<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
--- of the Securities Exchange Act of 1934
For the quarter ended March 31, 1999
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 April 30, 1999, there were 18,912,318 shares of Common Stock of the
Registrant issued and outstanding.
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
FORM 10-Q
INDEX
Pages
-----
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Charles E. Smith Residential Realty, Inc. Financial
Statements as of March 31, 1999 and December 31, 1998,
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 25
SIGNATURES 26
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property, net $1,017,521 $ 926,749
Rental property under construction 204,404 167,214
Escrow funds 7,459 23,819
Investment in and advances to Property Service Businesses 35,254 28,633
Investment in Joint Venture 4,356 -
Deferred charges, net 17,622 18,081
Security deposits 2,412 2,408
Other assets 16,912 18,495
---------- ----------
$1,305,940 $1,185,399
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans and notes payable:
Mortgage loans $ 681,796 $ 622,386
Construction loans 82,190 63,193
Lines of credit 123,000 105,000
---------- ----------
Total mortgage loans and notes payable 886,986 790,579
Accounts payable and accrued expenses 31,732 22,830
Security deposits 2,412 2,408
---------- ----------
Total liabilities 921,130 815,817
---------- ----------
Commitments and contingencies
Minority Interest 103,703 104,605
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 shares issued and outstanding at March 31, 1999 and
December 31, 1998, respectively 71,500 71,500
Preferred stock - $ 0.01 par value; 1,216,666 shares authorized;
Series B Cumulative Convertible Redeemable Preferred Stock, liquidation
preference of $28.50; 589,261 and 714,628 shares issued and outstanding
at March 31, 1999 and December 31, 1998, respectively 16,794 20,367
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 50,000
Common stock - $0.01 par value; 95,000,000 shares
authorized; 18,878,991 and 18,212,600 shares issued
and outstanding at March 31, 1999 and December 31, 1998,
respectively 188 182
Additional paid-in capital - includes contributed
deficit of $244,208 152,888 132,669
Retained deficit (10,263) (9,741)
---------- ----------
Total shareholders' equity 281,107 264,977
---------- ----------
$1,305,940 $1,185,399
========== ==========
</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
Ended March 31,
-------------------------------------------------------
1999 1998
------------------------ -----------------------
<S> <C> <C>
Rental Properties:
Revenues $ 69,033 $ 55,670
Expenses
Operating costs (22,154) (18,641)
Real estate taxes (5,404) (3,657)
Depreciation and amortization (8,228) (6,387)
-------- --------
Total expenses (35,786) (28,685)
Equity in income of Property Service Businesses and other 28 664
Corporate general and administrative expenses (2,209) (2,025)
Interest income 134 161
Interest expense (13,148) (10,888)
-------- --------
Income before gain on sale and extraordinary item 18,052 14,897
Gain on sale of property 1,858 3,120
-------- --------
Income before extraordinary item 19,910 18,017
Extraordinary item - loss on extinguishment of debt (359) (4,702)
-------- ---------
Net income of the Operating Partnership 19,551 13,315
Minority Interest (7,442) (5,871)
-------- --------
Net income 12,109 7,444
Less: Income attributable to preferred shares (2,354) (1,490)
-------- --------
Net income attributable to common shares $ 9,755 $ 5,954
======== ========
Earnings per common share - basic
Income before extraordinary item $ 0.54 $ 0.55
Extraordinary item (0.01) (0.16)
-------- --------
Net income $ 0.53 $ 0.39
======== ========
Earnings per common share - diluted
Income before extraordinary item $ 0.54 $ 0.55
Extraordinary item (0.01) (0.16)
-------- --------
Net income $ 0.53 $ 0.39
======== ========
</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, Except Per Share Data)
<TABLE>
<CAPTION>
Common Series A Series B Series C Additional Retained
Stock Preferred Preferred Preferred Common Paid-in Earnings
Outstanding Stock Stock Stock Stock Capital (Deficit) Total
- ----------- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 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 - - - - (1,874) - (1,874)
Proceeds from issuance of Common Stock,
1,400,000 net of offering costs of $221 - - - 14 45,440 - 45,454
Conversion of Preferred Stock to Common
502,038 Stock - (14,308) - 5 14,303 - -
Conversion of Operating Partnership units
1,342,133 to common stock - - - 13 (13) - -
Repurchase and cancellation of Operating
Partnership units - - - - (594) - (594)
Amortization of unit grants - - - - 521 - 521
5,000 Exercise of options - - - - 2,999 - 2,999
21,000 Stock grants awarded - - - - - - -
Net income - - - - - 41,129 41,129
Dividends - - - - - (44,498) (44,498)
Adjustment for Minority Interest - - - - (24,794) - (24,794)
- ---------- ------- -------- ------- ---- -------- -------- --------
18,212,600 Balance, December 31, 1998 71,500 20,367 50,000 182 132,669 (9,741) 264,977
Operating Partnership equity exchanged
for acquisitions - - - - 15,084 - 15,084
Conversion of Preferred Stock to Common
125,367 Stock - (3,573) - 1 3,572 - -
Conversion of Operating Partnership units
505,524 to common stock - - - 5 (5) - -
Amortization of unit grants - - - - 89 - 89
5,000 Exercise of options - - - - 146 - 146
30,500 Stock grants awarded - - - - - - -
Net income - - - - - 12,109 12,109
Dividends - - - - - (12,631) (12,631)
Adjustment for Minority Interest - - - - 1,333 - 1,333
- ---------- ------- -------- ------- ---- -------- -------- --------
18,878,991 Balance, March 31, 1999 (unaudited) $71,500 $ 16,794 $50,000 $188 $152,888 $(10,263) $281,107
========== ======= ======== ======= ==== ======== ======== ========
</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 Three Months
Ended March 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 33,035 $ 26,974
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (92,883) (22,234)
Additions to rental property (3,642) (3,647)
Disposition of rental property 22,597 -
Increase in investment in and advances to Property Service Businesses (6,621) (10,769)
Increase in investment in Joint Venture (3,677) -
Acquisition deposits and other 1,758 (2,516)
-------- --------
Net cash used by investing activities (82,468) (39,166)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to deferred charges 1,049 -
Net proceeds from sale of preferred stock - 48,996
Mortgage loans, net 31,921 (99,713)
Lines of credit, net 18,000 80,000
Construction loans, net 18,997 5,998
Prepayment penalties (1,038) (3,025)
Dividends and distributions - Common (16,858) (15,148)
Dividends and distributions - Preferred (2,784) (1,808)
Other, net 146 (346)
-------- --------
Net cash provided by financing activities 49,433 14,954
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS - 2,762
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - -
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD - $ 2,762
======== ========
SUPPLEMENTAL INFORMATION:
Capitalized interest 2,130 967
Purchase of property in exchange for Operating Partnership units 14,405 8,820
Purchase of property in exchange for assumption of debt 28,169 -
Proceeds from sale of rental property held in 1031 escrow 17,712 4,308
Purchase of property with 1031 escrow proceeds 17,712 -
Purchase of joint venture interest in exchange for Operating Partnership units 679 -
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial statements include all of the accounts of
Charles E. Smith Residential Realty, Inc. (the "Company") and Charles E. Smith
Residential Realty L.P. (the "Operating Partnership") and its subsidiary
financing partnerships. The Company consolidates the Operating Partnership due
to the Company's control as sole general partner. All significant intercompany
balances and transactions have been eliminated. The financial information
furnished is unaudited, and in management's opinion, includes all adjustments
(consisting only of normal, recurring adjustments), that are necessary for a
fair presentation of financial position as of March 31, 1999 and the results of
operations for the interim periods ended March 31, 1999 and 1998. 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 March 31, 1999, the Operating Partnership owned 50 operating
multifamily properties containing 19,852 apartment units and two retail shopping
centers aggregating 436,000 square feet. The Operating Partnership also had
approximately 3,400 units under construction at eight additional sites. 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 and engineering and technical
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 have been reclassified to conform with current presentation.
2. ACQUISITIONS AND DISPOSITIONS
In January 1999, the Company acquired a 442-unit multifamily property in
Crystal City, Virginia ("Buchanan House") for a capitalized cost of $66.0
million which includes assumed debt of $7.4 million, a fair value adjustment to
debt of $0.5 million, initial capital improvement costs of $5.0 million and $0.4
million in acquisition related costs. The balance was funded by proceeds from
the 1998 sale of Marbury Plaza and a draw on the Company's bank line of credit.
7
<PAGE>
In January 1999, the Company acquired a 139-unit multifamily property in
Chicago, Illinois ("Parkwest") for a capitalized cost of approximately $13.6
million, consisting of 138,111 net Operating Partnership Units valued at $4.3
million, assumed debt of $6.0 million, a fair value adjustment to debt of $0.4
million, initial capital improvement costs of $0.8 million, and $2.1 million of
cash. The assumed loan has an effective interest rate of 6.5% with principal
amortized using a 25-year amortization schedule and a final payment due April 1,
2007.
In January 1999, the Company acquired a 427-unit multifamily property in
Chicago, Illinois ("Terrace") for a capitalized cost of approximately $25.7
million, consisting of 291,551 net Operating Partnership Units valued at $9.1
million, assumed debt of $13.7 million, a fair value adjustment to debt of $0.2
million, initial capital improvement costs of $1.2 million, and $1.5 million of
cash.
In February 1999, the Company sold The Manor, a 435-unit multifamily property
located in suburban Maryland for $22.6 million. The Company recognized a gain
on the sale of $1.9 million.
In February 1999, the Company acquired a parcel of land for development in
Chicago, Illinois for $8.6 million.
In March 1999, the Company acquired the land beneath its Crystal Square
property and the 5.1% net profits interest in its Crystal Plaza property. The
purchase price of $10.0 million consisted of 32,258 Operating Partnership Units
valued at $1.0 million and the assumption of debt which was repaid with $9.0
million cash drawn upon the line of credit. This transaction was completed
concurrently with the purchase by Charles E. Smith Commercial Realty L.P.
("CESCR") of commercial land and partnership interests. The transaction was
reviewed and approved by the Company's independent Directors.
In March 1999, the Company and J.P. Morgan Strategic Property Fund ("J.P.
Morgan") formed a joint venture which acquired the Renaissance, a 330-unit
multifamily property in Tysons Corner, Virginia for approximately $37 million.
The joint venture plans to invest an additional $2.0 million in initial capital
improvements and has placed debt of $19.0 million on the property. The debt
carries an interest rate of 6.48% and matures in February 2006. Ownership
interests in the joint venture are held 75% by J.P. Morgan and 25% by the
Company. The Company's initial equity contribution totaled $4.4 million
consisting of 21,903 Operating Partnership units valued at $0.7 million and cash
of $3.7 million. The transaction was reviewed and approved by the Company's
independent Directors since Messrs. Smith and Kogod held a general partnership
interest in the selling entity.
3. MORTGAGE LOANS
In February 1999, the Company repaid the $7.4 million Buchanan mortgage
through a draw on its line of credit. The Company paid a prepayment penalty of
$0.9 million. In March 1999, the Company obtained a $38.0 million mortgage on
Buchanan House with an effective fixed interest rate of 6.67%. The loan is
interest only through March 2009, at which time principal amortization begins
using a 30-year amortization schedule with a balloon payment due February 1,
2011.
8
<PAGE>
In March 1999, the Company repaid the $13.7 million mortgage on Terrace. The
company paid a prepayment penalty of $0.2 million. The Company obtained a new,
interest-only mortgage of $15.6 million at an effective interest rate of 6.64%
with principal due April 1, 2007.
4. SHAREHOLDERS' EQUITY
In March 1999, 125,367 shares of Series B Cumulative Convertible Redeemable
Preferred Stock were converted to common shares on a one-for-one basis.
5. PER SHARE DATA
Earnings per common share of the Company for the three months ended March 31,
1999 and 1998 is computed based on weighted average common shares/units
outstanding during the period as follows (in millions):
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---- ----
Basic Diluted Basic Diluted
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Weighted Average Common Shares 18.5 18.6 15.2 15.4
Weighted Average Common Operating
Partnership Units/1/ 13.4 13.4 14.2 14.2
</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 three months ended March 31, 1999, 505,524
million Operating Partnership units were redeemed for shares of common stock.
Options to purchase 877,917 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.
9
<PAGE>
6. SEGMENT REPORTING
Property Segments
The Company's primary business is the ownership and operation of multifamily
residential real estate. As such, the residential rental properties have been
divided into three primary operating segments -- the Core, Acquisition and
Development portfolios. The Core Portfolio consists of all multifamily
properties which have been owned more than one full calendar year. Therefore,
the 1999 Core represents properties owned as of December 31, 1997. The
Acquisition Portfolio consists of purchased properties which have not yet
reflected one full calendar year of operations. The Development Portfolio
consists of properties which the Company has constructed or is in the process of
constructing which have not yet had a full calendar year of stabilized operating
results. On the first of January each year, Acquisition and Development
properties that have been stabilized or held by the Company for one year are
transferred to the Core Portfolio.
The Company's fourth property segment is the Retail Portfolio which consists
of two freestanding retail properties.
The Company evaluates performance for the Property Segments based on Net
Operating Income ("NOI") calculated as the difference between Rental Revenue and
Operating Expenses (which excludes interest expense, general and administrative
costs and depreciation.)
Property Service Business Segment
The Company also separately evaluates the financial information of its equity
investment in the Property Service Businesses. These businesses provide
professional services such as property management, furnished corporate apartment
rentals, engineering and technical consulting, and construction management to
both Company-owned properties and properties owned by third parties. Previously,
the Company reported the Property Service Businesses as three separate operating
segments, however, given the similarities in the nature of services, customers
and distribution methods, as well as the overall profit contribution, the
Company considers the Property Service Businesses to be one segment. The Company
evaluates performance for the Property Service Business segment based on Funds
from Operations ("FFO") which is defined using 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 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.
10
<PAGE>
The accounting policies for all segments are the same as those described in
the summary of significant accounting policies in the Company's Annual Report on
Form 10-K.
Information concerning operations by segment for the three months ended
March 31, 1999 and 1998 was as follows (in thousands):
Property Segments
<TABLE>
<CAPTION>
Three months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net Operating Income
--------------------
Core Portfolio $ 32,903 $ 30,268
Acquisition Portfolio 6,174 1,549
Development Portfolio 686 (124)
Retail Portfolio 1,712 1,679
---------- ----------
Consolidated total 41,475 33,372
Depreciation and amortization (8,228) (6,387)
Equity in income of Property Service Businesses and other 28 664
Corporate general and administrative expenses (2,209) (2,025)
Net interest expense (13,014) (10,727)
---------- ----------
Income before gain on sale and
extraordinary item $ 18,052 $ 14,897
========== ==========
Revenues
--------
Core Portfolio $ 53,574 $ 49,860
Acquisition Portfolio 11,338 3,346
Development Portfolio 1,567 1
Retail Portfolio 2,554 2,463
---------- ----------
Consolidated total $ 69,033 $ 55,670
========== ==========
Real Estate Assets, gross
-------------------------
Core Portfolio $ 893,970 $ 868,860
Acquisition Portfolio 298,058 46,663
Development Portfolio 204,859 70,283
Retail Portfolio 60,043 59,900
---------- ----------
Sub-total 1,456,930 1,045,706
Accumulated Depreciation (235,005) (214,213)
---------- ----------
Consolidated total, net $1,221,925 $ 831,493
========== ==========
</TABLE>
11
<PAGE>
Property Service Business Segment
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Funds from Operations $ 109 $ 664
Revenues $27,394 $19,352
Depreciation $ 436 $ 368
</TABLE>
7. SUBSEQUENT EVENTS
In May 1999, the Company formed two additional joint ventures with J.P.
Morgan. The first venture ("University Center JV") will develop a new 630-unit
multifamily property in Loudoun County, Virginia at the western end of the
Dulles Technology corridor. Ownership interests are held 60% by J.P. Morgan
and 40% by the Company. The joint venture intends to place debt financing for
50% of the project's estimated $60 million development cost. Construction is
expected to commence during the third quarter of 1999 with final completion in
2001. The Company's initial equity contribution consisted of land acquired in
1998 for $5.4 million, less cash received of $3.0 million. A Company affiliate
will provide development, property management and marketing services to the
venture for a market rate fee. This affiliate will provide a construction
completion guarantee to the venture.
The second venture ("Springfield Station JV") was formed to own and operate
the Company's recently developed 631-unit Springfield Station property. The
Company sold a 52% interest in Springfield Station JV to J.P. Morgan and
received proceeds of approximately $50 million from the transaction. The joint
venture placed $37 million in debt financing on the property at 6.85% fixed
interest which matures on June 1, 2001. The Company provided a construction
completion guarantee on the project as well as a payment guarantee of $14.1
million of the debt. The construction completion guarantee expires on October 1,
1999. The debt guarantee will expire on or before the achievement of 92%
occupancy for 45 consecutive days. The Company will defer recognition of a $5.2
million gain on the sale until the guarantees have expired.
In May 1999, the Company finalized the settlement of financing services
provided to commercial office partnerships now owned and managed by CESCR, an
affiliate of Messrs. Smith and Kogod. This settlement was initiated by the
formation of CESCR in 1997, at which time the Company entered into an agreement
to provide financing services to CESCR only through December 31, 1998. On May 1,
1999, the Company received 79,905 Operating Partnership units valued at
$2.5 million as final settlement from an affiliate of Messrs. Smith and Kogod
and immediately canceled the units.
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
months ended March 31, 1999 and 1998 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 7.4% in the first quarter of 1999 as compared
with 1998.
A schedule of portfolio statistics follows:
13
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
Residential Portfolio Statistics
<TABLE>
<CAPTION>
Gross Average
Average Operating Revenue % Change Economic Change
Property Apartment Sq. Ft. Income Per Unit from Occupancy From
Property Type/Property Name Type Units Per Unit Q1-99 Q1-99 Q1-98 Q1-99 Q1-98
- --------------------------- -------- --------- -------- --------- -------- -------- --------- ------
(in 000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Core Residential Portfolio
NW Washington, D.C.
1841 Columbia Road High-rise 115 634 $ 350 $1,014 11.4% 98.7% -.2%
2501 Porter Street High-rise 202 760 963 1,588 14.6% 99.7% 5.9%
Albemarle High-rise 235 1,097 867 1,230 1.8% 96.1% -3.9%
Calvert-Woodley High-rise 136 1,001 505 1,239 9.8% 99.4% 1.5%
Cleveland House High-rise 216 894 762 1,176 8.0% 98.7% .2%
Connecticut Heights High-rise 519 536 1,391 893 4.5% 94.9% .3%
Corcoran House High-rise 138 464 369 890 9.5% 99.8% .4%
Statesman High-rise 281 593 715 849 10.3% 99.6% 3.2%
Van Ness South High-rise 625 956 2,162 1,153 7.4% 99.4% 1.9%
The Kenmore High-rise 376 725 879 779 6.2% 97.7% .0%
------ ----- ------- ------ ---- ---- ----
2,843 771 8,963 1,051 7.6% 98.1% 1.1%
Northern Virginia
Crystal City
------------
The Bennington High-rise 348 804 1,120 1,073 7.2% 96.1% 3.7%
Crystal House I High-rise 426 917 1,352 1,058 8.8% 98.6% 3.9%
Crystal House II High-rise 402 938 1,224 1,015 7.7% 98.7% 5.7%
Crystal Square High-rise 378 1,121 1,369 1,207 5.1% 99.0% .6%
Crystal Place High-rise 180 894 718 1,330 4.1% 96.0% -.8%
Gateway Place High-rise 162 826 808 1,662 -5.9% 87.7% -4.7%
Water Park Towers High-rise 360 881 1,572 1,456 13.9% 94.7% 8.8%
Crystal Plaza High-rise 540 1,129 2,114 1,305 7.7% 99.8% 2.3%
Crystal Towers High-rise 912 1,107 3,268 1,194 8.6% 98.9% 2.7%
------ ----- ------- ------ ---- ---- ----
3,708 998 13,543 1,217 7.3% 97.6% 3.1%
Rosslyn/Ballston
----------------
Courthouse Plaza High-rise 396 772 1,536 1,293 3.9% 94.6% -.6%
Lincoln Towers High-rise 714 879 2,843 1,327 12.0% 93.7% 2.8%
------ ----- ------- ------ ---- ---- ----
1,110 841 4,379 1,315 9.0% 94.0% 1.6%
Tyson/Dulles
------------
Charter Oak Garden 262 1,097 774 985 8.3% 97.2% 2.4%
Oaks of Tyson Garden 218 968 712 1,089 11.1% 98.2% 3.2%
Potomac View Garden 192 965 457 794 4.0% 95.2% -2.3%
Bedford Village Garden 752 1,070 2,160 957 9.2% 96.9% 4.2%
Patriot Village Garden 1,065 1,162 2,995 937 6.6% 97.3% 2.8%
Westerly at Worldgate Garden 320 921 1,060 1,105 1.4% 96.0% 2.3%
------ ----- ------- ------ ---- ---- ----
2,809 1,075 8,158 968 7.0% 97.0% 2.8%
Other
-----
Arlington Overlook Mid-rise 711 877 1,745 818 11.5% 96.8% 4.6%
Berkeley Mid-rise 138 891 314 758 2.6% 98.0% .7%
Boulevard of Old Town Garden 159 603 430 901 8.3% 98.8% 1.6%
Columbia Crossing Garden 247 976 865 1,167 10.0% 97.4% 5.5%
Columbian Stratford Mid-rise 227 942 516 758 1.4% 96.1% .1%
Concord Village Garden 531 1,025 1,342 843 6.7% 95.9% 3.5%
Newport Village Garden 937 1,115 2,613 930 5.1% 97.6% 1.4%
Orleans Village Garden 851 1,061 2,200 862 8.6% 96.3% 4.5%
Skyline Towers High-rise 940 1,221 2,834 1,005 3.4% 96.3% .2%
Windsor Towers Mid-rise 280 1,025 686 816 2.5% 96.2% -.9%
------ ----- ------- ------ ---- ---- ----
5,021 1,040 13,545 899 6.3% 96.7% 2.3%
Boston/Chicago
2000 Commonwealth High-rise 188 878 988 1,753 10.8% 98.7% .1%
One East Delaware High-rise 306 704 1,889 2,058 15.2% 97.6% -.3%
------ ----- ------- ------ ---- ---- ----
494 770 2,877 1,942 13.7% 98.1% -.1%
Other
Car Barn Garden 196 1,311 551 937 11.9% 98.2% 2.1%
Fort Chaplin Garden 549 983 1,123 682 4.6% 97.6% .3%
Suburban Tower High-rise 172 677 435 842 3.7% 97.9% .6%
------ ----- ------- ------ ---- ---- ----
917 996 2,109 766 6.2% 97.8% .8%
------ ----- ------- ------ ---- ---- ----
16,902 968 53,574 1,057 7.4% 97.1% 2.2%
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Gross Average
Average Operating Revenue % Change Economic Change
Property Apartment Sq. Ft. Income Per Unit from Occupancy From
Property Type/Property Name Type Units Per Unit Q1-99 Q1-99 Q1-98 Q1-99 Q1-98
- --------------------------- -------- --------- -------- --------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquisition Portfolio
1998
----
Tunlaw Gardens (NW Washington, D.C.) Garden 167 850 412 822 17.5% 98.5% 5.0%
Tunlaw Park (NW Washington, D.C.) Mid-rise 120 856 401 1,115 5.6% 96.0% -.9%
Parc Vista (Crystal City, VA.) High-rise 299 770 1,400 1,560 N/A 97.4% N/A
McClurg Court (Chicago, IL.) High-rise 1,075 688 4,124 1,279 N/A 93.5% N/A
Cronin's Landing (Waltham, MA) Mid-rise 281 1,129 1,554 1,843 N/A 93.3% N/A
1999
----
Buchanan House (Crystal City, VA.) High-rise 442 1,173 1,665 N/A N/A N/A N/A
Parkwest (Chicago, IL.) Garden 139 580 402 N/A N/A N/A N/A
Terrace (Chicago, IL.) Garden 427 839 844 N/A N/A N/A N/A
----- --- ------ ----- ---- ---- ---
Subtotal/Average 2,950 844 10,801 N/A N/A N/A N/A
Development Portfolio
Springfield Station (Other Northern VA.) Mid-rise/Garden 631
Courthouse Place (Rosslyn/Ballston, Va.) High-rise 564
One Superior Place (Chicago, IL.) High-rise 809
Park Connecticut (NW Washington, D.C.) High-rise 142
Subtotal/Average -----
2,146
All Residential Properties 21,998
======
</TABLE>
15
<PAGE>
RENTAL PROPERTIES
Revenues, expenses and income from the multifamily and retail properties for
the three months ended March 31, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,
---------
1999 1998/(2)/
-------- ---------
<S> <C> <C>
Multifamily Properties - Core/(1)/
Revenues $ 53,574 $ 49,860
Expenses (20,671) (19,592)
-------- --------
Income before depreciation $ 32,903 $ 30,268
======== ========
Multifamily Properties-
Acquisitions and Dispositions
Revenues $ 11,338 $ 3,346
Expenses (5,164) (1,797)
-------- --------
Income before depreciation $ 6,174 $ 1,549
======== ========
Multifamily Properties-
Development
Revenues $ 1,567 $ 1
Expenses (881) (125)
-------- --------
Income before depreciation $ 686 $ (124)
======== ========
Retail Properties
Revenues $ 2,554 $ 2,463
Expenses (842) (784)
-------- --------
Income before depreciation $ 1,712 $ 1,679
======== ========
Total Rental Properties
Revenues $ 69,033 $ 55,670
Expenses (27,558) (22,298)
Depreciation (8,228) (6,387)
-------- --------
Income from Rental Properties $ 33,247 $ 26,985
======== ========
</TABLE>
/(1)/Represents properties owned as of December 31, 1997.
/(2)/Certain prior period balances have been reclassified to conform with
current period presentation.
16
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the Property Service Businesses for the
three months ended March 31, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
Total Property Service Businesses
Revenues
Expenses $ 27,394 $ 19,352
Depreciation (26,956) (18,320)
(436) (368)
-------- --------
Income from Property Service Businesses $ 2 $ 664
======== ========
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1999 to Three Months Ended March 31,
1998.
Summary. Net income of the Operating Partnership increased $6.3 million, or
46.8%, from $13.3 million for the three months ended March 31, 1998 to $19.6
million for the three months ended March 31, 1999. Funds from Operations
("FFO") of the Operating Partnership increased $4.7 million, or 22.9%, from
$20.7 million to $25.4 million during the same period. Net income of the
Company increased from $6.0 million, or $0.39 per diluted common share, for the
three months ended March 31, 1998 to $9.8 million, or $0.53 per diluted common
share, for the three months ended March 31, 1999. FFO of the Company increased
36.2%, from $11.5 million to $15.7 million during the same period. The
increases in FFO are primarily attributable to revenue growth of 7.4% on the
core portfolio and the performance of acquired and developed properties.
Rental Properties. Revenue from all rental properties increased $13.3
million, or 24.0%, from $55.7 million for the three months ended March 31, 1998
to $69.0 million for the three months ended March 31, 1999. Operating expenses
from all rental operations increased $5.3 million, or 23.6% from $22.3 million
during the first quarter of 1998 to $27.6 million during the current quarter.
Core Portfolio. Revenue from the core portfolio increased $3.7 million, or
7.4%, over the prior year period resulting in average monthly revenue per
apartment unit of $1,057. 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 occupancy levels. Average
economic occupancy for the core portfolio was 97.1% for the three months ended
March 31, 1999 compared to 94.9% for the comparable prior year. Expenses for
the core portfolio increased $1.1 million, or 5.5%, due primarily to expected
increases in real estate taxes, higher wages due to additional staffing at the
properties and higher utilities due to a mild winter in 1998.
Acquisition Portfolio. The eight acquisition properties (defined as
properties acquired subsequent to December 31, 1997) and three disposition
properties contributed approximately 60%, or $8.0 million, of the total rental
revenue increase and approximately $3.4 million of the total rental expense.
Five of the acquisition properties (comprising 1,942 apartment units) were
acquired during 1998 and three (comprising 1,008 units) were acquired during the
first quarter of 1999.
Development Portfolio. Springfield Station delivered 120 units during the
quarter for a total of 400 units delivered as of March 31, 1999. The project
provided net operating income of $0.5 million for the quarter.
Courthouse Place delivered 175 units during the quarter for a total of 278
units delivered as of March 31, 1999. The project provided net operating income
of $0.2 million for the quarter.
Property Service Businesses. The Company uses the equity method of
accounting for its 99% non-voting interest in the Property Service Businesses.
18
<PAGE>
The decrease in income from Property Service Businesses of $0.7 million in
the first quarter of 1999 compared to the prior year quarter is primarily due to
decreases of $0.3 million and $0.5 million, respectively, for Property
Management Services and Interior Construction Services. The former is
primarily due to seasonality of the corporate furnished apartment business which
was acquired in mid-1998. The latter is due to a decrease in general
contracting projects for affiliated commercial office partnerships.
Other. Corporate general and administrative expenses increased 9.1% compared
to the prior year quarter due primarily to costs related to the Company's
acquisition and development efforts. Interest expense increased $2.3 million
during the quarter, or 20.8%, primarily due to additional debt related to
acquisitions and development partially offset by lower interest rates on the
line of credit and refinanced debt.
LIQUIDITY AND CAPITAL RESOURCES
Summary. Net cash flow provided by operating activities increased $6.0
million from $27.0 million for the three months ended March 31, 1998 to $33.0
million for the three months ended March 31, 1999. The increase is primarily a
result of higher cash flow contributed by the core and acquisition portfolios
and higher accrued costs related primarily to acquisition properties.
Net cash flow of $82.5 million was used by investment activities during the
first quarter of 1999 compared to $39.2 million during the comparable prior year
period due primarily to the acquisition of three properties and one joint
venture interest in 1999 as well as further investments during the quarter in
the four projects under construction. Partially offsetting such outflows was
the $22.6 million in cash proceeds from the sale of The Manor.
Net cash flows provided by financing activities was $49.4 million for the
three months ended March 31, 1999 , primarily comprised of $68.9 million of net
cash inflow from borrowings aginst the properties, the line of credit and
construction loans less $19.6 million of dividends/distributions. Net cash
flows provided by financing activities of $15.0 million in the comparable prior
year period primarily consisted of $49.0 of inflow from the sale of preferred
stock less $16.7 million of net debt repayments and $17.0 million of
dividends/distributions.
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 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
19
<PAGE>
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.
Funds from Operations for the three months ended March 31, 1999 and 1998 are
computed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net Income of the Operating Partnership $19,551 $13,315
Perpetual preferred dividends (989) (626)
Depreciation of real property 8,228 6,387
Amortization of goodwill 107 --
Gain on sale of property (1,858) (3,120)
Extraordinary item - loss on debt
extinguishment 359 4,702
------- -------
Funds from Operations of the Operating
Partnership 25,398 20,658
Minority Interest (9,668) (9,109)
------- -------
Attributable to Shareholders $15,730 $11,549
======= =======
</TABLE>
Acquisitions
In January 1999, the Company acquired a 442-unit multifamily property in
Crystal City, Virginia ("Buchanan House") for a capitalized cost of $66.0
million which includes assumed debt of $7.4 million, a fair value adjustment to
debt of $0.5 million, initial capital improvement costs of $5.0 million and $0.4
million in acquisition related costs. Funding of $17.7 million was provided from
the 1998 sale of Marbury Plaza with the balance drawn on the Company's bank line
of credit.
In January 1999, the Company acquired a 139-unit multifamily property in
Chicago, Illinois ("Parkwest") for a capitalized cost of approximately $13.6
million, consisting of 138,111 net Operating Partnership Units valued at $4.3
million, assumed debt of $6.0 million, a fair value adjustment to debt of $0.4
million, initial capital improvement costs of $0.8 million, and $2.1 million of
cash. The assumed mortgage has an effective interest rate of 6.5% with
principal amortized using a 25-year amortization schedule and a final payment
due April 1, 2007.
In January 1999, the Company acquired a 427-unit multifamily property in
Chicago, Illinois ("Terrace") for a capitalized cost of approximately $25.7
million, consisting of 291,551 net Operating Partnership Units valued at $9.1
million, assumed debt of $13.7 million, a fair value
20
<PAGE>
adjustment to debt of $0.2 million, initial capital improvement costs of $1.2
million, and $1.5 million of cash.
Development
As of March 31, 1999, the Company had the following properties under
construction:
<TABLE>
<CAPTION>
Number Units Initial Estimated Estimated Estimated
of Units Delivered Delivery Completion Stabilization Cost
-------- --------- -------- ---------- ------------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Springfield Station 631 400 May, '98 Q3, 1999 Q4, 1999 $ 62
(Northern Virginia)
Courthouse Place 564 278 December, '98 Q3, 1999 Q4, 2000 69
(Rosslyn/Ballston)
One Superior Place 809 N/A Q3, 1999 Q2, 2000 Q4, 2000 115
(Chicago)
Park Connecticut 142 N/A Q1, 2000 Q2, 2000 Q3, 2000 27
(Washington, D.C.) ----- --- ----
2,146 678 $273
===== === ====
</TABLE>
In February 1999, the Company acquired for $8.6 million a parcel of land for
development in Chicago, Illinois.
Commitments
As of March 31, 1999, the Company had executed contracts to purchase
multifamily properties under construction as follows:
<TABLE>
<CAPTION>
Number Units Estimated Purchase Estimated
of Units Delivered Completion Date Purchase Price
-------- --------- ---------- -------- --------------
(in millions)
<S> <C> <C> <C> <C> <C>
New River Village 240 N/A Q2, 2000 Q4, 2000 $ 33
(Ft. Lauderdale, FL.)
Wilson Boulevard 220 N/A Q3, 2000 Q4, 2000 28
(Rosslyn/Ballston)
Ballston Place 383 N/A Q4, 2000 Q2, 2001 50
(Rosslyn/Ballston)
Reston Landing 400 N/A Q4, 1999 Q3, 2000 44
(Reston, VA.) ----- ----
1,243 $155
===== ====
</TABLE>
These contracts are contingent upon satisfactory completion of construction
and attainment of final certificates of occupancy by the owners. At March 31,
1999, the Company had posted three letters-of-credit totaling $7.7 million in
accordance with three of the contracts each to be drawn only in the event the
Company defaults on its contractual obligation to purchase the completed asset.
21
<PAGE>
Joint Ventures
In March 1999, the Company and J.P. Morgan formed a joint venture which
acquired the Renaissance, a 330-unit multifamily property in Tysons Corner,
Virginia for approximately $37 million. The joint venture plans to invest an
additional $2.0 million in initial capital improvements and has placed debt of
$19.0 million on the property. The debt carries an interest rate of 6.48% and
matures in February 2006. Ownership interests in the joint venture are held 75%
by J.P. Morgan and 25% by the Company. The Company's initial equity
contribution totaled $4.4 million consisting of 21,903 Operating Partnership
units valued at $0.7 million and cash of $3.7 million.
In May 1999, the Company formed two additional joint ventures with J.P.
Morgan. The first venture ("University Center JV") will develop a new 630-unit
multifamily property in Loudoun County, Virginia at the western end of the
Dulles Technology corridor. Ownership interests are held 60% by J.P. Morgan
and 40% by the Company. The joint venture intends to place debt financing for
50% of the project's estimated $60 million development cost. Construction is
expected to commence during the third quarter of 1999 with final completion in
2001. The Company's initial equity contribution consisted of land acquired in
1998 for $5.4 million less cash received of $3.0 million. A Company affiliate
will provide development, property management and marketing services to the
venture for a market rate fee. The affiliate will provide a construction
completion guarantee to the venture.
The second venture ("Springfield Station JV") was formed to own and operate
the Company's recently developed 631-unit Springfield Station property. The
Company sold a 52% interest in Springfield Station JV to J.P. Morgan and
received proceeds of approximately $50 million from the transaction. The joint
venture placed $37 million in debt financing on the property at 6.85% fixed
interest which matures on June 1, 2001. The Company provided a construction
completion guarantee on the project as well as a payment guarantee of $14.1
million of the debt. The construction completion guarantee expires on October 1,
1999. The debt guarantee will expire on or before the achievement of 92%
occupancy for 45 consecutive days. The Company will defer recognition of a $5.2
million gain on the sale until the guarantees have expired.
Debt
In February 1999, the Company repaid the $7.4 million mortgage on Buchanan
House through a draw on its line of credit and paid a prepayment penalty of $0.9
million.
In March 1999, the Company obtained a $38.0 million mortgage on Buchanan
House with an effective fixed interest rate of 6.67%. The loan is interest only
through March 2009, at which time principal amortization begins using a 30-year
amortization schedule with a balloon payment due February 1, 2011.
In March 1999, the Company repaid the mortgage on Terrace and obtained a new,
interest-only mortgage of $15.6 million at an effective rate of 6.64% with
principal due April 1, 2007. The Company paid a prepayment penalty of $0.2
million.
22
<PAGE>
As of March 31, 1999, the Company had mortgage indebtedness and other
borrowings, which carried a weighted average interest rate of 6.86%, as follows:
<TABLE>
<CAPTION>
Dollars in % of
Thousands Total
----------- -----------
<S> <C> <C>
Fixed rate debt:
Mortgages $681,796 76.9%
Variable rate debt:
$100M line of credit 52,000 5.9%
$185M line of credit 71,000 8.0%
Construction Loans 82,190 9.2%
-------- -----
$886,986 100.0%
======== =====
</TABLE>
As of March 31, 1999, the Company had $216.1 million of unused borrowing
capacity on lines of credit and construction loans. Amounts outstanding under
lines of credit averaged $112.3 million for the three months ended March 31,
1999 compared to $110.7 million for the three months ended March 31, 1998.
As of March 31, 1999, the Company's Debt to Total Market Capitalization Ratio
was 43.8% (based on 18.9 million common shares, 3.2 million convertible
preferred shares and 13.2 million partnership units outstanding at a common
stock price of $30.813 and $50 million of perpetual preferred stock) versus
40.3% as of December 31, 1998 and 34.7% as of March 31, 1998.
The Company's Interest Coverage Ratio for the three months ended March 31,
1999 was 3.24 to 1 compared to 3.01 for the comparable prior year period.
Capital Expenditures
For the three months ended March 31, 1999, total capital improvements were
$3.6 million, of which $3.1 million were for the core portfolio ($186 per unit).
Approximately 42% of the capital expenditures on the core portfolio in 1999 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 $ Average $
Spent Per
Expenditure Type (In Thousands) Core Unit
---------------- -------------- --------------
<S> <C> <C>
Installations $ 345 $ 20
Water saving devices 90 5
Renovations 429 25
Redevelopment 349 21
Other 94 6
------ ----
Total NOI generating
improvements 1,307 77
Non-NOI generating
improvements 1,837 109
------ ----
Total capital
expenditures - core
portfolio $3,144 $186
====== ====
</TABLE>
23
<PAGE>
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.
The Company's primary financial and operational software programs were
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 replaced one computer system which was not
year 2000 compliant at an estimated cost of approximately $1.6 million. The new
system will be depreciated over its estimated useful life of five years.
As part of Phase II, the Company has taken 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. Phase III was initiated in March 1999.
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.
24
<PAGE>
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults on Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
A Form 8-K dated January 5, 1999 was filed on January 20, 1999 to
report the Company's acquisition of the Buchanan House apartments.
Historical and pro forma financial information for this property
were included in a Form 8-K/A dated March 22, 1999 which was filed
on March 22, 1999.
A Form 8-K dated January 27, 1999 was filed on February 12, 1999 to
report the Company's acquisition of the Parkwest and Terrace
apartments.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
May 14, 1999 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.
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,871
<PP&E> 1,456,930
<DEPRECIATION> (235,005)
<TOTAL-ASSETS> 1,305,940
<CURRENT-LIABILITIES> 34,144
<BONDS> 886,986
0
138,294
<COMMON> 188
<OTHER-SE> 142,625
<TOTAL-LIABILITY-AND-EQUITY> 1,305,940
<SALES> 0
<TOTAL-REVENUES> 69,033
<CGS> 0
<TOTAL-COSTS> 35,786
<OTHER-EXPENSES> 2,209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,014
<INCOME-PRETAX> 19,910
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,910
<DISCONTINUED> 0
<EXTRAORDINARY> 359
<CHANGES> 0
<NET-INCOME> 9,755
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.53
</TABLE>
