SECURITY CAPITAL ATLANTIC INC
10-Q, 1997-11-12
REAL ESTATE INVESTMENT TRUSTS
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<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.


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