<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-12303
SECURITY CAPITAL ATLANTIC INCORPORATED
(Exact name of registrant as specified in its charter)
MARYLAND 85-0415503
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SIX PIEDMONT CENTER, SUITE 600, 30305
ATLANTA, GEORGIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(404) 237-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days.
Yes __X_ No _____
The number of shares outstanding of the Registrant's common stock as of May
11, 1998 was: 47,752,052
<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--March 31, 1998 (unaudited) and December 31, 1997...................... 3
Condensed Statements of Earnings--Three months ended March 31, 1998 and 1997
(unaudited)..................................................................................... 4
Condensed Statement of Shareholders' Equity--Three months ended March 31, 1998
(unaudited)..................................................................................... 5
Condensed Statements of Cash Flows--Three months ended March 31, 1998 and 1997
(unaudited)..................................................................................... 6
Notes to Condensed Financial Statements......................................................... 7
Independent Accountant's Review Report.......................................................... 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................................... 16
PART II. Other Information
Item 4. Submission of Matters to Vote of Securities Holders............................................. 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>
MARCH 31, DECEMBER 31,
1998 1997
------------------ ------------------
ASSETS (Unaudited)
------
<S> <C> <C>
Real estate................................................................ $ 1,426,931 $ 1,364,572
Less accumulated depreciation.............................................. 73,396 65,626
------------------ ------------------
1,353,535 1,298,946
Homestead Convertible Mortgages............................................ 122,990 122,482
------------------ ------------------
Net investments......................................................... 1,476,525 1,421,428
Cash and cash equivalents.................................................. 3,247 1,273
Other assets............................................................... 21,965 18,710
------------------ ------------------
Total assets...................................................... $ 1,501,737 $ 1,441,411
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Short-term borrowings................................................. $ 233,088 $ 164,743
Notes payable......................................................... 150,000 150,000
Mortgages payable..................................................... 163,782 170,525
Distributions payable................................................. -- 19,104
Accounts payable...................................................... 24,456 22,774
Accrued expenses and other liabilities................................ 23,688 23,284
------------------ ------------------
Total liabilities................................................. 595,014 550,430
------------------ ------------------
Shareholders' equity (250,000,000 total shares authorized):
Series A Preferred Shares (2,000,000 shares issued and outstanding at
March 31, 1998 and December 31,1997; stated liquidation preference
of $25 per share).................................................. 50,000 50,000
Common Shares (47,760,965 issued and outstanding at March 31,
1998 and 47,760,580 issued and outstanding at December 31, 1997)..... 478 478
Additional paid-in capital............................................ 904,641 904,668
Employee stock purchase notes ........................................ (12,290) (12,347)
Unrealized gains on Homestead Convertible Mortgages................... 17,322 16,707
Distributions in excess of net earnings............................... (53,428) (68,525)
------------------ ------------------
Total shareholders' equity........................................ 906,723 890,981
------------------ ------------------
Total liabilities and shareholders' equity........................ $ 1,501,737 $ 1,441,411
================== ==================
</TABLE>
See accompanying notes to the condensed financial statements.
3
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Revenues:
Rental income..................................................... $ 46,148 $ 39,715
Homestead Convertible Mortgages interest income................... 2,109 185
Other interest income............................................. 168 57
---------------- -----------------
48,425 39,957
---------------- -----------------
Expenses:
Rental expenses:
Paid to affiliate............................................. 404 1,280
Paid to third parties......................................... 11,980 10,206
Real estate taxes................................................. 4,600 3,849
Depreciation...................................................... 7,798 6,132
Interest.......................................................... 5,909 4,761
REIT management fee paid to affiliate............................. -- 3,029
General and administrative expenses:
Paid to affiliate............................................. 214 --
Paid to third parties......................................... 1,210 265
Provision for possible loss on investments........................ -- 200
Other............................................................. 16 57
---------------- -----------------
32,131 29,779
---------------- -----------------
Earnings before extraordinary item..................................... 16,294 10,178
Extraordinary item-costs related to early extinguishment of debt.. 119 --
---------------- -----------------
Net earnings........................................................... 16,175 10,178
Less preferred share dividends.................................... 1,078 --
---------------- -----------------
Net earnings attributable to Common Shares............................. $ 15,097 $ 10,178
================ =================
Per Common Share amounts:
Basic and diluted earnings before extraordinary item.............. $ 0.32 $ 0.27
================ =================
Basic and diluted net earnings attributable to Common Shares...... $ 0.32 $ 0.27
================ =================
Basic and diluted weighted-average Common Shares outstanding...... 47,751 37,892
================ =================
Distributions paid................................................ $ 0.40 $ 0.39
================ =================
</TABLE>
See accompanying notes are to the condensed financial statements.
4
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31,1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES, $0.01 PAR VALUE
-----------------------------
SERIES A
PREFERRED UNREALIZED
SHARES EMPLOYEE GAINS ON DISTRIBUTIONS
AT AGGREGATE COMMON ADDITIONAL STOCK HOMESTEAD IN EXCESS
LIQUIDATION SHARES AT PAID-IN PURCHASE CONVERTIBLE OF NET
PREFERENCE PAR VALUE CAPITAL NOTES MORTGAGES EARNINGS TOTAL
-------------- ---------- ----------- ---------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997.......... $ 50,000 $ 478 $ 904,668 $ (12,347) $ 16,707 $ (68,525) $ $890,981
-----------
Net earnings........................... -- -- -- -- -- 16,175 16,175
Preferred share dividends paid......... -- -- -- -- -- (1,078) (1,078)
Other comprehensive income - change in
unrealized holding gains on Homestead
Convertible Mortgages................. -- -- -- -- 615 -- 615
----------
Comprehensive income attributable to
Common Shares ........................ 15,712
----------
Common Shares repurchased under
employee stock purchase plan, net of
issuances............................. -- -- (17) 12 -- -- (5)
Principal payments on employee stock
purchase notes........................ -- -- -- 45 -- -- 45
Other.................................. -- -- (10) -- -- -- (10)
-------------- ---------- ----------- --------- -------------- ------------- ----------
Balances at March 31, 1998............. $ 50,000 $ 478 $ 904,641 $ (12,290) $ 17,322 $ (53,428) $ 906,723
============== ========== =========== ========== ============== ============= ==========
</TABLE>
See accompanying notes are to the condensed financial statements.
5
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Operating activities:
Net earnings....................................................... $ 16,175 $ 10,178
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:
Depreciation and amortization.................................. 7,925 6,205
Early extinguishment of debt................................... 119 --
Provision for possible loss on investments..................... -- 200
Decrease in accounts payable................................... (1,565) (2,056)
Increase in accrued expenses and other liabilities............. 516 2,884
Increase in other assets....................................... (3,524) (498)
---------------- -----------------
Net cash flow provided by operating activities............... 19,646 16,913
---------------- -----------------
Investing activities:
Real estate investments............................................ (59,111) (51,026)
Tax-deferred exchange proceeds held in escrow...................... -- 1,672
Funding of Homestead Convertible Mortgages......................... -- (20,000)
---------------- -----------------
Net cash flow used by investing activities................... (59,111) (69,354)
---------------- -----------------
Financing activities:
Proceeds from short-term borrowings................................ 501,062 75,000
Repayments of short-term borrowings................................ (432,717) (7,750)
Distributions paid on Common Shares................................ (19,104) (14,778)
Dividends paid on preferred shares................................. (1,078) --
Transaction costs incurred......................................... (21) (45)
Regularly scheduled mortgage principal payments.................... (481) (372)
Early extinguishment of mortgage debt.............................. (6,262) --
Principal payments on employee stock purchase notes................ 45 --
Common Shares repurchased under employee stock purchase plan,
net of issuances................................................. (5) --
---------------- -----------------
Net cash flow provided by financing activities............... 41,439 52,055
---------------- -----------------
Net increase (decrease) in cash and cash equivalents.................... 1,974 (386)
Cash and cash equivalents, beginning of period.......................... 1,273 4,339
---------------- -----------------
Cash and cash equivalents, end of period................................ $ 3,247 $ 3,953
================ =================
Non-cash investing and financing activities:
Change in the unrealized gains on Homestead Convertible
Mortgages.......................................................... $ 615 $ 5,900
Common Shares repurchased under employee stock purchase plan,
net of issuances................................................... 12 --
</TABLE>
See accompanying notes to thecondensed financial statements.
6
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE 1 GENERAL
The financial statements of Security Capital Atlantic Incorporated
("ATLANTIC") as of March 31, 1998 and for the three months ended March 31, 1998
and 1997 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 1997 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 months ended March 31, 1998 and 1997 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 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 1997 amounts have been reclassified to conform to the 1998
presentation.
NOTE 2 PROPOSED MERGER TRANSACTION
On April 2, 1998, ATLANTIC announced a proposed merger in which ATLANTIC
would be merged with and into Security Capital Pacific Trust ("PTR") (NYSE:PTR),
a multifamily real estate investment trust ("REIT") currently operating
primarily in the western United States (the "PTR Merger"). The combined company
will operate under the name Archstone Communities Trust ("ARCHSTONE"). The
merger agreement with PTR (the "Merger Agreement") was executed on April 1, 1998
and provides that each issued and outstanding share of ATLANTIC common stock,
par value $0.01 per share ("Common Shares"), will be converted into the right to
receive one share of PTR common stock and each issued and outstanding share of
ATLANTIC Series A Cumulative Redeemable Preferred Stock ("Series A Preferred
Shares") will be converted into the right to receive one share of a new class of
PTR Series C preferred stock. Additionally, the Merger Agreement provides for
PTR to assume all of ATLANTIC's outstanding debt and other liabilities. The PTR
Merger has been structured as a tax-free merger and will be accounted for under
the purchase method.
ATLANTIC's Board of Directors (the "Board") approved the PTR Merger based
upon the recommendation of a special committee comprised of the independent
members of the Board. The recommendation of this special committee was in part
based upon an opinion obtained from a financial advisor engaged to review the
fairness of the consideration to be received by ATLANTIC's shareholders, other
than Security Capital Group Incorporated ("Security Capital"), ATLANTIC's
principal shareholder, from a financial point of view. The PTR Merger, which is
expected to be consummated by August 1998, is subject to the approval of a
majority of ATLANTIC's shareholders, the approval of two-thirds of PTR's
shareholders and certain other conditions. ATLANTIC and PTR filed a joint proxy
statement with the Securities and Exchange Commission on April 28, 1998 related
to the PTR Merger which has not yet been declared effective.
Security Capital owns approximately 49.9% of the Common Shares and 33.0% of
the outstanding shares of PTR common stock and has agreed to vote all of its
shares in favor of the PTR Merger, subject to certain conditions. After the PTR
Merger is consummated, Security Capital would own approximately 38.7% of
ARCHSTONE's common shares and would be ARCHSTONE's largest shareholder.
7
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The Merger Agreement provides that ARCHSTONE's common share distribution
will be initially set at an annualized level $1.42 per share.
NOTE 3 REAL ESTATE
INVESTMENT IN REAL ESTATE
ATLANTIC's real estate, which consists entirely of multifamily communities,
at cost, was as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------------------------ ------------------------------------
INVESTMENT UNITS INVESTMENT UNITS
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operating communities....................... $ 1,164,377 22,181 $ 1,132,511 21,693
Communities under construction.............. 242,910 (1) 5,567 (1) 217,065 5,847
Communities in planning(2):
Owned.............................. 18,780 (3) 1,772 (4) 10,709 (3) 928 (4)
Under control...................... -- (5) 2,584 (4) -- (5) 1,864 (4)
--------------- --------------- --------------- ---------------
18,780 4,356 10,709 2,792
Land held for future development(6)......... 864 -- 4,287 --
--------------- --------------- --------------- ---------------
Total........................ $ 1,426,931 (7) 32,104 $ 1,364,572 (7) 30,332
=============== =============== =============== ===============
</TABLE>
- --------
(1) At March 31, 1998 includes communities which were leasing completed units
of $149.1 million (2,555 units) and communities with no completed units of
$93.8 million (3,012 units). Unfunded commitments for all communities under
construction were $122.4 million at March 31, 1998 which will result in a
total completed construction cost of $365.3 million.
(2) The term "in planning" means that construction is anticipated to commence
within 12 months. The term "under control" means that ATLANTIC has an
exclusive right (through a contingent contract or letter of intent) during
a contractually agreed-upon time period to acquire land for future
development of multifamily communities, but does not currently own the
land. There can be no assurance that such land will be acquired.
(3) Costs for owned communities in planning are primarily for land
acquisitions.
(4) Unit information is based on management's estimates and is unreviewed and
unaudited.
(5) ATLANTIC's investment at March 31, 1998 and December 31, 1997 in
communities in planning and under control for future development was $2.0
million and $1.8 million, respectively. These amounts are classified as
other assets.
(6) Construction is not anticipated to commence within 12 months.
(7) Communities located in Atlanta, Georgia aggregated 28.0% and 28.5% at
March 31, 1998 and December 31, 1997, respectively, of ATLANTIC's real
estate, at cost.
The change in real estate, at cost, for the three months ended March 31,
1998 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1998................................... $ 1,364,572
Acquisitions and renovation expenditures..................... 12,595
Development expenditures, including land acquisitions........ 49,174
Recurring capital expenditures............................... 590
--------------
Balance at March 31, 1998.................................... $ 1,426,931
==============
</TABLE>
8
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
PARTNERSHIP AGREEMENT
On May 1, 1998, ATLANTIC acquired a controlling general partnership
interest in Atlantic Multifamily Limited Partnership-I ("Partnership-I"). Also
on May 1, 1998, Partnership-I acquired six operating communities aggregating
1,494 units. Partnership-I has three additional operating communities,
aggregating 890 units, under contract. Two of these communities are expected to
be acquired in July 1998 with the remaining community scheduled for acquisition
in January 1999.
Upon completion of the three additional acquisitions, Partnership-I will
own nine communities with a total investment of approximately $161.9 million.
ATLANTIC will have a 71% general partnership interest in Partnership-I based
upon its anticipated total cash investment of approximately $115.0 million. The
communities acquired by Partnership-I are not encumbered by debt.
ATLANTIC is the sole general partner of Partnership-I, which is organized
as a Delaware limited partnership. Under the terms of the partnership agreement,
ATLANTIC has sole management power over the partnership. Should a community
owned by Partnership-I be sold, ATLANTIC has agreed to utilize tax-deferred
exchanges in order to mitigate the tax consequences to the limited partners. At
any time after one year from the contribution date, the limited partners in
Partnership-I are entitled to exchange their partnership units for Common Shares
on the basis of one partnership unit for one Common Share. Limited partners are
entitled to receive preferential, cumulative quarterly distributions equal to
the quarterly distribution in respect of Common Shares. ATLANTIC is entitled to
all cash flow in excess of the preferential return.
NOTE 4 HOMESTEAD CONVERTIBLE MORTGAGES
GENERAL
ATLANTIC entered into a funding commitment agreement (the "Funding
Agreement") to provide secured financing to Homestead Village Incorporated
("Homestead") for purposes of completing the development and construction of the
Homestead Village(R) properties sold by ATLANTIC to Homestead in October 1996.
As of April 30, 1998, ATLANTIC had received $98.0 million of convertible
mortgage notes from Homestead ("Homestead Convertible Mortgages") in exchange
for full funding of $111.1 million under the Funding Agreement. The individual
Homestead Village(R) properties serve as collateral individually and in the
aggregate under cross-collateral provisions.
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 convertible at ATLANTIC's option into one share of
Homestead common stock for every $11.50 of principal
outstanding (approximately 8.5 million shares),
(iii) are not callable until 2001, and
(iv) mature in October 2006.
9
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
CARRYING VALUE
At March 31, 1998, ATLANTIC held Homestead Convertible Mortgages with a
face amount of $93.5 million, as a result of funding $106.0 million of its
commitment to Homestead. ATLANTIC funded the remaining $5.1 million commitment
under the Funding Agreement in April 1998. The difference between the face
amount and the amount funded has been recorded as an original issue premium that
is being amortized over the term of the Homestead Convertible Mortgages. The
value attributed to the conversion feature of the Homestead Convertible
Mortgages issued, approximately $6.9 million, is recognized along with an
offsetting discount (deferred credit) in the Homestead Convertible Mortgages'
balance. This deferred credit is being amortized over the term of the Homestead
Convertible Mortgages. Furthermore, the carrying value of the Homestead
Convertible Mortgages has been adjusted to fair value (a total adjustment of
$17.3 million at March 31, 1998). For the three months ended March 31, 1998, an
adjustment to the fair value of $0.6 million was recognized. The adjustment is
reflected as an unrealized gain and a component of comprehensive income in the
statement of shareholders' equity. The amount of the fair value adjustment is
based upon the conversion value of the Homestead Convertible Mortgages and was
calculated using the closing price of Homestead common stock on March 31, 1998
of $15.125 per share.
At March 31, 1998 the carrying value of the Homestead Convertible Mortgages
consisted of the following components (in thousands):
<TABLE>
<S> <C>
Face amount............................................... $ 93,513
Original issue premium.................................... 12,487
------------
Amount funded............................................. 106,000
Amortization of original issue premium.................... (701)
Initial value of conversion feature....................... 6,587
Unamortized discount on conversion feature................ (6,218)
Fair value adjustment..................................... 17,322
------------
Carrying value (fair value)............................... $ 122,990
============
</TABLE>
NOTE 5 BORROWINGS
SHORT-TERM BORROWINGS
ATLANTIC has a $350 million unsecured line of credit with Morgan Guaranty
Trust Company of New York ("MGT"), as agent for a group of lenders. Borrowings
on this unsecured line of credit bear interest at prime or, at ATLANTIC's
option, LIBOR plus 0.75%. Under a competitive bid option contained in the line
of credit agreement, ATLANTIC may be able to borrow at a lower interest rate
spread over LIBOR, depending on market conditions. This option is available on
up to $175 million of borrowings. ATLANTIC pays an annual facility fee of 0.15%
on the total line of credit available of $350 million. The line of credit
matures November 1999 and may be extended for one year with the approval of MGT
and the other participating lenders. At March 31, 1998, there were $187.0
million of borrowings outstanding under this line of credit.
All debt incurrences under this unsecured line of credit are subject to
certain covenants. Specifically, distributions for the preceding four quarters
may not exceed 95% of ATLANTIC's funds from operations (as defined in the line
of credit agreement) for the preceding four quarters. ATLANTIC was in compliance
with all such covenants at March 31, 1998.
In January 1998, ATLANTIC entered into a $50 million unsecured borrowing
agreement with Chase Bank of Texas, N.A. (which replaced a $25 million agreement
that was entered into in June 1997). This loan, which allows for same day
borrowings and more efficient cash management, matures in January 1999 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 these borrowings during 1998
ranged from 6.25% to 7.38% with a weighted-average daily interest rate of 6.50%.
At March 31, 1998, there were $46.1 million of borrowings outstanding under this
agreement.
10
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
A summary of ATLANTIC's short-term borrowings is as follows (dollar amounts
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
------------------- ----------------------
<S> <C> <C>
Total borrowing capacity.................................... $ 400,000 $ 375,000
Borrowings at end of period................................. 233,088 164,743
Weighted-average daily borrowings........................... 186,153 207,672
Maximum borrowings outstanding at any month-end............. 233,088 295,250
Weighted-average daily interest rate........................ 6.68% 7.20%
Weighted-average interest rate at end of period............. 6.63% 7.41%
</TABLE>
NOTES PAYABLE
ATLANTIC had notes payable outstanding at March 31, 1998 as follows (in
thousands):
<TABLE>
<S> <C>
7.25% Senior Unsecured Notes, issued August 20, 1997 in an
original principal amount of $100,000. Interest is payable on
February 15 and August 15 of each year. The notes are payable
in eight consecutive annual installments ranging from $10,000
to $15,000 commencing August 15, 2002 and mature on August 15,
2009
$100,000
7.86% Senior Unsecured Notes, issued August 20, 1997 in an
original principal amount of $50,000. Interest is payable on
February 15 and August 15 of each year. The notes are payable
in five consecutive annual installments of $10,000 commencing
August 15, 2013 and mature on August 15, 2017................... 50,000
--------
Total.................................................. $150,000
=========
</TABLE>
ATLANTIC's notes payable have an average effective interest rate, including
issuance costs, of 7.66%. The foregoing notes are governed by the terms and
provisions of an indenture (the "Indenture") between ATLANTIC and State Street
Bank and Trust Company, as trustee. All of the foregoing notes are redeemable at
any time at the option of ATLANTIC. Additionally, the Indenture places
limitations on the amount of additional debt that ATLANTIC may incur and
contains certain covenants. ATLANTIC was in compliance with all such covenants
contained in the Indenture at March 31, 1998.
11
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
MORTGAGES PAYABLE
Mortgages payable consisted of the following at March 31, 1998 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
STATED PERIODIC
INTEREST MATURITY PAYMENT PRINCIPAL
COMMUNITY RATE DATE DATE BALANCE
- -------------------------------------------- ----------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
Conventional fixed rate:
Cameron Ridge.......................... 7.000% 09/10/98 (1) Fully $
amortizing 5,633
Country Place Village I................ 7.750% 11/01/00 (2) 1,958
Cameron Hidden Harbor.................. 7.930% 05/12/01 (3) 5,464
Country Oaks........................... 7.655% 07/01/02 (4) 5,857
Cameron at Hickory Grove............... 8.000% 07/10/03 (5) 5,914
Shadowbluff............................ 8.050% 12/01/05 (6) 5,490
Cameron Palm Harbor.................... 8.040% 11/01/06 (7) 5,241
Cameron on the Cahaba II............... 7.125% 03/01/29 Fully 7,937
amortizing
------------
43,494
------------
Tax exempt fixed rate or variable rate
subject to swap agreements (8):
Cameron Station........................ 6.000% 05/01/07 Interest only 14,500
Azalea Park............................ (9) 06/01/25 Interest only 15,500
Cameron Brook.......................... (9) 06/01/25 Interest only 19,500
Cameron Cove........................... (9) 06/01/25 Interest only 8,500
Clairmont Crest........................ (9) 06/01/25 Interest only 11,600
Forestwood............................. (9) 06/01/25 Interest only 11,485
Foxbridge on the Bay................... (9) 06/01/25 Interest only 10,400
The Greens............................. (9) 06/01/25 Interest only 10,400
Parrot's Landing I..................... (9) 06/01/25 Interest only 15,835
WintersCreek........................... (9) 06/01/25 Interest only 5,000
Less amounts held in principal
reserve fund (10).................... (2,432)
------------
120,288
------------
$ 163,782
Total annual weighted-average interest ============
rate (11)............................ 7.06%
============
</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 $4,869,000
due at maturity.
(4) Interest and principal payments due monthly; balloon payment of $5,539,000
due at maturity.
(5) Interest and principal payments due monthly; balloon payment of $5,556,000
due at maturity.
(6) Interest and principal payments due monthly; balloon payment of $4,926,000
due at maturity.
(7) Interest and principal payments due monthly; balloon payment of $4,661,000
due at maturity.
(8) 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 and liabilities
and business operations.
(9) Interest rate is fixed through swap agreements executed in conjunction with
the credit enhancement agreement with the Federal National Mortgage
Association ("FNMA"). The swap agreements are discussed in Note 8.
(10) ATLANTIC has a 30-year credit enhancement agreement with FNMA related to
the underlying tax-exempt bond issues. This credit enhancement agreement
requires ATLANTIC to make monthly payments into a principal reserve account
based on a 30-year amortization.
(11) 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. See Note 8.
12
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Real estate with an aggregate undepreciated cost at March 31, 1998 of $70.7
million and $206.1 million serves as collateral for the conventional mortgages
payable and the tax-exempt mortgages payable, respectively. Additionally,
ATLANTIC has a letter of credit in the amount of $2.5 million that serves as
additional collateral for the tax-exempt mortgages payable.
The change in mortgages payable for the three months ended March 31, 1998
consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1998.......................... $ 170,525
Regularly scheduled principal payments.............. (481)
Early extinguishment of mortgage debt............... (6,262)
-------------
Balance at March 31, 1998........................... $ 163,782
=============
</TABLE>
ATLANTIC was in compliance with all covenants contained in the mortgage
agreements at March 31, 1998.
INTEREST EXPENSE
For the three months ended March 31, 1998 and 1997, the total interest paid
in cash on all outstanding debt was $11.3 million and $7.5 million,
respectively. For the three months ended March 31, 1998 and 1997, interest
capitalized as part of the cost of real estate projects under development was
$3.1 million and $2.6 million, respectively.
Amortization of loan costs, which is included in interest expense, was $0.1
million in each of the three months ended March 31, 1998 and 1997.
NOTE 6 DISTRIBUTIONS AND DIVIDENDS
ATLANTIC paid a quarterly cash distribution of $0.40 per Common Share for
the first quarter of 1998 on February 26, 1998 to holders of record of Common
Shares on February 12, 1998. On April 29, 1998, the Board declared a
distribution of $0.40 per Common Share payable on May 27, 1998 of holders of
record of Common Shares on May 13, 1998.
ATLANTIC paid a dividend of $0.539 per share on its Series A Preferred
Shares on March 31, 1998. Pursuant to the terms of the preferred shares,
ATLANTIC is restricted from declaring or paying any distribution with respect to
Common Shares unless all cumulative dividends with respect to the Series A
Preferred Shares have been paid and sufficient funds have been set aside for
Series A Preferred Share dividends that have been declared.
NOTE 7 INTERNALIZATION OF MANAGEMENT TRANSACTION
ATLANTIC acquired the operations and business of Security Capital
(Atlantic) Incorporated (the "REIT Manager") and SCG Realty Services Atlantic
Incorporated (the "Property Manager") on September 9, 1997 from Security
Capital, ATLANTIC's principal shareholder, in exchange for 2,306,591 Common
Shares.
Concurrent with this transaction, ATLANTIC terminated its REIT management
agreement with the REIT Manager and its property management agreement, covering
approximately 97% of ATLANTIC's operating communities, with the Property
Manager. Consequently, ATLANTIC has not incurred the costs associated with these
agreements in 1998. However, for the three months ended March 31, 1998, ATLANTIC
did incur certain of the operating costs of the businesses acquired, primarily
the personnel costs associated with the employees of the REIT Manager and the
Property Manager who are now employees of ATLANTIC. Also, ATLANTIC purchased
certain administrative services from Security Capital under an Administrative
Services Agreement ("ASA"). The fees payable under the ASA are equal to Security
Capital's direct cost plus an overhead factor of 20%. ATLANTIC incurred $0.7
million under the ASA for the three months ended March 31, 1998. For the year
ended December 31, 1998, ATLANTIC's costs under the ASA cannot exceed $3.7
million, but may be less than that amount as any cost savings will accrue to
ATLANTIC.
13
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Costs related to the management function, including charges under the ASA,
incurred subsequent to September 9, 1997 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
qualifying management costs related to the acquisition and development of
multifamily communities have been capitalized ($1.5 million for the three months
ended March 31, 1998). Management costs that have not been capitalized and are
not classified as rental expenses are reflected as general and administrative
expenses. On April 1, 1998 ATLANTIC adopted a new accounting rule and will no
longer capitalize internal management costs incurred related to the acquisition
of operating communities. The new rule is not expected to have a material impact
on ATLANTIC's financial position or results of operations.
NOTE 8 FINANCIAL INSTRUMENTS
ATLANTIC occasionally utilizes derivative financial instruments as hedges
to manage interest rate risk on anticipated future transactions. ATLANTIC does
not use derivative financial instruments for trading purposes.
ATLANTIC entered into interest rate swap agreements on its variable
interest rate mortgages and $100 million of short-term borrowings to mitigate
its variable interest rate exposure. 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.
The following table summarizes the activity in interest rate contracts
and interest rate swap agreements for the three months ended March 31, 1998
(in millions):
<TABLE>
<CAPTION>
INTEREST RATE SWAP AGREEMENTS
---------------------------------------
INTEREST
RATE FUTURE TAX-EXEMPT SHORT-TERM
CONTRACTS (1) BOND ISSUES (2) BORROWINGS (3)
-------------- ----------------- -----------------
<S> <C> <C> <C>
Notional amounts at January 1, 1998.......... $ 100.0 $ 106.3 $ 100.0
New contracts................................ -- -- --
Matured contracts............................ -- -- (100.0)
Contractual reductions....................... -- (0.2) --
-------------- ---------------- -----------------
Notional amounts at March 31, 1998........... $ 100.0 (1) $ 106.1 $ --
============== ================= =================
</TABLE>
- --------
(1) Includes a contract entered into in anticipation of a 1998 long-term debt
offering that provided for an interest rate of 6.309%. ATLANTIC realized a
loss of approximately $6.0 million on this contract when it expired on
April 17, 1998. ATLANTIC does not intend to complete the long-term debt
offering in light of the proposed PTR Merger. Accordingly, this loss will
be expensed.
(2) ATLANTIC pays interest on the notional amount at an all-in, fixed rate of
6.64%. ATLANTIC paid $0.5 million more in interest than it received under
these swap agreements in each of the three month periods ended March 31,
1998 and 1997.
(3) This one-year agreement expired on February 5, 1998. A similar swap
agreement on $100 million of borrowings was in effect for the period
February 5, 1996 to February 4, 1997. ATLANTIC paid $19,000 and $77,000
more in interest than it received under these swap agreements during the
three months ended March 31, 1998 and 1997, respectively.
14
<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 March 31, 1998 and the related condensed
statements of earnings and cash flows for the three months ended March 31, 1998
and 1997, and the condensed statements of shareholders' equity for the three
months ended March 31, 1998. 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 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, 1997 and the related statements of earnings, shareholders' equity,
and cash flows for the year then ended (not presented herein) and in our report
dated January 27, 1998, 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, 1997, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
Ernst & Young LLP
Dallas, Texas
May 1, 1998
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with ATLANTIC's
condensed financial statements and the notes thereto included in Item 1 of this
report. See ATLANTIC's 1997 Annual Report on Form 10-K for a discussion of
various risk factors associated with forward looking statements made in this
document.
OVERVIEW
ATLANTIC's results of operations, financial position and liquidity have
been influenced by its operations of and investments in real estate, which
consist entirely of multifamily communities. Detailed information about
ATLANTIC's real estate investments at March 31, 1998 and its real estate
investment activity during the three months then ended is provided under "--Real
Estate Investments". A description of the transaction whereby ATLANTIC became an
internally managed REIT and the financial impact of this transaction are
included under "--Results of Operations--Internalization of Management
Transaction".
PROPOSED MERGER TRANSACTION
On April 2, 1998, ATLANTIC announced a proposed Merger (the "PTR Merger")
in which ATLANTIC would be merged with and into Security Capital Pacific Trust
("PTR") (NYSE:PTR), a multifamily REIT currently operating primarily in the
western United States The combined company will operate under the name Archstone
Communities Trust ("ARCHSTONE"). The Merger Agreement was executed on April 1,
1998 and provides that each issued and outstanding Common Share will be
converted into the right to receive one share of PTR common stock and each
issued and outstanding Series A Preferred Share will be converted into the right
to receive one share of a new class of PTR Series C preferred stock.
Additionally, the Merger Agreement provides for PTR to assume all of ATLANTIC's
outstanding debt and other liabilities. The PTR Merger has been structured as a
tax-free merger and will be accounted for under the purchase method.
The Board approved the PTR Merger based upon the recommendation of a
special committee comprised of the independent members of the Board. The
recommendation of this special committee was in part based upon an opinion
obtained from a financial advisor engaged to review the fairness of the
consideration to be received by ATLANTIC's shareholders other than Security
Capital, ATLANTIC's principal shareholder, from a financial point of view. The
PTR Merger, which is expected to be consummated by August 1998, is subject to
the approval of a majority of ATLANTIC's shareholders, the approval of
two-thirds of PTR's shareholders and certain other conditions. ATLANTIC and PTR
filed a joint proxy statement with the Securities and Exchange Commission on
April 28, 1998 related to the PTR Merger which has not yet been declared
effective.
Security Capital owns approximately 49.9% of the Common Shares and 33.0% of
the outstanding shares of PTR common stock and has agreed to vote all of its
shares in favor of the PTR Merger, subject to certain conditions. After the PTR
Merger is consummated, Security Capital would own approximately 38.7% of
ARCHSTONE's common shares and would be ARCHSTONE's largest shareholder.
The Merger Agreement provides that ARCHSTONE's common share distribution
will be initially set at an annualized level of $1.42 per share.
Based upon the multifamily portfolios of ATLANTIC and PTR at March 31, 1998
and assuming consummation of the PTR Merger, ARCHSTONE would have 307
multifamily communities, consisting of 91,201 units in 19 states and Washington,
D.C., of which 26,161 units are under construction or in planning (including 25
communities aggregating 7,875 units that are under control but not owned as of
March 31, 1998). Additionally, ARCHSTONE's total market capitalization would be
approximately $5.3 billion.
16
<PAGE>
REAL ESTATE INVESTMENTS
OPERATING COMMUNITIES
The following table summarizes ATLANTIC's investment activity with
respect to operating communities for the three months ended March 31, 1998
(dollar amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
OPERATING COMMUNITIES AT END OF PERIOD:
Communities........................................................ 81 (1)
Units 22,181
Total investment (2)............................................... $ 1,174,784
Cost per unit...................................................... $ 53.0
INVESTMENT ACTIVITY DURING THE PERIOD:
DEVELOPMENTS COMPLETED:
Communities........................................................ 1
Units 280
Total investment (3)............................................... $ 18,905
Cost per unit...................................................... $ 67.5
ACQUISITIONS (4):
Communities........................................................ 1 (5)
Units.............................................................. 208
Total investment (2)............................................... $ 10,566
Cost per unit...................................................... $ 50.8
</TABLE>
- ----------
(1) Separate phases of two communities that had previously been combined are now
reflected separately in this number.
(2) Represents cost, plus budgeted capital expenditures.
(3) Represents total budgeted development cost, which includes the cost of
land, fees, permits, payments to contractors, architectural and engineering
fees and interest and property taxes to be capitalized during the
construction period.
(4) See ATLANTIC's 1997 Annual Report on Form 10-K for a discussion of various
risks associated with ATLANTIC's acquisition activities.
(5) Community is located in Indianapolis, Indiana.
There were no dispositions of operating communities during the three months
ended March 31, 1998.
PARTNERSHIP AGREEMENT
On May 1, 1998, ATLANTIC acquired a controlling general partnership
interest in Atlantic Multifamily Limited Partnership-I ("Partnership-I"). Also
on May 1, 1998, Partnership-I acquired six operating communities aggregating
1,494 units. Partnership-I has three additional operating communities,
aggregating 890 units, under contract. Two of these communities are expected to
be acquired in July 1998 with the remaining community scheduled for acquisition
in January 1999.
Upon completion of the three additional acquisitions, Partnership-I will
own nine communities with a total investment of approximately $161.9 million.
ATLANTIC will have a 71% general partnership interest in Partnership-I based
upon its anticipated total cash investment of approximately $115.0 million. The
communities acquired by Partnership-I are not encumbered by debt.
17
<PAGE>
ATLANTIC is the sole general partner of Partnership-I, which is organized
as a Delaware limited partnership. Under the terms of the partnership agreement,
ATLANTIC has sole management power over the partnership. Should a community
owned by Partnership-I be sold, ATLANTIC has agreed to utilize tax-deferred
exchanges in order to mitigate the tax consequences to the limited partners. At
any time after one year from the contribution date, the limited partners in
Partnership-I are entitled to exchange their partnership units for Common Shares
on the basis of one partnership unit for one Common Share. Limited partners are
entitled to receive preferential, cumulative quarterly distributions equal to
the quarterly distribution in respect of Common Shares. ATLANTIC is entitled to
all cash flow in excess of the preferential return.
The operations of Partnership-I will be consolidated with ATLANTIC's
operations in future reporting periods. In accordance with generally accepted
accounting principles ("GAAP"), diluted per share net earnings attributable to
Common Shares will give effect to these partnership units as if they had been
exchanged, to the extent the effect is dilutive. ATLANTIC will calculate both
basic and diluted funds from operations per share as if all partnership units
have been exchanged.
COMMUNITIES UNDER DEVELOPMENT
ATLANTIC believes that development of multifamily communities from the
ground up which are built for long-term ownership and designed to meet broad
renter preferences and demographic trends will provide a greater source of
long-term cash flow growth in the future. While ATLANTIC's development activity
is dilutive to net earnings and funds from operations in the short term ($ 0.027
per Common Share for the three months ended March 31, 1998), this activity 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 "--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 are capitalized
during the construction period. The operating expenses and 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 portfolio of communities under
construction at March 31, 1998 are expected to be stabilized by the third
quarter of 2000.
18
<PAGE>
ATLANTIC's development activity for the three months ended March 31, 1998
is summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
COMPLETIONS DURING PERIOD:
Communities......................................................... 1
Units 280
Total investment (1)................................................ $ 18,905
Cost per unit....................................................... $ 67.5
STABILIZATIONS DURING PERIOD:
Communities......................................................... 3
Units............................................................... 640
Total investment (2)................................................ $ 44,155
Cost per unit....................................................... $ 69.0
UNDER CONSTRUCTION AT END OF PERIOD (3):
Communities......................................................... 20
Units............................................................... 5,567
Total investment(2)................................................. $ 365,257
Cost per unit....................................................... $ 65.6
Investment to date.................................................. $ 242,910
</TABLE>
- --------
(1) Represents total budgeted development cost, which includes the cost of
land, fees, permits, payments to contractors, architectural and
engineering fees and interest and property taxes to be capitalized during
the construction period.
(2) Represents cost, plus budgeted capital expenditures.
(3) See ATLANTIC's 1997 Annual Report on Form 10-K for a discussion of
various risks associated with ATLANTIC's development and construction
activities.
19
<PAGE>
CURRENT DEVELOPMENT ACTIVITY
ATLANTIC's 20 communities under construction at March 31, 1998 are
located in nine metropolitan areas. 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):
ATLANTA, GEORGIA:
Cameron Landing........... 368 $ 20,041 $ 22,450 1Q/97 4Q/97 3Q/99 91.4%
BIRMINGHAM, ALABAMA:
Cameron at the Summit I... 372 21,768 21,874 2Q/96 2Q/97 4Q/98 96.2
CHARLOTTE, NORTH CAROLINA:
Cameron Matthews.......... 212 11,371 12,195 2Q/97 1Q/98 4Q/98 75.0
Waterford Square II....... 286 16,015 16,723 2Q/96 2Q/97 4Q/98 69.1
JACKSONVILLE, FLORIDA:
Cameron Lakes II.......... 253 14,317 15,888 4Q/96 2Q/97 3Q/98 75.0
NASHVILLE, TENNESSEE:
Cameron Overlook.......... 452 24,238 24,243 2Q/96 2Q/97 4Q/98 95.8
RICHMOND, VIRGINIA:
Cameron at Wyndham........ 312 20,690 21,301 3Q/96 4Q/97 1Q/99 71.7
SOUTHEAST FLORIDA:
Cameron Waterways......... 300 20,611 22,050 1Q/97 1Q/98 1Q/99 73.8
--------- ----------- ------------- --------
TOTAL IN LEASE-UP......... 2,555 149,051 156,724 82.9%
--------- ----------- ------------- --------
OTHER DEVELOPMENTS
UNDER CONSTRUCTION:
ATLANTA, GEORGIA:
Cameron at Barrett Creek.. 332 6,614 23,222 4Q/97 1Q/99 3Q/00 N/A
Cameron at North Point.... 264 8,004 20,348 4Q/97 4Q/98 1Q/00 N/A
Cameron Bridge............ 224 6,617 16,510 4Q/97 4Q/98 4Q/99 N/A
ORLANDO, FLORIDA:
Cameron Promenade (5)..... 212 9,114 14,078 3Q/97 2Q/98 1Q/99 N/A
Cameron Wellington II (5). 120 7,602 9,112 3Q/97 2Q/98 4Q/98 N/A
RALEIGH, NORTH CAROLINA:
Cameron at Southpoint..... 288 5,357 17,614 3Q/97 4Q/98 4Q/99 N/A
Cameron Woods............. 328 7,438 19,846 3Q/97 4Q/98 1Q/00 N/A
RICHMOND VIRGINIA:
Cameron at Virginia 264 12,995 17,345 2Q/97 2Q/98 1Q/99 N/A
Center (5)................
Cameron Crossing II....... 144 7,221 9,930 2Q/97 3Q/98 1Q/99 N/A
SOUTHEAST FLORIDA:
Cameron Gardens........... 300 8,837 21,365 4Q/97 4Q/98 1Q/00 N/A
Cameron Palms............. 340 7,073 24,623 4Q/97 4Q/98 1Q/00 N/A
Cameron Park I............ 196 6,987 14,540 4Q/97 4Q/98 3Q/99 N/A
--------- ----------- -------------
TOTAL OTHER............... 3,012 93,859 208,533
--------- ----------- -------------
TOTAL DEVELOPMENTS
UNDER CONSTRUCTION........ 5,567 $ 242,910 $ 365,257
========= =========== =============
</TABLE>
20
<PAGE>
- --------
(1) Represents total budgeted development cost, which includes the cost of
land, fees, permits, payments to contractors, architectural and engineering
fees and interest and property taxes to be capitalized during the
construction period.
(2) Represents the date 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 at March 31, 1998.
(4) A development community is considered in "lease-up" once ATLANTIC begins
leasing completed units.
(5) This community's first units were delivered in April 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net earnings attributable to Common Shares for the three months ended March
31, 1998 and 1997 were $15.1 million and $10.2 million, respectively. Net
earnings increased $4.9 million in the three months ended March 31, 1998 over
the three months ended March 31, 1997.
PROPERTY OPERATIONS
At March 31, 1998, ATLANTIC had 22,181 operating multifamily units as
compared to 19,241 operating multifamily units at March 31, 1997. This increase
in the number of communities in operation resulted in an increase in
property-level net operating income of $4.8 million as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Rental income............................................................... $ 46,148 $ 39,715
Property operating expenses:
Rental expenses............................................................. 12,384 11,486
Real estate taxes........................................................... 4,600 3,849
------------- -------------
16,984 15,335
------------- -------------
Net operating income........................................................ $ 29,164 $ 24,380
============= =============
Operating margin (net operating income/rental income)....................... 63.2% 61.4%
============= =============
</TABLE>
The increases in rental income and property operating expenses are
primarily the result of the increase in operating units from the first quarter
of 1997 to the first quarter of 1998 as discussed above. ATLANTIC's improved
operating margin for the first three months of 1998 as compared to the same
period in 1997 (63.2% for 1998 and 61.4% for 1997) is the result of 1)
ATLANTIC's efforts aimed at reducing resident turnover, thereby reducing the
costs associated with re-leasing vacated units; 2) certain programs implemented
by ATLANTIC to reduce operating costs, such as the water utility submetering
program; and 3) reduced property operating costs incurred in 1998 as a result of
ATLANTIC becoming an internally managed REIT. See "--Internalization of
Management Transaction". ATLANTIC's operating margin is expected to continue to
improve as ATLANTIC completes the communities it currently has under development
because operating costs are generally lower for newer communities than for older
communities.
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 operating expenses
in subsequent periods.
21
<PAGE>
ANALYSIS OF OPERATING RESULTS OF SAME STORE COMMUNITIES
Operating Summary
ATLANTIC had 50 "same store" communities that were stabilized throughout
the first three months of 1997 and 1998. These same store communities consist of
13,017 units at a total expected investment of $674.4 million (57.4% of
ATLANTIC's total operating portfolio) at March 31, 1998. The operating
performance of these same store communities was as follows:
<TABLE>
FIRST QUARTER
1998 VS. 1997
-----------------
<S> <C>
Collections growth.................................................... 2.77%
Operating expense reduction.......................................... (0.56)%
Net operating income growth........................................... 4.96%
</TABLE>
ATLANTIC's operating results are a function of rental collections and
operating expenses. Rental collections are a function of the rental rates and
occupancy levels achieved. ATLANTIC's operating personnel continually monitor
rental rates and occupancy levels in an effort to maximize rental collections.
ATLANTIC experienced an increase in same store community occupancy during the
first three months of 1998 over the first three months of 1997 (95.45% compared
to 94.19%). ATLANTIC's same store average rental rate increased by 1.2% for the
first three months of 1998 over the first three months of 1997. Consequently,
same store rental collections during the first three months of 1998 have
increased by 2.77% over the first three months of 1997.
Operating expense as a percentage of rental income for ATLANTIC's same
store communities was 38.4% for the first three months of 1998, primarily due to
ATLANTIC's efforts aimed at reducing operating costs as discussed in
"--Results of Operations--Property Operations". This percentage has ranged
between 38.0% and 41.0% during the past two years. The current trends in rental
rates, occupancy and operating 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 50 same store communities by market:
<TABLE>
<CAPTION>
COLLECTIONS TOTAL
AVERAGE AVERAGE GROWTH SAME STORE ATLANTIC
PHYSICAL PHYSICAL 1998 COMMUNITIES PORTFOLIO
OCCUPANCY OCCUPANCY COMPARED % BY % BY
1998 1997 TO 1997 MARKET MARKET (1)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
MID-ATLANTIC:
Charlotte, North Carolina........ 96.32% % 89.86% 6.38% 5.58% 5.04%
Columbus, Ohio (2)............... -- -- -- -- 1.28
Greenville, South Carolina (2)... -- -- -- -- 0.98
Indianapolis, Indiana (2)........ -- -- -- -- 0.90
Memphis, Tennessee (2)........... -- -- -- -- 2.16
Nashville, Tennessee............. 91.84 94.42 (0.59) 5.22 3.74
Raleigh, North Carolina.......... 96.50 93.76 5.05 4.93 10.50
Richmond, Virginia............... 94.05 95.12 (0.99) 4.46 4.17
Washington, D.C.................. 95.85 95.94 2.56 4.66 8.19
------------- ------------- ------------- ------------- -------------
Total Mid-Atlantic........... 94.80% 93.54% 2.55% 24.85% 36.96%
------------- ------------- ------------- ------------- -------------
SOUTHEAST:
Atlanta, Georgia................. 95.36% 93.23% 3.05% 43.77% 30.69%
Birmingham, Alabama.............. 91.90 93.97 (0.82) 4.28 4.33
------------- ------------- ------------- ------------- -------------
Total Southeast.............. 95.02% 93.30% 2.74% 48.05% 35.02%
------------- ------------- ------------- ------------- -------------
FLORIDA:
Ft. Lauderdale/West Palm Beach,
Florida....................... 97.09% 96.15% 1.49% 7.04% 10.36%
Jacksonville, Florida............ 93.64 92.20 1.93 1.85 5.56
Orlando, Florida................. 95.61 95.91 4.06 6.29 3.61
Tampa/Ft. Myers/Sarasota,
Florida....................... 97.26 96.57 3.55 11.92 8.49
------------- ------------- ------------- ------------- -------------
Total Florida................ 96.64 96.07 3.00 27.10 28.02
------------- ------------- ------------- ------------- -------------
Totals....................... 95.45% 94.19% 2.77% 100.00% 100.00%
============= ============= ============= ============= =============
</TABLE>
- --------
(1) Represents percentage of ATLANTIC's total operating communities in each
market.
(2) No communities in this market were stabilized at January 1, 1997.
While ATLANTIC's same store communities have experienced an overall
increase in collections of 2.77% for the first three months of 1998 as compared
to the same period in 1997, some markets have experienced decreases in
collections. Management believes that the decreases in collections experienced
in Nashville, Richmond and Birmingham are caused by temporary supply imbalances
and that these cities continue to provide opportunities for long-term growth in
cash flow. In Atlanta, which represents 43.77% of the same store communities,
same store collections grew 3.05% in the first three months of 1998 over the
same period in 1997. In the first quarter of 1998, Atlanta's same store
collections grew 1.05% over the fourth quarter of 1997.
23
<PAGE>
HOMESTEAD CONVERTIBLE MORTGAGES INTEREST INCOME
At March 31, 1998, ATLANTIC had funded $106.0 million of its total funding
commitment to Homestead of $111.1 million as compared to funding of $20.0
million at March 31, 1997. ATLANTIC funded the remaining $5.1 million of the
commitment to Homestead in April 1998. For the three months ended March 31, 1998
and 1997, ATLANTIC recognized interest income related to the Homestead
Convertible Mortgages of $2.1 million and $0.2 million, respectively. The
increase in interest income for the period ended March 31, 1998 as compared to
the same period in 1997 is due to the larger amount of Homestead Convertible
Mortgages outstanding in 1998 as compared to 1997.
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 th deferred commitment fee which increases
income.
The effective interest rate on the funded amount is 8.46% per annum for
purposes of calculating net earnings. The effective interest rate on the funded
amount is 7.09% per annum for purposes of calculating funds from operations
because 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 Homestead Convertible Mortgages provide
ATLANTIC with a source of future liquidity and financial flexibility. See
"--Liquidity and Capital Resources--Homestead Convertible Mortgages".
DEPRECIATION EXPENSE
The increase in depreciation expense of $1.7 million for the three months
ended March 31, 1998 as compared to the same period in 1997 results primarily
from the net increase in operating communities in 1998. See "--Results of
Operations--Property Operations".
INTEREST EXPENSE
The following summarizes ATLANTIC's interest expense (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Mortgages payable ........................... $ 3,015 $ 2,650
Notes payable............................... 2,787 --
Short-term borrowings....................... 3,158 4,664
Capitalized interest........................ (3,051) (2,553)
----------- -----------
Total interest expense.................. $ 5,909 $ 4,761
=========== ===========
</TABLE>
Mortgage interest expense increased $0.4 million for the three months
ended March 31, 1998 as compared to the same period in 1997. This increase is
the result of additional weighted average mortgage debt outstanding.
ATLANTIC issued notes payable in August 1997 and recognized $2.8 million of
interest related to this debt for the three months ended March 31, 1998.
Interest expense on ATLANTIC's short-term borrowings decreased $1.5 million
for the three months ended March 31, 1998 from the three months ended March 31,
1997. This decrease is primarily a function of a decrease in the average
outstanding balance ($186.2 million in 1998 as compared to $260.9 million in
1997) and a lower weighted-average daily interest rate (6.68% in 1998 as
compared to 7.10% in 1997).
The increase in interest expense is offset by increases in capitalized
interest of $0.5 million for the three months ended March 31, 1998 as compared
to the same period in 1997. This increase in capitalized interest is the result
of ATLANTIC's increased development activity in 1998.
24
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $1.2 million for the three
months ended March 31, 1998 over the three months ended March 31, 1997,
primarily due to costs incurred after the internalization of management
transaction. See "--Internalization of Management Transaction".
INTERNALIZATION OF MANAGEMENT TRANSACTION
ATLANTIC acquired the operations and business of Security Capital
(Atlantic) Incorporated (the "REIT Manager") and SCG Realty Services Atlantic
Incorporated (the "Property Manager") on September 9, 1997 from Security
Capital, ATLANTIC's principal shareholder, in exchange for 2,306,591 Common
Shares.
Concurrent with this transaction, ATLANTIC terminated its REIT management
agreement with the REIT Manager and its property management agreement, covering
approximately 97% of ATLANTIC's operating communities, with the Property
Manager. Consequently, ATLANTIC has not incurred the costs associated with these
agreements in 1998. However, for the three months ended March 31, 1998, ATLANTIC
did incur certain of the operating costs of the businesses acquired, primarily
the personnel costs associated with the employees of the REIT Manager and the
Property Manager who are now employees of ATLANTIC. Also, ATLANTIC purchased
certain administrative services from Security Capital under an Administrative
Services Agreement ("ASA"). The fees payable under the ASA are equal to Security
Capital's direct cost plus an overhead factor of 20%. ATLANTIC incurred $0.7
million under the ASA for the three months ended March 31, 1998. For the year
ended December 31, 1998, ATLANTIC's costs under the ASA cannot exceed $3.7
million, but may be less than that amount as any cost savings will accrue to
ATLANTIC.
Costs related to the management function, including charges under the ASA,
incurred subsequent to September 9, 1997 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
qualifying management costs related to the acquisition and development of
multifamily communities have been capitalized ($1.5 million for the three months
ended March 31, 1998). Management costs that have not been capitalized and are
not classified as rental expenses are reflected as general and administrative
expenses. On April 1, 1998 ATLANTIC adopted a new accounting rule and will no
longer capitalize internal management costs incurred related to the acquisition
of operating communities. The new rule is not expected to have a material impact
on ATLANTIC's financial position or results of operations.
EXTRAORDINARY ITEM--COSTS RELATED TO EARLY EXTINGUISHMENT OF DEBT
In March 1998, ATLANTIC prepaid the principal balance of the mortgage note
associated with Cameron Villas I. This prepayment, which extinguished high
interest rate debt (8.75% stated interest rate), required ATLANTIC to pay
$119,000 of costs which have been reflected as an extraordinary item in the
condensed statement of earnings for the three months ended March 31, 1998.
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 and debt service
needs as well as its shareholder distribution requirements prior to the
consummation of the PTR Merger.
At May 1, 1998, ATLANTIC had $59.3 million available for short-term
borrowing. ATLANTIC uses its short-term borrowing capacity to meet its
operating, investing and shareholder distribution requirements. ATLANTIC had
intended to issue unsecured long-term debt in the second quarter of 1998 and use
the proceeds from this offering to repay its short-term borrowings. In light of
the PTR Merger, ATLANTIC no longer intends to issue the unsecured long-term
debt. Accordingly, ATLANTIC has negotiated, but not yet closed, on an agreement
that will provide for $150 million of unsecured bridge financing which will meet
ATLANTIC's liquidity needs until the PTR Merger is consummated.
25
<PAGE>
Should the PTR Merger not be consummated, ATLANTIC believes it will be able
to finance its future activities with its shelf-registered securities ($492.6
million at March 31, 1998) which can be issued in the form of unsecured
long-term debt, preferred stock or common stock 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 24.3% at March 31, 1998)
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 $2.7 million
for the three months ended March 31, 1998 as compared to the same period in
1997, principally due to the increased number of communities in operation in
1997. ATLANTIC's investment activities during the three months ended March 31,
1998 used $59.1 million of cash on a net basis, a decrease of $10.2 million from
the three months ended March 31, 1997. Such activities consisted primarily of
acquiring and developing multifamily communities in both 1998 and 1997.
Additionally, ATLANTIC funded $20.0 million of its commitment to Homestead
during the three months ended March 31, 1997. ATLANTIC's financing activities
provided net cash flow of $41.4 million for the three months ended March 31,
1998 and $52.1 million for the three months ended March 31, 1997. ATLANTIC's
financing activities in both periods consisted primarily of short-term
borrowings.
HOMESTEAD CONVERTIBLE MORTGAGES
At March 31, 1998, ATLANTIC had funded $106.0 million of its total $111.1
million commitment to Homestead and the remaining $5.1 million commitment was
funded in April 1998. As of April 30, 1998, ATLANTIC owned 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 outstanding. Assuming full conversion of the
Homestead Convertible Mortgages and using the Homestead common stock closing
price on March 31, 1998, ATLANTIC's ownership would result in the following
incremental value per ATLANTIC Common Share (in thousands, except per share
amounts):
<TABLE>
<S> <C>
Homestead common stock price at March 31, 1998.......................... $ 15.125
Conversion price........................................................ 11.500
--------------
Incremental value per share of Homestead common stock................... $ 3.625
Shares of Homestead common stock issuable upon conversion............... 8,522
--------------
Total incremental value from conversion................................. $ 30,892
Common Shares outstanding at March 31, 1998............................ 47,761
--------------
Assumed incremental value per Common Share.............................. $ 0.65
==============
</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. See "--Results of Operations--Homestead Convertible Mortgages Interest
Income".
COMMITMENTS
ATLANTIC had communities in various stages of development at March 31,
1998. The developments, which are shown below, are subject to a number of
conditions and ATLANTIC cannot predict with certainty that any of them will be
consummated (dollar amounts in millions):
26
<PAGE>
<TABLE>
<CAPTION>
CONTRACTUALLY
NUMBER TOTAL COMMITTED
OF EXPECTED UNFUNDED UNFUNDED
UNITS INVESTMENT (1) AMOUNT AMOUNT
------------ ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Communities under construction:
In lease-up............................. 2,555 $ 156.7 $ 7.7 $ 7.7
Other................................... 3,012 208.6 114.7 114.7
------------ ----------------- -------------- -----------------
5,567 365.3 122.4 122.4
------------ ----------------- -------------- -----------------
Communities in planning (2):
Owned................................... 1,772 118.7 100.0 --
Under control........................... 2,584 182.0 179.9 --
------------ ----------------- -------------- -----------------
4,356 300.7 279.9 --
------------ ----------------- -------------- -----------------
Totals.............................. 9,923 $ 666.0 $ 402.3 $ 122.4
============ ================= ============== =================
</TABLE>
- --------
(1) For operating communities, represents cost, plus budgeted capital
expenditures. For communities under construction and in planning,
represents total budgeted development cost, which includes cost of land,
fees, permits, payments to contractors, architectural and engineering fees
and interest and property taxes to be capitalized during the construction
period.
(2) The term "in planning" means that construction is anticipated to commence
within 12 months. The term "under control" means that ATLANTIC has an
exclusive right (through a contingent contract or letter of intent) during
a contractually agreed-upon time period to acquire land for future
development of multifamily communities, but does not currently own the
land. There can be no assurance that such land will be acquired.
ATLANTIC occasionally utilizes derivative financial investments as hedges
to manage interest rate risk on anticipated future transactions. ATLANTIC does
not use derivative financial instruments for trading purposes. In October 1997,
ATLANTIC entered into an interest rate contract in anticipation of a 1998
long-term debt offering. This contract had a notional amount of $100.0 million.
ATLANTIC does not intend to complete this long-term debt offering in light of
the PTR Merger. Accordingly, ATLANTIC expensed the approximately $6.0 million
loss realized on this contract upon the expiration of the contract in April
1998. See "--Overview".
OTHER CONTINGENCIES
ATLANTIC is party to various claims and routine litigation arising in the
ordinary course of business. ATLANTIC does not believe that the claims and
litigation, individually or in the aggregate, will have a material adverse
effect on its business, financial position or results of operations.
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 will be higher than quarterly
earnings, resulting in a reduction to shareholders' equity. ATLANTIC announces
the following year's projected annual distribution level after its Board annual
budget review and approval in December of each year. As its December 4, 1997
meeting, the Board announced a projected annual distribution level of $1.60 per
Common Share for 1998. The first quarter 1998 distribution was paid on February
26, 1998. On April 29, 1998 the Board declared a distribution of $0.40 per
Common Share payable on May 27, 1998 to holders of record of Common Shares on
May 13, 1998. The payment of distributions is subject to the discretion of the
Board and is dependent upon the financial condition and operating results of
ATLANTIC. The Merger Agreement discussed under "--Proposed Merger Agreement"
provides that after the PTR Merger is consummated, ARCHSTONE's common share
distribution will be initially set at an annualized level of $1.42 per share.
27
<PAGE>
FUNDS FROM OPERATIONS
Funds from operations is defined as net earnings computed in accordance with
GAAP, excluding real estate depreciation, gains (or losses) from depreciated
real estate, provisions for possible losses, non-cash interest income,
extraordinary items and significant non-recurring items. 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, investing and financing
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. The funds from operations measure presented by ATLANTIC, while consistent
with the National Association of Real Estate Investment Trusts' 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.
Funds from operations were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net earnings attributable to Common Shares..................................... $ 15,097 $ 10,178
Add (deduct):
Real estate depreciation.................................................. 7,770 6,132
Provision for possible loss on investments................................ -- 200
Non-cash interest income.................................................. (230) (20)
Extraordinary item-costs related to early extinguishment of debt.......... 119 --
------------- -------------
Funds from operations.......................................................... 22,756 16,490
Cash common distributions paid................................................. (19,104) (14,778)
------------- -------------
Excess of funds from operations over cash common distributions paid............ $ 3,652 $ 1,712
============= =============
Basic and diluted weighted-average Common Shares outstanding................... 47,751 37,892
============= =============
</TABLE>
28
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
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 Stock Dividends
15 Letter from Ernst & Young LLP dated May 13, 1998 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>
April 3, 1998 Item 5 No
April 24, 1998 Item 5 Yes
</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
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Date: May 14, 1998
30
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,247
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,426,931
<DEPRECIATION> 73,396
<TOTAL-ASSETS> 1,501,737
<CURRENT-LIABILITIES> 0
<BONDS> 313,782
0
50,000
<COMMON> 478
<OTHER-SE> 856,245
<TOTAL-LIABILITY-AND-EQUITY> 1,501,737
<SALES> 46,148
<TOTAL-REVENUES> 48,425
<CGS> 0
<TOTAL-COSTS> 24,782
<OTHER-EXPENSES> 1,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,909
<INCOME-PRETAX> 15,097
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,097
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
<PAGE>
EXHIBIT 12.1
SECURITY CAPITAL ATLANTIC
INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993 (1)
--------- ---------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from operations........... $ 16,294 $ 10,178 $ 51,115 $ 32,998 $ 19,639 $ 9,926 $ 38
Add:
Interest expense............... 5,909 4,761 20,292 16,181 19,042 9,240 --
--------- --------- --------- ---------- --------- --------- ----------
Earnings, as adjusted.............. $ 22,203 $ 14,939 $ 71,407 $ 49,179 $ 38,681 $ 19,166 $ 38
========= ========== ========= ========= ========= ========= ==========
Fixed charges:
Interest expense............... $ 5,909 $ 4,761 $ 20,292 $ 16,181 $ 19,042 $ 9,240 $ --
Capitalized interest........... 3,051 2,553 10,169 10,250 4,404 793 --
--------- -------- --------- --------- --------- --------- ----------
Total fixed charges............ $ 8,960 $ 7,314 $ 30,461 $ 26,431 $ 23,446 $ 10,033 $ --
========= ========== ========= ========= ========= ========= ==========
Ratio of earnings to fixed
charges......................... 2.5 2.0 2.3 1.9 1.6 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 STOCK DIVIDENDS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993 (1)
--------- ---------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from operations.......... $ 16,294 $ 10,178 $ 51,115 $ 32,998 $ 19,639 $ 9,926 $ 38
Add:
Interest expense.............. 5,909 4,761 20,292 16,181 19,042 9,240 --
--------- ---------- --------- ---------- --------- --------- ----------
Earnings, as adjusted............. $ 22,203 $ 14,939 $ 71,407 $ 49,179 $ 38,681 $ 19,166 $ 38
========= ========== ========= ========= ========= ========= ==========
Combined fixed charges and preferred
stock dividends:
Interest expense............... $ 5,909 $ 4,761 $ 20,292 $ 16,181 $ 19,042 $ 9,240 $ --
Capitalized interest........... 3,051 2,553 10,169 10,250 4,404 793 --
--------- ---------- --------- --------- --------- --------- ----------
Total fixed charges........ 8,960 7,314 30,461 26,431 23,446 10,033 --
Preferred stock dividends......... 1,078 -- 1,569 -- -- -- --
---------- ---------- --------- --------- --------- --------- ----------
Combined fixed charges
and preferred stock dividends.. $ 10,038 $ 7,314 $32,030 $26,431 $23,446 $10,033 $ --
========= ========== ========= ========= ========= ========= ==========
Ratio of earnings to combined fixed
charges and preferred stock
dividends...................... 2.2 2.0 2.2 1.9 1.6 1.9 N/A
========= ========== ========= ========= ========= ========= ==========
</TABLE>
(1) For the period from inception (October 26, 1993) to December 31, 1993.
<PAGE>
EXHIBIT 15
May 13, 1998
Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We are aware of the incorporation by reference in the registration statement on
Form S-4 (No. 333-51139) of Security Capital Pacific Trust and related
Prospectus and Joint Proxy Statement of Security Capital Pacific Trust and
Security Capital Atlantic Incorporated (ATLANTIC) and in the registration
statement on Form S-3 (No. 333-38477) and in the related Prospectus and the
registration statements on Form S-8 (No. 333-43761, 333-31419 and 333-25993) of
ATLANTIC of our report dated May 1, 1998, relating to the unaudited condensed
interim financial statements of ATLANTIC that are included in ATLANTIC's Form
10-Q for the quarter ended March 31, 1998.
Pursuant to Rule 435(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
