<PAGE>
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 JUNE 30, 1997
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 X No
The number of shares outstanding of the Registrant's common stock as of
August 12, 1997 was: 41,968,780
<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--June 30, 1997 (unaudited) and
December 31, 1996............................................ 3
Condensed Statements of Earnings--Three and six months ended
June 30, 1997 and 1996 (unaudited)........................... 4
Condensed Statements of Cash Flows--Six months ended June 30,
1997 and 1996 (unaudited).................................... 5
Notes to Condensed Financial Statements...................... 6
Independent Accountant's Review Report....................... 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 16
PART II. Other Information
Item 4. Submission of Matters to Vote of Securities Holders.......... 28
Item 6. Exhibits and Reports on Form 8-K............................. 28
</TABLE>
2
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Real estate........................................... $1,237,576 $1,157,235
Less accumulated depreciation......................... 52,885 41,166
---------- ----------
1,184,691 1,116,069
Homestead Convertible Mortgages....................... 71,304 --
---------- ----------
Net investments................................... 1,255,995 1,116,069
Cash and cash equivalents--unrestricted............... 2,861 4,339
Cash and cash equivalents--restricted tax-deferred
exchange proceeds.................................... 3,826 1,672
Other assets.......................................... 16,923 12,985
---------- ----------
Total assets...................................... $1,279,605 $1,135,065
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Line of credit...................................... $ 278,750 $ 228,000
Mortgages payable................................... 155,037 155,790
Distributions payable............................... -- 14,778
Accounts payable.................................... 14,769 20,076
Accrued expenses and other liabilities.............. 24,912 17,779
---------- ----------
Total liabilities................................. 473,468 436,423
---------- ----------
Shareholders' equity:
Common shares (250,000,000 authorized, 41,968,780
issued and outstanding at June 30, 1997 and
37,891,580 issued and outstanding at December 31,
1996............................................... 420 379
Additional paid-in capital.......................... 830,072 747,640
Unrealized gains on Homestead Convertible Mortgages. 19,351 --
Distributions in excess of net earnings............. (43,706) (49,377)
---------- ----------
Total shareholders' equity........................ 806,137 698,642
---------- ----------
Total liabilities and shareholders' equity........ $1,279,605 $1,135,065
========== ==========
</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 MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ---------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Rental income................................ $41,107 $32,876 $80,822 $63,685
Homestead Convertible Mortgages interest
income...................................... 744 -- 929 --
Other interest income........................ 104 104 161 176
------- ------- ------- -------
41,955 32,980 81,912 63,861
------- ------- ------- -------
Expenses:
Rental expenses.............................. 10,260 8,356 20,234 16,851
Real estate taxes............................ 4,017 2,982 7,866 6,086
Property management fees:
Paid to affiliate.......................... 1,416 973 2,696 1,893
Paid to third parties...................... 171 247 403 464
Depreciation................................. 6,451 4,793 12,583 9,597
Interest..................................... 4,624 3,764 9,385 8,106
REIT management fee paid to affiliate........ 3,200 2,581 6,229 4,704
General and administrative................... 237 160 502 347
Provision for possible loss on investments... -- -- 200 --
Other........................................ 8 39 65 78
------- ------- ------- -------
30,384 23,895 60,163 48,126
------- ------- ------- -------
Earnings from operations....................... 11,571 9,085 21,749 15,735
Gain on disposition of real estate........... 259 662 259 662
------- ------- ------- -------
Net earnings................................... $11,830 $ 9,747 $22,008 16,397
======= ======= ======= =======
Weighted-average shares outstanding............ 41,228 30,393 39,569 29,085
======= ======= ======= =======
Net earnings per share......................... $ 0.29 $ 0.32 $ 0.56 $ 0.56
======= ======= ======= =======
Distributions paid per share................... $ 0.39 $ 0.42 $ 0.78 $ 0.84
======= ======= ======= =======
</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>
SIX MONTHS
ENDED
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating activities
Net earnings........................................... $ 22,008 $ 16,397
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:
Depreciation and amortization........................ 12,728 10,473
Provision for possible loss on investments........... 200 --
Gain on disposition of real estate................... (259) (662)
Decrease in accounts payable......................... (2,259) (757)
Increase in accrued expenses and other liabilities... 7,182 4,949
Increase in other assets............................. (3,976) (3,561)
--------- ---------
Net cash flow provided by operating activities..... 35,624 26,839
--------- ---------
Investing activities:
Real estate investments................................ (96,066) (145,238)
Proceeds from disposition of real estate............... 11,873 14,651
Tax-deferred exchange proceeds held in escrow.......... (2,154) --
Funding of Homestead Convertible Mortgages............. (52,000) --
--------- ---------
Net cash flow used by investing activities......... (138,347) (130,587)
--------- ---------
Financing activities:
Proceeds from sale of shares........................... 82,473 119,090
Proceeds from line of credit........................... 154,750 107,000
Payments on line of credit............................. (104,000) (103,000)
Proceeds from mortgage debt............................ -- 5,000
Distributions paid..................................... (31,115) (24,447)
Debt issuance costs incurred........................... (110) (1,384)
Regularly scheduled mortgage principal payments........ (753) (480)
--------- ---------
Net cash flow provided by financing activities..... 101,245 101,779
--------- ---------
Net decrease in cash and cash equivalents................ (1,478) (1,969)
Cash and cash equivalents, beginning of period........... 4,339 6,494
--------- ---------
Cash and cash equivalents, end of period................. $ 2,861 $ 4,525
========= =========
Non-cash investing and financing activities:
Unrealized gains on Homestead Convertible Mortgages.... $ 19,351 $ --
Assumption of mortgages payable upon purchase of
multifamily communities............................... -- 6,000
</TABLE>
See accompanying notes to the condensed financial statements.
5
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE 1 GENERAL
The financial statements of Security Capital Atlantic Incorporated
("ATLANTIC") as of June 30, 1997 and for the three and six months ended June
30, 1997 and 1996 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 1996 Annual Report on
Form 10-K.
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 three and six months ended June 30, 1997 and 1996 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.
Certain of the 1996 amounts have been reclassified to conform to the 1997
presentation.
NOTE 2 REAL ESTATE
Real Estate
ATLANTIC's real estate, which consists entirely of multifamily communities,
at cost, was as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
-------------------- --------------------
COST UNITS COST UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Operating communities:
Acquired....................... $ 871,978 17,367 $ 878,029 17,727
Developed...................... 96,431 1,898 74,741 1,514
---------- ------ ---------- ------
968,409 19,265 952,770 19,241
Communities under
construction(1)................. 250,526 5,487 194,587 4,727
Communities in planning:
Owned(2)....................... 15,904 1,480(3) 7,795 868(3)
Under control(4)............... -- 3,406(3) -- 2,228(3)
---------- ------ ---------- ------
15,904 4,886 7,795 3,096
Land held for future development. 2,737 -- 2,083 --
---------- ------ ---------- ------
Total..........................$1,237,576(5) 29,638 $1,157,235(5) 27,064
========== ====== ========== ======
</TABLE>
- --------
(1) Includes communities in lease-up of $226.0 million (3,887 units) and
communities not yet in lease-up of $24.5 million (1,600 units). Unfunded
commitments for all communities under construction were $96.7 million at
June 30, 1997 which will result in a total completed construction cost of
$347.2 million.
(2) Costs for communities in planning and owned are primarily for land
acquisitions.
(3) Unit information is based on management's estimates and is unaudited and
unreviewed.
6
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(4) ATLANTIC's investment at June 30, 1997 and December 31, 1996 in land in
planning and under control for future development was $2.4 million and
$1.4 million, respectively, and is reflected in the "Other assets" caption
of ATLANTIC's balance sheets.
(5) Communities located in Atlanta, Georgia aggregated 29.5% and 30.7% at June
30, 1997 and December 31, 1996, respectively, of ATLANTIC's real estate,
at cost.
The change in real estate, at cost, for the six months ended June 30, 1997
consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997.................................... $1,157,235
Acquisitions and renovation expenditures...................... 5,133
Development expenditures, including land acquisitions......... 86,258
Recurring capital expenditures................................ 1,627
Dispositions.................................................. (12,477)
Provision for possible loss on investments.................... (200)
----------
Balance at June 30, 1997...................................... $1,237,576
==========
</TABLE>
Third-Party Owner/Developers
To enhance its flexibility in developing and acquiring multifamily
communities, ATLANTIC has and will enter into presale agreements with third-
party owner/developers to acquire communities developed by such third-party
owner/developers where the developments meet ATLANTIC's investment criteria.
ATLANTIC has and will fund such developments through development loans to such
third-party owner/developers. Since inception, ATLANTIC entered into one such
pre-sale agreement. During the six months ended June 30, 1997, the community
covered by this agreement was completed and acquired by ATLANTIC as repayment
of the development loan. As of June 30, 1997 there were no other development
or mortgage loans outstanding.
Gains and Losses from Dispositions 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 no longer meet ATLANTIC's investment
criteria and redeploy the proceeds therefrom, primarily through tax-deferred
exchanges, into assets with better prospects for long-term growth. ATLANTIC
disposed of two communities during the six months ended June 30, 1997.
ATLANTIC recognized an aggregate gain of $259,000 on these dispositions. At
June 30, 1997, ATLANTIC held a portion of the proceeds from one of these
dispositions aggregating $3,826,000 in an interest-bearing account pending
completion of the tax-deferred exchange. These communities accounted for
$306,000 and $675,000 of net operating income for the six months ended June
30, 1997 and 1996, respectively.
In July 1997 ATLANTIC disposed of a 504-unit development community that was
in lease-up and substantially completed. The proceeds from the disposition of
$36.3 million approximated the carrying value at June 30, 1997. The community,
which was being held for sale at June 30, 1997, accounted for $1,138,000 of
net operating income for the six months ended June 30, 1997.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. ATLANTIC
recognized a provision for possible loss of $200,000 during the six months
ended June 30, 1997 and $2,500,000 during 1996 associated with one of the
communities that was sold in 1997. At June 30, 1997, ATLANTIC's investments
are carried at cost, which is not in excess of fair market value.
7
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 HOMESTEAD CONVERTIBLE MORTGAGES
General
To provide funds for the completion of construction of the Homestead Village
assets sold by ATLANTIC in October 1996, ATLANTIC entered into a funding
commitment agreement ("Funding Agreement") which provides for aggregate
fundings of $111.1 million in exchange for convertible mortgages ("Homestead
Convertible Mortgages"). During the six months ended June 30, 1997 ATLANTIC
funded $52.0 million under the Funding Agreement.
The Homestead Convertible Mortgages (i) bear interest at 9% per annum which
is due in interest only payments on a semi-annual basis, (ii) are due October
2006, (iii) are not callable until 2001, and (iv) beginning March 31, 1997,
are convertible at ATLANTIC's option into one share of common stock of
Homestead Village Incorporated ("Homestead") for every $11.50 of principal
outstanding (approximately 8.5 million shares upon full funding). The
individual Homestead Village development projects serve as collateral
individually and in the aggregate under cross-collateral provisions. The
Homestead Convertible Mortgages represent approximately 70% of the estimated
value of the projects upon completion.
Carrying Value
ATLANTIC will receive $98.0 million of Homestead Convertible Mortgages
assuming full funding under the Funding Agreement of $111.1 million, resulting
in the recognition of an original issue premium which will be amortized over
the term of the Homestead Convertible Mortgages. The value attributed to the
conversion feature of the Homestead Convertible Mortgages issued ($6,905,000
assuming full funding) has been recognized along with an offsetting discount
(deferred credit) in the Homestead Convertible Mortgages balance. This
discount will be amortized over the term of the Homestead Convertible
Mortgages. The carrying value of the Homestead Convertible Mortgages has been
further adjusted to fair value. The fair value adjustment of $19,351,000 is
recognized as an unrealized gain in shareholders' equity. The amount of the
adjustment is based upon the conversion value of the Homestead Convertible
Mortgages and is calculated using the trading price of Homestead common stock
at June 30, 1997 of $17.875 per share.
At June 30, 1997 the carrying value of the Homestead Convertible Mortgages
consisted of the following components (in thousands):
<TABLE>
<S> <C>
Face amount...................................................... $45,874
Original issue premium........................................... 6,126
-------
Amount funded.................................................... 52,000
Amortization of original issue premium........................... (99)
Initial value of conversion feature.............................. 3,231
Unamortized discount on conversion feature....................... (3,179)
Fair value adjustment............................................ 19,351
-------
Carrying value................................................... $71,304
=======
</TABLE>
Deferred Revenue
ATLANTIC received a commitment fee in the form of warrants to purchase
shares of Homestead common stock in return for entering into the Funding
Agreement. The warrants, which were distributed to ATLANTIC's shareholders,
were valued at $6,511,000. The commitment fee has been recognized as deferred
revenue in the liability section of ATLANTIC's balance sheet and is being
amortized over the term of the Homestead Convertible Mortgages.
8
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Income Recognized
The aggregate income recognized on the Homestead Convertible Mortgages
consists of (i) the interest income recognized at 9% per annum, (ii) the
amortization of the original issue premium which reduces income, (iii) the
amortization of the discount on the conversion feature which increases income,
and, (iv) the amortization of the deferred commitment fee which increases
income. ATLANTIC uses the effective interest method to calculate the
amortization of all items associated with the Homestead Convertible Mortgages.
The effective interest rate on the funded amount is 8.46% per annum for
purposes of calculating net earnings.
NOTE 4 BORROWINGS
Variable Interest Rate Swap Agreements
ATLANTIC has effectively eliminated its variable interest rate debt exposure
on its variable interest rate mortgages and $100 million of borrowings on its
line of credit by entering into swap agreements. Under the swap agreements
ATLANTIC pays a fixed rate of interest to a swap counterparty 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 these amounts 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.
Credit Facilities
On December 18, 1996, ATLANTIC entered into a $350 million unsecured
revolving line of credit agreement with Morgan Guaranty Trust Company of New
York, as agent for a group of lenders ("MGT"). Borrowings on the unsecured
line of credit bear interest at prime, or at ATLANTIC's option, LIBOR plus a
margin, 1.375% through July 2, 1997. Thereafter, the interest rate was reduced
to LIBOR plus 1.125% due to ATLANTIC's receipt of an investment-grade debt
rating. ATLANTIC currently pays a commitment fee on the average unfunded line
of credit balance ranging from 0.125% to 0.25% per annum, depending on the
amount of undrawn commitments. The line of credit matures December 1998 and
may be extended for one year with the approval of MGT and the other
participating lenders.
All debt incurrences under the unsecured line of credit are subject to
certain covenants. Primarily, distributions for the preceding four quarters,
excluding the non-cash distribution related to the transaction with Homestead
in October 1996, may not exceed 95% of ATLANTIC's funds from operations (as
defined in the credit agreement) for the preceding four quarters. ATLANTIC is
in compliance with all such covenants.
ATLANTIC has a swap agreement with MGT covering $100 million of borrowings
under the line of credit, effectively eliminating a portion of its variable
interest rate exposure associated with the line of credit. Under this one-year
agreement which became effective on February 5, 1997, ATLANTIC paid a fixed
rate of interest on $100 million of borrowings of 7.325% through July 2, 1997
and will pay 7.075% thereafter. ATLANTIC had a similar swap agreement in place
from February 5, 1996 through February 4, 1997. Under that agreement, ATLANTIC
paid a fixed rate of interest on the $100 million of borrowings of 7.46%
through December 17, 1996 and 7.335% thereafter. ATLANTIC paid $148,000 and
$288,000 more in interest than it received under the swap agreement during the
six months ended June 30, 1997 and 1996, respectively. ATLANTIC is exposed to
credit loss in the event of non-performance by the swap counterparty. However,
ATLANTIC believes the risk of loss is minimal.
9
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
On June 30, 1997, ATLANTIC entered into a $25,000,000 short-term, unsecured
borrowing agreement with Texas Commerce Bank National Association. The loan
matures at June 30, 1998 and bears interest at an overnight rate depending on
availability of funds. There were no borrowings outstanding under this
agreement at June 30, 1997.
Mortgages Payable
Mortgages payable consisted of the following at June 30, 1997 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
INTEREST MATURITY PERIODIC PAYMENT PRINCIPAL
COMMUNITY RATE DATE TERMS BALANCE
--------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cameron Ridge............... 7.000% 09/10/98(1) Fully amortizing $ 5,789
Country Place Village I..... 7.750% 11/01/00 (2) 1,986
Country Oaks................ 7.655% 07/01/02 (3) 5,903
Cameron at Hickory Grove.... 8.000% 07/10/03 (4) 5,954
Cameron Villas I............ 8.750% 04/01/24 Fully amortizing 6,312
Cameron on the Cahaba II.... 7.125% 03/01/29 Fully amortizing 7,988
--------
33,932
--------
Tax-exempt fixed rate or
variable rate subject to swap
agreements(5):
Cameron Station............. 6.000% 05/01/07 Interest only 14,500
Azalea Park................. (6) 06/01/25 Interest only 15,500
Cameron Brook............... (6) 06/01/25 Interest only 19,500
Cameron Cove................ (6) 06/01/25 Interest only 8,500
Clairmont Crest............. (6) 06/01/25 Interest only 11,600
Forestwood.................. (6) 06/01/25 Interest only 11,485
Foxbridge on the Bay........ (6) 06/01/25 Interest only 10,400
The Greens.................. (6) 06/01/25 Interest only 10,400
Parrot's Landing I.......... (6) 06/01/25 Interest only 15,835
WintersCreek................ (6) 06/01/25 Interest only 5,000
Less amounts held in
principal reserve fund(7).. (1,615)
--------
121,105
--------
$155,037
========
Total annual weighted-
average interest rate.... 6.97%
========
</TABLE>
- --------
(1) This loan is callable at the option of the mortgage lender on September
10, 1998 and at subsequent five-year intervals through September 10, 2013.
(2) Interest and principal payments due monthly; balloon payment of $1,849,000
due at maturity.
(3) Interest and principal payments due monthly; balloon payment of $5,539,000
due at maturity.
(4) Interest and principal payments due monthly; balloon payment of $5,556,000
due at maturity.
(5) These communities, 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, liabilities
and business operations.
10
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(6) Interest rate is fixed through swap agreements executed in conjunction
with the credit enhancement agreement with the Federal National Mortgage
Association ("FNMA") discussed below. Through these swap agreements,
ATLANTIC has effectively eliminated the variable interest rate exposure
associated with its tax-exempt bond issues.
(7) ATLANTIC has a 30-year credit enhancement agreement with FNMA related to
the tax-exempt bond issues. This credit enhancement agreement requires
ATLANTIC to make monthly payments on each mortgage into a principal
reserve account based on a 30-year amortization.
ATLANTIC's swap agreements related to its tax-exempt variable rate mortgages
are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT OF MATURITY FIXED INTEREST
MORTGAGES DATE RATE(1) ISSUER
- --------- -------- -------------- ------
<S> <C> <C> <C>
$23.1
million June 2002 6.48% General Re Financial Products Corporation
64.6
million June 2005 6.74% Morgan Guaranty Trust Company of New York
5.0
million March 2006 6.21% Morgan Guaranty Trust Company of New York
15.5
million August 2006 6.50% Morgan Stanley Derivative Products Inc.
-----
</TABLE>
<TABLE>
<S> <C>
Weighted-average interest rate..... 6.63%
=====
</TABLE>
- --------
(1) Includes the fixed interest rate provided by the swap agreements, annual
fees associated with the swap agreements and credit enhancement agreement
and amortization of capitalized costs associated with the credit
enhancement agreement.
ATLANTIC paid $872,000 and $773,000 more in interest during the six months
ended June 30, 1997 and 1996, respectively, than it received under the swap
agreements. The swap agreements cover 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 (an amount equal to
the amount of the principal reserve fund) at the variable rates provided by
the mortgage agreements. ATLANTIC is exposed to credit loss in the event of
non-performance by the swap counterparties. However, ATLANTIC believes the
risk of loss is minimal.
Real estate with an aggregate undepreciated cost at June 30, 1997 of
$51,259,000 and $204,518,000 serves as collateral for the conventional
mortgages payable and the tax-exempt mortgages payable, respectively.
The change in mortgages payable for the six months ended June 30, 1997 is as
follows (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997...................................... $155,790
Regularly scheduled principal payments.......................... (753)
--------
Balance at June 30, 1997........................................ $155,037
========
</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 six months ended June
30, 1997 was $15,293,000, including $5,322,000 of interest capitalized during
construction. Interest paid in cash on all outstanding debt for the six months
ended June 30, 1996 was $11,618,000, including $4,585,000 of interest
capitalized during construction.
Amortization of loan costs included in interest expense for the six months
ended June 30, 1997 and 1996 was $145,000 and $876,000, respectively.
11
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5 REIT MANAGEMENT AND PROPERTY MANAGEMENT
Current Agreements
ATLANTIC has entered into a REIT management agreement (which will be
terminated if the merger discussed below is consummated) with Security Capital
(Atlantic) Incorporated (the "REIT Manager"), to provide REIT management
services to ATLANTIC. The REIT Manager is a wholly-owned subsidiary of
Security Capital Group Incorporated ("Security Capital"), which owned 51.3% of
ATLANTIC's common shares, par value $.01 per Share ("Shares") at June 30,
1997. The REIT management agreement is renewable annually, subject to a
determination by the independent members of ATLANTIC's Board of Directors (the
"Board") 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") currently
manages approximately 93% of ATLANTIC's multifamily properties under a
property management agreement that will be terminated if the merger discussed
below is consummated. Security Capital 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 the
independent members of the Board and are at rates prevailing in the markets in
which ATLANTIC operates.
Proposed Merger Transaction
On August 5, 1997, the Securities and Exchange Commission declared effective
a registration statement filed by Security Capital relating to warrants to
purchase Class B common stock of Security Capital and containing ATLANTIC's
proxy statement relating to a proposed merger transaction whereby ATLANTIC
would acquire the operations and businesses of the REIT Manager and SCG Realty
Services in exchange for 2.3 million Shares valued at approximately $54.6
million (the "Merger"). The $54.6 million value was based on a three-year
discounted analysis of net operating income prepared by Security Capital and
revised after negotiation with a special committee comprised of the
independent members of ATLANTIC's Board (the "Special Committee"). The number
of Shares to be issued to Security Capital was determined using a per Share
price of $23.675 (the average market price of Shares over the five-day period
prior to the August 6, 1997 record date for determining ATLANTIC's
shareholders entitled to vote on the Merger). As a result of the Merger,
ATLANTIC will become an internally managed REIT and Security Capital will
remain ATLANTIC's largest shareholder. ATLANTIC's Board has approved the
Merger based on the recommendation of the Special Committee. The Merger
requires the approval of a majority of the outstanding Shares. ATLANTIC's
proxy statement has been mailed to its shareholders and the shareholder vote
is scheduled to be held on September 8, 1997. ATLANTIC expects the Merger will
be consummated prior to the end of the third quarter of 1997.
In addition, subject to and after the closing of the Merger and after the
closing of the rights offering described below in Note 6, ATLANTIC's
shareholders (other than Security Capital) will also receive $46.9 million of
warrants from Security Capital to purchase shares of Security Capital Class B
common stock. The number of Class B common shares subject to these warrants
will be based on the closing price of such shares on the date the warrants are
issued to a warrant distribution agent for subsequent distribution to
ATLANTIC's shareholders. The warrants will have a term of one year. Security
Capital is issuing these warrants to induce ATLANTIC's shareholders to vote to
approve the Merger and to raise additional equity capital at a relatively low
cost, in addition to other benefits.
Because ATLANTIC, the REIT Manager and SCG Realty Services are under the
common control of Security Capital, the difference between the market value of
the Shares issued to Security Capital on the date the Merger is consummated
and the net tangible assets of the REIT Manager and SCG Realty Services being
acquired by ATLANTIC (approximately $1.3 million at June 30, 1997) will be
accounted for as a distribution to Security Capital.
12
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6 SHAREHOLDER'S EQUITY
Completed Capital Offering
In April and May 1997 ATLANTIC completed an underwritten public offering of
4,077,200 common shares at a price of $21.50 per Share. The proceeds from the
sale of these Shares, net of underwriters' commissions and other expenses,
were approximately $82.5 million. The proceeds were used to repay borrowings
under ATLANTIC's $350 million unsecured line of credit.
Planned Capital Offerings
In connection with the Merger discussed in Note 5, ATLANTIC has commenced a
rights offering to subscribe for and purchase 2,552,770 Shares. ATLANTIC's
shareholders will receive one right for each Share held on August 6, 1997.
Eight rights entitle the holder to purchase one Share at a price of $22.375
per Share. The rights are transferable and expire on September 9, 1997. The
rights are being offered to allow ATLANTIC's shareholders (other than Security
Capital) to maintain their relative ownership in ATLANTIC by purchasing
additional Shares at a price which is below the price at which Security
Capital is receiving Shares in the Merger.
ATLANTIC plans to offer approximately $50 million (which may be increased or
decreased subject to market conditions) of its shares of Series A Cumulative
Redeemable Preferred Stock, par value $.01 per share (the "Series A Preferred
Shares"). Holders of the Series A Preferred Shares will be entitled to receive
cumulative preferential cash distributions at a rate to be determined. The
Series A Preferred Shares will be redeemable after a specified date by
ATLANTIC for cash at the redemption price to be determined, plus all accrued
and unpaid distributions. Subject to certain exceptions, the holders of Series
A Preferred Shares will have no voting rights. The Series A Preferred Shares
will not be convertible into or exchangeable for any other property or
securities of ATLANTIC.
Additionally, ATLANTIC plans to offer approximately $150 million (which may
be increased or decreased subject to market conditions) of its unsecured
senior debt securities (the "Notes"). The Notes will be direct, senior
unsecured obligations of ATLANTIC and will rank equally with all other
unsecured and unsubordinated indebtedness of ATLANTIC from time to time
outstanding. The Notes will bear interest at stated rates to be determined,
payable semiannually in arrears. Principal installments will be paid in each
year on the Notes beginning in a specified year, so that the Notes will
amortize beginning in such year. The Notes will be redeemable at any time at
the option of ATLANTIC, in whole or in part, at a redemption price equal to
the principal amount of the Notes being redeemed plus accrued interest thereon
to the redemption date plus a make-whole amount, if any.
ATLANTIC expects to complete all three planned offerings in the third
quarter of 1997 and the funds therefrom will be used to repay borrowings under
ATLANTIC's unsecured line of credit.
Distributions
ATLANTIC paid quarterly distributions of $0.39 per Share on February 19,
1997 and May 27, 1997. On July 21, 1997 ATLANTIC's Board declared a
distribution of $0.39 per Share for the third quarter of 1997. The
distribution is payable on August 26, 1997 to shareholders of record on August
12, 1997.
Earnings Per Share
In the fourth quarter of 1997, ATLANTIC will adopt Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share, which changes the
method used to compute earnings per share. The impact of SFAS No. 128 on the
calculation of ATLANTIC's earnings per share is not expected to be material.
13
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 7 LONG-TERM INCENTIVE PLAN
The Board has adopted, subject to shareholder approval, the 1997 Incentive
Plan (the "Incentive Plan") which authorizes the establishment of one or more
option programs and share purchase programs and the award of share grants. No
more than 3,000,000 Shares in the aggregate may be awarded under the Incentive
Plan and no individual may be granted awards with respect to more than 500,000
Shares in any one-year period. Options awarded under the Incentive Plan may be
either incentive share options or non-qualified share options. Options become
exercisable and expire in accordance with the terms established by the
Compensation Committee of the Board (the "Compensation Committee"). The
Incentive Plan provides generally that participants who are awarded options
will also receive dividend equivalent units with respect to the options. The
dividend equivalent units will be subject to the same vesting schedule as the
options and will be payable when the options are exercised, unless the
participant elects to defer receipt, or expire. Each dividend equivalent unit
also accumulates additional dividend equivalent units on an annual basis. All
dividend equivalent units are paid in the form of Shares at the rate of one
Share per dividend equivalent unit.
The Incentive Plan provides that the Compensation Committee may award
participants performance stock, subject to achievement of performance
objectives. The number of Shares and the performance measures and periods
shall be established by the Compensation Committee at the time the award is
made, provided that any performance period shall be at least one year.
Concurrently with the consummation of the Merger, certain officers and
employees of ATLANTIC will be granted options to purchase Shares at the
closing price of the Shares on the date the Incentive Plan is approved by
shareholders. Additionally, ATLANTIC will permit officers and employees to
purchase up to a total of $14,435,000 of Shares at the closing price of the
Shares on the date the Incentive Plan is approved by shareholders with two
matching options for each Share purchased. Each matching option shall have an
exercise price equal to the closing price of one Share on the date the
Incentive Plan is approved by the shareholders. No dividend equivalent units
will be issued with respect to such matching options. ATLANTIC will make loans
for up to 95% of the purchase price available to participants who elect to
purchase Shares. Each loan will be full recourse to the participant and be
secured by the purchased Shares. ATLANTIC's proxy statement has been mailed to
its shareholders and the shareholder vote is scheduled to be held on September
8, 1997.
14
<PAGE>
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 June 30, 1997 and the related condensed
statements of earnings for the three and six months ended June 30, 1997 and
1996 and the condensed statements of cash flows for the six months ended June
30, 1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial statements 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 reviews, 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, 1996 and the related statements of earnings, shareholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated February 3, 1997, 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, 1996, is fairly
stated, in all material respects, in relation to the balance sheet from which
it has been derived.
Ernst & Young LLP
Dallas, Texas
July 22, 1997, except for
Notes 5 and 6 as to which the date is August 5, 1997
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with ATLANTIC's
financial statements and the notes thereto included in Item 1 of this report.
The statements contained in this discussion and elsewhere in this report 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. These forward-looking statements are based on current
expectations, estimates and projections about the industry and markets in which
ATLANTIC operates, management's beliefs and assumptions made by management.
Words such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements. ATLANTIC's operating results depend primarily on
income from multifamily communities, 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 communities. Capital and credit
market conditions which affect ATLANTIC's cost of capital also influence
operating results.
OVERVIEW
Since its inception on October 26, 1993 and through June 30, 1997, ATLANTIC
has amassed a portfolio of 26,232 multifamily units with a total expected
investment cost of $1.43 billion located in the southeastern United States.
Additionally, at June 30, 1997, ATLANTIC had land in planning and under control
for the development of 3,406 units with a total expected development cost of
$222.8 million. ATLANTIC's investment in real estate has been financed through
both debt and equity. From inception through June 30, 1997, ATLANTIC has raised
approximately $888.7 million in net equity, primarily through private and
public sales of Shares. Additionally, ATLANTIC had long-term mortgage debt at
June 30, 1997 of approximately $155.0 million, which is secured by certain of
the communities acquired. ATLANTIC's $350 million unsecured line of credit
provided the remaining investment capital.
16
<PAGE>
The following table summarizes ATLANTIC's multifamily investment activity
(dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED
MARCH 31, 1997 JUNE 30, 1997 JUNE 30, 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Operating Communities at End of
Period;
Communities...................... 70 69 69
Units............................ 19,241 19,265 19,265
Total investment(1).............. $968,081 $979,127 $979,127
Cost per unit.................... $ 50.3 $ 50.8 $ 50.8
Development Communities
Starts During Period:
Communities...................... 2 3 5
Units............................ 668 620 1,288
Total investment(1).............. $ 44,161 $ 37,095 $ 81,256
Cost per unit.................... $ 66.1 $ 59.8 $ 63.1
Completions During Period:
Communities...................... -- 1 1
Units............................ -- 384 384
Total investment(1).............. -- $ 21,520 $ 21,520
Cost per unit.................... -- $ 56.0 $ 56.0
Stabilizations During Period:
Communities...................... 1 -- 1
Units............................ 408 -- 408
Total investment(1).............. $ 20,799 -- $ 20,799
Cost per unit.................... $ 51.0 -- $ 51.0
Under Construction at End of
Period:
Communities...................... 16 18 18
Units............................ 5,395 5,487 5,487
Total investment(1).............. $335,591 $347,177 $347,177
Cost per unit.................... $ 62.2 $ 63.3 $ 63.3
Investment to date............... $238,176 $250,526 $250,526
Acquisitions N/A N/A N/A
Dispositions:
Communities...................... -- 2 2
Units............................ -- 360 360
Proceeds......................... -- $ 12,602 $ 12,602
Gain............................. -- $ 259 $ 259
</TABLE>
- --------
(1) For operating communities, represents cost at June 30, 1997 plus budgeted
renovations. For communities under construction, represents cost through
June 30, 1997 plus additional budgeted development expenditures at June
30, 1997, which include the cost of land, fees, permits, payments to
contractors, architectural and engineering fees and interest and property
taxes to be capitalized during the construction period.
At June 30, 1997, 96.2% of ATLANTIC's portfolio, based upon total expected
investment, was located in ATLANTIC's primary target market cities. These
primary target market cities and submarkets have benefited substantially in
recent periods from demographic trends, in particular population and job
growth. From July 1993 to July 1995, the population growth rate in ATLANTIC's
primary target market cities (3.8%) exceeded the population growth rate in the
United States as a whole (2.0%) based upon U.S. Census Bureau information.
From 1993 to 1996, the job growth rate in ATLANTIC's primary target market
cities (10.7%) exceeded the job growth rate in the United States as a whole
(8.0%), based upon U.S. Department of Labor Statistics information. As a
result, the demand for and supply of multifamily units in ATLANTIC's primary
target market cities has increased. The increases in aggregate demand for and
supply of multifamily units have resulted in an increase in ATLANTIC's rental
rates in each multifamily product type in ATLANTIC's portfolio and a slight
reduction in occupancy levels with the net result being a positive effect on
ATLANTIC's operating results.
17
<PAGE>
ATLANTIC's operating results are a function of rental collections and rental
expenses. Rental collections are a function of rental rates and occupancy
levels achieved. ATLANTIC's operating personnel continually monitor rental
rates and occupancy levels in an effort to maximize rental collections. At
times, ATLANTIC finds it advantageous to increase rental rates even though
this may cause occupancy levels to decrease as long as the expected result is
an increase in rental collections. While ATLANTIC experienced a slight
decrease in same store community occupancy during the first six months of 1997
over the first six months of 1996 (94.66% compared to 94.93%), rental
collections during the first six months of 1997 have increased by 2.17% over
the first six months of 1996. ATLANTIC expects that rental collections will
continue to increase at approximately this same pace.
ATLANTIC's rental expenses as a percentage of rental revenues for ATLANTIC's
same store communities have generally remained flat (ranging between 39.4% and
40.5%), primarily due to a continual effort by ATLANTIC to reduce resident
turnover, thereby reducing the costs associated with re-leasing vacated units.
ATLANTIC expects rental expenses as a percentage of rental revenues to remain
at a level consistent with the level achieved over the past two years. The
expected trends in rental rates, occupancy, and rental expenses are expected
to have a positive impact on ATLANTIC's future operating results. See
additional discussion below in "--Results of Operations-Communities Fully
Operating Throughout Both Periods".
ATLANTIC believes that development of multifamily communities from the
ground up, which are built for long-term ownership and designed to meet broad
renter preferences and demographic trends, will provide a greater source of
long-term cash flow growth in the future. Therefore, while land prices are
favorable, ATLANTIC has acquired and will continue to acquire, on an
unleveraged basis, prudent amounts of land zoned for multifamily development.
ATLANTIC believes its ability to compete is significantly enhanced relative to
other companies because of the REIT Manager's depth of development and
acquisition personnel and presence in local markets combined with ATLANTIC's
access to investment capital.
ATLANTIC's overall results of operations and financial condition for the six
months ended June 30, 1997 and 1996 have been significantly influenced by
ATLANTIC's investment activity. Detailed information about this investment
activity during the six months ended June 30, 1997, which will significantly
influence future operations, is provided below.
Current Development Activity
At June 30, 1997, ATLANTIC had 5,487 units under construction, representing
a total expected investment cost of $347.2 million. These development
communities are summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
NUMBER FUNDED TOTAL
OF COST TO EXPECTED AVERAGE %
UNITS DATE INVESTMENT(1) LEASED(2)
------ -------- ------------ ---------
<S> <C> <C> <C> <C>
Communities under construction and in
lease-up (3).......................... 3,887 $226,055 $245,516 82.3%
Communities under construction, but not
yet in lease-up (3)................... 1,600 24,471 101,661 N/A
----- -------- --------
Total communities under
construction...................... 5,487 $250,526 $347,177
===== ======== ========
</TABLE>
- --------
(1) Represents cost through June 30, 1997 plus additional budgeted development
expenditures at June 30, 1997, which include the cost of land, fees,
permits, payments to contractors, architectural and engineering fees and
interest and property taxes to be capitalized during the construction
period.
(2) The percentage leased is based on units completed and available for lease
at June 30, 1997.
(3) A development community is considered in "lease-up" once ATLANTIC begins
leasing completed units.
There are risks associated with ATLANTIC's development and construction
activities which include: development and acquisition opportunities explored
by ATLANTIC may be abandoned; construction costs of a community may exceed
original estimates due to increased materials, labor or other expenses, which
could make the completed community's yields less economical; occupancy rates
and rents at a newly completed community
18
<PAGE>
are dependent on a number of factors, including market and general economic
conditions, and may not be sufficient to make the community profitable; funds
may not be available on favorable terms for the development of a community;
and construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs. Development activities
are also subject to risks relating to the inability to obtain, or delays in
obtaining, all necessary land-use, building, occupancy and other required
governmental permits and authorizations, although ATLANTIC mitigates a portion
of this risk by only investing in zoned land parcels with entitlements already
in place. The occurrence of any of the events described above could adversely
affect ATLANTIC's ability to achieve its projected yields on communities under
development or redevelopment.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996
Net earnings for the six months ended June 30, 1997 and 1996 were $22.0
million and $16.4 million, respectively. Net earnings increased $5.6 million
in the six months ended June 30, 1997 over the six months ended June 30, 1996.
Property Operations
At June 30, 1997, ATLANTIC had 19,265 operating multifamily units as
compared to 17,109 operating multifamily units at June 30, 1996. The increased
number of communities in operation resulted in increases in rental income
($17.1 million in 1997 over 1996), rental expenses ($3.4 million in 1997 over
1996), real estate taxes ($1.8 million in 1997 over 1996), property management
fees ($0.7 million in 1997 over 1996) and depreciation ($3.0 million in 1997
over 1996).
During the period prior to a community being stabilized, management begins
implementing expense controls, reconfiguring the resident mix, supervising
renovations and implementing a strategy to increase rental income. The full
benefits of the changes are not reflected until the communities are
stabilized. At June 30, 1997, 27.3% of ATLANTIC's operating multifamily
communities, based on total expected investment cost, were classified as pre-
stabilized as compared to 31.9% at June 30, 1996.
Because ATLANTIC will be completing construction on its current development
portfolio and acquiring additional operating communities in its target market,
ATLANTIC anticipates increases in rental income and property-level expenses in
subsequent periods.
Communities Fully Operating Throughout Both Periods
The following table presents the operating performance of ATLANTIC's 47
"same store" communities that were fully operational throughout the first six
months of 1996 and 1997. Operating expenses and net operating income have been
adjusted for pre-stabilized versus stabilized accounting differences that
result from capitalizing certain costs during the period after acquisition
when a community is being repositioned and is classified as pre-stabilized and
expensing those costs once repositioning is completed and the community is
classified as stabilized. The same store communities consist of 12,783 units
at a total expected investment cost of $646.6 million (66.04% of ATLANTIC's
total operating portfolio) at June 30, 1997. A summary of the operating
performance of the same store communities is as follows:
<TABLE>
<S> <C>
FIRST SIX MONTHS OF 1997 COMPARED TO FIRST SIX MONTHS OF 1996:
Collections growth............................................... 2.17%
Operating expense growth, as adjusted............................ 0.78%
Net operating income growth, as adjusted......................... 3.07%
SIX MONTHS ENDED JUNE 30, 1997:
Average physical occupancy....................................... 94.66%
Property operating expense ratio................................. 40.16%
Actual average rental rate per unit.............................. $ 714
Recurring capital expenditures per unit.......................... $ 117
</TABLE>
19
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
AVERAGE AVERAGE COLLECTIONS TOTAL
PHYSICAL PHYSICAL GROWTH 1997 SAME STORE ATLANTIC
OCCUPANCY OCCUPANCY COMPARED TO COMMUNITIES PORTFOLIO%
1997 1996 1996 (1) % BY MARKET BY MARKET
--------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Mid-Atlantic:
Charlotte, North
Carolina............... 93.97% 95.86% (4.09)% 2.39% 6.62%
Greenville, South
Carolina(1)............ -- -- -- -- 0.84
Memphis, Tennessee...... 91.93 93.24 (4.01) 2.71 3.23
Nashville, Tennessee.... 94.36 94.64 0.24 5.35 4.41
Raleigh, North Carolina. 95.51 95.29 1.49 2.49 7.78
Richmond, Virginia...... 95.65 96.25 3.21 4.61 7.06
Washington, D.C......... 96.31 93.99 5.38 7.19 9.97
----- ----- ----- ------ ------
Total Mid-Atlantic.... 94.68% 94.71% 1.39% 24.74% 39.91%
===== ===== ===== ====== ======
South Atlantic:
Atlanta, Georgia........ 93.99% 94.60% 1.50% 42.91% 28.59%
Birmingham, Alabama..... 95.19 94.79 (0.28) 4.40 5.45
Ft. Lauderdale/West Palm
Beach Florida.......... 95.77 95.09 5.60 7.28 9.90
Jacksonville, Florida... 92.58 98.00 (2.65) 1.90 6.13
Orlando, Florida........ 95.45 95.84 4.44 6.48 3.16
Tampa/Ft.
Myers/Sarasota,
Florida................ 95.75 95.40 3.94 12.29 6.86
----- ----- ----- ------ ------
Total South Atlantic.. 94.66% 95.00% 2.42% 75.26% 60.09%
----- ----- ----- ------ ------
Totals................ 94.66% 94.93% 2.17% 100.00% 100.00%
===== ===== ===== ====== ======
</TABLE>
- --------
(1) ATLANTIC entered this market subsequent to January 1, 1996. Therefore,
there are no communities for the same store comparison.
Development Dilution
ATLANTIC's development activity is dilutive to net earnings and funds from
operations in the short term, but is expected to add significantly to
ATLANTIC's long-term performance as the developments reach stabilization later
in 1997 and in subsequent years.
During the construction period, the reduction to interest expense resulting
from the capitalization of interest on units under construction is less than
the operating income which could be earned on those expenditures if the
community were complete and earning a stabilized return, thus resulting in
dilution. Essentially, the return on investment during the construction period
is equivalent to ATLANTIC's cost of funds.
The lease-up phase commences when units are placed in service. During the
lease-up phase, ATLANTIC's policy is to expense operating expenses (including
pre-opening marketing expenses) and interest expense which during the
construction period is capitalized. The operating expenses and the interest
expense on such completed units will typically exceed rental revenues, due to
less than break-even occupancy, thus resulting in dilution in the form of a
"lease-up" deficit. These deficits are typically experienced for a period of
two to four months after "first units" are placed in service.
Development dilution begins to decline once occupancy increases and revenues
from completed units exceed the operating expenses and interest expense
associated with such completed units. However, the net operating income
generated during this pre-stabilized period is less than the net operating
income which would be earned if the community were stabilized. The time
required to achieve stabilization generally ranges from six to twelve months
after completion of construction.
20
<PAGE>
Homestead Convertible Mortgages Interest Income
ATLANTIC began funding the Homestead Convertible Mortgages in 1997. At June
30, 1997 ATLANTIC had funded $52.0 million of its total funding commitment to
Homestead of $111.1 million. For the six months ended June 30, 1997 ATLANTIC
recognized interest income related to these mortgages of $929,000. The
interest income will increase as ATLANTIC funds the remaining Homestead
Convertible Mortgages in 1997 and early 1998.
The aggregate income recognized on the Homestead Convertible Mortgages
consists of (i) the interest income recognized at 9% per annum, (ii) the
amortization of the original issue premium which reduces income, (iii) the
amortization of the discount on the conversion feature which increases income,
and, (iv) the amortization of the deferred commitment fee which increases
income. ATLANTIC uses the effective interest method to calculate the
amortization of all items associated with the Homestead Convertible Mortgages.
The effective interest rate on the funded amount is 8.46% per annum for
purposes of calculating net earnings. The amortization of the discount on the
conversion feature and the amortization of the deferred commitment fee are
deducted from net earnings in calculating funds from operations. The effective
interest rate on the funded amount is 7.09% per annum for purposes of
calculating funds from operations.
Interest Expense
The following summarizes ATLANTIC's interest expense (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
--------------
1997 1996
------ ------
<S> <C> <C>
Mortgages................................................. $5,354 $4,151
Line of credit............................................ 9,353 8,540
Capitalized interest...................................... (5,322) (4,585)
------ ------
Total interest expense................................ $9,385 $8,106
====== ======
</TABLE>
Mortgage interest expense increased $1.2 million in the six months ended
June 30, 1997 as compared to the same period in 1996. This increase is the
result of additional weighted average mortgage debt outstanding.
Line of credit interest expense increased $0.8 million in the six months
ended June 30, 1997 over the same period in 1996. This increase is primarily a
function of an increase in the average outstanding balance ($257.3 million in
1997 as compared to $203.8 million in 1996), partially offset by a lower
weighted-average daily interest rate (7.18% in 1997 as compared to 7.44% in
1996). The increase is further offset by a decrease in amortization of debt
issuance costs and other loan-related costs as a result of the write-off of
loan-related costs in the fourth quarter of 1996 in connection with the
extinguishment of ATLANTIC's previous secured line of credit facility.
The increase in interest expense is also offset by increases in capitalized
interest of $0.7 million in the six months ended June 30, 1997 as compared to
the same period in 1996. This increase in capitalized interest is the result
of ATLANTIC's increased development activity.
REIT Management Fee Paid to Affiliate
The REIT management fee paid by ATLANTIC increased by $1.5 million in the
six months ended June 30, 1997 as compared to the same period in 1996. 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 larger increase in revenues than expenses experienced by ATLANTIC
during the six months ended June 30, 1997. The interest income recognized on
the Homestead Convertible Mortgages is not included in the calculation of the
REIT management fee to be paid by ATLANTIC, therefore, the REIT management fee
calculated as a percentage of ATLANTIC's funds from operations will decline as
the Homestead Convertible Mortgages are funded and the related interest income
increases. See "--Proposed Merger Transaction" below for information regarding
the proposed merger transaction which would result in ATLANTIC becoming an
internally managed REIT with Security Capital remaining as ATLANTIC's largest
shareholder.
21
<PAGE>
Gains on Dispositions and Valuation of Long-Lived Investments
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 no longer meet ATLANTIC's investment
criteria and redeploy the proceeds therefrom, primarily through tax-deferred
exchanges, into assets with better prospects for long-term growth. ATLANTIC
disposed of two communities during the six months ended June 30, 1997.
ATLANTIC recognized an aggregate gain of $259,000 on these dispositions. At
June 30, 1997, ATLANTIC held a portion of the proceeds from one of these
dispositions aggregating $3,826,000 in an interest-bearing account pending
completion of the tax-deferred exchange. These communities accounted for
$306,000 and $675,000 of net operating income for the six months ended June
30, 1997 and 1996, respectively.
In July 1997 ATLANTIC disposed of a 504-unit development community that was
in lease-up and substantially completed. The proceeds from the disposition of
$36.3 million approximated the carrying value at June 30, 1997. The community,
which was being held for sale at June 30, 1997, accounted for $1,138,000 of
net operating income for the six months ended June 30, 1997.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. ATLANTIC
recognized a provision for possible loss of $200,000 during the six months
ended June 30, 1997 and $2,500,000 during 1996 associated with one of the
communities that was sold in 1997. At June 30, 1997, ATLANTIC's investments
are carried at cost, which is not in excess of fair market value.
Three Months Ended June 30, 1997 and 1996
Property revenues, operating expenses, depreciation, property level net
operating income and net earnings for the three months ended June 30, 1997
compared to the three months ended June 30, 1996 reflect changes similar to
those discussed in the preceding paragraphs for the comparison of the six
months ended on the same dates and the changes are substantially attributable
to the same reasons discussed in the preceding paragraphs.
ENVIRONMENTAL MATTERS
ATLANTIC is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence procedures, ATLANTIC has conducted Phase I environmental assessments
on each community prior to acquisition. The cost of complying with
environmental regulations was not material to ATLANTIC's results of
operations. ATLANTIC is not aware of any environmental condition on any of its
communities that 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,
Homestead commitment and shareholder distribution requirements. At June 30,
1997, ATLANTIC had unfunded commitments for multifamily developments under
construction of $96.7 million and unfunded commitments of $59.1 million in
connection with the Homestead convertible mortgage notes described below.
Operating Activities
Net cash flow provided by operating activities increased by $8.8 million for
the six months ended June 30, 1997 as compared to the same period in 1996
principally due to the increased number of communities in operation.
22
<PAGE>
Investing and Financing Activities
ATLANTIC's investment activities during the six months ended June 30, 1997,
which consisted primarily of acquiring and developing multifamily communities
and funding of the Homestead Convertible Mortgages, used $138.3 million of
cash, an increase of $7.8 million over the six months ended June 30, 1996.
ATLANTIC began construction on 1,288 multifamily units during the six months
ended June 30, 1997. ATLANTIC's net additional investment in real estate for
the six months ended June 30, 1997 was $80.3 million bringing its total real
estate investment at cost to $1.24 billion at June 30, 1997. For the six
months ended June 30, 1997, ATLANTIC funded $52.0 million under its funding
commitment agreement with Homestead.
ATLANTIC's financing activities provided net cash flow of $101.2 million for
the six months ended June 30, 1997 and $101.8 million for the six months ended
June 30, 1996. In 1997, ATLANTIC's financing activities consisted primarily of
borrowings on its line of credit of $50.8 million, net of repayments, and
proceeds from the sale of shares of $82.5 million. In 1996, borrowings on the
line of credit of $4.0 million, net of repayments, and proceeds from the sale
of shares of $119.1 million were the primary sources of financing funds.
The $82.5 million of proceeds from the sale of Shares was the result of an
underwritten public offering of 4,077,200 Shares that was completed in April
and May of 1997. The proceeds are net of commissions and offering expenses.
The Shares were sold at a price of $21.50 per Share.
Planned Capital Offerings
In connection with the Merger, ATLANTIC has commenced a rights offering to
subscribe for and purchase 2,552,770 Shares. ATLANTIC's shareholders will
receive one right for each Share held on August 6, 1997. Eight rights entitle
the holder to purchase one Share at a price of $22.375 per Share. The rights
are transferable and expire on September 9, 1997. The rights are being offered
to allow ATLANTIC's shareholders (other than Security Capital) to maintain
their relative ownership in ATLANTIC by purchasing additional Shares at a
price which is below the price at which Security Capital is receiving Shares
in the Merger.
On August 13, 1997, ATLANTIC priced a $50 million offering of its Series A
Preferred Shares at $25.00 per share. Holders of the Series A Preferred Shares
will be entitled to receive cumulative preferential cash distributions at a
rate of 8.625% per annum. The Series A Preferred Shares will be redeemable
after five years by ATLANTIC for cash at the redemption price of $25.00 per
share, plus all accrued and unpaid distributions. Subject to certain
exceptions, the holders of Series A Preferred Shares will have no voting
rights. The Series A Preferred Shares will not be convertible into or
exchangeable for any other property or securities of ATLANTIC.
Additionally, ATLANTIC plans to offer approximately $150 million of its
unsecured senior debt securities (the "Notes"). The Notes will be direct,
senior unsecured obligations of ATLANTIC and will rank equally with all other
unsecured and unsubordinated indebtedness of ATLANTIC from time to time
outstanding. The Notes will bear interest at stated rates to be determined,
payable semiannually in arrears. Principal installments amounts will be paid
in each year on the Notes beginning in a specified year, so that the Notes
will amortize beginning in such year. The Notes will be redeemable at any time
at the option of ATLANTIC, in whole or in part, at a redemption price equal to
the principal amount of the Notes being redeemed plus accrued interest thereon
to the redemption date plus a make-whole amount, if any.
ATLANTIC expects to complete all three planned offerings in the third
quarter of 1997 and the funds therefrom will be used to repay borrowings under
ATLANTIC's unsecured line of credit.
23
<PAGE>
Homestead Convertible Mortgages
At June 30, 1997, ATLANTIC had funded $52.0 million of its total $111.1
million commitment to Homestead. Upon full funding, ATLANTIC will have
Homestead Convertible Mortgages with a face amount of $98.0 million. These
mortgages are convertible into Homestead common stock on a basis of one share
of Homestead common stock for every $11.50 of principal face amount
outstanding, which would result in the ownership of approximately 8.5 million
shares of Homestead common stock. Assuming full funding and full conversion
and using the Homestead common stock closing price on June 30, 1997,
ATLANTIC's ownership in Homestead would result in the following incremental
value per ATLANTIC Share (in thousands, except per Share amounts):
<TABLE>
<S> <C>
Homestead common stock price..................................... $17.875
Conversion price................................................. 11.500
-------
Incremental value per share of Homestead common stock............ $ 6.375
Shares of Homestead common stock upon conversion (at full
funding)........................................................ 8,522
-------
Total incremental value from conversion.......................... $54,328
ATLANTIC Shares outstanding at June 30, 1997..................... 41,969
-------
Assumed incremental value per ATLANTIC Share..................... $ 1.29
=======
</TABLE>
Commitments
At June 30, 1997, ATLANTIC had 3,887 units under construction and in lease-
up with a total budgeted development cost of $245.5 million of which $19.5
million was unfunded. In addition ATLANTIC had 1,600 units under construction,
but not yet in lease-up, with a total budgeted development cost of $101.7
million of which $77.2 million was unfunded. ATLANTIC owned multifamily
developments in planning at June 30, 1997 aggregating 1,480 units located in
various target market cities with a total budgeted development cost of $99.0
million. ATLANTIC's multifamily developments in planning and under control at
June 30, 1997 aggregated 3,406 units with a total budgeted development cost of
$222.8 million. The foregoing developments are subject to a number of
conditions and ATLANTIC cannot predict with certainty that any of them will be
consummated.
At June 30, 1997, ATLANTIC had $5.4 million of budgeted capital expenditures
(major renovations, replacements or improvements with a substantial expected
economic life) for the remainder of 1997. At June 30, 1997, ATLANTIC had $59.1
million remaining to be funded under its funding commitment agreement with
Homestead.
ATLANTIC expects to finance construction, development and acquisition of
multifamily communities and fundings to Homestead primarily with cash on hand,
borrowings under its line of credit and cash from future securities offerings.
ATLANTIC believes that its current conservative ratio of long-term debt to
total long-term undepreciated book capitalization (which was 15.3% at June 30,
1997) 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.
Distributions
ATLANTIC's current distribution policy is to pay quarterly cash
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, quarterly cash distributions will be higher than quarterly
earnings, resulting in a reduction to shareholders' equity. In light of the
transaction with Homestead and ATLANTIC's initial public offering, the Board
announced a projected annual distribution level of $1.56 per Share for 1997 on
December 19, 1996. ATLANTIC paid quarterly cash distributions of $0.39 per
Share on February 19, 1997 and May 27, 1997. On July 21, 1997 the Board
declared a
24
<PAGE>
distribution of $0.39 per Share for the third quarter of 1997. The distribution
is payable on August 26, 1997 to holders of record of Shares on August 12,
1997. The payment of distributions is subject to the discretion of the Board
and is dependent upon the financial condition and operating results of
ATLANTIC.
Funds from Operations
Funds from operations represents ATLANTIC's net earnings computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains (or losses) from real estate transactions, provisions for possible
losses, extraordinary items and real estate depreciation. Funds from operations
should not be considered as an alternative to net earnings or any other GAAP
measurement of performance as an indicator of ATLANTIC's operating performance
or as an alternative to cash flows from operating, investing or financing
activities as a measure of liquidity. ATLANTIC believes that funds from
operations is helpful to a reader as a measure of the performance of an equity
REIT because, along with cash flow from operating activities, financing
activities and investing activities, it provides a reader with an indication of
the ability of ATLANTIC to incur and service debt, to make capital expenditures
and to fund other cash needs. On January 1, 1996, ATLANTIC adopted NAREIT's
revised definition of funds from operations. Under this more conservative
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 the revised definition. The
funds from operations measure presented by ATLANTIC, while consistent with the
NAREIT definition, will not be comparable to similarly titled measures of other
REITs which do not compute funds from operations in a manner consistent with
ATLANTIC. Funds from operations is not intended to represent cash made
available to shareholders.
In 1996, ATLANTIC sold its Homestead Village(R) extended-stay lodging assets
("Homestead Assets"). ATLANTIC believes that funds from operations for 1996
should be adjusted to reflect the effects of the sale of the Homestead Assets
on results of operations in order to be comparable. Accordingly, the table
below also presents pro forma funds from operations, which have been calculated
as if the sale of the Homestead Assets had occurred on January 1, 1996.
ATLANTIC believes that the pro forma funds from operations information
presented below provides a more meaningful comparison. However, the pro forma
funds from operations information does not give effect to or adjust for any
other events and is not necessarily indicative of what actual funds from
operations would have been if the Homestead transaction had occurred on January
1, 1996.
25
<PAGE>
Funds from operations and pro forma funds from operations were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net earnings......................... $ 11,830 $ 9,747 $ 22,008 $ 16,397
Add (deduct):
Depreciation....................... 6,451 4,793 12,583 9,597
Gain on disposition of Real Estate. (259) (662) (259) (662)
Provision for possible loss on
investments....................... -- -- 200 --
Amortization of discount on
conversion feature and deferred
commitment fee related to the
Homestead Convertible Mortgages... (81) -- (101) --
--------- --------- -------- --------
Funds from operations................ 17,941 13,878 34,431 25,332
Add (deduct) pro forma adjustments
relating to the sale of the
Homestead Assets:
Increase in interest expense (1)... -- (860) -- (1,710)
Other, net......................... -- 17 -- 29
REIT Management fee effect (2)..... -- 135 -- 269
--------- --------- -------- --------
Total pro forma adjustments...... -- (708) -- (1,412)
--------- --------- -------- --------
Pro forma funds from operations...... 17,941 13,170 34,431 23,920
Cash distributions paid.............. (16,337) (12,780) (31,115) (24,447)
--------- --------- -------- --------
Excess (deficit) of pro forma funds
from operations over cash
distributions paid.................. $ 1,604 $ 390 $ 3,316 $ (527)
========= ========= ======== ========
Weighted-average Shares outstanding
(as adjusted for one-for-two reverse
Share split)........................ 41,228 30,393 39,569 29,085
========= ========= ======== ========
</TABLE>
- --------
(1) Represents the increase in interest expense due to (i) the reduction in
capitalized interest that would have resulted from the sale of the
Homestead Assets that were under development and (ii) the increased
borrowings necessary to fund the $16.6 million cash payment to Homestead
upon closing of the Homestead transaction, as if these two items had
occurred on January 1, 1996.
(2) Represents the decrease in REIT Management fee that would have resulted
from the pro forma adjustments.
MERGER TRANSACTION
ATLANTIC has entered into a REIT management agreement with its REIT Manager
to provide REIT management services to ATLANTIC. The REIT Manager is a wholly-
owned subsidiary of Security Capital, which owned 51.3% of ATLANTIC's Shares
at June 30, 1997. SCG Realty Services currently manages approximately 93% of
ATLANTIC's multifamily properties. Security Capital owns 100% of SCG Realty
Services' voting shares. If the Merger discussed below is consummated, the
REIT management and property management agreements will be terminated.
On August 5, 1997, the Securities and Exchange Commission declared effective
a registration statement filed by Security Capital relating to warrants to
purchase Class B common stock of Security Capital and containing ATLANTIC's
proxy statement relating to the Merger whereby ATLANTIC would acquire the
operations and businesses of the REIT Manager and SCG Realty Services in
exchange for 2.3 million Shares valued at approximately $54.6 million. The
$54.6 million value was based on a three-year discounted analysis of net
operating income prepared by Security Capital and revised after negotiation
with the Special Committee. The number of Shares to be issued to Security
Capital was determined using a per Share price of $23.675 (the average market
price of Shares over the five-day period prior to the August 6, 1997 record
date for determining
26
<PAGE>
ATLANTIC's shareholders entitled to vote on the Merger). As a result of the
Merger, ATLANTIC will become an internally managed REIT and Security Capital
will remain ATLANTIC's largest shareholder. ATLANTIC's Board has approved the
Merger based on the recommendation of the Special Committee. ATLANTIC's proxy
statement has been mailed to its shareholders and the shareholder vote is
scheduled to be held on September 8, 1997. The Merger requires the approval of
a majority of the outstanding Shares. ATLANTIC expects the Merger will be
consummated prior to the end of the third quarter of 1997.
In addition, subject to and after the closing of the Merger and after the
closing of the rights offering described above in "--Liquidity and Capital
Resources--Planned Capital Offerings", ATLANTIC's shareholders will also
receive $46.9 million of warrants from Security Capital to purchase shares of
Security Capital Class B common stock. The number of Class B common shares
subject to these warrants will be based on the closing price of such shares on
the date the warrants are issued to a warrant distribution agent for subsequent
distribution to ATLANTIC's shareholders. The warrants will have a term of one
year. Security Capital is issuing these warrants to induce ATLANTIC's
shareholders to vote to approve the Merger and to raise additional equity
capital at a relatively low cost, in addition to other benefits.
Because ATLANTIC, the REIT Manager and SCG Realty Services are under common
control, the difference between the market value of the Shares issued to
Security Capital on the date the Merger is consummated and the net tangible
assets of the REIT Manager and SCG Realty Services being acquired by ATLANTIC
(approximately $1.3 million at June 30, 1997) will be accounted for as a
distribution to Security Capital.
27
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
At a meeting on May 29, 1997, the shareholders of ATLANTIC elected Mr. James
C. Potts as a Class III Director of ATLANTIC to serve until the annual meeting
of shareholders in the year 2000, with 36,250,358 Shares (86.5% of the total
shares outstanding of 41,891,580 on the record date of April 16, 1997) voting
for Mr. Potts' election and 5,629,489 Shares withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S> <C>
15 Letter from Ernst & Young LLP dated August 12, 1997
regarding unaudited financial information
27 Financial Data Schedule
99 Press release dated July 21, 1997
</TABLE>
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
DATE ITEMS REPORTED FINANCIAL STATEMENTS
---- -------------- --------------------
<S> <C> <C>
None
</TABLE>
28
<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 Controller
(Principal Financial and
Accounting Officer)
Date: August 13, 1997
29
<PAGE>
EXHIBIT 15
August 12, 1997
Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We are aware of the incorporation by reference in the Registration Statements
(Form S-8, Nos. 333-31419 and 333-25993) pertaining to the Security Capital
Atlantic Incorporated 1997 Long-Term Incentive Plan and Security Capital
Atlantic Incorporated Share Option Plan for Outside Directors of our report
dated July 22, 1997, except for Notes 5 and 6 as to which the date is August 5,
1997, relating to the unaudited condensed interim financial statements of
Security Capital Atlantic Incorporated that are included in its Form 10-Q for
the quarter ended June 30, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Ernst & Young LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,687
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,237,576
<DEPRECIATION> 52,885
<TOTAL-ASSETS> 1,279,605
<CURRENT-LIABILITIES> 0
<BONDS> 155,037
0
0
<COMMON> 420
<OTHER-SE> 805,717
<TOTAL-LIABILITY-AND-EQUITY> 1,279,605
<SALES> 80,822
<TOTAL-REVENUES> 81,912
<CGS> 0
<TOTAL-COSTS> 43,782
<OTHER-EXPENSES> 6,796
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 9,385
<INCOME-PRETAX> 22,008
<INCOME-TAX> 0
<INCOME-CONTINUING> 22,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,008
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
<PAGE>
Press Release
- - For Immediate Release -
SECURITY CAPITAL ATLANTIC INCORPORATED
Reports 6.1% Increase Year-To-Date
in Funds from Operations Over Prior Year Period
July 21, 1997 -- Security Capital Atlantic Incorporated (ATLANTIC) (NYSE:SCA)
reported Funds from Operations (FFO) of $17,941,000 or $0.44 per share for the
quarter ended June 30, 1997, compared with $13,170,000 or $0.43 per share in the
prior year period. For the first half of 1997, FFO was $34,431,000 or $0.87 per
share, an increase of 6.1% compared with $23,920,000 or $0.82 per share for the
same period of 1996. (The 1996 results have been restated on a pro forma basis
for the spin-off of ATLANTIC's Homestead Village(R) assets as if the transaction
had occurred on January 1, 1996.)
Total revenues for the second quarter of 1997 were $41,874,000, compared to
$32,977,000 for the same quarter of 1996. For the first half of 1997, total
revenues were $81,811,000, compared with $63,852,000 for the same period of
1996. Developments generated 39% of ATLANTIC's increase in FFO, with
acquisitions and the impact of repositioning these properties to meet ATLANTIC's
long-term investment objectives generating 43%. The remaining 18% of FFO growth
was produced by an increase in net operating income (NOI) for ATLANTIC's
same-store portfolio.
Constance B. Moore, Co-Chairman and Chief Operating Officer, said ATLANTIC's
performance for the quarter was in line with management's expectations.
"ATLANTIC's second quarter performance was impacted by a supply imbalance in
several of our markets, which we believe is temporary, and has resulted in
moderate collections growth," she said. In addition, during the second and third
quarters of 1996 the Atlanta market, which currently represents 43% of
ATLANTIC's same-store portfolio, experienced a one-time benefit due to the 1996
Summer Olympics, which resulted in unusually strong occupancy and rental rate
growth during that period.
NOI, as adjusted, for ATLANTIC's communities that were fully operational
throughout the first six months of 1997 and 1996, increased 3.07%. The increase
in NOI reflects a 2.17% increase in collections for the period and expense
growth of 0.78% for the period. Ms. Moore said ATLANTIC's management is focused
on improving operating efficiencies at the property level. The company's
continued focus on customer service has helped to stabilize resident turnover
and maintain occupancy. Turnover in the first six months of the year was 63.55%
and average occupancy for the same period was 94.66% for these communities.
James C. Potts, Co-Chairman and Chief Investment Officer, noted that ATLANTIC
continues to focus on its long-term growth strategy of developing
moderate-income communities, located in key submarkets within its target
markets. During the second quarter ATLANTIC commenced construction on $37.1
million of multifamily communities, representing 620 units, bringing total
developments under construction as of June 30, 1997, to $347.2 million (5,487
units) or approximately one-third of ATLANTIC's operating properties. While
current starts continued to outpace completions in the first half of 1997,
construction starts are expected to match completions by early 1998. "Our
development pipeline is diversified across nine target markets as identified by
our market research, and we carefully monitor the commencement of construction
to ensure that unit deliveries match anticipated demand," said Mr. Potts.
<PAGE>
Consistent with this development strategy, ATLANTIC' completed the acquisition
of 72.1 acres of land in three target markets for the development of new
communities. When development on this acquired land and other land owned or
under control is completed, the total investment will be $321.8 million. "We
anticipate starting between $200 to $250 million of this significant pipeline
in 1998," Mr. Potts noted.
ATLANTIC had an average of $267.6 million of communities in lease-up and under
construction during the second quarter, compared to $171.1 million for the same
period in 1996, resulting in dilution of approximately $0.023 per share
(approximately $0.05 per share for the first half of 1997). While properties in
lease-up and under construction have a short-term dilutive impact on FFO, they
are expected to add significantly to ATLANTIC's long-term performance as they
achieve stabilization beginning in the fourth quarter of 1997 and beyond.
The company continues to selectively dispose of assets that no longer meet its
investment objectives and intends to redeploy those proceeds into properties
that will produce better long-term growth. During the second quarter, ATLANTIC
disposed of two communities realizing $12.6 million in gross proceeds and
disposed of a third community in July 1997 for $36.3 million. "Although these
dispositions will have a short-term dilutive impact on ATLANTIC's funds from
operations, we believe that it is in the best interest of our shareholders over
the long term," said Mr. Potts.
Also during the second quarter, ATLANTIC completed a 4,077,200 common share
equity offering, raising gross proceeds of $87.7 which were used to pay down the
company's $350 million unsecured line of credit. The company recently received
an investment-grade rating, allowing ATLANTIC to pursue its strategy of
long-term, fixed-rate unsecured corporate debt. ATLANTIC also reported that its
Board of Directors has declared a regular dividend of $0.39 per share, payable
on August 26, 1997, to shareholders of record on August 12, 1997.
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 June 30, 1997, ATLANTIC's portfolio of multifamily communities
included 19,265 operating units, 5,487 units under construction and an estimated
4,886 units in planning.
FOR MORE INFORMATION, CONTACT: K. Scott Canon (800)201-0632
or
Gerard de Gunzburg (212)838-9292
In addition to historical information, this press release contains
forward-looking statements under the federal securities laws. These statements
are based on current expectations, estimates and projections about the industry
and markets in which ATLANTIC operates, management's beliefs and assumptions
made by management. Forward-looking statements are not guarantees of future
performance and involve certain risks and uncertainties which are difficult to
predict. Actual operating results may be affected by changes in national and
local economic conditions, competitive market conditions, weather, obtaining
governmental approvals and meeting development schedules, and therefore, may
differ materially from what is expressed or forecasted in this press release.
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Second Quarter 1997
Financial Highlights
(in thousands, except per share amounts, share price and ratios)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------
1997 1996 % Change 1997 1996 % Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Performance (1)
Rental income $41,107 $32,876 25.04% $80,822 $63,685 26.91%
Net operating income $25,243 $20,318 24.24% $49,623 $38,391 29.26%
Funds from operations $17,941 $13,170 36.23% $34,431 $23,920 43.94%
Funds from operations per
share(2) $0.44 $0.43 2.33% $0.87 $0.82 6.10%
Cash distributions paid per
share(2)(3) $0.39 $0.42 -7.14% $0.78 $0.84 -7.14%
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 % Change
-----------------------------------------
<S> <C> <C> <C>
Financial Position
Assets
Real estate investments before depreciation $1,237,576 $1,157,235 6.94%
Total assets $1,279,605 $1,135,065 12.73%
Book Capitalization
Total long term debt $155,037 $155,790 -0.48%
Total debt $433,787 $383,790 13.03%
Total long term undepreciated book capitalization $1,014,059 $895,598 13.23%
Total undepreciated book capitalization $1,292,809 $1,123,598 15.06%
Total long term debt/total long term undepreciated book
capitalization 15.29% 17.40% -12.13%
Total debt/total undepreciated book capitalization 33.55% 34.16% -1.79%
Market Capitalization
Total shares outstanding 41,969 37,892 10.76%
Share price $23.9375 $24.50 -2.30%
Equity market capitalization $1,004,633 $928,354 8.22%
</TABLE>
NOTES
(1) Operating Performance: Except for distributions, 1996 information reflects
pro forma data assuming the spin-off of ATLANTIC's Homestead Village(R)
extended-stay lodging assets ("Homestead Assets") to a newly formed company,
Homestead Village Incorporated ("Homestead") as of January 1, 1996.
Distributions and all 1997 information reflect actual amounts.
(2) All share and per share amounts reflect the one-for-two reverse stock split
that occurred on September 10, 1996.
(3) In light of the Homestead Village spin-off and ATLANTIC's initial public
offering in October 1996, the ATLANTIC Board of Directors adjusted the
distribution level for 1997.
Supplemental Information Page 1
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Second Quarter 1997
Statements of Funds From Operations (1)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- ----------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $41,107 $32,876 $80,822 $63,685
Homestead convertible mortgages interest
income 663 -- 828 --
Other interest income 104 101 161 167
- ----------------------------------------------------------------------------------------------------
$41,874 $32,977 $81,811 $63,852
- ----------------------------------------------------------------------------------------------------
Expenses:
Rental expenses $10,260 $8,356 $20,234 $16,851
Real estate taxes 4,017 2,982 7,866 6,086
Property management fees:
Paid to affiliate 1,416 973 2,696 1,893
Paid to third parties 171 247 403 464
Interest 4,624 4,624 9,385 9,816
REIT management fee 3,200 2,446 6,229 4,436
General and administrative 237 148 502 330
Other 8 31 65 56
- ----------------------------------------------------------------------------------------------------
$23,933 $19,807 $47,380 $39,932
- ----------------------------------------------------------------------------------------------------
Funds from operations $17,941 $13,170 $34,431 $23,920
- ----------------------------------------------------------------------------------------------------
Weighted average shares outstanding (2) 41,228 30,393 39,569 29,085
- ----------------------------------------------------------------------------------------------------
Funds from operations per share (2) $0.44 $0.43 $0.87 $0.82
- ----------------------------------------------------------------------------------------------------
</TABLE>
Incremental Value Per ATLANTIC Share Resulting From the Ownership of Homestead
Convertible Mortgages
During 1997 and early 1998, ATLANTIC will complete the funding of $98.0
million of convertible mortgages on Homestead development properties. These
mortgages are convertible into Homestead common shares at a price of $11.50
per share. ATLANTIC's ownership of the Homestead mortgages results in the
following incremental value per ATLANTIC share.
<TABLE>
<S> <C>
Homestead common share price (at 6/30/97) $17.875
Conversion price $11.500
---------------------------------------------------------------------
Incremental value per Homestead common share $6.375
Homestead common shares upon conversion (at full funding) 8,522
---------------------------------------------------------------------
Total incremental value $54,328
ATLANTIC shares outstanding (at 6/30/97) 41,969
---------------------------------------------------------------------
Total Incremental value per ATLANTIC share $1.29
</TABLE>
NOTES
(1) The 1996 Statements of Funds From Operations were prepared on a pro forma
basis assuming the spin-off of Homestead Assets as of January 1, 1996. The
Homestead Village spin-off occurred on October 17, 1996; therefore, the 1997
Statements of Funds From Operations reflect actual amounts.
(2) All share and per share amounts reflect the one-for-two reverse stock split
that occurred on September 10, 1996.
Supplemental Information Page 2
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Second Quarter 1997
Statements of Earnings
(Historical Operating Results, Not Adjusted for Homestead Spin-off (1))
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- ----------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $41,107 $32,876 $80,822 $63,685
Homestead convertible mortgages interest income 744 -- 929 --
Other interest income 104 104 161 176
- ----------------------------------------------------------------------------------------------------
$41,955 $32,980 $81,912 $63,861
- ----------------------------------------------------------------------------------------------------
Expenses:
Rental expenses $10,260 $8,356 $20,234 $16,851
Real estate taxes 4,017 2,982 7,866 6,086
Property management fees:
Paid to affiliate 1,416 973 2,696 1,893
Paid to third parties 171 247 403 464
Depreciation 6,451 4,793 12,583 9,597
Interest 4,624 3,764 9,385 8,106
REIT management fee 3,200 2,581 6,229 4,704
General and administrative 237 160 502 347
Provision for possible loss on investments -- -- 200 --
Other 8 39 65 78
- ----------------------------------------------------------------------------------------------------
$30,384 $23,895 $60,163 $48,126
- ----------------------------------------------------------------------------------------------------
Earnings from operations $11,571 $9,085 $21,749 $15,735
Gain on disposition of real estate 259 662 259 662
- ----------------------------------------------------------------------------------------------------
Net earnings $11,830 $9,747 $22,008 $16,397
- ----------------------------------------------------------------------------------------------------
Weighted average shares outstanding (2) 41,228 30,393 39,569 29,085
- ----------------------------------------------------------------------------------------------------
Per share amounts:
Earnings per share (2) $0.29 $0.32 $0.56 $0.56
- ----------------------------------------------------------------------------------------------------
Cash distributions paid per share (2)(3) $0.39 $0.42 $0.78 $0.84
- ----------------------------------------------------------------------------------------------------
Reconciliation of Funds From Operations (1)
Net earnings $11,830 $9,747 $22,008 $16,397
Gain on disposition of real estate (259) (662) (259) (662)
Depreciation 6,451 4,793 12,583 9,597
Amortization related to Homestead convertible
mortgages (81) -- (101) --
Provision for possible loss on investments -- -- 200 --
- ----------------------------------------------------------------------------------------------------
Funds from operations $17,941 $13,878 $34,431 $25,332
- ----------------------------------------------------------------------------------------------------
Weighted average shares outstanding (2) 41,228 30,393 39,569 29,085
- ----------------------------------------------------------------------------------------------------
Funds from operations per share (2) $0.44 $0.46 $0.87 $0.87
- ----------------------------------------------------------------------------------------------------
</TABLE>
NOTES
(1) The Statements of Earnings represent ATLANTIC's historical earnings and are
reconciled to ATLANTIC's historical Funds From Operations. The 1996
statement does not give effect to pro forma calculations relating to the
spin-off of the Homestead Assets.
(2) All share and per share amounts reflect the one-for-two reverse stock split
that occurred on September 10, 1996.
(3) In light of the Homestead Village spin-off and ATLANTIC's initial public
offering in October 1996, the ATLANTIC Board of Directors adjusted the
distribution level for 1997.
Supplemental Information Page 3
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
Second Quarter 1997
Balance Sheets
(in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
- ------------------------------------------------------------------------------
Assets 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Real estate $1,237,576 $1,157,235
Less: accumulated depreciation 52,885 41,166
---------- ----------
1,184,691 1,116,069
Homestead convertible mortgages 71,304 --
---------------------------------------------------------------------------
Net investments 1,255,995 1,116,069
Cash and cash equivalents - unrestricted 2,861 4,339
Cash and cash equivalents - restricted
tax-deferred exchange proceeds 3,826 1,672
Other assets 16,923 12,985
---------------------------------------------------------------------------
Total assets $1,279,605 $1,135,065
---------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Liabilities and shareholders' equity
- ------------------------------------------------------------------------------
Liabilities:
Line of credit $278,750 $228,000
Mortgages payable 155,037 155,790
Distributions payable -- 14,778
Accounts payable 14,769 20,076
Accrued expenses and other liabilities 24,912 17,779
---------------------------------------------------------------------------
Total liabilities $473,468 $436,423
---------------------------------------------------------------------------
Shareholders' equity:
Shares, $0.01 par value $420 $379
Additional paid-in capital 830,072 747,640
Unrealized gains on Homestead convertible
mortgages 19,351 --
Distributions in excess of net earnings (43,706) (49,377)
---------------------------------------------------------------------------
Total shareholders' equity $806,137 $698,642
---------------------------------------------------------------------------
Total liabilities and shareholders'
equity $1,279,605 $1,135,065
---------------------------------------------------------------------------
Share data:
Weighted average shares outstanding 39,569 32,028
====== ======
Total shares outstanding 41,969 37,892
====== ======
</TABLE>
Supplemental Information Page 4
