<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD FROM TO
COMMISSION FILE NUMBER: 1934 ACT FILE NUMBER: 1-13174
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 54-1681655
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2345 CRYSTAL DRIVE
CRYSTAL CITY, VA 22202
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (703) 920-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
SHARES OF COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of October 16, 1998, there were 17,479,435 shares of Common Stock of the
Registrant issued and outstanding.
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
FORM 10-Q/A
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Charles E. Smith Residential Realty, Inc. Financial
Statements as of September 30, 1998 and December 31, 1997,
Filed as a Part of This Report
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION 29
SIGNATURES 30
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, net $ 952,063 $ 751,230
Rental property under construction 106,562 53,093
Cash and cash equivalents 13,116 -
Tenants' security deposits 2,649 2,453
Escrow funds 10,650 7,606
Investment in and advances to Property Service Businesses 26,392 14,141
Deferred charges, net 14,956 16,047
Other assets 16,387 20,936
----------------- -----------------
$ 1,142,775 $ 865,506
================= =================
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 482,476 $ 500,435
Lines of credit 244,500 105,000
Construction loans 25,572 5,536
Accounts payable and accrued expenses 22,650 13,732
Tenants' security deposits 2,649 2,453
----------------- -----------------
Total liabilities 777,847 627,156
----------------- -----------------
Commitments and contingencies
Minority Interest 100,941 80,036
Shareholders' equity
Preferred stock - $0.01 par value; 2,640,325 shares authorized;
Series A Cumulative Convertible Redeemable Preferred
Stock, liquidation preference of $27.08; 2,640,325 and
1,661,744 shares issued and outstanding at September 30, 1998
and December 31, 1997, respectively 71,500 45,000
Preferred stock - $ 0.01 par value; 1,216,666 shares authorized;
Series B Cumulative Convertible Redeemable Preferred
Stock, liquidation preference of $28.50; 973,933 and
1,216,666 shares issued and outstanding at September 30, 1998
and December 31, 1997, respectively 27,757 34,675
Preferred stock - $ 0.01 par value; 500 shares authorized;
Series C Cumulative Redeemable Preferred Stock,
liquidation preference of $100,000; 500 shares issued
and outstanding 50,000 -
Common stock - $0.01 par value; 95,000,000 shares
authorized; 17,471,741 and 14,942,429 shares issued
and outstanding at September 30, 1998 and December 31, 1997,
respectively 175 150
Additional paid-in capital - includes contributed
deficit of $244,208 126,806 84,861
Retained deficit (12,251) (6,372)
----------------- -----------------
Total shareholders' equity 263,987 158,314
----------------- -----------------
$ 1,142,775 $ 865,506
================= =================
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Rental Properties:
Revenues $ 66,061 $ 50,829 $ 183,488 $ 145,088
Expenses
Operating costs (23,301) (18,296) (62,482) (52,062)
Real estate taxes (4,481) (3,098) (12,722) (9,096)
Depreciation (7,970) (5,294) (21,445) (15,440)
------------- ----------- ------------ -----------
Total expenses (35,752) (26,688) (96,649) (76,598)
Equity in income of Property Service
Businesses 2,693 1,931 5,584 3,636
Corporate general and administrative
expenses (2,177) (1,544) (6,405) (4,583)
Interest income 388 236 855 768
Interest expense (12,582) (10,981) (35,071) (33,664)
------------- ----------- ------------ -----------
Income before gain on sale, loss on unused
treasury lock, and extraordinary item 18,631 13,783 51,802 34,647
Gain on sale of property - - 3,120 -
Loss on unused treasury lock (4,923) - (4,923) -
------------- ----------- ------------ -----------
Income before extraordinary item 13,708 13,783 49,999 34,647
Extraordinary item - loss on extinguishment
of debt - - (4,702) -
------------- ----------- ------------ -----------
Net income of the Operating Partnership 13,708 13,783 45,297 34,647
Minority Interest (5,434) (6,769) (18,977) (17,527)
------------- ----------- ------------ -----------
Net income 8,274 7,014 26,320 17,120
Less: Income attributable to
preferred shares (2,868) (384) (7,938) (384)
------------- ----------- ------------ -----------
Net income attributable to common shares $ 5,406 $ 6,630 $ 18,382 $ 16,736
============= =========== ============ ===========
Earnings per common share - basic
Income before extraordinary item $ 0.32 $ 0.50 $ 1.32 $ 1.32
Extraordinary item - - (0.16) -
------------- ----------- ------------ -----------
Net income $ 0.32 $ 0.50 $ 1.16 $ 1.32
============= =========== ============ ===========
Earnings per common share - diluted
Income before extraordinary item $ 0.32 $ 0.49 $ 1.31 $ 1.32
Extraordinary item - - (0.16) -
------------- ----------- ------------ -----------
Net income $ 0.32 $ 0.49 $ 1.15 $ 1.32
============= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Series A Series B Series C Additional
Stock Preferred Preferred Preferred Common Paid-in Retained
Outstanding Stock Stock Stock Stock Capital Deficit Total
- ----------- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9,969,607 Balance, December 31, 1996 $ - $ - $ - $100 $ (23,852) $(13,627) $ (37,379)
Operating Partnership equity exchanged
for acquisitions - - - - 75,019 - 75,019
Proceeds from issuance of Series A
Preferred Stock 45,000 - - - - - 45,000
Proceeds from issuance of Series B
Preferred Stock - 34,675 - - - - 34,675
Offering costs associated with
Preferred Stock - - - - (562) - (562)
Proceeds from issuance of Common Stock,
4,555,000 net of offering costs of $5,249 - - - 46 124,134 - 124,180
Conversion of Operating Partnership
407,822 units to Common Stock - - - 4 (4) - -
Repurchase and cancellation of Operating
Partnership units - - - - (2,206) - (2,206)
Amortization of unit grants - - - - 579 - 579
Adjustment for Minority Interest - - - - (88,597) 7,813 (80,784)
10,000 Exercise of options - - - - 350 - 350
Net income - - - - - 26,593 26,593
Dividends - - - - - (27,151) (27,151)
--------- ---------- ---------- -------- ------ -------- -------- ---------
14,942,429 Balance, December 31, 1997 45,000 34,675 - 150 84,861 (6,372) 158,314
Operating Partnership equity exchanged
for acquisitions - - - - 11,820 - 11,820
Proceeds from issuance of Common Stock,
1,400,000 net of offering costs of $21 - - - 14 45,640 - 45,654
Proceeds from issuance of Series A
Preferred Stock 26,500 - - - - - 26,500
Proceeds from issuance of Series C
Preferred Stock - - 50,000 - - - 50,000
Offering costs associated with
Preferred Stock - - - - (1,461) - (1,461)
Conversion of Preferred Stock to Common
242,733 Stock - (6,918) - 2 6,916 - -
Conversion of Operating Partnership
860,579 units to Common Stock - - - 9 (9) - -
Repurchase and cancellation of Operating
Partnership units - - - - (594) - (594)
21,000 Stock grants awarded - - - - - - -
Amortization of grants - - - - 460 - 460
5,000 Exercise of options - - - - 2,719 - 2,719
Net income - - - - - 26,320 26,320
Dividends - - - - - (32,199) (32,199)
Adjustment for Minority Interest - - - - (23,546) - (23,546)
--------- ---------- ---------- -------- ------ --------- -------- ---------
17,471,741 Balance, September 30, 1998 (unaudited) $ 71,500 $ 27,757 $ 50,000 $175 $ 126,806 $(12,251) $ 263,987
========== ========== ========== ======== ====== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 84,337 $ 50,593
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (213,957) (16,518)
Additions to rental property (13,170) (8,177)
Increase in investment in and advances
to Property Service Businesses (12,251) (5,813)
Decrease (increase) in acquisition deposits and other 280 (11,248)
---------- ----------
Net cash used by investing activities (239,098) (41,756)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 45,654 82,855
Net proceeds from sale of preferred stock 75,039 19,772
Mortgages, net (51,416) (10,030)
Lines of credit, net 139,500 (44,050)
Construction loans, net 20,036 (17,686)
Prepayment penalties (3,025) -
Termination of treasury lock (4,923) -
Dividends and distributions (53,819) (37,687)
Other, net 831 (693)
---------- ----------
Net cash provided (used) by financing activities 167,877 (7,519)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,116 1,318
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 3,898
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,116 $ 5,216
========== ==========
SUPPLEMENTAL INFORMATION:
Capitalized interest $ 4,382 $ 436
Purchase of property in exchange for Operating Partnership units 11,820 47,129
Purchase of property in exchange for assumption of debt 33,456 80,164
</TABLE>
The accompanying notes are an integral part of these statements
6
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim financial statements include all of the accounts of
Charles E. Smith Residential Realty, Inc. (the "Company") and Charles E. Smith
Residential Realty L.P. (the "Operating Partnership") and its subsidiary
financing partnerships. The Company consolidates the Operating Partnership due
to the Company's control as sole general partner. All significant intercompany
balances and transactions have been eliminated. The financial information
furnished is unaudited, and in management's opinion, includes all adjustments
(consisting only of normal, recurring adjustments), that are necessary for a
fair presentation of financial position as of September 30, 1998 and the results
of operations for the interim periods ended September 30, 1998 and 1997. Such
interim results are not necessarily indicative of the operating results for a
full year. The accompanying financial statements should be read in conjunction
with the audited financial statements and related footnotes appearing in the
Company's Annual Report on Form 10-K.
The Company, through the Operating Partnership and its subsidiaries, is
engaged in the ownership, operation, management, leasing, acquisition, and
development of real estate properties, primarily residential multifamily
properties. As of September 30, 1998, the Operating Partnership owned 49
operating multifamily properties containing 19,951 apartment units, two retail
shopping centers aggregating 436,000 square feet, and four development sites
with approximately 2,100 units under construction. The Operating Partnership
also owns substantially all of the economic interest in entities which provide
multifamily and retail property management and leasing, construction and
construction management services, engineering and technical services, and
financial advisory services (collectively the "Property Service Businesses").
The Operating Partnership uses the equity method of accounting for its 99% non-
voting interest in the Property Service Businesses.
Certain amounts from the prior year have been reclassified to conform to the
current year's presentation. In addition, Minority Interest has been restated
for the prior year to conform with Statement of Financial Accounting Standards
No. 128 "Earnings Per Share".
2. ACQUISITIONS AND DISPOSITIONS
During the first quarter, the Company completed the acquisition of two
multifamily properties in northwest Washington, D.C. totaling 287 apartment
units. The total cost of approximately $13.8 million was comprised of 254,000
Operating Partnership units valued at approximately $8.8 million, $3.2 million
cash and approximately $1.8 million of initial capital improvements. One of the
properties was an affiliate in which the Company previously owned a minority
interest. Both properties were previously managed by the Company.
7
<PAGE>
During the first quarter, the Company also sold Oxford Manor, a 227-unit
multifamily property located in southeast Washington, D.C., for $4.4 million.
The Company recognized a gain on the sale of $3.1 million.
During the second quarter, the Company acquired a 1,075-unit
multifamily property in Chicago, Illinois. The cost of approximately $70
million cash was funded from the line of credit and proceeds from the sale of
Series A Preferred Shares totaling $26.5 million. The total capitalized cost of
approximately $74 million reflects $4 million of planned initial capital
improvements. The Company also acquired in April a 299-unit multifamily
property in Arlington, Virginia for approximately $39 million cash funded from
the line of credit. The property had been managed by the Company since
January 1, 1998.
During the second quarter, the Company also began construction of an 11-
story, 142-unit high rise in northwest Washington, D.C. Total cost is expected
to be approximately $25 million, which will be funded from the Company's line of
credit, and initial occupancy is expected in late 1999.
During the third quarter, the Company acquired a newly-constructed 281-unit
mid-rise multifamily property in Boston, Massachusetts. The total capitalized
cost of approximately $63.3 million was comprised of $26.8 million cash,
$31.5 million in assumed debt, a fair value adjustment to debt of $2.0 million,
and 92,793 Operating Partnership units valued at $3.0 million.
As a result of property acquisitions/dispositions, stock offerings and the
conversion of partnership units into common shares, the Company's ownership
percentage of the Operating Partnership increased from 51.5% as of September 30,
1997 to 60.5% as of September 30, 1998 based on the number of outstanding units.
3. LOANS
The $110.1 million principal balance of Mortgage Pool One was partially
repaid on February 28, 1998, in conjunction with the sale of Oxford Manor, and
fully repaid on March 31, 1998.
The Company terminated its $100 million line of credit in 1998 and entered
into a new $275 million, unsecured line of credit with PNC Bank, NationsBank,
and U.S. Bank, as agents, which matures in March 2001. Draws upon the new line
are subject to certain unencumbered asset requirements and bear interest at a
selected London Interbank Offer Rate (LIBOR) plus 75 to 110 basis points based
on the leverage ratio of the Company. As of September 30, 1998, the weighted
average interest rate on outstanding draws was 6.65%. If the Company receives
an investment grade rating on its unsecured debt, the interest rate will
decrease to 60 to 90 basis points over LIBOR based on the rating.
During the second quarter, the Company obtained a $53 million, ten year
secured loan from Prudential at a fixed coupon rate of 6.88%. The loan is
secured by two of the multifamily properties and, under certain conditions, may
be converted to an unsecured loan. In conjunction with this loan,
8
<PAGE>
the Company terminated a $20 million (notional value) treasury lock contract at
a gain of $0.4 million which will be amortized over the term of the new loan.
During the third quarter, the Company obtained a $90 million interest-only
construction loan in connection with the development of One Superior Place in
Chicago, Illinois, with interest at LIBOR plus 135 basis points, payable
monthly, due July 1, 2001. At the Company's option, maturity may be extended up
to two years. The loan is collateralized by the property.
During the third quarter, the Company assumed a $31.5 million mortgage loan
in connection with an acquisition. The loan has a fixed interest rate of 7.78%
with principal amortized using a 25-year amortization schedule and a final
payment due June 2009.
During the third quarter, the Company terminated a $50 million (notional
value) treasury lock contract at a loss of $4.9 million. The treasury lock was
put in place in the first quarter of 1998 in anticipation of a planned 10-year,
unsecured financing which ultimately did not occur and is not anticipated to
occur in the near future. Therefore, this amount has been charged to current
period earnings.
4. INVESTMENT IN PROPERTY SERVICE BUSINESSES
During the second quarter, Smith Realty Company ("SRC"), one of the Property
Service Businesses, acquired Noel Enterprises, Inc. ("Presidential Villas"), a
provider of furnished corporate apartments in Chicago, Illinois. A portion of
the total purchase price of $8.5 million is contingent upon achievement by
Presidential Villas of certain earnings targets over the next two years. The
Operating Partnership lent to SRC the initial payment of $6.75 million in
exchange for a five year note.
5. SHAREHOLDERS' EQUITY
In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value, for
$48.8 million, which is net of offering costs of $1.2 million. The Company
amended the Articles of Incorporation to designate and establish the rights and
privileges of the Series C Preferred Shareholders which include certain voting,
dividend and liquidation preferences over the common shareholders. The Series C
Preferred Shares have a liquidation preference of $100,000 per share and an
initial annual dividend rate of $7,910 per share. If the securities receive an
investment grade rating, the annual dividend rate will decrease by $250 per
share. Dividends are cumulative and are payable quarterly. The Company may
redeem Series C Preferred Shares after February 1, 2028, at the liquidation
price plus accrued dividends.
In April 1998, the Company sold the remaining 978,581 shares of Series A
Preferred Shares under its agreement with Security Capital Group, Inc. for
$26.2 million, which is net of offering costs of $0.3 million.
In June 1998, 91,467 shares of Series B Cumulative Convertible Redeemable
Preferred Stock (Series B Preferred Stock) were converted to common shares on a
one-for-one basis.
9
<PAGE>
In July 1998, the Company completed the sale of 1.4 million shares of common
stock (par value $0.01 per share) under its existing shelf registration
statement at a net purchase price of $32.625 per share. The net proceeds of
approximately $45.7 million have been used to retire outstanding debt and for
working capital needs.
In September 1998, 151,266 shares of Series B Preferred Stock were converted
to common shares on a one-for-one basis.
6. PER SHARE DATA
Earnings per common share of the Company for the three and nine months ended
September 30, 1998 and 1997 is computed based on weighted average common
shares/units outstanding during the period as follows (in millions):
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------
1998 1997
--------------- --------------
Basic Diluted Basic Diluted
------ ------- ----- -------
<S> <C> <C> <C> <C>
Weighted Average Common Shares 15.5 15.6 13.4 13.5
Weighted Average Common Operating
Partnership Units/1/ 15.2 15.2 13.4 13.4
Nine months ended September 30,
--------------- --------------
1998 1997
--------------- --------------
Basic Diluted Basic Diluted
------ ------- ----- -------
Weighted Average Common Shares 15.9 16.0 12.7 12.8
Weighted Average Common Operating
Partnership Units/1/ 14.0 14.0 13.2 13.2
</TABLE>
/1/ Represents Operating Partnership units not held by Company
Operating Partnership units not held by the Company may be redeemed at the
Unitholders' sole discretion. Such redemption may be made for cash at the then
fair value of the Company's common stock, or, at the option of the Company, for
shares of common stock of the Company on a one-for-one basis, which does not
have a dilutive effect. During the nine months ended September 30, 1998,
approximately 0.9 million Operating Partnership units were redeemed for shares
of common stock.
10
<PAGE>
Reconciliations of income and shares used to calculate basic and diluted
earnings per share for the nine months ended September 30, 1998 and the three
months ended September 30, 1997 follow (dilutive securities had no effect on
earnings for the three months ended September 30, 1998 and the nine months ended
September 30, 1997):
<TABLE>
<CAPTION>
Weighted Per Share
Income Average Shares Amount
------ -------------- -------
Nine Months Ended September 30, 1998 (In Thousands) (In Thousands)
- ------------------------------------
<S> <C> <C> <C>
Income before extraordinary item $ 49,999
Minority Interest (20,947)
Income Attributable to Preferred Shares (7,938)
--------
Earnings per share - Basic
Income attributable to common
shareholders before extraordinary item $ 21,114 15,870 $ 1.33
Effect of Dilutive Securities
Options/1/ 111 178 (0.01)
-------- ------ ------
Earnings per share - Diluted $ 21,225 16,048 $ 1.32
======== ====== ======
<CAPTION>
Three Months Ended September 30, 1997
- -------------------------------------
<S> <C> <C> <C>
Net Income $ 13,783
Minority Interest (6,769)
Income Attributable to Preferred Shares (384)
Earnings per share - Basic
Income attributable to common
shareholders before extraordinary item $ 6,630 13,350 $ 0.50
Effect of Dilutive Securities
Options/1/ 45 176 (0.01)
-------- ------ ------
Earnings per share - Diluted $ 6,675 13,526 $ 0.49
======== ====== ======
</TABLE>
/1/ Adjustment to numerator reflects change in the Minority Interest share of
income based on ownership calculation including common stock equivalents.
Options to purchase 0.8 million shares of common stock were not included in
the computation of diluted earnings per share because the options' exercise
price was higher than the average price of the common shares. All convertible
preferred shares were also excluded from the calculation of diluted earnings per
share since the preferred dividends paid per share exceeded basic earnings per
share.
7. COMMITMENTS AND CONTINGENCIES
As of September 30, 1998, the Company had executed four contracts to purchase
to-be-constructed multifamily properties totaling approximately 1,200 apartment
units. The maximum aggregate contract purchase price totals $151 million with
projected closing dates between June 2000
11
<PAGE>
and May 2001. The contracts are contingent upon satisfactory completion of
construction and attainment of final certificates of occupancy by the owners. At
September 30, 1998, the Company had posted three letters-of-credit totaling
$7.7 million in accordance with three of the contracts to be drawn upon only if
the Company defaults on its contractual obligations to purchase the completed
assets.
8. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" which had no effect on
current reporting or disclosure. The Company will adopt SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" during
1998 which is not expected to significantly impact the Company's current
reporting or disclosure.
9. EXTRAORDINARY ITEM
The Company recognized an extraordinary loss of $4.7 million in connection
with debt extinguishments in 1998. A $4.1 million loss was recognized in
connection with the repayment of Mortgage Pool One and consisted of a
$2.9 million yield maintenance premium and a $1.2 million non-cash write-off of
unamortized loan fees. A loss of $0.6 million was recognized due to the write-
off of unamortized loan fees associated with the termination of the $100 million
line of credit and the refinancing of $9.2 million of mortgage loans.
10. SUBSEQUENT EVENTS
In October 1998, the Company established a standby credit facility of up to
$300 million with Fannie Mae which provides for non-recourse, long-term debt for
up to fifteen years. The initial draw on this facility was $140 million at
6.75% for fifteen years. The bulk of the proceeds were used to retire Mortgage
Pool Two of $125.2 million and the associated prepayment penalty of
$9.5 million. Terms and rates of subsequent draws on this facility will be
determined at the time of use.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the accompanying
financial statements and notes thereto. The results of operations for the three
and nine months ended September 30, 1998 and 1997 presented in the Consolidated
Statements of Operations and discussed below represent the operations of Charles
E. Smith Residential Realty, Inc. (the "Company"), Charles E. Smith Residential
Realty L.P. (the "Operating Partnership") and its subsidiary financing
partnerships. The Company consolidates the Operating Partnership due to its
control as sole general partner.
FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes", "anticipates", and
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements indicate that assumptions have been used that are
subject to a number of risks and uncertainties which could cause actual
financial results or management plans and objectives to differ materially from
those projected or expressed herein, including: the effect of national and
regional economic conditions, particularly with regard to the levels of
multifamily property occupancy and rental growth in the Washington, D.C.
metropolitan area; the registrant's ability to identify and secure additional
properties and sites that meet its criteria for acquisition or development; the
acceptance of the registrant's financing plans by the capital markets, and the
effect of prevailing market interest rates and the pricing of the Company's
stock; and other risks described from time to time in the registrant's filings
with the Securities and Exchange Commission. Given these uncertainties, readers
are cautioned not to place undue reliance on such statements. The registrant
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
RENTAL REVENUE
Average revenue per apartment unit for the Company's core multifamily
properties increased approximately 4.8% in the third quarter of 1998 as compared
with 1997.
A schedule of portfolio statistics follows:
13
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
- --------------------------------------------------------------------------------
Residential Portfolio Statistics for the Three Months Ended September 30, 1998
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Units Per Unit Per Unit Occupancy
- --------------------------- -------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
CORE RESIDENTIAL PORTFOLIO
NW Washington, D.C.
1841 Columbia Road High-rise 115 634 986 98.2%
2501 Porter Street High-rise 202 760 1,512 99.6%
Albemarle High-rise 235 1,097 1,245 99.8%
Calvert-Woodley High-rise 136 1,001 1,183 98.7%
Cleveland House High-rise 216 894 1,157 98.9%
Connecticut Heights High-rise 519 536 908 95.8%
Corcoran House High-rise 138 464 842 99.6%
Statesman High-rise 281 593 827 99.0%
Van Ness South High-rise 625 956 1,129 99.3%
----- ----- ----- ----
2,467 778 1,073 98.6%
Other NE & SE Washington, D.C.
Car Barn Garden 196 1,311 917 97.9%
Fort Chaplin Garden 549 983 690 98.9%
Marbury Plaza High-rise 672 997 663 96.3%
----- ----- ----- ----
1,417 1,035 708 97.6%
Other Northern Virginia - Inside Beltway
Crystal City
------------
The Bennington High-rise 348 804 1,091 97.3%
Crystal House I High-rise 426 917 1,040 99.1%
Crystal House II High-rise 402 938 1,020 99.1%
Crystal Square High-rise 378 1,121 1,198 99.3%
Crystal Place High-rise 180 894 1,337 99.1%
Gateway Place High-rise 162 826 1,720 97.4%
Water Park Towers High-rise 360 881 1,510 96.4%
------ ----- ----- ----
2,256 923 1,218 98.2%
Rosslyn/Ballston
----------------
Courthouse Plaza High-rise 396 772 1,347 98.2%
Other
-----
Arlington Overlook Mid-rise 711 877 809 97.5%
Bedford Village Garden 752 1,070 931 96.7%
Berkeley Mid-rise 138 891 746 98.2%
Boulevard of Old Town Garden 159 603 872 98.2%
Columbia Crossing Garden 247 976 1,157 98.0%
Columbian Stratford Mid-rise 227 942 781 99.0%
Concord Village Garden 531 1,025 842 98.0%
Newport Village Garden 937 1,115 929 97.5%
Orleans Village Garden 851 1,061 853 96.4%
Patriot Village Garden 1,065 1,162 942 98.3%
Skyline Towers High-rise 940 1,221 1,010 96.1%
Windsor Towers Mid-rise 280 1,025 824 99.0%
------ ----- ----- -----
6,838 1,063 908 97.4%
Other Northern Virginia - Outside Beltway
Charter Oak Garden 262 1,097 971 98.3%
Oaks of Tysons Garden 218 968 1,089 99.2%
Potomac View Garden 192 965 809 98.3%
Westerly at Worldgate Garden 320 921 1,122 96.2%
------ ----- ----- -----
992 986 1,014 97.8%
Suburban Maryland
The Manor Garden 435 999 787 97.7%
Suburban Tower High-rise 172 677 847 99.1%
------ ----- ----- -----
607 908 804 98.1%
------ ----- ----- -----
Subtotal/Average 14,973 973 977 97.8%
------ ----- ----- -----
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Units Per Unit Per Unit Occupancy
- --------------------------- -------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ACQUISITION PORTFOLIO
The Kenmore (NW Washington, D.C.) High-rise 376 725 759 96.9%
Crystal Plaza (Crystal City) High-rise 540 1,129 1,279 98.6%
Crystal Towers (Crystal City) High-rise 912 1,107 1,170 98.9%
Lincoln Towers (Rosslyn/Ballston) High-rise 714 879 1,297 94.6%
2000 Commonwealth (Boston, MA) High-rise 188 878 1,681 95.8%
One East Delaware (Chicago, IL) High-rise 306 704 1,938 98.9%
Tunlaw Gardens (NW Washington, D.C.) Garden 167 850 793 98.3%
Tunlaw Park (NW Washington, D.C.) Mid-rise 120 856 1,143 99.5%
Parc Vista (Crystal City) High-rise 299 770 1,397 99.7%
McClurg Court (Chicago, IL) High-rise 1,075 688 1,349 95.5%
Cronin's Landing (Waltham, MA) Mid-rise 281 1,129 N/A N/A
------ ----- ----- -----
Sub-Total/Average 4,978 890 N/A N/A
------ ----- ----- -----
DEVELOPMENT PORTFOLIO
Springfield Station
(Other Northern Virginia) Mid-rise/
Garden 631
Courthouse Place (Rosslyn/Ballston) High-rise 564
One Superior Place (Chicago) High-rise 809
Park Connecticut (NW Washington, D.C.) High-rise 142
-----
Sub-Total/Average 2,146
------
All Residential Properties 22,097
======
</TABLE>
15
<PAGE>
RENTAL PROPERTIES
Revenues, expenses and income from the multifamily and retail properties
for the three and nine months ended September 30, 1998 and 1997 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- -----------------------
September 30, September 30,
-------------------- -----------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Multifamily Properties - Core/(1)/
Revenues $ 43,906 $ 41,891 $ 127,982 $ 122,569
Expenses (18,900) (17,887) (53,270) (52,107)
-------- -------- --------- ---------
Income before depreciation $ 25,006 $ 24,004 $ 74,712 $ 70,462
======== ======== ========= =========
Multifamily Properties-
Acquisitions and Dispositions/(2)/
Revenues $ 19,325 $ 6,306 $ 47,726 $ 15,037
Expenses (7,859) (2,648) (18,872) $ (6,457)
-------- -------- --------- ---------
Income before depreciation $ 11,466 $ 3,658 $ 28,854 $ 8,580
======== ======== ========= =========
Multifamily Properties-
Development
Revenues $ 387 $ 0 $ 474 $ 0
Expenses (261) (14) (665) (14)
-------- -------- --------- ---------
Income before depreciation $ 126 $ (14) $ (191) $ (14)
======== ======== ========= =========
Retail Properties
Revenues $ 2,443 $ 2,632 $ 7,306 $ 7,482
Expenses (762) (845) (2,397) (2,580)
-------- -------- --------- ---------
Income before depreciation $ 1,681 $ 1,787 $ 4,909 $ 4,902
======== ======== ========= =========
Total Rental Properties
Revenues $ 66,061 $ 50,829 $ 183,488 $ 145,088
Expenses (27,782) (21,394) (75,204) (61,158)
Depreciation (7,970) (5,294) (21,445) (15,440)
-------- -------- --------- ---------
Income from Rental Properties $ 30,309 $ 24,141 $ 86,839 $ 68,490
======== ======== ========= =========
</TABLE>
/(1)/ Represents properties owned as of December 31, 1996.
/(2)/ Includes operations of Oxford Manor which was sold in February 1998.
16
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the various Property Service Businesses
for the three and nine months ended September 30, 1998 and 1997 were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- -----------------------
September 30, September 30,
-------------------- -----------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Multifamily & Retail Property
Management Services/(1)/
Revenues $ 10,648 $ 2,489 $ 18,493 $ 7,763
Expenses (10,024) (2,227) (17,503) (7,159)
-------- -------- -------- --------
Income before depreciation $ 624 $ 262 $ 990 $ 604
======== ======== ======== ========
Interior Construction and Renovation
Services
Net Fee Revenues $ 2,516 $ 2,000 $ 5,561 $ 4,626
Expenses (1,569) (1,433) (4,614) (4,049)
-------- -------- -------- --------
Income before depreciation $ 947 $ 567 $ 947 $ 577
======== ======== ======== ========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 18,014 $ 12,982 $ 49,153 $ 36,913
Expenses (16,899) (12,060) (46,302) (34,007)
-------- -------- -------- --------
Income before depreciation $ 1,115 $ 922 $ 2,851 $ 2,906
======== ======== ======== ========
Financing Services
Revenues $ 742 $ 704 $ 2,623 $ 996
Expenses (169) (206) (766) (577)
-------- -------- -------- --------
Income before depreciation $ 573 $ 498 $ 1,857 419
======== ======== ======== ========
Total Property Service Businesses
Revenues $ 31,920 $ 18,175 $ 75,830 $ 50,298
Expenses (28,661) (15,926) (69,185) (45,792)
Depreciation (566) (318) (1,061) (870)
-------- -------- -------- --------
Income from Property
Service Businesses $ 2,693 $ 1,931 $ 5,584 $ 3,636
======== ======== ======== ========
</TABLE>
/(1)/ Includes May 1998 purchase of Presidential Villas.
17
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
SUMMARY. Net income of the Operating Partnership decreased $0.1 million,
or 0.5%, from $13.8 million for the three months ended September 30, 1997 to
$13.7 million for the three months ended September 30, 1998 due primarily to a
$4.9 million loss in connection with the termination of an unused treasury
lock. Funds from Operations ("FFO") of the Operating Partnership increased
$6.7 million, or 35.3%, from $19.1 million to $25.8 million during the same
period. Net income of the Company decreased from $6.6 million, or $0.49 per
diluted common share, for the three months ended September 30, 1997 to
$5.4 million, or $0.32 per diluted common share, for the three months ended
September 30, 1998. FFO of the Company increased 58.7%, from $9.7 million to
$15.4 million during the same period. The increases in FFO are primarily
attributable to revenue growth of 4.8% on the core portfolio and the performance
of acquired properties.
RENTAL PROPERTIES. Revenue from all rental properties increased
$15.3 million, or 30.0%, from $50.8 million for the three months ended
September 30, 1997 to $66.1 million for the three months ended September 30,
1998. Expenses (including depreciation) from all rental operations increased
$9.1 million, or 34.1% from $26.7 million during the third quarter of 1997 to
$35.8 million during the current quarter.
CORE PORTFOLIO. Revenue from the core portfolio increased
$2.0 million, or 4.8%, over the prior year period resulting in average monthly
revenue per apartment unit of $977. This was primarily due to continued strong
demand in all submarkets, particularly Northwest Washington, D.C. Management
successfully increased rents during the quarter and improved vacancy levels.
Average economic occupancy for the core portfolio was at its high for the year
at 97.8% for the three months ended September 30, 1998 compared to 97.3% for the
comparable prior year. Expenses for the core portfolio increased $1.5 million
or 6.8% including an increase of $0.5 million in depreciation expense, due
primarily to higher than expected costs of selected outsourcing as well as
anticipated repair and maintenance projects carried over from the first half of
1998.
ACQUISITION PORTFOLIO. The eleven acquisition properties (defined as
properties acquired subsequent to December 31, 1996) contributed approximately
85%, or $13.0 million, of the total rental revenue increase and approximately
$7.3 million of the total rental expense including an increase in depreciation
expense of $2.0 million. Six of the acquisition properties (comprising 3,036
apartment units) were acquired during 1997 and five (comprising 1,942 units)
were acquired during 1998.
DEVELOPMENT PORTFOLIO. Springfield Station, currently the only
operational development property, delivered 120 units during the quarter for a
total of 200 units delivered as of September 30, 1998. The project provided net
operating income of $0.1 million for the quarter.
The leasing center for Courthouse Place was delivered in the third
quarter in anticipation of initial unit deliveries expected to occur in
December 1998.
18
<PAGE>
Initial deliveries on the remaining two projects under construction, The Park
Connecticut and One Superior Place, are expected in late 1999.
PROPERTY SERVICE BUSINESSES. The Company uses the equity method of
accounting for its 99% non-voting interest in the Property Service Businesses.
Income from the Property Service Businesses increased from $1.9 million in
the third quarter of 1997 to $2.7 million in the third quarter of 1998.
Income before depreciation for Multifamily and Retail Property Management
Services increased $0.4 million during the third quarter of 1998 as compared to
the prior year quarter due primarily to the acquisition in the second quarter of
Presidential Villas, a furnished apartment business in Chicago.
Income before depreciation for Interior Construction and Renovation Services
increased $0.4 million during the three months ended September 30, 1998 as
compared to the prior year period due primarily to an increase in the volume of
projects completed on behalf of Affiliated commercial office property
partnerships.
Income before depreciation for Engineering and Technical Services increased
$0.2 million due to a 67% increase in revenue from new facilities management
contracts, particularly with government agencies. This increase was partially
offset by a 16% decline in higher margin HVAC repair and replacement projects
and professional service engagements.
Revenue for Financing Services was flat for the third quarter of 1998
compared to the prior year period. The Company earned a fee on a $75 million
debt financing arranged for a commercial office property owned by Charles E.
Smith Commercial Realty L.P. ("CESCR"). The fee was earned in accordance with
the Company's financing services agreement with CESCR.
OTHER. Corporate general and administrative expenses increased 41.0%
compared to the prior year quarter due primarily to additional personnel added
in 1997 in connection with the Company's national acquisition program as well as
the write-off of certain capitalized development costs on terminated projects.
Interest expense increased $1.4 million during the quarter, or 13.5%, primarily
due to additional debt related to acquisitions and development in late 1997 and
1998 partially offset by lower interest rates on the line of credit and the
refinancing of Mortgage Pool One.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997.
SUMMARY. Net income of the Operating Partnership increased $10.7 million, or
30.7%, from $34.6 million for the nine months ended September 30, 1997 to
$45.3 million for the nine months ended September 30, 1998. Funds from
Operations ("FFO") of the Operating Partnership increased $20.7 million, or
41.4%, from $50.1 million to $70.8 million during the same period. Net income of
the Company increased from $16.7 million, or $1.32 per diluted common share, for
the nine months ended September 30, 1997 to $18.4 million, or $1.15 per diluted
common share, for the nine months ended September 30, 1998. FFO of the Company
increased 66.3%, from $24.7 million to
19
<PAGE>
$41.2 million during the same period. The increases in both net income and FFO
are primarily attributable to rent growth on core properties, expense control
and the performance of acquired properties.
RENTAL PROPERTIES. Revenue from all rental properties increased
$38.4 million, or 26.5%, from $145.1 million for the nine months ended
September 30, 1997 to $183.5 million for the nine months ended September 30,
1998. Expenses (including depreciation) from all rental operations increased
$20.0 million, or 26.2%, from $76.6 million to $96.6 million during the nine
months ended September 30, 1997 and 1998, respectively
CORE PORTFOLIO. Revenue from the core portfolio revenue increased
$5.4 million, or 4.4% over the prior year period. Average economic occupancy for
the core portfolio decreased to 96.3% for the nine months ended September 30,
1998 compared to 96.9% for the comparable prior year period which primarily
reflects the higher vacancy experienced during the first two quarters. Despite
the higher vacancy, average monthly revenue per core apartment unit increased
4.4% from $910 during the first nine months of 1997 to $950 during the first
nine months of 1998. Operating expenses on the core portfolio increased 2.2%
year-to - date over the prior year period. This was primarily due to higher
personnel costs (including outsourcing ) and real estate tax expenses partially
offset by utility savings related to a mild winter and lower repair and
maintenance costs.
ACQUISITION PORTFOLIO. The eleven acquisition properties (defined as
properties acquired subsequent to December 31, 1996) contributed approximately
86%, or $32.7 million, of the total rental revenue increase and $12.4 million of
the increase in expenses resulting in a contribution to net operating income of
$20.3 million.
DEVELOPMENT PORTFOLIO. Springfield Station, currently the only
operational development property delivered initial units in May 1998 and has a
total of 200 units delivered as of September 30, 1998. Estimated completion
and stabilization is expected in late 1999.
PROPERTY SERVICE BUSINESSES. The Company uses the equity method of
accounting for its 99% non-voting interest in the Property Service Businesses
which comprised approximately 6% of total rental property and Property Service
Business income. Income from the Property Service Businesses increased from
$3.6 million during the nine months ended September 30, 1997 to $5.6 million in
the nine months ended September 30, 1998.
Income before depreciation for Multifamily and Retail Property Management
Services increased $0.4 million during the nine months ended September 30, 1998
as compared to the prior year period due primarily to income from the
Presidential Villas acquisition partially offset by a decrease in third party
management fees related to acquired properties previously managed by the
Company.
Income before depreciation for Interior Construction and Renovation Services
increased $0.4 million during the nine months ended September 30, 1998 as
compared to the prior year period. This was due primarily to an increase in the
volume of projects completed on behalf of Affiliated commercial office property
partnerships, partially offset by a loss incurred during the first quarter of
20
<PAGE>
1998 associated with cost overruns and unrecovered owner change orders on a
large outside contract. The Company is currently pursuing an arbitration claim
which may result in a partial recovery of the loss.
Despite a 33.2% increase in revenues primarily due to significant additional
facilities management contracts, income before depreciation for Engineering and
Technical Services decreased $0.1 million. This was primarily due to a decrease
in higher margin HVAC repair and replacement projects.
Revenue for Financing Services increased $1.6 million for the nine months
ended September 30, 1998 due to the timing of fees earned on debt refinancings
arranged for commercial office properties owned or managed by Charles E. Smith
Commercial Realty L.P. ("CESCR"). The fees on properties owned by CESCR were
earned in accordance with the Company's one-year financing services agreement
with CESCR while fees on managed properties were separately negotiated.
OTHER. Corporate general and administrative expenses increased 39.8%
compared to the prior year period due primarily to additional personnel added in
mid-1997 to expand the Company's acquisition and development program and write-
offs of capitalized costs on terminated acquisition and development projects.
Interest expense increased $1.3 million during the period, or 4.0%, primarily
due to the Company's financing of acquisition and development activities.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY. Net cash flow provided by operating activities increased
$33.7 million from $50.6 million for the nine months ended September 30, 1997 to
$84.3 million for the nine months ended September 30, 1998. The increase is
primarily a result of higher cash flow contributed by the core and acquisition
portfolios and an increase of $ 8.9 million in accrued costs related primarily
to real estate taxes and initial capital improvements on acquisition properties.
Net cash flows used by investing activities increased $197.3 million during
the nine months ended September 30, 1998 due primarily to acquisitions and
investments in projects under construction. In addition, a $6.75 million term
loan was made to SRC for the acquisition of Presidential Villas.
Net cash flows provided by financing activities was $167.9 million for the
nine months ended September 30, 1998 , primarily comprised of $75.0 million of
net cash inflow from the placement of preferred stock, $45.7 million of cash
inflow from the sale of common stock, and $108.1 million of net borrowings less
$3.0 million of prepayment penalties, a $4.9 million loss on termination of an
unused treasury lock contract and $53.8 million of dividends/distributions.
Net cash flows used by financing activities of $7.5 million in the comparable
prior year period primarily consisted of $71.8 million of debt repayments and
$37.7 million of dividends/distributions partially offset by $82.9 million of
cash inflow from the sale of common stock and $19.8 million of cash inflow from
the issuance of preferred stock.
21
<PAGE>
FUNDS FROM OPERATIONS. Funds from Operations 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,
unused treasury lock and sale of property, 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.
22
<PAGE>
Funds from Operations for the three and nine months ended September 30, 1998
and 1997 are computed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- ------------------
September 30, September 30,
-------------------- ------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Income of the Operating Partnership $ 13,708 $13,783 $ 45,297 $ 34,647
Perpetual preferred dividends (1,011) -- (2,637) --
Depreciation of real property 7,970 5,294 21,445 15,440
Amortization of goodwill 228 -- 228 --
Gain on sale of property -- -- (3,120) --
Loss on unused treasury lock 4,923 -- 4,923 --
Extraordinary item - loss on debt
extinguishment -- -- 4,702 --
-------- ------- -------- --------
Funds from Operations of the Operating
Partnership 25,818 19,077 70,838 50,087
Minority Interest (10,375) (9,349) (29,677) (25,338)
-------- ------- -------- --------
Attributable to Shareholders $ 15,443 $ 9,728 $ 41,161 $ 24,749
======== ======= ========= ========
</TABLE>
DEBT
During 1998, the Company completed several debt financing transactions as
follows:
. The Company terminated its existing $100 million line of credit and entered
into a new $275 million, unsecured line of credit with PNC Bank, NationsBank,
and U.S. Bank which matures in March 2001. The Company repaid the balance
outstanding under the $100 million line and recognized an extraordinary loss
of $0.3 million related to the extinguishment of such debt.
. The Company repaid $110.1 million outstanding on Mortgage Pool One by
drawing on the new line of credit. The Company recognized an extraordinary
loss of $4.1 million related to the repayment.
. The Company repaid mortgage loans totaling $9.2 million and recognized an
extraordinary loss of $0.3 million due to extinguishment of debt.
. The Company obtained a $53 million, ten year secured loan from Prudential at
a fixed coupon rate of 6.88%. The loan is secured by two of the multifamily
properties. In conjunction with
23
<PAGE>
this loan, the Company terminated a $20 million (notional value) treasury
lock contract at a gain of $0.4 million which will be amortized over the term
of the new loan.
. In connection with the development of One Superior Place in Chicago,
Illinois, the Company obtained a $90 million interest-only construction loan
in July 1998 with interest at LIBOR plus 135 basis points, payable monthly,
due July 1, 2001. The loan is collateralized by the property.
. The Company assumed a $31.5 million mortgage loan in connection with the
Cronin's Landing acquisition in July 1998. The loan has a fixed interest
rate of 7.78% with principal amortized using a 25-year amortization schedule
and a final payment due June 2009. A fair value adjustment of $2.0 million
was recorded upon assumption of this loan.
. In September 1998, the Company terminated a $50 million (notional value)
treasury lock contract at a loss of $4.9 million. The treasury lock was put
in place in the first quarter of 1998 to hedge interest rate risk associated
with an anticipated 10-year, unsecured financing which ultimately did not
occur. Therefore, this amount has been charged to current period earnings.
. In October 1998, the Company announced a standby credit facility of up to
$300 million with Fannie Mae which provides for non-recourse, long-term debt
for up to fifteen years. The initial draw on this facility will be
$140 million at 6.75% for fifteen years. The bulk of the proceeds will be
used to retire Mortgage Pool Two of $125.2 million and the associated
prepayment penalty of $9.5 million. Terms and rates of subsequent draws on
this facility will be determined at the time of use.
24
<PAGE>
As of September 30, 1998 , the Company had mortgage indebtedness and other
borrowings, which carried a weighted average interest rate of 7.32%, as follows:
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
---------- ------
<S> <C> <C>
Fixed rate debt:
Mortgages $473,317 62.9%
$83M line of credit 30,000 4.0%
Variable rate debt:
Mortgages 9,159 1.2%
$275M line of credit 214,500 28.5%
Construction Loans 25,572 3.4%
-------- ----
$752,548 100%
======== ====
</TABLE>
As of September 30, 1998, the Company had $224.2 million of unused borrowing
capacity available on lines of credit and construction loans. Amounts
outstanding under lines of credit averaged $195.1 million for the nine months
ended September 30, 1998 compared to $69.0 million for the nine months ended
September 30, 1997.
As of September 30, 1998 , the Company's Debt to Total Market Capitalization
Ratio was 40.5% (based on 17.5 million common shares, 3.6 million convertible
preferred shares and 13.7 million partnership units outstanding at a stock price
of $30.375) versus 35.0% as of December 31, 1997 and 37.2% as of September 30,
1997.
The Company's Interest Coverage Ratio for the nine months ended September 30,
1998 was 3.06 to 1 compared to 2.66 for the comparable prior year period.
EQUITY
In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value, for
$48.8 million, which is net of offering costs of $1.2 million. The Company
amended the Articles of Incorporation to designate and establish the rights and
privileges of the Series C Preferred Shareholders which include certain voting,
dividend and liquidation preferences over the common shareholders. The Series C
Preferred Shares have a liquidation preference of $100,000 per share and an
initial annual dividend rate of $7,910 per share. If the securities receive an
investment grade rating, the annual dividend rate will decrease by $250 per
share. Dividends are cumulative and are payable quarterly. The Company may
redeem Series C Preferred Shares after February 1, 2028, at the liquidation
price plus accrued dividends.
In April 1998, the Company sold the remaining 978,581 shares of Series A
Preferred Shares under its agreement with Security Capital Group, Inc. for
$26.2 million, which is net of offering costs of $0.3 million.
25
<PAGE>
In July 1998, the Company completed the sale of 1.4 million shares of common
stock (par value $0.01 per share) under its existing shelf registration
statement at a net purchase price of $32.625 per share. The net proceeds of
approximately $45.7 million were used to retire outstanding debt and for working
capital purposes.
DEVELOPMENT
The Company's development pipeline as of September 30, 1998 consists of the
following projects:
<TABLE>
<CAPTION>
Projected
Number of Units Initial Estimated Estimated Estimated
of Units Delivered Delivery Completion Stabilization Cost
--------- --------- ------------ ------------ ------------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Springfield Station
(Northern Virginia) 631 200 May, 1998 Spring, 1999 Spring, 2000 $ 60
Courthouse Place
(Rosslyn/Ballston) 564 n/a Winter, 1998 Spring, 1999 Spring, 2000 $ 68
One Superior Place
(Chicago) 809 n/a Fall, 1999 Winter, 1999 Spring, 2001 $115
Park Connecticut
(N.W. Washington, D.C) 142 n/a Fall, 1999 Fall, 1999 Fall, 2000 $ 26
----- ----- ----
2,146 200 $269
===== ===== ====
</TABLE>
COMMITMENTS
As of September 30, 1998, the Company had executed four contracts to purchase
to-be-constructed multifamily properties as follows:
<TABLE>
<CAPTION>
Estimated
Number of Units Estimated Purchase Purchase
of Units Delivered Completion Date Price
--------- --------- ------------ ------------ --------
(in millions)
<S> <C> <C> <C> <C> <C>
New River Village
(Ft. Lauderdale, FL.) 240 n/a Spring, 2000 Fall, 2000 $32
Wilson Boulevard
(Rosslyn/Ballston) 220 n/a Spring, 2000 Fall, 2000 $28
Pollard Gardens
(Rosslyn/Ballston) 383 n/a Winter, 2000 Spring, 2001 $47
Reston Landing
(Reston, VA.) 400 n/a Winter, 1999 Summer, 2000 $ 44
----- ----
1,243 $151
===== ====
</TABLE>
These contracts are contingent upon satisfactory completion of construction
and attainment of final certificates of occupancy by the owners. At
September 30, 1998, the Company had posted three letters-of-credit totaling
$7.7 million in accordance with three of the contracts to be drawn upon only
26
<PAGE>
in the event the Company defaults on its contractual obligations to purchase the
completed assets.
CAPITAL EXPENDITURES
For the nine months ended September 30, 1998, total capital improvements were
$13.2 million, of which $10.9 million were for the core portfolio ($726 per
unit). Approximately 53% of the capital expenditures on the core portfolio in
1998 are considered by management to generate net operating income ("NOI") by
increasing revenue or decreasing expenses ("NOI generating"). The remaining
capital expenditures on the core portfolio indirectly influence the Company's
ability to generate NOI ("non-NOI generating"). A summary of core capital
expenditures follows:
<TABLE>
<CAPTION>
Total $
Spent Average $ Per
Expenditure Type (In Thousands) Core Unit
- ---------------------------- -------------- -------------
<S> <C> <C>
Installations $ 2,425 $ $162
Water saving devices 1,147 77
Renovations 1,615 108
Other 534 36
---------- ---------
Total NOI generating
improvements 5,721 383
Non-NOI generating
improvements 5,141 343
---------- ---------
Total capital expenditures -
core portfolio $10,862 $726
========== =========
</TABLE>
YEAR 2000
In 1997, the Company began a comprehensive review of its year 2000 compliance
issues utilizing an overlapping, three-phased approach. Phase I involves
assessments of building infrastructure and internal computer systems including
both hardware and software to identify possible compliance failures. Phase II
involves vendor compliance and actual testing of hardware and software
applications including significant electronic interfaces. Phase III involves
identifying remaining company-wide risks and development of contingency plans.
The Company expects to complete Phases I and II of its Year 2000 review in mid-
1999. Phase III is expected to run from March 1999 through December 1999.
Based on the review plan as well as the expected success of remediation efforts
currently underway, management believes the Company has no material risks
related to the ability of its hardware and software to recognize the year 2000
and beyond as valid dates.
27
<PAGE>
The Company's primary financial and operational software programs are
purchased from outside vendors who have already resolved year 2000 issues. The
Company has received letters from these vendors indicating that their software
is Year 2000 compliant. The Company is in the process of replacing one computer
system, however, which is not currently year 2000 compliant at an estimated cost
of approximately $1.6 million. The new system is expected to be operational in
early 1999 and the related cost will be depreciated over its estimated useful
life.
As part of Phase II, the Company has initiated steps to identify and contact
key vendors whose inability to provide service in the year 2000 could have a
material adverse effect on the Company's business operations. With the
exception of utility services, the Company believes that there are no other
critical suppliers whose inability to provide service would materially affect
business operations. This is due primarily to the physical nature of the
Company's product as well as the availability of multiple suppliers of property
services. The Company does not have a contingency plan to address the
possibility that utility services may not be available. However, management
believes that this is a very unlikely scenario. Readers are cautioned that
these conclusions involve numerous subjective assumptions and there can be no
assurances that management has adequately identified or addressed all possible
contingencies.
Excluding the replacement system, the Company's Year 2000 compliance efforts
have been primarily conducted with internal staff. Accordingly, the costs have
been immaterial and are expensed as incurred.
28
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES.
In September 1998, 151,266 shares of Series B Cumulative Convertible
Redeemable Preferred Stock were converted to common shares on a one-for-one
basis.
ITEM 3. DEFAULTS ON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION.
As of September 30, 1998, the Company had executed four contracts to
purchase to-be-constructed multifamily properties totaling approximately 1,200
apartment units. The maximum aggregate contract purchase price totals $151
million with projected closing dates between June 2000 and May 2001. The
contracts are contingent upon satisfactory completion of construction and
attainment of final certificates of occupancy by the owners. At September 30,
1998, the Company had posted three letters-of-credit totaling $7.7 million in
accordance with two of the contracts to be drawn upon only in the event the
Company defaults on its contractual obligations to purchase the completed
assets.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
November 23, 1998 By: /s/ W. D. Minami
------------------------------------
W. D. Minami
Senior Vice President and Chief Financial Officer
of Charles E. Smith Residential Realty, Inc.
(on behalf of the Registrant and as Principal
Financial Officer)
By: /s/ Steven E. Gulley
------------------------------------
Steven E. Gulley
Vice President and Chief Accounting Officer
of Charles E. Smith Residential Realty, Inc.
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,116
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,415
<PP&E> 1,286,792
<DEPRECIATION> (228,167)
<TOTAL-ASSETS> 1,142,775
<CURRENT-LIABILITIES> 25,299
<BONDS> 752,548
0
149,257
<COMMON> 175
<OTHER-SE> 114,555
<TOTAL-LIABILITY-AND-EQUITY> 1,142,775
<SALES> 0
<TOTAL-REVENUES> 183,488
<CGS> 0
<TOTAL-COSTS> 96,649
<OTHER-EXPENSES> 6,405
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,216
<INCOME-PRETAX> 49,999
<INCOME-TAX> 0
<INCOME-CONTINUING> 49,999
<DISCONTINUED> 0
<EXTRAORDINARY> 4,702
<CHANGES> 0
<NET-INCOME> 18,382
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.15
</TABLE>
