<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 SEPTEMBER 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
November 7, 1997 was: 47,420,161
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets--September 30, 1997 (unaudited) and
December 31, 1996.................................................. 3
Condensed Statements of Earnings--Three and nine months ended
September 30, 1997 and 1996 (unaudited)............................ 4
Condensed Statements of Cash Flows--Nine months ended September 30,
1997 and 1996(unaudited)........................................... 5
Notes to Condensed Financial Statements............................ 6
Independent Accountant's Review Report............................. 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 17
PART II. Other Information
Item 4. Submission of Matters to Vote of Securities Holders................ 29
Item 6. Exhibits and Reports on Form 8-K................................... 29
</TABLE>
2
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Real estate............................................................ $ 1,262,757 $ 1,157,235
Less accumulated depreciation.......................................... 59,487 41,166
------------ ------------
1,203,270 1,116,069
Homestead Convertible Mortgages........................................ 132,080 --
------------ ------------
Net investments ................................................. 1,335,350 1,116,069
Cash and cash equivalents--unrestricted................................ 460 4,339
Cash and cash equivalents--restricted tax-deferred exchange proceeds... -- 1,672
Other assets........................................................... 25,673 12,985
------------ ------------
Total assets................................................ $ 1,361,483 $ 1,135,065
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Lines of credit.................................................. $ 84,802 $ 228,000
Notes payable.................................................... 150,000 --
Mortgages payable................................................ 160,166 155,790
Distributions payable............................................ 491 14,778
Accounts payable................................................. 14,845 20,076
Accrued expenses and other liabilities........................... 27,415 17,779
------------ ------------
Total liabilities........................................... 437,719 436,423
------------ ------------
Shareholders' equity:
Series A Preferred Shares (2,000,000 shares issued; stated
liquidation preference of $25 per share) ....................... 50,000 --
Common Shares (250,000,000 authorized, 47,420,161 issued and
outstanding at September 30, 1997 and 37,891,580 issued and
outstanding at December 31, 1996)............................... 474 379
Additional paid-in capital....................................... 898,298 747,640
Employee stock purchase notes.................................... (12,614) --
Unrealized gains on Homestead Convertible Mortgages.............. 35,198 --
Distributions in excess of net earnings.......................... (47,592) (49,377)
------------ ------------
Total shareholders' equity.................................. 923,764 698,642
------------ ------------
Total liabilities and shareholders' equity.................. $ 1,361,483 $ 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental income.......................................... $ 42,943 $ 35,959 $ 123,765 $ 99,644
Homestead Convertible Mortgages interest income........ 1,406 -- 2,335 --
Other interest income.................................. 122 132 283 308
--------- --------- --------- --------
44,471 36,091 126,383 99,952
--------- --------- --------- --------
Expenses:
Rental expenses ($99,000 paid to affiliate in 1997).... 11,846 9,950 32,080 26,801
Real estate taxes...................................... 3,524 3,023 11,390 9,109
Property management fees ($1,152,000 and $3,848,000
in 1997 and $1,116,000 and $3,009,000 in 1996
paid to affiliate)................................... 1,282 1,370 4,381 3,727
Depreciation........................................... 6,870 5,472 19,453 15,069
Interest............................................... 5,187 3,718 14,572 11,824
REIT management fee paid to affiliate.................. 2,319 2,786 8,548 7,490
General and administrative ($101,000 paid to affiliate
in 1997)............................................. 465 132 967 479
Provision for possible loss on investments............. -- -- 200 --
Other.................................................. 5 102 70 180
--------- --------- --------- --------
31,498 26,553 91,661 74,679
--------- --------- --------- --------
Earnings from operations..................................... 12,973 9,538 34,722 25,273
Gain on disposition of real estate..................... -- 1,593 259 2,255
--------- --------- --------- --------
Net earnings................................................. 12,973 11,131 34,981 27,528
Less Preferred Share dividends......................... 491 -- 491 --
--------- --------- --------- --------
Net earnings attributable to Common Shares................... $ 12,482 $ 11,131 $ 34,490 $ 27,528
========= ========= ========= ========
Weighted average Common Shares outstanding................... 42,998 32,952 40,725 30,384
========= ========= ========= ========
Net earnings per Common Share................................ $ 0.29 $ 0.34 $ 0.85 $ 0.91
========= ========= ========= ========
Distributions per Common Share:
Declared............................................... $ 0.39 $ 0.81 $ 1.17 $ 1.65
Paid................................................... $ 0.39 $ 0.42 $ 1.17 $ 1.26
========= ========= ========= ========
</TABLE>
See accompanying notes to the condensed financial statements.
4
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Operating activities:
Net earnings............................................................ $ 34,981 $ 27,528
Adjustments to reconcile net earnings to net cash flow provided
by operating activities:
Depreciation and amortization......................................... 19,687 16,396
Provision for possible loss on investments............................ 200 --
Gain on disposition of real estate.................................... (259) (2,255)
Increase (decrease) in accounts payable............................... (1,881) (746)
Increase in accrued expenses and other liabilities.................... 9,759 6,504
Increase in other assets.............................................. (10,640) (6,406)
---------- ----------
Net cash flow provided by operating activities....................... 51,847 41,021
---------- ----------
Investing activities:
Real estate investments................................................ (152,534) (208,851)
Proceeds from disposition of real estate............................... 48,120 36,549
Tax-deferred exchange proceeds held in escrow.......................... 1,672 (12,325)
Funding of Homestead Convertible Mortgages............................. (97,000) --
---------- ----------
Net cash flow used by investing activities........................... (199,742) (184,627)
---------- ----------
Financing activities:
Proceeds from sale of shares........................................... 188,143 118,896
Proceeds from lines of credit.......................................... 297,493 162,000
Payments on lines of credit............................................ (440,691) (118,000)
Proceeds from notes payable............................................ 150,000 --
Proceeds from mortgage debt............................................ -- 20,500
Distributions paid on Common Shares.................................... (47,483) (38,286)
Debt issuance and other transaction costs incurred..................... (2,301) (1,816)
Regularly scheduled mortgage principal payments........................ (1,145) (752)
---------- ----------
Net cash flow provided by financing activities....................... 144,016 142,542
---------- ----------
Net decrease in cash and cash equivalents................................. (3,879) (1,064)
Cash and cash equivalents, beginning of period............................ 4,339 6,494
---------- ----------
Cash and cash equivalents, end of period.................................. $ 460 $ 5,430
========== ==========
Non-cash investing and financing activities:
Investing:
Unrealized gains on Homestead Convertible Mortgages.................... $ 35,198 $ --
Non-real estate assets acquired in Merger for Common Shares............... 878 --
Financing:
Assumption of mortgage debt upon purchase of multifamily communities... 5,521 11,947
Dividends accrued on preferred shares.................................. 491 --
Notes received for Common Share purchases.............................. 12,614 --
Issuance of Common Shares and related distribution to affiliate in
Merger................................................................ 50,876 --
</TABLE>
See accompanying notes to the condensed financial statements.
5
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1 GENERAL
The financial statements of Security Capital Atlantic Incorporated
("ATLANTIC") as of September 30, 1997 and for the three and nine months ended
September 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 nine months ended September 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>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------------ ------------------------
COST UNITS COST UNITS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating communities:
Acquired............................. $ 892,038 17,759 $ 878,029 17,727
Developed............................ 193,748 3,318 74,741 1,514
---------- ---------- ---------- ----------
1,085,786 21,077 952,770 19,241
Communities under construction(1).......... 159,784 4,511 194,587 4,727
Communities in planning:
Owned(2).............................. 12,939 828(3) 7,795 868(3)
Under control(4)...................... -- 3,416(3) -- 2,228(3)
---------- ---------- ---------- ----------
12,939 4,244 7,795 3,096
Land held for future development........... 4,248 -- 2,083 --
---------- ---------- ---------- ----------
Total................................... $1,262,757(5) 29,832 $1,157,235(5) 27,064
========== ========== ========== ==========
</TABLE>
6
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
- - --------
(1) At September 30, 1997 includes communities which were leasing completed
units of $105.9 million (1,963 units) and communities with no completed
units of $53.9 million (2,548 units). Unfunded commitments for all
communities under construction were $117.9 million at September 30, 1997
which will result in a total completed construction cost of $277.7 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 unreviewed and
unaudited.
(4) ATLANTIC's investment at September 30, 1997 and December 31, 1996 in land
in planning and under control for future development was $4.6 million and
$1.4 million, respectively. These amounts are classified as Other Assets.
(5) Communities located in Atlanta, Georgia aggregated 29.5% and 30.7% at
September 30, 1997 and December 31, 1996, respectively, of ATLANTIC's real
estate, at cost.
The change in real estate, at cost, for the nine months ended September 30,
1997 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997................................... $1,157,235
Acquisitions and renovation expenditures..................... 24,589
Development expenditures, including land acquisitions........ 127,715
Recurring capital expenditures............................... 2,400
Dispositions................................................. (48,982)
Provision for possible loss on investments................... (200)
----------
Balance at September 30, 1997................................ $1,262,757
==========
</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 long-term growth. ATLANTIC disposed of three
communities during the nine months ended September 30, 1997. ATLANTIC recognized
an aggregate gain of $259,000 on these dispositions. These communities accounted
for $1,439,000 and $1,002,000 of net operating income for the nine months ended
September 30, 1997 and 1996, respectively.
Long-lived investments held and used are periodically evaluated for
impairment and a provision for possible loss is made, if required. ATLANTIC
recognized a provision for possible loss of $200,000 during the nine months
ended September 30, 1997 associated with one of the communities that was sold in
1997. At September 30, 1997, ATLANTIC's investments are carried at cost, which
is not in excess of fair market value.
ACTIVITY SUBSEQUENT TO SEPTEMBER 30, 1997
In October 1997, ATLANTIC acquired two operating communities aggregating
456 units at an initial investment of $22.4 million and disposed of two
communities aggregating 532 units with total proceeds of $17.7 million. ATLANTIC
will recognize an aggregate gain of approximately $1.5 million on the two
dispositions in the fourth quarter. The two communities disposed of accounted
for $1,021,000 and $1,285,000 of net operating income for the nine months ended
September 30, 1997 and 1996, respectively.
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 nine months ended September 30, 1997, ATLANTIC funded
$97.0 million under the Funding Agreement.
The Homestead Convertible Mortgages (i) bear interest at 9.0% 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) 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.
CARRYING VALUE
ATLANTIC will receive $98.0 million of Homestead Convertible Mortgages
assuming funding of $111.1 million under the Funding Agreement 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 ($6.9 million 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 $35,198,000 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 September 30, 1997 of $17.75 per
share.
At September 30, 1997 the carrying value of the Homestead Convertible
Mortgages consisted of the following components (in thousands):
<TABLE>
<S> <C>
Face amount.................................................... $ 85,573
Original issue premium......................................... 11,427
---------
Amount funded.................................................. 97,000
Amortization of original issue premium......................... (249)
Initial value of conversion feature............................ 6,027
Unamortized discount on conversion feature..................... (5,896)
Fair value adjustment.......................................... 35,198
---------
Carrying value.................................................. $ 132,080
=========
</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 common
shareholders, were valued at $6.5 million. 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 9.0% 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 8.46% per annum for purposes
of calculating net earnings.
NOTE 4 BORROWINGS
LINES 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 ("MGT"), as agent for a group of lenders. Borrowings on the unsecured line
of credit bear interest at prime, or at ATLANTIC's option, LIBOR plus a margin
of 1.125%. ATLANTIC 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 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.
On June 30, 1997, ATLANTIC entered into a $25 million unsecured borrowing
agreement with Texas Commerce Bank National Association. This loan, which allows
for same day borrowings and more efficient cash management, matures on June 30,
1998 and bears interest at an overnight rate that depends on the availability of
funds at the time the borrowing is made. The interest rate on the borrowings has
ranged from 6.5% to 7.375%. At September 30, 1997, there were $18.3 million of
borrowings outstanding under this agreement.
NOTES PAYABLE
On August 20, 1997, ATLANTIC completed an offering of $100 million of 7.25%
debt securities due 2009 (the "2009 Notes") and $50 million of 7.86% debt
securities due 2017 (the "2017 Notes" and together with the 2009 Notes, "the
Notes"). The Notes are direct, senior unsecured obligations of ATLANTIC and rank
equally with all other unsecured and unsubordinated indebtedness of ATLANTIC
from time to time outstanding. The Notes bear interest at the rates stated
above, payable semiannually in arrears. Principal installments on the Notes will
be paid in each year beginning in 2002 for the 2009 Notes and in 2013 for the
2017 Notes, so that the Notes will amortize beginning in such years. The Notes
are 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. The Notes are governed by the terms and provisions of an indenture
agreement. Net proceeds from the offering were approximately $148.8 million, net
of underwriters' commissions and other costs, and were used to repay borrowings
under ATLANTIC's $350 million unsecured line of credit.
9
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
MORTGAGES PAYABLE
Mortgages payable consisted of the following at September 30, 1997 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
PERIODIC
INTEREST MATURITY 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 $ 5,738
Country Place Village I ............................. 7.750% 11/01/00 (2) 1,977
Country Oaks......................................... 7.655% 07/01/02 (3) 5,888
Cameron at Hickory Grove............................. 8.000% 07/10/03 (4) 5,941
Shadowbluff.......................................... 8.050% 12/01/05 (5) 5,517
Cameron Villas I..................................... 8.750% 04/01/24 Fully amortizing 6,295
Cameron on the Cahaba II............................. 7.125% 03/01/29 Fully amortizing 7,972
----------
39,328
----------
Tax-exempt fixed rate or variable rate subject to swap agreements(6):
Cameron Station...................................... 6.000% 05/01/07 Interest only 14,500
Azalea Park.......................................... (7) 06/01/25 Interest only 15,500
Cameron Brook........................................ (7) 06/01/25 Interest only 19,500
Cameron Cove........................................ (7) 06/01/25 Interest only 8,500
Clairmont Crest...................................... (7) 06/01/25 Interest only 11,600
Forestwood........................................... (7) 06/01/25 Interest only 11,485
Foxbridge on the Bay................................. (7) 06/01/25 Interest only 10,400
The Greens........................................... (7) 06/01/25 Interest only 10,400
Parrot's Landing I................................... (7) 06/01/25 Interest only 15,835
WintersCreek......................................... (7) 06/01/25 Interest only 5,000
Less amounts held in principal reserve fund (8) (1,882)
----------
120,838
----------
$ 160,166
==========
Total annual weighted average interest rate(9).... 6.96%
==========
</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) Interest and principal payments due monthly; balloon payment of $4,926,000
due at maturity.
(6) 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.
(7) Interest rate is fixed through swap agreements executed in conjunction with
the credit enhancement agreement with the Federal National Mortgage
Association ("FNMA") discussed below.
(8) 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
fund based on a 30-year amortization.
(9) This rate includes annual fees associated with the mortgage agreements,
swap agreements and the credit enhancement agreement and amortization of
capitalized costs associated with the mortgage agreements and the credit
enhancement agreement.
10
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Real estate with an aggregate undepreciated cost at September 30, 1997 of
$59,538,000 and $205,189,000 serves as collateral for the conventional mortgages
payable and the tax-exempt mortgages payable, respectively.
The change in mortgages payable for the nine months ended September 30,
1997 is as follows (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997................................. $ 155,790
Mortgages assumed.......................................... 5,521
Regularly scheduled principal payments..................... (1,145)
------------
Balance at September 30, 1997.............................. $ 160,166
============
</TABLE>
ATLANTIC is in compliance with all debt covenants required by the mortgage
agreements.
INTEREST RATE SWAP AGREEMENTS
ATLANTIC has effectively eliminated its variable interest rate exposure on
its variable interest rate mortgages and $100 million of short-term borrowings
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 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 expense associated with the underlying
borrowings.
ATLANTIC has a swap agreement with MGT covering $100 million of borrowings,
effectively eliminating a portion of its variable interest rate exposure
associated with its short-term borrowings. Under this one-year agreement which
became effective on February 5, 1997, ATLANTIC pays a fixed rate of interest on
$100 million of borrowings of 5.95%, exclusive of any credit spread. ATLANTIC
had a similar swap agreement in place from February 5, 1996 through February 4,
1997. Under the previous agreement, ATLANTIC paid a fixed rate of interest on
$100 million of borrowings of 5.96%, exclusive of any credit spread. ATLANTIC
paid $222,000 and $336,000 more in interest than it received under these swap
agreements during the nine months ended September 30, 1997 and 1996,
respectively.
ATLANTIC's swap agreements related to its tax-exempt variable rate
mortgages are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT OF FIXED
MORTGAGES MATURITY DATE INTEREST RATE(1) ISSUER
- - -------------------- ------------------------ --------------------- -------------------------------------------------
<S> <C> <C> <C>
$23.1 million August 2002 6.48% General Re Financial Products Corporation
64.6 million August 2005 6.72% 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 6.49% Morgan Stanley Derivative Products Inc.
-----
</TABLE>
<TABLE>
<S> <C>
Weighted average interest rate.................. 6.61%
=====
</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.
11
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
ATLANTIC paid $1,330,000 and $1,299,000 more in interest than it received
under the swap agreements related to its tax-exempt variable rate mortgages
during the nine months ended September 30, 1997 and 1996, respectively. The swap
agreements cover the principal amount of the bonds, net of amounts deposited in
the principal reserve fund. ATLANTIC pays interest on the portion of the 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.
INTEREST EXPENSE
Interest paid in cash on all outstanding debt for the nine months ended
September 30, 1997 was $21,787,000, including $7,653,000 of interest capitalized
during construction. Interest paid in cash on all outstanding debt for the nine
months ended September 30, 1996 was $17,877,000, including $7,587,000 of
interest capitalized during construction.
Amortization of loan costs included in interest expense for the nine months
ended September 30, 1997 and 1996 was $235,000 and $1,327,000, respectively.
NOTE 5 MERGER TRANSACTION
TERMS OF TRANSACTION
On September 8, 1997 ATLANTIC acquired the operations and business of
Security Capital (Atlantic) Incorporated (the "REIT Manager") and SCG Realty
Services Atlantic Incorporated ("SCG Realty Services") its property manager, in
exchange for 2,306,591 of ATLANTIC's common shares, par value $0.01 per share
("Common Shares") (the "Merger"). The REIT Manager and SCG Realty Services were
wholly-owned subsidiaries of Security Capital Group Incorporated ("Security
Capital"), which owns a majority of ATLANTIC's Common Shares. The Common Shares
issued to Security Capital were valued at $54.6 million and a per Common Share
price of $23.675 (the average market price of Common 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) was used to determine the number of
Common Shares issued. As a result of the Merger, ATLANTIC has become an
internally-managed REIT and Security Capital remains ATLANTIC's largest
shareholder with 50.3% of ATLANTIC's outstanding Common Shares.
Because ATLANTIC, the REIT Manager and SCG Realty Services were under the
common control of Security Capital when the Merger was consummated, the
difference between the market value of the Common Shares issued to Security
Capital on September 8, 1997 of $51,754,000 and the $878,000 of net tangible
assets of the REIT Manager and SCG Realty Services that were acquired by
ATLANTIC has been accounted for as a distribution to Security Capital and has
been reflected as a deduction to Additional Paid-in Capital (See Note 6).
As part of the Merger, ATLANTIC's common shareholders (other than Security
Capital) received $46.9 million of warrants from Security Capital to purchase
1,675,940 shares of Security Capital Class B common stock. ATLANTIC's common
shareholders of record as of September 16, 1997 received 0.071116 warrants for
each Common Share held. Each warrant can be exercised for one share of Security
Capital Class B common stock at an exercise price of $28.00 per share through
September 18, 1998. Security Capital issued these warrants as an incentive to
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.
12
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
EFFECT ON FUTURE OPERATIONS
As a result of the Merger, ATLANTIC terminated its REIT management
agreement with the REIT Manager and its property management agreement with SCG
Realty Services (which covered approximately 97% of ATLANTIC's operating
communities). Consequently, ATLANTIC did not incur the costs associated with
these agreements after September 8, 1997. However, after the Merger was
completed, ATLANTIC did incur, and will continue to incur, certain of the
operating costs of the businesses acquired, primarily the personnel costs
associated with the employees of the REIT Manager and SCG Realty Services who
have now become employees of ATLANTIC. In addition, ATLANTIC purchased, and will
continue to purchase, certain administrative services from Security Capital
under an Administrative Services Agreement (ASA). The fees payable under the ASA
are equal to Security Capital's cost plus 20%. For the initial term of the
agreement (through December 31, 1998), the fees payable to Security Capital will
not exceed approximately $5.2 million, but may be less than that amount as any
cost savings will accrue to ATLANTIC. Of the total, approximately $1.5 million
will apply to the period from September 9, 1997 to December 31, 1997. ATLANTIC
incurred $204,000 of costs under the ASA for the period September 9, 1997
through September 30, 1997.
Costs related to the management function, including charges under the ASA,
incurred subsequent to the Merger are collectively referred to as "management
costs". Management costs related to property operations are reflected as rental
expenses in arriving at net operating income. Certain direct and indirect
qualifying management costs related to the acquisition and development of
multifamily communities have been capitalized ($267,000 for the period September
9, 1997 through September 30, 1997). Management costs that have not been
capitalized and are not classified as rental expenses are reflected as general
and administrative expenses.
NOTE 6 SHAREHOLDERS' EQUITY
COMPLETED CAPITAL OFFERINGS
In 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 Common Shares, net of underwriters' commissions and other expenses, were
approximately $82.2 million.
In connection with the Merger discussed in Note 5, ATLANTIC completed a
fully-subscribed rights offering pursuant to which 2,552,770 Common Shares were
sold at $22.375 per share. ATLANTIC's common shareholders received one right for
each Common Share held on August 6, 1997 and eight rights were needed to
purchase one Common Share. The rights were offered to allow ATLANTIC's common
shareholders (other than Security Capital) to maintain their relative ownership
in ATLANTIC after the Merger by purchasing additional Common Shares at a price
below the price at which Security Capital received Common Shares in the Merger.
Proceeds from the offering were approximately $56.9 million, net of costs.
On August 20, 1997 ATLANTIC completed an offering of 2,000,000 shares of
Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share with a
stated liquidation preference of $25.00 per share (the "Series A Preferred
Shares"). Holders of the Series A Preferred Shares are entitled to receive
cumulative preferential cash distributions at a rate of 8.625% per annum. The
Series A Preferred Shares will be redeemable on or after August 20, 2002 by
ATLANTIC for cash at a 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. Proceeds from the offering were approximately $48.3 million, net of
underwriters' commissions and other costs.
The proceeds from ATLANTIC's 1997 offerings were used to repay borrowings
under ATLANTIC's $350 million unsecured line of credit.
13
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
SHELF REGISTRATION
On October 22, 1997, ATLANTIC filed a $500 million shelf registration
statement with the Securities and Exchange Commission, which was declared
effective on November 6, 1997. These securities can be issued in the form of
senior unsecured debt, preferred shares and common shares on an as-needed basis,
subject to ATLANTIC's ability to effect an offering on satisfactory terms.
DISTRIBUTIONS
ATLANTIC paid quarterly distributions of $0.39 per Common Share on February
19, 1997, May 27, 1997 and August 26, 1997. On October 27, 1997 ATLANTIC's Board
of Directors (the "Board") declared a distribution of $0.39 per Common Share for
the fourth quarter of 1997. The distribution is payable on November 25, 1997 to
common shareholders of record on November 11, 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.
ADDITIONAL PAID-IN CAPITAL
During the nine months ended September 30, 1997 ATLANTIC entered into
certain transactions which affected Additional Paid-in Capital which are
summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Balance at January 1, 1997................................................ $ 747,640
Shares issued to the public, net of costs................................. 137,408
Common Shares issued to affiliate in Merger, net of costs of $882,000..... 50,849
Distribution to affiliate in Merger...................................... (50,876)
Common Shares issued under employee stock purchase plan................... 13,277
-----------
Balance at September 30, 1997............................................. $ 898,298
===========
</TABLE>
NOTE 7 LONG-TERM COMPENSATION
On September 8, 1997, ATLANTIC's common shareholders approved a long-term
incentive plan which includes an employee stock purchase plan and a stock option
plan (the "Incentive Plan"). No more than 3,000,000 Common Shares in the
aggregate may be awarded under the Incentive Plan and no individual may be
awarded more than 500,000 Common Shares in any one-year period.
EMPLOYEE STOCK PURCHASE PLAN
Under the employee stock purchase plan, certain employees of ATLANTIC
purchased 592,020 Common Shares at a price of $22.4375 per share on September 8,
1997. ATLANTIC financed 95% of the total purchase price through ten-year,
recourse loans to the participants aggregating $12,614,000 (including
$10,711,000 due from officers of ATLANTIC). The loans, which have been recorded
as a deduction in Shareholders' Equity, bear interest at the lower of ATLANTIC's
annual dividend yield or 6% per annum. The loans are secured by the Common
Shares purchased. For each Common Share purchased, participants were granted two
options, each to purchase one Common Share at a price of $22.4375 per share.
Proceeds from this sale, net of the loans received, were $0.7 million.
14
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
STOCK OPTIONS
At September 30, 1997 ATLANTIC had stock options outstanding under various
stock option plans as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE EXPIRATION
OF OPTIONS PRICE DATE
------------- ------------- ----------------------
<S> <C> <C> <C>
Outside Directors Plan (1)........................ 3,000 $ 24.00 October 14, 2001
Outside Directors Plan (1)........................ 3,000 $ 21.875 May 29, 2002
Options held by employees (2) (3)................. 1,277,862 $ 22.4375 September 8, 2007
-------------
Total....................................... 1,283,862
=============
</TABLE>
- - --------
(1) Options are fully exercisable.
(2) Vesting at various rates over periods from five to ten years.
(3) Includes 93,822 options whose holders are awarded dividend equivalent units
or "DEUs" on December 31st of each year of the ten-year plan. The options
and DEUs vest at a rate of 25% per year beginning on September 8, 1999. The
DEUs are accrued in the form of Common Shares at a rate of one Common Share
per DEU.
ATLANTIC has adopted the provisions of SFAS No. 123, "Accounting for Stock
Based Compensation." Under the provisions of this statement, ATLANTIC will
continue to account for its stock options under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations.
15
<PAGE>
Board of Directors and Shareholders
SECURITY CAPITAL ATLANTIC INCORPORATED
We have reviewed the accompanying condensed balance sheet of Security
Capital Atlantic Incorporated as of September 30, 1997 and the related condensed
statements of earnings for the three and nine months ended September 30, 1997
and 1996 and the condensed statements of cash flows for the nine months ended
September 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
November 7, 1997
16
<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
condensed financial statements and the notes thereto included in Item 1 of this
report. See ATLANTIC's 1996 Form 10-K for a discussion of various risk factors
associated with forward looking statements made in this document.
OVERVIEW
GENERAL
ATLANTIC's results of operations, financial position and liquidity have
been influenced by the operations of and investments in real estate, which
consist entirely of multifamily communities. Detailed information about
ATLANTIC's real estate investments at September 30, 1997 and its real estate
investment activity during the nine months then ended is provided below under
"--Real Estate Investments". A description of the Merger is included in Note 5
to the Condensed Financial Statements in Item 1 and the Merger's financial
impact is discussed below in "--Results of Operations--Merger Transaction".
REAL ESTATE INVESTMENTS
OPERATING COMMUNITIES
The following table summarizes ATLANTIC's investment activity with respect
to operating communities for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
OPERATING COMMUNITIES AT END OF PERIOD:
Communities............................ 72 71 78 78
Units.................................. 19, 241 19,265 21,077 21,077
Total investment(1).................... $ 968,081 $ 979,127 $ 1,091,388 $ 1,091,388
Cost per unit.......................... $ 50.3 $ 50.8 $ 51.8 $ 51.8
INVESTMENT ACTIVITY DURING THE PERIOD:
DEVELOPMENTS COMPLETED:
Communities........................... -- 1 5 6
Units................................. -- 384 1,420 1,804
Total investment(1)................... -- $ 21,529 $ 93,284 $ 114,813
Cost per unit......................... -- $ 56.1 $ 65.7 $ 63.6
ACQUISITIONS (2):
Communities........................... -- -- 2(3) 2
Units................................. -- -- 392 392
Total investment(1)................... -- -- $ 17,652 $ 17,652
Cost per unit......................... -- -- $ 45.0 $ 45.0
DISPOSITIONS:
Communities........................... -- 2(4) 1(5) 3
Units................................. -- 360 504 864
Proceeds.............................. -- $ 12,602 $ 36,250 $ 48,852
Gain.................................. -- $ 259 -- $ 259
</TABLE>
17
<PAGE>
- - ----------
(1) Represents cost plus budgeted capital expenditures.
(2) See ATLANTIC's Form 10-K for a discussion of various risks associated with
ATLANTIC's acquisition activities.
(3) Represents one community in Raleigh, North Carolina and one community in
Nashville, Tennessee.
(4) Represents one community in Miami, Florida and one community in Tampa,
Florida.
(5) Represents a community under construction located in Washington, D.C. that
was disposed of prior to completion.
COMMUNITIES UNDER DEVELOPMENT
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. However, ATLANTIC's development
activity is dilutive to net earnings and funds from operations in the short term
although it is expected to add significantly to ATLANTIC's long-term performance
as the developments reach stabilization later in 1998 and in subsequent years as
shown in the table under "---Real Estate Investments---Current Development
Activity".
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, 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. ATLANTIC's entire portfolio of communities currently
under construction are expected to be stabilized by the fourth quarter of 1999.
18
<PAGE>
ATLANTIC's development activity for the periods indicated is summarized
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
STARTS DURING PERIOD:
Communities........................ 2 3 4 9
Units 668 620 948 2,236
Total investment(1)................ $ 44,346 $ 39,285 $ 59,277 $ 142,908
Cost per unit...................... $ 66.4 $ 63.4 $ 62.5 $ 63.9
COMPLETIONS DURING PERIOD:
Communities........................ -- 1 5 6
Units -- 384 1,420 1,804
Total investment(1)................ -- $ 21,529 $ 93,284 $ 114,813
Cost per unit...................... -- $ 56.1 $ 65.7 $ 63.6
STABILIZATIONS DURING PERIOD:
Communities........................ 1 -- 2 3
Units.............................. 408 -- 828 1,236
Total investment(1)................ $ 21,477 -- $ 53,028 $ 74,505
Cost per unit...................... $ 52.6 -- $ 64.0 $ 60.3
UNDER CONSTRUCTION AT END OF PERIOD (2):
Communities......................... 16 18 16 16
Units............................... 5,395 5,487 4,511 4,511
Total investment(1) $ 335,591 $ 347,177 $ 277,735 $ 277,735
Cost per unit....................... $ 62.2 $ 63.3 $ 61.6 $ 61.6
Investment to date.................. $ 238,176 $ 250,526 $ 159,784 $ 159,784
</TABLE>
- - --------
(1) Represents cost plus additional budgeted development expenditures at
September 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) See ATLANTIC's 1996 Form 10-K for a discussion of various risks associated
with ATLANTIC's development and construction activities.
19
<PAGE>
CURRENT DEVELOPMENT ACTIVITY
ATLANTIC's 16 communities under construction at September 30, 1997 are
located in 9 of ATLANTIC's 13 primary target market cities. The communities are
at various stages of completion as presented below (dollar amounts in
thousands):
<TABLE>
<CAPTION>
DATE OF EXPECTED
TOTAL START FIRST STABILIZATION
NUMBER INVESTMENT EXPECTED DATE UNITS DATE %
OF COST TO INVESTMENT (QUARTER/ (QUARTER/ (QUARTER/ LEASED
UNITS DATE (1) YEAR) YEAR) (2) YEAR) (3)
--------- ------------ ----------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
DEVELOPMENTS UNDER CONSTRUCTION
AND IN LEASE-UP (4):
BIRMINGHAM, ALABAMA:
Cameron at the Summit I..... 372 $ 19,815 $ 21,781 2Q/96 2Q/97 1Q/99 91.2%
CHARLOTTE, NORTH CAROLINA:
Waterford Square II......... 286 15,654 16,637 2Q/96 2Q/97 1Q/99 55.7
JACKSONVILLE, FLORIDA:
Cameron Lakes II............ 253 13,474 15,785 4Q/96 2Q/97 4Q/98 78.3
Cameron Timberlin Parc I(5). 320 17,157 17,185 4Q/95 3Q/96 1Q/98 86.7
NASHVILLE, TENNESSEE:
Cameron Overlook............ 452 22,111 23,888 2Q/96 2Q/97 1Q/99 83.5
RICHMOND, VIRGINIA:
Cameron Crossing I.......... 280 17,637 18,648 1Q/96 2Q/97 3Q/98 92.5
--------- ------------ ----------- ---------
TOTAL IN LEASE-UP 1,963 $ 105,848 $ 113,924 82.0%
--------- ------------ ----------- ---------
OTHER DEVELOPMENTS
UNDER CONSTRUCTION:
ATLANTA, GEORGIA:
Cameron Landing............. 368 $ 8,603 $ 22,340 1Q/97 2Q/98 4Q/99 N/A
CHARLOTTE, NORTH CAROLINA:
Cameron Matthews............ 212 4,286 12,132 2Q/97 2Q/98 1Q/99 N/A
ORLANDO, FLORIDA:
Cameron Promenade........... 212 2,868 13,876 3Q/97 3Q/98 2Q/99 N/A
The Wellington II........... 120 1,941 8,936 3Q/97 3Q/98 1Q/99 N/A
RALEIGH, NORTH CAROLINA:
Cameron at Southpoint....... 288 2,980 17,330 3Q/97 4Q/98 4Q/99 N/A
Cameron Woods............... 328 1,906 19,135 3Q/97 3Q/98 4Q/99 N/A
RICHMOND VIRGINIA:
Cameron at Virginia Center.. 264 4,003 17,266 2Q/97 2Q/98 2Q/99 N/A
Cameron at Wyndham (6)...... 312 15,354 20,903 3Q/96 4Q/97 2Q/99 N/A
Cameron Crossing II......... 144 2,499 9,887 2Q/97 3Q/98 1Q/99 N/A
SOUTHEAST FLORIDA:
Cameron Waterways........... 300 9,496 22,006 1Q/97 2Q/98 3Q/99 N/A
--------- ------------ -----------
TOTAL OTHER 2,548 $ 53,936 $ 163,811
--------- ------------ -----------
TOTAL DEVELOPMENTS
UNDER CONSTRUCTION 4,511 $ 159,784 $ 277,735
========= ============ ===========
</TABLE>
- - ----------
(1) Represents costs plus additional budgeted development expenditures at
September 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) Represents the date that the first completed units were made available for
leasing (or are expected to be made available for leasing). ATLANTIC begins
leasing completed units prior to completion of the entire community.
(3) The percentage leased is based on total units completed and available for
lease.
(4) A development community is considered in "lease-up" once ATLANTIC begins
leasing completed units.
(5) This community's final units were delivered in October 1997.
(6) This community's first units were delivered in October 1997.
20
<PAGE>
ACTIVITY SUBSEQUENT TO SEPTEMBER 30, 1997
In October 1997, ATLANTIC acquired two operating communities: one community
in Tampa, Florida with 168 units and a total expected investment of $7.5 million
and one community in Columbus, Ohio with 288 units and a total expected
investment of $14.9 million. Additionally, ATLANTIC acquired land in
Indianapolis, Indiana for the future development of a 202-unit community.
ATLANTIC's market research has identified Columbus and Indianapolis as having
attractive supply and demand characteristics and ATLANTIC plans to achieve a
strong presence in these two new primary target market cities.
Also in October 1997, ATLANTIC disposed of two communities located in
Memphis, Tennessee. These two communities aggregated 532 units and total
proceeds were $17.7 million. ATLANTIC will recognize an aggregate gain of
approximately $1.5 million on these dispositions in the fourth quarter. These
communities accounted for $1,021,000 and $1,285,000 of net operating income for
the nine months ended September 30, 1997 and 1996, respectively. ATLANTIC's
plans for the Memphis market are discussed below under "Results of
Operations--Communities Fully Operating Throughout Both Periods--Market
Analysis".
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net earnings attributable to Common Shares for the nine months ended
September 30, 1997 and 1996 were $34.5 million and $27.5 million, respectively.
Net earnings increased $7.0 million in the nine months ended September 30, 1997
over the nine months ended September 30, 1996.
PROPERTY OPERATIONS
At September 30, 1997, ATLANTIC had 21,077 operating multifamily units as
compared to 17,535 operating multifamily units at September 30, 1996. The
increased number of communities in operation resulted in increases in rental
income ($24.1 million in 1997 over 1996), rental expenses ($5.3 million in 1997
over 1996), real estate taxes ($2.3 million in 1997 over 1996), property
management fees ($0.7 million in 1997 over 1996) and depreciation ($4.4 million
in 1997 over 1996). Rental expenses and property management fees were also
impacted by the Merger as discussed in "-- Merger Transaction" below.
During the period prior to a community being stabilized, management begins
implementing expense controls, reconfiguring the resident profile, 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 September 30, 1997, 26.9% of ATLANTIC's operating multifamily communities,
based on total expected investment cost, were classified as pre-stabilized as
compared to 20.8% at September 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.
21
<PAGE>
COMMUNITIES FULLY OPERATING THROUGHOUT BOTH PERIODS
Operating Summary
ATLANTIC had 47 "same store" communities that were fully operational
throughout the first nine months of 1996 and 1997. These same store communities
consist of 12,783 units at a total expected investment cost of $646.8 million
(59.3% of ATLANTIC's total operating portfolio) at September 30, 1997. The
operating performance of these same store communities is as follows:
<TABLE>
<S> <C>
FIRST NINE MONTHS OF 1997 COMPARED TO FIRST NINE MONTHS OF 1996:
Collections growth (1)................................................................... 1.74%
Operating expense increase, as adjusted (2).............................................. 0.92%
Net operating income growth, as adjusted (3)............................................. 2.27%
NINE MONTHS ENDED SEPTEMBER 30, 1997:
Average physical occupancy............................................................... 94.96%
Actual operating expense ratio (4)....................................................... 40.34%
Actual average rental rate per unit...................................................... $ 716
Recurring capital expenditures per unit.................................................. $ 174
</TABLE>
- - --------
(1) Collections represents actual rent and other income collected, net of
vacancies, bad debts and concessions.
(2) Operating expense, as adjusted represents operating expenses (excluding
depreciation and interest expense) as adjusted to remove the accounting
differences which result from capitalizing certain costs during the period
of pre-stabilization and expensing those costs once the community has
reached stabilization.
(3) Net operating income, as adjusted represents total collected revenues less
operating expenses, as adjusted.
(4) Actual operating expense ratio represents actual operating expenses
(excluding depreciation and interest expense) as a percentage of total
collected revenues.
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. ATLANTIC experienced a slight decrease in same store
community occupancy during the first nine months of 1997 over the first nine
months of 1996 (94.96% compared to 95.01%). However, ATLANTIC's same store
average rental rate of $716 per unit for 1997 was 2.29% higher than the 1996
same store average rental rate of $700. Consequently, same store rental
collections during the first nine months of 1997 have increased by 1.74% over
the first nine months of 1996. ATLANTIC expects that rental collections will
continue to grow in 1998 at a pace slightly ahead of the growth experienced in
1997.
ATLANTIC's rental expenses as a percentage of rental revenues for
ATLANTIC's same store communities have generally remained flat (ranging between
39.5% and 40.8%), 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.
22
<PAGE>
Market Analysis
The following table presents occupancy levels and collections growth for
the 47 same store communities by market:
<TABLE>
<CAPTION>
TOTAL
AVERAGE AVERAGE COLLECTIONS SAME STORE ATLANTIC
PHYSICAL PHYSICAL GROWTH 1997 COMMUNITIES PORTFOLIO
OCCUPANCY OCCUPANCY COMPARED % BY % BY
1997 1996 TO 1996 MARKET MARKET (1)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North Carolina........ 94.80% 96.32% (5.18)% 2.39% 6.40%
Greenville, South Carolina (2)... -- -- -- -- 0.82
Memphis, Tennessee............... 91.55 93.37 (5.70) 2.71 3.12
Nashville, Tennessee............. 94.31 94.80 0.31 5.35 4.87
Raleigh, North Carolina.......... 96.30 95.44 1.67 2.49 10.92
Richmond, Virginia............... 96.11 95.71 4.15 4.61 7.05
Washington, D.C.................. 96.27 94.33 4.15 7.19 6.93
------------- ------------- ------------- ------------- -------------
Total Mid-Atlantic........... 94.82% 94.80% 0.92% 24.74% 40.11%
------------- ------------- ------------- ------------- -------------
SOUTHEAST:
Atlanta, Georgia................. 94.76% 94.81% 1.10% 42.91% 27.72%
Birmingham, Alabama.............. 95.41 94.93 (1.46) 4.41 5.29
------------- ------------- ------------- ------------- -------------
Total Southeast.............. 94.82% 94.82% 0.88% 47.32% 33.01%
------------- ------------- ------------- ------------- -------------
FLORIDA:
Ft. Lauderdale/West Palm Beach,
Florida....................... 95.09% 94.99% 5.21% 7.27% 9.60%
Jacksonville, Florida............ 93.69 97.63 (2.73) 1.90 5.91
Orlando, Florida................. 95.55 95.47 5.23 6.48 4.73
Tampa/Ft. Myers/Sarasota,
Florida....................... 95.41 95.43 3.03 12.29 6.64
------------- ------------- ------------- ------------- -------------
Total Florida................ 95.26% 95.45% 3.73% 27.94% 26.88%
------------- ------------- ------------- ------------- -------------
Totals....................... 94.96% 95.01% 1.74% 100.00% 100.00%
============= ============= ============= ============= =============
</TABLE>
- - --------
(1) Represents percentage of operating communities and communities under
construction in each market.
(2) ATLANTIC entered this market subsequent to January 1, 1996. Therefore,
there are no communities for the same store comparison.
While ATLANTIC's same store communities have experienced an overall
increase in collections of 1.74% for the first nine months of 1997 as compared
to the same period in 1996, certain of its primary target market cities have
experienced collections decreases. Management believes that the decreases
experienced in Charlotte, Birmingham and Jacksonville are caused by temporary
supply imbalances which are expected to reverse before the end of 1998. In
Atlanta, which represents 43% of the same store communities, same store
collections grew 1.10% over the same period in 1996. This small increase was
expected since ATLANTIC experienced strong occupancies and rental rates in
Atlanta in 1996 associated with the Summer Olympics.
ATLANTIC employs an "asset optimization strategy" which is based on market
research and is aimed at optimizing its portfolio composition. Under this
strategy, ATLANTIC may from time to time dispose of assets that no longer meet
its long-term investment objectives and redeploy those assets, preferably
through tax-deferred exchanges, into assets with better prospects for growth. As
noted above, ATLANTIC disposed of two communities in Memphis in October 1997.
These two communities, which are the only Memphis communities in the same store
comparisons above, experienced a 5.70% decrease in collections in 1997 as
compared to 1996. Management believes that the opportunities for growth in
Memphis are limited. Accordingly, this market is no longer considered a primary
target market city.
23
<PAGE>
HOMESTEAD CONVERTIBLE MORTGAGES INTEREST INCOME
ATLANTIC began funding the Homestead Convertible Mortgages in 1997. At
September 30, 1997 ATLANTIC had funded $97.0 million of its total funding
commitment to Homestead of $111.1 million. For the nine months ended September
30, 1997 ATLANTIC recognized interest income related to these mortgages of $2.3
million. The interest income will increase as ATLANTIC funds the remaining
Homestead Convertible Mortgages by 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>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Mortgages payable .............................. $ 8,112 $ 6,677
Notes payable................................... 1,285 --
Lines of credit................................. 12,828 12,734
Capitalized interest............................ (7,653) (7,587)
----------- -----------
Total interest expense.......................... $ 14,572 $ 11,824
=========== ===========
</TABLE>
Mortgage interest expense increased $1.4 million in the nine months ended
September 30, 1997 as compared to the same period in 1996. This increase is the
result of additional weighted average mortgage debt outstanding.
ATLANTIC issued notes payable in August 1997 and recognized $1.3 million of
interest related to this debt in 1997.
Interest expense on the lines of credit increased $0.1 million in the nine
months ended September 30, 1997 over the same period in 1996. This increase is
primarily a function of an increase in the average outstanding balance ($233.9
million in 1997 as compared to $202.9 million in 1996), partially offset by a
lower weighted average daily interest rate (7.19% in 1997 as compared to 7.40%
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 $66,000 in the nine months ended September 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 $1.1 million in the
nine months ended September 30, 1997 as compared to the same period in 1996 due
to the increased number of communities in operation in 1997, partially offset by
the effect of the termination of the REIT management agreement as a result of
the Merger as discussed in "--Merger Transaction" below.
24
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expense increased by $0.5 million for the nine
months ended September 30, 1997 over the nine months ended September 30, 1996,
primarily due to costs incurred after the Merger as discussed in "--Merger
Transaction" below.
MERGER TRANSACTION
As a result of the Merger, ATLANTIC terminated its REIT management
agreement with the REIT Manager and its property management agreement with SCG
Realty Services (which covered approximately 97% of ATLANTIC's operating
communities). Consequently, ATLANTIC did not incur the costs associated with
these agreements after September 8, 1997. However, after the Merger was
completed, ATLANTIC did incur, and will continue to incur, certain of the
operating costs of the businesses acquired, primarily the personnel costs
associated with the employees of the REIT Manager and SCG Realty Services who
have now become employees of ATLANTIC. In addition, ATLANTIC purchased, and will
continue to purchase, certain administrative services from Security Capital
under an Administrative Services Agreement (ASA). The fees payable under the ASA
are equal to Security Capital's cost plus 20%. For the initial term of the
agreement (through December 31, 1998), the fees payable to Security Capital will
not exceed approximately $5.2 million, but may be less than that amount as any
cost savings will accrue to ATLANTIC. Of the total, approximately $1.5 million
will apply to the period from September 9, 1997 to December 31, 1997. ATLANTIC
incurred $204,000 of costs under the ASA for the period September 9, 1997
through September 30, 1997.
Costs related to the management function, including charges under the ASA,
incurred subsequent to the Merger are collectively referred to as "management
costs". Management costs related to property operations are reflected as rental
expenses in arriving at net operating income. Certain direct and indirect
qualifying management costs related to the acquisition and development of
multifamily communities have been capitalized ($267,000 for the period September
9, 1997 through September 30, 1997). Management costs that have not been
capitalized and are not classified as rental expenses are reflected as general
and administrative expenses.
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Property revenues, operating expenses, depreciation, property level net
operating income and net earnings for the three months ended September 30, 1997
compared to the three months ended September 30, 1996 reflect changes similar to
those discussed in the preceding paragraphs for the comparison of the nine
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
OVERVIEW
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.
25
<PAGE>
ATLANTIC expects to finance future activities with cash on hand and
borrowings under its lines of credit prior to arranging long-term capital. The
lines of credit will facilitate an efficient response to market opportunities
while minimizing the amount of cash invested in short-term investments at lower
yields. At September 30, 1997, ATLANTIC had $290.2 million available for
borrowing under its lines of credit. Another source of future liquidity and
financial flexibility is ATLANTIC's $500 million of shelf-registered securities
which can be issued in the form of unsecured long-term debt, preferred shares or
common shares on an as-needed basis, subject to ATLANTIC's ability to effect an
offering on satisfactory terms. ATLANTIC believes that its current conservative
ratio of long-term debt to total long-term undepreciated book capitalization
(which was 24.0% at September 30, 1997) provides considerable flexibility to
prudently increase its capital base by utilizing long-term debt as a financing
tool in the future within the framework of the restrictive covenants in
ATLANTIC's current debt agreements. Long-term undepreciated book capitalization
is defined as the sum of long-term debt and shareholders' equity after adding
back accumulated depreciation.
Net cash flow provided by operating activities increased by $10.8 million
for the nine months ended September 30, 1997 as compared to the same period in
1996, principally due to the increased number of communities in operation in
1997. ATLANTIC's investment activities during the nine months ended September
30, 1997 used $199.7 million of cash on a net basis, an increase of $15.1
million over the nine months ended September 30, 1996. Such activities consisted
primarily of acquiring and developing multifamily communities in both 1997 and
1996. In addition, ATLANTIC invested $97.0 million in the Homestead Convertible
Mortgages in 1997. ATLANTIC's financing activities provided net cash flow of
$144.0 million for the nine months ended September 30, 1997 and $142.5 million
for the nine months ended September 30, 1996. In 1997 ATLANTIC raised a total of
$336.9 million in net proceeds from the sale of Common Shares ($139.8 million),
Series A Preferred Shares ($48.3 million) and long-term senior debt securities
($148.8 million). The proceeds from these offerings were used to repay
borrowings under ATLANTIC's $350 million unsecured line of credit, accordingly,
repayments on ATLANTIC's lines of credit were $143.2 million greater than
borrowings in 1997. In 1996, net proceeds from the sale of Common Shares were
$118.9 million and borrowings on ATLANTIC's line of credit were $44.0 million,
net of repayments.
HOMESTEAD CONVERTIBLE MORTGAGES
At September 30, 1997, ATLANTIC had funded $97.0 million of its total
$111.1 million commitment to Homestead and expects the remaining $14.1 million
commitment to be funded by early 1998. 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 September 30, 1997, ATLANTIC's ownership
in Homestead would result in the following incremental value per ATLANTIC Common
Share (in thousands, except per share amounts):
<TABLE>
<S> <C>
Homestead common stock price............................................ $ 17.750
Conversion price........................................................ 11.500
----------
Incremental value per share of Homestead common stock................... $ 6.250
Shares of Homestead common stock upon conversion (at full funding)...... 8,522
----------
Total incremental value from conversion................................. $ 53,263
ATLANTIC Shares outstanding at September 30, 1997...................... 47,420
----------
Assumed incremental value per ATLANTIC Common Share..................... $ 1.12
==========
</TABLE>
The Homestead Convertible Mortgages, which are not callable until 2001,
provide ATLANTIC with another source of future liquidity and financial
flexibility. Management intends to monitor its investment in the Homestead
Convertible Mortgages and evaluate opportunities to utilize this financial
resource.
26
<PAGE>
COMMITMENTS
In addition to the Homestead commitment, ATLANTIC had 1,963 units under
construction and in lease-up with a total budgeted development cost of $113.9
million of which $8.1 million was unfunded at September 30, 1997. Also at
September 30, 1997, ATLANTIC had 2,548 units under construction, but not yet in
lease-up, with a total budgeted development cost of $163.8 million of which
$109.9 million was unfunded. ATLANTIC owned multifamily developments in planning
at September 30, 1997 aggregating 828 units located in various target market
cities with a total budgeted development cost of $60.5 million. ATLANTIC's
multifamily developments in planning and under control at September 30, 1997
aggregated 3,416 units with a total budgeted development cost of $239.0 million.
The foregoing developments are subject to a number of conditions and ATLANTIC
cannot predict with certainty that any of them will be consummated.
COMMON SHARE DISTRIBUTIONS
ATLANTIC's current distribution policy is to pay quarterly cash
distributions to common 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 may 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 Common Share for
1997 on December 19, 1996. ATLANTIC paid quarterly cash distributions of $0.39
per Common Share on February 19, 1997, May 27, 1997 and August 26, 1997. On
October 27, 1997 the Board declared a distribution of $0.39 per Common Share for
the fourth quarter of 1997. The distribution is payable on November 25, 1997 to
common shareholders of record on November 11, 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. 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 to 1997 results.
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 1996 pro forma funds from
operations information presented below provides a more meaningful comparison.
However, the 1996 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.
27
<PAGE>
Funds from operations and pro forma funds from operations were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net earnings attributable to Common Shares............. $ 12,482 $ 11,131 $ 34,490 $ 27,528
Add (deduct):
Real estate depreciation......................... 6,860 5,472 19,443 15,069
Gain on disposition of Real Estate............... -- (1,593) (259) (2,255)
Provision for possible loss on investments....... -- -- 200 --
Amortization of discount on conversion feature
and deferred commitment fee related to the
Homestead Convertible Mortgages.............. (154) -- (255) --
----------- ----------- ----------- ------------
Funds from operations.................................. 19,188 15,010 53,619 40,342
----------- ----------- ----------- ------------
Add (deduct) pro forma adjustments relating to the sale
of the Homestead Assets:
Reduction in rental income (1)................... -- (348) -- (348)
Reduction in rental expenses (1)................. -- 137 -- 137
Increase in interest expense (2)................. -- (869) -- (2,579)
Other, net....................................... -- 5 -- 34
REIT Management fee effect (3)................... -- 170 -- 439
----------- ----------- ----------- ------------
Total pro forma adjustments................. -- (905) -- (2,317)
----------- ----------- ----------- ------------
Pro forma funds from operations........................ 19,188 14,105 53,619 38,025
Cash distributions paid................................ (16,368) (13,839) (47,483) (38,286)
----------- ----------- ----------- ------------
Excess (deficit) of pro forma funds from operations
over cash distributions paid......................... $ 2,820 $ 266 $ 6,136 $ (261)
=========== =========== =========== ============
Weighted average Common Shares outstanding............. 42,998 32,952 40,725 30,384
=========== =========== =========== ============
</TABLE>
- - --------
(1) Represents the reduction in rental income and rental expenses that would
have occurred had the Homestead property that commenced operations in 1996
been sold as of January 1, 1996.
(2) 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.
(3) Represents the decrease in REIT Management fee that would have resulted
from the pro forma adjustments.
28
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
At a special meeting of ATLANTIC's common shareholders on September 8,
1997, the shareholders approved: (1) the Merger and Issuance Agreement dated as
of March 24, 1997, which among other things provided for the acquisition of the
business and operations of the REIT Manager and SCG Realty Services in exchange
for 2,306,591 Common Shares, with 34,255,652 Common Shares (81.6% of the total
Common Shares outstanding of 41,968,780 on the record date of August 6, 1997)
voting for approval and 7,713,128 Common Shares withheld and (2) the 1997
Long-Term Incentive Plan with 33,276,824 Common Shares (79.3% of the total
Common Shares outstanding of 41,968,780 on the record date of August 6, 1997)
voting for approval and 8,691,956 Common Shares withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S> <C>
12.1 Statement regarding Computation of Ratio of Earnings to Fixed Charges
12.2 Statement regarding Computation of Ratio of Earnings to Fixed
Charges and Preferred Share Dividends
15 Letter from Ernst & Young LLP dated November 3, 1997 regarding
unaudited financial information
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
DATE ITEMS REPORTED FINANCIAL STATEMENTS
---- -------------- --------------------
<S> <C> <C>
None
</TABLE>
29
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
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 OFFICER)
/s/ Ann L. Schumacher
__________________________________
Ann L. Schumacher
VICE PRESIDENT (PRINCIPAL
ACCOUNTING OFFICER)
Date: November 12, 1997
30
<PAGE>
EXHIBIT 15
November 7, 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, No. 333-31419) pertaining to the Security Capital Atlantic
Incorporated 1997 Long-Term Incentive Plan, (Form S-8, No. 333-25993) pertaining
to Security Capital Atlantic Incorporated Share Option Plan for Outside
Directors and (Form S-3, No. 333-38477) for the registration of $500,000,000 in
debt and equity securities of our report dated November 7, 1997, relating to the
unaudited condensed interim financial statements of Security Capital Atlantic
Incorporated that are included in the Form 10-Q for the quarter ended September
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>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 460
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,262,757
<DEPRECIATION> 59,487
<TOTAL-ASSETS> 1,361,483
<CURRENT-LIABILITIES> 0
<BONDS> 310,166
0
50,000
<COMMON> 474
<OTHER-SE> 873,290
<TOTAL-LIABILITY-AND-EQUITY> 1,361,483
<SALES> 123,765
<TOTAL-REVENUES> 126,383
<CGS> 0
<TOTAL-COSTS> 67,304
<OTHER-EXPENSES> 9,585
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 14,572
<INCOME-PRETAX> 34,490
<INCOME-TAX> 0
<INCOME-CONTINUING> 34,490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,490
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
<PAGE>
EXHIBIT 12.1
SECURITY CAPITAL ATLANTIC
INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------
1997 1996 1996 1995 1994 1993(1)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings from operations...... $ 34,722 $ 25,273 $ 32,998 $ 19,639 $ 9,926 $ 38
Add:
Interest expense.............. 14,572 11,824 16,181 19,042 9,240 0
--------- --------- --------- --------- --------- ---------
Earnings, as adjusted............. $ 49,294 $ 37,097 $ 49,179 $ 38,681 $ 19,166 $ 38
========= ========= ========= ========= ========= =========
Fixed charges:
Interest expense.............. $ 14,572 $ 11,824 $ 16,181 $ 19,042 $ 9,240 $ 0
Capitalized interest.......... 7,653 7,587 10,250 4,404 793 0
--------- --------- --------- --------- --------- ---------
Total fixed charges........... $ 22,225 $ 19,411 $ 26,431 $ 23,446 $ 10,033 $ 0
========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges........................ 2.2 1.9 1.9 1.7 1.9 N/A
========= ========= ========= ========= ========= =========
</TABLE>
(1) For the period from inception (October 26, 1993) to December 31, 1993.
<PAGE>
EXHIBIT 12.2
SECURITY CAPITAL ATLANTIC
INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------
1997 1996 1996 1995 1994 1993(1)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings from operations...... $ 34,722 $ 25,273 $ 32,998 $ 19,639 $ 9,926 $ 38
Add:
Interest expense.............. 14,572 11,824 16,181 19,042 9,240 0
--------- --------- --------- --------- --------- ---------
Earnings, as adjusted............. $ 49,294 $ 37,097 $ 49,179 $ 38,681 $ 19,166 $ 38
========= ========= ========= ========= ========= =========
Combined fixed charges and preferred
share dividends:
Interest expense.............. $ 14,572 $ 11,824 $ 16,181 $ 19,042 $ 9,240 $ 0
Capitalized interest.......... 7,653 7,587 10,250 4,404 793 0
--------- --------- --------- --------- --------- ---------
Total fixed charges........ 22,225 19,411 26,431 23,446 10,033 0
Preferred share dividends......... 491 0 0 0 0 0
--------- --------- --------- --------- --------- ---------
Combined fixed charges
and preferred share dividends.... $ 22,716 $ 19,411 $ 26,431 $ 23,446 $ 10,033 $ 0
========= ========= ========= ========= ========= =========
Ratio of earnings to combined fixed
charges and preferred share
dividends........................ 2.2 1.9 1.9 1.7 1.9 N/A
========= ========= ========= ========= ========= =========
</TABLE>
(1) For the period from inception (October 26, 1993) to December 31, 1993.