<PAGE>
- -------------------------------------------------------------------------------
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UNITED STATES 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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 1-12303
SECURITY CAPITAL ATLANTIC INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 85-0415503
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SIX PIEDMONT CENTER, SUITE 600, 30305
ATLANTA, GEORGIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(404) 237-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 for the past 90 days.
Yes No X
The number of shares outstanding of the Registrant's common stock as of
November 13, 1996 was: 37,891,580
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<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets--September 30, 1996 (unaudited) and
December 31, 1995............................................ 3
Condensed Statements of Earnings--Three and nine months ended
September 30, 1996 and 1995 (unaudited)...................... 4
Condensed Statements of Cash Flows--Nine months ended
September 30, 1996 and 1995 (unaudited)...................... 5
Notes to Condensed Financial Statements...................... 6
Independent Accountants' Review Report....................... 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 15
PART II. Other Information
Item 4. Submission of Matters to Vote of Securities Holders.......... 22
Item 6. Exhibits and Reports on Form 8-K............................. 22
</TABLE>
2
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Real estate......................................... $1,083,742 $888,928
Less accumulated depreciation....................... 36,884 23,561
---------- --------
Net investments in real estate.................. 1,046,858 865,367
Cash and cash equivalents--unrestricted............. 5,430 6,494
Cash and cash equivalents--restricted tax-deferred
exchange proceeds.................................. 12,325 --
Other assets........................................ 20,858 13,963
---------- --------
Total assets.................................... $1,085,471 $885,824
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Line of credit.................................... $ 234,000 $190,000
Mortgages payable................................. 150,219 118,524
Distributions payable............................. 14,778 --
Accounts payable.................................. 20,340 11,030
Accrued expenses and other liabilities............ 15,836 9,332
---------- --------
Total liabilities............................... 435,173 328,886
---------- --------
Shareholders' equity:
Common shares (250,000,000 authorized, 32,951,580
issued and outstanding at September 30, 1996 and
27,762,817 issued and outstanding at December 31,
1995)............................................ 330 278
Additional paid-in capital........................ 695,668 576,824
Distributions in excess of net earnings........... (45,700) (20,164)
---------- --------
Total shareholders' equity...................... 650,298 556,938
---------- --------
Total liabilities and shareholders' equity...... $1,085,471 $885,824
========== ========
</TABLE>
See accompanying notes to the condensed financial statements.
3
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS NINE-MONTH PERIODS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income........................ $ 35,959 $ 26,969 $ 99,644 $ 74,251
Interest income...................... 132 64 308 160
--------- --------- --------- ---------
36,091 27,033 99,952 74,411
--------- --------- --------- ---------
Expenses:
Rental expenses...................... 10,204 7,400 27,519 19,632
Real estate taxes.................... 3,023 2,701 9,109 7,525
Property management fees paid to
affiliate........................... 1,116 946 3,009 2,502
Depreciation......................... 5,472 4,051 15,069 11,410
Interest............................. 3,718 4,463 11,824 13,287
REIT management fee paid to
affiliate........................... 2,786 1,814 7,490 5,041
General and administrative........... 132 292 479 498
Other................................ 102 33 180 52
--------- --------- --------- ---------
26,553 21,700 74,679 59,947
--------- --------- --------- ---------
Earnings from operations............... 9,538 5,333 25,273 14,464
Gain on disposition of investments..... 1,593 -- 2,255 --
--------- --------- --------- ---------
Net earnings........................... $ 11,131 $ 5,333 $ 27,528 $ 14,464
--------- --------- --------- ---------
Weighted average shares outstanding.... 32,952 23,340 30,384 21,200
--------- --------- --------- ---------
Net earnings per share................. $ 0.34 $ 0.23 $ 0.91 $ 0.68
--------- --------- --------- ---------
Distributions per share:
Declared............................. $ 0.81 $ 0.40 $ 1.65 $ 1.20
Paid................................. $ 0.42 $ 0.40 $ 1.26 $ 1.20
========= ========= ========= =========
</TABLE>
See accompanying notes to the condensed financial statements.
4
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities
Net earnings.............................................. $ 27,528 $ 14,464
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:
Depreciation and amortization........................... 16,396 12,493
Gain on disposition of investments...................... (2,255) --
Increase in accounts payable............................ 9,310 10,037
Increase in accrued expenses and other liabilities...... 6,504 9,006
Increase in other assets................................ (6,406) (2,019)
-------- --------
Net cash flow provided by operating activities........ 51,077 43,981
-------- --------
Investing activities:
Real estate investments................................... (218,907) (185,869)
Disposition of investment property........................ 36,549 --
Tax-deferred exchange proceeds held in escrow............. (12,325) --
-------- --------
Net cash flow used in real estate investing
activities........................................... (194,683) (185,869)
-------- --------
Financing activities:
Repurchase of shares...................................... -- (55,000)
Proceeds from sale of shares.............................. 118,896 159,841
Proceeds from line of credit.............................. 162,000 187,000
Proceeds from mortgage debt............................... 20,500 --
Payments on line of credit................................ (118,000) (112,000)
Distributions paid........................................ (38,286) (25,439)
Debt issuance costs incurred.............................. (1,816) (4,167)
Principal payments at maturity............................ -- (6,378)
Regularly scheduled principal payments on mortgages
payable.................................................. (752) (421)
-------- --------
Net cash flow provided by financing activities........ 142,542 143,436
-------- --------
Net increase (decrease) in cash and cash equivalents........ (1,064) 1,548
Cash and cash equivalents, beginning of period.............. 6,494 6,262
-------- --------
Cash and cash equivalents, end of period.................... $ 5,430 $ 7,810
======== ========
Non-cash investing and financing activities:
Assumption of mortgages payable upon purchase of
multifamily properties................................... $ 11,947 $ 10,178
</TABLE>
See accompanying notes to the condensed financial statements.
5
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 GENERAL
The financial statements of Security Capital Atlantic Incorporated
("ATLANTIC") as of September 30, 1996 and for the three- and nine-month periods
ended September 30, 1996 and 1995 are unaudited and certain information and
footnote disclosures normally included in financial statements have been
omitted. While management of ATLANTIC believes that the disclosures presented
are adequate, these interim financial statements should be read in conjunction
with the financial statements and notes included in ATLANTIC's financial
statements for the years ended December 31, 1995 and 1994 and the period from
October 26, 1993 (inception) through December 31, 1993.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of ATLANTIC's financial statements for the
interim periods presented. The results of operations for the nine-month periods
ended September 30, 1996 and 1995 are not necessarily indicative of the results
to be expected for the entire year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The share and per share amounts included in the financial statements reflect
the reverse stock split discussed in Note 4.
NOTE 2 SPIN-OFF OF HOMESTEAD VILLAGE PROPERTIES
On October 17, 1996 ATLANTIC completed the spin-off of its moderate priced,
purpose-built, extended-stay lodging facilities known as Homestead Village(R)
properties to Homestead Village Incorporated ("Homestead"). In the transaction,
ATLANTIC contributed assets which consisted of one operating property, 25
properties under construction or in planning (or the rights to acquire such
properties) and $16.8 million in cash. In addition, ATLANTIC entered into a
funding commitment agreement to provide secured financing of up to $111.1
million to Homestead for purposes of completing the development and
construction of the properties contributed in the transaction.
The transaction resulted in ATLANTIC receiving 4,201,220 shares of common
stock of Homestead in exchange for the cash and properties contributed and
2,818,517 warrants to purchase Homestead common shares at $10 per share in
exchange for entering into the funding commitment agreement. On November 12,
1996 ATLANTIC will distribute the Homestead common stock and warrants to its
shareholders of record on October 29, 1996. ATLANTIC shareholders will receive
.110875 shares of Homestead common stock and .074384 Homestead warrants for
each share of ATLANTIC common stock owned. ATLANTIC will receive $98.0 million
of convertible mortgage notes from Homestead in exchange for funding up to
$111.1 million under the funding commitment agreement. The difference between
the amounts funded and the convertible mortgage notes received of $13.1 million
represents a mortgage note premium which will be amortized as a reduction to
interest income over the term of the convertible mortgage notes.
ATLANTIC will realize a gain of $4,076,000 (before deducting expenses
associated with the transaction) representing the excess of the value of the
Homestead common stock received over the recorded basis of the properties and
cash contributed. The Homestead warrants received represent a funding
commitment fee which has been valued at $6.5 million. The conversion feature of
the convertible mortgage notes has been valued at
6
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
$6.9 million (assuming full funding of the funding commitment). These deferred
credits will be amortized as an increase to interest income over the term of
the convertible mortgage notes.
The convertible mortgage notes received from Homestead will bear interest at
9% per annum, will be due October 2006, will not be callable until 2001 and
will be convertible at the option of the holder into one share of Homestead
common stock for every $11.50 of principal amount outstanding. Upon full
funding of ATLANTIC's convertible mortgage notes, its conversion rights would
represent a 15.4% ownership in Homestead assuming conversion of all
outstanding convertible mortgage notes and exercise of all outstanding
warrants. The effective yield on the convertible mortgage notes, assuming full
conversion of the convertible mortgage notes and exercise of all of the
Homestead warrants, is estimated to be 8.46%, after giving effect to the
mortgage note premium, funding commitment fee and the conversion value of the
convertible mortgage notes. At September 30, 1996 no funds had been advanced
pursuant to the funding commitment agreement and there were no convertible
mortgage notes outstanding.
For the nine months ended September 30, 1996, ATLANTIC's one operating
Homestead Village property, which began operations in July 1996, accounted for
$211,000 of ATLANTIC's net operating income or approximately 0.4%.
NOTE 3 REAL ESTATE
Investments in Real Estate
Investments in real estate, at cost, were as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 DECEMBER 31, 1995
----------------- -----------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating properties:
Acquired.......................... $ 820,964 16,323 $757,986 15,355
Developed......................... 58,495 1,212 23,097 468
---------- ------ -------- ------
879,459 17,535 781,083 15,823
---------- ------ -------- ------
Developments under construction..... 168,209 4,632 94,094 2,958
Developments in planning:
Owned............................. 4,689 597(1) 9,830 1,258(1)
Under control (2)................. -- 1,780(1) -- 922(1)
---------- ------ -------- ------
4,689 2,377 9,830 2,180
Land held for future development.... 2,083 -- 1,294 --
---------- ------ -------- ------
Total multifamily (3)................. 1,054,440 24,544 886,301 20,961
---------- ------ -------- ------
Extended-stay lodging (4):
Operating properties:
Developed......................... 5,017 137 -- --
---------- ------ -------- ------
Developments under construction..... 15,271 1,054 1,199 137
Developments in planning:
Owned............................. 9,014 844(1) 1,428 246(1)
Under control (5)................. -- 1,480(1) -- 2,132(1)
---------- ------ -------- ------
9,014 2,324 1,428 2,378
---------- ------ -------- ------
Total extended-stay lodging........... 29,302 3,515 2,627 2,515
---------- ------ -------- ------
Total........................... $1,083,742 28,059 $888,928 23,476
========== ====== ======== ======
</TABLE>
- --------
(1) Unit information is based upon management's estimates.
(2) ATLANTIC's investment as of September 30, 1996 and December 31, 1995 for
multifamily developments under control was $754,000 and $576,000,
respectively, and is reflected in the "Other assets" caption of ATLANTIC's
balance sheets.
7
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(3) At September 30, 1996, ATLANTIC had unfunded commitments for multifamily
developments under construction of $111.7 million, for a total completed
construction cost of $280.0 million. Cost for multifamily developments in
planning shown above are primarily for land acquisitions.
(4) ATLANTIC closed an agreement on October 17, 1996 to spin-off all of its
extended-stay lodging assets. The spin-off is discussed in Note 2.
(5) ATLANTIC's investment as of September 30, 1996 and December 31, 1995 for
extended-stay lodging developments under control was $1.7 million and $1.4
million, respectively, and is reflected in the "Other assets" caption of
ATLANTIC's balance sheets. These amounts were included in ATLANTIC's
contribution under the Homestead spin-off.
The change in investments in real estate, at cost, for the nine-month period
ended September 30, 1996 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1996.................................... $ 888,928
Acquisitions and renovation expenditures...................... 96,867
Capital improvements.......................................... 2,158
Development expenditures, including land acquisitions......... 131,829
Dispositions.................................................. (36,040)
----------
Balance at September 30, 1996................................. $1,083,742
==========
</TABLE>
ATLANTIC has acquired seven operating properties aggregating 1,752 units at
a cost of $88.8 million in 1996.
Third Party Owner-Developers
To enhance its flexibility in developing and acquiring multifamily
properties, ATLANTIC has and will enter into presale agreements with third
party owner-developers to acquire properties developed by such owner-
developers where the developments meet ATLANTIC's investment criteria.
ATLANTIC has and will fund such developments through development loans to such
owner-developers. In addition, to provide greater flexibility for the use of
land acquired for development and to dispose of excess parcels, ATLANTIC plans
to make mortgage loans to Atlantic Development Services Incorporated
("Atlantic Development Services") to purchase land for development. ATLANTIC
owns all of the preferred stock of Atlantic Development Services, which
entitles ATLANTIC to substantially all of the net operating cash flow (95%) of
Atlantic Development Services. All of the common stock of Atlantic Development
Services is owned by an unaffiliated trust. The common stock is entitled to
receive the remaining 5% of net operating cash flow. As of September 30, 1996
the outstanding balance of development and mortgage loans made by ATLANTIC to
third party owner-developers and Atlantic Development Services aggregated
$15,354,000 and none, respectively. The activities of Atlantic Development
Services and third party owner development projects to which development loans
are made are consolidated with ATLANTIC's activities and all intercompany
transactions have been eliminated in consolidation.
Gains and Losses from Sales or Impairments of Real Estate
ATLANTIC's real estate investments have been made with a view to effective
long-term operation and ownership. Based upon ATLANTIC's market research and
in an effort to optimize its portfolio composition, ATLANTIC may from time to
time seek to dispose of assets that in management's view do not meet
ATLANTIC's long-term investment criteria and redeploy the proceeds therefrom,
preferably through tax-deferred exchanges, into assets that are more
consistent with ATLANTIC's investment objectives.
As a result of this asset optimization strategy, ATLANTIC disposed of three
operating properties aggregating 784 units during the nine months ended
September 30, 1996. For financial reporting purposes a gain was recognized on
each disposition with the total gain aggregating $2,255,000. These three
properties accounted
8
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
for $1,574,000 of net operating income during the nine-month period ended
September 30, 1996. Each disposition has been included in a tax-deferred
exchange. At September 30, 1996, ATLANTIC held the proceeds from one of these
dispositions aggregating $12,325,000 in an interest-bearing escrow account.
These funds were used in the acquisition of an operating property in October
1996, completing the tax-deferred exchange.
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting For
The Impairment of Long-Lived Assets And For Long-Lived Assets To Be Disposed
Of, adopted by ATLANTIC effective January 1, 1996, requires that an investment
held for disposition be carried at the lower of the investment's depreciated
cost or fair market value less cost to sell. At September 30, 1996 ATLANTIC had
no properties held for sale.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. As of
September 30, 1996, such investments are carried at cost, which is not in
excess of fair market value and no provisions for possible losses have been
made.
NOTE 4 LINE OF CREDIT AND MORTGAGES PAYABLE
Variable Interest Rate Swap Agreements
ATLANTIC has effectively mitigated its variable interest rate debt exposure
by entering into swap agreements covering all of its variable interest rate
mortgages and $100 million of borrowings on its line of credit. Under the swap
agreements ATLANTIC pays a fixed rate of interest to a swap counter party
pursuant to one agreement and receives a variable rate of interest from a swap
counter party pursuant to another agreement. The amounts received from the
variable rate agreement are structured such that the amount received will
closely approximate the amount of variable interest due on the underlying line
of credit or mortgage note borrowings. The difference between the variable
amount received and the fixed amount paid represents either the cost or the
benefit of the interest rate swap agreement and is recorded as an increase or
decrease to the variable interest paid on the underlying debt instrument.
Line of Credit
In June 1996, ATLANTIC increased its line of credit with Morgan Guaranty
Trust Company of New York, as agent for a group of lenders ("MGT"), to $350
million. Borrowings bear interest at prime, or at ATLANTIC's option, LIBOR plus
1.50% or the certificate of deposit rate (as defined) plus 1.625%.
Additionally, there is a commitment fee of .1875% per annum on the average
unfunded line of credit balance. The line is collateralized by multifamily
properties having an aggregate undepreciated cost of $457,018,000 at September
30, 1996, which allows ATLANTIC to borrow up to $273 million on the line of
credit. ATLANTIC has additional assets which could be pledged as security on
the line of credit which would allow ATLANTIC to borrow up to $350 million. The
line of credit matures June 1998 and may be extended for one year with the
approval of MGT and other participating lenders. ATLANTIC used the proceeds
from its initial public offering of common shares in October 1996 to repay
borrowings on the line of credit (as discussed in Note 5). The outstanding
balance on the line of credit was $177 million on October 18, 1996.
In August 1995, ATLANTIC entered into a swap agreement with Goldman Sachs
Capital Markets, L.P. covering $100 million of borrowings under the line of
credit. Under this one-year agreement which became effective on February 5,
1996, ATLANTIC pays a fixed rate of interest of 7.46%. Upon expiration of the
existing swap agreement on February 5, 1997, a swap agreement with MGT will
take effect. The MGT agreement provides for a fixed rate of 7.45% on $100
million of borrowings through February 5, 1998. ATLANTIC paid $336,000 more in
interest during the nine months ended September 30, 1996 than was received
under the swap agreement.
All debt incurrences under the line of credit are subject to certain
covenants. ATLANTIC must maintain a debt to tangible net worth ratio of not
greater than 2 to 1 and an adjusted net worth (as defined) of at least $325
million. ATLANTIC's interest payment coverage (as defined) is required to be
not less than 2 to 1. Restricted
9
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
payments or distributions (as defined) may not exceed 95% of ATLANTIC's funds
from operations (as defined) for the preceding four quarters. ATLANTIC has
been granted a waiver of the restricted payments covenant. This waiver allows
for restricted payments not to exceed 97% of funds from operations through the
third quarter of 1997. ATLANTIC is in compliance with all such covenants.
Mortgages Payable
Mortgages payable consisted of the following at September 30, 1996 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
INTEREST MATURITY PERIODIC PRINCIPAL
PROPERTY RATE DATE PAYMENT TERMS BALANCE
- -------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cahaba Forest II............... 7.125% 03/01/29 fully amortizing $ 8,037
Cameron at Hickory Grove....... 8.0% 07/10/03 (1) 5,992
Cameron Villas I............... 8.75% 04/01/24 fully amortizing 6,358
Country Oaks................... 7.655% 07/01/02 (2) 5,947
Country Place Village I........ 7.75% 11/01/00 (3) 2,013
--------
28,347
--------
Tax exempt fixed rate or variable
rate subject to swap agreements
(4):
Azalea Park.................... (5) 06/01/25 interest only 15,500
Cameron Brook.................. (5) 06/01/25 interest only 19,500
Cameron Station................ 6.0% 06/01/07 interest only 14,500
Clairmont Crest................ (5) 06/01/25 interest only 11,600
Forestwood..................... (5) 06/01/25 interest only 11,485
Foxbridge...................... (5) 06/01/25 interest only 10,400
The Greens..................... (5) 06/01/25 interest only 10,400
Parrot's Landing............... (5) 06/01/25 interest only 15,835
Sun Pointe Cove................ (5) 06/01/25 interest only 8,500
WintersCreek................... (5) 06/01/25 interest only 5,000
Less amounts held in principal
reserve fund (6).............. (848)
--------
121,872
--------
$150,219
========
Total annual weighted average
interest rate............... 6.76%
========
</TABLE>
- --------
(1) Interest and principal payments due monthly; balloon payment of $5,556,000
due at maturity.
(2) Interest and principal payments due monthly; balloon payment of $5,539,000
due at maturity.
(3) Interest and principal payments due monthly; balloon payment of $1,849,000
due at maturity.
(4) These properties, in addition to others, are held by Security Capital
Atlantic Multifamily Incorporated, a wholly-owned subsidiary of ATLANTIC.
Security Capital Atlantic Multifamily Incorporated is a legal entity that
is separate and distinct from ATLANTIC with separate assets and
liabilities and business operations.
(5) Interest rate is fixed through swap agreements executed in conjunction
with the credit enhancement agreement with the Federal National Mortgage
Association discussed below.
(6) ATLANTIC has a thirty-year credit enhancement agreement with the Federal
National Mortgage Association related to the tax exempt bond issues. This
credit enhancement agreement requires ATLANTIC to make monthly payments on
each mortgage, based upon a thirty-year amortization, into a principal
reserve account.
10
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
ATLANTIC's swap agreements related to its variable rate mortgages are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT OF FIXED
BONDS EXPIRATION PAYMENT RATE ISSUER
--------- ---------- ------------ ------
<C> <C> <S> <C>
$23.1 million June 2002 5.18% General Re Financial Products Corporation
$64.6 million June 2005 5.42% Morgan Guaranty Trust Company of New York
$5.0 million March 2006 4.82% Morgan Guaranty Trust Company of New York
$15.5 million August 2006 5.34% Morgan Stanley Derivative Products Inc.
-----
Weighted average
interest rate 5.33%
=====
</TABLE>
ATLANTIC paid $1,331,000 more in interest during the nine months ended
September 30, 1996 than was received under the swap agreements. The swap
agreements cover the the principal amount of the bonds, net of amounts
deposited in the principal reserve fund. ATLANTIC pays interest on that portion
of bonds not covered by the swap agreements at the variable rates as provided
by the mortgage agreements.
Real estate with an aggregate undepreciated cost at September 30,1996 of
$40,191,000 and $206,578,000 serves as collateral for the conventional
mortgages payable and the tax exempt mortgages payable, respectively. Based on
prevailing market borrowing rates, the fair value of the mortgages payable was
not materially different from the book value at September 30, 1996.
The change in mortgages payable for the nine-month period ended September 30,
1996 is as follows (in thousands):
<TABLE>
<S> <C>
Balances at January 1, 1996..................................... $118,524
Mortgage proceeds............................................... 20,500
Mortgages assumed............................................... 11,947
Regularly scheduled principal payments.......................... (752)
--------
Balances at September 30, 1996.................................. $150,219
========
</TABLE>
ATLANTIC is in compliance with all debt covenants required by the mortgage
agreements.
Interest Expense
Interest paid in cash on all outstanding debt for the nine months ended
September 30, 1996 was $17,877,000, including $7,587,000 of interest
capitalized during construction. Interest paid in cash on all outstanding debt
for the nine months ended September 30, 1995 was $13,733,000, including
$3,012,000 of interest capitalized during construction.
Amortization of loan costs included in interest expense for the nine months
ended September 30, 1996 and 1995 was $1,327,000 and $1,083,000, respectively.
NOTE 5 SHAREHOLDERS' EQUITY
Shares Authorized
At September 30, 1996, 250,000,000 shares of common stock, par value $0.01
per share, were authorized. ATLANTIC's Board of Directors may classify or
reclassify any unissued shares of ATLANTIC's stock from
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SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
time to time by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms or conditions of redemption of such shares. No such
shares have been reclassified, except in connection with the Purchase Rights
discussed below, and none are issued or outstanding.
Reverse Stock Split
On September 10, 1996, the shareholders of ATLANTIC authorized a one-for-two
reverse stock split of ATLANTIC's common stock. A transfer from the common
shares account to additional paid-in capital was made to reflect the reduced
number of shares outstanding after the split. All references in the
accompanying financial statements to the number of common shares and per share
amounts reflect the reverse stock split.
Capital Offerings
In June 1996, ATLANTIC completed a private offering that began in November
1995 and raised a total of $250 million through the sale of 10,862,278 shares
(9,612,278 shares sold at $23.00 per share and 1,250,000 shares sold at $23.136
per share). Of the total, $119.3 million was raised in 1996 through the sale of
5,188,763 shares.
Security Capital Group Incorporated's ("SCG") third and final Put Obligation
related to ATLANTIC shares was paid by SCG on July 1, 1996. This Put Obligation
was not assumed by ATLANTIC.
On October 18, 1996 ATLANTIC completed an initial public offering of
4,940,000 common shares at a price of $24.00 per share. The shares, excluding
the 416,666 shares sold to SCG, were sold through an underwritten offering. The
proceeds from the sale of these 4,940,000 common shares, net of underwriters'
commissions and other expenses, were approximately $110.3 million. The proceeds
were used to repay borrowings under ATLANTIC's $350 million line of credit.
Distributions
ATLANTIC paid quarterly distributions of $0.42 per share on March 28, 1996,
June 27, 1996 and September 27, 1996. On September 16, 1996 ATLANTIC declared a
distribution of $0.39 per share for the fourth quarter. This distribution,
payable on December 16, 1996 to shareholders of record as of December 2, 1996,
has been accrued as of September 30, 1996. On November 12, 1996, ATLANTIC will
make a non-cash distribution of all of the Homestead common stock and warrants
received as a result of the spin-off of the Homestead Village properties as
discussed in Note 2.
Purchase Rights
On March 12, 1996, the Board of Directors declared and paid a dividend of one
preferred share purchase right ("Purchase Right") for each common share
outstanding at the close of business on March 12, 1996 to the holders of
ATLANTIC's common shares on that date. Holders of additional common shares
issued after March 12, 1996 and prior to the expiration of the rights on March
12, 2006 will be entitled to one Purchase Right for each such additional common
share.
Each Purchase Right entitles the holder, under certain circumstances, to
purchase from ATLANTIC two one-hundredths of a share of non-redeemable Series A
Junior Participating Preferred Stock of ATLANTIC, par value $0.01 per share
(the "Participating Preferred Shares"), at a price of $40 per one one-hundredth
of a Participating Preferred Share, subject to adjustment. ATLANTIC has
designated two one-hundredths of the total shares of common stock outstanding
at any point in time as Participating Preferred Shares. Purchase Rights are
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SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONCLUDED)
exercisable when a person or group of persons (other than certain affiliates of
ATLANTIC) acquire 20% or more of the outstanding ATLANTIC common shares or
announces a tender offer for 25% or more of the outstanding ATLANTIC common
shares. Under certain circumstances, each Purchase Right entitles the holder to
purchase, at the Purchase Right's then current exercise price, a number of
ATLANTIC common shares having a market value of twice the Purchase Right's
exercise price. The acquisition of ATLANTIC pursuant to certain mergers or
other business transactions would entitle each holder to purchase, at the
Purchase Right's then current exercise price, a number of the acquiring
company's common shares having a market value at that time equal to twice the
Purchase Right's exercise price. The Purchase Rights held by certain 20%
shareholders (other than certain affiliates of ATLANTIC) would not be
exercisable. As of September 30, 1996, ATLANTIC has no Participating Preferred
Shares outstanding and the events required to exercise the Purchase Rights have
not occurred. Therefore, the Purchase Rights dividend has no value and has not
been recorded in the financial statements.
Option Plan
On March 12, 1996, ATLANTIC adopted its Share Option Plan for Outside
Directors (the "Option Plan"). Under the Option Plan, there are 100,000 Shares
approved which can be granted to Outside Directors. All Options granted are for
a term of five years and are exercisable in whole or in part. The exercise
price of the Options granted may not be less than the fair market value on the
date of grant. On October 14, 1996, each of the three Outside Directors serving
on that date was granted an Option to purchase 1,000 Shares at the initial
public offering price of $24.00 per share. Other than the Options discussed
above, no other Options were outstanding.
NOTE 6 REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
ATLANTIC has entered into a REIT management agreement with Security Capital
(Atlantic) Incorporated (the "REIT Manager"), to provide REIT management
services to ATLANTIC. The REIT Manager is a wholly-owned subsidiary of SCG,
which owns 56.9% of ATLANTIC's common shares after the completion of ATLANTIC's
initial public offering in October 1996. The REIT management agreement is
renewable annually, subject to a determination by ATLANTIC's independent
Directors that the REIT Manager's performance has been satisfactory and that
the compensation payable to the REIT Manager is fair.
SCG Realty Services Atlantic Incorporated ("SCG Realty Services") began
managing properties for ATLANTIC on May 12, 1994 and currently manages
approximately 84% of ATLANTIC's multifamily properties. SCG owns 100% of SCG
Realty Services' voting shares. Rates for services performed by SCG Realty
Services are reviewed annually by a third party and are subject to approval by
ATLANTIC's independent Directors and are at rates prevailing in the markets in
which ATLANTIC operates.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have reviewed the accompanying condensed balance sheet of Security
Capital Atlantic Incorporated as of September 30, 1996, the statements of
earnings and statements of cash flows for the three-month and nine-month
periods ended September 30, 1996 and 1995. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year, with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Security Capital Atlantic Incorporated as of
December 31, 1995, and the related statements of earnings, shareholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated January 26, 1996, except for Note 3, as to which the date is
February 5, 1996, and Note 9, as to which the date is September 10, 1996, we
expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed balance sheet
as of December 31, 1995, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Dallas, Texas
October 18, 1996
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Security Capital
Atlantic Incorporated's ("ATLANTIC") condensed financial statements and notes
thereto included elsewhere herein.
The statements contained in this discussion that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Among the important factors that could cause ATLANTIC's actual results to
differ materially from those expressed in the forward-looking statements are
(i) changes in general economic conditions in the markets that could impact
demand for ATLANTIC's product and (ii) changes in financial markets and
interest rates that could adversely affect ATLANTIC's cost of capital and its
ability to meet its financing needs and obligations.
OVERVIEW
ATLANTIC's operating results depend primarily upon income from multifamily
properties, which is substantially influenced by (i) the demand for and supply
of multifamily units in ATLANTIC's primary target market and submarkets, (ii)
operating expense levels, (iii) the effectiveness of property level
operations, and (iv) the pace and price at which ATLANTIC can acquire and
develop additional multifamily properties. Capital and credit market
conditions which affect ATLANTIC's cost of capital also influence operating
results.
ATLANTIC's target market cities and submarkets have benefitted substantially
in recent periods from demographic trends (including population and job
growth) which increase the demand for multifamily units. Consequently, rental
rates for multifamily units have increased more than the inflation rate for
the last two years and are expected to continue to experience such increases
throughout 1996.
RESULTS OF OPERATIONS
Nine-month Periods Ended September 30, 1996 and 1995
At September 30, 1996 ATLANTIC's total portfolio consisted of 28,059 units
(17,672 operating units, 5,686 units under construction and 4,701 units in
planning) with a total budgeted cost, including budgeted renovations and total
budgeted development expenditures, of $1.47 billion. At September 30, 1995
ATLANTIC's total portfolio consisted of 19,042 units (14,536 operating units,
3,106 units under construction and 1,400 units in planning) with a total
budgeted cost of $977.6 million.
Excluding the Homestead Village(R) properties that were spun-off in October
1996, as more fully described below, ATLANTIC's total portfolio of multifamily
properties at September 30, 1996 consisted of 24,544 units (17,535 operating
units, 4,632 units under construction and 2,377 units in planning) with a
total budgeted cost, including budgeted renovations and total budgeted
development expenditures, of $1.31 billion. At September 30, 1995 ATLANTIC's
total portfolio of multifamily properties consisted of 18,908 units (14,536
operating units, 3,106 units under construction and 1,266 units in planning)
with a total budgeted cost of $972.9 million.
At September 30, 1996, ATLANTIC had 64 operating multifamily properties and
six multifamily properties in lease-up as compared to 53 operating garden
properties and three multifamily properties in lease-up at September 30, 1995.
Net earnings for the nine months ended September 30, 1996 were $27.5 million
($0.91 per share) as compared to $14.5 million ($0.68 per share) for the nine
months ended September 30, 1995.
Property Operations
Rental revenues for the nine months ended September 30, 1996 were $99.6
million as compared to $74.3 million for the same period in 1995, an increase
of $25.3 million. Rental expenses, real estate taxes, property management fees
paid to an affiliate and depreciation increased during the nine months ended
September 30,
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1996 from the same period in 1995 by $7.9 million, $1.6 million, $0.5 million
and $3.7 million, respectively. Property level net operating income (defined
as rental income plus other real estate income, less rental expenses, real
estate taxes and property management fees paid to an affiliate) during the
nine months ended September 30, 1996 and 1995 were $60.0 million and $44.6
million, respectively. This increase in net operating income is attributable
to: (i) the inclusion in 1996 of a full period of operations for the 15
properties acquired in 1995 and the two development properties that were
completed in 1995; (ii) the acquisition of seven properties in 1996; and (iii)
the completion and leasing of newly-constructed units in 1996. Two of the
acquisitions made in 1996 were made under ATLANTIC's asset optimization
program whereby assets that, in ATLANTIC's view do not meet ATLANTIC's long-
term objective, are disposed of and the proceeds redeployed, preferably
through tax-deferred exchanges, into assets that ATLANTIC believes will offer
better long-term prospects. These two assets were acquired with the proceeds
from two dispositions in 1996. Consequently, the increase in net operating
income attributable to the seven acquisitions in 1996 was partially offset by
the decrease in net operating income attributable to the properties that were
disposed of through the exchanges. In addition, net operating income for the
nine months ended September 30, 1996 as compared to the same period in 1995
was affected by the disposition of two other properties in the fourth quarter
of 1995.
Properties Fully Operating Throughout Both Periods
For the 35 properties that were fully operational through the nine-month
periods ended September 30, 1996 and 1995, net operating income (as adjusted
for pre-stabilized versus stabilized accounting differences) increased 6.78%
as a result of a 3.33% rental revenue increase and a 2.52% decrease in
operating expenses for such properties for the nine-month period ended
September 30, 1996 as compared to the same period in 1995. The accounting
differences result from capitalizing certain costs during the period after
acquisition when a property is being repositioned and is classified as pre-
stabilized and expensing those costs once repositioning is completed and the
property is classified as stabilized.
Lease-up Deficits
ATLANTIC has adopted an accounting policy related to properties in the
development and lease-up stage whereby substantially all operating expenses
are expensed as incurred. ATLANTIC treats each unit in a property separately
for cost accumulation, capitalization and expense recognition purposes. Prior
to the commencement of leasing activities, interest as well as other
construction costs are capitalized and reflected on the balance sheet as
construction in progress. Once a unit is placed in service, all expenses
allocated to that unit, including interest, are expensed as incurred. During
the lease-up phase, the sum of interest expense and other operating expenses
on completed units (including pre-opening marketing expenses) will typically
exceed rental revenues, resulting in a "lease-up deficit."
The schedule below presents only those properties which were dilutive during
each period. Accordingly different properties may be included in different
periods. The "lease-up deficit" charged to and included in results of
operations during 1996 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996
--------- -------- -------------
<S> <C> <C> <C>
Rental income $1,502 $1,233 $ 891
Rental expenses (excluding depreciation and
amortization)................................ 660 487 404
------ ------ -----
Net operating income.......................... 842 746 487
Interest expense.............................. 1,159 902 620
------ ------ -----
Lease-up deficit.............................. $ (317) $ (156) $(133)
====== ====== =====
</TABLE>
Development Dilution
Development activities resulted in dilution of $.02 per share for the third
quarter of 1996 and $.07 per share for the first nine months of 1996 when
compared to ATLANTIC's results of operations that would have occurred had
ATLANTIC invested its development expenditure dollars in the acquisition of
operating properties.
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Although properties in lease-up or under development have a short term
dilutive impact they are expected to add significantly to ATLANTIC's long term
performance as they reach stabilization starting in the third quarter of 1997.
Interest Expense
Interest expense decreased $1.5 million for the nine months ended September
30, 1996 as compared to the same period in 1995. Interest expense is a
function of mortgage interest, line of credit interest and capitalized
interest.
Mortgage interest expense increased $1.0 million for the nine months ended
September 30, 1996 as compared to the same period in 1995 as a result of
additional mortgages aggregating $32.4 million in 1996 incurred in connection
with property acquisitions.
Line of credit interest expense increased $2.1 million for the nine months
ended September 30, 1996 as compared to the same period in 1995. This increase
is primarily a function of an increase in average outstanding balances ($202.9
million in 1996 versus $157.7 million in 1995) partially offset by a lower
average daily interest rate (7.40% in 1996 versus 7.95% in 1995).
The increases in interest expense were offset by an increase in capitalized
interest of $4.6 million ($7.6 million in 1996 versus $3.0 million in 1995).
This increase in capitalized interest is the result of ATLANTIC's increased
development activity in 1996 over 1995 (average assets under development in
1996 were $67.7 million as compared to $37.9 million in 1995). ATLANTIC's
development activity is expected to continue at the current level or higher
throughout 1997.
REIT Management Fee Paid to Affiliate
The REIT management fee paid by ATLANTIC increased by $2.4 million during
the nine months ended September 30, 1996 as compared to the nine months ended
September 30, 1995. Because the REIT management fee fluctuates with the level
of ATLANTIC's cash flow calculated before the REIT management fee, this
increase is expected based upon the increases in other revenue and expense
items experienced by ATLANTIC during the nine months ended September 30, 1996.
In the future, interest income recognized on the convertible mortgage notes
made by ATLANTIC as provided in the funding commitment agreement entered into
as part of the spin-off of ATLANTIC's Homestead Village properties will not be
included in the calculation of the REIT management fee to be paid by ATLANTIC.
See "--Liquidity and Capital Resources." Because this interest income is not
included in cash flow for purposes of calculating the REIT management fee, the
REIT management fee calculated as a percentage of ATLANTIC's funds from
operations will decline as the convertible mortgage notes are funded and the
related interest income increases.
Gains on Dispositions and Valuation of Long-Lived Investments
ATLANTIC develops and acquires multifamily properties with a view to
effective long-term operation and ownership. Based upon ATLANTIC's market
research and in an effort to optimize its portfolio composition, ATLANTIC may
from time to time seek to dispose of assets that in management's view do not
meet ATLANTIC's long-term investment objective and redeploy the proceeds
therefrom, preferably through tax-deferred exchanges, into assets that in
ATLANTIC's view offer better long-term growth prospects. As a result of this
asset optimization strategy, ATLANTIC disposed of three operating properties
aggregating 784 units during the nine months ended September 30, 1996. For
financial reporting purposes, a gain was recognized on each disposition with
the total gain aggregating $2,255,000. These three properties accounted for
$1,574,000 of net operating income during the nine-month period ended
September 30, 1996. Each disposition has been included in a tax-deferred
exchange. At September 30, 1996, ATLANTIC held the proceeds from one of these
dispositions aggregating $12,325,000 in an interest-bearing escrow account.
These funds were used in the acquisition of an operating property in October
1996, completing the tax-deferred exchange.
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Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. ATLANTIC
has not recognized any losses as a result of such evaluation. ATLANTIC's real
estate investments are carried a cost, which is not in excess of fair market
value. Subsequent to September 30, 1996, ATLANTIC entered into an agreement to
dispose of an operating multifamily property located in Washington, D.C.
ATLANTIC expects the disposition to be completed by the end of 1996 with an
estimated gain on the disposition of approximately $4 million.
Three-month Periods Ended September 30, 1996 and 1995
Property revenues, operating expenses, depreciation, property level net
operating income and net earnings for the three months ended September 30,
1996 compared to the three months ended September 30, 1995 reflect changes
similar to those discussed in the preceding paragraphs for the comparison of
the nine months ended on the same dates. The changes are substantially
attributable to the same reasons discussed in the preceding paragraphs for the
nine months periods ended September 30, 1996 and 1995.
Spin-Off of Homestead Village Assets
As described under "--Liquidity and Capital Resources" ATLANTIC completed
the spin-off of its Homestead Village properties on October 17, 1996. For the
nine months ended September 30, 1996, ATLANTIC's one operating Homestead
Village property, which began operations in July 1996, accounted for $211,000
of ATLANTIC's property level net operating income (approximately 0.4% of
ATLANTIC's total property level net operating income).
ENVIRONMENTAL MATTERS
ATLANTIC is not aware of any environmental condition on any of its
properties which is likely to have a material adverse effect on ATLANTIC's
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
ATLANTIC considers its liquidity and ability to generate cash from
operations and financings to be adequate and expects it to continue to be
adequate to meet ATLANTIC's development, acquisition, operating, debt service
and shareholder distribution requirements.
ATLANTIC expects to finance construction, development and acquisitions
primarily with cash on hand, borrowings under its line of credit and cash from
future securities offerings. After building a substantial equity base,
ATLANTIC intends to arrange fully amortizing, fixed rate, 15 year to 25 year
debt to finance additional acquisitions and developments. ATLANTIC believes
that its current conservative ratio of long-term debt to total long-term
undepreciated book capitalization (which was 17.9% at September 30, 1996)
provides considerable flexibility to prudently increase its capital base by
utilizing long-term debt as a financing tool in the future. Long-term
undepreciated book capitalization is defined as the sum of long-term debt and
shareholders' equity after adding back accumulated depreciation.
Operating Activities
Net cash flow provided by operating activities increased by $7.1 million for
the nine months ended September 30, 1996 as compared to the same period in
1995. This increase is due principally to increased net earnings.
Investing Activities
During the first nine months of 1996, ATLANTIC's additional investment in
real estate aggregated $230.9 million ($218.9 million of which was paid in
cash). For the same period, ATLANTIC received $36.5 million in proceeds in
connection with property dispositions. The investments include the acquisition
of operating
18
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properties aggregating 1,752 units and the acquisition of land parcels for the
development of 1,757 multifamily units and 1,652 Homestead Village(R) units
and progress payments on properties under development. ATLANTIC's total
portfolio, including Homestead Village properties, aggregated 28,059 units at
September 30, 1996 (17,672 operating units and 10,387 units of developments
under construction or in planning). Of the total portfolio, 24,544 units were
multifamily properties (17,535 operating units and 7,009 units of developments
under construction or in planning). During 1996, ATLANTIC completed
construction on 744 multifamily units and 137 Homestead Village units,
bringing its total of internally-developed operating units to 1,349 (1,212
multifamily units and 137 Homestead Village units).
At September 30, 1996, ATLANTIC had multifamily projects under construction
with total budgeted development costs of $280.0 million of which $111.7
million was unfunded at September 30, 1996. In addition, ATLANTIC owned
multifamily developments in planning at September 30, 1996 aggregating 597
units in various target market cities with an aggregate budgeted development
cost of $34.4 million. ATLANTIC's multifamily developments under control at
September 30, 1996 aggregating 1,780 units with an aggregate budgeted
development cost of $106.4 million. The foregoing developments are subject to
a number of conditions, and ATLANTIC cannot predict with certainty that any of
them will be consummated.
Subsequent to September 30, 1996, ATLANTIC acquired three operating
properties aggregating 960 units at a total investment cost of $45.6 million.
At November 12, 1996, ATLANTIC had letters of intent or contingent contracts,
subject to ATLANTIC's final due diligence, for the acquisition of 844 units
with an aggregate investment cost of $36.2 million.
Financing Activities
ATLANTIC's investment in real estate during the nine months ended September
30, 1996 was financed primarily through borrowings on the line of credit and
additional mortgage debt. The proceeds from the private sale of common shares
and the public sale of common shares in October 1996 were used to repay
borrowings on the line of credit. On November 12, 1996, ATLANTIC's outstanding
borrowings on the line of credit were $195 million.
In June 1996, ATLANTIC completed a private offering that began in November
1995 and raised a total of $250 million through the sale of 10,862,278 shares
(9,612,278 shares sold at $23.00 per share and 1,250,000 shares sold at
$23.136 pere share). Of the total, $119.3 million was raised in 1996 through
the sale of 5,188,763 shares.
ATLANTIC's initial public offering of 4,940,000 shares at $24.00 was
completed on October 18, 1996. The shares, excluding the 416,666 shares sold
to Security Capital Group Incorporated ("SCG"), were sold through an
underwritten offering. The proceeds from the sale, net of the underwriters'
commissions and other expenses, were $110.3 million. Subsequent to the
offering, SCG owned 56.9% of ATLANTIC's shares outstanding.
ATLANTIC incurred additional mortgage debt in 1996 aggregating $32.4
million. The total mortgage debt outstanding at September 30, 1996 was $150.2
million.
Spin-off of Homestead Village Assets
On October 17, 1996 ATLANTIC completed the spin-off of its moderate priced,
purpose-built, extended-stay lodging facilities known as Homestead Village
properties to Homestead Village Incorporated ("Homestead"). In the
transaction, ATLANTIC contributed assets which consisted of one operating
property, 25 properties under construction or in planning (or the rights to
acquire such properties) and $16.8 million in cash. In addition, ATLANTIC
entered into a funding commitment agreement to provide secured financing of up
to $111.1 million to Homestead for purposes of completing the development and
construction of the properties contributed in the transaction.
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<PAGE>
The transaction resulted in ATLANTIC receiving 4,201,220 shares of common
stock of Homestead in exchange for the cash and properties contributed and
2,818,517 warrants to purchase Homestead common shares at $10 per share in
exchange for entering into the funding commitment agreement. On November 12,
1996 ATLANTIC distributed the Homestead common stock and warrants to its
shareholders of record on October 29, 1996. ATLANTIC shareholders received
.110875 shares of Homestead common stock and .074384 Homestead warrants for
each share of ATLANTIC common stock owned. ATLANTIC will receive up to $98.0
million of convertible mortgage notes from Homestead in exchange for funding
up to $111.1 million under the funding commitment agreement. The difference
between the amounts funded and the convertible mortgage notes received of
$13.1 million represents a mortgage note premium which will be amortized as a
reduction to interest income over the term of the convertible mortgage notes.
ATLANTIC will realize a gain of $4,076,000 (before deducting expenses
associated with the transaction) representing the excess of the value of the
Homestead common stock received over the recorded basis of the properties and
cash contributed. The Homestead warrants received represent a funding
commitment fee which has been valued at $6.5 million. The conversion feature
of the convertible mortgage notes has been valued at $6.9 million (assuming
full funding of the funding commitment). These deferred credits will be
amortized as an increase to interest income over the term of the convertible
mortgage notes.
The convertible mortgage notes received from Homestead will bear interest at
9% per annum, will be due October 2006, will not be callable until 2001 and
will be convertible at the option of the holder into one share of Homestead
common stock for every $11.50 of principal amount outstanding. Upon full
funding of ATLANTIC's convertible mortgage notes, its conversion rights would
represent a 15.4% ownership in Homestead assuming conversion of all
outstanding mortgage notes and exercise of all outstanding warrants. The
effective yield on the convertible mortgage notes, assuming full conversion of
the convertible mortgage notes and exercise of all of the Homestead warrants,
is estimated to be 8.46%, after giving effect to the convertible mortgage note
premium, funding commitment fee and the conversion value of the convertible
mortgage notes. At September 30, 1996 no funds had been advanced pursuant to
the funding commitment agreement and there were no convertible mortgage notes
outstanding.
ATLANTIC will exclude the amortization of both the funding commitment fee
and the conversion value of the convertible mortgage notes in calculating
funds from operations. Therefore, the effective yield on the convertible
mortgage notes for purposes of calculating funds from operations will be
approximately 7.09%.
Distributions
ATLANTIC's current distribution policy is to pay quarterly distributions to
shareholders based upon what it considers to be a reasonable percentage of
cash flow. Because depreciation is a non-cash expense, cash flow typically
will be greater than earnings from operations and net earnings. Therefore,
distributions will be higher than quarterly earnings.
Cash distributions paid on common shares aggregated $38.3 million and $25.4
million for the nine months ended September 30, 1996 and 1995, respectively.
The distributions paid were in excess of net earnings in both 1996 and 1995
resulting in decreases in shareholders' equity of $10.8 million for the nine
months ended September 30, 1996 and $11.0 million for the nine months ended
September 30, 1995.
Quarterly distributions of $0.42 per share were paid on March 28, 1996, June
27, 1996 and September 27, 1996. On September 16, 1996 the ATLANTIC Board of
Directors ("Board") declared a cash distribution for the fourth quarter of
1996 of $0.39 per share payable on December 16, 1996 to shareholders of record
on December 2, 1996. In light of the spin-off of ATLANTIC's Homestead Village
properties, the Board adjusted the distribution for the fourth quarter of
1996. The Board declared a non-cash distribution of all the Homestead common
stock and warrants received by ATLANTIC as a result of the spin-off of
ATLANTIC's Homestead Village properties. This distribution, which will result
in a decrease in shareholders' equity, was paid on November 12, 1996 to
shareholders of record on October 29, 1996.
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Funds from Operations
Funds from operations represents ATLANTIC's net earnings computed in
accordance with generally accepted accounting principles less gains (or losses)
plus depreciation. ATLANTIC believes that funds from operations is helpful in
understanding a property portfolio's ability to support interest payments and
general operating expenses. On January 1, 1996, ATLANTIC adopted the National
Association of Real Estate Investment Trusts' new definition of funds from
operations. Under this new definition, loan cost amortization is not added back
to net earnings in determining funds from operations. For comparability, funds
from operations for the periods prior to January 1, 1996 give effect to this
new definition.
Funds from operations were $40.3 million and $25.9 million for the nine
months ended September 30, 1996 and 1995, respectively. The aggregate increase
in funds from operations corresponds to the increased number of properties in
operation during 1996 as compared to 1995. Funds from operations for the three
and nine months ended September 30, 1996 and 1995 were as follows (dollars and
shares in thousands):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings................................. $11,131 $ 5,333 $27,528 $14,464
Add (Deduct):
Depreciation............................... 5,472 4,051 15,069 11,410
Gain on disposition of investments......... (1,593) -- (2,255) --
------- ------- ------- -------
Funds from operations........................ 15,010 9,384 40,342 25,874
Distributions paid........................... 13,839 9,336 38,286 25,439
------- ------- ------- -------
Excess of funds from operations after
distributions............................... $ 1,171 $ 48 $ 2,056 $ 435
======= ======= ======= =======
Weighted average shares outstanding.......... 32,952 23,340 30,384 21,200
======= ======= ======= =======
</TABLE>
Funds from operations should not be considered as an alternative to net
income or any other generally accepted accounting principles' measurement of
performance as an indicator of ATLANTIC's operating performance nor as an
alternative to cash flows from operating, investing or financing activities as
a measure of liquidity. ATLANTIC's policy is to expense, rather than
capitalize, repairs and maintenance, in determining net income and funds from
operations. The funds from operations measure presented by ATLANTIC may not be
comparable to other similarly titled measures of other REITs.
21
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
At a meeting held on September 10, 1996 the shareholders of ATLANTIC
approved a one-for-two reverse stock split of ATLANTIC's common stock, with
42,247,757 shares (64.1% of the total shares outstanding of 65,903,160) voting
to approve. There were no votes against the proposal and no abstentions.
At a meeting held on September 13, 1996 the shareholders of ATLANTIC
approved a Merger and Distribution Agreement, dated May 21, 1996, among
ATLANTIC, Homestead, Security Capital Pacific Trust and SCG, relating to the
spin-off of ATLANTIC's Homestead Village assets, with 21,153,548 shares (64.2%
of the total shares outstanding of 32,951,580) voting to approve. There were
no votes against the proposal and no abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <S>
27-- Financial Data Schedule
99-- Press release dated October 31, 1996
</TABLE>
(b) Reports on Form 8-K:
<TABLE>
<S> <C> <C>
None
</TABLE>
22
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Security Capital Atlantic
Incorporated
/s/ Constance B. Moore
-------------------------------------
Constance B. Moore, Co-Chairman
and Chief Operating Officer
/s/ William Kell
-------------------------------------
William Kell, Vice President
and Principal Financial Officer
Date: November 13, 1996
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,855
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,083,742
<DEPRECIATION> 36,884
<TOTAL-ASSETS> 1,085,471
<CURRENT-LIABILITIES> 0
<BONDS> 150,219
<COMMON> 330
0
0
<OTHER-SE> 649,968
<TOTAL-LIABILITY-AND-EQUITY> 1,085,471
<SALES> 99,644
<TOTAL-REVENUES> 99,952
<CGS> 0
<TOTAL-COSTS> 54,706
<OTHER-EXPENSES> 8,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,824
<INCOME-PRETAX> 27,528
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,528
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
<PAGE>
PRESS RELEASE
- - For Immediate Release -
SECURITY CAPITAL ATLANTIC INCORPORATED
Announces
15% Increase in Third Quarter
Funds from Operations Per Common Share
October 31, 1996 -- Security Capital Atlantic Incorporated (ATLANTIC) (New
York Stock Exchange Symbol: SCA) reported that for the third quarter ended
September 30, 1996, ATLANTIC generated Funds From Operations (FFO) of
$15,010,000 or $0.46 per share, compared to $9,384,000 or $0.40 per share for
the same quarter of 1995, representing an increase in FFO per share of 15%.
Total revenues for the third quarter of 1996 were $36,091,000, compared to
$27,033,000 for the same quarter of 1995.
Constance B. Moore, Co-Chairman and Chief Operating Officer, attributed the
quarter's strong performance to the strength of ATLANTIC's southeastern target
market and improved operating efficiencies at the property level. ATLANTIC's
multifamily properties that were fully operational throughout both quarters
realized a 4.02% increase in collected revenues in the third quarter of 1996,
compared to the same period in 1995. Average occupancy for these properties
during the third quarter was 95.6%. For ATLANTIC's properties that were fully
operational throughout the first nine months of 1996 and 1995, net operating
income (NOI) increased 6.78%. ATLANTIC continues to focus on reducing resident
turnover and turnover-related expenses. Turnover in the first nine months of the
year was 61.7%, an 8.4% drop from the same period in 1995.
ATLANTIC's 15% increase in per share FFO was driven by the strong NOI
growth from the same-store portfolio, which contributed 37% of the FFO growth,
and the positive impact of the acquisitions completed since the third quarter of
1995, which contributed another 42% of the FFO growth. While ATLANTIC's
development activity continues to be dilutive relative to acquisition
alternatives in the short-term, the stabilization of new developments, which
contributed the remaining 21% of FFO growth, is expected to add significantly to
ATLANTIC's long-term performance. The contribution to FFO growth from
developments occurred even though ATLANTIC had an average of $196.2 million of
assets under development or in lease-up during 1996, which resulted in dilution
of approximately $.07 per share for the first nine months of 1996.
James C. Potts, Co-Chairman and Chief Investment Officer, said ATLANTIC
continues to take advantage of investment opportunities throughout its target
market. During the third quarter, ATLANTIC acquired two properties totaling 444
units with a total expected investment of $24.8 million, bringing total
year-to-date acquisitions to 1,752 units at a total expected investment of
$91.8 million. ATLANTIC's primary focus going forward will be the development of
new moderate income multifamily communities. In the third quarter, ATLANTIC
started construction on a 312-unit development in Richmond at a total expected
investment of $19.7 million. Including this development, ATLANTIC currently has
$280.0 million of assets under construction representing 4,632 units.
In addition, ATLANTIC is implementing an asset optimization strategy which
allows the company to dispose of assets that are no longer consistent with its
long-term investment objectives and redeploy the
<PAGE>
proceeds through tax-deferred exchanges into target market cities with optimal
growth potential. During 1996, ATLANTIC completed the disposition of three
properties with an aggregate gain of $2.3 million on proceeds of $37.2 million.
The proceeds have been redeployed into moderate income multifamily communities
which management believes will have stronger prospects for long-term growth.
The spin-off of Homestead Village(R) properties to a newly formed company,
Homestead Village Incorporated (Homestead) was completed on October 17, 1996.
ATLANTIC will own 15.35% of Homestead through its funding of convertible
mortgage notes on certain Homestead assets. Ms. Moore said, "We expect
ATLANTIC's ownership position in Homestead to create significant incremental
value for our shareholders." All Homestead common stock and warrants to acquire
additional common shares which ATLANTIC received in the transaction will be
distributed November 12, 1996, to ATLANTIC shareholders of record on October 29,
1996. Each ATLANTIC shareholder will receive 11.0875 shares of Homestead common
stock and 7.4384 Homestead warrants per 100 shares of ATLANTIC stock, plus cash
for fractional shares and warrants. Homestead stock commenced trading on the
American Stock Exchange on October 31, 1996.
ATLANTIC also announced the successful completion of its initial public
offering (IPO) which closed on October 18, 1996. ATLANTIC raised net proceeds of
$110.3 million from the sale of 4,940,000 common shares at a price of $24 per
share, including the underwriters' overallotment of 590,000 shares. The proceeds
from the offering were used to repay borrowings under ATLANTIC's $350 million
revolving line of credit. ATLANTIC has 37,891,580 total shares outstanding after
the offering.
ATLANTIC's Board of Directors previously declared a regular dividend of
$0.39 per share, payable on December 16, 1996, to shareholders of record on
December 2, 1996.
ATLANTIC is focused on becoming the preeminent real estate operating
company for the development, acquisition, operation and long-term ownership of
multifamily properties in the growth markets of the southeastern United States.
ATLANTIC's primary objective is generating long-term, sustainable growth in per
share cash flow. As of September 30, 1996, ATLANTIC's portfolio, included 17,672
operating units, 5,686 units under construction and an estimated 4,701 units in
planning. Of those totals, 137 operating units, 1,054 units under construction
and 2,324 units in planning are Homestead Village(R) units which have been spun
off to the new company since the end of the third quarter.
FOR MORE INFORMATION CONTACT: K. Scott Canon
(800) 820-0181
or
Gerard De Gunzburg
(212) 838-9292
A copy of ATLANTIC's Third Quarter Supplemental Information is available by
request at (800) 820-0181.
<PAGE>
[LOGO OF SECURITY CAPITAL]
SECURITY CAPITAL ATLANTIC
INCORPORATED
SUPPLEMENTAL INFORMATION
THIRD QUARTER 1996
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Highlights.................................................. 1
Statements of Funds From Operations................................... 2
Statements of Earnings................................................ 3
Balance Sheets........................................................ 4
Components of Growth in ATLANTIC Funds From Operations................ 5
ATLANTIC Multifamily Portfolio Composition............................ 6
Same Store Analysis................................................... 7a
1/1/95 Same Store Investment and Total ATLANTIC Investment By Market.. 7b
Garden Style Apartment Investment Summary............................. 8
Pro Forma Funds From Operations Relating to Homestead Village(R) Spin-off 9a
Other Selected Pro Forma Financial Information Relating to the Homestead
Village(R) Spin-off.................................................. 9b
</TABLE>
Information included in this supplemental information is unaudited.
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Financial Highlights
(in thousands, except per share amounts and ratios)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 % Change 1996 1995 % Change
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Operating Performance
Rental Revenues $35,959 $26,969 33.33% $ 99,644 $ 74,251 34.20%
Net Operating Income (1) $21,616 $15,922 35.76% $ 60,007 $ 44,592 34.57%
Funds From Operations $15,010 $ 9,384 59.95% $ 40,342 $ 25,874 55.92%
Funds From Operations Per Share (2) $ 0.46 $ 0.40 15.00% $ 1.33 $ 1.22 9.02%
Distributions Paid Per Share $ 0.42 $ 0.40 5.00% $ 1.26 $ 1.20 5.00%
As of September 30,
----------------------------------
1996 1995 % Change
==================================
Assets
Real Estate Investments Before Depreciation $1,083,742 $827,307 31.00%
Total Assets $1,085,471 $829,132 30.92%
Capitalization
Total Long Term Debt $ 150,219 $110,726 35.67%
Total Debt $ 384,219 $338,726 13.43%
Total Long Term Undepreciated Book Capitalization $ 837,401 $591,428 41.59%
Total Undepreciated Book Capitalization $1,071,401 $819,428 30.75%
Total Long Term Debt/Total Long Term Undepreciated Book Capitalization 17.94% 18.72% -4.17%
Total Debt/Total Undepreciated Book Capitalization 35.86% 41.34% -13.26%
Total Shares Outstanding at Quarter End 32,952 23,339 41.19%
Price at Quarter End (3) $ 23.00 $ 22.00 4.55%
Equity Market Capitalization at Quarter End $ 757,886 $513,465 47.60%
</TABLE>
DEFINITIONS (share and per share amounts are not in thousands)
(1) Net Operating Income is total rental revenues less property operating
expenses (excluding depreciation and interest expense).
(2) Per share amounts are calculated based on weighted average shares
outstanding.
(3) Price at the end of the quarter represents the last private offering sales
price. On October 18, 1996, ATLANTIC closed its Initial Public Offering of
4,940,000 shares at $24.00 per share.
Supplemental Information Page 1
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Statements of Funds From Operations
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
=======================================================================================================
<S> <C> <C> <C> <C>
Revenues:
Rental Income $35,959 $26,969 $99,644 $74,251
Other Interest Income 132 64 308 160
- -------------------------------------------------------------------------------------------------------
$36,091 $27,033 $99,952 $74,411
- -------------------------------------------------------------------------------------------------------
Expenses:
Rental Expenses, excluding real estate taxes $11,320 $ 8,346 $30,528 $22,134
Real Estate Taxes 3,023 2,701 9,109 7,525
Interest 3,718 4,463 11,824 13,287
General and Administrative, including REIT management fee 2,918 2,106 7,969 5,539
Other 102 33 180 52
- -------------------------------------------------------------------------------------------------------
$21,081 $17,649 $59,610 $48,537
- -------------------------------------------------------------------------------------------------------
Funds From Operations $15,010 $ 9,384 $40,342 $25,874
=======================================================================================================
Weighted Average Shares Outstanding 32,952 23,340 30,384 21,200
=======================================================================================================
Per Share Amounts:
Funds From Operations Per Share (1) $ 0.46 $ 0.40 $ 1.33 $ 1.22
- -------------------------------------------------------------------------------------------------------
</TABLE>
Pro Forma Adjustments to Funds From Operations Assuming the Spin-Off of
Homestead Village Assets as of January 1, 1995 (2)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
=======================================================================================================
<S> <C> <C> <C> <C>
Pro Forma Per Share Adjustment $ (0.03) $ (0.03) $ (0.08) $ (0.10)
Pro Forma Funds From Operations Per Share $ 0.43 $ 0.37 $ 1.25 $ 1.12
- -------------------------------------------------------------------------------------------------------
</TABLE>
DEFINITIONS
(1) Funds from operations per share calculated from weighted average shares
outstanding.
(2) See pages 9a and 9b for detail.
Supplemental Information Page 2
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Statements of Earnings
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
=======================================================================================================
<S> <C> <C> <C> <C>
Revenues:
Rental Income $35,959 $26,969 $99,644 $74,251
Other Interest Income 132 64 308 160
- -------------------------------------------------------------------------------------------------------
$36,091 $27,033 $99,952 $74,411
- -------------------------------------------------------------------------------------------------------
Expenses:
Rental Expenses, excluding real estate taxes $11,320 $ 8,346 $30,528 $22,134
Real Estate Taxes 3,023 2,701 9,109 7,525
Depreciation 5,472 4,051 15,069 11,410
Interest 3,718 4,463 11,824 13,287
General and Administrative, including REIT management fee 2,918 2,106 7,969 5,539
Other 102 33 180 52
- -------------------------------------------------------------------------------------------------------
$26,553 $21,700 $74,679 $59,947
- -------------------------------------------------------------------------------------------------------
Earnings From Operations $ 9,538 $ 5,333 $25,273 $14,464
Gain on Disposition of Investments 1,593 -- 2,255 --
- -------------------------------------------------------------------------------------------------------
Net Earnings $11,131 $ 5,333 $27,528 $14,464
=======================================================================================================
Weighted Average Shares Outstanding 32,952 23,340 30,384 21,200
=======================================================================================================
Per Share Amounts:
Earnings Per Share $ 0.34 $ 0.23 $ 0.91 $ 0.68
=======================================================================================================
Distributions Paid Per Share $ 0.42 $ 0.40 $ 1.26 $ 1.20
- -------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental Information Page 3
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Balance Sheets
(in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
- -------------------------------------------------------------------------------------------------
Assets 1996 1995 1995
=================================================================================================
<S> <C> <C> <C>
Real Estate $1,083,742 $827,307 $888,928
Less: Accumulated Depreciation 36,884 20,206 23,561
---------------------------------------------------------------------------------------------
Net Investments in Real Estate 1,046,858 807,101 865,367
Cash and Cash Equivalents - Unrestricted 5,430 7,810 6,494
Cash and Cash Equivalents - Restricted Tax-Deferred
Exchange Proceeds 12,325 -- --
Other Assets 20,858 14,221 13,963
---------------------------------------------------------------------------------------------
Total Assets $1,085,471 $829,132 $885,824
=============================================================================================
- -------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
=================================================================================================
Liabilities:
Line of Credit $ 234,000 $228,000 $190,000
Mortgages Payable 150,219 110,726 118,524
Distributions Payable 14,778 -- --
Accounts Payable 20,340 14,626 11,030
Accrued Expenses and Other Liabilities 15,836 15,284 9,332
---------------------------------------------------------------------------------------------
Total Liabilities $ 435,173 $368,636 $328,886
=============================================================================================
Shareholders' Equity:
Common Shares, $0.01 Par Value $ 330 $ 233 $ 278
Additional Paid-In Capital 695,668 475,922 576,824
Distributions in Excess of Net Earnings (45,700) (15,659) (20,164)
---------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 650,298 $460,496 $556,938
---------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,085,471 $829,132 $885,824
=============================================================================================
Share Data:
Weighted Average Shares Outstanding 30,384 21,200 21,944
========== ======== ========
Total Shares Outstanding 32,952 23,339 27,763
========== ======== ========
</TABLE>
Supplemental Information Page 4
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Components of Growth in ATLANTIC Funds From Operations Per Share
Q3 1996 vs. Q3 1995
[PIE CHART]
Same Store Universe/1/ 37%
Developments/2/ 21%
Acquisitions/3/ 42%
YTD 1996 vs. YTD 1995
[PIE CHART]
Same Store Universe/1/ 34%
Developments/2/ 22%
Acquisitions/3/ 44%
DEFINITIONS
- -----------
1 Same Store Universe: FFO per share growth from NOI increases on properties
which were fully operational as of 1/1/95.
2 Developments: FFO per share growth from the stabilization of new
developments.
3 Acquisitions: FFO per share growth from properties acquired after 1/1/95.
Supplemental Information Page 5
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
ATLANTIC Garden Style Multifamily Portfolio Composition
The following graphs illustrate the changing composition of ATLANTIC's portfolio
during 1996.
Garden Style Multifamily Portfolio as of 12/31/95
[PIE CHART]
Same Store Universe/1/ 57%
Developments/2/ 21%
Acquisitions/3/ 22%
Garden Style Multifamily Portfolio as of 9/30/96
[PIE CHART]
Same Store Universe/1/ 45%
Developments/2/ 29%
Acquisitions/3/ 26%
DEFINITIONS
- -----------
1 Same Store Properties: Fully operating properties as of 1/1/95, adjusted for
sales.
2 Developments: Properties completed after 1/1/95 and properties under
construction on the dates indicated in each graph, based on total expected
investment
3 Acquisitions: Properties acquired after 1/1/95, based on total expected
investment.
Supplemental Information Page 6
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Same Store Analysis
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Fully Operating Fully Operating
Properties on Properties on
Same Store Universe 7/1/1995(a) 1/1/1995(b)
====================================================================================
<S> <C> <C>
Portfolio
Properties 39 35
Units 11,065 9,858
Total Investment in Same Store Properties $576,373,128 $522,462,029
% of Total ATLANTIC Portfolio 49.38% 44.76%
Q3 1996 vs Q3 YTD 1996 vs
Operating Performance 1995 YTD 1995
------------- ------------
Collections Growth 4.02% 3.33%
Pro Forma Operating Expense Growth -5.34% -2.52%
Pro Forma Net Operating Income Growth 9.77% 6.78%
- ------------------------------------------------------------------------------------
Summary Information on 7/1/1995
Same Store Universe Q3 1996 Q3 1995
====================================================================================
Average Physical Occupancy 95.55% 95.18%
Operating Expense Ratio 40.07% 40.99%
Average Rental Rate Per Unit $716 $702
Recurring Capital Expenditures Per Unit - Q3 $43 --
Recurring Capital Expenditures Per Unit - YTD $170 --
</TABLE>
DEFINITIONS
- -----------
Same Store Universe:
(a) Fully Operating Properties on 7/1/1995: All operating garden apartment
properties (including stabilized and pre-stabilized properties) that were
fully operational during the entire third quarter of 1996 and the entire third
quarter of 1995.
(b) Fully Operating Properties on 1/1/1995: All operating garden apartment
properties (including stabilized and pre-stabilized properties) that were
fully operational during the entire first nine months of 1996 and the entire
first nine months of 1995.
Total Investment in Same Store Properties: Represents cost, including planned
renovations.
% of Total ATLANTIC Portfolio: Expected same store investment as a percentage of
ATLANTIC's total investment, including properties under construction, based on
total expected investment as of September 30, 1996.
Collections: Actual rent and other income, net of vacancies, bad debts and
concessions.
Pro Forma Operating Expense: Operating expenses as adjusted to remove the
accounting differences which result from capitalizing certain costs during the
period of pre-stabilization and expensing those costs once the property has
reached stabilization.
Pro Forma Net Operating Income: Total collected revenues less property pro forma
operating expenses (excluding depreciation and interest expense).
Operating Expense Ratio: Operating expenses as a percentage of collected
revenues.
Average Rental Rate Per Unit: Weighted average asking rents.
Recurring Capital Expenditures: During the period of pre-stabilization all costs
to reposition and refurbish a property are recorded as non-recurring capital
expenditures. Once repositioning and refurbishing is complete, costs are
recorded as recurring capital expenditures.
Supplemental Information Page 7a
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Comparison of 1/1/95 Same Store Universe With ATLANTIC's
Total Investment By Market
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Collections
Growth 1/1/95 Total
Physical Physical 1996 YTD Same Store ATLANTIC
Occupancy % Occupancy % vs. 1995 Universe % by Portfolio %
Market Distribution 1996 YTD 1995 YTD YTD(3) Market(1) by Market(2)
==================================================================================================
<S> <C> <C> <C> <C> <C>
Mid-Atlantic
Washington D.C. 94.44% 93.25% 1.59% 10.44% 13.20%
Richmond 95.02% 96.07% 4.35% 3.72% 5.69%
Raleigh 95.44% 94.29% -1.15% 3.06% 5.79%
Greenville (4) -- -- -- -- 0.97%
Charlotte 96.32% 95.91% 5.97% 2.95% 6.51%
Nashville 94.27% 95.66% 1.58% 3.48% 5.00%
Memphis (4) -- -- -- -- 2.18%
------ ------ ------ ------- -------
Mid-Atlantic Subtotal 94.88% 94.60% 2.19% 23.64% 39.34%
------ ------ ------ ------- -------
Southeast
Atlanta 96.11% 96.19% 5.54% 40.10% 28.45%
Birmingham 92.63% 95.94% -2.94% 3.80% 6.00%
------ ------ ------ ------- -------
Southeast Subtotal 95.76% 96.16% 4.76% 43.90% 34.45%
------ ------ ------ ------- -------
Florida
Jacksonville 97.62% 95.58% 5.88% 2.34% 5.50%
Orlando 95.22% 94.94% 3.68% 6.39% 3.52%
West Coast Florida 95.53% 95.17% 3.05% 12.46% 7.03%
Southeast Florida 94.73% 94.80% 0.23% 11.27% 10.15%
------ ------ ------ ------- -------
Florida Subtotal 95.32% 95.02% 2.34% 32.46% 26.20%
------ ------ ------ ------- -------
Total Properties 95.41% 95.40% 3.33% 100.00% 100.00%
====== ====== ====== ======= =======
Same Store as a % of Total ATLANTIC Portfolio 44.76%
=======
</TABLE>
DEFINITIONS
- -----------
(1) 1/1/95 Same Store Universe % by Market: 1/1/95 Same Store Universe by market
as a percentage of total 1/1/95 same store universe, based upon total
expected investment as of September 30, 1996.
(2) Total ATLANTIC Portfolio % by Market: Total ATLANTIC Portfolio by market as
a percentage of the total ATLANTIC portfolio, including properties under
construction, based upon total expected investment as of September 30, 1996.
(3) Collections Growth 1996 YTD vs. 1995 YTD: Percentage growth in actual rent
and other income, net of vacancies, bad debts and concessions in aggregate
for the 1/1/95 same store universe.
(4) ATLANTIC entered these markets subsequent to 1/1/95; therefore, there were
no properties for same store comparisons.
Supplemental Information Page 7b
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Garden Style Multifamily Investment Summary
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1996
------------------------------------------------------------
Q1 Q2 Q3 YTD
- --------------------------------------------------------------------------------------------------------
Operating Properties
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Properties 59 63 64 64
Units 16,159 17,109 17,535 17,535
Total Investment $808,669,818 $863,031,651 $887,243,838 $887,243,838
Cost Per Unit $ 50,045 $ 50,443 $ 50,598 $ 50,598
Development Properties
- --------------------------------------------------------------------------------------------------------
Starts During Period
Properties 3 4 1 8
Units 844 1,262 312 2,418
Total Investment $ 47,409,516 $ 70,908,470 $ 19,711,634 $138,029,620
Cost Per Unit $ 56,172 $ 56,187 $ 63,178 $ 57,084
Completions During Period
Properties 1 -- 1 2
Units 336 -- 408 744
Total Investment $ 17,542,084 -- $ 20,973,258 $ 38,515,342
Cost Per Unit $ 52,209 -- $ 51,405 $ 51,768
Stabilizations During Period
Properties -- -- 3 3
Units -- -- 804 804
Total Investment -- -- $ 42,631,813 $ 42,631,813
Cost Per Unit -- -- $ 53,025 $ 53,025
Under Construction at Quarter End
Properties 10 14 14 14
Units 3,466 4,718 4,632 4,632
Total Investment $204,544,599 $277,610,946 $279,950,421 $279,950,421
Cost Per Unit $ 59,015 $ 58,841 $ 60,438 $ 60,438
Investment To Date At Quarter End $109,671,074 $151,601,829 $168,208,579 $168,208,579
Development Expenditures During Period $ 21,209,308 $ 31,125,698 $ 31,332,756 $ 83,667,762
Acquisitions
- --------------------------------------------------------------------------------------------------------
Properties -- 5 2 7
Units -- 1,308 444 1,752
Total Investment -- $ 67,051,460 $ 24,764,200 $ 91,815,660
Cost Per Unit -- $ 51,263 $ 55,775 $ 52,406
Dispositions
- --------------------------------------------------------------------------------------------------------
Properties -- 1 2 3
Units -- 358 426 784
Proceeds From Dispositions -- $ 14,900,000 $ 22,250,000 $ 37,150,000
Gain On Dispositions -- $ 654,000 $ 1,601,000 $ 2,255,000
</TABLE>
DEFINITIONS
- -----------
Operating and Development Properties: Excludes Homestead Village assets.
Total Investment: For operating properties, this equals the total investment to
date plus planned capital expenditures. For development properties, this equals
the total expected investment at completion.
Stabilization During Period: Completed development properties achieving 93%
occupancy at stabilized rental rates.
Under Construction at Quarter End: Development properties on which construction
has commenced, but all units have not been completed or accepted.
Development Expenditures During Period: Costs expended on projects under
construction during the period.
Supplemental Information Page 8
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Pro Forma Funds From Operations Relating to Homestead Village Spin-Off
(in thousands, except per share amounts)
The following pro forma statements of funds from operations assume the spin-off
of ATLANTIC's Homestead Village extended-stay lodging assets to a newly formed
company, Homestead Village Incorporated, based on the methodology discussed on
page 9b under "Explanation Of The Methodology Used Relating To Homestead Village
Spin-off".
<TABLE>
<CAPTION>
For the Three Months Ended March 31, For the Three Months Ended June 30,
----------------------------------------- -----------------------------------------
1996 1995 1996 1995
Pro Forma Statements of ------------------- ------------------- ------------------- -------------------
Funds From Operations: Actual Proforma Actual Proforma Actual Proforma Actual Proforma
=================== =================== =================== ===================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental Income $30,809 $30,809 $22,952 $22,952 $32,876 $32,876 $24,330 $24,330
Homestead Convertible Mortgages
Interest Income - - - - - - - -
Other Interest Income 72 66 45 45 104 101 51 51
------------------ ------------------ ------------------ ------------------
$30,881 $30,875 $22,997 $22,997 $32,980 $32,977 $24,381 $24,381
------------------ ------------------ ------------------ ------------------
Expenses:
Rental Expenses
including real estate taxes $12,736 $12,736 $ 8,918 $ 8,918 $12,558 $12,558 $ 9,694 $ 9,694
Interest 4,342 5,192 4,677 5,527 3,764 4,624 4,147 5,006
General and Administrative,
including REIT management fee 2,310 2,172 1,620 1,484 2,741 2,594 1,813 1,674
Other 39 25 2 2 39 31 17 17
------------------ ------------------ ------------------ ------------------
$19,427 $20,125 $15,217 $15,931 $19,102 $19,807 $15,671 $16,391
------------------ ------------------ ------------------ ------------------
Funds From Operations $11,454 $10,750 $ 7,780 $ 7,066 $13,878 $13,170 $ 8,710 $ 7,990
================== ================== ================== ==================
Per Share Amounts $ 0.41 $ 0.39 $ 0.42 $ 0.38 $ 0.46 $ 0.43 $ 0.40 $ 0.37
================== ================== ================== ==================
For the Three Months Ended September 30, For the Three Months Ended September 30,
----------------------------------------- -----------------------------------------
1996 1995 1996 1995
------------------- ------------------- ------------------- -------------------
Actual Proforma Actual Proforma Actual Proforma Actual Proforma
=================== =================== =================== ===================
Revenues:
Rental Income $35,959 $35,611 $26,969 $26,969 $99,644 $99,296 $74,251 $74,251
Homestead Convertible Mortgages
Interest Income - - - - - - - -
Other Interest Income 132 121 64 63 308 288 160 159
------------------ ------------------ ------------------ ------------------
$36,091 $35,732 $27,033 $27,032 $99,952 $99,584 $74,411 $74,410
------------------ ------------------ ------------------ ------------------
Expenses:
Rental Expenses
including real estate taxes $14,343 $14,206 $11,047 $11,047 $39,637 $39,500 $29,659 $29,659
Interest 3,718 4,587 4,463 5,332 11,824 14,403 13,287 15,865
General and Administrative,
including REIT management fee 2,918 2,733 2,106 1,965 7,969 7,499 5,539 5,123
Other 102 101 33 25 180 157 52 44
------------------ ------------------ ------------------ ------------------
$21,081 $21,627 $17,649 $18,369 $59,610 $61,559 $48,537 $50,691
------------------ ------------------ ------------------ ------------------
Funds From Operations $15,010 $14,105 $ 9,384 $ 8,663 $40,342 $38,025 $25,874 $23,719
================== ================== ================== ==================
Per Share Amounts $ 0.46 $ 0.43 $ 0.40 $ 0.37 $ 1.33 $ 1.25 $ 1.22 $ 1.12
================== ================== ================== ==================
</TABLE>
Supplemental Information Page 9a
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Third Quarter 1996
Other Selected Pro Forma Financial Information
Relating To Homestead Village Spin-Off
(Information in thousands of dollars)
The following pro forma financial position information assumes the spin-off of
ATLANTIC's Homestead Village extended-stay lodging assets to a newly formed
company Homestead Village Incorporated ("Homestead"), based on the methodology
discussed below under "Explanation Of The Methodology Used Relating To Homestead
Village Spin-Off".
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
1996 1995 December 31, 1995
------------------------ ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Pro Forma Balance Sheets: Actual Proforma Actual Proforma Actual Proforma
------------------------ ---------------------- ---------------------
Assets:
Real Estate $ 1,046,858 $ 1,017,594 $ 807,101 $ 805,998 $ 865,367 $ 862,740
Homestead Convertible Mortgage Note -- -- -- -- -- --
Other Assets 38,613 36,429 22,031 21,031 20,457 18,767
------------------------ --------------------- ---------------------
Total Assets $ 1,085,471 $ 1,054,023 $ 829,132 $ 827,029 $ 885,824 $ 881,507
======================== ===================== =====================
Liabilities and Shareholders' Equity:
Total Liabilities $ 435,173 $ 457,859 $ 368,636 $ 420,667 $ 328,886 $ 378,703
Total Shareholders' Equity 650,298 596,164 460,496 406,362 556,938 502,804
Total Liabilities and ------------------------ --------------------- ---------------------
Shareholders' Equity $ 1,085,471 $ 1,054,023 $ 829,132 $ 827,029 $ 885,824 $ 881,507
======================== ===================== =====================
</TABLE>
Explanation Of The Methodology Used Relating To Homestead Village Spin-Off:
Pro forma funds from operations information presented on page 9a and pro forma
financial position presented above was prepared assuming: (1) the spin-off of
ATLANTIC's Homestead Village extended-stay lodging assets ("Homestead Assets")
to a newly-formed company, Homestead Village Incorporated ("Homestead")
occurred on January 1, 1995; (2) ATLANTIC financed its contribution to Homestead
on January 1, 1995 with additional borrowings on its line of credit; (3) no
fundings were made under the Funding Commitment Agreement with Homestead
through September 30, 1996 and, accordingly, no convertible mortgage notes have
been received through September 30, 1996; and, (4) ATLANTIC distributed all of
the Homestead common stock and warrants to its shareholders on January 1, 1995.
In accordance with these assumptions, pro forma funds from operations and pro
forma financial position presented exclude historical operating revenues and
expenses associated with the Homestead Assets and include interest expense
related to the additional borrowings on the line of credit.
The unaudited pro forma funds from operations is not necessarily indicative of
what ATLANTIC's actual funds from operations would have been for the respective
periods presented had the subject transaction been completed as of the dates
indicated above, nor do they purport to present funds from operations for future
periods for ATLANTIC. Additionally, the pro forma information is not necessarily
indicative of funds from operations for the full year.
Funds from operations is not to be construed as a substitute for "net earnings"
in evaluating operating results nor as a substitute for "cash flow" in
evaluating liquidity and may not be comparable to other similarly titled
measures of other companies.
Homestead Village Convertible Mortgage Notes Information:
ATLANTIC will receive up to $98.0 million of convertible mortgage notes from
Homestead in exchange for funding up to $111.1 million under the funding
commitment agreement. The difference between the amounts funded and the
mortgage notes received of $13.1 million represents a mortgage note premium
which will be amortized as a reduction to interest income over the term of the
mortgage notes. The Homestead warrants received represent a funding commitment
fee which has been valued at $6.5 million. The conversion feature of the
mortgage notes has been valued at $6.9 million (assuming full funding of the
funding commitment). These deferred credits will be amortized as an increase to
interest income over the term of the mortgage notes.
The convertible mortgage notes received from Homestead will bear interest at 9%
per annum, will be due October 2006, will not be callable until 2001 and will be
convertible at the option of the holder into one share of Homestead common
stock for every $11.50 of principal amount outstanding. The effective yield on
the convertible mortgage notes, assuming full conversion of the mortgage notes
and exercise of all of the Homestead warrants is estimated to be 8.46%, after
giving effect to the mortgage note premium, funding commitment fee and the
conversion value of the mortgage notes. ATLANTIC will exclude the amortization
of both the funding commitment fee and the conversion value of the mortgage
notes in calculating funds from operations. Therefore, the effective yield on
the convertible mortgage notes for purposes of calculating funds from
operations is estimated to be 7.09%.
Supplemental Information Page 9b
