-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KNFFeE+1cx7ivkBPOrzZLGb+dZpJg44l6uYe3oecxOs4eL+KVhiyB1CRFT6VnJXB 9031XNkj9BN1HD/0shCb4g== 0000916641-98-000941.txt : 19980817 0000916641-98-000941.hdr.sgml : 19980817 ACCESSION NUMBER: 0000916641-98-000941 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED DOMINION REALTY TRUST INC CENTRAL INDEX KEY: 0000074208 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 540857512 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10524 FILM NUMBER: 98690114 BUSINESS ADDRESS: STREET 1: 10 S 6TH ST STE 203 CITY: RICHMOND STATE: VA ZIP: 23219-3802 BUSINESS PHONE: 8047802691 MAIL ADDRESS: STREET 1: 10 SOUTH SIXTH STREET STREET 2: SUITE 203 CITY: RICHMOND STATE: VA ZIP: 23219-3802 FORMER COMPANY: FORMER CONFORMED NAME: OLD DOMINION REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19850110 FORMER COMPANY: FORMER CONFORMED NAME: OLD DOMINION REIT ONE DATE OF NAME CHANGE: 19770921 FORMER COMPANY: FORMER CONFORMED NAME: OLD DOMINION REAL ESTATE INVESTMENT TRUS DATE OF NAME CHANGE: 19741216 10-Q 1 UNITED DOMINION REALTY TRUST, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q FOR QUARTERLY AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 1-10524 UNITED DOMINION REALTY TRUST, INC. (Exact name of registrant as specified in its charter) Virginia 54-0857512 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 10 South Sixth Street, Richmond, Virginia 23219-3802 (Address of principal executive offices - zip code) (804) 780-2691 (Registrant's telephone number, including area code) 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, and (2) has been subject to filing requirements for at least the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE USERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 7, 1998: Common Stock: 103,472,610 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except for share data) (Unaudited)
June 30, December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Real estate owned: Real estate held for investment $ 2,813,957 $ 2,281,438 Less: accumulated depreciation 242,803 200,506 ---------------- ---------------- 2,571,154 2,080,932 Real estate under development 43,811 24,598 Real estate held for disposition 104,864 166,501 Cash and cash equivalents 11,575 473 Other assets 97,796 41,221 ---------------- ---------------- Total assets $ 2,829,200 $ 2,313,725 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable-secured $ 623,248 $ 417,325 Notes payable-unsecured 827,881 738,901 Distributions payable to common and preferred shareholders 29,867 25,607 Accounts payable, accrued expenses and other liabilities 73,085 58,842 ---------------- ---------------- Total liabilities 1,554,081 1,240,675 Minority interest of unitholders in operating partnership 51,675 14,693 Shareholders' equity: Preferred stock, no par value; $25 liquidation preference, 25,000,000 shares authorized; 4,200,000 shares 9.25% Series A Cumulative Redeemable 105,000 105,000 6,000,000 shares 8.60% Series B Cumulative Redeemable 150,000 150,000 Common stock, $1 par value; 150,000,000 shares authorized 101,988,375 shares issued and outstanding (89,168,442 in 1997) 101,988 89,168 Additional paid-in capital 1,070,440 906,307 Notes receivable from officer-shareholders (8,333) (8,806) Distributions in excess of net income (195,651) (183,312) ---------------- ---------------- Total shareholders' equity 1,223,444 1,058,357 ================ ================ Total liabilities and shareholders' equity $ 2,829,200 $ 2,313,725 ================ ================
See accompanying notes. 2 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, ------------------------------- --------------------------- 1998 1997 1998 1997 ------------------------------- --------------------------- Revenues Rental income $118,176 $95,341 $222,275 $185,312 Interest and other non-property income 1,147 137 2,159 388 ------------- ---------- --------- -------- 119,323 95,478 224,434 185,700 Expenses Rental expenses: Utilities 6,140 5,658 11,945 12,124 Repairs and maintenance 15,681 14,206 28,035 26,179 Real estate taxes 10,343 7,796 19,341 14,907 Property management 4,638 3,297 7,920 6,074 Other operating expenses 12,516 9,959 23,031 19,235 Real estate depreciation 25,548 19,127 46,476 35,289 Interest 25,736 19,769 48,561 38,919 General and administrative 2,539 1,820 4,618 3,653 Other depreciation and amortization 795 395 1,541 845 ---------- ------------ ----------- ----------- 103,936 82,027 191,468 157,225 ---------- ------------ ----------- ----------- Income before gains on sales of investments, minority interest unitholders in operating partnership and extraordinary item 15,387 13,451 32,966 28,475 Gains on sales of investments 20,721 1,254 20,461 3,374 ---------- ------------ ----------- ----------- Income before minority interest of unitholders in operating partnership and extraordinary item 36,108 14,705 53,427 31,849 Minority interest of unitholders in operating partnership (987) (28) (1,122) (59) ---------- ------------ ----------- ----------- Income before extraordinary item 35,121 14,677 52,305 31,790 Extraordinary item-early extinguishment of debt (116) -- (116) -- ---------- ------------ ----------- ----------- Net income 35,005 14,677 52,189 31,790 Dividends to preferred shareholders (5,653) (3,611) (11,303) (6,039) ---------- ------------ ----------- ----------- Net income available to common shareholders $29,352 $11,066 $40,886 $25,751 ========== ============ =========== =========== Earnings per common share: Basic earnings per common share $0.29 $0.13 $0.42 $0.30 ========== ============ =========== =========== Diluted earnings per common share $0.29 $0.13 $0.42 $0.30 ========== ============ =========== =========== Distributions declared per common share $0.2625 $0.2525 $0.5250 $0.5050 ========== ============ =========== =========== Weighted average number of common shares outstanding-basic 101,562 86,877 96,244 85,967 Weighted average number of common shares outstanding-diluted 105,145 87,036 98,666 86,157
See accompanying notes. 3 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six months ended June 30, 1998 1997 - ------------------------------------------------------------------------------------------------- Operating Activities Net income $ 52,189 $ 31,790 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 48,017 36,134 Minority interest of unitholders in operating partnership 1,122 59 Gains on sales of investments (20,461) (3,374) Amortization of deferred financing costs 965 810 Changes in operating assets and liabilities: Increase/(decrease) in operating liabilities (695) 2,473 Increase in operating assets (1,307) (4,572) -------- -------- Net cash provided by operating activities 79,830 63,320 Investing Activities Acquisition of real estate, net of liabilities assumed (129,049) (150,615) Capital expenditures (33,937) (45,966) Development of real estate assets (30,075) (24,861) Net proceeds from sales of investments 85,684 27,089 Proceeds from interest rate hedge transaction -- 1,538 Issuance of and payments on notes receivable (12,951) 2,142 Net cash acquired in acquisition of ASR Investments Corporation 330 -- -------- -------- Net cash used in investing activities (119,998) (190,673) Financing Activities Net proceeds from the issuance of common stock 38,876 59,670 Net proceeds from the sale of preferred stock -- 145,275 Net proceeds from the issuance of common stock through the dividend reinvestment and stock purchase plan 29,017 14,538 Gross proceeds from the issuance of unsecured notes payable -- 125,000 Net borrowings/(repayments) of short-term bank debt 96,900 (104,750) Distributions paid to preferred shareholders (11,303) (4,856) Distributions paid to common shareholders (48,963) (41,482) Distributions paid to minority interest unitholders (2,586) (67) Scheduled principal payments on secured notes payable (3,192) (2,773) Gross proceeds from the issuance of secured notes payable 7,770 -- Non-scheduled payments on secured notes payable (46,431) (3,350) Payments on unsecured notes payable (7,504) (63,414) Payment of financing costs (1,314) (1,594) -------- -------- Net cash provided by financing activities 51,270 122,197 Net increase (decrease) in cash and cash equivalents 11,102 (5,156) Cash and cash equivalents, beginning of period 473 13,452 -------- -------- Cash and cash equivalents, end of period $ 11,575 $ 8,296 ======== ======== Supplemental Information: Interest paid during the period $ 48,496 $ 37,628 Non-cash transactions associated with the acquisition of properties: Secured debt assumed through the acquisition of properties 86,626 22,063 Issuance of operating partnership units 17,617 -- Issuance of common stock 1,077 -- Non-cash transactions associated with the acquisition of ASR Investment Corporation: Real estate assets acquired 313,700 -- Other operating assets acquired 8,848 Issuance of common stock 108,456 -- Issuance of operating partnership units 21,420 -- Secured debt assumed 179,440 -- Operating liabilities assumed 13,553 --
See accompanying notes. 4 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1998 (In thousands, except per share amounts) (Unaudited)
Preferred Stock Balance, December 31, 1997 $ 255,000 ------------------- Balance, June 30, 1998 $ 255,000 =================== Common Stock, $1 Par Value Balance, December 31, 1997 $ 89,168 Issuance of common shares through Unit Investment Trust 2,804 Issuance of common shares in the acquisition of ASR Investments Corporation 7,743 Issuance of common shares through dividend reinvestment and stock purchase plan 2,157 Issuance of common shares in connection with the acquisition of properties 73 Issuance of common shares through exercise of stock options 43 ------------------- Balance, June 30, 1998 $ 101,988 =================== Additional Paid-in Capital Balance, December 31, 1997 $ 906,307 Issuance of common shares through Unit Investment Trust 35,150 Issuance of common shares in the acquisition of ASR Investments Corporation 100,713 Issuance of common shares through dividend reinvestment and stock purchase plan 26,860 Issuance of common shares in connection with the acquisition of properties 1,004 Issuance of common shares through exercise of stock options 406 ------------------- Balance, June 30, 1998 $ 1,070,440 =================== Notes Receivable from Officer-Shareholders Balance, December 31, 1997 $ (8,806) Principal repayments 473 =================== Balance, June 30, 1998 $ (8,333) =================== Distributions in Excess of Net Income Balance, December 31, 1997 $ (183,312) Net income 52,189 Common stock distributions declared ($0.5250 per share) (53,225) Preferred stock distributions declared-Series A ($1.16 per share) (4,856) Preferred stock distributions declared-Series B ($1.08 per share) (6,447) ------------------- Balance, June 30, 1998 $ (195,651) =================== Total Shareholders' Equity $ 1,223,444 ===================
See accompanying notes. 5 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of presentation The accompanying consolidated financial statements include the accounts of United Dominion Realty Trust, Inc. and its subsidiaries, including United Dominion Realty, L.P., its Operating Partnership, (collectively, the "Company"). As of June 30, 1998, United Dominion Realty Trust, Inc. and its wholly-owned subsidiaries (collectively "United Dominion") had a 85% interest in the Operating Partnership. The financial statements of the Company include the minority interest of unitholders in the operating partnership. As of June 30, 1998, there were 13,496,109 units in the Operating Partnership outstanding, of which 11,476,448, or 85.0% were owned by United Dominion and 2,019,660 or 15.0% were owned by non-affiliated limited partners. All significant inter-company accounts and transactions have been eliminated in consolidation. In addition, in connection with the ASR merger, the Company acquired Heritage Communities L.P., a Delaware limited partnership. As of June 30, 1998, there were 4,504,243 units in the Operating Partnership outstanding, of which 2,974,253, or 66% were owned by United Dominion and 34% were owned by non-affiliated limited partners. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position at June 30, 1998 and results of operations for the interim periods ended June 30, 1998 and 1997. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and related notes appearing in the Company's December 31, 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission. 2. Real estate held for investment The following table summarizes real estate held for investment: June 30, December 31, Dollars in thousands 1998 1997 - ----------------------------------------------------------------------------- Land and land improvements $ 480,376 $ 393,505 Buildings and improvements 2,203,077 1,783,565 Furniture, fixtures and equipment 124,340 100,380 Construction in progress 6,164 3,988 ----------- ----------- Real estate held for investment 2,813,957 2,281,438 Accumulated depreciation (242,803) (200,506) ----------- ----------- Real estate held for investment, net $ 2,571,154 $ 2,080,932 =========== =========== 3. Notes payable - secured Notes payable-secured, which encumber $.9 billion or 30% of the Company's real estate owned, at cost, ($2.1 billion or 70% of the Company's real estate owned, at cost, is unencumbered) consist of the following at June 30, 1998:
Principal Weighted Average Weighted Average No. Communities Dollars in thousands Balance Interest Rate Years to Maturity Encumbered - --------------------------------------------------------------------------------------------------------------------- Fixed Rate Debt Mortgage notes payable $ 331,063 7.83% 4.8 64 Tax-exempt secured notes payable 131,250 7.01% 21.8 18 REMIC financings 79,476 7.38% 2.5 23 Secured notes payable (a) 45,000 7.29% 1.1 5 ----------------------------------------------------------------------------- Total Fixed Rate Notes 586,789 7.55% 8.1 110 Variable Rate Debt Secured notes payable 26,559 6.52% 5.7 6 Tax-exempt secured notes payable 9,900 6.13% 9.1 2 ----------------------------------------------------------------------------- Total Variable Rate Notes 36,459 6.41% 6.4 8 ----------------------------------------------------------------------------- Total Notes Payable - Secured $ 623,248 7.48% 8.0 118 =============================================================================
(a) Variable-rate secured notes payable which have been effectively swapped to a fixed-rate consist of a $32.7 million variable-rate secured senior credit facility which encumbers five apartment communities and two variable-rate construction notes payable aggregating $12.3 million. The Company has five interest rate swap agreements with an aggregate notional value of $45 million under which the Company pays a fixed-rate of interest and receives a variable-rate on the notional amounts. The interest rate swap agreements effectively change the Company's interest rate exposure on $45 million from a variable-rate to a weighted average fixed-rate of approximately 7.29%. 6 4. Notes payable - unsecured A summary of notes payable - unsecured is as follows:
June 30, December 31, Dollars in thousands 1998 1997 ----------------- ---------------- Commercial Banks Borrowings outstanding under revolving credit facilities $ 232,500 $135,600 Insurance Companies--Senior Unsecured Notes 7.98% due March, 1999-2003 (a) 37,143 44,571 8.72% due November 1998 2,000 2,000 --------- --------- 39,143 46,571 Other (b) 6,238 6,730 Senior Unsecured Notes - Other 7.25% Notes due April 1999 75,000 75,000 8.50% Debentures due September 2024 (c) 150,000 150,000 7.95% Medium-Term Notes due July 2006 125,000 125,000 7.25% Notes due January 2007 125,000 125,000 7.07% Medium-Term Notes due November 2006 25,000 25,000 7.02% Medium-Term Notes due November 2005 50,000 50,000 -------- -------- 550,000 550,000 ------- ------- Total Notes Payable - Unsecured $827,881 $738,901 ======== ========
(a) Payable in five equal annual principal installments of $7.4 million. (b) Includes $5.8 million and $6.2 million at June 30, 1998 and December 31, 1997, respectively, of deferred gains from the termination of interest rate hedge transactions. (c) Debentures include an investor put feature, which grants a one time option to redeem debentures in September 2004. 5. Earnings Per Share Basic earnings per common share is computed using net income available to common shareholders and the weighted average shares outstanding. Diluted earnings per common share is also computed using net income available to common shareholders, however, the weighted average shares outstanding are adjusted for potentially dilutive securities for the periods presented. The effect of the operating partnership units was antidilutive for the three and six months ended June 30, 1997, and is therefore not included in the following calculations. The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ---------------------------- ---------------------- In thousands, except per share data - ----------------------------------- Numerator: Numerator for basic earnings per share-net income available to common shareholders $ 29,352 $ 11,066 $ 40,886 $ 25,751 Effect of minority interest 987 -- 1,122 -- -------- -------- -------- -------- Numerator for diluted earnings per share- net income available to common shareholders $ 30,339 $ 11,066 $ 42,008 $ 25,751 ======== ======== ======== ======== Denominator: Denominator for basic earnings per share- weighted average shares 101,562 86,877 96,244 85,967 Effect of dilutive securities: Operating partnership units 3,478 -- 2,311 -- Employee stock options 105 159 111 190 -------- -------- -------- -------- Dilutive potential common shares denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions 105,145 87,036 98,666 86,157 ======== ======== ======== ======== Basic earnings per common share $ .29 $ .13 $ .42 $ .30 Diluted earnings per common share $ .29 $ .13 $ .42 $ .30
6. Pro Forma Financial Information On March 27, 1998, the Company completed the acquisition of ASR Investments Corporation (ASR) in a statutory merger. ASR was a publicly-traded multifamily REIT that owned and operated 39 communities with 7,550 apartment homes located in Arizona, Texas, New Mexico and the state of Washington. Each share of ASR's common stock was exchanged for 1.575 shares of the Company's common stock. The acquisition was structured as a tax-free transaction and was treated as a purchase for accounting purposes. In connection with the acquisition, the Company acquired primarily real estate assets totaling $313.7 million. Consideration given by the Company included 7,742,839 shares of the Company's common stock valued at $14 per share for an aggregate equity value of $108.4 million plus the issuance of 1,529,990 Units in the ASR Operating Partnership valued at $21.4 million. In addition, the Company assumed, at fair value, mortgage debt totaling $179.4 million and other liabilities of $13.6 million. Information concerning unaudited pro forma results of operations for the six months ended June 30, 1998 and 1997 are set forth below. For the six months ended June 30, 1998, such pro forma information assumes the acquisition of ASR as if the transaction occurred on January 1, 1997. For the six months ended June 30, 1997, such pro forma information assumes the following transactions occurred on January 1, 1997: (i) the acquisition by the Company of 17 apartment communities with 5,659 apartment homes at a total cost of $219 million and (ii) the acquisition by ASR Investments Corporation of 22 apartment communities with 4,208 apartment homes at a total cost of $176 million. 8 Pro Forma Six Months Ended June 30 1998 1997 -------------------------- In thousands, except per share amounts -------------------------------------- Rental income $ 234,005 $ 223,527 Net income available to common shareholders before extraordinary item $ 41,724 $ 23,284 Net income per common share before extraordinary item-basic $ .40 $ .25 Net income per common share before extraordinary item-diluted $ .39 $ .25 The unaudited information is not necessarily indicative of what the Company's consolidated results of operations would have been if the acquisitions had occurred at the beginning of each period presented. Additionally, the pro forma information does not purport to be indicative of the Company's results of operations for future periods. 7. Accounting Pronouncements As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of Statement 130 had no impact on the Company's net income or stockholders' equity for each of the periods presented. On March 19, 1998, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus decision on Issue No. 97-11, "Accounting for Internal Costs Relating to Real Estate Property Acquisitions" which provides that internal costs of identifying and acquiring operating properties should be expensed as incurred. The Company had historically capitalized, on a successful efforts basis, the direct internal costs of identifying and acquiring operating property and, accordingly, has realized an increase in expense with the adoption of this consensus on March 19, 1998. The Company does not expect the impact on earnings to be material in 1998. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133) which is required to be adopted in years beginning after June 15, 1999. Statement 133 permits early adoption as of the beginning of any fiscal quarter after its issuance, however, the Company does not anticipate adopting Statement 133 until such time as it is required. Statement 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the hedged assets, liabilities, or firm commitments are recognized through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of Statement 133 will be on earnings and the financial position of the Company, however, given the Company's use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. 9 PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company considers portions of the information contained in Item 2. to include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. The Company is engaged in the ownership, acquisition, development and operation of apartment communities throughout the country. Management's strategy is to transform the Company into a national, low cost provider of "B" and "A" quality apartment homes. The Company is implementing this strategy through the acquisition of portfolios of higher quality communities, the sale of lower quality communities, a greater commitment to development and the upgrade of older communities. The Company's investment strategy focuses on acquiring apartment communities in targeted major U.S. markets, currently 24, and geographically expanding into other major markets in the Mid West and Far West. The Company intends to continue its expansion into other areas of the United States and enter into new markets as appropriate opportunities arise. The Company seeks to be a market leader by operating a sufficiently sized portfolio of apartments within each market in order to drive down operating costs through economies of scale and management efficiencies. The Company believes this market diversification increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies. [This space intentionally left blank] 10 The following table summarizes the Company's apartment market information by geographic market:
Six Months Ended Three Months Ended As of June 30, 1998 June 30, 1998 June 30, 1998 - ------------------------------------------------------------------ --------------------- --------------------- Average Average No. of No. of % of Carrying Physical Monthly Physical Monthly Apartment Apartment Apartment Value Occupancy Rental Occupancy Rental Market Communities Homes Homes (in thousands) ** Rates * ** Rates * - ------------------------------------------------------------------ -------------------------------------------------- Dallas, TX*** 29 8,954 13% $ 375,607 93.7% $ 598 94.1% $ 601 Houston, TX*** 23 5,783 8% 192,395 92.1% 545 93.0% 546 San Antonio, TX 12 3,673 5% 149,243 91.7% 621 92.1% 622 Orlando, FL 12 3,584 5% 160,634 93.7% 622 93.3% 628 Raleigh, NC 11 3,484 5% 152,537 93.3% 653 94.0% 655 Columbia, SC 11 3,326 5% 111,650 93.8% 510 93.5% 512 Phoenix, AZ*** 9 3,136 4% 168,176 91.0% 655 89.7% 660 Richmond, VA 10 3,091 4% 113,062 92.9% 602 93.8% 605 Tampa, FL 9 2,669 4% 100,558 95.4% 599 95.0% 602 Eastern NC 10 2,573 4% 105,257 87.1% 594 85.9% 605 Charlotte, NC 11 2,566 4% 118,879 89.2% 654 89.7% 656 Nashville, TN 9 2,416 3% 113,312 92.8% 597 93.5% 597 Memphis, TN 6 2,196 3% 100,481 89.9% 539 88.6% 540 Greensboro, NC 8 2,123 3% 100,428 82.0% 612 84.7% 612 Baltimore, MD 8 1,746 3% 78,897 92.8% 672 94.3% 673 Washington, DC 6 1,483 2% 66,561 91.5% 694 92.5% 695 Hampton Roads, VA 8 1,830 3% 62,737 91.4% 553 92.0% 554 Atlanta, GA 7 1,642 2% 76,666 91.5% 620 92.2% 623 Greenville, SC 6 1,436 2% 52,878 87.1% 528 86.7% 529 Jacksonville 3 1,157 2% 55,288 91.4% 607 91.3% 611 Tucson, AZ *** 8 1,112 2% 29,007 -- -- 90.8% 425 Miami/Ft.Lauderdale 4 960 1% 62,450 92.1% 811 91.1% 815 Fayetteville, NC 3 884 1% 40,550 90.2% 565 90.8% 566 Eastern Shore, MD 4 784 1% 33,974 97.7% 648 98.0% 651 Other Florida 7 1,646 2% 71,358 94.5% 581 93.4% 585 Other Virginia 6 1,156 2% 47,203 82.4% 603 84.0% 605 Washington state*** 3 812 1% 38,268 -- -- 75.3% 627 Other Texas 3 776 1% 22,526 87.7% 526 86.4% 527 New Mexico*** 4 758 1% 28,704 79.5% 550 76.3% 550 Austin, TX 2 542 1% 22,559 90.0% 593 90.5% 594 Arkansas 2 512 1% 21,305 92.1% 577 91.6% 578 Other Georgia 2 468 1% 22,049 89.1% 646 86.8% 650 Other South Carolina 2 408 1% 13,174 89.9% 423 88.3% 425 Nevada 1 384 -- 20,401 81.7% 648 79.0% 645 Oklahoma 1 316 -- 9,605 89.8% 457 90.6% 454 Alabama 1 242 -- 11,087 91.1% 519 89.7% 519 Delaware 2 368 -- 17,466 93.8% 614 94.5% 615 Other North Carolina 1 168 -- 7,458 93.1% 585 91.9% 588 - ----------------------------------------------------------------------------------------------------------------------- Total 264 71,164 100% $2,974,390 91.3% $ 601 91.3% $ 604 =======================================================================================================================
* Average monthly rental rates represent potential rent collections (gross potential rents less market adjustments), which approximate net effective rents. These figures exclude 1998 acquisitions. ** Physical occupancy is defined as rental income (potential rental collections less vacancy loss, management units, units held out of service and move-in concessions) divided by potential collections (gross potential rent less management units, units held out of service and move-in concessions) for the period, expressed as a percentage. *** Physical Occupancy and Average Monthly Rental Rates are not available for the communities included in these markets which were acquired on March 27, 1998 in connection with the acquisition of ASR Investments Corporation as the markets include only non-mature properties. 11 Liquidity and Capital Resources As a qualified real estate investment trust ("REIT"), the Company distributes a substantial portion of its cash flow to its shareholders in the form of quarterly distributions. The Company believes that cash provided by operations will be adequate to meet normal operating requirements and payment of distributions by the Company in accordance with REIT requirements in both the short and long term. For the six months ended June 30, 1998, the Company's cash flow from operating activities exceeded cash distributions paid to preferred and common shareholders and operating partnership unitholders by $17.0 million. The Company utilizes a variety of primarily external financing sources to fund portfolio growth, major capital improvement programs and balloon debt payments. The Company's bank lines of credit generally have been used to temporarily finance these expenditures, and subsequently this short-term bank debt has been replaced with longer term debt or equity. At June 30, 1998, the Company had cash and cash equivalents of $11.6 million and amounts available under its credit facilities aggregating $32.5 million. The following discussion explains the changes in net cash provided by operating activities, net cash used for investing activities and net cash provided by financing activities which are presented in the Company's Consolidated Statements of Cash Flows. Operating Activities For the six months ended June 30, 1998, the Company's cash flow from operating activities increased $16.5 million over the same period last year. This increase is primarily due to the increased operating income from the Company's acquired apartment communities, as well as increases in property operating income within the Company's mature apartment portfolio achieved through higher rental rates and decreased property operating expenses as discussed below and under "Results of Operations". Investing Activities During the six months ended June 30, 1998, net cash used for investing activities was $120.0 million compared to $190.7 million for the same period last year. Changes in the level of investing activities from period to period primarily reflect the changing levels of the Company's acquisition, capital expenditure, development and sales programs. Acquisitions The Company seeks to acquire apartment communities in individual or portfolio transactions that can provide returns on investment in the 10 1/2% range by the third year of ownership. These acquisitions typically have the prospect for future cash flow growth and appreciation. During the first six months of 1998, the Company acquired 17 apartment communities with 5,682 apartment homes (excluding ASR) at a total cost (including closing costs) of $239.6 million or $42,200 per home. The communities acquired by market were as follows: 12
Purchase Purchase No. Apt. Year Price Cost Location Date Name Homes Built (thousands) per Home - ------------------------------------------------------------------------------------------------------------------------------ San Antonio, Texas 04/16/98 Audubon 216 1984 $ 7,082 $32,787 04/16/98 Carmel 228 1984 8,084 35,456 04/16/98 Cimarron 140 1984 5,087 36,336 04/16/98 Grand Cypress 164 1995 9,975 60,823 04/16/98 Kenton Place 244 1982 11,883 48,701 04/16/98 Peppermill 232 1984 8,151 35,134 04/16/98 Villages of Thousand Oaks 466 1983 13,986 30,013 Memphis, Tennessee 01/09/98 The Trails at Kirby Parkway(a) 376 1987 16,757 44,566 01/09/98 Cinnamon Trails 208 1989 9,531 45,822 01/09/98 The Trails at Mount Moriah(a) 630 1990/91 28,026 44,486 02/06/98 Dogwood Creek 278 1997 18,446 66,353 Phoenix, Arizona 01/09/98 The Village at North Park 320 1983 15,056 47,050 05/28/98 Rancho Mirage 856 1984/85 38,538 45,021 06/09/98 Woodland Park 300 1980 9,723 32,410 Dallas, Texas 01/30/98 Summit Ridge 264 1983 8,034 30,430 04/16/98 The Crest 280 1983 7,026 25,093 Atlanta, Georgia 04/15/98 Waterford Place 180 1990 11,900 66,111 Nashville, Tennessee 05/20/98 Williamsburg Apartments 300 1986 12,307 41,023 ------------------------------------------------------------------------------------------------------- Total/Weighted Average 5,682 1986 $239,592 $42,167 (a) These two properties are operating as one apartment community named The Trails.
On July 2, 1998, the Company acquired a portfolio of four class A apartment communities in Ohio in a transaction valued at approximately $15.5 million. The acquisition includes 684 completed apartment homes and 452 homes which are currently in various stages of construction and lease-up and are scheduled for completion during 1998 and 1999. This portfolio acquisition allowed the Company to continue with its national strategy and enter into a Mid-western market the Company had targeted. Mergers On March 27, 1998, the Company completed the acquisition of ASR Investments Corporation in a statutory merger (the "Merger"). ASR was a publicly-traded multifamily REIT with apartment communities located in Arizona, Texas, New Mexico and the state of Washington. Each share of ASR's common stock was exchanged for 1.575 shares of the Company's common stock. The acquisition was structured as a tax-free merger and was treated as a purchase for accounting purposes. In connection with the acquisition, the Company acquired primarily real estate assets totaling $313.7 million. Consideration given by the Company included 7,742,839 shares of the Company's common stock valued at $14 per share for an aggregate equity value of $108.4 million plus the issuance of 1,529,990 Units in the ASR Operating Partnership valued at $21.4 million. In addition, the Company assumed, at fair value, mortgage debt totaling $179.4 million and other liabilities of $13.6 million. The Merger both strengthened the Company's position in several long-term growth markets in the Southwest and established an initial presence in the Northwest where the Company plans to make additional acquisitions in the future. These communities are projected to produce a first year return on investment in the 9% range. The 7,550 apartment homes had a weighted average year built of 1984 and are geographically distributed as follows: Number of Number of City/State Apartment Communities Apartment Homes - ------------------ --------------------- --------------- Houston, Texas 14 2,261 Dallas, Texas 8 1,889 Tucson, Arizona 8 1,112 Phoenix, Arizona 3 928 Albuquerque, New Mexico 3 548 Washington 3 812 --- ------ Total 39 7,550 === ===== 13 Real estate under development Consistent with the Company's acquisition strategy, development activity is focused primarily in sub-markets within its major markets. During the first six months of 1998, the Company invested approximately $30.1 million in development projects. At June 30, 1998, the Company had 1,587 apartment homes under development as outlined below (dollars in thousands, except cost per home):
Development Estimated Estimated Expected No. Apt. Completed Costs Development Cost Completion Property Location Homes Apt. Homes to Date Cost Per Home Date - --------------------------------------------------------------------------------------------------------------------- New Apartment Communities Dominion Franklin Nashville, TN 360 -- $16,324 $ 22,082 $ 61,300 1Q99 Ashlar I Fort Myers, FL 260 -- 3,710 18,566 71,400 2Q99 Sierra Foothills Phoenix, AZ 322 -- 2,844 21,062 65,400 4Q99 Stone Creek Houston, TX 216 -- 1,046 11,043 51,100 2Q99 Ashton at Waterford Lakes Orlando, FL 292 -- 3,078 18,643 63,850 3Q99 ----------------------------------------------------------- 1,450 -- 27,002 91,396 63,000 Additional Phases Mill Creek II Wilmington, NC 180 43 8,497 12,105 67,250 4Q98 ----------------------------------------------------------- Land Held for Development Indian Creek Dallas, TX -- -- 3,065 -- -- -- Ashlar II Fort Myers, FL -- -- 1,127 -- -- -- Wimbledon II Dallas, TX -- -- 647 -- -- -- Park 10 Houston, TX -- -- 2,005 -- -- -- Manor at England Run III Fredericksburg, VA -- -- 542 -- -- -- Other -- -- 926 -- -- -- ----------------------------------------------------------- -- -- 8,312 -- -- ----------------------------------------------------------- 1,630 43 $43,811 $103,501 $63,500 ===========================================================
The Company completed the following development project during 1998 (dollars in thousands, except cost per home):
Original Budgeted No. Apt. Development Development Cost Date of % Leased Property Location Homes Costs Cost Per Home Completion at 6/30/98 - ------------------------------------------------------------------------------------------------------------------------ Additional Phases Oak Forest II Dallas, TX 260 $11,858 $13,375 $51,400 1Q98 91% =====================================================
In July 1998 the Company acquired two communities which contain 452 apartment homes under various stages of development and lease-up in connection with a portfolio acquisition. Due to the fact that the acquisitions market has become very competitive, the Company has increased its commitment to development. During 1998, the Company expects to start another 1,700 apartment homes in five different markets, investing approximately $100 million on the development of new communities and additional phases to existing communities which are anticipated to provide stabilized returns on investment exceeding that of communities acquired. Capital Expenditures During the first half of 1998, the Company invested $33.9 million on capital improvements to its apartment portfolio. During this period, capitalized expenditures averaged $975 per home (on an annualized basis) for all apartment homes acquired prior to 1996. A significant portion of these expenditures are designed to increase revenues or reduce expenses. These improvements include the addition of intrusion alarms, sub-meters to pass the cost of water and sewer to residents, various interior upgrades and enhanced amenities such as business and fitness centers. These expenditures should allow the Company's communities to operate more effectively in competitive markets over the long-term. Capital expenditures for the full year 1998 are expected to be at or below 1997 levels. The Company has reduced its capital expenditures this year versus last year on its mature apartment homes, but will continue to add revenue-enhancing improvements as needed. 14 Disposition of investments In an effort to upgrade its apartment portfolio, the Company continually undertakes portfolio review analyses with the objective of identifying properties that no longer meet the Company's investment objectives due to size, location, age, quality and/or performance. These sales allow the Company to reduce the age of its existing portfolio, which should result in lower operating expense and capital expenditure growth associated with the older properties. The sales are initially dilutive to earnings as the initial returns on investment on higher quality apartments are lower than the returns on investment on the communities being sold. Management of the Company believes this is a good time to sell properties given the competitive nature of the acquisitions market, and as such, intends to sell approximately $120 million or more of real estate during the remainder of 1998. On January 20, 1998, the Company sold a portfolio of five apartment communities containing 2,406 apartment homes, which had a weighted average age of 21 years for an aggregate sales price of $65.6 million. The transaction was structured to qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code, so the related capital gain will be deferred for federal income tax purposes. These five communities, all located in Texas, were acquired on December 31, 1996 in connection with the South West Property Trust Inc. Merger ("South West Merger"), and accordingly, no significant gain or loss was recorded for financial reporting purposes. On April 24, 1998, the Company sold a portfolio of eleven Southeast apartment communities containing 2,303 homes, which had a weighted average age of 24 years for an aggregate sales price of $69.4 million. For income tax purposes, eight of the eleven communities sold were structured to qualify as a tax deferred exchange so that the related capital gains will be deferred. The Company realized a $21.2 million gain on the sale for financial reporting purposes in the second quarter of 1998. The Company has a portfolio of eight communities containing 1,870 apartment homes under contract for sale at June 30, 1998 for an aggregate sales price of $60.3 million, with closing anticipated in the fourth quarter of 1998. The Company anticipates realizing a $12.0 million gain on the sale for financial reporting purposes. There can be no assurances that this transaction will be consummated. Financing Activities Net cash provided by financing activities during the six months ended June 30, 1998 was $51.3 million compared to $122.2 million for the same period last year. Cash provided by financing activities During the first quarter of 1998, the Company entered into two separate transactions to sell its common stock to Unit Investment Trusts ("UIT"). In February 1998, the Company issued 1.7 million shares of its common stock at a gross sales price of $14.31 per share to a UIT. In March 1998, the Company issued 1.1 million shares of its common stock at a gross sales price of $14.19 to a second UIT. The net proceeds from the two UIT's aggregating $38.0 million were primarily used to curtail bank debt. The Company issued 2,157,436 shares of its common stock and received $29.0 million under its Dividend Reinvestment and Stock Purchase Plan (the "Plan") during the first half of 1998, which included $22.9 million in optional cash investments and $6.1 million of reinvested distributions. Depending upon the volume and timing of acquisition activity, the Company anticipates raising additional debt and equity capital during the next twelve months to finance capital requirements, while striving to minimize the overall cost of capital. Derivative Instruments The Company has, from time to time, used derivative instruments to synthetically alter on-balance sheet liabilities to hedge anticipated transactions. Derivative contracts did not have a material impact on the results of operations during the three and six months ended June 30, 1998 and 1997. 15 In order to reduce the interest rate risk associated with the anticipated issuance of unsecured notes during 1998, the Company entered into a $100 million (notional amount) fixed pay forward starting swap agreement with a major Wall Street investment banking firm in July 1997. The transaction allowed the Company to lock-in a ten year Treasury rate of 6.486% on or before September 9, 1998. This interest rate risk management agreement had an unfavorable position to the Company of $7.9 million at June 30, 1998. Funds from Operations Funds from operations ("FFO") is defined as income before gains (losses) on sales of investments, minority interest of unitholders in operating partnership and extraordinary items (computed in accordance with generally accepted accounting principles) plus real estate depreciation, less preferred dividends and after adjustment for significant non-recurring items, if any. The Company computes FFO in accordance with the recommendations set forth by the National Association of Real Estate Investment Trusts ("NAREIT"). The Company considers FFO in evaluating property acquisitions and its operating performance, and believes that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of the Company's operating performance and liquidity. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. For the three months ended June 30, 1998, FFO increased 22.7% to $35.3 million, compared with $28.7 million for the same period last year. For the six months ended June 30, 1998, FFO increased 18.1% to $67.6 million, compared with $57.2 million for the same period last year. The increase in FFO was principally due to the increased net rental income from the Company's non-mature apartment homes acquired and developed subsequent to January 1, 1997.
Three Months Ended Six Months Ended June 30, June 30, (in thousands) (in thousands) ----------------------------------- ------------------------------------- 1998 1997 % Change 1998 1997 % Change ----------------------------------- ------------------------------------- Calculation of funds from operations: Income before gains on sales of investments and minority interest of unitholders in operating partnership $ 15,387 $ 13,451 14.4% $ 32,966 $ 28,475 15.8% Adjustments: Real estate depreciation 25,548 19,127 33.6% 46,476 35,289 31.7% Dividends to preferred shareholders (5,653) (3,611) 56.5% (11,303) (6,039) 87.2% Changes in accounting for internal acquisition costs -- (220) -- (544) (479) 13.6% ----------------------------------- ------------------------------------- Funds from operations $ 35,282 $ 28,747 22.7% $ 67,595 57,246 18.1% =================================== =====================================
Results of Operations The Company's net income is primarily generated from the operations of its apartment communities. For purposes of evaluating the Company's comparative operating performance, the Company categorizes its apartment communities into two categories, mature and non-mature. For the 1998 versus 1997 comparison, these communities are as follows: (i) mature--those communities acquired, developed and stabilized prior to January 1, 1997 and held throughout the first six months of 1998 and 1997 and (ii) non-mature--those communities acquired, developed or sold subsequent January 1, 1997. For the first half of 1998, the Company's apartment operations were divided into four geographic regions, each of which constitutes a core operating unit. Based on the total number apartment homes, the Northern Region constitutes 27.6% of the Company's apartment portfolio and includes Delaware, Maryland, Virginia and northern North Carolina. The Southern Region constitutes 20.7% of the Company's portfolio and includes Charlotte, North Carolina, South Carolina, Georgia, Tennessee and Alabama. The Florida Region includes the entire state of Florida or 14.1% of the Company's apartment portfolio, while the Western Region constitutes 37.6% of the Company's apartment portfolio and includes Texas, Arkansas, Oklahoma, Nevada, New Mexico, Arizona and Washington. For the three and six months ended June 30, 1998, the Company reported increases over the same period last year in rental income, income before gains on sales of investments and minority interest of unitholders in operating partnership and net income. The non-mature apartment homes provided a substantial portion of the aggregate reported increases. Compared to the same period last year, net income available to common shareholders increased $18.3 and $15.1 million for the three and six months ended June 30, 1998. Net income available to common shareholders for the three and six months ended June 30, 1998 included aggregate gains of $20.7 ($.20 per share) million and $20.5 million ($.21 per share), respectively, on the sales of investments. The combination of initially lower returns on newer, higher quality replacement acquisitions together with the money market returns earned on escrowed funds required to complete 1031 exchanges had a cost of $.01 per share and $.02 per share for the three and six months ended June 30, 1998, respectively. 16 All Apartment Communities The operating performance of the Company's 264 apartment communities with 71,164 apartment homes for the three and six months ended June 30, 1998, and 218 apartment communities with 59,437 apartment homes for the three and six months ended June 30, 1997, respectively, is summarized in the chart below (dollars in thousands):
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1998 1997 % Change 1998 1997 % Change --------------------------------- --------------------------------- Property rental income $ 117,831 $ 94,591 24.6% $ 221,547 $ 183,813 20.5% Property operating expenses (excluding depreciation and amortization) (49,144) (40,699) 20.7% (90,026) (78,080) 15.3% --------------------------------- --------------------------------- Property operating income $ 68,687 $ 53,892 27.5% $ 131,521 $ 105,733 24.4% ================================= ================================= Weighted average number of apartment homes 70,726 58,678 20.5% 63,341 57,545 10.1% Physical occupancy 91.3% 92.4% (1.1%) 91.3% 91.9% (0.6%)
Due to the acquisition and development of 22,919 apartment homes since January 1, 1997, the weighted average number of apartment homes increased significantly during both periods presented, resulting in significant increases in property rental income and property operating expenses for the first half of 1998. Mature Apartment Communities The operating performance for the Company's 181 mature apartment communities with 48,245 apartment homes for the three and six months ended June 30, 1998 is summarized in total and by geographic region below (dollars in thousands): Total Mature Operating Performance
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- ------------------------------ 1998 1997 %Change 1998 1997 % Change -------------------------------- ------------------------------ Property rental income $ 81,874 $ 79,118 3.5% $ 162,819 $ 157,089 3.6% Property operating expenses (excluding depreciation and amortization) (33,224) (33,747) (1.5%) (64,547) (65,971) (2.2%) -------------------------------- ------------------------------ Property operating income $ 48,650 $ 45,371 7.2% $ 98,272 $ 91,118 7.9% ================================ ============================== Physical occupancy 92.6% 92.6% -- 92.5% 92.2% 0.3% Average monthly rents $ 599 $ 579 3.5% $ 597 $ 576 3.7%
Mature Operating Performance (By Geographic Region) Three Months Ended June 30,
North South Florida West Total -------------------- ------------------ ------------------- -------------------- -------------------- 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 -------------------- ------------------ ------------------- -------------------- -------------------- Property rental income $ 30,830 $ 29,602 $17,991 $ 17,480 $ 15,061 $ 14,416 $ 17,992 $17,620 $ 81,874 $ 79,118 Property operating expenses (excluding depreciation and amortization) (11,124) (11,542) (7,951) (8,020) (6,465) (6,651) (7,684) (7,534) (33,224) (33,747) --------------------- ------------------ ------------------- -------------------- -------------------- Property operating income $ 19,706 $ 18,060 $10,040 $ 9,460 $ 8,596 $ 7,765 $ 10,308 $10,086 $ 48,650 $ 45,371 ===================== ================== =================== ========================================== Physical occupancy 92.4% 92.3% 92.3% 91.6% 93.3% 93.9% 92.7% 93.0% 92.6% 92.6% Average monthly rents $ 615 $ 595 $ 559 $ 544 $ 627 $ 598 $ 592 $ 576 $ 599 $ 579
17 Six Months Ended June 30,
North South Florida West Total -------------------- ------------------ ------------------- -------------------- -------------------- 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 -------------------- ------------------ ------------------- -------------------- -------------------- Property rental income $ 60,870 $ 58,944 $ 35,892 $ 34,586 $ 30,094 $ 28,737 $35,963 $ 34,822 $ 162,819 $157,089 Property operating expenses (excluding depreciation and amortization) (21,635) (22,621) (15,389) (15,595) (12,611) (13,193) (14,912) (14,562) (64,547) (65,971) --------------------- ------------------ ------------------ -------------------- -------------------- Property operating income $ 39,235 $ 36,323 $ 20,503 $ 18,991 $ 17,483 $ 15,544 $21,051 $ 20,260 $ 98,272 $ 91,118 ===================== ================== ================== ==================== ==================== Physical occupancy 91.6% 92.2% 92.4% 90.5% 94.0% 93.8% 92.9% 92.9% 92.5% 92.2% Average monthly rents $ 614 $ 592 $ 558 $ 543 $ 623 $ 596 $590 $ 572 $ 597 $ 576
For the six months ended June 30,1998, the Company's mature communities provided approximately 73.5% of the Company's property rental income and 74.7% of its property operating income. During the first half 1998, the Company's mature communities continued to generate strong rent growth. Compared to the same period last year, total property rental income from these apartment homes grew 3.6%, or $5.7 million, reflecting an increase in average monthly rents of 3.7% to $597 per month. A portion of the rent growth reflected the impact of upgrades and revenue enhancing capital expenditures. For the quarter ended June 30, 1998 total property rental income grew 3.5% or $2.8 million, reflecting the 3.5% increase in average monthly rents to $599 as physical occupancy remained flat compared to the same period last year. The Company expects to maintain annualized rent growth in the 3 1/2% range and economic occupancy in the 91% to 93% range during the remainder of 1998. For the six months ended June 30, 1998, property operating expenses at these communities decreased 2.2%, or $1.4 million, resulting in a decrease in the operating expense ratio of 42.0% to 39.6%. This decline is primarily the result of two factors: (i) lower utility expenses directly attributable to the Company's water sub-metering initiative and (ii) overall decreases in repairs and maintenance and other operating expenses. The decreases in repairs and maintenance and other operating expenses occurred as the Company has begun to benefit from its upgrade program. In addition, the Company has taken advantage of economies of scale due to its increased size and centralized purchasing. For the quarter ended June 30, 1998, rental expenses decreased 1.5% or $0.5 million due to the same factors discussed above. The Company's objective is to maintain annualized rental expense growth in the 2% range during the remainder of 1998. Non-Mature Communities The operating performance for the three and six months ended June 30, 1998 for the Company's 83 non-mature communities with 22,919 homes is summarized in the chart below (dollars in thousands): Three Months Ended June 30:
Sales Development 1997 Acquisitions 1998 Acquisitions Properties Properties Total Non-Mature ----------------- ---------------------- ----------------- ---------------- -------------------- 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 ----------------- ---------------------- ----------------- ---------------- -------------------- Property rental income $ 14,237 $ 5,330 $ 18,589 $ -- $ 1,138 $ 9,618 $ 1,993 $ 525 $ 35,957 $ 15,473 Property operating expenses (excluding depreciation and amortization) (6,143) (1,869) (8,288) -- (714) (4,845) (775) (238) (15,920) (6,952) ------------------ ---------------------- ----------------- ---------------- --------------------- Property operating income $ 8,094 $ 3,461 $ 10,301 $ -- $ 424 $ 4,773 $ 1,218 $ 287 $ 20,037 $ 8,521 ================== ====================== ================= ================ =====================
18 Six Months Ended June 30:
Sales Development 1997 Acquisitions 1998 Acquisitions Properties Properties Total Non-Mature ----------------- ---------------------- ----------------- ---------------- -------------------- 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 ----------------- ---------------------- ----------------- ---------------- -------------------- Property rental income $ 28,177 $ 6,433 $ 21,377 $ -- $ 5,461 $ 19,432 $ 3,713 $ 859 $ 58,728 $26,724 Property operating expenses (excluding depreciation and amortization) (11,997) (2,186) (9,215) -- (2,759) (9,582) (1,508) (341) (25,479) (12,109) ------------------- --------------------- ------------------ ---------------- -------------------- Property operating income $ 16,180 $ 4,247 $ 12,162 $ -- $ 2,702 $ 9,850 $ 2,205 $ 518 $ 33,249 $14,615 ==================== ===================== ================== ================ =====================
For the six months ended June 30, 1998, the Company's non-mature communities provided approximately 26.5% of the Company's property rental income and 25.3% of its property operating income. For the quarter ended June 30, 1998, these communities had physical occupancy of 88.6% (including Development Properties undergoing lease-up) and an operating margin of 55.7%. For the six months ended June 30, 1998, these communities had physical occupancy of 88.2% (including Development Properties undergoing lease-up) and an operating margin of 56.6%. 1997 Acquisitions The 27 communities containing 8,524 apartment homes (net of one resold) included in this category had average monthly rental rates of $597, physical occupancy of 90.8% and an operating margin of 57.4% for the first half of 1998. For the second quarter of 1998, these communities had average monthly rental rates of $599, physical occupancy of 91.5% and an operating margin of 56.9%. The annualized return on investment for these communities for the six months ended June 30, 1998, on an average investment of approximately $357 million, was 9.3%. 1998 Acquisitions Included in this category are the following: (i) the 17 communities with 5,682 apartment homes acquired by the Company during the first six months of 1998 which are projected to have a first year return on investment in the 9% to 9 1/2% range and (ii) the 39 communities with 7,550 apartment homes included in the ASR portfolio acquired on March 27, 1998 which are projected to have a first year return on investment in the 9% range. On an average investment of $543.9 million, these communities provided a 9.0% return on investment for the three and six months ended June 30, 1998. Sales Included in this category are the 29 communities with 7,518 apartment homes sold as part of the Company's disposition program (see Disposition of investments under Liquidity and Capital Resources) since January 1, 1997 (17 communities with 4,948 apartment homes were sold during the first half of 1998). Development This represents the 1,158 homes developed at various times since January 1, 1997 which includes one new apartment community and seven additional phases to existing communities. These communities did not have a material impact on the results of operations for the three and six months ended June 30,1998. Real Estate Depreciation Real estate depreciation increased $6.4 million or 33.6% and $11.2 million or 31.7% for the three and six months ended June 30, 1998, respectively over the same periods last year. These increases are directly attributable to the addition of depreciable real estate assets as a result of the Company's acquisition, development and capital expenditure programs. Interest Expense Interest expense increased $6.0 million and $9.6 million for the three and six months ended June 30, 1998, respectively over the same periods last year. The weighted average amount of debt employed during the first six months of 1998 was higher than it was for the same period during 1997 ($1.4 billion in 1998 versus $1.1 billion in 1997). For both the three and six months ended June 30, 1998, the weighted average interest rate on this debt was slightly lower than it was during the same periods last year, decreasing from 7.5% in 1997 to 7.4% in 1998. For the quarter ended June 30, 1998, the weighted average amount of debt outstanding was higher than the same period last year ($1.5 billion in 1998 versus $1.1 billion in 1997). For the three and six months ended June 30, 1998, total interest capitalized was $777,000 and $1.3 million, respectively. 19 General and Administrative During the three and six months ended June 30, 1998, general and administrative expenses increased by $719,000 and $965,000 over the same periods last year due to the increased size of the Company. In 1998, the Company incurred increases in most of its general and administrative expense categories, as it invested heavily in its personnel and technological infrastructure as part of a strategic plan to position the Company for future growth. Despite the significant improvement of its infrastructure, the Company has been able to keep general and administrative expenses remained relatively flat year over year as a percentage of rental income. Inflation The Company believes that the direct effects of inflation on the Company's operations have been inconsequential. 20 PART II Item 1. LEGAL PROCEEDINGS Neither the Company nor any of its apartment communities is presently subject to any material litigation nor, to the Company's knowledge, is any litigation threatened against the Company or any of the communities, other than routine actions arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the business or financial condition or results of operations of the Company. Item 2. CHANGES IN SECURITIES None Item 3. DEFAULT UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits listed on the accompanying index to exhibits are filed as part of this quarterly report. (b) A Form 8-K dated March 27, 1998 was filed with the Securities and Exchange Commission on April 13, 1998. The filing reported the merger of ASR Investments Corporation into a wholly-owned subsidiary of the Company on March 27, 1998. The Form 8-K was subsequently amended by Form 8-K/A No. 1 which was filed with the Securities and Exchange Commission on June 12, 1998. This Form 8-K/A contained the audited financial statements of ASR Investment Corporation for the year ended December 31, 1997. A Form 8-K dated June 9, 1998 was filed with the Securities and Exchange Commission on June 24, 1998. The filing reported the acquisition by the Company of properties which were in the aggregate "significant". 21 EXHIBIT INDEX Item 6 (a) The exhibits listed below are filed as part of this quarterly report. References under the caption ALocation@ to exhibits, forms, or other filings indicate that the form or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference.
Exhibit Description Location - ------- ----------- -------------------------------------- 2 Agreement and Plan of Merger dated Exhibit 2(a) to the Company's Form S-4 Registration as of December 19, 1997, between Statement (Registration No. 333-45305) filed with the Company, ASR Investment the Commission on January 30, 1998. Corporation and ASR Acquisition Sub, Inc. 3(a) Restated Articles of Incorporation Exhibit 4(b) to the Company's Form S-3 Registration Statement (Registration No. 333-44463) filed with the Commission on January 16, 1998. 3(a)(i) Amendment of Articles of Exhibit 3 to the Company's Form 8-A Incorporation Registration Statement dated February 4, 1998. 3(b) Restated By-Laws Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. 4(i)(a) Specimen Common Stock Exhibit 4(i) to the Company's Annual Report Certificate on Form 10-K for the year ended December 31, 1993. 4(i)(b) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A of 9 1/4% Series A Cumulative Registration Statement dated April 24, 1995. Redeemable Preferred Stock 4(i)(c) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A of 8.60% Series B Cumulative Registration Statement dated June 11, 1997. Redeemable Preferred Stock 4(i)(d) Rights Agreement dated as of Exhibit 1 to the Company's Form 8-A January 27, 1998, between the Company Registration Statement dated February 4, 1998. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. 4(i)(e) Form of Rights Certificate Exhibit 4(e) to the Company's Form 8-A Registration Statement dated February 4, 1998. 4(ii)(a) Loan Agreement dated as of Exhibit 6(c)(i) to the Company's Form 8-A November 7, 1991, between the Registration Statement dated April 19, 1990. Company and Aid Association for Lutherans 4(ii)(e) Note Purchase Agreement dated Exhibit 6(c)(5) to the Company's Form 8-A as of February 15, 1993, between Registration Statement dated April 19, 1990. the Company and CIGNA Property and Casualty Insurance Company, Connecticut General Life Insurance Company, Connecticut General Life Insurance Company, on behalf of one or more separate accounts, Insurance Company of North America, Principal Mutual Life Insurance Company and Aid Association for Lutherans 10(i) Employment Agreement between Exhibit 10(v)(i) to the Company's Annual Report the Company and John P. McCann on Form 10-K for the year ended December 31, 1982. dated October 29, 1982. 10(ii) Employment Agreement between Exhibit 10(v)(ii) to the Company's Annual Report the Company and James Dolphin on Form 10-K for the year ended December 31, 1982. dated October 29, 1982. 10(iii) Employment Agreement between Exhibit 10(iv) to the Company's Annual the Company and John S. Schneider Report on Form 10-K for the year ended dated December 14, 1996. December 31, 1996. 10(iv) 1985 Stock Option Plan, Filed herewith. as amended. 10(v) 1991 Stock Purchase and Loan Exhibit 10(viii) to the Company's Quarterly Report Plan. on Form 10-Q for the quarter ended March 31, 1997. 10(vi) Second Amended and Restated Exhibit 10(ix) to the Company's Quarterly Report on Agreement of Limited Partnership of Form 10-Q for the quarter ended September 30,1997. United Dominion Realty, L.P. Dated as of August 30, 1997. 10(vi)(a) Subordination Agreement dated Exhibit 10(vi)(a) to the Company's Form 10-Q for April 16, 1998, between the the quarter ended March 31, 1998. Company and United Dominion Realty, L.P. 12 Computation of Ratio of Earnings Filed herewith. to Fixed Charges. 27 Financial Data Schedule Filed herewith.
23 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. United Dominion Realty Trust, Inc. (registrant) Date: August 14, 1998 /s/ James Dolphin - ------------------------------------ ----------------- James Dolphin Executive Vice President, Chief Financial Officer and Chief Accounting Officer 24 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. United Dominion Realty Trust, Inc. (registrant) Date: August 14, 1998 - ---------------------------------- ------------------------------- James Dolphin Executive Vice President, Chief Financial Officer and Chief Accounting Officer UNITED DOMINION REALITY TRUST, INC. 1985 STOCK OPTION PLAN ARTICLE I DEFINITIONS 1.01 Affiliate means any "subsidiary" or "parent" corporation (within the meaning of Section 422A of the Code) of the Company. 1.02 Agreement means a written agreement (including any amendment or supplement thereto) between the Company and a Participant specifying the terms and conditions of an Option granted to such Participant. 1.03 Board means the Board of Directors of the Company. 1.04 Code means the Internal Revenue Code of 1954, as amended, and the Internal Revenue Code of 1986, as amended. 1.05 Committee means the Compensation Committee of the Board. 1.06 Common Stock means the Common Stock of the Company. 1.07 Company means United Dominion Realty Trust, Inc. 1.08 Director means a member of the Board who is not employed by the Company or an Affiliate. 1.09 Director Option means an Option granted to a Director. 1.10 ERISA means the Employee Retirement Income Security Act of 1974, as amended. 1.11 Fair Market Value means, on any given date, the closing sale price of the Common Stock on the NYSE on such date, or, if the NYSE shall be closed on such date, or if the Common Stock is not traded on the NYSE on such date, the next preceding date on which the NYSE shall have been open and the Common Stock traded thereon. 1.12 NYSE means the New York Stock Exchange. 1.13 Option means a stock option that entitles the holder to purchase from the Company a stated number of shares of Common Stock, at the price set forth in an Agreement. 1.14 Participant means an employee of the Company or an Affiliate, including such an employee who is also a member of the Board, who satisfies requirements of Article IV and is selected by the Committee to receive an Option. 1.15 Plan means the United Dominion Realty Trust, Inc. 1985 Stock Option Plan. 1.16 Stated Termination Date means the date specified in or determined pursuant to an Agreement on which the Option which is the subject of such Agreement terminates. 1.17 Ten Percent Shareholder means any individual owning more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of an Affiliate. An individual shall be considered to own any voting stock owned (directly or indirectly) by or for brothers, sisters, spouse, ancestors or lineal descendants and shall be considered to own proportionately any voting stock owned (directly or indirectly) by or for a corporation, partnership, estate or trust of which such individual is a shareholder, partner or beneficiary. ARTICLE II PURPOSES The Plan is intended to assist the Company in recruiting and retaining Directors and key employees with ability and initiative by enabling Directors and employees who contribute significantly to the Company or an Affiliate to participate in its future success and to associate their interests with those of the Company. It is further intended that Options granted under the Plan shall constitute "incentive stock options" within the meaning of Section 422A of the Code, but no Option shall be invalid for failure to qualify as an incentive stock option. The proceeds received by the Company from the sale of Common Stock pursuant to the Plan shall be used for general corporate purposes. ARTICLE III ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall have authority to grant Options upon such terms (not inconsistent with the provisions of the Plan) as it may consider appropriate. Such terms may include conditions (in addition to those contained in the Plan) upon the exercisability of all or any part of an Option. Notwithstanding any such conditions, the Committee, in its discretion, may accelerate the time at which any Option, other than a Director Option, may be exercised; provided, however, that no acceleration shall affect the applicability of Section 7.04 (relating to the order in which incentive stock options may be exercised) or Section 4.02 (relating to the maximum number of shares for which an incentive stock option may be exercisable in any calendar year). In addition, the Committee shall have complete authority to interpret all provisions of the Plan; to prescribe the form of Agreements; to adopt, amend, and rescind rules and regulations pertaining to the administration of the Plan; and to make all other determinations necessary or advisable for the administration of the Plan. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting the power or authority of the Committee. Any decision made, or action taken, by the Committee in connection with the administration of the Plan shall be final and conclusive. No member of the Committee shall be liable for any act done in good faith with respect to the Plan or any Agreement or Option. All expenses of administering the Plan shall be borne by the Company. ARTICLE IV ELIGIBILITY 4.01 General. Any employee (including an employee who is a member of the Board)of the Company or of any Affiliate (including any corporation that becomes an Affiliate after the adoption of the Plan) who, in the judgment of the Committee, has contributed or can be expected to contribute to the profits or growth of the Company or such Affiliate may, and each Director will, be granted one or more Options. All Options granted under the Plan shall be evidenced by Agreements that shall be subject to applicable provisions of the Plan and to such other provisions consistent with the Plan as the Committee may adopt. No Participant may be granted incentive stock options (under all incentive stock option plans of the Company and Affiliates) which are first exercisable in any calendar year for stock having an aggregate fair market value (determined as of the date an option is granted) exceeding $100,000. 4.02 Grants to Employees. The Committee will designate employees to whom Options are to be granted and will specify the number of shares of Common Stock subject to each grant. 4.03 Director Options. Each Director will be granted Options to purchase 2,000 shares of Common Stock on each date each director is elected or re-elected to the Board. The option price of such Director Options will in each case be the Fair Market Value on the date of grant and will be payable only in cash. Such Director Options will be exercisable for a period of ten (10) years from the date of grant (subject to earlier termination as described below) and will be immediately exercisable in whole or from time to time in part. In addition, on the date of his or her first being elected to the Board, a Director will be granted options to purchase 5,000 shares of Common Stock at the Fair Market Value on the date of grant. The option price of such Director Options will be payable only in cash; such Director Options will be exercisable for a period of five (5) years from the date of grant (subject to earlier termination as described below) and will be immediately exercisable in whole or from time to time in part. Notwithstanding anything to the contrary in this Section 4.03, a Director first elected to the Board pursuant to any agreement relating to the acquisition, by merger or otherwise, of assets by the Company or any Affiliate or to the sale by the Company of its securities will not be granted Options upon being first elected, but such Director will be granted Options to purchase 2,000 shares of Common Stock as provided herein upon being re-elected to the Board. Options granted to a Director will terminate 30 days after the Director resigns or is removed from the Board, or 30 days after the annual meeting of shareholders at which the Director's term expires, if the Director does not stand or is not nominated for re-election or retires at that meeting. Notwithstanding the foregoing, if, at the date of such resignation or removal or at the date of such annual meeting of shareholders, as the case may be, such Director has completed at least ten (10) years of service on the Board (including, as such service, service as a director of a corporation whose assets are acquired by the Company, by merger or otherwise), Options held by such Director on such date will terminate upon the earlier of (i) the second anniversary of such date or (ii) the Termination Date of such Options. The provisions of this Section 4.03 will control in the event of any inconsistency with other provisions of the Plan and may not be varied by the Committee in any Agreement. ARTICLE V STOCK SUBJECT TO OPTIONS The maximum number of shares of Common Stock that may be issued pursuant to Options granted under the Plan at any time is (i) 8% of the number of shares of Common Stock issued and outstanding at that time, less (ii) the number of shares subject to outstanding Options at that time, provided that the maximum aggregate number of shares of Common Stock that may be issued pursuant to Options granted under the Plan is 12,000,000 (subject to adjustment as provided in Article IX). If an Option is terminated, in whole or in part, for any reason other than its exercise, the number of shares of Common Stock allocated to the Option or portion thereof may be reallocated to other Options to be granted under the Plan. ARTICLE VI OPTION PRICE The price per share for Common Stock purchased by the exercise of any Option granted under the Plan shall be determined by the Committee on the date the Option is granted; provided, however, that the price per share shall not be less than the Fair Market Value on the date of grant in the case of Option that is an incentive stock option, and that in the case of a Director Option the price per share shall be the Fair Market Value. In addition, the price per share shall not be less than 110% of such Fair Market Value in the case of an Option that is an incentive stock granted to a Participant who is a Ten Percent Shareholder on the date the Option is granted. ARTICLE VII EXERCISE OF OPTIONS 7.01 Maximum Option Period. No Option shall be exercisable after the expiration of ten years from the date the Option was granted. The terms of any Option not prescribed by the Plan may provide that it is exercisable for a period less than such maximum period. 7.02 Nontransferability. Any Option granted under the Plan shall be nontransferable except by will or by the laws of descent and distribution and, during the lifetime of the Participant to whom the Option is granted, may be exercised only by the Participant. No right or interest of a Participant in any Option shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 7.03 Employee Status. For purposes of determining the applicability of Section 422A of the Code and Section 7.01, the Board may decide in each case to what extent leaves of absence for governmental or military service, illness, temporary disability, or other reasons shall not be deemed interruptions of continuous employment. 7.04 Nonexercisability. While Previously Granted Option Outstanding. No Option which is an incentive stock option and which was granted before January 1, 1987 shall be exercisable by a Participant while that Participant has outstanding (within the meaning of Subsection 422A(c)(7) of the Code) any option which was granted before the Option was granted and which is an incentive stock option to purchase stock in the Company, in a corporation that (at the time the Option was granted) was an Affiliate, or in a predecessor of any of such corporations. ARTICLE VIII METHOD OF EXERCISE 8.01 Exercise. Subject to the provisions of Articles VII and X, an Option other than a Director Option may be exercised in whole at any time or in part from time to time at such times and in compliance with such requirements as the Committee shall determine. An Option granted under the Plan may be exercised with respect to any number of whole shares less than the full number for which the Option could be exercised. Such partial exercise of an Option shall not affect the right to exercise the Option from time to time in accordance with the Plan with respect to remaining shares subject to the Option. 8.02 Payment. Payment of the Option price shall be made in cash or, in the case of Options other than Director Options, a cash equivalent acceptable to the Committee. If the Agreement provides, payment of all or a part of the Option price may be made by surrendering shares of Common Stock to the Company. If Common Stock is used to pay all or part of the Option price, the shares surrendered must have a Fair Market Value (determined as of the day preceding the date of exercise) that is not less than such price or part thereof. 8.03 Installment Payment. If the Agreement provides, and if the Participant is employed by the Company on the date the Option is exercised, payment of all or part of the Option price may be made in installments. In that event, the Company shall lend the Participant an amount equal to not more than ninety percent (90%) of the Option price of the shares acquired by the exercise of the Option. This amount shall be evidenced by the Participant's promissory note and shall be payable in not more than five equal annual installments, unless the amount of the loan exceeds the maximum loan value for the shares purchased, which value shall be established from time to time by regulations of the Board of Governors of the Federal Reserve System (the "Fed"). In that event, the note shall be payable in equal quarterly installments over a period of time not to exceed five years. The Committee, however, may vary such terms and make such other provisions concerning the unpaid balance of such purchase price in the case of hardship, subsequent termination of employment, absence on military or government service, or subsequent death of the Participant as in its discretion are necessary or advisable in order to protect the Company, promote the purposes of the Plan and comply with regulations of the Fed relating to securities credit transactions. The Participant shall pay interest on the unpaid balance at the minimum rate necessary to avoid imputed interest or original issue discount under the Code. All shares acquired with cash borrowed from the Company shall be pledged to the Company as security for the repayment thereof. In the discretion of the Committee, shares may be released from such pledge proportionately as payments on the note (together with interest) are made, provided the release of such shares complies with the regulations of the Fed relating to securities credit transactions then applicable. While shares are so pledged, and so long as there has been no default in the installment payments, such shares shall remain registered in the name of the Participant, and he shall have the right to vote such shares and to receive all dividends thereon. 8.04 Shareholders' Rights. No Participant shall, as a result of receiving any Option, have any rights as a shareholder until the date he exercises such Option. ARTICLE IX ADJUSTMENT UPON CHANGE IN COMMON STOCK Should the Company effect one or more stock dividends, stock split-ups, subdivisions or consolidations of shares, or other similar changes in capitalization, the maximum number of shares as to which Options may be granted under the Plan shall be proportionately adjusted and the terms of options shall be adjusted as the Board shall determine to be equitably required. Any determination made under this Article IX by the Board shall be final and conclusive. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, Options. ARTICLE X COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES No Option shall be exercisable, no Common Stock shall be issued, no certificates for shares of Common Stock shall be delivered, and no payment shall be made under the Plan except in compliance with all applicable federal and state laws and regulations and rules of all domestic stock exchanges on which the Common Stock may be listed. The Company shall have the right to rely on the opinion of its counsel as to such compliance. Any share certificate issued to evidence Common Stock for which an Option is exercised may bear such legends and statements as the Board may deem advisable to assure compliance with federal and state laws and regulations. No Option shall be exercised, no Common Stock shall be issued, no certificate for shares shall be delivered, and no payment shall be made under the Plan until the Company has obtained such consent or approval as the Board may deem advisable from regulatory bodies having jurisdiction over such matters. ARTICLE XI GENERAL PROVISIONS 11.01 Effect on Employment. Neither the adoption of the Plan, its operation, nor any documents describing or referring to the Plan (or any part thereof) shall confer upon any Board member any right to continue on the Board or to confer upon any employee any right to continue in the employ of the Company or an Affiliate or in any way affect any right and power of the Company or an Affiliate to remove any Board member or terminate the employment of any employee at any time with or without assigning a reason thereof. 11.02 Unfunded Plan. The Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under the Plan. Any liability of the Company to any person with respect to any grant under the Plan shall be based solely upon any contractual obligations that may be created pursuant to the Plan. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 11.03 Rules of Construction. Headings are given to the articles and sections of the Plan solely as a convenience to facilitate reference. The reference to any statute, regulation or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. ARTICLE XII AMENDMENT The Board may amend or terminate the Plan from time to time; provided, however, that no amendment may become effective until shareholder approval is obtained if the amendment (i) increases the aggregate number of shares that may be issued under Options or (ii) changes the class of persons eligible to become Participants or (iii) otherwise materially increase the benefits accruing to Participants. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any Option outstanding at the time such amendment is made. ARTICLE XIII DURATION OF PLAN No Option may be granted under the Plan after December 31, 2002. Options granted before such date shall remain valid in accordance with their terms. ARTICLE XIV EFFECTIVE DATE OF PLAN Options may be granted under the Plan upon its adoption by the Board, provided that no Option will be effective unless the Plan is approved (at a duly held shareholders' meeting within twelve months of such adoption) by shareholders holding a majority of the Company's outstanding voting stock. EX-12 2 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Dollars in thousands)
Three Months ended June 30, Six Months ended June 30, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------- -------------- -------------- -------------- Net income $35,005 $14,677 $52,189 $31,790 Add: Portion of rents representative of the interest factor 133 105 246 194 Interest on indebtedness 25,736 19,769 48,561 38,919 ------------- -------------- -------------- -------------- Earnings $60,874 $34,551 $100,996 $70,903 ============= ============== ============== ============== Fixed charges and preferred stock dividend: Interest on indebtedness $25,736 $19,769 $48,561 $38,919 Capitalized interest 777 721 1,312 1,230 Portion of rents representative of the interest factor 133 105 246 194 ------------- -------------- -------------- -------------- Fixed charges 26,646 20,595 50,119 40,343 ------------- -------------- -------------- -------------- Add: Preferred stock dividend 5,653 3,611 11,303 6,039 ------------- -------------- -------------- -------------- Combined fixed charges and preferred stock dividend $32,299 $24,206 $61,422 $46,382 ============= ============== ============== ============== Ratio of earnings to fixed charges 22.8x 1.68x 2.02x 1.76x Ratio of earnings to combined fixed charges and preferred stock dividend 1.88 1.43 1.64 1.53
EX-27 3 FINANCIAL DATA SCHEDULE
5 6-MOS JUN-30-1998 JUN-30-1998 11,575 0 0 0 0 97,796 2,962,632 242,803 2,829,200 102,952 1,451,129 0 255,000 101,988 866,456 2,829,200 222,275 224,434 0 90,272 52,635 0 48,561 52,189 0 52,189 0 0 0 52,189 .42 .42
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