<PAGE>
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May
9, 1997 was: 41,891,580
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<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets--March 31, 1997 (unaudited) and
December 31, 1996............................................ 3
Condensed Statements of Earnings--Three-month periods ended
March 31, 1997 and 1996 (unaudited).......................... 4
Condensed Statements of Cash Flows--Three-month periods ended
March 31, 1997 and 1996 (unaudited).......................... 5
Notes to Condensed Financial Statements...................... 6
Independent Accountant's Review Report....................... 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 14
PART II. Other Information
Item 4. Submission of Matters to Vote of Securities Holders.......... 23
Item 6. Exhibits and Reports on Form 8-K............................. 23
</TABLE>
2
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Real estate........................................... $1,208,229 $1,157,235
Less accumulated depreciation......................... 47,297 41,166
---------- ----------
1,160,932 1,116,069
Homestead Convertible Mortgages....................... 25,891 --
---------- ----------
Net investments................................... 1,186,823 1,116,069
Cash and cash equivalents--unrestricted............... 3,953 4,339
Cash and cash equivalents--restricted tax-deferred
exchange proceeds.................................... -- 1,672
Other assets.......................................... 13,455 12,985
---------- ----------
Total assets...................................... $1,204,231 $1,135,065
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Line of credit...................................... $ 295,250 $ 228,000
Mortgages payable................................... 155,418 155,790
Distributions payable............................... -- 14,778
Accounts payable.................................... 18,189 20,076
Accrued expenses and other liabilities.............. 20,654 17,779
---------- ----------
Total liabilities................................. 489,511 436,423
---------- ----------
Shareholders' equity:
Common shares (250,000,000 authorized, 37,891,580
issued and outstanding at March 31, 1997 and
December 31, 1996)................................. 379 379
Additional paid-in capital.......................... 747,640 747,640
Unrealized gains on Homestead Convertible Mortgages. 5,900 --
Distributions in excess of net earnings............. (39,199) (49,377)
---------- ----------
Total shareholders' equity........................ 714,720 698,642
---------- ----------
Total liabilities and shareholders' equity ....... $1,204,231 $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-MONTH
PERIODS
ENDED MARCH 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Revenues:
Rental income................................................ $39,715 $30,809
Homestead Convertible Mortgages interest income.............. 185 --
Other interest income........................................ 57 72
------- -------
39,957 30,881
------- -------
Expenses:
Rental expenses.............................................. 9,974 8,495
Real estate taxes............................................ 3,849 3,104
Property management fees:
Paid to affiliate.......................................... 1,280 920
Paid to third parties...................................... 232 217
Depreciation................................................. 6,132 4,804
Interest..................................................... 4,761 4,342
REIT management fee paid to affiliate........................ 3,029 2,123
General and administrative................................... 265 187
Provision for possible loss on investments................... 200 --
Other........................................................ 57 39
------- -------
29,779 24,231
------- -------
Net earnings................................................... $10,178 $ 6,650
======= =======
Weighted-average shares outstanding............................ 37,892 27,777
======= =======
Net earnings per share......................................... $ 0.27 $ 0.24
======= =======
Distributions paid per share................................... $ 0.39 $ 0.42
======= =======
</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>
THREE-MONTH PERIODS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating activities:
Net earnings........................................... $ 10,178 $ 6,650
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:
Depreciation and amortization........................ 6,205 5,236
Provision for possible loss on investments........... 200 --
Decrease in accounts payable......................... (2,056) (444)
Increase in accrued expenses and other liabilities... 2,884 2,076
Increase in other assets............................. (498) (1,188)
--------- ---------
Net cash flow provided by operating activities..... 16,913 12,330
--------- ---------
Investing activities:
Real estate investments................................ (51,026) (41,520)
Tax-deferred exchange proceeds held in escrow.......... 1,672 --
Fundings on Homestead Convertible Mortgages............ (20,000) --
--------- ---------
Net cash flow used by investing activities......... (69,354) (41,520)
--------- ---------
Financing activities:
Proceeds from sale of shares........................... -- 430
Proceeds from line of credit........................... 75,000 42,000
Payments on line of credit............................. (7,750) (6,000)
Proceeds from mortgage debt............................ -- 5,000
Distributions paid..................................... (14,778) (11,667)
Debt issuance costs incurred........................... (45) (281)
Regularly scheduled mortgage principal payments........ (372) (233)
--------- ---------
Net cash flow provided by financing activities..... 52,055 29,249
--------- ---------
Net increase (decrease) in cash and cash equivalents..... (386) 59
Cash and cash equivalents, beginning of period........... 4,339 6,494
--------- ---------
Cash and cash equivalents, end of period................. $ 3,953 $ 6,553
========= =========
Non-cash investing activities:
Unrealized gains on Homestead convertible mortgages.... $ 5,900 $ --
</TABLE>
See accompanying notes to the condensed financial statements.
5
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 1 GENERAL
The financial statements of Security Capital Atlantic Incorporated
("ATLANTIC") as of March 31, 1997 and for the three-month periods ended March
31, 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-month periods ended March 31, 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.
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>
MARCH 31, 1997 DECEMBER 31, 1996
----------------- --------------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Operating communities:
Acquired........................ $ 880,634 17,727 $ 878,029 17,727
Developed....................... 75,711 1,514 74,741 1,514
---------- ------ ---------- ------
956,345 19,241 952,770 19,241
Communities under construction(1). 238,176 5,395 194,587 4,727
Communities in planning(1):
Owned........................... 11,625 1,172(2) 7,795 868(2)
Under control(3)................ -- 2,332(2) -- 2,228(2)
---------- ------ ---------- ------
11,625 3,504 7,795 3,096
Land held for future development.. 2,083 -- 2,083 --
---------- ------ ---------- ------
Total......................... $1,208,229 28,140(4) $1,157,235(4) 27,064
========== ====== ========== ======
</TABLE>
- --------
(1) At March 31, 1997, ATLANTIC had unfunded commitments for communities under
construction of $97.4 million, for a total completed construction cost of
$335.6 million. Costs for communities in planning shown above are
primarily for land acquisitions.
(2)Unit information is based on management's estimates and is unaudited and
unreviewed.
(3) ATLANTIC's investment at March 31, 1997 and December 31, 1996 in land in
planning and under control for future development was $1.2 million and
$1.4 million, respectively, and is reflected in the "Other assets" caption
of ATLANTIC's balance sheets.
(4) Of ATLANTIC's real estate, at cost, communities located in Atlanta,
Georgia aggregated 30.1% and 30.7% at March 31, 1997 and December 31,
1996, respectively.
6
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The change in real estate, at cost, for the three-month period ended March
31, 1997 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997.................................... $1,157,235
Acquisition and renovation expenditures....................... 2,397
Development expenditures, including land acquisitions......... 48,279
Recurring capital expenditures................................ 518
Provision for possible loss on investments.................... (200)
----------
Balance at March 31, 1997..................................... $1,208,229
==========
</TABLE>
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 growth. ATLANTIC did not
dispose of any communities in the three-month period ended March 31, 1997. As
discussed below, one community was disposed of subsequent to March 31, 1997.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. At March
31, 1997, such investments are carried at cost, which is not in excess of fair
market value. ATLANTIC recognized a provision for possible loss of $200,000
during the three-month period ended March 31, 1997 and $2,500,000 during 1996
associated with a community that was being held for sale. ATLANTIC disposed of
this community in April 1997. The sales price approximated ATLANTIC's carrying
value at March 31, 1997. This community accounted for $224,000 and $236,000 of
net operating income for the three-month periods ended March 31, 1997 and
1996, respectively.
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 three-month period ended March 31, 1997
ATLANTIC funded $20.0 million.
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 8,522,000 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
7
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
feature of the Homestead Convertible Mortgages issued ($6,900,000 assuming
full funding) has been recognized along with an offsetting discount 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 $5,900,000 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 March 31, 1997 of
$16.875.
At March 31, 1997 the carrying value of the Homestead Convertible Mortgages
consisted of the following components (in thousands):
<TABLE>
<S> <C>
Face amount...................................................... $17,644
Original issue premium........................................... 2,356
-------
Amount funded.................................................... 20,000
Amortization of original issue premium........................... (20)
Initial value of conversion feature.............................. 1,243
Unamortized discount on conversion feature....................... (1,232)
Fair value adjustment............................................ 5,900
-------
Carrying value................................................. $25,891
=======
</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 $6,500,000. 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.
Income Recognized
The aggregate income recognized on the Homestead Convertible Mortgages
consists of (i) the interest income recognized at 9.0% 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 approximately 8.46% per
annum.
NOTE 4 LINE OF CREDIT AND MORTGAGES PAYABLE
Variable Interest Rate Swap Agreements
ATLANTIC has effectively eliminated its variable interest rate debt exposure
on all of 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
counterparty 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
8
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
between the variable amount received and the fixed amount paid represents
either the cost or the benefit of the interest rate swap agreement and is
recorded as an increase or decrease to the variable interest paid on the
underlying debt instrument.
Line of Credit
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
ranging from 1.0% to 1.375% (currently 1.375%) depending on ATLANTIC's credit
rating. ATLANTIC's objective is to achieve an investment-grade debt rating in
1997. ATLANTIC currently pays a commitment fee on the average unfunded line of
credit balance of 0.1875%. If ATLANTIC achieves an investment-grade debt
rating, the commitment fee on the average unfunded line of credit balance will
range 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. Specifically, 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 pays a fixed
rate of interest of 7.325% on the $100 million of borrowings. The interest rate
ATLANTIC will pay will be reduced if ATLANTIC achieves an investment-grade debt
rating and will range from 6.95% to 7.2% depending on the rating achieved.
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 $77,000 and $110,000 more in interest than it
received under the swap agreement during the three-month periods ended March
31, 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)
Mortgages Payable
Mortgages payable consisted of the following at March 31, 1997 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
INTEREST MATURITY PERIODIC PRINCIPAL
COMMUNITY RATE DATE PAYMENT TERMS BALANCE
- --------- -------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cameron Ridge............... 7.000% 09/10/98(1) fully amortizing $ 5,839
Country Place Village I..... 7.750% 11/01/00 (2) 1,995
Country Oaks................ 7.655% 07/01/02 (3) 5,918
Cameron at Hickory Grove.... 8.000% 07/10/03 (4) 5,967
Cameron Villas I............ 8.750% 04/01/24 fully amortizing 6,327
Cameron on the Cahaba II.... 7.125% 03/01/29 fully amortizing 8,005
--------
34,051
--------
Tax-exempt fixed rate or
variable rate subject to swap
agreements(5):
Cameron Station............. 6.000% 06/01/07 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).. (1,353)
--------
121,367
--------
$155,418
--------
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 financial 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.
(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 its 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 principle reserve
account based on a 30-year amortization.
10
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
ATLANTIC's swap agreements related to its tax-exempt variable rate mortgages
are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT OF FIXED
MORTGAGES TERM INTEREST RATE(1) ISSUER
--------- ---- ---------------- ------
<S> <C> <C> <C>
$23.1 million June 1995 to June 2002 6.48% General Re Financial Products Corporation
64.6 million June 1995 to June 2005 6.74% Morgan Guaranty Trust Company of New York
5.0 million March 1996 to March 2006 6.21% Morgan Guaranty Trust Company of New York
15.5 million August 1996 to August 2006 6.50% Morgan Stanley Derivative Products Inc.
-----
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 $493,000 and $428,000 more in interest during the three-month
periods ended March 31, 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 as 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 March 31, 1997 of
$51,019,000 and $207,462,000 serves as collateral for the conventional
mortgages payable and the tax-exempt mortgages payable, respectively.
The change in mortgages payable for the three-month period ended March 31,
1997 is as follows (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997...................................... $155,790
Regularly scheduled principal payments.......................... (372)
--------
Balance at March 31, 1997....................................... $155,418
========
</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 three-month period
ended March 31, 1997 was $7,516,000, including $2,553,000 of interest
capitalized during construction. Interest paid in cash on all outstanding debt
for the three-month period ended March 31, 1996 was $5,948,000, including
$2,036,000 of interest capitalized during construction.
Amortization of loan costs included in interest expense for the three-month
periods ended March 31, 1997 and 1996 was $72,000 and $432,000, respectively.
NOTE 5 SHAREHOLDERS' EQUITY
Capital Offerings
On April 10, 1997 ATLANTIC completed an underwritten public offering of
4,000,000 common shares, par value $.01, ("Shares") at a price of $21.50 per
Share. The proceeds from the sale of these Shares, net of
11
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONCLUDED)
underwriters' commissions and other expenses, were approximately $80.5
million. The proceeds were used to repay borrowings under ATLANTIC's $350
million line of credit which had an outstanding balance of $228,250,000 on May
9, 1997.
Distributions
ATLANTIC paid a quarterly distribution of $0.39 per Share on February 19,
1997. On April 22, 1997 the Board declared a distribution of $0.39 per Share
for the second quarter of 1997. The distribution is payable on May 27, 1997 to
shareholders of record on May 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.
NOTE 6 REIT MANAGER AND PROPERTY MANAGER ACQUISITION PROPOSAL
ATLANTIC has a REIT management agreement with Security Capital (Atlantic)
Incorporated (the "REIT Manager"), to provide REIT management services to
ATLANTIC. The REIT Manager is a wholly-owned subsidiary of Security Capital
Group Incorporated ("Security Capital Group"), which owned 56.9% of ATLANTIC's
Shares at March 31, 1997 (51.4% after the completion of ATLANTIC's public
offering in April 1997). The REIT management agreement is renewable annually,
subject to a determination by ATLANTIC's independent directors that the REIT
Manager's performance has been satisfactory and that the compensation payable
to the REIT Manager is fair.
SCG Realty Services Atlantic Incorporated ("SCG Realty Services") currently
manages approximately 88% of ATLANTIC's multifamily properties. Security
Capital Group owns 100% of SCG Realty Services' voting shares. Rates for
services performed by SCG Realty Services are reviewed annually by a third
party and are subject to approval by ATLANTIC's independent Directors and are
at rates prevailing in the markets in which ATLANTIC operates.
On May 1, 1997, Security Capital Group filed a Form S-4 Registration
Statement with the Securities and Exchange Commission containing ATLANTIC's
preliminary proxy statement and Security Capital Group's preliminary
prospectus relating to warrants to purchase Class B common stock of Security
Capital Group relating to a proposed merger transaction whereby ATLANTIC would
acquire the operations and businesses of its REIT Manager and SCG Realty
Services in exchange for Shares valued at approximately $54.6 million. The
number of Shares issuable to Security Capital Group will depend on the average
market price of the Shares over the five-day period prior to the record date,
subject to such average not being more than $25.8633 or less than $20.6367. As
a result of the transaction, ATLANTIC would become an internally managed REIT
and Security Capital Group would remain ATLANTIC's largest shareholder.
ATLANTIC's Board recently approved the proposed merger transaction based on
the recommendation of a special committee comprised of independent directors.
The proposed merger transaction requires the approval of a majority of the
outstanding Shares. ATLANTIC's proxy statement, after review and clearance by
the Securities and Exchange Commission, will be mailed to ATLANTIC's
shareholders prior to the shareholder vote.
12
<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 March 31, 1997 and the related condensed
statements of earnings and statements of cash flows for the three-month
periods ended March 31, 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
April 24, 1997
13
<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 undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. 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 March 31, 1997, ATLANTIC
has amassed a portfolio of 25,808 multifamily units with a total expected
investment cost of $1.38 billion located in the southeastern United States.
Additionally, at March 31, 1997, ATLANTIC had land in planning and under
control for the development of 2,332 units with a total budgeted development
cost of $137.5 million. ATLANTIC's investment in real estate has been financed
through both debt and equity. From inception through March 31, 1997, ATLANTIC
has raised approximately $806.2 million in net equity, primarily through
private and public sales of Shares. Additionally, ATLANTIC had long-term
mortgage debt at March 31, 1997 of approximately $155.4 million which is
secured by certain of the communities acquired. ATLANTIC's $350 million
unsecured line of credit provided the remaining investment capital.
14
<PAGE>
The following table summarizes ATLANTIC's multifamily investment activity
for the three-month period ended March 31, 1997 (dollar amounts in thousands):
<TABLE>
<S> <C>
Operating Communities at End of Period:
Communities................................................. 70
Units....................................................... 19,241
Total investment(1)......................................... $968,081
Cost per unit............................................... $50.3
Development Communities
Starts During Period:
Communities................................................. 2
Units....................................................... 668
Total investment(1)......................................... $ 42,910
Cost per unit............................................... $64.2
Stabilizations During Period:
Communities................................................. 1
Units....................................................... 408
Total investment(1)......................................... $ 20,799
Cost per unit............................................... $51.0
Under Construction at End of Period:
Communities................................................. 16
Units....................................................... 5,395
Total investment(1)......................................... $335,591
Cost per unit............................................... $62.2
Investment to date.......................................... $238,176
</TABLE>
- --------
(1) For operating communities, represents cost, including budgeted
renovations. For communities under construction, represents total budgeted
development cost, which includes 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.
There were no acquisitions or dispositions of operating communities during
the three-month period ended March 31, 1997.
ATLANTIC's target market cities and submarkets have benefited in recent
periods from demographic trends (including population and job growth) which
increase the demand for multifamily units. Consequently, rental rates for
multifamily units have increased more than the inflation rate for the last two
years. Management of expense levels also influence operating results. Over the
past two years, rental expenses (other than real estate taxes) as a percentage
of rental revenues for multifamily communities have generally remained flat
due to a continual effort to reduce resident turnover.
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
three-month periods ended March 31, 1997 and 1996 have been significantly
influenced by this investment activity. Detailed information about this
investment activity during the three-month period ended March 31, 1997, which
will significantly influence future operations, is provided below.
15
<PAGE>
Current Development Activity
At March 31, 1997, ATLANTIC had 5,395 units under construction, representing
a total expected investment cost of $335.6 million. These development
communities are summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
TOTAL AVERAGE
NUMBER INVESTMENT EXPECTED %
OF COST TO INVESTMENT LEASED
UNITS DATE (1) (2)
------ ---------- ---------- -------
<S> <C> <C> <C> <C>
Communities under construction and in
lease-up(3).............................. 2,628 $162,964 $168,355 55.8%
Other communities under construction...... 2,767 75,212 167,236 N/A
----- -------- --------
Total communities under construction.... 5,395 $238,176 $335,591
===== ======== ========
</TABLE>
- --------
(1) Represents total budgeted costs, which includes 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 total units upon completion.
(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 are dependent on a number of factors,
including market and general economic conditions, and may not be sufficient to
make the community profitable; financing 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
Three-month Periods Ended March 31, 1997 and 1996
Net earnings for the three-month periods ended March 31, 1997 and 1996 were
$10.2 million and $6.7 million, respectively. Net earnings increased $3.5
million in the three-month period ended March 31, 1997 over the three-month
period ended March 31, 1996.
Property Operations
At March 31, 1997, ATLANTIC had 19,241 operating multifamily units as
compared to 16,159 operating multifamily units at March 31, 1996. The
increased number of communities in operation resulted in increases in rental
income ($8.9 million in 1997 over 1996), rental expenses ($1.5 million in 1997
over 1996), real estate taxes ($0.7 million in 1997 over 1996), property
management fees ($0.4 million in 1997 over 1996) and depreciation ($1.3
million in 1997 over 1996).
During the period prior to a community being stabilized, the REIT Manager
and the property managers begin 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 March 31, 1997, 19.0% of ATLANTIC's
operating multifamily communities, based on total expected investment cost,
were classified as pre-stabilized as compared to 30.0% at March 31, 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.
16
<PAGE>
Communities Fully Operating Throughout Both Periods
The following table presents the operating performance of ATLANTIC's 50
"same store" communities that were fully operational throughout the first
quarter 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 13,503 units
at a total expected investment cost of $679.1 million (70.2% of ATLANTIC's
total operating portfolio) at March 31, 1997. A summary of the operating
performance of the same store communities is as follows:
<TABLE>
<CAPTION>
1997
COMPARED TO
1996(1)
-----------
<S> <C>
Collections growth............................................ 2.42 %
Operating expense decrease, as adjusted....................... (2.43)%
Net operating income growth, as adjusted...................... 5.72 %
</TABLE>
- --------
(1) Compares the three-month period ended March 31, 1997 to the same period in
1996.
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
MARCH 31, 1997
--------------
<S> <C>
Average physical occupancy................................. 94.36%
Property operating expense ratio........................... 40.05%
Actual average rental rate per unit........................ $ 711
Recurring capital expenditures per unit.................... $ 38
</TABLE>
<TABLE>
<CAPTION>
TOTAL
AVERAGE AVERAGE COLLECTIONS ATLANTIC
PHYSICAL PHYSICAL GROWTH SAME STORE PORTFOLIO
OCCUPANCY OCCUPANCY 1997 COMPARED COMMUNITIES % BY
1997 1996 TO 1996(1) % BY MARKET MARKET
--------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Mid-Atlantic:
Charlotte, North
Carolina............... 92.69% 96.36% (2.85)% 2.27% 5.72%
Greenville, South
Carolina(2)............ -- -- -- -- 0.85
Memphis, Tennessee...... 91.84 93.40 (4.27) 2.58 3.28
Nashville, Tennessee.... 94.42 94.70 0.31 5.09 4.48
Raleigh, North Carolina. 95.32 94.40 2.46 2.37 7.88
Richmond, Virginia...... 95.12 97.28 2.53 4.39 5.86
Washington, D.C......... 95.51 92.84 4.90 6.83 10.13
----- ----- ----- ------ ------
Total Mid-Atlantic.... 94.27% 94.69% 1.29 % 23.53% 38.20%
----- ----- ----- ------ ------
South Atlantic:
Atlanta, Georgia........ 93.20% 93.91% 2.87 % 40.78% 28.99%
Birmingham, Alabama..... 93.22 92.31 (1.28) 5.77 5.54
Ft. Lauderdale/West Palm
Beach Florida.......... 95.86 95.35 2.49 9.70 10.66
Jacksonville, Florida... 92.20 98.44 (3.96) 1.81 6.14
Orlando, Florida........ 95.91 95.65 4.64 6.16 3.21
Tampa/Ft.
Myers/Sarasota,
Florida................ 96.55 95.86 4.25 12.25 7.26
----- ----- ----- ------ ------
Total South Atlantic.. 94.38% 94.62% 2.75 % 76.47% 61.80%
----- ----- ----- ------ ------
Totals................ 94.36% 94.63% 2.42 % 100.00% 100.00%
===== ===== ===== ====== ======
</TABLE>
- --------
(1) Compares the three-month period ended March 31, 1997 to the same period in
1996.
(2) ATLANTIC entered this market subsequent to January 1, 1996; therefore,
there are no communities for the same store comparison.
17
<PAGE>
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.
Homestead Convertible Mortgages Interest Income
ATLANTIC began funding the Homestead Convertible Mortgages in 1997. At March
31, 1997 ATLANTIC had funded $20.0 million of its total funding commitment to
Homestead of $111.1 million. For the three-month period ended March 31, 1997
ATLANTIC recognized interest income related to these mortgages of $185,000.
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>
THREE-MONTH PERIODS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Mortgages........................................... $ 2,650 $ 2,041
Line of credit...................................... 4,664 4,337
Capitalized interest................................ (2,553) (2,036)
--------- ---------
Total interest expense............................ $ 4,761 $ 4,342
========= =========
</TABLE>
Mortgage interest expense increased $0.6 million in the three-month period
ended March 31, 1997 as compared to the same period in 1996. This increase is
the result of additional weighted average mortgage debt outstanding.
18
<PAGE>
Line of credit interest expense increased $0.3 million in the three-month
period ended March 31, 1997 over the same period in 1996. This increase is
primarily a function of an increase in the average outstanding balance ($260.9
million in 1997 as compared to $203.3 million in 1996), partially offset by a
lower weighted-average daily interest rate (7.10% in 1997 as compared to 7.61%
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.
The increase in interest expense is also offset by increases in capitalized
interest of $0.5 million in the three-month period ended March 31, 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 $0.9 million in the
three-month period ended March 31, 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 increases in revenues than expenses experienced by
ATLANTIC during the three-month period ended March 31, 1997. Interest income
recognized on the Homestead Convertible Mortgages received by ATLANTIC
pursuant to the funding commitment agreement entered into as part of the
Homestead transaction is not included in the calculation of the REIT
management fee 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 "Item 1. Financial Statements, Note 6--REIT Manager and
Property Manager Acquisition Proposal" for information regarding a proposed
merger transaction which would result in ATLANTIC becoming an internally
managed REIT with Security Capital Group remaining as ATLANTIC's largest
shareholder.
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 growth. ATLANTIC did not
dispose of any communities in the three-month period ended March 31, 1997. As
discussed below, one community was disposed of subsequent to March 31, 1997.
Long-lived investments held and used are periodically evaluated for
impairment and provisions for possible losses are made if required. At March
31, 1997, such investments are carried at cost, which is not in excess of fair
market value. ATLANTIC recognized provisions for possible loss of $0.2 million
during the three-month period ended March 31, 1997 and $2.5 million during
1996 associated with a community that was being held for sale. ATLANTIC
disposed of this community in April 1997. The sales price approximated
ATLANTIC's carrying value at March 31, 1997. This community accounted for
$224,000 and $236,000 of net operating income for the three-month periods
ended March 31, 1997 and 1996, respectively.
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,
19
<PAGE>
debt service, Homestead commitment and shareholder distribution requirements.
ATLANTIC expects to finance construction, development and acquisition of
multifamily communities primarily with cash on hand, borrowings under its line
of credit and cash from future securities offerings. After it has achieved a
substantial equity base and an investment-grade debt rating, ATLANTIC intends
to arrange fully amortizing, fixed rate, 15-year to 25-year unsecured debt to
finance additional acquisitions and developments. ATLANTIC believes that its
current conservative ratio of long-term debt to total long-term undepreciated
book capitalization (which was 16.9% at March 31, 1997 and is 15.6% after
giving effect to the equity offering that closed in April 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.
Operating Activities
Net cash flow provided by operating activities increased by $4.6 million for
the three-month period ended March 31, 1997 as compared to the same period in
1996 principally due to the increased number of communities in operation.
Investing and Financing Activities
ATLANTIC's investment activities during the three month-period ended March
31, 1997, which consisted primarily of acquiring and developing multifamily
communities, used $69.4 million of cash, an increase of $27.8 million over the
three-month period ended March 31, 1996.
ATLANTIC began construction on 668 multifamily units during the three-month
period ended March 31, 1997. ATLANTIC's net additional investment in real
estate at March 31, 1997 was $51.0 million bringing its total real estate
investment at cost to $1.21 billion. During the three-month period ended March
31, 1997, ATLANTIC funded $20.0 million under its funding commitment agreement
with Homestead. At April 30, 1997, ATLANTIC had unfunded commitments of $79.1
million under its funding commitment with Homestead.
At April 30, 1997, ATLANTIC had 5,011 units under construction with a total
budgeted development cost of $315.1 million of which $86.2 million was
unfunded. In addition, ATLANTIC owned multifamily developments in planning at
April 30, 1997 aggregating 1,172 units located in various target market cities
with a total budgeted development cost of $ 74.5 million. ATLANTIC's
multifamily developments under control at April 30, 1997 aggregated 2,164
units with a total budgeted development cost of $ 137.5 million. The foregoing
developments are subject to a number of conditions, and ATLANTIC cannot
predict with certainty that any of them will be consummated.
ATLANTIC's financing activities provided net cash flow of $52.1 million for
the three-month period ended March 31, 1997 and $29.2 million for the three-
month period ended March 31, 1996. In 1997, ATLANTIC's financing activities
consisted primarily of borrowings on its line of credit of $67.3 million, net
of repayments. In 1996, borrowings on the line of credit of $36.0 million net
of repayments were the primary source of financing funds. At May 9, 1997,
ATLANTIC had outstanding borrowings of $228.3 million on its $350 million line
of credit.
ATLANTIC completed an underwritten public offering of 4,000,000 Shares on
April 10, 1997 which generated $80.5 million of proceeds, net of commissions
and offering expenses. The Shares were sold at a price of $21.50 per Share.
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
20
<PAGE>
the transaction with Homestead and ATLANTIC's initial public offering the
ATLANTIC Board announced on December 19, 1996, a projected annual distribution
level of $1.56 per Share for 1997. ATLANTIC paid a quarterly cash distribution
of $0.39 per Share on February 19, 1997 for the first quarter of 1997. On
April 22, 1997 the ATLANTIC Board declared a distribution of $0.39 per Share
for the second quarter of 1997. The distribution is payable on May 27, 1997 to
shareholders of record on May 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 losses,
extraordinary items and depreciation. ATLANTIC's presentation of funds from
operations follows the National Association of Real Estate Investments Trusts'
definition of funds from operations.
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.
Funds from operations and pro forma funds from operations were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
THREE-MONTH PERIODS
ENDED MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net earnings....................................... $ 10,178 $ 6,650
Add (deduct):
Depreciation..................................... 6,132 4,804
Provision for possible loss on investments....... 200 --
Amortization of discount on conversion feature
and deferred commitment fee related to the
Homestead Convertible Mortgages ................ (20) --
--------- ---------
Funds from operations.............................. 16,490 11,454
--------- ---------
Add (deduct) pro forma adjustments relating to the
sale
of the Homestead Assets:
Increase in interest expense (1)................. -- (850)
Other, net....................................... -- 12
REIT Management fee effect (2)................... -- 134
--------- ---------
Total pro forma adjustments.................... -- (704)
--------- ---------
Pro forma funds from operations.................... 16,490 10,750
Cash distributions paid............................ (14,778) (11,667)
--------- ---------
Excess (deficit) of pro forma funds from operations
over cash distributions paid...................... $ 1,712 $ (917)
========= =========
Weighted-average Shares outstanding (as adjusted
for reverse Share split).......................... 37,892 27,777
========= =========
</TABLE>
21
<PAGE>
- --------
(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.
Funds from operations should not be considered as an alternative to net
income 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. Cash
flow from financing activities is expected to be substantially equivalent to
cash used in investing activities, as ATLANTIC utilizes revolving credit
borrowings to be refunded with sales of equity and long-term, fully amortizing
unsecured debt securities, to fund its investment activities. ATLANTIC's policy
is to expense, rather than capitalize, repairs and maintenance including carpet
and appliance replacements, in determining net income and funds from
operations. Only major renovations, replacements or improvements with a
substantial expected economic life (such as roofs, parking lots and additions)
are capitalized. Therefore, the funds from operations measure presented by
ATLANTIC may not be comparable to similarly titled measures of other REITs.
22
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <S>
15 Letter from Ernst & Young LLP dated May 12, 1997 regarding
unaudited financial information
27 Financial Data Schedule
99 Press release dated April 28, 1997
</TABLE>
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
DATE ITEMS REPORTED FINANCIAL STATEMENTS
---- -------------- --------------------
<S> <C> <C>
January 22, 1997 Item 5, Item 7 No
March 24, 1997 Item 5, Item 7 No
</TABLE>
23
<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: May 9, 1997
24
<PAGE>
Exhibit 15
May 12, 1997
Shareholders and Board of Directors
Security Capital Atlantic Incorporated
We are aware of the incorporation by reference in the Registration Statement on
Form S-8 pertaining to the Security Capital Atlantic Incorporated Share Option
Plan for Outside Directors filed on April 28, 1997 for our report dated April
24, 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 March 31, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our reports are not a
part of the registration statement 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,953
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,208,229
<DEPRECIATION> 47,297
<TOTAL-ASSETS> 1,204,231
<CURRENT-LIABILITIES> 0
<BONDS> 155,418
0
0
<COMMON> 379
<OTHER-SE> 714,341
<TOTAL-LIABILITY-AND-EQUITY> 1,204,231
<SALES> 39,715
<TOTAL-REVENUES> 39,957
<CGS> 0
<TOTAL-COSTS> 21,467
<OTHER-EXPENSES> 3,351
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 4,761
<INCOME-PRETAX> 10,178
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,178
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
<PAGE>
EXHIBIT 99
Press Release
- -For Immediate Release-
SECURITY CAPITAL ATLANTIC INCORPORATED
Announces
12.82% Increase in First-Quarter
Funds from Operations Per Share
April 28, 1997 -- Security Capital Atlantic Incorporated (ATLANTIC) (New
York Stock Exchange Symbol: SCA) reported that for the first quarter ended March
31, 1997, ATLANTIC generated Funds From Operations (FFO) of $16,490,000 or $0.44
per share, compared to $10,750,000 or $0.39 per share for the same quarter of
1996, representing an increase in FFO per share of 12.82%. Total revenues for
the first quarter of 1997 were $39,937,000, compared to $30,875,000 for the same
quarter 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.)
Constance B. Moore, Co-Chairman and Chief Operating Officer, attributed
the quarter's strong performance to development communities currently in
lease-up, representing a total investment of $168.4 million. ATLANTIC's
developments are leasing at rents 3.02% higher than budget and in line with
budgeted absorption schedules. In addition, four of ATLANTIC's completed
developments achieved stabilization within the last six months. Development
generated 29% of ATLANTIC's 12.82% increase in FFO. Acquisition activities and
the implementation of ATLANTIC's value-added operating systems generated 39% of
the FFO growth. The remaining 32% of FFO growth was produced by a 5.72% increase
in net operating income (NOI), as adjusted, for ATLANTIC's same-store portfolio.
James C. Potts, Co-Chairman and Chief Investment Officer, said ATLANTIC's
research-driven development program is expected to be the key driver of future
growth. "We are focused on development because it allows ATLANTIC to build
carefully designed multifamily product in selected high-growth submarkets
identified by our research team. The diversity of ATLANTIC's 12-state target
market, along with our development capabilities, should not only provide
ATLANTIC with sustainable long-term cash flow growth, but should allow us to
strategically deploy capital in markets that exhibit the strongest long-term
fundamentals."
By the end of the fourth quarter of 1996, the Atlanta market was
experiencing a short-term oversupply of product, primarily in the
upper-middle-income segment of the market, creating significant competition for
the upper-middle-income resident. "Our research indicates that the fundamental
demand characteristics in Atlanta continue to remain strong, and we expect the
temporary oversupply of multifamily communities to be absorbed by the end of the
year." Mr. Potts emphasized that ATLANTIC's development pipeline is diversified
throughout nine target market cities, with no single market representing more
than 20% of ATLANTIC's development capital.
During the first quarter of 1997, ATLANTIC commenced construction on $42.9
million of multifamily communities, representing 668 units, bringing total
developments under construction as of March 31, 1997, to $335.6 million, or
5,395 units. As these communities are completed and achieve stabilization, they
are expected to contribute significantly to FFO growth in 1997 and beyond. While
development is ATLANTIC's primary focus, the company will continue to
opportunistically acquire existing multifamily
<PAGE>
communities. Mr. Potts said that ATLANTIC is seeing fewer acquisition
opportunities that meet ATLANTIC's long-term investment objectives at attractive
returns. "However, we will continue to pursue acquisitions where we believe the
implementation of our focused management programs will create long-term value."
ATLANTIC's development strategy is focused on moderate-income communities
targeting households earning 65% to 90% of a submarket's median income. As of
March 31, 1997, 47.3% of ATLANTIC's operating portfolio and 71.8% of the
budgeted 1997 development starts were classified as moderate income. Ms. Moore
said that ATLANTIC's moderate-income communities continue to outperform
higher-end multifamily product. Moderate-income communities achieved collection
growth of 3.72% and maintained stable occupancy levels in the first quarter of
1997 over the same period of 1996, outperforming upper-middle-and middle-income
properties which realized collection growth of only 1.43% and a 1.10% drop in
occupancy.
"This continued strong performance from our moderate-income communities is
consistent with our research that indicates that moderate-income renters
represent one of the broadest yet most underserved segments of the renter
population. By targeting value-conscious renters and providing them with
state-of-the-art multifamily homes at a lower price point, we expect to reduce
resident turnover and increase NOI for our moderate-income portfolio. We
believe moderate-income communities will continue to outperform upper-income
communities, even during temporary periods of softness, resulting in
predictable, sustainable long-term cash flow growth," Ms. Moore said.
Since the end of the first quarter, ATLANTIC has successfully completed a
4-million-share common equity offering raising gross proceeds of $86.0 million,
further strengthening the balance sheet. As a result, management believes
ATLANTIC is well positioned to receive an investment-grade rating later this
year. ATLANTIC's long-term debt to total undepreciated book capitalization
declined to 15.6% after this offering. ATLANTIC also reported that its Board of
Directors has declared a regular dividend of $0.39 per share, payable on May 27,
1997, to shareholders of record on May 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 March 31, 1997, ATLANTIC's portfolio of garden-style
multifamily communities included 19,241 operating units, 5,395 units under
construction and an estimated 3,504 units in planning.
FOR MORE INFORMATION, CONTACT: K. Scott Canon
(800) 201-0632
or
Gerard de Gunzburg
(212) 838-9292
A copy of ATLANTIC's First-Quarter Supplemental Information is available by
request at (800) 201-0632.
<PAGE>
SECURITY CAPITAL ATLANTIC
Incorporated
All figures in this press release are unaudited
First Quarter 1997
Financial Highlights
(in thousands, except per share amounts, share price and ratios)
Three Months
Ended March 31,
---------------------------------------
1997 1996 % Change
---------------------------------------
Operating Performance (1)
Rental income $39,715 $30,809 28.91%
Net operating income $24,380 $18,073 34.90%
Funds from operations $16,490 $10,750 53.40%
Funds from operations per share (2) $0.44 $0.39 12.82%
Cash distribution paid per share (2)(3) $0.39 $0.42 -7.14%
March 31, December 31,
1997 1996 % Change
---------------------------------------
Financial Position
Assets
Real estate investments
before depreciation $1,208,229 $1,157,235 4.41%
Total assets $1,204,231 $1,135,065 6.09%
Book Capitalization
Total long term debt $155,418 $155,790 -0.24%
Total debt $450,668 $383,790 17.43%
Total long term undepreciated
book capitalization $917,435 $895,598 2.44%
Total undepreciated book
capitalization $1,212,685 $1,123,598 7.93%
Total long term debt/total long term
undepreciated book capitalization 16.94% 17.40% -2.64%
Total debt/total undepreciated
book capitalization 37.16% 34.16% 8.78%
Market Capitalization
Total shares outstanding 37,892 37,892 0.00%
Share price $22.25 $24.50 -9.18%
Equity market capitalization $843,097 $928,354 -9.18%
(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>
Statements of Funds From Operations (1)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Rental income $39,715 $30,809
Homestead convertible mortgages interest income 165 --
Other interest income 57 66
- ------------------------------------------------------------------------------
$39,937 $30,875
- ------------------------------------------------------------------------------
Expenses:
Rental expenses $ 9,974 $ 8,495
Real estate taxes 3,849 3,104
Property management fees:
Paid to affiliate 1,280 920
Paid to third parties 232 217
Interest 4,761 5,192
REIT management fee 3,029 1,990
General and administrative 265 182
Other 57 25
- ------------------------------------------------------------------------------
$23,447 $20,125
- ------------------------------------------------------------------------------
Funds from operations $16,490 $10,750
- ------------------------------------------------------------------------------
Weighted average shares outstanding (2) 37,892 27,777
- ------------------------------------------------------------------------------
Funds from operations per share (2) $0.44 $0.39
- ------------------------------------------------------------------------------
</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 3/31/97) $16.875
Conversion price $11.500
- -------------------------------------------------------------------
Incremental value per Homestead common share $ 5.375
Homestead common shares upon conversion (at full funding) 8,522
- -------------------------------------------------------------------
Total incremental value from conversion $45,806
ATLANTIC shares outstanding (at 3/31/97) 37,892
- -------------------------------------------------------------------
Incremental value per ATLANTIC share $1.21
=======
</TABLE>
NOTES
- -----
(1) The 1996 Statement of Funds From Operations was 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 Statement of Funds From Operations reflects 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>
<TABLE>
Statement of Earnings (1)
(in thousands except per share amounts)
Three Months Ended
March 31,
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Rental income $39,715 $30,809
Homestead convertible mortgages interest
income 185 --
Other interest income 57 72
----------------------------------------------------------------------------
$39,957 $30,881
----------------------------------------------------------------------------
Expenses:
Rental expenses $ 9,974 $ 8,495
Real estate taxes 3,849 3,104
Property management fees:
Paid to affiliate 1,280 920
Paid to third parties 232 217
Depreciation 6,132 4,804
Interest 4,761 4,342
REIT management fee 3,029 2,123
General and administrative 265 187
Provision for possible loss on investments 200 --
Other 57 39
----------------------------------------------------------------------------
$29,779 $24,231
----------------------------------------------------------------------------
Net earnings $10,178 $ 6,650
- ------------------------------------------------------------------------------
Weighted average shares outstanding (2) 37,892 27,777
- ------------------------------------------------------------------------------
Per share amounts:
Earnings per share (2) $0.27 $0.24
- ------------------------------------------------------------------------------
Cash distributions paid per share (2)(3) $0.39 $0.42
- ------------------------------------------------------------------------------
Reconciliation of Funds from Operations (1)
Net earnings $10,178 $ 6,650
Depreciation 6,132 4,804
Amortization related to Homestead
convertible mortgages (20) --
Provision for possible loss on investments 200 --
- ------------------------------------------------------------------------------
Funds from operations $16,490 $11,454
- ------------------------------------------------------------------------------
Weighted average shares outstanding (2) 37,892 27,777
- ------------------------------------------------------------------------------
Funds from operations per share (2) $0.44 $0.41
- ------------------------------------------------------------------------------
</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>
BALANCE SHEETS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
- -------------------------------------------------------------------------
Assets 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Real estate $1,208,229 $1,157,235
Less: accumulated depreciation 47,297 41,166
--------------------------
1,160,932 1,116,069
Investment in Homestead convertible
mortgages 25,891 --
- -------------------------------------------------------------------------
Net investments 1,186,823 1,116,069
Cash and cash equivalents - unrestricted 3,953 4,339
Cash and cash equivalents - restricted
tax-deferred exchange proceeds -- 1,672
Other assets 13,455 12,985
- -------------------------------------------------------------------------
Total assets $1,204,231 $1,135,065
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Liabilities and shareholders' equity
- -------------------------------------------------------------------------
Liabilities:
Line of credit $295,250 $228,000
Mortgages payable 155,418 155,790
Distributions payable -- 14,778
Accounts payable 18,189 20,076
Accrued expenses and other liabilities 20,654 17,779
- -------------------------------------------------------------------------
Total liabilities $489,511 $436,423
- -------------------------------------------------------------------------
Shareholders' equity:
Shares, $0.01 par value $379 $379
Additional paid-in capital 747,640 747,640
Unrealized gain on Homestead convertible
mortgages 5,900 --
Distributions in excess of net earnings (39,199) (49,377)
- -------------------------------------------------------------------------
Total shareholders' equity $714,720 $698,642
- -------------------------------------------------------------------------
Total liabilities and shareholders'
equity $1,204,231 $1,135,065
- -------------------------------------------------------------------------
Share data:
Weighted average shares outstanding 37,892 32,028
========== ==========
Total shares outstanding 37,892 37,892
========== ==========
</TABLE>
Supplemental Information Page 4
