UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter ended June 30, 1997 Commission File Number 1-13256
---------------
EVANS WITHYCOMBE RESIDENTIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland 86-0766008
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
6991 East Camelback Road, Suite A200, Scottsdale, Arizona 85251
(Address of principal executive offices)
Registrant's telephone number, including area code: (602) 840-1040
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 requirements for the past 90 days.
YES X NO
--- ---
As of August 1, 1997 there were 20,342,763 shares of the registrant's common
stock, $0.01 par value outstanding.
Page 1 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, INC.
----------------------------------
INDEX
-----
Part I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (Unaudited) and
December 31, 1996 ............................................. 3
Consolidated Statements of Income for the three and six months
ended June 30, 1997 and 1996 (Unaudited) ...................... 4
Consolidated Statement of Stockholders' Equity as of June 30, 1997
(Unaudited) ................................................... 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 (Unaudited) ...................... 6
Notes to Consolidated Financial Statements .................... 7
Item 2 Management's Discussion
and Analysis of Financial
Condition and Results of
Operations ........................................... 14
Part II OTHER INFORMATION
- ------- -----------------
Item 4 Submission of Matters to Vote by Security Holders .... 25
Item 6 Exhibits and Reports on Form 8-K...................... 25
Signatures ............................................................... 25
Page 2 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except for number of shares)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Real Estate:
Land ....................................................................$ 130,490 $ 121,915
Buildings and improvements .............................................. 598,421 543,839
Furniture and fixtures .................................................. 31,728 29,567
Construction-in-progress ................................................ 43,265 66,229
--------- ---------
803,904 761,550
Less accumulated depreciation ........................................... (48,925) (38,331)
--------- ---------
754,979 723,219
Cash and cash equivalents ................................................. 1,051 2,568
Restricted cash ........................................................... 8,518 1,622
Accounts and notes receivable ............................................. 2,886 3,500
Mortgage notes receivable ................................................. 15,120 --
Deferred costs, net of accumulated amortization
of $1,555 and $1,265 at June 30, 1997 and
December 31, 1996, respectively .......................................... 4,489 3,838
Other assets .............................................................. 1,906 1,587
--------- ---------
Total assets ..............................................................$ 788,949 $ 736,334
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage and notes payable ................................................$ 445,441 $ 436,172
Accounts payable and other liabilities .................................... 10,106 7,833
Dividends payable ......................................................... 8,235 --
Accrued interest .......................................................... 2,860 1,417
Accrued property taxes .................................................... 3,241 2,912
Resident security deposits ................................................ 2,408 1,818
Prepaid rent .............................................................. 870 585
--------- ---------
Total liabilities ......................................................... 473,161 450,737
Minority interest ......................................................... 54,610 56,592
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, issued and outstanding - none ............................. -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 20,334,743 and 18,366,902 issued
and outstanding at June 30, 1997 and
December 31, 1996, respectively ....................................... 204 184
Additional paid-in capital .............................................. 292,253 253,425
Unamortized employee restricted stock compensation ...................... (1,104) (465)
Distributions in excess of net income ................................... (30,175) (24,139)
--------- ---------
Total stockholders' equity ................................................ 261,178 229,005
--------- ---------
Total liabilities and stockholders' equity ................................$ 788,949 $ 736,334
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
Page 3 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except for number of shares and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental ................................................$ 27,713 $ 22,078 $ 54,865 $ 44,214
Third party management fees ........................... 120 664 230 951
Interest and other .................................... 1,770 1,364 3,529 3,120
------------ ------------ ------------ ------------
Total revenues ...................................... 29,603 24,106 58,624 48,285
Expenses:
Repairs and maintenance ............................... 2,637 2,719 5,578 5,275
Property operating .................................... 4,237 2,865 8,437 5,548
Advertising ........................................... 542 599 956 1,032
Real estate taxes ..................................... 2,079 1,615 4,198 3,264
Property management ................................... 633 824 1,540 1,708
General and administrative ............................ 356 463 867 960
Interest .............................................. 8,013 5,469 15,402 10,893
Depreciation and amortization ......................... 6,459 4,870 12,637 9,640
------------ ------------ ------------ ------------
Total expenses .......................................... 24,956 19,424 49,615 38,320
------------ ------------ ------------ ------------
Income before minority interest, gain on sale of
real estate assets and extraordinary item ............. 4,647 4,682 9,009 9,965
Gain on sale of real estate assets ...................... 5,253 -- 5,253 --
Minority interest ....................................... (1,828) (1,027) (2,664) (2,239)
------------ ------------ ------------ ------------
Income before extraordinary item ........................ 8,072 3,655 11,598 7,726
Extraordinary item-
loss on early extinguishment of debt
net of minority interest of $300 .................. -- -- (1,200) --
------------ ------------ ------------ ------------
Net income ..............................................$ 8,072 $ 3,655 $ 10,398 $ 7,726
============ ============ ============ ============
Earnings per share before extraordinary item ............$ 0.40 $ 0.22 $ 0.59 $ 0.47
============ ============ ============ ============
Earnings per share ......................................$ 0.40 $ 0.22 $ 0.52 $ 0.47
============ ============ ============ ============
Weighted average shares outstanding ..................... 20,257,173 16,933,771 19,809,734 16,535,454
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
Page 4 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except for number of shares and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Unamortized
Employee
Additional Restricted Distributions
Number of Common Paid-in Stock in Excess of
Shares Stock Capital Compensation Net Income Total
----------- ----------- ----------- ------------ ----------- -----------
<C> <C> <C> <C> <C> <C> <C>
Stockholders' equity, December 31,
1996 .............................. 18,366,902 $ 184 $ 253,425 $ (465) $ (24,139) $ 229,005
Net income .................... -- -- -- -- 10,398 10,398
Dividends on common stock
($0.81 per share) ......... -- -- -- -- (16,434) (16,434)
Proceeds of third offering, net
of underwriting discount and
offering costs of $406 ...... 1,800,000 18 35,397 -- -- 35,415
Conversion of units to common
stock ....................... 126,387 2 2,480 -- -- 2,482
Exercise of stock options ..... 7,500 -- 207 -- -- 207
Issuance of restricted stock .. 36,130 -- 744 (744) -- --
Forfeiture of restricted stock (2,176) -- -- -- -- --
Amortization of deferred
compensation ................ -- -- -- 105 -- 105
----------- ----------- ----------- ----------- ----------- -----------
Stockholders' equity, June 30 1997 20,334,743 $ 204 $ 292,253 $ (1,104) $ (30,175) $ 261,178
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
Page 5 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income ................................................. $ 10,398 $ 7,726
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 13,183 9,960
Amortization of deferred comp .......................... 81 350
Minority interest ...................................... 2,364 2,239
Net gain on sale of real estate assets ................. (5,253) --
Write-off of development and acquisition costs ......... 402 39
Write-off of deferred loan costs ....................... 294 --
Decrease (increase) in assets:
Restricted cash ........................................ (6,896) (437)
Accounts and notes receivable .......................... 614 (441)
Other assets ........................................... (319) 206
(Decrease) increase in liabilities:
Accounts payable and other liabilities ................. 2,273 (883)
Accrued interest ....................................... 1,443 (64)
Accrued property taxes ................................. 329 901
Resident security deposits ............................. 590 2
Prepaid rent ........................................... 285 (12)
--------- ---------
Net cash provided by operating activities .................. 19,788 19,586
Cash flows from investing activities
Purchase of real estate assets ............................. (42,354) (60,643)
Sale of real estate assets ................................. 6,012 --
--------- ---------
Net cash used in investing activities ...................... (36,342) (60,643)
Cash flows from financing activities
Proceeds from Third Public Offering, net of expenses ....... 35,415 --
Proceeds from Second Public Offering, net of expenses ...... -- 41,107
Proceeds from exercise of options .......................... 207 160
Proceeds from mortgage notes and revolving
credit facility .......................................... 184,306 176,221
Principal payments on mortgage notes ....................... (193,355) (161,887)
Payment for loan costs ..................................... (1,473) (315)
Dividends paid ............................................. (8,199) (12,424)
Minority interest distributions ............................ (1,864) (3,651)
--------- ---------
Net cash provided by financing activities .................. 15,037 39,211
--------- ---------
Net decrease in cash and cash equivalents .................. (1,517) (1,846)
Cash and cash equivalents, beginning of period ............. 2,568 3,634
--------- ---------
Cash and cash equivalents, end of period ................... $ 1,051 $ 1,788
========= =========
Supplemental information
Cash paid during the period for interest ................... $ 13,457 $ 10,645
========= =========
Supplemental disclosure of non-cash activity
Assumption of debt related to the acquisition of
apartment communities .................................... $ 18,318 $ --
========= =========
Origination of carryback mortgage notes arising from sale of
apartment communities .................................. $ 15,120 $ --
========= =========
Issuance of stock under restricted stock incentive plan .... $ 24 $ --
========= =========
Conversion of units to common stock ........................ $ 2,482 $ 888
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
Page 6 of 25
<PAGE>
EVANS WITHYCOMBE RESIDENTIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Amounts in thousands, except for number of shares
or units and per share amounts)
(Unaudited)
1. Organization and Formation of the Company
Evans Withycombe Residential, Inc. (the "Company") is one of the largest
developers and managers of upscale apartment communities in Arizona and is
expanding its operations into selected sub-markets in Southern California. The
Company owns and manages 52 stabilized multifamily apartment communities
containing 14,723 units, of which 45 stabilized multifamily apartment
communities are located in Phoenix and Tucson, Arizona, containing a total of
12,325 units and seven stabilized multifamily apartment communities are located
in the Southern California market containing a total of 2,398 units. The Company
is also in the process of developing or expanding three multifamily apartment
communities comprising 720 units in its Phoenix market. The Company is fully
integrated with expertise in development, acquisitions, construction and
management of apartment communities. The Company had approximately 600 employees
at June 30, 1997.
The Company was incorporated on May 24, 1994 to develop, acquire, own and manage
upscale multifamily apartment communities. On August 17, 1994, the Company
completed an Initial Public Offering and engaged in various formation
transactions designed to transfer ownership of the communities and other assets
of the predecessor company to Evans Withycombe Residential, L. P. (the
"Operating Partnership") or Evans Withycombe Finance Partnership, L.P. (the
"Financing Partnership"). The Company is the sole general partner of and owned a
81.46 percent and 77.08 percent interest in the Operating Partnership at June
30, 1997 and 1996, respectively. The Company also holds a noncontrolling
interest in Evans Withycombe Management, Inc. (the "Management Company").
In the second quarter of 1996, the Company completed the Second Public Offering.
The net proceeds of $40,891 from the sale of 2,088,889 shares of common stock
from the Second Public Offering were used to repay a portion of the $150 million
unsecured Revolving Credit Facility (Revolving Credit Facility).
In the first quarter of 1997, the Company completed the Third Public Offering.
The net proceeds of $35,415 from the sale of 1,800,000 shares of common stock
from the Third Public Offering were used to repay a portion of the Revolving
Credit Facility.
The Company elected to be taxed as a real estate investment trust ("REIT") for
Federal income tax purposes. A corporate REIT is a legal entity which holds real
estate interests and, through payments of dividends to stockholders, is
permitted to reduce or avoid the payment of federal income taxes at the
corporate level.
2. Basis of Presentation
The accompanying consolidated financial statements of Evans Withycombe
Residential, Inc. include the consolidated accounts of the Company, the
Operating Partnership, the Financing Partnership and the Management Company.
The accompanying unaudited consolidated financial statements have been presented
by the Company's management in accordance with generally accepted accounting
principles for interim financial information and the rules and regulations of
the Securities and Exchange Commission (SEC). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation. In the opinion
of management, all adjustments (consisting of normally recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations for the six month period ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997.
Page 7 of 25
<PAGE>
2. Basis of Presentation (continued)
These consolidated financial statements should be read in conjunction with the
Company's December 31, 1996 audited consolidated financial statements and
accompanying notes in the Evans Withycombe Residential, Inc. Annual Report on
Form 10-K/A.
3. Summary of Significant Accounting Policies
Real Estate Assets and Depreciation
The Company records its real estate assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed of". SFAS No. 121
requires that long-lived assets such as real estate assets, be reviewed whenever
events or changes in circumstances indicate that the book value of the asset may
not be recoverable. If the sum of the estimated future net cash flows
(undiscounted and without interest charges) from an asset to be held and used is
less than the book value of the asset, an impairment loss must be recognized in
the amount of the difference between book value and fair value as opposed to the
difference between book value and net realizable value under the previous
accounting standard. For long-term assets like apartment communities, the
determination of whether there is an impairment loss is dependent primarily on
the Company's estimates on occupancy, rent and expense increases, which involves
numerous assumptions and judgments as to future events over a period of many
years. At June 30, 1997 the Company does not hold any assets that meet the
impairment criteria of SFAS No. 121.
Costs related directly to the acquisition and improvement of real estate are
capitalized. Interest costs incurred during construction of a new property are
capitalized until completion of construction on a building-by-building basis.
Interest capitalized was $493 and $970 and $744 and $1,464, for the three and
the six months ended June 30, 1997 and 1996, respectively.
Ordinary repairs, maintenance and costs incurred in connection with resident
turnover such as unit cleaning, painting, and carpet cleaning are expensed as
incurred; major replacements and betterments are capitalized and depreciated
over their estimated useful lives. Depreciation is computed on a straight-line
basis over the expected useful lives of depreciable property, which ranges from
10 to 40 years for buildings and improvements and five to eight years for
furnishings and equipment.
The Company reports developments and lease-up properties as
construction-in-progress until construction on the apartment community has been
completed and the apartment community has reached stabilized occupancy.
The Company also reports land relating to construction-in-progress as land on
its balance sheet. Land associated with construction-in-progress was $10,802 and
$12,060 at June 30, 1997 and December 31, 1996, respectively.
Revenue Recognition
Rental income attributable to residential leases is recorded when due from
residents. Leases are for periods of up to one year, with rental payments due
monthly.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and cash equivalent investments with
original maturities of three months or less, primarily consisting of demand
deposits in banks.
Restricted Cash
Restricted cash includes restricted deposits held by third party intermediaries
for the purpose of completing an IRS Section 1031 tax free exchange, sinking
fund accounts related to tax exempt bonds, property taxes and escrow accounts.
Page 8 of 25
<PAGE>
3. Summary of Significant Accounting Policies (continued)
Deferred Costs
Costs incurred in obtaining long-term financing are deferred. These costs are
amortized on the effective interest method over the terms of the related debt
agreements.
Income Taxes
The Company has made an election to be taxed as a REIT and accordingly, no
federal or state income taxes have been provided in the accompanying
consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Earnings Per Share
Earnings per share has been computed by dividing net income for the three and
the six months ended June 30, 1997 and 1996, respectively, by the weighted
average number of shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share" which is required to be adopted on December 31, 1997. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods presented. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options will be excluded. The impact of SFAS No. 128 is not expected to
be material.
4. Mortgage Notes Receivable
The Company's mortgage notes receivable consist of the following:
<TABLE>
<S> <C>
$7.9 million mortgage note receivable at a fixed interest rate of 9.5 percent, $ 7,932
secured by a first mortgage lien on Deer Creek Village Apartments, matures
November 1, 1997. (Paid off on July 23, 1997.)
$7.2 million mortgage note receivable at a fixed interest rate of 8.0 7,188
percent secured by a first mortgage lien on The Pines Apartments, matures
November 1, 1997
-------
$15,120
=======
</TABLE>
Page 9 of 25
<PAGE>
5. Mortgage and Notes Payable
The Company's mortgage notes and notes payable consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Mortgage note payable at a fixed interest rate of 8.0 percent, monthly principal $ - $ 5,380
and interest payments. The unpaid principal balance was repaid on January 9,
1997.
Mortgage note payable at a fixed interest rate of 8.0 percent, monthly principal - 4,340
and interest payments. The unpaid principal balance was repaid on January 9, 1997.
Mortgage note payable at a fixed interest rate of 8.0 percent, monthly principal - 8,951
and interest payments. The unpaid principal balance was repaid on January 9, 1997.
Mortgage note payable at a fixed interest rate of 8.28 percent, monthly principal - 6,225
and interest payments. The unpaid principal balance was repaid on January 31,
1997.
Mortgage note payable at a fixed interest rate of 9.95 percent, monthly principal 12,000 12,065
and interest payments through September 15, 1997, remaining balance due September
15, 1997. The unpaid principal balance was repaid on July 15, 1997.
Mortgage note payable at a fixed interest rate of 9.3 percent, monthly principal 3,166 3,182
and interest payments through September 15, 1997, remaining balance due September
15, 1997. The unpaid principal balance was repaid on July 15, 1997.
Mortgage note payable at fixed interest rates ranging from 6.25 percent to 9.0 18,252
percent, monthly principal and interest payments through August 17, 2004, -
remaining balance due August 17, 2004. Interest rate increases 0.25 percent
annually each September. Secured by a first mortgage lien on one apartment
community. The mortgage note can be repaid at any time at the Company's option
without prepayment penalty.
$50 million securitized debt at a fixed interest rate of 7.17 percent, monthly 49,250 49,509
principal and interest payments through January 1, 2006, remaining balance due
January 1, 2006. Secured by first mortgage liens on 5 communities.
Securitized debt at a fixed stated interest rate of 7.98 percent, with an 130,563 130,520
effective interest rate of 8.05 percent, monthly interest payments only through
August 1, 2001. Secured by first mortgage liens on 21 communities. The face
amount of $131 million is due August 1, 2001. The balance is net of unamortized
discount of $437 and $480 at June 30, 1997 and December 31, 1996, respectively.
$17.3 million tax exempt bonds with a floating interest rate based on the tax 17,300 17,300
exempt note rate set by the remarketing agent, or at the option of the Company
can convert to a fixed rate as determined by the remarketing agent. Secured by a
$17.5 million direct pay letter of credit, interest payments only, matures
December 1, 2007 (Effective interest rate of 5.20 percent at June 30, 1997).
$22.6 million tax exempt bonds with a floating interest rate based on the tax 22,650 22,650
exempt note rate set by the remarketing agent, interest payments only. Secured
by a $22.8 million direct pay letter of credit, matures February 1, 2016.
(Effective interest rate of 5.56 percent at June 30, 1997).
</TABLE>
Page 10 of 25
<PAGE>
5. Mortgage and Notes Payable (continued)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<C> <C> <C>
$24.05 million tax exempt bonds with a floating interest rate based on the tax $ 24,050 $ 24,050
exempt note rate set by the remarketing agent, interest payments only. Secured
by a $24.4 million direct pay letter of credit, matures August 1, 2005.
(Effective interest rate of 5.34 percent at June 30, 1997).
$150 million unsecured Revolving Credit Facility with floating interest rate 44,000 152,000
based on LIBOR plus 1.15 percent or at the option of the Company at prime rate,
interest payments only. Matures September 24, 1999 (Effective interest rate of
7.23 percent at June 30, 1997).
$75 million senior unsecured notes with a fixed coupon rate of 7.50 percent. 74,595 -
Semiannual interest only payments due April 15 and October 15 commencing October
15, 1997. Face amount of $75 million is due April 15, 2004. The balance is net
of an unamortized discount of $405 at June 30, 1997. The effective interest rate
inclusive of the benefit of a treasury lock transaction is 7.18 percent.
$50 million senior unsecured notes with a fixed coupon rate of 7.625 percent. 49,615 -
Semiannual interest only payments due April 15 and October 15 commencing October
15, 1997. Face amount of $50 million is due April 15, 2007. The balance is net
of an unamortized discount of $385 at June 30, 1997. The effective interest rate
inclusive of the benefit of a treasury lock transaction is 7.36 percent.
------------- ------------
$445,441 $436,172
============= ============
</TABLE>
Scheduled principal payments on debt, assuming that the Company exercises its
options to extend the maturity date on the Revolving Credit Facility, are as
follows:
<TABLE>
<CAPTION>
--------------- --------------- -------------- --------------- ----------------- ----------------
Mortgage Mortgage Senior Revolving
Notes Loan Unsecured Tax-Exempt Credit
Payable Certificate Notes Bonds Facility Total
--------------- --------------- -------------- --------------- ----------------- ----------------
<C> <C> <C> <C> <C> <C> <C>
1997 $ 15,487 $ - $ - $ - $ - $ 15,487
1998 784 - - - - 784
1999 831 - - - 44,000 44,831
2000 882 - - - - 882
2001 500 130,563 - - - 131,063
Thereafter 64,184 - 124,210 64,000 - 252,394
--------------- --------------- -------------- --------------- ----------------- ----------------
Total $ 82,668 $ 130,563 $ 124,210 $ 64,000 $ 44,000 $ 445,441
--------------- --------------- -------------- --------------- ----------------- ----------------
</TABLE>
On June 13, 1997, the Company amended its existing $225 million Revolving Credit
Facility with a bank group to decrease the commitment amount from $225 million
to $150 million and decrease the interest rate from LIBOR plus 1.50 percent to
LIBOR plus 1.15 percent.
The $150 million Revolving Credit Facility provides funding for working capital,
construction activities and acquisitions.
The Company has three direct pay letters of credit of $17,500, $22,800 and
$24,400 which serve as a credit enhancement for the tax exempt bonds. The
letters of credit are secured by a first mortgage on four apartment communities.
Page 11 of 25
<PAGE>
In January 1997, the Company extinguished the debt on four mortgages with unpaid
principal balances of approximately $25,000 with proceeds from the Revolving
Credit Facility. As a result, the Company incurred a loss from the early
extinguishment of debt of approximately $1,200, net of minority interest of
$300.
6. Distributions
On July 15, 1997, the Company paid a distribution of $0.405 per share ($8,235)
to shareholders and $0.405 per unit ($1,864) to unitholders of record as of June
30, 1997.
7. Management Fees
The Company performs management services for certain unaffiliated communities.
Management fees received from managed communities were $119 and $664 for the
three months ended June 30, 1997 and 1996 and $230 and $951 for the six months
ended June 30, 1997 and 1996, respectively. The Second Quarter 1996 balance
includes a one time non-recurring $500 termination fee received from the sale of
management contracts.
8. Stock Incentive Plan
Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Proforma information regarding net income and earnings per share is required by
SFAS No. 123 and is provided by the Company in its annual report.
Initially 1,830,000 shares of the Company's common stock were reserved for
issuance under the plan. Information with respect to stock options granted
during the six months ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Shares Per Share
------ ---------
<S> <C> <C>
Options outstanding at December 31, 1996 908,850 $20.63
Exercised (7,500) 20.00
Granted 241,500 20.49
Forfeited (32,225) 20.84
Options outstanding at June 30, 1997 --------------- ----------------
1,110,625 $20.66
=============== ================
Options exercisable:
December 31, 1996 357,700 $19.98
June 30, 1997 521,125 $20.46
</TABLE>
Options to purchase 719,375 and 901,650 shares of common stock were available
for grant under the plan at June 30, 1997 and December 31, 1996, respectively.
Executive Stock Incentive Plan
Prior to the Initial Public Offering, the Company's predecessor Evans
Withycombe, Inc. had in place an Executive Incentive Deferred Compensation Plan
(the "Executive Plan"). Pursuant to the Executive Plan, certain executives of
Evans Withycombe, Inc. (the "Participants") were granted an aggregate of 98,500
shares of restricted stock from the
Page 12 of 25
<PAGE>
Company one year following the Initial Public Offering if they remained
employees of the Company during such period. One-third of the shares vest on
each of the second, third and fourth anniversaries of the Initial Public
Offering based on an offering price per share of $20. The expense is being
amortized ratably over the periods in which the shares vest and an expense of
$30 and $180 and $60 and $350 for the three and six months ended June 30, 1997
and 1996, respectively, is included in general and administrative expense.
Information with respect to the executive restricted stock incentive plan is as
follows:
Shares
------
Restricted stock, net of forfeitures, at December 31, 1996, 74,346
Forfeited (1,174)
------
Restricted stock at June 30, 1997 73,172
======
Number of shares vested at June 30, 1997 27,600
Restricted Stock Program
The Company has awarded 45,220 shares, net of forfeitures, of restricted stock
to certain employees of the Company under its 1994 Stock Incentive Plan. The
restricted stock vests ratably over periods ranging from one to seven years from
the date of the award and are based on the price of the stock at the award date
which ranges from $19.13 to $22.25. The related expense will be amortized
ratably over the periods in which the shares vest and an expense of $27 and $11
and $45 and $20, for the three and six months ended June 30, 1997 and 1996,
respectively, is included in general and administrative expense.
9. Minority Interest
Minority interest at June 30, 1997 is comprised of the following:
Number
of Units Dollars
-------- -------
Balance at December 31, 1996 4,677,810 $56,592
Conversion of units to common stock (126,387) (2,482)
Allocation of net income - 2,664
Allocation of extraordinary item -
loss from early extinguishment of debt - (300)
Distributions paid - (1,864)
--------- -------
Balance at June 30, 1997 4,551,423 $54,610
========= =======
The Units can be redeemed for cash or shares of common stock of the Company on a
one-for-one basis at the Company's option. Minority interest of unitholders in
the Operating Partnership is calculated based on the weighted average of shares
of common stock and Units outstanding during the period.
Page 13 of 25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except apartment data and number of shares and
units)
The following discussion, which is based primarily on the consolidated financial
statements of Evans Withycombe Residential, Inc. should be read in conjunction
with the consolidated financial statements appearing elsewhere in this report.
The consolidated financial statements of the Company consist of the Company, the
Operating Partnership, the Financing Partnership, and the Management Company.
Overview
When used in the following discussion, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected, including,
but not limited to, the actual timing of the Company's planned acquisitions and
developments, the strength of the local economies in the sub-markets in which
the Company operates, and the Company's ability to successfully manage its
planned expansion into Southern California. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Results of Operations - Consolidated Financial Statements
The results of operations for the three and the six months ended June 30, 1997
and 1996, respectively, were significantly affected by acquisitions,
developments and expansions.
Comparison of Results of Operations for the Three Months and Six Months Ended
June 30, 1997 to the Three and Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
----------------- Percentage --------------- Percentage
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Rental income $27,713 $22,078 25.5% $54,865 $44,214 24.1%
Third party management
fees 120 664 (81.9) 230 951 (75.8)
Interest and other 1,770 1,364 29.8 3,529 3,120 13.1
------- ------- ---- ------- ------- ----
Total revenues 29,603 24,106 22.8 58,624 48,285 21.4
Property operating and
maintenance (1) 9,495 7,798 21.8 19,169 15,119 26.8
Property management 633 824 (23.2) 1,540 1,708 (9.8)
General and administrative 356 463 (23.1) 867 960 (9.6)
Interest 8,013 5,469 46.6 15,402 10,893 41.4
Depreciation and
amortization 6,459 4,870 32.6 12,637 9,640 31.1
------- ------- ---- ------- ------- ----
Total expenses 24,956 19,424 28.5 49,615 38,320 29.5
------- ------- ---- ------- ------- ----
Income before minority
interest, gain on sale
of real estate assets
and extraordinary item $ 4,647 $ 4,682 (0.7)% $ 9,009 $ 9,965 (9.6)%
======= ======= ==== ======= ======= ====
Weighted average monthly
rental revenue per
unit, net of concessions $ 682 $ 671 $ 684 $ 653
======= ======= ======= =======
Weighted average number
of apartments 15,272 12,302 15,019 12,116
======= ======= ======= =======
Economic occupancy (2) 86.5% 88.3% 87.7% 90.3%
======= ======= ======= =======
</TABLE>
Page 14 of 25
<PAGE>
(1) The Company defines property operating and maintenance expense as
repairs and maintenance, other property operating, advertising expense and
real estate taxes.
(2) Stabilized properties only.
Rental revenues increased by $5,635 and $10,651 or 25.5 percent and 24.1 percent
for the three and six months ended June 30, 1997 as compared to the similar
period in 1996 as a result of increases in the weighted average number of
apartments and weighted average monthly revenue per occupied apartment. The
Company believes that the increase in rental income was largely attributable to
the acquisitions and stabilization of properties developed by the Company in its
rental markets.
Third party management fees decreased $544 and $721 or 81.9 percent and 75.8
percent due to the sale of several properties in the management portfolio in
1996 including a $500 one time termination fee for the sale of management
contracts received in the Second Quarter of 1996.
Interest and other income for the three and six months ended June 30, 1997
increased $406 and $409 or 29.8 percent and 13.1 percent as compared to the
similar period in 1996 as a result of an increase in the weighted average number
of units.
Property operating and maintenance expense increased due to the increase in the
weighted average number of apartments for the three and the six months ended
June 30, 1997 as compared to the same period in 1996, respectively.
Interest expense increased due to an increase in debt resulting from
acquisitions and the increase in weighted average number of units in the
portfolio. The Company capitalized $493 and $971 of interest for the three and
six months ended June 30, 1997 compared to $744 and $1,464 for the same periods
in 1996 due to a decrease in construction activity. Interest costs incurred
during construction of a new property are capitalized until completion of
construction on a building-by-building basis.
"Same Store" Portfolio
The Company defines same store portfolio as those communities that reached
stabilized occupancy prior to January 1, 1996. Same store portfolio consists of
39 stabilized properties containing 10,551 apartment units that were owned by
the Company for the three months and six months ended June 30, 1997 and 1996.
Same store portfolio was adjusted in the second quarter 1997 to reflect the sale
of Deer Creek Village and The Pines apartment communities.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ------------------
June 30, June 30,
-------------------- Percentage ------------------ Percentage
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Rental income $ 18,504 $ 18,868 (1.9)% $ 37,518 $ 38,329 (2.1)%
Other income 1,052 819 28.4 2,124 1,910 11.2
-------- -------- ---- -------- -------- ----
19,556 19,687 (0.7) 39,642 40,239 (1.5)
Property operating and
maintenance 6,783 6,610 2.6 13,430 12,975 3.5
-------- -------- ---- -------- -------- ----
Property net operating
income $ 12,773 $ 13,077 (2.3)% $ 26,212 $ 27,264 (3.9)%
======== ======== ==== ======== ======== ====
Weighted average
monthly rental
revenue per unit,
net of concessions $ 676 $ 675 $ 676 $ 670
======== ======== ======== ========
Economic occupancy 86.5% 88.4% 87.7% 90.3%
======== ======== ======== ========
</TABLE>
Rental income for the three and six months ended June 30, 1997 decreased $364
and $811 as compared to the same period in 1996 as a result of a decline in the
average economic occupancy. Other income for the three and six
Page 15 of 25
<PAGE>
months ended June 30, 1997 increased as a result of higher ancillary income such
as redecoration and application fees, and lease termination fees.
Communities Stabilized Less Than Two Years
Communities stabilized less than two years consist of the development of four
new apartment communities and the expansion of four existing apartment
communities by the Company, containing an aggregate of 1,444 new apartment units
that reached stabilized occupancy during the year ended December 31, 1996.
Increases in the three and six month periods ended June 30, 1997 as compared to
the three and six month periods ended June 30, 1996 are the result of the
increase in the weighted average number of apartments.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------
1997 1996 1997 1996
------ ------ ------ ------
Rental income $2,935 $2,286 $5,997 $4,180
Other income 137 127 296 262
------ ------ ------ ------
3,072 2,413 6,293 4,442
Property operating and maintenance 955 769 1,917 1,422
------ ------ ------ ------
Property net operating income $2,117 $1,644 $4,376 $3,020
====== ====== ====== ======
Weighted average number of
apartments 1,444 1,180 1,444 1,027
====== ====== ====== ======
Development and Lease Up Communities
Development and lease up communities consist of the development of five new
apartment communities and the expansion of two existing apartment communities
containing an aggregate of 1,542 apartment units that were in the
"construction," "development," or "lease up" stage during 1997 and therefore,
not considered to have achieved stabilized occupancy for all of the periods
presented. Increases in the three and the six month periods ended June 30, 1997
as compared to the three and the six month periods ended June 30, 1996 are the
result of an increase in the weighted average number of apartments.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------
1997 1996 1997 1996
------ ------ ------ ------
Rental income $1,700 $ 101 $3,049 $ 103
Other income 133 24 254 25
------ ------ ------ ------
1,833 125 3,303 128
Property operating and maintenance 435 109 1,047 125
------ ------ ------ ------
Property net operating income $1,398 $ 16 $2,256 $ 3
====== ====== ====== ======
Weighted average number of
apartments in lease up 869 69 782 36
====== ====== ====== ======
Page 16 of 25
<PAGE>
Acquisitions
Acquisitions consist of 6 properties containing 1,906 apartment units, which
have been acquired by the Company since January 1, 1996. There was one
acquisition of an apartment community during the first six months of 1996,
Canyon Crest Views a 178 unit apartment community that was acquired on June 27,
1996.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------
1997 1996 1997 1996
------ ------ ------ ------
Rental income $3,800 $ 18 $6,739 $ 18
Other income 138 -- 211 --
------ ------ ------ ------
3,938 18 6,950 18
Property operating and maintenance 1,110 2 2,264 2
------ ------ ------ ------
Property net operating income $2,828 $ 16 $4,686 $ 16
====== ====== ====== ======
Weighted average number of
apartments 1,906 2 1,740 --
====== ====== ====== ======
Dispositions
Dispositions consist of two properties containing 502 apartment units, which
were sold by the Company in June 1997. There were no dispositions of apartment
communities during 1996.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------
1997 1996 1997 1996
------ ------ ------ ------
Rental income $ 774 $ 805 $1,562 $1,584
Other income 41 35 82 70
------ ------ ------ ------
815 840 1,644 1,654
Property operating and maintenance 212 308 511 595
------ ------ ------ ------
Property net operating income $ 603 $ 532 $1,133 $1,059
====== ====== ====== ======
Weighted average number of
apartments 502 502 502 502
====== ====== ====== ======
Liquidity and Capital Resources
Liquidity
The Company's net cash provided by operating activities of $19.6 million for the
six months ended June 30, 1996 was comparable to the $19.8 million for the six
months ended June 30, 1997. Net cash used in investing activities decreased from
$60.6 million for the six months ended June 30, 1996 to $36.4 million for the
six months ended June 30, 1997. The decrease is the result of a reduction in
construction activity for the first six months of 1997 of $22.3 million as
compared to $46.2 million for the first six months of 1996 being offset by $16.5
million related to the acquisitions of two apartment communities, net of assumed
debt. Net cash provided by financing activities decreased from $39.2 million for
the six months ended June 30, 1996 to $15.0 million for the six months ended
June 30, 1997 due to less borrowings taking place on the Revolving Credit
Facility as a result of the reduction in construction activity.
Page 17 of 25
<PAGE>
The Company elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its taxable year
ended December 31, 1994. REITs are subject to a number of organizational and
operational requirements, including a requirement that they currently distribute
95 percent of their ordinary taxable income.
The Company expects to meet its short-term liquidity requirements, including
capital expenditures relating to maintaining Stabilized Communities, generally
through its net cash provided by operations and borrowings under its credit
arrangements and anticipates meeting long-term liquidity requirements, such as
scheduled debt maturities, financing of construction and development activities
and possible acquisitions through long-term unsecured borrowings, issuance of
additional equity securities of the Company or debt securities of the Operating
Partnership, or, possibly in connection with acquisitions of land or existing
properties, issuance of Units of the Operating Partnership. The Company believes
that its net cash provided by operations will be adequate and anticipates that
it will continue to be adequate to meet both operating requirements and payment
of dividends by the Company in accordance with REIT requirements in both the
short and the long term.
The information in the immediately preceding paragraph is forward looking and
involves risks and uncertainties that could significantly impact the Company's
expected liquidity requirements in the short and long term. While it is
impossible to itemize the many factors and specific events that could affect the
Company's outlook for its liquidity requirements, such factors would include the
actual timing of the Company's planned development of new, and expansion of
existing, communities; acquisitions of existing apartment communities; the
actual costs associated with such developments and acquisitions; and the
strength of the local economies in the sub-markets in which the Company
operates. The Company is further subject to risks relating to the limited
geographic area in which it operates and its ability to successfully manage its
planned expansion into Southern California, a market in which it did not have
any operating history prior to 1995. Higher than expected costs, delays in
development of communities, a downturn in the local economies and/or the lack of
growth of such economies could reduce the Company's revenues and increase its
expenses, resulting in a greater burden on the Company's liquidity than that
which the Company has described above.
Capital Resources
At June 30, 1997, the Company's total debt was approximately $445.4 million and
the Company's debt to total market capitalization (Market Equity plus Debt) was
approximately 46.2 percent. The Company received an investment grade security
rating of "BBB-" from Standard & Poor's Corporation, "Baa3" from Moody's
Investors Service, Inc., and " BBB-" from Fitch Investors Service, L.P. in
December 1996 with respect to prospective issuances of senior unsecured debt.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization, and each rating should be evaluated independently of any other
rating. A rating of (a) BBB- from Standard & Poor's Corporation indicates that
the obligations of the Company are in the lower range of those obligations that
exhibit adequate protection parameters, (b) Baa3 from Moody's Investors Service,
Inc. indicates that the obligations of the Company are considered to be in the
lower range of medium-grade obligations, which are not considered to be highly
protected or poorly secured and (c) BBB- from Fitch Investors Service, L.P.
indicates that the obligations of the Company are considered to be in the lower
range of obligations considered to be of investment grade and of satisfactory
credit quality and that its ability to pay interest and to repay principal is
considered to be adequate.
Conventional Mortgage Loans
Conventional mortgage loans are comprised of three fixed rate loans at June 30,
1997, each of which is collateralized by a first mortgage lien on an apartment
community included in real estate assets. The mortgages are payable in monthly
installments of principal and interest and mature at various dates through
August 17, 2004. The conventional mortgage loans aggregated $33.4 million at
June 30, 1997 with interest rates ranging from 6.25 percent to 9.95 percent. In
January 1997, the Company extinguished the debt on four mortgages with unpaid
principal balances of approximately $25.0 million with proceeds from the
Revolving Credit Facility. As a result, the Company incurred a loss from the
early extinguishment of debt of approximately $1.2 million, net of minority
Page 18 of 25
<PAGE>
interest of $300. On July 15, 1997, the Company repaid two additional mortgages
with unpaid principal balances of approximately $15.2 million with proceeds from
the Revolving Credit Facility. There were no prepayment penalties associated
with the repayment of these two mortgages.
In December 1995, the Company entered into a ten year $50 million fixed rate
loan from an insurance company that bears interest at 7.17 percent, with
principal and interest due monthly based on a 25-year amortization schedule
beginning January 1, 1996 through January 1, 2006, and the remaining unpaid
principal balance due January 1, 2006. The loan is secured by a first deed of
trust on five apartment communities. Proceeds from the loan were used to pay
down outstanding balances on the Revolving Credit Facility. The outstanding debt
was $49.3 million at June 30, 1997. The loan is convertible to unsecured upon
the Company achieving an investment grade rating of BBB or better.
Mortgage Loan Certificates
The Company, through the Financing Partnership, borrowed $102.0 million under a
securitized loan in August 1994. During January 1995, the Company borrowed the
balance of $29.0 million (increasing the total to $131.0 million). The loan is
secured by the first mortgage liens on 21 Communities. The $102.0 million was
issued at 99.97 percent of its face amount and the $29.0 million was issued at
97.9375 percent of its face amount and will mature on August 1, 2001. Although
both amounts bear interest at 7.98 percent, the $29.0 million has an effective
interest rate of 8.40 percent due to the discount. The weighted average
effective interest rate of the total $131 million loan is 8.05 percent. The
bonds have been rated "AA" by Standard & Poor's.
In March 1997, the Company substituted two apartment communities, Sonoran and
The Heritage, as collateral for the securitized loan in exchange for releasing
the liens on three apartment communities, The Pines and Deer Creek Village,
which were sold in June 1997, and La Valencia.
Senior Unsecured Notes
On April 2, 1997, the Company through the Operating Partnership completed the
sale of $75 million senior unsecured notes priced at 99.44 percent of par with a
coupon rate of 7.50 percent due April 15, 2004 and $50 million senior unsecured
notes priced at 99.21 percent of par with a coupon rate of 7.625 percent due
April 15, 2007. Proceeds to the Operating Partnership from the sale of the
notes, net of underwriter's discount and out-of-pocket costs, was approximately
$122.8 million. In anticipation of the Offering, the Operating Partnership
entered into two forward treasury lock agreements on February 25, 1997. The
treasury lock agreements were settled concurrently with the completion of the
sale of the senior unsecured notes on April 2, 1997, and the Operating
Partnership received proceeds from the settlement of the treasury lock
agreements of approximately $3 million. The Operating Partnership is amortizing
the gain on the settlement of the treasury lock transaction as a reduction in
interest expense on the notes using the effective interest rate method. The
effective interest rates on the senior unsecured notes inclusive of the benefit
from the settlement of the treasury lock transaction is 7.18 percent and 7.36
percent, respectively. The Operating Partnership used the proceeds from the sale
of the notes and settlement of the treasury lock transaction to pay down its
Revolving Credit Facility.
Tax Exempt Bonds
Tax exempt bonds were comprised of three floating rate bonds based on the tax
exempt note rate set by the respective remarketing agents (or, at the option of
the Company at a fixed rate determined by the remarketing agents). The bonds are
secured by letters of credit which are secured by first mortgage liens on four
apartment communities. The tax exempt bonds have monthly interest only payments
and mature at various dates through 2016. The tax exempt bonds aggregated $64
million at June 30, 1997 with interest rates ranging from 5.20 percent to 5.56
percent.
Revolving Credit Facility
On June 13, 1997, the Company amended its existing $225 million unsecured
Revolving Credit Facility with a bank group to decrease the commitment amount
from $225 million to $150 million and decrease the interest rate from a floating
rate of London Inter Bank Offered Rate (LIBOR ) plus 150 basis points (100 basis
points equals one
Page 19 of 25
<PAGE>
percent) to 115 basis points (or, at the option of the Company, at the prime
rate announced by the banks). The Revolving Credit Facility has a term of three
years which expires in September 1999, with an option to extend for one year and
provides for monthly payments of interest only. It will be used to finance
acquisitions, to fund construction and development and renovation costs, and for
working capital purposes. At June 30, 1997, there was $44.0 million outstanding
on the Revolving Credit Facility, with an effective interest rate of 7.23
percent. The Revolving Credit Facility contains customary representations,
covenants and events of default, including a limitation which restricts
dividends to 95 percent of Funds From Operations, as defined. The Company does
not expect that the covenants will affect its ability to pay dividends in
accordance with its current dividend policy or its ability to maintain a REIT
status.
The table below outlines the Company's debt structure as of June 30, 1997.
Outstanding Weighted Average
Balance Interest Rate
------- -------------
Fixed Rate Debt:
Mortgage Debt
Conventional ....................................$ 82,668 7.60%
Mortgage Loan Certificates ...................... 130,563 8.05
Unsecured
$75 million senior notes ........................ 74,595 7.18
$50 million senior notes ........................ 49,615 7.36
-------- ----
Total Fixed Rate Debt ....................... 337,441 7.63
Variable Rate Debt:
Tax Exempt Bonds .................................. 64,000 5.40
Revolving Credit Facility ......................... 44,000 7.23
-------- ----
Total Variable Rate Debt .................... 108,000 6.10
-------- ----
Total Debt ..................................$445,441 7.28%
======== ====
The Company had 6,140 unencumbered apartment units related to the Stabilized
Communities and 720 unencumbered apartment units related to the Communities
Under Construction and in Lease-Up at June 30, 1997.
Subsequent Offerings
On May 28, 1996, the Company completed the Second Public Offering of 4,500,000
shares of its Common Stock of which 2,000,000 shares were sold by the Company
and an aggregate of 2,500,000 were sold by two institutional stockholders. On
June 25, 1996, the underwriters exercised their over-allotment option for
200,000 shares and the Company issued an additional 88,889 shares of its Common
Stock and the institutional stockholders sold an additional 111,111 shares
pursuant to a partial exercise of the over-allotment option granted to the
underwriters. Net proceeds to the Company from the Second Public Offering were
approximately $40,891,000. The Company used the proceeds from the sale of Common
Stock to pay down its Revolving Credit Facility.
In January 1997, the Company filed a shelf registration statement with the SEC
for up to $125 million of common stock, preferred stock and warrants issuable by
the Company and $200 million of debt securities issuable by the Operating
Partnership. The registration statement, which has been declared effective by
the SEC includes $125 million of available securities under the September 1995
registration statement. These registration statements provide the Company with
the ability to issue and sell a portion of such securities from time to time.
On February 14, 1997, the Company completed the Third Public Offering of
1,800,000 shares of its Common Stock. Net proceeds to the Company from the
February 1997 Offering were approximately $35,415,000. The Company used the
proceeds from the sale of Common Stock to pay down its Revolving Credit
Facility.
Page 20 of 25
<PAGE>
Inflation
Most of the leases at the communities are for a term of one year or less, which
may enable the Company to seek increased rents upon renewal of existing leases
or commencement of new leases. The short-term nature of the leases generally
serves to reduce the risk to the Company of the adverse effects of inflation.
Funds From Operations
The Company and industry analysts consider Funds from Operations ("FFO") to be
an appropriate measure of the performance of an equity REIT because it is
predicated on cash flow analyses. The Company computes FFO in accordance with
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO is defined as net income (loss) determined in accordance
with GAAP, excluding gains (or losses) from debt restructuring and sales of
property plus depreciation and amortization, excluding depreciation on non-real
estate assets and amortization of deferred financing costs. Funds from
Operations should not be considered as an alternative to net income (determined
in accordance with GAAP) as an indicator of the Company's financial performance
or to cash flow from operating activities (determined in accordance with GAAP)
as a measure of the Company's needs. The Company believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of the Company, FFO should be examined in conjunction with net income,
as presented in the consolidated financial statements and elsewhere in this
document.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------
1997 1996 1997 1996
------- ------- ------- -------
Income before minority interest,
gain on sale of real estate assets
and extraordinary item $ 4,647 $ 4,682 $ 9,009 $ 9,965
Depreciation and amortization, net
of corporate depreciation 6,386 4,831 12,498 9,562
Amortization of executive deferred
compensation expense 30 180 60 350
------- ------- ------- -------
Funds from Operations $11,063 $ 9,693 $21,567 $19,877
======= ======= ======= =======
Number of Common Shares and Units
The Company had 24,415,225 and 21,320,722 weighted average number of shares and
units at June 30, 1997 and 1996, respectively.
Capitalization of Fixed Assets and Community Improvements.
The Company has established a policy of capitalizing those expenditures relating
to acquiring new assets, materially enhancing the value of an existing asset, or
substantially extending the useful life of an existing asset. All expenditures
necessary to maintain a community in ordinary operating condition are expensed
as incurred.
Page 21 of 25
<PAGE>
Acquisition of assets and community expenditures are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
New community development $12,532 $15,895 $22,325 $46,171
Acquisitions -- 13,018 34,800 13,018
Nonrecurring capital expenditures:
Vehicle access control gates 412 -- 725 --
Computer upgrade 81 23 152 51
Recurring capital expenditures:
Community additions and
improvements 1,490 913 2,042 1,329
Corporate additions and improvements 34 -- 46 --
------- ------- ------- -------
$14,549 $29,849 $60,090 $60,569
======= ======= ======= =======
</TABLE>
Development and Construction Activity
The apartment communities under construction and in lease-up are listed below:
<TABLE>
<CAPTION>
Actual Actual or
Average Estimated Date of Estimated Estimated
Unit Construction Construction Commence- Date of
Total Size Cost Commence- ment of Stabilized
Name City Units (Sq. Ft.) (Millions) ment Lease-Up Occupancy
- --------------------------------------------------------------------------------------------------------------------
Quarter
-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Phoenix
- -------
The Isle at Arrowhead Ranch Glendale 256 940 $ 17 2:96 4:96 4:97
The Retreat Phase I Phoenix 240 973 14 1:97 3:97 2:98
Vista Grove Mesa 224 911 14 1:97 3:97 2:98
--- ------
Total 720 $ 45
=== ======
</TABLE>
The Company owns sites intended for the development of two additional
multifamily apartment communities and Phase II of the Retreat, which, if
completed, are expected to contain approximately 651 apartment units. There can
be no assurance that the Company will succeed in obtaining any necessary
governmental approvals or any financing required to develop these projects, or
that the Company will decide to develop any particular project.
The information set forth in the table above is based upon a number of estimates
and assumptions that are inherently subject to business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control. The actual development cost, completion date and
stabilization date of any project will be dependent upon a variety of factors
beyond the control of the Company including, for example, labor and other
personnel costs, material costs, weather conditions, government fees and leasing
rates.
Acquisition Activity
The Company is actively pursuing and in preliminary negotiations regarding the
acquisition of additional properties in Riverside/San Bernardino and San Diego,
California, but no assurance can be given that it will continue to pursue or
consummate any acquisitions as a result of these negotiations.
Page 22 of 25
<PAGE>
Disposition Activity
During the second quarter of 1997, the Company sold two properties, Deer Creek
Village and The Pines, containing 502 apartment units. The aggregate sales price
was approximately $22.4 million resulting in a gain from the sale of
approximately $5.2 million. The Company received cash of approximately $7.3
million and two carryback mortgage notes of approximately $15.1 million. The
mortgage notes are secured by a first deed of trust on the two properties and
mature in November 1997. The buyer may repay the two mortgage notes at anytime
without prepayment penalties.
Apartment Communities
The following sets forth certain information regarding the current apartment
communities at June 30, 1997. All of the communities are owned 100 percent in
fee by the Company.
<TABLE>
<CAPTION>
Year
Developed
Number of Developed/ or
Apartment Communities City Apartments Acquired Acquired
--------------------- ---- ---------- -------- --------
<S> <C> <C> <C> <C>
Same Store
Arizona
- -------
Phoenix:
Acacia Creek Scottsdale 508 Acquired 1995
Bayside at the Islands Gilbert 272 Developed 1988
Country Brook Chandler 276 Acq/Dev 1991/1993
Gateway Villas Phoenix 180 Developed 1995
Greenwood Village Tempe 270 Acquired 1993
Heritage Point Mesa 148 Acquired 1994
La Mariposa Mesa 222 Acquired 1990
La Valencia Mesa 361 Acquired 1990
Little Cottonwoods Tempe 379 Acq/Acq/Dev 1989/89/90
Los Arboles Chandler 232 Developed 1985
Miramonte Scottsdale 151 Developed 1983
Morningside Scottsdale 160 Acquired 1992
Mountain Park Ranch Phoenix 240 Developed 1995
Park Meadow Gilbert 156 Acquired 1992
Preserve at Squaw Peak Phoenix 108 Acquired 1991
Promontory Pointe Phoenix 304 Acquired 1988
Rancho Murietta Tempe 292 Acquired 1995
Scottsdale Courtyards Scottsdale 274 Developed 1993
Scottsdale Meadows Scottsdale 168 Developed 1984
Shadow Brook Phoenix 224 Acquired 1993
Shores at Andersen Springs Chandler 299 Developed 1989/1993
Silver Creek Phoenix 174 Acquired 1991
Sonoran Phoenix 429 Developed 1995
Sun Creek Glendale 175 Acquired 1993
Superstition Vista Mesa 316 Acquired 1995
The Enclave Tempe 204 Developed 1995
The Heritage Phoenix 204 Developed 1995
The Meadows Mesa 306 Acquired 1987
The Palms Phoenix 132 Developed 1990
Towne Square Chandler 468 Acq/Dev 1992/1995
Villa Encanto Phoenix 382 Developed 1983
Village at Lakewood Phoenix 240 Developed 1988
--------
8,254
Tucson:
Harrison Park Tucson 172 Acquired 1991
La Reserve Oro Valley 240 Developed 1988
Orange Grove Village Tucson 256 Acquired 1991
Suntree Village Oro Valley 424 Acquired 1992
The Arboretum Tucson 496 Acq/Dev 1992/1995
Village at Tanque Verde Tucson 217 Acq/Dev 1990/1994
--------
1,805
California:
The Ashton Corona Hills 492 Acquired 1995
--------
492
--------
Total Same Store 10,551
========
</TABLE>
Page 23 of 25
<PAGE>
<TABLE>
<CAPTION>
Year
Developed
Number of Developed/ or
Apartment Communities City Apartments Acquired Acquired
--------------------- ---- ---------- -------- --------
<S> <C> <C> <C> <C>
Communities Stabilized Less than Two Years
Arizona
- -------
Phoenix:
Country Brook Expansion Phase III Chandler 120 Developed 1995/96
Ingleside Phoenix 120 Developed 1995/96
Ladera Phoenix 248 Developed 1995/96
Mirador Phoenix 316 Developed 1995/96
Park Meadow Expansion Phase II Gilbert 68 Developed 1995/96
Towne Square Expansion Phase III Chandler 116 Developed 1995/96
--------
988
Tucson:
The Legends Tucson 312 Developed 1995/96
Orange Grove Expansion Phase II Tucson 144 Developed 1995/96
--------
456
--------
Total Communities Stabilized Less than Two Years 1,444
========
Developments and Lease-Up Properties
Arizona
- -------
Phoenix:
The Hawthorne (1) Phoenix 276 Developed 1995/96
The Retreat Phase I Glendale 240 Developed 1996/97
Vista Grove Mesa 224 Developed 1996/97
The Isle at Arrowhead Ranch (2) Glendale 256 Developed 1996
Promontory Pointe Expansion Phase II (1) Phoenix 120 Developed 1995/96
--------
1,116
Tucson:
Bear Canyon (3) Tucson 238 Developed 1995/96
Harrison Park Expansion Phase II (3) Tucson 188 Developed 1995/96
--------
426
--------
Total Developments and Lease-Up Properties 1,542
========
Acquisitions
California
----------
Canyon Crest Views Riverside 178 Acquired 1996
Canyon Ridge San Diego 162 Acquired 1997
Marquessa Corona Hills 336 Acquired 1997
Portofino Chino Hills 176 Acquired 1996
Parkview Terrace Club Redlands 558 Acquired 1996
Redlands Lawn & Tennis Club Redlands 496 Acquired 1996
--------
1,906
--------
Total 15,443
========
Dispositions
Arizona
- -------
Deer Creek Village Phoenix 308 Acquired 1991
The Pines Mesa 194 Acquired 1992
--------
502
========
</TABLE>
(1) Community reached stabilized occupancy in the first quarter 1997
(2) Community is in lease-up
(3) Community reached stabilized occupancy in the second quarter 1997
Page 24 of 25
<PAGE>
PART II OTHER INFORMATION
Item 4 - Submission of Matters to Vote by Security Holders.
On June 10, 1997 at the Annual Meeting of Stockholders, two directors were
re-elected to the Board of Directors for a three year term to expire at the 2000
Annual Meeting of Stockholders. The stockholders voted to elect both nominees as
follows:
Total Votes for Total Votes Against
Each Director Each Director Abstained
------------- ------------- ---------
Richard G. Berry 15,124,417 45,225 5,075,322
Gadi Kaufmann 15,124,417 45,225 5,075,322
Item 6 - Exhibits and Reports on Form 8-K.
(b) No current reports on Form 8-K were filed during the quarter ended June 30,
1997.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EVANS WITHYCOMBE RESIDENTIAL, INC.
August 11, 1997 /s/ Stephen O. Evans
- ----------------------- -----------------------------------
(Date) Stephen O. Evans,
Chairman of the Board and
Chief Executive Officer
August 11, 1997 /s/ Paul R. Fannin
- ----------------------- -----------------------------------
(Date) Paul R. Fannin,
Senior Vice President and
Chief Financial Officer
Page 25 of 25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 9,569
<SECURITIES> 0
<RECEIVABLES> 15,120
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 803,904
<DEPRECIATION> 48,925
<TOTAL-ASSETS> 788,949
<CURRENT-LIABILITIES> 0
<BONDS> 445,441
0
0
<COMMON> 204
<OTHER-SE> 260,974
<TOTAL-LIABILITY-AND-EQUITY> 788,949
<SALES> 0
<TOTAL-REVENUES> 58,624
<CGS> 0
<TOTAL-COSTS> 19,169
<OTHER-EXPENSES> 15,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,402
<INCOME-PRETAX> 11,598
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,598
<DISCONTINUED> 0
<EXTRAORDINARY> (1,200)
<CHANGES> 0
<NET-INCOME> 10,398
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
