition of Crystal Plaza
Purchase price of rental property................................. $43,180
Mortgage debt..................................................... (33,000)
Fair value adjustment to mortgage debt............................ (800)
-------
Value of Operating Partnership Units issued....................... 9,380
=======
Number of Operating Partnership Units issued (assuming a $29.00
unit price)...................................................... 323,448
=======
Purchase price of rental property................................. $43,180
Acquisition costs................................................. 300
-------
Cost basis of rental property................................. $43,480
=======
(C) Acquisition of Crystal Towers
Purchase price of rental property................................. $69,298
Mortgage debt..................................................... (46,002)
Fair value adjustment to mortgage debt............................ 1,470
-------
24,766
Fannie Mae cash reserve........................................... 900
Cash paid for Tower ownership interest............................ (1,610)
-------
Value of Operating Partnership Units issued....................... $24,056
=======
Number of Operating Partnership Units issued (assuming a $29.00
unit price)...................................................... 829,517
=======
Purchase price of rental property................................. $69,298
Acquisition costs................................................. 375
-------
Cost basis of rental property................................. $69,673
=======
</TABLE>
S-32
<PAGE>
(D) Acquisition of The Kenmore
<TABLE>
<S> <C>
Purchase price of rental property................................. $16,081
Mortgage debt..................................................... (1,150)
Fair value adjustment to mortgage debt............................ (50)
-------
Value of Operating Partnership Units issued....................... $14,881
=======
Number of Operating Partnership Units issued (assuming a $29.00
Unit price)...................................................... 513,138
=======
Purchase price of rental property................................. $16,081
Acquisition costs................................................. 247
-------
Cost basis of rental property................................. $16,328
=======
</TABLE>
(E) Acquisition of 17 acres of land located in Springfield, Virginia
("Springfield Land") for $9,540. Acquisition is assumed to be funded with
proceeds from the Company's line of credit.
(F) To adjust the interest of Other Operating Partnership Unitholders for the
issuance of Operating Partnership Units and shares of Common Stock in the
Company. As of September 30, 1996, the interest of Other Operating
Partnership Unitholders was a deficit of approximately $21,000. In
accordance with generally accepted accounting principles, this deficit was
charged to shareholders' equity. Consequently, the first $37,400 in equity
raised in the Offering is used to restore the $21,000 deficit related to
the interest of Other Operating Partnership Unitholders and the remaining
deficit of approximately $16,400 in shareholders' equity. The remaining
equity raised in the Offering and the equity value of the units issued in
connection with the acquisitions of Crystal Towers, Crystal Plaza and The
Kenmore are then allocated between the Company and the Other Operating
Partnership Unitholders based on their relative ownership percentages of
the Operating Partnership after adjusting for the issuance of the shares
of Common Stock in the Offering and units issued for the acquisitions.
(G) Records tenant security deposits for Crystal Plaza, Crystal Towers and The
Kenmore.
S-33
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------
OFFERING
(INCLUDING
ASSETS TO BE 1996
HISTORICAL ACQUIRED) ACQUISITIONS (A) PRO FORMA
---------- ------------ ---------------- ---------
<S> <C> <C> <C> <C>
RENTAL PROPERTIES
Revenues................. $122,814 $16,449 (B) $ 5,438 $144,701
Expenses
Operating.............. 56,615 6,496 (B) 2,816 65,927
Depreciation and amor-
tization.............. 13,476 2,427 (C) 561 16,464
-------- ------- ------- --------
Total expenses....... 70,091 8,923 3,377 82,391
PROPERTY SERVICE BUSINESSES
Equity in income of
Property Service
Businesses.............. 4,789 (366)(B) 4,423
Corporate general and ad-
ministrative expenses..... (2,207) (2,207)
Interest income............ 726 726
Interest expense........... (32,248) (433)(D) (2,269) (34,950)
-------- ------- ------- --------
Net income of the Operating
Partnership............... 23,783 6,727 (208) 30,302
Interest of Other Operating
Partnership Unitholders... 13,047 2,735 (E) 15,782
Distributions in excess of
earnings allocated to
Other Operating
Partnership Unitholders... 4,726 (4,726)(F) --
-------- ------- --------
Net income................. $ 6,010 $ 14,520
======== ========
Net income per share....... $ 0.61 $ 1.15
======== ========
Weighted average shares
outstanding............... 9,878 12,578
======== ========
</TABLE>
S-34
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------
OFFERING
(INCLUDING
ASSETS TO BE 1996
HISTORICAL ACQUIRED) ACQUISITIONS(A) PRO FORMA
---------- ------------ --------------- ---------
<S> <C> <C> <C> <C>
RENTAL PROPERTIES
Revenues.................. $144,909 $21,096 (B) $11,213 $177,218
Expenses
Operating............... 65,627 8,884 (B) 5,319 79,830
Depreciation and amorti-
zation................. 16,258 3,237 (C) 1,139 20,634
-------- ------- ------- --------
Total expenses........ 81,885 12,121 6,458 100,464
PROPERTY SERVICE BUSINESSES
Equity in income of
Property Service
Businesses............... 6,868 (453)(B) 6,415
Corporate general and
administrative expenses.... (2,842) (2,842)
Interest income............. 1,424 1,424
Interest expense............ (37,421) (612)(D) (5,060) (43,093)
-------- ------- ------- --------
Net income of the Operating
Partnership................ 31,053 7,910 (305) 38,658
Interest of Other Operating
Partnership Unitholders.... 17,648 3,200 (E) 20,848
Distributions in excess of
earnings allocated to Other
Operating Partnership
Unitholders................ 5,876 (5,876)(F) --
-------- --------
Net income.................. $ 7,529 $ 17,810
======== ========
Net income per share........ $0.81 $1.48
======== ========
Weighted average shares
outstanding................ 9,311 12,011
======== ========
</TABLE>
S-35
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE YEAR
ENDED DECEMBER 31, 1995
(UNAUDITED) (DOLLARS IN THOUSANDS)
(A) During 1996 the Company acquired Van Ness South Apartments (on July 30,
1996), 1841 Columbia Road Apartments (on August 2, 1996), Charter Oak
Apartments (on March 15, 1996), and Governor Spotswood Apartments (on March
14, 1996). The adjustments reflect the operations of the four acquisitions as
if the purchases occurred on January 1, 1996 for the nine months ended
September 30, 1996 and January 1, 1995 for the year ended December 31, 1995.
Depreciation and amortization has been adjusted based on the allocated
purchase price of the assets acquired and an estimated useful life of 40
years. Interest expense has been adjusted based on the additional financing
incurred as a result of the acquisitions, using a weighted average borrowing
rate of 7.3% and 7.9% for the nine months ended September 30, 1996 and the
year ended December 31, 1995, respectively.
(B) Rental revenues and operating expenses of the following assets to be
acquired.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------------- ------------
<S> <C> <C>
REVENUES:
Crystal Plaza.................................. $ 5,605 $ 7,167
Crystal Towers................................. 8,556 10,962
The Kenmore.................................... 2,288 2,967
------- -------
$16,449 $21,096
======= =======
OPERATING EXPENSES:
Crystal Plaza.................................. $ 2,339 $ 3,016
Crystal Towers................................. 3,368 4,764
The Kenmore.................................... 1,155 1,557
------- -------
6,862 9,337
------- -------
Elimination of management fee.................. (687) (859)
Property management costs in Property Service
Businesses.................................... 321 406
------- -------
(366) (453)
------- -------
Total...................................... $ 6,496 $ 8,884
======= =======
</TABLE>
(C) Depreciation and amortization has been adjusted based on the allocated
purchase price of the assets to be acquired and an estimated useful life of 40
years, as if the purchases occurred on January 1, 1996 for the nine months
ended September 30, 1996 and January 1, 1995 for the year ended December 31,
1995.
S-36
<PAGE>
(D) The interest expense adjustment is comprised of the following.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------------- ------------
<S> <C> <C>
Increase in interest expense for Crystal Towers
mortgage loan (assuming weighted average
interest rate of 7.3% for the nine months
ended September 30, 1996 and 7.9% for the year
ended December 31, 1995)...................... $(2,522) $(3,626)
Decrease in interest expense for pay down of
notes payable with proceeds from Offering
(assuming a weighted average interest rate of
7.3% for the nine months ended September 30,
1996 and 7.9% for the year ended December 31,
1995)......................................... 2,152 3,105
Increase in interest expense for The Kenmore
(assuming a weighted average interest rate of
7.3% for the nine months ended September 30,
1996 and 7.9% for the year ended December 31,
1995)......................................... (63) (91)
------- -------
$ (433) $ (612)
======= =======
</TABLE>
Interest expense related to draws on the line-of-credit to purchase the
Springfield Land were $522 and $754 for the nine months ended September 30,
1996 and the year ended December 31, 1995, respectively. These amounts are
capitalized in the cost basis of the property in accordance with generally
accepted accounting principles.
(E) Interest of Other Operating Partnership Unitholders is adjusted for
change in ownership interest as a result of units of the Operating Partnership
and shares of stock of the Company being issued.
(F) There are no distributions in excess of earnings allocated to Other
Operating Partnership Unitholders as a result of the issuance of units in the
Operating Partnership and shares of stock in the Company restoring a balance
in the Interest of Other Operating Partnership Unitholders' account.
S-37
<PAGE>
PROSPECTUS
$200,000,000
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK AND COMMON STOCK WARRANTS
_________________
Charles E. Smith Residential Realty, Inc. (the "Company") may from time to
time offer in one or more series (i) unsecured debt securities ("Debt
Securities"), (ii) shares of preferred stock ("Preferred Stock"),
(iii) shares of common stock, $.01 par value per share ("Common Stock"), and
(iv) warrants exercisable for Common Stock ("Common Stock Warrants"), with an
aggregate public offering price of up to $200,000,000 (or its equivalent based
on the exchange rate at the time of sale) in amounts, at prices and on terms to
be determined at the time of offering. The Debt Securities, Preferred Stock,
Common Stock and Common Stock Warrants (collectively, the "Securities") may be
offered, separately or together, in separate series in amounts, at prices and on
terms to be described in one or more supplements to this Prospectus (a
"Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, any terms for
redemption at the option of the Company or repayment at the option of the
holder, any terms for any sinking fund payments, any terms for conversion into
Preferred Stock or Common Stock of the Company, covenants and any initial public
offering price; (ii) in the case of Preferred Stock, the specific title and
stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price; (iii) in the case of Common
Stock, any initial public offering price; and (iv) in the case of Common Stock
Warrants, the specific title and aggregate number, and the issue price and the
exercise price. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to preserve the status of the Company as a
real estate investment trust for federal income tax purposes.
The applicable Prospectus Supplement also will contain information, where
applicable, about certain U.S. federal income tax considerations relating to,
and any listing on a securities exchange of, the Securities covered by such
Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement with,
between or among them, will be set forth, or will be calculable from the
information set forth, in an accompanying Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of a Prospectus
Supplement describing the method and terms of the offering of such Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS
RELATING TO AN INVESTMENT IN THE SECURITIES.
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
_________________
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
_________________
The date of this Prospectus is February 7, 1996
<PAGE>
THE COMPANY
GENERAL
The Company is a self-administered and self-managed equity real estate
investment trust ("REIT") that is engaged primarily in the acquisition,
development, management and operation of multifamily properties in the
Washington, D.C. metropolitan area. The Company, together with its
subsidiaries, is a fully integrated real estate company with in-house
acquisition, development, financing, marketing and property management and
leasing expertise. The Company's primary strategy for growth is to
acquire, develop, own and manage high quality multifamily properties for
long-term income generation and value appreciation.
The Company is the sole general partner and owns approximately 44% of
the units of limited partnership interest ("Units") in Charles E. Smith
Residential Realty L.P. (the "Operating Partnership") as of December 31,
1995. The other limited partners of the Operating Partnership are the
former limited and general partners of partnerships that owned the
properties, and the former owners of certain property service businesses,
acquired by the Operating Partnership at the time of its formation in June
1994 or thereafter. All of the Company's properties, property interests,
and business assets are owned by, and its operations conducted through, the
Operating Partnership and its subsidiaries. In addition, the Operating
Partnership owns 100% of the nonvoting common stock, which represents 99%
of the total economic interest, of three operating companies (collectively,
the "Property Service Businesses") which provide management and leasing
services, engineering and technical services and interior construction and
renovation services to the properties owned by the Operating Partnership
and to other multifamily, retail, and office properties. As of December
31, 1995, the Company, through the Operating Partnership, owns 38
multifamily apartment communities containing a total of 14,150 units (the
"Multifamily Properties"), two retail centers containing approximately
436,000 square feet of retail space (the "Retail Properties", and together
with the Multifamily Properties, the "Properties"), all located in the
Washington, D.C. metropolitan area. The Company also manages over 6,400
additional apartment units for other owners.
The Company's executive offices are located at 2345 Crystal Drive,
Crystal City, Arlington, Virginia 22202, and its telephone number is (703)
920-8500. The Company is a Maryland corporation formed in 1993, and
completed its initial public offering on June 30, 1994. The Operating
Partnership is a Delaware limited partnership formed in 1993; it commenced
business operations on June 30, 1994.
RISK FACTORS
Prospective investors should carefully consider, among other factors,
the matters described below.
REAL ESTATE INVESTMENT RISKS
General. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate and the
Company's ability to service debt will depend in large part on the amount
of income generated, expenses incurred and capital expenditures required.
The Company's income from multifamily or retail properties may be adversely
affected by a number of factors, including the general economic climate and
local real estate conditions, such as an oversupply of, or a reduction in
demand, for apartment or retail space in the area and the attractiveness of
the properties to residents and shoppers. In addition, income from
properties and real estate values also are affected by such factors as the
cost of compliance with government regulation, including zoning and tax
laws, the potential for liability under applicable laws, interest rate
levels and the availability of financing. Certain significant expenditures
associated with each equity investment by the Company in a property (such
as mortgage payments, if any, real estate taxes and maintenance costs) also
are generally not reduced when circumstances cause a reduction in income
from the property.
Debt Financing. The Company is subject to the risks associated with
debt financing, including the risk that the Company's cash provided by
operating activities will be insufficient to meet required payments of
principal and interest, the risks of rising interest rates on the Company's
floating rate debt, the risk that the Company will
2
<PAGE>
not be able to prepay or refinance existing indebtedness on the Properties
(which generally will not have been fully amortized at maturity) or that the
terms of such refinancing will not be as favorable as the terms of existing
indebtedness. In the event the Company is unable to secure refinancing of such
indebtedness on acceptable terms, the Company might be forced to dispose of
properties upon disadvantageous terms, which might result in losses to the
Company and might adversely affect the cash flow available for distribution to
equity holders or debt service. In addition, if a property or properties are
mortgaged to secure payment of indebtedness and the Company is unable to meet
mortgage payments, the mortgage securing the property could be foreclosed upon
by, or the property could be otherwise transferred to, the mortgagee with a
consequent loss of income and asset value to the Company.
Renewal of Leases and Reletting of Space at Retail Properties. The
Company is subject to the risks that upon expiration of leases for space
located at Retail Properties, the leases may not be renewed, the space may
not be relet or the terms of the renewal or reletting (including the cost
of required renovations or concessions to tenants) may be less favorable
than current lease terms. Although the Company has established an annual
budget for renovation and reletting expenses that it believes are
reasonable in light of each Retail Property's situation, no assurance can
be given that this budget will be sufficient to cover these expenses. If
the Company is unable to promptly relet or renew leases for all or
substantially all of the space at its Retail Properties, if the rental
rates upon such renewal or reletting are significantly lower than expected,
or if the Company's reserves for these purposes prove inadequate, then the
Company's cash provided by operating activities and ability to make
expected distributions to shareholders or debt service payments could be
adversely affected.
Dependence on the Washington, D.C. Metropolitan Area Market. All of
the Properties are located in the Washington, D.C. metropolitan area
market, and the Company intends to concentrate future acquisitions and
development primarily in this market. A decline in the economy or rental
activities in this market may adversely affect the ability of the Company
to make distributions to its shareholders.
Possible Environmental Liabilities. Under various Federal, state and
local laws, ordinances and regulations, a current or previous owner or
operator of real estate may be required to investigate and clean up certain
hazardous substances released at the property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by such parties in connection with
the contamination. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs it
incurs in connection with the contamination. The presence of contamination
or the failure to remediate contamination may adversely affect the owner's
ability to sell or lease real estate or to borrow using the real estate as
collateral. The owner or operator of a site may be liable under common law
to third parties for damages and injuries resulting from environmental
contamination emanating from the site. The Company has not been notified
by any governmental authority of any material non-compliance, liability or
other claim in connection with any of the Properties and the Company is not
aware of any other material environmental condition with respect to any of
the Properties. No assurance, however, can be given that no prior owner
created any material environmental condition not known to the Company, that
no material environmental condition with respect to any Property has
occurred during the Company's ownership thereof, or that future uses or
conditions (including, without limitation, changes in applicable
environmental laws and regulations) will not result in imposition of
environmental liability.
Rent Control Laws. As of December 31, 1995, nine of the Properties,
representing 2,972 units or 21.0% of the total apartment units owned by the
Company, which were built prior to 1976 and are located in the District of
Columbia, are subject to the District's rent control laws that potentially
restrict a property owner's ability to increase rents and to recover
increases in operating expenses and the costs of capital improvements.
Although these rent control provisions currently allow the maximum rent
"ceiling" to be increased annually in response to several factors, recent
legislative changes have limited the Company's ability to take full
advantage of the available "ceilings" in any one year. Thus, no assurance
can be given that the Company will be able to raise rents under the new
legislation to levels that reflect future market rates.
District of Columbia Tenants' Rights. Under the District of Columbia
Rental Housing Conversion and Sale Act of 1980 (the "Conversion Act"), in
the event of a "sale" of a residential property in the District of
3
<PAGE>
Columbia, the tenants have a right of first refusal to purchase the
property as well as a right to match offers made on the property by
prospective purchasers. A transfer of all of the partnership interests of
a partnership that owns such property, or a transfer of all of the stock of
a corporation that owns such property, is considered to be a "sale" within
the meaning of the Conversion Act. Consequently, essentially all future
acquisitions and sales by the Company of residential properties located in
the District of Columbia will be subject to the rights of the tenants of
such properties to purchase the properties at the offered price. Such
tenants' rights may make it difficult for the Company to purchase or sell
residential properties located in the District of Columbia even if a
purchase or sale were in the interests of the Company's shareholders.
CONFLICTS OF INTEREST
Certain members of the Company's Board of Directors and officers
(including Robert H. Smith and Robert P. Kogod) own Units in the Operating
Partnership and, thus, may have interests that conflict with shareholders
with respect to business decisions affecting the Company and the Operating
Partnership. In particular, a holder of Units may suffer different and/or
more adverse tax consequences than the Company upon the sale or refinancing
of some of the Properties as a result of unrealized gain attributable to
certain Properties. These Unit holders and the Company, therefore, may
have different objectives regarding the appropriate pricing and timing of
any sale or refinancing of Properties. Although the Company, as the sole
general partner of the Partnership, has the exclusive authority as to
whether and on what terms to sell or refinance an individual Property,
these Unit holders might seek to influence the Company not to sell or
refinance the Properties, even though such sale might otherwise be
financially advantageous to the Company, or may seek to influence the
Company to refinance a Property with a higher level of debt than would be
in the best interests of the Company.
Messrs. Smith and Kogod hold interests in certain companies that in the
past have performed property management, leasing, construction management,
insurance brokerage and other services with respect to the Properties.
These companies may perform similar services for the Company in the future.
As a result of their financial interest in these companies, Messrs. Smith
and Kogod may realize benefits from transactions between such companies and
the Company that are not realized by other shareholders of the Company. In
addition, Messrs. Smith and Kogod, as directors of the Company, may be in a
position to influence the Company to do business with companies in which
they have a financial interest. Also, Messrs. Smith and Kogod continue to
hold general and limited partnership interests in certain limited
partnerships that own multifamily and commercial properties that were not
acquired by the Company at the time the Company was formed and acquired its
assets, which may give rise to conflicts of interest concerning the
fulfillment of their responsibilities as officers and directors of the
Company. Although the Company has adopted certain policies designed to
eliminate or minimize potential conflicts of interest, including a policy
which requires that transactions in which a director or officer of the
Company has a conflict of interest be approved by a majority of the
disinterested directors, there can be no assurance that these policies will
be successful in eliminating the influence of such conflicts, or that such
transactions, if any, will be on terms as favorable to the Company as could
be obtained in an arms-length transaction with a third party.
DEVELOPMENT AND ACQUISITION RISKS
The Company intends to continue development of new multifamily and
retail properties (including expansions of existing Properties on the land
adjacent to those Properties) and to consider acquisitions of multifamily
and retail properties where it believes that such development or
acquisition is consistent with the business strategies of the Company. New
project development is subject to a number of risks, including construction
delays or cost overruns that may increase project costs, financing risks as
described above, the failure to meet anticipated occupancy or rent levels
as and when expected, failure to receive required zoning, occupancy and
other governmental permits and authorizations and changes in applicable
zoning and land use laws, which may result in the incurrence of development
costs in connection with projects that are not pursued to completion. In
addition, because the Company must distribute 95% of its taxable income in
order to maintain its qualification as a REIT, the Company anticipates that
new developments and acquisitions will be financed primarily through lines
of credit or other forms of secured or unsecured construction financing.
If permanent debt or equity financing is not available on acceptable terms
to refinance such new developments or acquisitions are undertaken
4
<PAGE>
without permanent financing, further development activities or acquisitions may
be curtailed or cash available for distribution to shareholders or to meet
debt service obligations may be adversely affected. Acquisitions entail
risks that investments will fail to perform in accordance with expectations
and that judgments with respect to the costs of improvements to bring an
acquired property up to standards established for the market position
intended for that property will prove inaccurate, as well as general
investment risks associated with any new real estate investment. See
"Real Estate Investment Risks" above.
RISKS ASSOCIATED WITH LEVERAGE
The Company intends to fund acquisitions and development of properties
primarily through short-term borrowings, and also out of undistributed cash
flow from operating activities. The Company expects to finance or
refinance such properties on a longer term basis when market conditions are
appropriate either with long-term indebtedness or equity financing,
depending upon the economic conditions at the time of refinancing. The
Company's debt-to-total market capitalization ratio (i.e., the ratio of
total indebtedness to the market value of issued and outstanding Common
Stock and Units plus total indebtedness) (the "Debt-to-Total Market
Capitalization Ratio") as of September 30, 1995 was 47.9%. The Company has
adopted a policy of incurring debt (including debt incurred under its line
of credit) only if upon such incurrence the Company's Debt-to-Total Market
Capitalization Ratio would be 60% or less. The Company's Articles of
Incorporation, as amended (the "Charter"), however, do not contain any
limitation on the amount or percentage of indebtedness that the Company may
incur in the future. Accordingly, the Company could modify the current
policy at any time. If this policy were changed, the Company could become
more highly leveraged, resulting in an increase in debt service that, in
turn, could increase the Company's risk of default on its obligations and
adversely affect the Company's funds from operations and ability to make
expected distributions to its shareholders.
PROPERTY SERVICES RISKS; LACK OF VOTING CONTROL OVER PROPERTY SERVICE
BUSINESSES
The Company's Property Service Businesses will continue to be subject
to the risks associated with providing services to affiliated and
unaffiliated multifamily, retail and office properties. These risks
include the risk that management, leasing and other service contracts with
property owners will be lost to competitors; that such contracts will not
be renewed upon expiration or will not be renewed on terms consistent with
current terms; that the rental revenues upon which management fees are
based will decline as a result of general real estate market conditions or
specific market factors affecting properties managed by the Property
Service Businesses, resulting in decreased management fee income; that
leasing and other service activity generally may decline; and that the
Property Service Businesses may not be retained to provide certain property
services that property owners are not obligated to retain the Company to
provide under existing contractual arrangements. Each of these
developments could adversely affect the ability of the Property Service
Businesses to make expected distributions to shareholders. In addition,
the restrictions applicable to REITs under the Code may limit the Company's
ability to expand its Property Service Businesses, and net income from such
businesses will be subject to corporate income tax.
The Company owns 100% of the nonvoting common stock, which represents
99% of the equity, of each of the Property Service Businesses, which
conduct the Company's property services business for properties not owned
by the Company. The members of the boards of directors of the Property
Service Businesses are Messrs. Smith, Kogod and Ernest A. Gerardi, Jr., the
Company's Chief Operating Officer. Separate partnerships consisting of
certain executives active in the management of the Company and the Property
Service Businesses and adult children of Messrs. Smith and Kogod own 100%
of the voting common stock, representing 1% of the equity, of each Property
Service Business. Therefore, such holders of the voting stock have the
ability to elect and remove all members of the boards of directors of the
Property Service Businesses. Although the Company's right to receive
distributions with respect to its nonvoting common stock cannot be changed
by the holders of the voting common stock, the Company is not able to elect
directors of the Property Service Businesses, and, therefore, it does not
have the right to control the day-to-day decisions of the Property Service
Businesses. As a result, decisions relating to the day-to-day operations
of the Property Service Businesses may not always reflect the interests of
the Company and all of its shareholders.
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CHANGES IN POLICIES
The major policies of the Company, including its policies with respect
to development, acquisitions, financing, growth, operations, debt
capitalization and distributions, are determined by its board of directors.
Although it has no present intention to do so, the board may amend or
revise these and other policies from time to time without a vote of the
shareholders of the Company. A change in these policies could adversely
affect the Company's financial condition, results of operations, funds
available for distributions to shareholders or debt service or the market
price of the Securities. The Company cannot change its policy of seeking
to maintain its qualification as a REIT without the approval of the holders
of a majority of the Common Shares.
CERTAIN TAX RISKS
Tax Liabilities as a Consequence of the Failure to Qualify as a REIT.
The Company believes that it has operated so as to qualify as a REIT under
the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ended December 31, 1994, and intends to continue to
so operate. No assurance, however, can be given that the Company has so
qualified or will be able to remain so qualified. Qualification as a REIT
involves the application of highly technical and complex Code provisions as
to which there are only limited judicial and administrative
interpretations. Certain facts and circumstances that may be wholly beyond
the Company's control may affect its ability to qualify or to continue to
qualify as a REIT. In addition, no assurance can be given that new
legislation, Treasury Regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to the
qualification as a REIT or the Federal income consequences of such
qualification to the Company. If the Company fails to qualify as a REIT,
it will be subject to Federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
In addition, unless entitled to relief under certain statutory provisions,
the Company would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is lost. The
additional tax incurred in such event would significantly reduce the cash
flow available for distribution to shareholders and to meet debt service
obligations. See "Federal Income Tax Considerations--Taxation of the
Company."
REIT Distribution Requirements and Potential Impact of Borrowings. To
obtain the favorable tax treatment associated with qualifying as a REIT
under the Code, the Company generally is required each year to distribute
to its shareholders at least 95% of its net taxable income. See "Federal
Income Tax Considerations--Taxation of the Company (Annual Distribution
Requirements)." The Company could be required to borrow funds on a short-
term basis to meet the distribution requirements that are necessary to
achieve the tax benefits associated with qualifying as a REIT, even if
management believed that then prevailing market conditions were not
generally favorable for such borrowings.
Other Tax Liabilities. Even if the Company qualifies as a REIT, the
Company -- through the Operating Partnership and the Property Services
Businesses -- will be subject to certain Federal, state and local taxes on
its income and property. See "Federal Income Tax Considerations --
Taxation of the Company and -- Other Tax Considerations."
PRICE FLUCTUATIONS OF THE COMMON SHARES AND TRADING VOLUME; SHARES
AVAILABLE FOR FUTURE SALE
A number of factors may adversely influence the price of the Company's
Common Stock in the public markets, many of which are beyond the control of
the Company. These factors include possible increases in market interest
rates, which may lead purchasers of Common Stock to demand a higher annual
yield from distributions by the Company in relation to the price paid for
Common Stock, the relatively low daily trading volume of REITs in general,
including the Common Stock and any inability of the Company to invest the
proceeds of a future offering of Securities in a manner that will increase
earnings per share. Sales of a substantial number of shares of Common
Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for shares. As of December 31, 1995, the
Company also had authority to issue up to 12,205,439 shares of Common Stock
(subject to the ownership limit described below) upon redemption of Units
issued in connection with the formation of the Company and subsequent
acquisitions. In addition, 2,015,000
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shares of Common Stock of the Company have been reserved for issuance
pursuant to share option and restricted share plans, and these shares will
be available for sale in the public markets from time to time pursuant to
exemptions from registration requirements or upon registration. No
prediction can be made about the effect that future sales of Common Stock
will have on the market prices of shares.
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF SHARES
In order to maintain its qualification as a REIT, not more than 50% in
number or value of the outstanding capital stock of the Company may be
owned, directly or constructively under the applicable attribution rules of
the Code, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year. In order to
protect the Company from the risk of losing its REIT status due to a
concentration of ownership among its shareholders, the Company has limited
ownership of the issued and outstanding shares of capital stock by any
single shareholder to 9.8% of either (i) the outstanding Common Stock or
(ii) the outstanding capital stock of the Company (determined in each case
taking into account certain ownership attribution rules). The Board of
Directors may waive the percentage ownership limit for certain entities
(but not individuals) if it is satisfied that ownership in excess of this
limit will not jeopardize the Company's status as a REIT and the Board of
Directors otherwise decides such action is in the best interests of the
Company. The Board of Directors has waived the percentage ownership limit
in one instance, in the case of an investment adviser that holds
approximately 12.7% of the Common Stock as the record owner on behalf of
other beneficial owners. A transfer of shares of capital stock to a person
who, as a result of the transfer, violates the ownership limit will be
void. Shares of Common Stock acquired in breach of the limitation will be
automatically exchanged for shares of a separate class of stock not
entitled to vote or to participate in distributions ("Excess Stock"). In
addition, ownership, either directly or indirectly under the applicable
attribution rules of the Code, of stock in excess of the ownership limit
generally will result in the conversion of those shares into Excess Stock.
The Company will direct a holder of Excess Stock to sell such stock to the
Company for the lesser of the price paid or the average closing price for
the five trading days preceding the sale or to sell such stock to a person
whose ownership of the stock does not violate the ownership limit. See
"Description of Common Stock--Restrictions on Transfer; Excess Stock" for
additional information regarding the ownership limits.
RESTRICTIONS ON ACQUISITION AND CHANGE IN CONTROL
Various provisions of the Company's Charter restrict the possibility for
acquisition or change in control of the Company, even if such acquisition
or change in control were in the shareholders' interest, including the
limit on the percentage of shares of Common Stock that may be owned by any
person, the staggered terms of the Company's Directors and the ability of
the board to issue preferred stock.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the
Company intends to invest, contribute or otherwise transfer the net
proceeds of any sale of Securities to the Operating Partnership, the
economic terms of which will be substantially identical to the terms of the
Securities sold. The Operating Partnership would use such net proceeds for
general business purposes, including the development and acquisition of
additional properties and other acquisition transactions, the payment of
certain outstanding debt and improvements to certain properties in the
Company's portfolio.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the six months
ended December 31, 1994 (operations commenced June 30, 1994) and for the
nine months ended September 30, 1995 was 1.87 and 1.78, respectively.
The ratios of earnings to fixed charges were computed by dividing
earnings by fixed charges. For this purpose, earnings consist of income
(loss) before gains from sales of property and extraordinary items plus
fixed
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charges. Fixed charges consist of interest expense (including
interest costs capitalized), the amortization of debt issuance costs and
the interest element of rentals. To date, the Company has not issued any
Preferred Stock; therefore, the ratios of earnings to combined fixed
charges and preferred stock dividends are unchanged from the ratios
presented in this section.
The Company completed its IPO in June 1994. Prior to such time, certain
of the predecessor entities operated in a highly leveraged manner. As a
result, although the Properties have historically generated positive net
cash flow, the combined financial statements of the predecessor entities
show a net loss for the six months ended June 30, 1994. Consequently, the
computation of the ratio of earnings to fixed charges for such period
indicates that earnings were insufficient to cover fixed charges by
approximately $10.7 million. For the fiscal years ended December 31, 1993,
1992, 1991 and 1990, the ratio of earnings to fixed charges of the
Company's predecessor entities, on a combined basis, was 1.26, 1.19, 1.05
and 1.11, respectively.
The reorganization and recapitalization of the Company effected in
connection with the IPO permitted the Operating Partnership to deleverage
the Properties significantly, resulting in an improved ratio of earnings to
fixed charges for periods subsequent to the IPO.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and
provisions of the Debt Securities to which this Prospectus and any
applicable Prospectus Supplement may relate. The particular terms of the
Debt Securities being offered and the extent to which such general
provisions may apply will be set forth in the applicable Indenture or in
one or more indentures supplemental thereto and described in a Prospectus
Supplement relating to such Debt Securities. The Forms of the Senior
Indenture (as defined herein) and the Subordinated Indenture (as defined
herein) have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
GENERAL
The Debt Securities will be direct, unsecured obligations of the Company
and may be either senior Debt Securities ("Senior Securities") or
subordinated Debt Securities ("Subordinated Securities"). The Debt
Securities will be issued under one or more indentures (the
"Indentures"). Senior Securities and Subordinated Securities will be
issued pursuant to separate indentures (respectively, a "Senior
Indenture" and a "Subordinated Indenture"), in each case between the
Company and a trustee (a "Trustee"). The Indentures will be subject to
and governed by the Trust Indenture Act of 1939, as amended (the "TIA").
The statements made under this heading relating to the Debt Securities and
the Indentures are summaries of the anticipated provisions thereof, do not
purport to be complete and are qualified in their entirety by reference to
the Indentures and such Debt Securities. All section references appearing
herein are to sections of each Indenture unless otherwise indicated and
capitalized terms used but not defined below shall have the respective
meanings set forth in each Indenture.
The indebtedness represented by Subordinated Securities will be
subordinated in right of payment to the prior payment in full of the Senior
Debt of the Company as described under "--Subordination."
Except as set forth in the applicable Indenture or in one or more
indentures supplemental thereto and described in a Prospectus Supplement
relating thereto, the Debt Securities may be issued without limit as to
aggregate principal amount, in one or more series, in each case as
established from time to time in or pursuant to authority granted by a
resolution of the Board of Trustees of the Company or as established in the
applicable Indenture or in one or more indentures supplemental to such
Indenture. All Debt Securities of one series need not be issued at the
same time and, unless otherwise provided, a series may be reopened, without
the consent of the Holders of the Debt Securities of such series, for
issuances of additional Debt Securities of such series.
It is anticipated that each Indenture will provide that there may be
more than one Trustee thereunder, each with respect to one or more series
of Debt Securities. Any Trustee under an Indenture may resign or be
removed with respect to one or more series of Debt Securities, and a
successor Trustee may be appointed to act with respect
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to such series. In the event that two or more persons are acting as Trustee
with respect to different series of Debt Securities, each such Trustee
shall be a trustee of a trust under the applicable Indenture separate and
apart from the trust administered by any other Trustee, and, except as
otherwise indicated herein, any action described herein to be taken by each
Trustee may be taken by each such Trustee with respect to, and only with
respect to, the one or more series of Debt Securities for which it is
Trustee under the applicable Indenture.
The Prospectus Supplement relating to any series of Debt Securities
being offered will contain the specific terms thereof, including, without
limitation:
(1) The title of such Debt Securities and whether such Debt Securities
are Senior Securities or Subordinated Securities;
(2) The aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) The percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the
portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof;
(4) If convertible in whole or in part into Common Stock or Preferred
Stock, the terms on which such Debt Securities are convertible,
including the initial conversion price or rate (or method for
determining the same), the portion that is convertible and the
conversion period, and any applicable limitations on the ownership
or transferability of the Common Stock or Preferred Stock receivable
on conversion;
(5) The date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(6) The rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(7) The date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the dates on which any
such interest will be payable, the regular record dates for such
interest payment dates, or the method by which such dates shall be
determined, the persons to whom such interest shall be payable, and
the basis upon which interest shall be calculated if other than that
of a 360-day year of twelve 30-day months;
(8) The place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where
such Debt Securities may be surrendered for conversion or
registration of transfer or exchange and where notices or demands to
or upon the Company in respect of such Debt Securities and the
applicable Indenture may be served;
(9) The period or periods within which, the price or prices at which and
the other terms and conditions upon which such Debt Securities may
be redeemed, in whole or in part, at the option of the Company, if
the Company is to have such an option;
(10) The obligation, if any, of the Company to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof, and the period or
periods within which or the date and dates on which, the price or
prices at which and the other terms and conditions upon which such
Debt Securities will be redeemed, repaid or purchased, in whole or
in part, pursuant to such obligation;
(11) If other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a
foreign currency or units of two or more foreign currencies or a
composite currency or currencies, and the terms and conditions
relating thereto;
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(12) Whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined
with reference to an index, formula or other method (which index,
formula or method may, but need not be, based on a currency,
currencies, currency unit or units or composite currency or
currencies) and the manner in which such amounts shall be
determined;
(13) Any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to Events of Default or covenants
set forth in the applicable Indenture;
(14) Whether such Debt Securities will be issued in certificate or book-
entry form;
(15) Whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than
$1,000 and any integral multiple thereof and, if in bearer form,
the denominations thereof and terms and conditions relating
thereto;
(16) The applicability, if any, of the defeasance and covenant
defeasance provisions of Article Fourteen of the applicable
Indenture;
(17) Whether and under what circumstances the Company will pay any
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Company
will have the option to redeem such Debt Securities in lieu of
making such payment; and
(18) Any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture (Section 301).
The Debt Securities may provide for less than the entire principal
amount thereof to be payable upon declaration of acceleration of the
maturity thereof ("Original Issue Discount Securities"). Special federal
income tax, accounting and other considerations applicable to Original
Issue Discount Securities will be described in the applicable Prospectus
Supplement.
Except as set forth in the applicable Indenture or in one or more
indentures supplemental thereto, the applicable Indenture will not contain
any provisions that would limit the ability of the Company to incur
indebtedness or that would afford Holders of Debt Securities protection in
the event of a highly leveraged or similar transaction involving the
Company or in the event of a change of control. Restrictions on ownership
and transfers of the Company's Common Stock and Preferred Stock are
designed to preserve its status as a REIT and, therefore, may act to
prevent or hinder a change of control. See "Description of Preferred
Stock--Restrictions on Ownership" and "Description of Common Stock--
Restrictions on Transfer." Reference is made to the applicable Prospectus
Supplement for information with respect to any deletions from,
modifications of or additions to the Events of Default or covenants of the
Company that are described below, including any addition of a covenant or
other provision providing event risk or similar protection.
"Significant Subsidiary" means any Subsidiary that is a
"significant subsidiary" (within the meaning of Regulation S-X
promulgated under the Securities Act) of the Company.
"Subsidiary" means a corporation or a partnership a majority of the
outstanding voting stock or partnership interests, as the case may be, of
which is owned or controlled, directly or indirectly, by the Company or by
one or more other Subsidiaries of the Company. For the purposes of this
definition, "voting stock" means stock having voting power for the
election of directors, or trustees, as the case may be, whether at all
times or only so long as no senior class of stock has such voting power by
reason of any contingency.
DENOMINATION, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000
and integral multiples thereof (Section 302).
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Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of
Debt Securities will be payable at the corporate trust office of the
Trustee, the address of which will be stated in the applicable Prospectus
Supplement; provided that, at the option of the Company, payment of
interest may be made by check mailed to the address of the person entitled
thereto as it appears in the applicable register for such Debt Securities
or by wire transfer of funds to such person at an account maintained within
the United States (Sections 301, 305, 306, 307 and 1002).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the Holder on the applicable regular
record date and may either be paid to the person in whose name such Debt
Security is registered at the close of business on a special record date
(the "Special Record Date") for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to the Holder of
such Debt Security not less than ten days prior to such Special Record
Date, or may be paid at any time in any other lawful manner, all as more
completely described in the Indenture (Section 307).
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of
such Debt Securities at the corporate trust office of the applicable
Trustee referred to above. In addition, subject to certain limitations
imposed upon Debt Securities issued in book-entry form, the Debt Securities
of any series may be surrendered for conversion or registration of transfer
or exchange thereof at the corporate trust office of the applicable
Trustee. Every Debt Security surrendered for conversion, registration of
transfer or exchange must be duly endorsed or accompanied by a written
instrument of transfer. No service charge will be made for any
registration of transfer or exchange of any Debt Securities, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. If the applicable
Prospectus Supplement refers to any transfer agent (in addition to the
applicable Trustee) initially designated by the Company with respect to any
series of Debt Securities, the Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that the Company will be
required to maintain a transfer agent in each place of payment for such
series. The Company may at any time designate additional transfer agents
with respect to any series of Debt Securities (Section 1002).
Neither the Company nor any Trustee shall be required to (i) issue,
register the transfer of or exchange Debt Securities of any series during a
period beginning at the opening of business 15 days before any selection of
Debt Securities of that series to be redeemed and ending at the close of
business on the day of mailing of the relevant notice of redemption; (ii)
register the transfer of or exchange any Debt Security, or portion thereof,
called for redemption, except the unredeemed portion of any Debt Security
being redeemed in part; or (iii) issue, register the transfer of or
exchange any Debt Security that has been surrendered for repayment at the
option of the Holder, except the portion, if any, of such Debt Security not
to be so repaid (Section 305).
MERGER, CONSOLIDATION OR SALE
The Company will be permitted to consolidate with, or sell, lease or
convey all or substantially all of its assets to, or merge with or into,
any other entity provided that (a) either the Company shall be the
continuing entity, or the successor entity (if other than the Company)
formed by or resulting from any such consolidation or merger or which shall
have received the transfer of such assets shall expressly assume payment of
the principal of (and premium, if any) and interest on all of the Debt
Securities and the due and punctual performance and observance of all of
the covenants and conditions contained in each Indenture; (b) immediately
after giving effect to such transaction and treating any indebtedness that
becomes an obligation of the Company or any Subsidiary as a result thereof
as having been incurred by the Company or Subsidiary at the time of such
transaction, no Event of Default under the Indentures, and no event which,
after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's
certificate and legal opinion covering such conditions shall be delivered
to each Trustee (Sections 801 and 803).
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CERTAIN COVENANTS
Existence. Except as described above under "Merger, Consolidation or
Sale", the Company will be required to do or cause to be done all things
necessary to preserve and keep in full force and effect its existence,
rights (by declaration of trust, by-laws and statute) and franchises;
provided, however, that the Company shall not be required to preserve any
right or franchise if it determines that the preservation thereof is no
longer desirable in the conduct of its business and that the loss thereof
is not disadvantageous in any material respect to the Holders of the Debt
Securities.
Maintenance of Properties. The Company will be required to cause all
of its material properties used or useful in the conduct of its business or
the business of any Subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and will
cause to be made all necessary repairs, renewals, replacements, betterments
and improvements thereof, all as in the judgment of the Company may be
necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times (Section 1007).
Insurance. The Company will be required to, and will be required to
cause each of its Subsidiaries to, keep all of its insurable properties
insured against loss or damage at least equal to their then full insurable
value with insurers of recognized responsibility and, if described in the
applicable Prospectus Supplement, having a specified rating from a
recognized insurance rating service (Section 1008).
Payment of Taxes and Other Claims. The Company will be required to pay
or discharge or cause to be paid or discharged, before the same shall
become delinquent, (i) all taxes, assessments and governmental charges
levied or imposed upon it or any Subsidiary or upon the income, profits or
property of the Company or any Subsidiary, and (ii) all lawful claims for
labor, materials and supplies which, if unpaid, might by law become a lien
upon the property of the Company or any Subsidiary; provided, however, that
the Company shall not be required to pay or discharge or cause to be paid
or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings (Section 1009).
Provision of Financial Information. Whether or not the Company is
subject to Section 13 or 15(d) of the Exchange Act, the Company will be
required, to the extent permitted under the Exchange Act, to file with the
Commission the annual reports, quarterly reports and other documents which
the Company would have been required to file with the Commission pursuant
to such Sections 13 or 15(d) if the Company were so subject (the
"Financial Information"), such documents to be filed with the Commission
on or prior to the respective dates (the "Required Filing Dates") by
which the Company would have been required so to file such documents if the
Company were so subject. The Company also will in any event (x) within 15
days of each Required Filing Date (i) to transmit by mail to all Holders of
Debt Securities, as their names and addresses appear in the Security
Register, without cost to such Holders, copies of the Financial Information
and (ii) to file with the Trustee copies of the Financial Information, and
(y) if filing such documents by the Company with the Commission is not
permitted under the Exchange Act, promptly upon written request and payment
of the reasonable cost of duplication and delivery, to supply copies of
such documents to any prospective Holder (Section 1010).
ADDITIONAL COVENANTS AND/OR MODIFICATIONS TO THE COVENANTS DESCRIBED ABOVE
Any additional covenants of the Company and/or modifications to the
covenants described above with respect to any Debt Securities or series
thereof, including any covenants relating to limitations on incurrence of
indebtedness or other financial covenants, will be set forth in the
applicable Indenture or an indenture supplemental thereto and described in
the Prospectus Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture will provide that the following events are "Events of
Default" with respect to any series of Debt Securities issued thereunder:
(i) default for 30 days in the payment of any installment of interest on
any Debt Security of such series; (ii) default in the payment of principal
of (or premium, if any, on) any Debt Security of
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such series at its maturity; (iii) default in making any sinking fund
payment as required for any Debt Security of such series; (iv) default in
the performance or breach of any other covenant or warranty of the Company
contained in the applicable Indenture (other than a covenant added to the
Indenture solely for the benefit of a series of Debt Securities issued
thereunder other than such series), continued for 60 days after written
notice as provided in the applicable Indenture; (v) default in the payment
of an aggregate principal amount exceeding $10,000,000 of any indebtedness
of the Company or any mortgage, indenture or other instrument under which
such indebtedness is issued or by which such indebtedness is secured, such
default having occurred after the expiration of any applicable grace period
and having resulted in the acceleration of the maturity of such
indebtedness, but only if such indebtedness is not discharged or such
acceleration is not rescinded or annulled; (vi) certain events of
bankruptcy, insolvency or reorganization, or court appointment of a
receiver, liquidator or trustee of the Company or any Significant
Subsidiary or either of its property; and (vii) any other Event of Default
provided with respect to a particular series of Debt Securities (Section
501).
If an Event of Default under any Indenture with respect to Debt
Securities of any series at the time outstanding occurs and is continuing,
then in every such case the applicable Trustee or the Holders of not less
than 25% of the principal amount of the Outstanding Debt Securities of that
series will have the right to declare the principal amount (or, if the Debt
Securities of that series are Original Issue Discount Securities or indexed
securities, such portion of the principal amount as may be specified in the
terms thereof) of all the Debt Securities of that series to be due and
payable immediately by written notice thereof to the Company (and to the
applicable Trustee if given by the Holders). However, at any time after
such a declaration of acceleration with respect to Debt Securities of such
series (or of all Debt Securities then Outstanding under any Indenture, as
the case may be) has been made, but before a judgment or decree for payment
of the money due has been obtained by the applicable Trustee, the Holders
of not less than a majority in principal amount of Outstanding Debt
Securities of such series (or of all Debt Securities then Outstanding under
the applicable Indenture, as the case may be) may rescind and annul such
declaration and its consequences if (a) the Company shall have deposited
with the applicable Trustee all required payments of the principal of (and
premium, if any) and interest on the Debt Securities of such series (or of
all Debt Securities then Outstanding under the applicable Indenture, as the
case may be), plus certain fees, expenses, disbursements and advances of
the applicable Trustee and (b) all events of default, other than the non-
payment of accelerated principal (or specified portion thereof), with
respect to Debt Securities of such series (or of all Debt Securities then
Outstanding under the applicable Indenture, as the case may be) have been
cured or waived as provided in such Indenture (Section 502). Each
Indenture also will provide that the Holders of not less than a majority in
principal amount of the Outstanding Debt Securities of any series (or of
all Debt Securities then Outstanding under the applicable Indenture, as the
case may be) may waive any past default with respect to such series and its
consequences, except a default (x) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (y) in
respect of a covenant or provision contained in the applicable Indenture
that cannot be modified or amended without the consent of the Holder of
each Outstanding Debt Security affected thereby (Section 513).
Each Trustee will be required to give notice to the Holders of Debt
Securities within 90 days of a default under the applicable Indenture
unless such default shall have been cured or waived; provided, however,
that such Trustee may withhold notice to the Holders of any series of Debt
Securities of any default with respect to such series (except a default in
the payment of the principal of (or premium, if any) or interest on any
Debt Security of such series or in the payment of any sinking fund
installment in respect of any Debt Security of such series) if specified
responsible officers of such Trustee consider such withholding to be in the
interest of such Holders (Section 601).
Each Indenture will provide that no Holders of Debt Securities of any
series may institute any proceedings, judicial or otherwise, with respect
to such Indenture or for any remedy thereunder, except in the cases of
failure of the applicable Trustee, for 60 days, to act after it has
received a written request to institute proceedings in respect of an Event
of Default from the Holders of not less than 25% in principal amount of the
Outstanding Debt Securities of such series, as well as an offer of
indemnity reasonably satisfactory to it (Section 507). This provision will
not prevent, however, any Holder of Debt Securities from instituting suit
for the enforcement of payment of the principal of (and premium, if any)
and interest on such Debt Securities at the respective due dates thereof
(Section 508).
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Subject to provisions in each Indenture relating to its duties in case
of default, no Trustee will be under any obligation to exercise any of its
rights or powers under an Indenture at the request or direction of any
Holders of any series of Debt Securities then Outstanding under such
Indenture, unless such Holders shall have offered to the Trustee thereunder
reasonable security or indemnity (Section 602). The Holders of not less
than a majority in principal amount of the Outstanding Debt Securities of
any series (or of all Debt Securities then Outstanding under an Indenture,
as the case may be) shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the
applicable Trustee, or of exercising any trust or power conferred upon such
Trustee. However, a Trustee may refuse to follow any direction which is in
conflict with any law or the applicable Indenture, which may involve such
Trustee in personal liability or which may be unduly prejudicial to the
Holders of Debt Securities of such series not joining therein (Section
512).
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to each Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of
any default under the applicable Indenture and, if so, specifying each such
default and the nature and status thereof (Section 1011).
MODIFICATION OF THE INDENTURES
Modifications and amendments of an Indenture will be permitted to be
made only with the consent of the Holders of not less than a majority in
principal amount of all Outstanding Debt Securities issued under such
Indenture which are affected by such modification or amendment; provided,
however, that no such modification or amendment may, without the consent of
the Holder of each such Debt Security affected thereby, (a) change the
stated maturity of the principal of, or any installment of interest (or
premium, if any) on, any such Debt Security; (b) reduce the principal
amount of, or the rate or amount of interest on, or any premium payable on
redemption of, any such Debt Security, or reduce the amount of principal of
an Original Issue Discount Security that would be due and payable upon
declaration of acceleration of the maturity thereof or would be provable in
bankruptcy, or adversely affect any right of repayment of the Holder of any
such Debt Security; (c) change the place of payment, or the coin or
currency, for payment of principal or premium, if any, or interest on any
such Debt Security; (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any such Debt Security;
(e) reduce the above-stated percentage of Outstanding Debt Securities of
any series necessary to modify or amend the applicable Indenture, to waive
compliance with certain provisions thereof or certain defaults and
consequences thereunder or to reduce the quorum or voting requirements set
forth in the applicable Indenture; or (f) modify any of the foregoing
provisions or any of the provisions relating to the waiver of certain past
defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not
be modified or waived without the consent of the Holder of such Debt
Security (Section 902).
The Holders of not less than a majority in principal amount of
Outstanding Debt Securities of each series affected thereby will have the
right to waive compliance by the Company with certain covenants in such
Indenture (Section 1013).
Modifications and amendments of an Indenture will be permitted to be
made by the Company and the respective Trustee thereunder without the
consent of any Holder of Debt Securities for any of the following purposes:
(i) to evidence the succession of another person to the Company as obligor
under such Indenture; (ii) to add to the covenants of the Company for the
benefit of the Holders of all or any series of Debt Securities or to
surrender any right or power conferred upon the Company in the Indenture;
(iii) to add Events of Default for the benefit of the Holders of all or any
series of Debt Securities; (iv) to add or change any provisions of an
Indenture to facilitate the issuance of, or to liberalize certain terms of,
Debt Securities in bearer form, or to permit or facilitate the issuance of
Debt Securities in uncertificated form, provided that such action shall not
adversely affect the interests of the Holders of the Debt Securities of any
series in any material respect; (v) to change or eliminate any provisions
of an Indenture, provided that any such change or elimination shall become
effective only when there are no Debt Securities Outstanding of any series
created prior thereto which are entitled to the benefit of such provision;
(vi) to secure the Debt Securities; (vii) to establish the form or terms of
Debt Securities
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of any series, including the provisions and procedures, if applicable, for
the conversion of such Debt Securities into Common Stock or Preferred Stock
of the Company; (viii) to provide for the acceptance of appointment by a
successor Trustee or facilitate the administration of the trusts under an
Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or
inconsistency in an Indenture, provided that such action shall not
adversely affect the interests of Holders of Debt Securities of any series
issued under such Indenture in any material respect; or (x) to supplement
any of the provisions of an Indenture to the extent necessary to permit or
facilitate defeasance and discharge of any series of such Debt Securities,
provided that such action shall not adversely affect the interests of the
Holders of the Debt Securities of any series in any material respect
(Section 901).
Each Indenture will provide that in determining whether the Holders of
the requisite principal amount of Outstanding Debt Securities of a series
have given any request, demand, authorization, direction, notice, consent
or waiver thereunder or whether a quorum is present at a meeting of Holders
of Debt Securities, (i) the principal amount of an Original Issue Discount
Security that shall be deemed to be Outstanding shall be the amount of the
principal thereof that would be due and payable as of the date of such
determination upon declaration of acceleration of the maturity thereof,
(ii) the principal amount of any Debt Security denominated in a foreign
currency that shall be deemed Outstanding shall be the U.S. dollar
equivalent, determined on the issue date for such Debt Security, of the
principal amount (or, in the case of Original Issue Discount Security, the
U.S. dollar equivalent on the issue date of such Debt Security of the
amount determined as provided in (i) above), (iii) the principal amount of
an indexed security that shall be deemed Outstanding shall be the principal
face amount of such indexed security at original issuance, unless otherwise
provided with respect to such indexed security pursuant to the applicable
Indenture, and (iv) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
Each Indenture will contain provisions for convening meetings of the
Holders of Debt Securities of a series (Section 501). A meeting will be
permitted to be called at any time by the applicable Trustee, and also,
upon request, by the Company or the Holders of at least 10% in principal
amount of the Outstanding Debt Securities of such series, in any such case
upon notice given as provided in the Indenture. Except for any consent
that must be given by the Holder of each Debt Security affected by certain
modifications and amendments of an Indenture, any resolution presented at a
meeting or adjourned meeting duly reconvened at which a quorum is present
may be adopted by the affirmative vote of the Holders of a majority in
principal amount of the Outstanding Debt Securities of that series;
provided, however, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the Holders of a
specified percentage, which is less than a majority, in principal amount of
the Outstanding Debt Securities of a series may be adopted at a meeting or
adjourned meeting or adjourned meeting duly reconvened at which a quorum is
present by the affirmative vote of the Holders of such specified percentage
in principal amount of the Outstanding Debt Securities of that series. Any
resolution passed or decision taken at any meeting of Holders of Debt
Securities of any series duly held in accordance with an Indenture will be
binding on all Holders of Debt Securities of that series. The quorum at
any meeting called to adopt a resolution, and at any reconvened meeting,
will be persons holding or representing a majority in principal amount of
the Outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver
which may be given by the Holders of not less than a specified percentage
in principal amount of the Outstanding Debt Securities of a series, the
persons holding or representing such specified percentage in principal
amount of the Outstanding Debt Securities of such series will constitute a
quorum.
Notwithstanding the foregoing provisions, each Indenture will provide
that if any action is to be taken at a meeting of Holders of Debt
Securities of any series with respect to any request, demand,
authorization, direction, notice, consent, waiver and other action that
such Indenture expressly provides may be made, given or taken by the
Holders of a specified percentage in principal amount of all Outstanding
Debt Securities affected thereby, or the Holders of such series and one or
more additional series: (i) there shall be no minimum quorum requirement
for such meeting, and (ii) the principal amount of the Outstanding Debt
Securities of such series that vote in favor of such request, demand,
authorization, direction, notice, consent, waiver or other action shall be
taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been
made, given or taken under such Indenture.
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SUBORDINATION
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest
on any Subordinated Securities will be subordinated to the extent provided
in the applicable Indenture in right of payment to the prior payment in
full of all Senior Debt (Sections 1601 and 1602 of the Subordinated
Indenture), but the obligation of the Company to make payment of the
principal and interest on such Subordinated Securities will not otherwise
be affected (Section 1608 of the Subordinated Indenture). No payment of
principal or interest will be permitted to be made on Subordinated
Securities at any time if a default on Senior Debt exists that permits the
Holders of such Senior Debt to accelerate its maturity and the default is
the subject of judicial proceedings or the Company receives notice of the
default (Section 1603 of the Subordinated Indenture). After all Senior
Debt is paid in full and until the Subordinated Securities are paid in
full, Holders will be subrogated to the right of Holders of Senior Debt to
the extent that distributions otherwise payable to Holders have been
applied to the payment of Senior Debt (Section 1607 of the Subordinated
Indenture). By reason of such subordination, in the event of a
distribution of assets upon insolvency, certain general creditors of the
Company may recover more, ratably, than Holders of Subordinated Securities.
Senior Debt will be defined in the Subordinated Indenture as the
principal of and interest on, or substantially similar payments to be made
by the Company in respect of, the following, whether outstanding at the
date of execution of the applicable Indenture or thereafter incurred,
created or assumed: (i) indebtedness of the Company for money borrowed or
represented by purchase-money obligations, (ii) indebtedness of the Company
evidenced by notes, debentures, or bonds or other securities issued under
the provisions of an indenture, fiscal agency agreement or other agreement,
(iii) obligations of the Company as lessee under leases of property either
made as part of any sale and leaseback transaction to which the Company is
a party or otherwise, (iv) indebtedness of partnerships and joint ventures
which is included in the consolidated financial statements of the Company,
(v) indebtedness, obligations and liabilities of others in respect of which
the Company is liable contingently or otherwise to pay or advance money or
property or as guarantor, endorser or otherwise or which the Company has
agreed to purchase or otherwise acquire, and (vi) any binding commitment of
the Company to fund any real estate investment or to fund any investment in
any entity making such real estate investment, in each case other than
(1) any such indebtedness, obligation or liability referred to in clauses
(i) through (vi) above as to which, in the instrument creating or evidencing
the same pursuant to which the same is outstanding, it is provided that
such indebtedness, obligation or liability is not superior in right of
payment to the Subordinated Securities or ranks pari passu with the
Subordinated Securities, (2) any such indebtedness, obligation or liability
which is subordinated to indebtedness of the Company to substantially the
same extent as or to a greater extent than the Subordinated Securities are
subordinated, and (3) the Subordinated Securities. As used in the
preceding sentence, the term "purchase money obligations" shall mean
indebtedness or obligations evidenced by a note, debenture, bond or other
instrument (whether or not secured by any lien or other security interest
but excluding indebtedness or obligations for which recourse is limited to
the property purchased) issued or assumed as all or a part of the
consideration for the acquisition of property, whether by purchase, merger,
consolidation or otherwise, but shall not include any trade accounts
payable. There will not be any restrictions in an Indenture relating to
Subordinated Securities upon the creation of additional Senior Debt.
If this Prospectus is being delivered in connection with a series of
Subordinated Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will contain the approximate
amount of Senior Debt outstanding as of the end of the Company's most
recent fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Company may be permitted under the applicable Indenture to discharge
certain obligations to Holders of any series of Debt Securities issued
thereunder that have not already been delivered to the applicable Trustee
for cancellation and that either have become due and payable or will become
due and payable within one year (or scheduled for redemption within one
year) by irrevocably depositing with the applicable Trustee, in trust,
funds in such currency or currencies, currency unit or units or composite
currency or currencies in which such Debt Securities are payable in an
amount sufficient to pay the entire indebtedness on such Debt Securities in
respect of
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principal (and premium, if any) and interest to the date of such
deposit (if such Debt Securities have become due and payable) or to the
stated maturity or redemption date, as the case may be.
Each Indenture will provide that, if the provisions of Article Fourteen
are made applicable to the Debt Securities of or within any series pursuant
to Section 301 of such Indenture, the Company may elect either (a) to
defease and be discharged from any and all obligations with respect to such
Debt Securities (except for the obligation to pay additional amounts, if
any, upon the occurrence of certain events of tax, assessment or
governmental charge with respect to payments on such Debt Securities, and
the obligations to register the transfer or exchange of such Debt
Securities, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold moneys for payment in trust) ("defeasance")
(Section 1402) or (b) to be released from its obligations with respect to
such Debt Securities under certain specified sections of Article Ten of
such Indenture as specified in the applicable Prospectus Supplement and any
omission to comply with such obligations shall not constitute an Event of
Default with respect to such Debt Securities ("covenant defeasance")
(Section 1403), in either case upon the irrevocable deposit by the Company
with the applicable Trustee, in trust, of an amount, in such currency or
currencies, currency unit or units or composite currency or currencies in
which such Debt Securities are payable at stated maturity, or Government
Obligations (as defined below), or both, applicable to such Debt Securities
which through the scheduled payment of principal and interest in accordance
with their terms will provide money in an amount sufficient without
reinvestment to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other
things, the Company has delivered to the applicable Trustee an opinion of
counsel (as specified in the applicable Indenture) to the effect that the
Holders of such Debt Securities will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such defeasance or covenant defeasance had not occurred, and such opinion
of counsel, in the case of defeasance, will be required to refer to and be
based upon a ruling of the Internal Revenue Service or a change in
applicable U.S. federal income tax law occurring after the date of the
Indenture (Section 1404).
"Government Obligations" means securities which are (i) direct
obligations of the United States of America or the government which issued
the foreign currency in which the Debt Securities of a particular series
are payable, for the payment of which its full faith and credit is pledged
or (ii) obligations of a person controlled or supervised by and acting as
an agency or instrumentality of the United States of America or such
government which issued the foreign currency in which the Debt Securities
of such series are payable, the timely payment of which is unconditionally
guaranteed as a full faith and credit obligation of the United States of
America or such government, which, in either case, are not callable or
redeemable at the option of the issuer thereof, and shall also include a
depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest
on or principal of any such Government Obligation held by such custodian
for the account of the Holder of a depository receipt, provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the Holder of such depository receipt
from any amount received by the custodian in respect of the Government
Obligation or the specific payment of interest on or principal of the
Government Obligation evidenced by such depository receipt (Section 101 of
each Indenture).
Unless otherwise provided in the applicable Prospectus Supplement, if
after the Company has deposited funds and/or Government Obligations to
effect defeasance or covenant defeasance with respect to Debt Securities of
any series, (a) the Holder of a Debt Security of such series is entitled
to, and does, elect pursuant to the applicable Indenture or the terms of
such Debt Security to receive payment in a currency, currency unit or
composite currency other than that in which such deposit has been made in
respect of such Debt Security, or (b) a Conversion Event (as defined below)
occurs in respect of the currency, currency unit or composite currency in
which such deposit has been made, the indebtedness represented by such Debt
Security will be deemed to have been, and will be, fully discharged and
satisfied through the payment of the principal of (and premium, if any) and
interest on such Debt Security as they become due out of the proceeds
yielded by converting the amount so
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deposited in respect of such Debt Security into the currency, currency unit
or composite currency in which such Debt Security becomes payable as a
result of such election or such cessation of usage based on the applicable
market exchange rate. "Conversion Event" means the cessation of use of (i)
a currency, currency unit or composite currency both by the government of
the country which issued such currency and for the settlement of
transactions by a central bank or other public institutions of or within
the international banking community, (ii) the ECU both within the European
Monetary System and for the settlement of transactions by public
institutions of or within the European Communities or (iii) any currency
unit or composite currency other than the ECU for the purposes for which it
was established. Unless otherwise provided in the applicable Prospectus
Supplement, all payments of principal of (and premium, if any) and interest
on any Debt Security that is payable in a foreign currency that ceases to
be used by its government of issuance shall be made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable
because of the occurrence of any Event of Default other than the Event of
Default described in clause (iv) under "Events of Default, Notice and
Waiver" with respect to certain specified sections of Article Ten of each
Indenture (which sections would no longer be applicable to such Debt
Securities as a result of such covenant defeasance) or described in clause
(vii) under "Events of Default, Notice and Waiver" with respect to any
other covenant as to which there has been covenant defeasance, the amount
in such currency, currency unit or composite currency in which such Debt
Securities are payable, and Government Obligations on deposit with the
applicable Trustee, will be sufficient to pay amounts due on such Debt
Securities at the time of their stated maturity but may not be sufficient
to pay amounts due on such Debt Securities at the time of the acceleration
resulting from such Default. However, the Company would remain liable to
make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the
provisions, if any, permitting such defeasance or covenant defeasance,
including any modifications to the provisions described above, with respect
to the Debt Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the
option of the Holders or the Company, the events requiring an adjustment of
the conversion price and provisions affecting conversion in the event of
the redemption of such Debt Securities and any restrictions on conversion,
including restrictions directed at maintaining the Company's REIT status.
REDEMPTION OF SECURITIES
The Indenture provides that the Debt Securities may be redeemed at any
time at the option of the Company, in whole or in part, at the Redemption
Price, except as may otherwise be provided in connection with any Debt
Securities or series thereof.
From and after notice has been given as provided in the Indenture, if
funds for the redemption of any Debt Securities called for redemption shall
have been made available on such redemption date, such Debt Securities will
cease to bear interest on the date fixed for such redemption specified in
such notice, and the only right of the Holders of the Debt Securities will
be to receive payment of the Redemption Price.
Notice of any optional redemption of any Debt Securities will be given
to Holders at their addresses, as shown in the Security Register, not more
than 60 nor less than 30 days prior to the date fixed for redemption. The
notice of redemption will specify, among other items, the Redemption Price
and the principal amount of the Debt Securities held by such Holder to be
redeemed.
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If the Company elects to redeem Debt Securities, it will notify the
Trustee at least 45 days prior to the redemption date (or such shorter
period as satisfactory to the Trustee) of the aggregate principal amount of
Debt Securities to be redeemed and the redemption date. If less than all
the Debt Securities are to be redeemed, the Trustee shall select the Debt
Securities to be redeemed pro rata, by lot or in such manner as it shall
deem fair and appropriate.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will
be deposited with, or on behalf of, a depository identified in the
applicable Prospectus Supplement relating to such series. Global
Securities may be issued in either registered or bearer form and in either
temporary or permanent form. The specific terms of the depository
arrangement with respect to a series of Debt Securities will be described
in the applicable Prospectus Supplement relating to such series.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 145,000,000 shares of capital stock,
$.01 par value, of which 95,000,000 shares are classified as Common Stock,
45,000,000 shares are classified as Excess Stock and 5,000,000 shares are
not classified. The 5,000,000 shares that are not classified as part of an
existing class of stock could be classified by the Board of Directors into
one or more series of Preferred Stock. As of December 31, 1995, there was
no Preferred Stock outstanding.
Under the Company's Charter, the Board of Directors may from time to
time establish and issue one or more series of Preferred Stock. The
Directors may classify or reclassify any unissued Preferred Stock by
setting or changing the number, designation, preference, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms or conditions of redemption of such series.
The following description of the Preferred Stock sets forth certain
general terms and provisions of the Preferred Stock to which any Prospectus
Supplement may relate. The statements below describing the Preferred Stock
are in all respects subject to and qualified in their entirety by reference
to the applicable provisions of the Company's Charter and the Company's
amended and restated bylaws (the "Bylaws").
GENERAL
The Board of Directors is empowered by the Company's Charter to
designate and issue from time to time one or more series of Preferred Stock
without shareholder approval. The Board of Directors may determine the
relative rights, preferences and privileges of each series of Preferred
Stock so issued. Because the Board of Directors has the power to establish
the preferences and rights of each series of Preferred Stock, it may afford
the holders of any series of Preferred Stock preferences, powers and
rights, voting or otherwise, senior to the rights of holders of Common
Stock. The Preferred Stock will, when issued, be fully paid and
nonassessable.
The Prospectus Supplement relating to any Preferred Stock offered
thereby will contain the specific terms thereof, including, without
limitation:
(l) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such
Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) The date from which dividends on such Preferred Stock shall
accumulate, if applicable;
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(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred Stock;
(7) The provision for redemption, if applicable, of such Preferred
Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into shares of Common Stock of the
Company, including the conversion price (or manner of calculation
thereof);
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(11) A discussion of federal income tax considerations applicable to
such Preferred Stock;
(12) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company;
(13) Any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred
Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; and
(14) Any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the
status of the Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank (i) senior to all classes or
series of Common Stock of the Company, and to all equity securities ranking
junior to such Preferred Stock; (ii) on a parity with all equity securities
issued by the Company the terms of which specifically provide that such
equity securities rank on a parity with the Preferred Stock; and (iii)
junior to all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank senior to the
Preferred Stock. The term "equity securities" does not include
convertible Debt Securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to
receive, when, as and if declared by the Board of Trustees of the Company,
out of assets of the Company legally available for payment, cash dividends
(or dividends in kind or in other property if expressly permitted and
described in the applicable Prospectus Supplement) at such rates and on
such dates as will be set forth in the applicable Prospectus Supplement.
Each such dividend shall be payable to holders of record as they appear on
the share transfer books of the Company on such record dates as shall be
fixed by the Board of Trustees of the Company.
Dividends on any series of Preferred Stock may be cumulative or non-
cumulative, as provided in the applicable Prospectus Supplement.
Dividends, if cumulative, will be cumulative from and after the date set
forth in the applicable Prospectus Supplement. If the Board of Trustees of
the Company fails to declare a dividend payable on a dividend payment date
on any series of the Preferred Stock for which dividends are non-
cumulative, then the holders of such series of the Preferred Stock will
have no right to receive a dividend in respect of the dividend period
ending on such dividend payment date, and the Company will have no
obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend
payment date.
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Unless otherwise specified in the Prospectus Supplement, if any shares
of Preferred Stock of any series are outstanding, no full dividends shall
be declared or paid or set apart for payment on any capital shares of the
Company of any other series ranking, as to dividends, on a parity with or
junior to the Preferred Stock of such series for any period unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for such payment on
the Preferred Stock of such series for all past dividend periods and the
then current dividend period or (ii) if such series of Preferred Stock does
not have a cumulative dividend, full dividends for the then current
dividend period have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such
payment on the Preferred Stock of such series. When dividends are not paid
in full (or a sum sufficient for such full payment is not so set apart)
upon Preferred Stock of any series and the shares of any other series of
Preferred Stock ranking on a parity as to dividends with the Preferred
Stock of such series, all dividends declared upon Preferred Stock of such
series and any other series of Preferred Stock ranking on a parity as to
dividends with such Preferred Stock shall be declared pro rata so that the
amount of dividends declared per share of Preferred Stock of such series
and such other series of Preferred Stock shall in all cases bear to each
other the same ratio that accrued dividends per share on the Preferred
Stock of such series (which shall not include any accumulation in respect
of unpaid dividends for prior dividend periods if such Preferred Stock does
not have a cumulative dividend) and such other series of Preferred Stock
bear to each other. No interest, or sum of money in lieu of interest, shall
be payable in respect of any dividend payment or payments on Preferred
Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for all past dividend periods
and the then current dividend period, and (ii) if such series of Preferred
Stock does not have a cumulative dividend, full dividends on the Preferred
Stock of such series have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period, no dividends (other than in
shares of Common Stock or other capital shares ranking junior to the
Preferred Stock of such series as to dividends and upon liquidation) shall
be declared or paid or set aside for payment or other distribution upon the
Common Stock, or any other capital shares of the Company ranking junior to
or on a parity with the Preferred Stock of such series as to dividends or
upon liquidation, nor shall any Common Stock, or any other capital shares
of the Company ranking junior to or on a parity with the Preferred Stock of
such series as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by the
Company (except by conversion into or exchange for other capital shares of
the Company ranking junior to the Preferred Stock of such series as to
dividends and upon liquidation).
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred
Stock will be subject to mandatory redemption or redemption at the option
of the Company, in whole or in part, in each case upon the terms, at the
times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that
is subject to mandatory redemption will specify the number of shares of
such Preferred Stock that shall be redeemed by the Company in each year
commencing after a date to be specified, at a redemption price per share to
be specified, together with an amount equal to all accrued and unpaid
dividends thereon (which shall not, if such Preferred Stock does not have a
cumulative dividend, include any accumulation in respect of unpaid
dividends for prior dividend periods) to the date of redemption. The
redemption price may be payable in cash or other property, as specified in
the applicable Prospectus Supplement. If the redemption price for
Preferred Stock of any series is payable only from the net proceeds of the
issuance of capital shares of the Company, the terms of such Preferred
Stock may provide that, if no such capital shares shall have been issued or
to the extent the net proceeds from any issuance are insufficient to pay in
full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be
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converted into the applicable capital shares of the Company pursuant to
conversion provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred
Stock has a cumulative dividend, full cumulative dividends on all
outstanding shares of any series of Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for all past dividends
periods and the then current dividend period, and (ii) if such series of
Preferred Stock does not have a cumulative dividend, full dividends on the
Preferred Stock of any series have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart
for payment for the then current dividend period, the Company shall not
(a) redeem any shares of Preferred Stock of any series unless all outstanding
shares of Preferred Stock of such series are simultaneously redeemed or
(b) purchase or otherwise acquire directly or indirectly any shares of
Preferred Stock of such series (except by conversion into or exchange for
capital shares of the Company ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation); provided, however, that the
foregoing shall not prevent the purchase or acquisition of shares of
Preferred Stock of such series to preserve the REIT status of the Company
or pursuant to a purchase or exchange offer made on the same terms to
holders of all outstanding shares of Preferred Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares
held or for which redemption is requested by such holder (with adjustments
to avoid redemption of fractional shares) or by lot in a manner determined
by the Company.
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of record of Preferred
Stock of any series to be redeemed at the address shown on the share
transfer books of the Company. Each notice shall state: (i) the redemption
date; (ii) the number and series of shares of Preferred Stock to be
redeemed; (iii) the redemption to be surrendered for payment of the
redemption price; (v) that dividends on the shares to be redeemed will
cease to accrue on such redemption date; and (vi) the date upon which the
holder's conversion rights, if any, as to such shares shall terminate. If
fewer than all of the shares of Preferred Stock of any series are to be
redeemed, the notice mailed to each such holder thereof shall also specify
the number of shares of Preferred Stock to be redeemed from each such
holder. If notice of redemption of any shares of Preferred Stock has been
given and if the funds necessary for such redemption have been set aside by
the Company in trust for the benefit of the holders of any shares of
Preferred Stock so called for redemption, then from and after the
redemption date dividends will cease to accrue on such Preferred Stock, and
all rights of the holders of such shares will terminate, except the right
to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company, then, before any distribution or payment
shall be made to the holders of any Common Stock or any other class or
series of capital shares of the Company ranking junior to the Preferred
Stock in the distribution of assets upon any liquidation, dissolution or
winding up of the Company, the holders of each series of Preferred Stock
shall be entitled to receive out of assets of the Company legally available
for distribution to shareholders liquidating distributions in the amount of
the liquidation preference per share (set forth in the applicable
Prospectus Supplement), plus an amount equal to all dividends accrued and
unpaid thereon (which shall not include any accumulation in respect of
unpaid dividends for prior dividend periods if such Preferred Stock does
not have a cumulative dividend). After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of
Preferred Stock will have no right or claim to any of the remaining assets
of the Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of the Company
are insufficient to pay the amount of the liquidating distributions on all
outstanding shares of Preferred Stock and the corresponding amounts payable
on all shares of other classes or series of capital shares of the Company
ranking on a parity with the Preferred Stock in the distribution of assets,
then the holders of the Preferred Stock and all other such classes or
series of capital shares shall share ratably in any such distribution of
assets in proportion to the full liquidating distributions to which they
would otherwise be respectively entitled.
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If liquidating distributions shall have been made in full to all holders
of Preferred Stock, the remaining assets of the Company shall be
distributed among the holders of any other classes or series of capital
shares ranking junior to the Preferred Stock upon liquidation, dissolution
or winding up, according to their respective rights and preferences and in
each case according to their respective number of shares. For such
purposes, the consolidation or merger of the Company with or into any other
corporation, trust or entity, or the sale, lease or conveyance of all or
substantially all of the property or business of the Company, shall not be
deemed to constitute a liquidation, dissolution or winding up of the
Company.
VOTING RIGHTS
Holders of Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Whenever dividends on any Preferred Stock shall be in arrears for six or
more consecutive quarterly periods, the holders of such Preferred Stock
(voting separately as a class with all other series of Preferred Stock upon
which like voting rights have been conferred and are exercisable) will be
entitled to vote for the election of two additional Directors of the
Company at a special meeting called by the holders of record of at least
ten percent (10%) of any series of Preferred Stock so in arrears (unless
such request is received less than 90 days before the date fixed for the
next annual or special meeting of the shareholders) or at the next annual
meeting of shareholders, and at each subsequent annual meeting until (i) if
such series of Preferred Stock has a cumulative dividend, all dividends
accumulated on such shares of Preferred Stock for the past dividend periods
and the then current dividend period shall have been fully paid or declared
and a sum sufficient for the payment thereof set aside for payment or
(ii) if such series of Preferred Stock does not have a cumulative dividend, four
consecutive quarterly dividends shall have been fully paid or declared and
a sum sufficient for the payment thereof set aside for payment. In such
case, the entire Board of Directors of the Company will be increased by two
Directors.
Unless provided otherwise for any series of Preferred Stock, so long as
any shares of Preferred Stock remain outstanding, the Company will not,
without the affirmative vote or consent of the holders of at least two-
thirds of each series of Preferred Stock outstanding at the time, given in
person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (i) authorize or create, or increase the authorized
or issued amount of, any class or series of capital shares ranking prior to
such series of Preferred Stock with respect to the payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital shares of the Company into such shares,
or create, authorize or issue any obligation or security convertible into
or evidencing the right to purchase any such shares; or (ii) amend, alter
or repeal the provisions of the Company's Charter or the Designating
Amendment for such series of Preferred Stock, whether by merger,
consolidation or otherwise (an ''Event''), so as to materially and
adversely affect any right, preference, privilege or voting power of such
series of Preferred Stock or the holders thereof; provided, however, with
respect to the occurrence of any of the Events set forth in (ii) above, so
long as the shares of Preferred Stock remain outstanding with the terms
thereof materially unchanged, taking into account that upon the occurrence
of an Event, the Company may not be the surviving entity, the occurrence of
any such Event shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting power of holders of Preferred
Stock and provided further that (x) any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series
of Preferred Stock, or (y) any increase in the amount of authorized shares
of such series or any other series of Preferred Stock, in each case ranking
on a parity with or junior to the Preferred Stock of such series with
respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to materially
and adversely affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of Preferred Stock of
such series shall have been redeemed or called for redemption and
sufficient funds shall have been deposited in trust to effect such
redemption.
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CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred
Stock is convertible into Common Stock will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number
of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the
holders of the Preferred Stock or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in
the event of the redemption of such series of Preferred Stock.
SHAREHOLDER LIABILITY
As discussed below under "Description of Common Stock," applicable
Maryland law provides that no shareholder, including holders of shares of
Preferred Stock, shall be personally liable for the acts and obligations of
the Company and that the funds and property of the Company shall be the
only recourse for such acts or obligations.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Stock--Ownership
Limits," for the Company to qualify as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), not more than 50% in value of its
outstanding capital shares may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year. In addition to the ownership
limitations described under "Description of Common Stock -- Restrictions on
Transfer; Excess Stock -- Ownership Limits" (which limits may impact on the
acquisition, holding and/or disposition of Preferred Stock), the
Designating Amendment for each series of Preferred Stock may contain
specific provisions restricting the ownership and transfer of shares of
Preferred Stock.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Preferred Stock will be set
forth in the applicable Prospectus Supplement.
DESCRIPTION OF COMMON STOCK
GENERAL
The authorized capital stock of the Company consists of 145,000,000
shares of capital stock, $.01 par value, of which 95,000,000 shares are
classified as Common Stock, 45,000,000 shares are classified as Excess
Stock and 5,000,000 shares are not classified. At December 31, 1995, there
were 9,708,123 shares of Common Stock outstanding. Under the Company's
Charter, the Board of Directors may issue, without any further action by
the shareholders, shares of capital stock in one or more series having such
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption as the Board of Directors may determine and as may be evidenced
by articles supplementary to the Charter adopted by the Board of Directors.
The following description of the terms and provisions of the shares of
capital stock of the Company and certain other matters does not purport to
be complete and is subject to and qualified in its entirety by reference to
the applicable provisions of Maryland law and the Company's Charter.
Subject to such preferential rights as may be granted by the Board of
Directors in connection with the future issuance of Preferred Stock,
holders of Common Stock are entitled to one vote per share on all matters
to be voted on by shareholders and are entitled to receive ratably such
dividends as may be declared on the Common Stock by the Board of Directors
in its discretion from funds legally available therefor. Neither the
Charter nor the Bylaws provide for cumulative voting for the election of
directors. The Company depends upon distributions from the Operating
Partnership to fund its dividends to shareholders. In the event of the
liquidation, dissolution or winding
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up of the Company, holders of Common Stock are entitled to share ratably in
all assets remaining after payment of all debts and other liabilities and
any liquidation preference of the holders of Preferred Stock. Matters
submitted for shareholder approval generally require a majority vote of the
shares present and voting thereon. Holders of Common Stock do not have any
preemptive rights or other rights to subscribe for additional shares.
Common Stock currently outstanding is listed for trading on the New York
Stock Exchange (the ''NYSE''). The Company will apply to the NYSE to list
the additional Common Stock to be sold pursuant to any Prospectus
Supplement, and the Company anticipates that such shares will be so listed.
Both the Maryland general corporation law and the Company's Charter
provide that no shareholder of the Company will be personally liable for
any obligations of the Company. The Company's Bylaws further provide that
the Company shall indemnify each shareholder against any claim or liability
to which the shareholder may become subject by reason of his being or
having been a shareholder, and that the Company shall reimburse each
shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability. In addition, it will be the
Company's policy to include a clause in its contracts which provides that
shareholders assume no personal liability for obligations entered into on
behalf of the Company. However, with respect to tort claims, contractual
claims where shareholder liability is not so negated, claims for taxes and
certain statutory liability, the shareholder may, in some jurisdictions, be
personally liable to the extent that such claims are not satisfied by the
Company. Inasmuch as the Company will carry public liability insurance
which it considers adequate, any risk of personal liability to shareholders
is limited to situations in which the Company's assets plus its insurance
coverage would be insufficient to satisfy the claims against the Company
and its shareholders.
CLASSIFICATION AND REMOVAL OF BOARD OF DIRECTORS; OTHER PROVISIONS
The Charter of the Company provides for the Board of Directors to be
divided into three classes of directors, with each class to consist as
nearly as possible of an equal number of the directors. The terms of
office of the first class of directors (2 directors) will expire at the
1998 annual meeting of shareholders; the term of the second class of
directors (2 directors) will expire at the 1996 annual meeting of
shareholders; and the term of the third class of directors (3 directors)
will expire at the 1997 annual meeting of shareholders. At each annual
meeting of shareholders, the class of directors to be elected at such
meeting will be elected for a three year term, and the directors in the
other two classes will continue in office. Because holders of Common Stock
have no right to cumulative voting for the election of directors, at each
annual meeting of shareholders, the holders of a majority of the shares of
Common Stock will be able to elect all of the successors of the class of
directors whose term expires at that meeting.
The Charter also provides that, except for any directors who may be
elected by holders of a class or series of capital stock other than Common
Stock, directors may be removed only for cause and only by the affirmative
vote of shareholders holding at least 80% of all the votes entitled to be
cast for the election of directors. Vacancies on the Board of Directors
may be filled by the affirmative vote of the remaining directors and, in
the case of a vacancy resulting from the removal of a director, by the
shareholders by a majority of the votes entitled to be cast for the
election of directors. A vote of shareholders holding at least 80% of all
the votes entitled to be cast thereon is required to amend, alter, change,
repeal or adopt any provisions inconsistent with the foregoing classified
board and director removal provisions. Under the Charter, the power to
amend the Bylaws of the Company is vested exclusively in the Board of
Directors, and the shareholders will not have any power to adopt, alter or
repeal the Bylaws absent amendment to the Charter. These provisions may
make it more difficult and time consuming to change majority control of the
Board of Directors of the Company and, thus, reduce the vulnerability of
the Company to an unsolicited proposal for the takeover of the Company or
the removal of incumbent management.
Because the Board of Directors has the power to establish the
preferences and rights of additional series of capital stock without
further shareholder vote, the Board of Directors may afford the holders of
any series of senior capital stock preferences, powers and rights, voting
or otherwise, senior to the rights of holders of Common Stock. The
issuance of any such senior capital stock could have the effect of delaying
or preventing a change in
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control of the Company. The Board of Directors, however, currently does not
contemplate the issuance of any series of capital stock other than the
Common Stock and Excess Stock (see "--Restrictions on Transfer; Excess
Stock" below).
The Bylaws of the Company provide that, with respect to an annual
meeting of shareholders, the proposal of business to be considered by
shareholders may be made only (i) by or at the direction of the Board of
Directors or (ii) by a shareholder who has complied with the advance notice
procedures set forth in the Bylaws. In addition, with respect to any
meeting of shareholders, nominations of persons for election to the Board
of Directors may be made only (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the Company who is entitled to vote
at the meeting and has complied with the advance notice provisions set
forth in the Bylaws.
SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
Business Combination Statute. The MGCL establishes special
requirements with respect to "business combinations" between Maryland
corporations and "interested shareholders" unless exemptions are
applicable. Among other things, the law prohibits for a period of five
years a merger and other specified or similar transactions between a
Company and an interested shareholder and requires a supermajority vote for
such transactions after the end of the five-year period.
"Interested Shareholders" are all persons owning beneficially,
directly or indirectly, more than 10% of the outstanding voting stock of
the Maryland corporation. "Business Combinations" include any merger or
similar transaction subject to a statutory vote and additional transactions
involving transfers of assets or securities in specified amounts to
Interested Shareholders or their affiliates. Unless an exemption is
available, transactions of these types may not be consummated between a
Maryland corporation and an Interested Shareholder or its affiliates for a
period of five years after the date on which the shareholder first became
an Interested Shareholder. Thereafter, the transaction may not be
consummated unless recommended by the board of directors and approved by
the affirmative vote of at least 80% of the votes entitled to be cast by
all holders of outstanding shares of voting stock and 66-2/3% of the votes
entitled to be cast by all holders of outstanding shares of voting stock
other than the Interested Shareholder. A Business Combination with an
Interested Shareholder that is approved by the board of directors of a
Maryland corporation at any time before an Interested Shareholder first
becomes an Interested Shareholder is not subject to the special voting
requirements. An amendment to a Maryland corporation's charter electing
not to be subject to the foregoing requirements must be approved by the
affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock and 66-2/3% of the votes
entitled to be cast by holders of outstanding shares of voting stock who
are not Interested Shareholders. Any such amendment is not effective until
18 months after the vote of shareholders and does not apply to any Business
Combination of a corporation with a shareholder who was an Interested
Shareholder on the date of the shareholder vote.
As permitted by Maryland law, the Company has exempted from the
Maryland business corporation statute any Business Combination with Messrs.
Smith or Kogod, and all persons, firms and corporations affiliated with, or
acting in concert or as a group with, either of them, as well as any
Business Combination that involves the redemption of Units for shares of
Common Stock.
Control Share Acquisition Statute. Maryland law imposes limitations
on the voting rights in a "control share acquisition." The Maryland
statute defines a "control share acquisition" at the 20%, 33-1/3% and 50%
acquisition levels, and requires a 2/3 shareholder vote (excluding shares
owned by the acquiring person and certain members of management) to accord
voting rights to stock acquired in a control share acquisition. The
statute also requires Maryland corporations to hold a special meeting at
the request of an actual or proposed control share acquirer generally
within 50 days after a request is made with the submission of an "acquiring
person statement," but only if the acquiring person (a) posts a bond for
the cost of a meeting and (b) submits a definitive financing agreement to
the extent that financing is not provided by the acquiring person. In
addition, unless the charter or by-laws provide otherwise, the statute
gives the Maryland corporation, within certain time limitations, various
redemption rights if there is a shareholder vote on the issue and the grant
of voting rights is not approved, or if an acquiring person statement is
not delivered to the target within 10 days following a control share
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acquisition. Moreover, unless the charter or by-laws provide otherwise,
the statute provides that if, before a control share acquisition occurs,
voting rights are accorded to control shares that result in the acquiring
person having majority voting power, then minority shareholders have
appraisal rights. An acquisition of shares may be exempted from the
control share statute, provided that a charter or bylaw provision is
adopted for such purpose prior to the control share acquisition. Pursuant
to the foregoing, the Company's Charter provides that any acquisition of
shares of capital stock of the Company that is not prohibited by the terms
of the restrictions on transfer described below under "--Restrictions on
Transfer; Excess Stock" is exempted from the provisions of the control
share acquisition statute.
RESTRICTIONS ON TRANSFER; EXCESS STOCK
Ownership Limits. The Charter contains certain restrictions on the
number of shares of capital stock that individual shareholders may own.
For the Company to qualify as a REIT under the Code, no more than 50% in
value of its outstanding shares of capital stock may be owned, directly or
constructively under the applicable attribution rules of the Code, by five
or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first taxable year
in which the Company qualifies as a REIT). In addition, the capital stock
must be beneficially owned by 100 or more persons during at least 335 days
of a taxable year or during a proportionate part of a shorter taxable year.
Because the Company expects to qualify as a REIT, the Charter of the
Company contains restrictions on the acquisition of capital stock,
including Common Stock.
Subject to certain exceptions specified in the Charter, no holder may
own, or be deemed to own by virtue of the attribution provisions of the
Code, either (i) more than 9.8% in number or value of the issued and
outstanding shares of Common Stock, or (ii) 9.8% in number or value of the
issued and outstanding shares of capital stock of the Company (including
both Common Stock and Preferred Stock), which even is more restrictive (the
"Ownership Limit"). The Board of Directors in its discretion may waive the
Ownership Limit with respect to a holder if such holder's ownership will
not then or in the future jeopardize the Company's status as a REIT.
Messrs. Smith and Kogod, members of their families and entities that
they control are subject to the Ownership Limit, and they also are subject
to certain additional special ownership limitations. Messrs. Smith and
Kogod, members of their families and entities that they control are
prohibited from acquiring additional shares of Common Stock (or rights to
acquire shares), if, as a result of, and giving effect to, such
acquisition, any tenant would be regarded as a Related Party Tenant for
purposes of Section 856(b)(2)(B) of the Code (see "Federal Income Tax
Considerations--Requirements for Qualification--Gross Income Tests") and
the Company would be considered to receive more than 0.5% of its gross
annual revenue from Related Party Tenants.
Notwithstanding any of the foregoing ownership limits, no holder may
own or acquire, either directly or constructively under the applicable
attribution rules of the Code, any shares of any class of the Company's
stock if such ownership or acquisition (i) would cause more than 50% in
value of the Company's outstanding stock to be owned, either directly or
constructively under the applicable attribution rules of the Code, by five
or fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds),
(ii) would result in the Company's stock being beneficially owned by less
than 100 persons (determined without reference to any rules of attribution), or
(iii) would otherwise result in the Company failing to qualify as REIT.
If any shareholder purports to transfer shares to a person and either
the transfer would result in the Company failing to qualify as a REIT, or
such transfer would cause the transferee to hold shares in excess of more
than the applicable Ownership Limit or Existing Holder Limit, the purported
transfer shall be null and void, and the intended transferee will acquire
no rights or economic interest in the shares, and the shareholder will be
deemed to have transferred the shares of Common Stock to the Company in
exchange for shares of Excess Stock, which will be deemed to be held by the
Company as trustee of a trust for the exclusive benefit of the person or
persons to whom the shares can be transferred without violating the
ownership limit. In addition, if any person owns, either directly or
constructively under the applicable attribution rules of the Code, shares
of capital stock in excess of the applicable Ownership Limit, such person
will be deemed to have exchanged the shares of capital
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stock that cause the Ownership Limit to be exceeded for an equal number of
shares of Excess Stock, which will be deemed to be held by the Company as
trustee of a trust for the exclusive benefit of the person or persons to
whom the share can be transferred without violating the Ownership Limit.
A person who holds or transfers shares such that shares of capital
stock shall have been deemed to be exchanged for Excess Stock will not be
entitled to vote the Excess Stock and will not be entitled to receive any
dividends or distributions (any dividend or distribution paid on shares of
capital stock prior to the discovery by the Company that such shares have
been exchanged for Excess Stock shall be repaid to the Company upon demand,
and any dividend or distribution declared but unpaid shall be rescinded).
Such person shall have the right to designate a transferee of such Excess
Stock so long as consideration received for designating such transferee
does not exceed a price that is equal to the lesser of (i) in the case of a
deemed exchange for Excess Stock resulting from a transfer, the price paid
for the shares in such transfer or, in the case of a deemed exchange for
Excess Stock resulting from some other event, the fair market value, on the
date of the deemed exchange, of the shares deemed exchanged, and (ii) the
fair market value of the shares for which such Excess Stock will be deemed
to be exchanged on the date of the designation of the transferee. For
these purposes, fair market value on a given date is determined by
reference to the average closing price for the five preceding days. The
share of Excess Stock so transferred will automatically be deemed to be
exchanged for shares of capital stock. Excess Stock may be purchased by
the Company for the lesser of the price paid or the average closing price
for the five days immediately preceding such purchase. The Company may
elect to redeem the Excess Stock for Units.
If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decisions, statute, rule or regulation, then
the intended transferee of any Excess Stock may be deemed, at the option of
the Company, to have acted as an agent on behalf of the Company in
acquiring such Excess Stock and to hold such Excess Stock on behalf of the
Company.
All certificates representing shares of Common Stock will bear a
legend referring to the restrictions described above.
Every owner (or deemed owner) of more than 5% (or such lower
percentage as required by the Code or regulations thereunder) in number or
value of the issued and outstanding shares of capital stock, including
Common Stock, must file a written notice with the Company containing the
information specified in the Charter no later than January 31 of each year.
In addition, each shareholder shall be required upon demand to disclose to
the Company in writing such information as the Company may request in order
to determine the effect on the Company's status as a REIT of such
shareholder's direct, indirect and constructive ownership of the shares.
The foregoing ownership limitations also may have the effect of
preventing or hindering any attempt to acquire control of the Company
without the consent of the Board of Directors.
Restrictions on Sale of Common Stock. Subject to certain limited
exemptions, Messrs. Smith and Kogod and their spouses are prohibited from
offering, selling, contracting to sell or otherwise disposing of any shares
of Common Stock or Units received in the transactions of June 30, 1994
involving the initial public offering of the Company (or any shares of
Common Stock received upon redemption of such Units) prior to June 30, 1996
without the written consent of Goldman, Sachs & Co. and the Company; this
prohibition does not include shares of Common Stock or Units purchased by
them for cash at the time of such transactions or subsequently acquired.
See "Shares Available for Future Sale."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent, Registrar and Dividend Disbursing Agent for the
shares of Common Stock is First Union National Bank of North Carolina.
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DESCRIPTION OF COMMON STOCK WARRANTS
The Company may issue Common Stock Warrants for the purchase of Common
Stock. Common Stock Warrants may be issued independently or together with
any other Securities offered by any Prospectus Supplement and may be
attached to or separate from such Securities. Each series of Common Stock
Warrants will be issued under a separate warrant agreement (each, a
"Warrant Agreement") to be entered into between the Company and a warrant
agent specified in the applicable Prospectus Supplement (the "Warrant
Agent"). The Warrant Agent will act solely as an agent of the Company in
connection with the Common Stock Warrants of such series and will not
assume any obligation or relationship of agency or trust for or with any
holders or beneficial owners of Common Stock Warrants. The following sets
forth certain general terms and provisions of the Common Stock Warrants
offered hereby. Further terms of the Common Stock Warrants and the
applicable Warrant Agreements will be set forth in the applicable
Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the
Common Stock Warrants in respect of which this Prospectus is being
delivered, including, where applicable, the following: (1) the title of
such Common Stock Warrants; (2) the aggregate number of such Common Stock
Warrants; (3) the price or prices at which such Common Stock Warrants will
be issued; (4) the designation, number and terms of the shares of Common
Stock purchasable upon exercise of such Common Stock Warrants; (5) the
designation and terms of the other Securities offered thereby with which
such Common Stock Warrants are issued and the number of such Common Stock
Warrants issued with each such Security offered thereby; (6) the date, if
any, on and after which such Common Stock Warrants and the related shares
of Common Stock will be separately transferable; (7) the price at which
each of the shares of Common Stock purchasable upon exercise of such Common
Stock Warrants may be purchased; (8) the date on which the right to
exercise such Common Stock Warrants shall commence and the date on which
such right shall expire; (9) the minimum or maximum number of such Common
Stock Warrants which may be exercised at any one time; (10) information
with respect to book entry procedures, if any; (11) a discussion of certain
federal income tax considerations; and (12) any other terms of such Common
Stock Warrants, including terms, procedures and limitations relating to the
exchange and exercise of such Common Stock Warrants.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a description of the material federal income tax
consequences to the Company and holders of Securities of the treatment of
the Company as a REIT under the applicable provisions of the Code. The
applicable Prospectus Supplement will contain information about specific
federal income tax considerations, if any, relating to Securities other
than Common Stock. The following discussion, which is not exhaustive of
all possible tax considerations, does not include a detailed discussion of
any state, local or foreign tax considerations. Nor does it discuss all of
the aspects of federal income taxation that may be relevant to a
prospective shareholder in light of its particular circumstances or to
certain types of shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations
and persons who are not citizens or residents of the United States) who are
subject to special treatment under the federal income tax laws. As used in
this discussion, the term "Company" refers solely to Charles E. Smith
Residential Realty, Inc.
EACH PROSPECTIVE PURCHASER OF SECURITIES IS URGED TO CONSULT WITH ITS
OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE PURCHASER'S
PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND SALE OF SECURITIES IN AN ENTITY ELECTING TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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TAXATION OF THE COMPANY
General. The Company will elect REIT status under Sections 856
through 860 of the Code commencing with its taxable year ending December
31, 1994. The Company believes that it was organized and has operated in
conformity with the requirements for qualification and taxation as a REIT
under the Code for its taxable year ended December 31, 1994, and that the
Company's current organization and method of operation should enable it to
continue to meet the requirements for qualification and taxation as a REIT.
It must be emphasized that the Company's qualification and taxation as a
REIT depend upon the Company's ability to meet on a continuing basis,
through actual annual operating and other results, the various requirements
under the Code with regard to, among other things, the sources of its gross
income, the composition of its assets, the level of its distributions to
its shareholders, and the diversity of its share ownership. No assurance
can be given that the actual results of the operations of the Company for
any taxable year will satisfy the requirement under the Code for
qualification and taxation as a REIT.
The following is a general summary of the Code provisions that govern
the federal income tax treatment of a REIT and its shareholders. These
provisions of the Code are highly technical and complex. This summary is
qualified in its entirety by the applicable Code provisions, Treasury
Regulations, and administrative and judicial interpretations thereof.
In any year in which the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on net
income that it distributes currently to shareholders. This treatment
substantially eliminates the "double taxation" (at the corporate and
shareholder levels) that generally results from investment in a
corporation. However, the Company will be subject to federal income tax on
any income that it does not distribute and will be subject to federal
income tax in certain circumstances on certain types of income even though
that income is distributed. In addition, the Property Services Businesses,
which will not qualify as REITs, will be subject to federal corporate
income tax on their net income.
REQUIREMENTS FOR QUALIFICATION.
Organizational Requirements. The Code defines a REIT as a
corporation, trust or association (1) that is managed by one or more
trustees or directors; (2) the beneficial ownership of which is evidenced
by transferable shares, or by transfer certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for Sections 856
through 859 of the Code; (4) that is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (5) the
beneficial ownership of which is held by 100 or more persons; (6) during
the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities); and
(7) that meets certain other tests, described below, regarding the nature
of its income and assets. The Code provides that conditions (1) through
(4), inclusive, must be met during the entire taxable year and that
condition (5) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than
12 months. The Company believes that it currently satisfies requirements
(1) through (6). In addition, the Company's Charter includes restrictions
regarding the transfer of its shares that are intended to assist the
Company in continuing to satisfy the share ownership requirements described
in (5) and (6) above. See "Description of Common Stock -- Restrictions on
Transfer; Excess Stock."
Gross Income Tests. In order to maintain qualification as a REIT,
there are three gross income requirements that must be satisfied annually.
First, at least 75% of the REIT's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments.
Second, at least 95% of the REIT's gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived from
sources that qualify for purposes of the 75% test, and from dividends,
interest and gain from the sale or disposition of stock or securities, or
from any combination of the foregoing. Third, the Company must derive less
than 30% of the its gross income (including gross income from prohibited
transactions) for each taxable year from short-term gain from the sale or
other disposition of stock or securities, gain from prohibited transactions
and gain on the sale
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or other disposition of real property held for less than four years (apart
from involuntary conversions and sales of foreclosure property).
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described
above only if several conditions (relating to the identity of the tenant,
the computation of the rent payable, and the nature of the property leased)
are met. The Company believes that no more than a de minimis amount of its
gross annual income will fail to meet these conditions. The Company's
belief with respect to this matter, however, is based upon the advice of
counsel with respect to certain technical issues (regarding the
determination of rents allocable to personal property and rent considered
derived from related party tenants, neither of which would qualify as
"rents from real property") that are not definitively answered under the
Code, the Treasury Regulations, and published administrative
interpretations. There can be no assurance that the Internal Revenue
Service (the "IRS") will agree with these conclusions.
In addition, for rents received to qualify as "rents from real
property," the Company generally must not operate or manage the property or
furnish or render services to tenants, other than through an "independent
contractor" from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by the Company are "usually or customarily rendered" in connection
with the rental space for occupancy only and are not otherwise considered
"rendered to the occupant." The Operating Partnership itself and the
Property Service Businesses, which are not independent contractors, provide
certain services with respect to the Properties. The Company received a
ruling from the IRS that the provision of certain of these services will
not cause the rents received with respect to the Properties to fail to
qualify as "rents from real property." The Company also received a ruling
from the IRS to the effect that certain revenues (including rents from
corporate apartments, revenues from laundry equipment, and certain parking
revenues) will qualify as "rents from real property." The Company will not
provide services that it does not consider "usually or customarily
rendered" in connection with the rental of property except through an
"independent contractor."
The Operating Partnership may receive fees for the performance of
services with respect to properties in which the Operating Partnership has
a partial interest. Only the portion of the management fee that
corresponds to the Operating Partnership interest in such properties will
qualify as "rents from real property." The Operating Partnership also may
receive certain other types of non-qualifying income (including, for
example, certain parking revenues, certain expense reimbursements, and
dividends and interest from the Property Service Businesses (which qualify
under the 95% gross income test but not under the 75% gross income test)).
The Company believes, however, that the aggregate amount of such fees and
other non-qualifying income in any taxable year will not cause the Company
to exceed the limits on non-qualifying income under the 75% and 95% gross
income tests.
If the Company fails to satisfy one or both of the 75% or the 95%
gross income tests for any taxable year, it may nevertheless qualify as a
REIT for such year if it is entitled to relief under certain provisions of
the Code. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. Even if these relief provisions were to apply, a tax would be
imposed with respect to the "excess net income" attributable to the failure
to satisfy the 75% and 95% gross income tests.
Asset Tests. At the close of each quarter of the Company's taxable
year, the Company must satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total assets
must be represented by "real estate assets," cash, cash items, and
government securities. Second, not more than 25% of the Company's total
assets may be represented by securities other than those in the 75% asset
class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets, and the Company may not own
more than 10% of any one issuer's outstanding voting securities. The
Operating Partnership owns 100% of the nonvoting stock of each of the
Property Service Businesses. In addition, the Operating Partnership holds
notes from each of the Property Service Businesses, and by virtue of its
ownership of Units, the Company will be considered to own its pro rata
share of the assets of the Operating Partnership, including the securities
of each of the Property Service Businesses described above. The Operating
Partnership, however, does not own more than 10% of the voting securities
of
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any of the Property Service Businesses. In addition, the Company
believes that the Company's pro rata share of the value of the securities
of each of the Property Service Businesses does not exceed 5% of the total
value of the Company's assets. There can be no assurance, however, that
the IRS might not contend either that the value of the securities of one or
more of the Property Service Businesses exceeds the 5% value limitation or
that all or some of the Property Service Businesses shall be viewed as a
single corporation for purposes of the 5% value limitation and that the
value of the securities of that corporation exceeds the 5% limitation.
The 5% value requirement must be satisfied not only on the date the
Company acquires securities of the Property Service Businesses, but also
each time the Company increases its ownership of securities of the Property
Service Businesses (including as a result of increasing its interest in the
Operating Partnership as limited partners exercise their rights to have
Units redeemed for shares of Common Stock and, at the options of the
Company, cash). Although the Company plans to take steps to ensure that it
satisfies the 5% value test for any quarter with respect to which retesting
is to occur, there can be no assurance that such steps always will be
successful or will not require a reduction in the Operating Partnership's
overall interest in the Property Service Businesses.
Annual Distribution Requirements. To qualify as a REIT, the Company
generally must distribute to its shareholders at least 95% of its income
each year. In addition, the Company will be subject to tax on the
undistributed amount at regular capital gains and ordinary income rates and
also may be subject to a 4% excise tax on undistributed income in certain
events.
The Company believes that it has made, and intends to continue to
make, timely distributions sufficient to satisfy the annual distribution
requirements. It is possible, however, that the Company, from time to
time, may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement. In that event, the Company may cause the
Operating Partnership to arrange for short-term, or possibly long-term,
borrowing to permit the payments of required dividends..
Failure to Qualify. If the Company fails to qualify for taxation as a
REIT in any taxable year and the relief provisions do not apply, the
Company will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. Unless
entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN THE OPERATING PARTNERSHIP AND
PROPERTY SERVICE BUSINESSES
General. All of the Company's investments are through the Operating
Partnership, and the Operating Partnership holds substantially all of the
Properties through certain subsidiary partnerships. This structure may
involve special tax considerations. These tax considerations include:
(a) the allocations of income and expense items of the Operating Partnership
and such subsidiary partnerships, which could affect the computation of
taxable income of the Company, (b) the status of the Operating Partnership
and each such subsidiary partnership as partnership (as opposed to an
association taxable as a corporation) for income tax purposes, and (c) the
taking of actions by the Operating Partnership or any of such subsidiary
partnerships that could adversely affect the Company's qualification as a
REIT. The Company believes that the Operating Partnership and each of the
subsidiary partnerships will be treated for tax purposes as a partnership
(and not as an association taxable as a corporation). If, however, the
Operating Partnership or any of such subsidiary partnerships were treated
as an association taxable as a corporation, the Company would fail to
qualify as a REIT for a number of reasons.
Tax Allocations with Respect to the Properties. The Operating
Partnership was formed by way of contributions of appreciated property
(including certain of the Properties) to the Partnership in the Formation
Transactions. When property is contributed to a partnership in exchange
for an interest in the partnership, the partnership generally takes a
carryover basis in that property for tax purposes equal to the adjusted
basis of the contributing partner in the property, rather than a basis
equal to the fair market value of the property at the time of contribution
(this difference is referred to as a "Book-Tax Difference"). The
Partnership Agreement requires such allocations to be made in a manner
consistent with Section 704(c) of the Code and the regulations thereunder,
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which allocations will tend to eliminate the Book-Tax Differences with
respect to the contributed Properties over the life of the Operating
Partnership. However, because of certain technical limitations, the
special allocation rules of section 704(c) of the Code may not always
entirely eliminate the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the
carryover basis of the contributed Properties in the hands of the Operating
Partnership could cause the Company (i) to be allocated lower amounts of
depreciation and other deductions for tax purposes than would be allocated
to the Company if all Properties were to have a tax basis equal to their
fair market value at the time of the Formation Transactions, and
(ii) possibly to be allocated taxable gain in the event of a sale of such
contributed Properties in excess of the economic or book income allocated
to the Company as a result of such sale.
Property Service Businesses. A substantial portion of the amounts
used by the Operating Partnership to fund distributions to partners comes
from the Property Service Businesses, through payments on notes issued by
the Property Service Businesses and dividends on non-voting stock of the
Property Service Businesses held by the Operating Partnership. The
Property Service Businesses do not qualify as REITs and thus pay federal,
state and local income taxes on their net income at normal corporate rates.
The Property Service Businesses attempt to limit the amount of such taxes.
There can be no assurance, however, whether or the extent to which measures
taken to limit taxes will be successful. Moreover, even if those measures
initially are successful, future increases in the income of the Property
Service Businesses inevitably will be subject to income tax. To the extent
that the Property Service Businesses are required to pay federal, state and
local income taxes, the cash available for distribution to shareholders
will be reduced accordingly. In addition, as described above, the value of
the securities of each of the Property Service Businesses held by the
Operating Partnership cannot exceed 5% of the value of the Operating
Partnership's assets at a time when a Limited Partner exercises his or her
redemption right (or the Company otherwise is considered to acquire
additional securities of a Property Service Business). See "Requirements
for Qualification -- Asset Tests." This limitation may restrict the ability
of the Property Service Businesses to increase the size of their respective
businesses unless the value of the assets of the Operating Partnership is
increasing at a commensurate rate.
TAXATION OF HOLDERS OF COMMON STOCK
Taxation of Taxable Domestic Shareholders. As long as the Company
qualifies as a REIT, distributions made to the Company's taxable domestic
shareholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by them as
ordinary income, and corporate shareholders will not be eligible for the
dividends received deduction as to such amounts. For purposes of
determining whether distributions on the Common Stock are out of current or
accumulated earnings and profits, the earnings and profits of the Company
will be allocated first to Preferred Stock, if any, and second to the
Common Stock. There can be no assurance that the Company will have
sufficient earnings and profits to cover distributions on any Preferred
Stock. Distributions that are designated as capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to
the period for which the shareholder has held its stock. However,
corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of
current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Stock, but rather will reduce the adjusted basis of
such Common Stock. To the extent that such distributions exceed the
adjusted basis of a shareholder's Common Stock, they will be included in
income as long-term capital gain (or short-term capital gain if the Common
Stock have been held for one year or less), assuming the Common Stock are a
capital asset in the hands of the shareholder.
In general, a domestic shareholder will realize capital gain or loss
on the disposition of Common Stock equal to the difference between (i) the
amount of cash and the fair market value of any property received on such
disposition and (ii) the shareholder's adjusted basis of such Common Stock.
Such gain or loss generally will constitute long-term capital gain or loss
if the shareholder has held the shares for more than one year. Loss upon a
sale or exchange of Common Stock by a shareholder who has held such Common
Stock for six months or less (after applying certain holding period rules)
will be treated as long-term capital loss to the extent of distribution
from the Company required to be treated by such shareholder as long-term
capital gain.
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Under certain circumstances, domestic shareholders may be subject to
backup withholding at the rate of 31% with respect to dividends paid.
Taxation of Tax-Exempt Shareholders. The Company does not expect the
distributions by the Company to a shareholder that is a tax-exempt entity
will constitute "unrelated business taxable income" ("UBTI"), provided that
the tax-exempt entity has not financed the acquisition of its Common Stock
with "acquisition indebtedness" within the meaning of the Code and the
Common Stock is not otherwise used in an unrelated trade or business of the
tax-exempt entity.
Taxation of Non-U.S. Shareholders. The rules governing U.S. federal
income taxation of nonresident alien individuals, foreign corporations,
foreign partnerships and other foreign shareholders (collectively, "Non-
U.S. Shareholders") are complex, and no attempt will be made herein to
provide more than a limited summary of such rules. Prospective Non-U.S.
Shareholders should consult with their own tax advisors to determine the
impact of U.S. federal, state and local income tax laws with regard to an
investment in Common Stock, including any reporting requirements.
Distributions that are not attributable to gain from sales or
exchanges by the Company of U.S. real property interests and not designated
by the Company as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions,
ordinarily, will be subject to a withholding tax equal to 30% of the gross
amount of the distribution unless an applicable tax treaty reduces that
tax. Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a shareholder to the extent
that they do not exceed the adjusted basis of the shareholder's Common
Stock, but rather will reduce the adjusted basis of such Common Stock. To
the extent that such distributions exceed the adjusted basis of a Non-U.S.
Shareholder's Common Stock, they will give rise to tax liability if the
Non-U.S. Shareholder otherwise would be subject to tax on any gain from the
sale or disposition of his Common Stock as described below. If it cannot
be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and
profits, the distribution will be subject to withholding at the rate
applicable to dividends. However, the Non-U.S. Shareholder may seek a
refund of such amounts from the IRS if it is subsequently determined that
such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of
U.S. real property interests will be taxed to a Non-U.S. Shareholder under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), at the normal capital gain rates applicable to U.S.
shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Also, distributions subject to FIRPTA may be subject to a 30% branch
profits tax in the hands of a corporate Non-U.S. Shareholder not entitled
to treaty relief or exemption. The Company is required by applicable
Treasury Regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gain dividend. This amount is
creditable against the Non-U.S Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during
a specified testing period less than 50% in value of the stock was held
directly or indirectly by foreign persons. The Company believes that it
currently is a "domestically controlled REIT," and, therefore, the sale of
Common Stock will not be subject to taxation under FIRPTA. If the gain on
the sale of Common Stock were to be subject to tax under FIRPTA, the Non-
U.S. Shareholder would be subject to the same treatment as U.S.
shareholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals), and the purchaser of the Common Stock would
be required to withhold and remit to the IRS 10% of the purchase price.
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TAXATION OF HOLDERS OF DEBT SECURITIES, PREFERRED STOCK OR COMMON STOCK
WARRANTS
Additional Tax Consequences for Holders of Debt Securities, Preferred
Stock or Common Stock Warrants. If the Company offers one or more series
of Debt Securities, Preferred Stock or Common Stock Warrants, then there
may be tax consequences for the holders of such Securities not discussed
herein. For a discussion of any such additional consequences, see the
applicable Prospectus Supplement.
OTHER TAX CONSIDERATIONS
State and Local Taxes; District of Columbia Unincorporated Business
Tax. The Company and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which
it or they transact business or reside. The state and local tax treatment
of the Company and its shareholders may not conform to the federal income
tax consequences discussed above. Consequently, prospective shareholders
should consult their own tax advisors regarding the effect of state and
local tax laws on an investment in the Common Stock of the Company.
In this regard, the District of Columbia imposes an unincorporated
business income tax, at the rate of 10.25% on the "District of Columbia
taxable income" of partnerships doing business in the District of Columbia.
Because certain of the Properties are located in the District of Columbia,
the subsidiary partnership owning these properties will be subject to this
tax. Thus, in effect, the Company's share of the "District of Columbia
taxable income" attributable to the Properties located in the District of
Columbia will be subject to this tax. The Operating Partnership and such
subsidiary partnership will attempt to reduce the amount of income that is
considered "District of Columbia taxable income," but it is likely that
some portion of the income attributable to the Properties located in the
District of Columbia will be subject to the District of Columbia tax. To
the extent the Operating Partnership or such subsidiary partnership is
required to pay the District of Columbia unincorporated business income
tax, the cash available for distribution to the Company and, therefore, to
its shareholders as dividends will be reduced accordingly. Moreover, a
shareholder of the Company will not receive a credit against its own state
income tax liability for its share of any District of Columbia
unincorporated business income tax paid by the Operating Partnership or
such subsidiary partnership. This tax would not apply if the Company were
to own and operate its assets directly, rather than through the Operating
Partnership; however, the Company's ability to eliminate the Operating
Partnership and thus own its assets directly is severely limited.
PLAN OF DISTRIBUTION
The Company may sell Securities in or through underwriters for public
offer and sale by them, and also may sell Securities offered hereby to
investors directly or through agents. Any such underwriter or agent
involved in the offer and sale of the Securities will be named in the
applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or
prices, which may be changed, at prices related to the prevailing market
prices at the time of sale or at negotiated prices. The Company also may,
from time to time, authorize underwriters acting as the Company's agents to
offer and sell Securities upon terms and conditions set forth in the
applicable Prospectus Supplement. In connection with the sale of the
Securities, underwriters may be deemed to have received compensation from
the Company in the form of underwriting discounts or commissions and may
also receive commissions from purchasers of the Securities for whom they
may act as agent. Underwriters may sell Securities to or through dealers,
and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from
the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of the Securities, and any
discounts, concessions or commissions allowed by underwriters to
participating dealers, will be set forth in the applicable Prospectus
Supplement. Underwriters, dealers and agents participating in the
distribution of the Securities may be deemed to be underwriters, and any
discounts and commissions
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received by them and any profit realized by them on resale of the
Securities may be deemed to be underwriting discounts and commissions under
the Securities Act. Underwriters, dealers and agents may be entitled, under
agreements to be entered into with the Company, to indemnification against
and contribution toward certain civil liabilities, including liabilities
under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company
will authorize underwriters or other persons acting as the Company's agents
to solicit offers by certain institutions to purchase Securities from the
Company at the public offering price set forth in such Prospectus
Supplement pursuant to delayed delivery contracts ("Contracts") providing
for payment and delivery on the date or dates stated in such Prospectus
Supplement. Each Contract will be for an amount not less than, and the
aggregate principal amount of Securities sold pursuant to Contracts shall
be not less nor more than, the respective amounts stated in the applicable
Prospectus Supplement. Institutions with whom Contracts, when authorized,
may be made include commercial and savings banks, insurance companies,
pension funds, investment companies, educational and charitable
institutions, and other institutions but will in all cases be subject to
the approval of the Company. Contracts will not be subject to any
conditions except (i) the purchase by an institution of the Securities
covered by its Contracts shall not at the time of delivery be prohibited
under the laws of any jurisdiction in the United States to which such
institution is subject, and (ii) if the Securities are being sold to
underwriters, the Company shall have sold to such underwriters the total
principal amount of the Securities less the principal amount thereof
covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
Subsidiaries in the ordinary course of business.
LEGAL MATTERS
The legality of the Debt Securities, the Preferred Stock, the Common
Stock and the Common Stock Warrants offered hereby will be passed upon for
the Company by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The Company's financial statements and related schedule incorporated by
reference herein and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information can be inspected at the Public
Reference Section maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and the following regional offices of
the Commission: 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. In addition, the Company's Common Stock is listed on
the New York Stock Exchange and such reports, proxy statements and other
information concerning the Company can be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on
Form S-3 (the "Registration Statement"), of which this Prospectus is a
part, under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Securities offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
36
<PAGE>
regulations of the Commission. Statements contained in this Prospectus as
to the contents of any contract or other documents are not necessarily
complete, and in each instance, reference is made to the copy of such
contract or documents filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference and
the exhibits and schedules thereto. For further information regarding the
Company and the Securities, reference is hereby made to the Registration
Statement and such exhibits and schedules which may be obtained from the
Commission at its principal office in Washington, D.C. upon payment of the
fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the Commission and are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1994 (the "10-K").
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1995, June 30, 1995 and September 30, 1995.
3. The Company's current reports on Form 8-K dated November 1, 1995 and
filed November 1, 1995 and dated December 22, 1995 and filed December
22, 1995.
All documents filed subsequent to the date of this Prospectus pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to
termination of the offering of all Securities to which this Prospectus
relates shall be deemed to be incorporated by reference in this Prospectus
and shall be part hereof from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained in this Prospectus (in the case of a statement in a previously
filed document incorporated or deemed to be incorporated by reference
herein), in any accompanying Prospectus Supplement relating to a specific
offering of Securities or in any other subsequently filed document that is
also incorporated or deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or any accompanying Prospectus
Supplement. Subject to the foregoing, all information appearing in this
Prospectus and each accompanying Prospectus Supplement is qualified in its
entirety by the information appearing in the documents incorporated by
reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon
their written or oral request, a copy of any or all of the documents
incorporated herein by reference (other than exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Written requests for such copies should be addressed to M.
Bruce Snyder, the Company's Vice-President-Investor Relations, at 2345
Crystal Drive, Arlington, Virginia 22202, telephone number (703) 769-1000.
As used herein, the term "Company" includes Charles E. Smith
Residential Realty, Inc., a Maryland corporation, and one or more of its
subsidiaries (including Charles E. Smith Residential Realty L.P., Smith
Realty Company, Consolidated Engineering Services, Inc. and Smith
Management Construction, Inc.) or, as the context may require, Charles E.
Smith Residential Realty, Inc. only or Charles E. Smith Residential Realty
L.P. (the "Operating Partnership") only.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary.................................................................. S-3
Selected Financial Data.................................................. S-11
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-13
The Company.............................................................. S-19
Price Range of Common Stock and Dividend History......................... S-25
Use Of Proceeds.......................................................... S-25
Capitalization........................................................... S-26
Management............................................................... S-27
Underwriting............................................................. S-28
Legal Matters............................................................ S-29
Pro Forma Consolidated Financial Statements.............................. S-30
PROSPECTUS
The Company.............................................................. 2
Risk Factors............................................................. 2
Use of Proceeds.......................................................... 7
Ratios of Earnings to Fixed Charges...................................... 7
Description of Debt Securities........................................... 8
Description of Preferred Stock........................................... 19
Description of Common Stock.............................................. 24
Description of Common Stock Warrants..................................... 29
Federal Income Tax Considerations........................................ 29
Plan of Distribution..................................................... 35
Legal Matters............................................................ 36
Experts.................................................................. 36
Available Information.................................................... 36
Incorporation of Certain Documents by Reference.......................... 37
</TABLE>
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2,700,000 SHARES
CHARLES E. SMITH
RESIDENTIAL REALTY, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
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PROSPECTUS SUPPLEMENT
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GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEGG MASON WOOD WALKER
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
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