-----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, IjS8BJROBUkP4V/1M2u//wbJqhylhUi4viCOgq6SBgJSBurGUvp5cFiC1ls9aPR+ 7svbsoQ3q+Eu+N7U7rWwcw== 0001029869-97-001151.txt : 19971006 0001029869-97-001151.hdr.sgml : 19971006 ACCESSION NUMBER: 0001029869-97-001151 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19971003 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERKSHIRE REALTY CO INC /DE CENTRAL INDEX KEY: 0000869446 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043086485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-10660 FILM NUMBER: 97690741 BUSINESS ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6174232233 MAIL ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 10-Q/A 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ -------------------------- Commission file number 1-10660 ------------------------------------------------ Berkshire Realty Company, Inc. - -------------------------------------------------------------------------------- Delaware 04-3086485 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 470 Atlantic Avenue, Boston, Massachusetts 02210 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (617) 423-2233 - -------------------------------------------------------------------------------- (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 (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 --- --- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS - ------ BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ----------- ASSETS
March 31, December 31, 1997 1996 ------------ ------------ (Unaudited) Real estate assets: (Note 3) Multifamily apartment complexes, net of accumulated depreciation $437,820,961 $430,936,889 Retail centers, net of accumulated depreciation 11,064,630 11,064,630 Investments in unconsolidated joint ventures (Note 4) 37,136,167 36,036,723 Mortgage loans and other loans receivable, net of purchase discounts (Note 5) 3,852,005 4,094,241 Land and construction-in-progress 2,977,806 4,035,820 Land held for future development 5,682,472 2,331,988 Property held for sale, net of valuation reserve (Note 3) 16,761,936 30,556,482 ------------ ------------ Total real estate assets 515,295,977 519,056,773 Cash and cash equivalents 5,625,006 7,015,953 Mortgage-backed securities, net ("MBS") (Note 6) 8,814,494 9,232,956 Escrows 9,849,489 11,096,213 Deferred charges and other assets 11,671,749 10,940,879 Acquisition of workforce and intangible assets, net of amortization (Note 2) 31,057,341 12,327,039 ------------ ------------ Total assets $582,314,056 $569,669,813 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Credit agreements (Note 7) $120,310,000 $136,060,000 Mortgage notes payable (Note 3) 160,652,123 149,805,607 Repurchase agreements (Note 7) 8,800,000 9,300,000 Tenant security deposits and prepaid rents 3,169,905 2,443,716 Accrued real estate taxes, other liabilities and accounts payable 8,187,162 11,797,967 ------------ ------------ Total liabilities 301,119,190 309,407,290 ------------ ------------ Minority interest in operating partnership (Note 8) 59,338,860 36,608,607 Commitments and Contingencies (Note 8) Shareholders' equity: Preferred stock, $0.01 par value; 60,000,000 shares authorized, none issued - - Common stock ("Shares"), $0.01 par value; 140,000,000 Shares authorized and 25,986,966 and 25,899,866 Shares issued, respectively 259,869 258,998 Additional paid-in capital 234,739,218 239,446,270 Retained deficit (10,404,173) (14,308,277) Loan receivable - officer (Note 10) (995,833) - Less common stock in treasury at cost (506,497 Shares) (1,743,075) (1,743,075) ------------ ------------ Total shareholders' equity 221,856,006 223,653,916 ------------ ------------ Total liabilities and shareholders' equity $582,314,056 $569,669,813 ============ ============
The accompanying notes are an integral part of the financial statements. -2- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS -----------
For the Three Months Ended March 31, --------------------------------- 1997 1996 ----------- ----------- (Unaudited) (Unaudited) Revenue: Rental $24,555,019 $19,365,109 Interest from mortgage loans (Note 5) 41,153 584,797 Interest income from MBS 207,138 261,536 Management fees and reimbursements 333,466 - Other interest income 265,792 217,759 ----------- ----------- Total revenue 25,402,568 20,429,201 ----------- ----------- Expenses: Property operating 6,026,513 4,368,024 Repairs and maintenance 1,644,522 1,339,042 Real estate taxes 2,345,772 2,233,186 Property management fees to an affiliate (Note 9) 768,860 890,354 Property management operations (Note 2) 663,837 326,053 General and administrative (Note 9) 1,072,402 527,903 State and corporate franchise taxes 84,501 81,000 Professional fees 46,400 44,442 Interest (Note 7) 5,834,396 4,194,846 Costs associated with advisor transaction (Note 8) 1,200,000 - Amortization of acquired workforce and intangible assets (Note 2) 548,162 111,290 Depreciation and amortization 7,668,931 6,146,019 Asset management fees to an affiliate (Note 2) - 392,636 ----------- ----------- Total expenses 27,904,296 20,654,795 ----------- ----------- Loss from operations (2,501,728) (225,594) Minority interest 282,832 8,458 Joint venture net income (loss), net of minority interest (294,783) 410,921 ----------- ----------- Income (loss) before gains on sales (2,513,679) 193,785 Gains on sales of properties, net of minority interest 5,408,702 - ----------- ----------- Net income $ 2,895,023 $ 193,785 =========== =========== Per share: Net income $ .11 $ .01 =========== =========== Weighted average Shares 25,420,444 25,392,952 =========== ===========
The accompanying notes are an integral part of the financial statements. -3- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Months Ended March 31, 1997 -----------
Additional Loan Treasury Paid-in Retained Receivable- Stock Common Stock at Par Capital Deficit Stockholder at Cost Total ------------------------- ------------ ------------- ----------- ------------ ------------- No. of Shares Amount ------------ -------- Balance, December 31, 1996 25,393,369 $258,998 $239,446,270 $(14,308,277) - $(1,743,075) $223,653,916 Net income 3,904,104 - 3,904,104 Stock option grants (Note 10) - 5,646 - - - 5,646 Issuance of stock (Note 10) 86,956 870 999,130 - - - 1,000,000 Stock purchase loan-net (Note 10) - - - (995,833) - (995,833) Proceeds from the exercise of stock warrants 144 1 1,697 - - - 1,698 Dividends - (5,713,525) - - - (5,713,525) ---------- ------- ------------ ------------ --------- ----------- ------------ Balance, March 31, 1997 25,480,469 $259,869 $234,739,218 $(10,404,173) $(995,833) $(1,743,075) $221,856,006 ========== ======== ============ ============ ========= =========== ============
The accompanying notes are an integral part of the financial statements. -4- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -----------
For the Three Months Ended March 31, --------------------------------- 1997 1996 ----------- ----------- (Unaudited) (Unaudited) Operating activities: Net income $ 2,895,023 $ 193,785 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,668,931 6,146,019 Amortization of intangible assets and costs related to workforce acquired 1,748,162 111,290 Joint venture net income (loss) 294,783 (410,921) Distributions received from joint ventures - 390,440 Gains on sales of properties (5,408,702) - Non-employee stock option plan 5,646 - Stock purchase loan forgiveness 4,167 - Discount amortization (37,512) (191,143) Minority interest in operating partnership (282,832) (8,458) Amortization of deferred financing costs 336,366 176,728 Decrease (increase) in operating escrows and other assets 328,490 (351,643) Decrease in accrued real estate taxes, insurance and other liabilities (3,610,805) (144,133) Increase in tenant security deposits, prepaid rents and escrows held 726,189 11,226 ----------- ----------- Net cash provided by operating activities 4,667,906 5,923,190 ----------- ----------- Investing activities: Cost to acquire properties (1,092,704) - Proceeds from sale of properties 26,644,405 - Recurring capital expenditures (886,948) (645,186) Rehabilitation and non-recurring capital expenditures (1,821,668) (1,760,533) Land acquisition and construction in progress (4,254,775) (1,624,019) Distributions received from joint ventures in excess of earnings 700,000 - Contributions to joint venture (2,150,000) - Principal collections on MBS 422,932 634,007 Principal collections on mortgage loans 275,278 65,471 Cost to acquire workforce and other intangible assets (440,964) (354,847) ----------- ----------- Net cash (used for) provided by investing activities 17,395,556 (3,685,107) ----------- ----------- Financing activities: Repayment on credit agreements (15,750,000) - Payment on repurchase agreement (500,000) - Payment of financing costs (153,726) (207,156) Principal payments on mortgage notes payable (513,911) (253,686) Proceeds from the exercise of stock warrants 1,698 968 Dividends (5,713,525) (5,713,431) Distributions to minority interest (824,945) (120,370) ----------- ----------- Net cash used for financing activities (23,454,409) (6,293,675) ----------- ----------- Net decrease in cash and cash equivalents (1,390,947) (4,055,592) Cash and cash equivalents, beginning of period 7,015,953 11,142,710 ----------- ----------- Cash and cash equivalents, end of period $ 5,625,006 $ 7,087,118 =========== ===========
Continued -5- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) -----------
For the Three Months Ended March 31, --------------------------------- 1997 1996 ----------- ----------- Supplemental cash flow disclosure: Cash paid for interest during period $ 6,367,925 $ 3,909,886 =========== =========== Interest capitalized during period $ 145,406 $ 56,694 =========== =========== Supplemental disclosure of non-cash financing and investing activities: Property contributed by minority interest $16,058,716 $ - Cash to minority contributor (856,243) - Debt assumed from minority contributor (11,360,427) - ----------- ----------- Increase in minority interest $ 3,842,046 $ - =========== =========== Units issued related to workforce and other intangible assets Note 2) $18,837,500 $13,000,000 =========== =========== Reclassification of construction in progress to multifamily apartment complexes $ 1,962,305 $ - =========== ===========
The accompanying notes are an integral part of the financial statements. -6- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ----------- 1. Significant Accounting Policies ------------------------------- These financial statements reflect the consolidated financial position, results of operations, changes in shareholders' equity and cash flows of the Company, its subsidiaries and the Operating Partnership (collectively the "Company") using historical cost of assets, liabilities and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. In the opinion of management, the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 for additional information relevant to significant accounting policies followed by the Company. In the opinion of the management, the accompanying unaudited financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company's financial position as of March 31, 1997 and the results of its operations for the three months ended March 31, 1997 and 1996 and cash flows for the three months ended March 31, 1997 and 1996. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. 2. Property Manager Transaction ---------------------------- On February 26, 1997, the Board of Directors, acting on the recommendation of a special committee comprised solely of outside directors, approved the acquisition of the workforce and other assets of the affiliate which provides multifamily property management services to the Company ("Property Manager"). The Property Manager was contributed on February 28, 1997 in exchange for 1.7 million units of the Operating Partnership ("Units"). The Property Manager manages 57 apartment communities, including the Company's 35 assets, and employs approximately 85 professionals, excluding site employees. As a result of this transaction, the Company will no longer pay management fees and reimbursements for the management operations of its multifamily portfolio. In addition, the Company will receive management fees and reimbursements of certain expenses associated with 22 third-party management contracts primarily with partnerships affiliated with certain directors and officers of the Company. The Company will continue to engage an affiliated company to manage its retail assets. The Board's actions were initiated to maximize shareholder value and to align the organization of the Company to be consistent with the structure preferred by institutional investors, rating agencies and market analysts. The Special Committee retained the services of an investment banking firm and an independent law firm to identify and evaluate the options available to the Company to achieve its goal of being self-managed. The process included, among other things, a review of the existing contractual arrangements with BCLP, identification of the employees, office space, computer systems and software, policies and procedures and other business documentation required. Continued -7- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) ----------- 2. Property Manager Transaction - Continued ---------------------------- The Board concluded that the most beneficial method of achieving the strategic objective was to seek the acquisition of BCLP's significant third-party management contracts, workforce and related assets. The decision was predicated on the determination that the acquisition (rather than the assembling of a similar workforce and organization) would provide the best results to the Company in terms of immediate efficiency of operations and improved cash flows. In establishing the consideration to be paid, the Board reviewed comparable transactions and, after deliberation, the Board approved the acquisition of the assets of the Property Manager in exchange for 1.7 million Units or a value of $17.6 million. The value of the assets acquired was determined by evaluating the future cash flows attributable to the third-party management contracts as well as the immediate operating efficiencies obtained through the acquisition of a cohesive assembled workforce. Accordingly, the value of the transaction was allocated to intangible assets associated with third-party management contracts and the workforce acquired. The Company recorded intangible assets of $4.4 million based on discounted cash flows from third-party property management contracts which is being amortized on a straight-line method over four years. The value of intangible assets associated with the workforce acquired, $13.2 million, is being amortized on a straight-line method over a 10-year period. 3. Multifamily and Retail Property ------------------------------- As of March 31, 1997, the Company had investments in 40 properties in 9 states consisting of 35 apartment communities having 12,528 units and 5 retail centers with a total of 928,034 square feet of leasable space. Two retail centers (397,705 square feet) are owned through joint venture investments. The following summarizes the carrying value of the Company's multifamily apartment complexes and retail centers, (in thousands):
March 31, December 31, 1997 1996 -------- ------------ Land $ 76,523 $ 76,525 Buildings and improvements 408,969 419,932 Appliances, carpeting and equipment 84,682 82,971 -------- -------- Total multifamily and retail property 570,174 579,428 Accumulated depreciation (104,527) (106,870) -------- -------- $465,647 $472,558 ======== ========
Acquisitions ------------ On January 1, 1997, the Operating Partnership acquired Westchester Apartments, a 345-unit apartment community located in Silver Spring, Maryland, for $16.1 million. The Operating Partnership paid cash of $856,243, assumed debt of $11.4 million and issued 388,333 Operating Partnership Units, 50,000 of which will be issued January 1998. The debt agreement requires monthly principal and interest payments based on an interest rate of 8.25% along with monthly funding of real estate tax escrows. Continued -8- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) ----------- 3. Multifamily and Retail Property - Continued ------------------------------- Development ----------- In the first quarter of 1997, the Company completed the construction of 96-units as an additional phase to Brookfield Trace, an existing community in Mauldin (Greenville), South Carolina. The phase cost approximately $6.7 million. In 1996, $4.7 million or 72 apartment units was transferred to multifamily assets on the Consolidated Balance Sheets. In the fourth quarter of 1996, the Company began construction of Crooked Creek Apartments, a 296-unit apartment community in Durham, North Carolina. The project is currently estimated to cost approximately $20.2 million. As of March 31, 1997, the project has incurred $3 million of construction costs. In the first quarter of 1997, the Company purchased a parcel of land in Greenville, South Carolina for $3,030,000. Development plans are currently under consideration for this site. The Company also owns two other parcels of land, one of which is located in Dallas, Texas and the other is located in Greenville, South Carolina. Development plans are under consideration for these two sites. Dispositions ------------ On January 15, 1997, the Company sold Howell Commons Apartments, a 348- unit apartment community located in Greenville, South Carolina for $13,000,000. The property had a depreciated cost basis of $6,408,033 and resulted in a gain on sale of $6,432,040. The net proceeds, after the repayment of indebtedness, was used to paydown short term borrowings and will ultimately be used for the development of Crooked Creek. On March 25, 1997, the Company sold Banks Crossing, a 243,660 square feet retail center in Fayetteville, Georgia for $13,825,000 which was its carrying value. Proceeds from this sale will be used for the development of Crooked Creek. The sale of Banks Crossing is consistent with the Company's plan to sell its retail properties and focus on multifamily properties. Continued -9- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) ----------- 4. Investments in Unconsolidated Joint Ventures -------------------------------------------- The Company holds a 50% interest in the Brookwood Village Joint Venture and a 50.1% interest in Spring Valley Partnership. Condensed financial statements for the Brookwood Village Joint Venture are as follows: BROOKWOOD VILLAGE JOINT VENTURE CONDENSED BALANCE SHEET -----------------------
Assets March 31, December 31, 1997 1996 ------------ ------------- Property at cost $ 60,534,867 $ 60,530,293 Less accumulated depreciation (28,162,866) (26,190,273) ------------ ------------ 32,372,001 34,340,020 Other assets 1,172,839 590,927 ------------ ------------ Total assets $ 33,544,840 $ 34,930,947 ============ ============ Liabilities and Partners' Equity Liabilities $ 493,110 $ 4,705,144 ------------ ------------ Partners' equity: The Company 16,525,869 15,112,903 Joint venture partner 16,525,861 15,112,900 ------------ ------------ Total partners' equity 33,051,730 30,225,803 ------------ ------------ Total liabilities and partners' equity $ 33,544,840 $ 34,930,947 ============ ============
BROOKWOOD VILLAGE JOINT VENTURE CONDENSED STATEMENT OF OPERATIONS ---------------------------------
For the Three Months Ended March 31, ----------------------------- 1997 1996 ----------- ------------- Revenues $ 1,583,382 $ 1,566,287 Property operating expenses (686,859) (652,606) Depreciation (492,136) (492,868) Provision for loss (1,480,456) - ----------- ------------- Net income $(1,076,069) $ 420,813 =========== ============= Allocation of net income: The Company $ (538,034) $ 210,406 Joint venture partner (538,035) 210,407 ----------- ------------- $(1,076,069) $ 420,813 =========== =============
In May 1997, the Company and its joint venture partner exchanged Brookwood Village for cash and two multifamily apartment complexes totaling $32,372,220. Each Joint Venture Partner will receive 50% of the fair value of the assets acquired, with the Company receiving the two multifamily properties and cash of approximately $8 million. In the first quarter of 1997, Brookwood Village recorded a $1.5 million provision for loss to adjust for the exchange price. Continued -10- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) ----------- 5. Mortgage Loans and Other Loans Receivable ----------------------------------------- As of March 31, 1997, the Company held one mortgage loan with an aggregate principal balance of approximately $2,998,000 and a promissory note with a principal balance of approximately $1,569,000. The mortgage loan is collateralized by a 120-unit apartment complex in Palm Bay, Florida. 6. MBS --- At March 31, 1997, the Company's MBS portfolio had an approximate market value of $9,330,000 and gross unrealized gains of $516,000 with maturity dates ranging from 2008 to 2021. Weighted average yield on the portfolio is 9.1%. The Company does not expect to realize these gains as it has the intention and ability to hold the MBS until maturity. At December 31, 1996, the Company's MBS portfolio had an approximate market value of $9,849,000 against a carrying value of $9,233,000 and gross unrealized gains of $616,000. 7. Debt Agreements --------------- At March 31, 1997, the Company had two lines of credit to provide for future acquisitions, development and general business obligations. The Company also had in effect a Repurchase Agreement to provide for short-term borrowings. The following summarizes the Company's borrowings on the Master Credit Facility with the Federal National Mortgage Association as of March 31, 1997:
Contract Contract Start End Interest Borrowings Date Date(a) Rate Amount ---------- -------- -------- -------- ----------- Revolver 3/03/97 6/02/97 6.037% $28,965,000 Fixed 11/22/95 9/20/03 6.997% 50,000,000 Fixed 9/20/96 11/20/05 7.540% 13,345,000 ----------- $92,310,000 ===========
The following summarizes the Company's borrowings on the Credit Agreement with the Bank of Boston and Mellon Bank as of March 31, 1997:
Contract Contract Start End Interest Borrowings Date Date(a) Rate Amount ---------- -------- -------- -------- ----------- LIBOR contract 3/03/97 4/02/97 (1) 7.1875% $ 3,000,000 LIBOR contract 1/28/97 4/28/97 (2) 7.3125% 10,000,000 LIBOR contract 3/26/97 6/24/97 7.4883% 6,000,000 LIBOR contract 3/31/97 7/29/97 7.500% 9,000,000 ----------- $28,000,000 ===========
(1) On April 2, 1997, the Company repriced the LIBOR contract to a new maturity of July 1, 1997 at a rate of 7.5625% per annum. (2) On April 28, 1997, the Company paid down $3,000,000 of the outstanding LIBOR contract and repriced the remaining principal to a maturity of May 28, 1997 at a rate of 7.4375% per annum. Continued -11- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) ----------- 7. Debt Agreements - Continued --------------- The following summarizes the Company's borrowings on the Repurchase Agreement with CS First Boston as of March 31, 1997:
Contract Contract Start End Interest Date Date(a) Rate Amount -------- -------- -------- ---------- Repurchase Agreement 1/17/97 5/19/97 5.60% $8,800,000
(a) On the Contract End Date, borrowings outstanding are repriced at the then current interest rates. The Credit Agreement and the Master Credit Facility require the Company to maintain certain debt service coverage ratios, liquidity and collateral coverages as further defined in the loan documents, all of which were met on March 31, 1997. In 1995 the Company entered into a five-year interest rate swap contract with a bank as counterparty. Under the swap arrangement, the Company will pay 6.06% on a $40 million notional amount and will receive LIBOR (based on 90 day contracts). The swap arrangement is intended to protect the Company from significant interest rate exposure on its anticipated revolving facilities. The current swap amount will cover floating rate debt under revolvers in the near term. The Company will continually reassess its rate exposure relative to debt levels and will execute additional interest rate protection as circumstances dictate. 8. Minority Interest ----------------- Minority interest in the Operating Partnership consists of the following at March 31, 1997 (in thousands): Balance, beginning of year $36,609 Value of Units issued to Minority Unitholders: Affiliated parties 18,837 Unrelated parties 3,842 Distribution to Unitholders (825) Minority income (loss allocation) 876 -------- Balance at March 31, 1997 $59,339 ======= On January 1, 1997, 338,333 Operating Partnership Units were issued to an unrelated party in exchange for Westchester Apartments (See Note 3). On January 2, 1997, 443,500 Operating Partnership Units were issued to an affiliated party in conjunction with the acquisition of the Berkshire Towers (formerly The Point Apartments) on May 14, 1996. These Units were recorded on the Consolidated Balance Sheet in 1996 by calculating the present value of the deferred Units. On March 19, 1997, 109,091 additional Operating Partnership Units were issued in conjunction with the March 1, 1996 acquisition of the workforce and other assets of the Company's Advisor ("Advisor Transaction"). The total value of the additional Units, $1.2 million, has been expensed as a cost associated with the Advisor Transaction. Continued -12- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) ----------- 8. Minority Interest - Continued ----------------- The Units were issued since the share price ("Share") benchmark of $11.00 was achieved. The benchmarks are achieved if the share price is equal to or greater than the benchmarks for any fifteen days during any twenty consecutive trading days. There are six Share price benchmarks beginning at $11.00 and increasing in increments of $1.00 up to a maximum of $16.00. Upon satisfaction of each benchmark, the contributor will receive Units equal to $1.2 million based on the benchmark price and will be expensed as a cost associated with the Advisor Transaction. 9. Related Party Transactions -------------------------- The following is a summary of fees and reimbursements to an affiliate for the three months ended March 31:
1997 1996 ---- ---- Costs reimbursements related to the operation of the Company's properties $164,308 $402,535 Fees and reimbursements for administrative services-net $296,191 $ 64,776
As a result of the Property Manager transaction as described in Note 2, the Company will no longer reimburse an affiliate for services related to multifamily property operations. 10. Stock Plans ----------- Stock Options ------------- On May 2, 1996, the shareholders approved the 1996 Stock Option Plan which provides for grants to non-employee directors and discretionary awards of stock options to key employees of the Company. Awards will be administered by the Compensation Committee which is comprised of two independent directors appointed by the Board of Directors. The purpose of the plan is to stimulate efforts of key employees on behalf of the Company and to attract and retain the best available personnel for service as directors. There are 1,500,000 Shares of common stock authorized for non-qualified and incentive stock option grants under the 1996 Plan. The plan will continue in effect until all Shares of stock subject to options have been acquired or until May 1, 2001, whichever is earlier. However, unexercised options will continue in affect after the termination of the plan. The Company has adopted Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation". The Company will measure the compensation cost of the plan by using the intrinsic value based method prescribed by APB Opinion No. 25 and will make pro forma disclosures regarding the fair value based method of accounting. Information regarding the Company's Stock Option Plan for 1996 and 1997 is summarized below:
Exercise Price -------------- Options granted, 1996 624,000 $9.75 - $10.25 Options granted, 1997 355,000 $11.00 ------- Balance March 31, 1997 979,000 ======= Options exercised - ======= Options available for grant at March 31, 1997 521,000 =======
-13- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) ----------- 10. Stock Plans - Continued ----------- Stock Purchase Loan ------------------- On February 28, 1997, the Board of Directors approved a $1 million Stock Purchase Loan for David Marshall, President and Chief Executive Officer of the Company. Loan proceeds are to be used to purchase Shares of the Company's stock. On March 4, 1997, Mr. Marshall purchased 86,956 Shares of common stock at $11.50 per Share using such proceeds. The terms of the loan provide for, among other things, an interest rate of 7.8% per year payable quarterly and an annual forgiveness feature of 5% of the original principal so long as Mr. Marshall is employed. Additional annual forgiveness of up to another 5% could be forgiven if certain Company performance measures are met. The maximum forgiveness in any one year is 10%. If Mr. Marshall terminates his employment, the loan is due and payable six months from the date of termination. However, in the event of change of control of the Company, any then outstanding principal and interest due shall be forgiven. -14- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES ----------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A. Overview: --------- The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein. On February 26, 1997, the Board of Directors, acting on the recommendation of a special committee comprised solely of outside directors, approved the acquisition of the third-party management contracts, workforce and other assets of an affiliate which provides multifamily property management services to the Company ("Property Manager"). The Property Manager was contributed on February 28, 1997 in exchange for 1.7 million Operating Partnership Units. The Property Manager manages 57 apartment communities, including the Company's 35 assets, and employs approximately 85 professionals, excluding site employees. As a result of this transaction, the Company will no longer pay management fees and reimbursements for the management operations of its multifamily portfolio. In addition, the Company will receive management fees and reimbursements of certain expenses associated with 22 third-party management contracts primarily with partnerships affiliated with certain directors and officers of the Company. The Company will continue to engage an affiliated company to manage its retail assets. The acquisition is recorded on the Consolidated Balance Sheet as intangible assets related to the third-party contracts of $4.4 million and intangible assets associated with the workforce acquired of $13.2 million. These recorded amounts will be amortized over the expected periods to be benefitted (See Note 2 to the Consolidated Financial Statements for details). As reported in the Company's Annual Report on Form 10-K as of December 31, 1996, the Company acquired the workforce and other assets of the Advisor on March 1, 1996 in exchange for 1.3 million Units in the Operating Partnership. Additional Units, in $1.2 million increments and up to a total of $7.2 million in value, may be issued during a six-year period if certain Share price benchmarks are achieved. On March 19, 1997, the first Share price benchmark was achieved and the Operating Partnership issued 109,091 Units representing $1.2 million in value to BCLP which has been expensed as a cost associated with the Advisor Transaction. B. Results of Operations: ---------------------- The results of operations from period to period are impacted by acquisition and disposition activity within the portfolio. Comparisons will be made with respect to the overall portfolio and constant properties. The following analysis compares the results of operations for the three months ended March 31, 1997 and 1996. Net income for the period ending March 31, 1997 increased by $6 million when compared to the same period in 1996 primarily as a result of a gain on the sale of Howell Commons Apartments in 1997. Income and Expenses: -------------------- Rental income and property operating expenses, including repairs and maintenance and real estate taxes increased primarily due to increased weighted average apartment units. Rental revenues for the quarter ended March 31, 1997 increased $5.1 million or 27% over the prior year and property operating expenses increased $2.1 million or 26% for the same periods. Average apartment units increased 33% between 1996 and 1997. -15- B. Results of Operations:- Continued ---------------------- Detail of the Company's apartment unit growth as of March 31 is set forth below:
1997 1996 ---- ---- Apartment Units: Beginning of period 12,435 9,433 Acquired 345 - Sold (348) - Completed developments 96 - ------ ----- End of period 12,528 9,433 ====== ===== Weighted Average Units 12,549 9,433 ====== ===== Percent increase 33% 2%
Property management operations began in 1997 in conjunction with the Property Manager transaction (see Note 2 to the Consolidated Financial Statements for details). General and administrative expenses increased in 1997 compared to 1996 as a result of becoming self-administered on March 1, 1996. These costs include employee salaries and benefits, administrative and office related expenses. Interest Expense - ---------------- Interest expense has increased because the Company has largely employed debt capital for acquisitions and development activities. The following is an analysis of weighted average debt outstanding and interest rates for the three months ended March 31 (Dollars in thousands).
1997 1996 ---- ---- Weighted Average Debt Outstanding Fixed Rate $218,049 $155,113 Variable Rate 81,628 56,090 -------- -------- Total $299,677 $211,203 ======== ======== Weighted Average Interest Rates Fixed Rate 7.71% 7.63% Variable Rate 6.62% 6.87%
Since the first quarter of 1996, fixed rate debt increased primarily due to debt of $52 million which was assumed with the acquisitions of three properties and the conversion of $13.3 million from variable to fixed rate debt. Depreciation and amortization increased $1.5 million from 1996 to 1997 due to an increased property asset base. Gains on sales of properties of $6.4 million was recorded in 1997 due to the sale of Howell Commons Apartments in the first quarter of 1997. -16- C. Funds from Operations (FFO)(fully adjusted for operating partnership units): ---------------------------------------------------------------------------- Industry analysts generally consider Funds from Operations, FFO, to be an appropriate measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities; it provides investors with an understanding of the ability of the Company to incur and service debt and make capital expenditures. However, FFO should not be considered by the reader as a substitute to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. The Company believes that in order to facilitate a clear understanding of the operating results of the Company, FFO should be analyzed in conjunction with net income as presented in the Consolidated Financial Statements and information presented elsewhere. FFO is determined in accordance with a resolution adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, and is defined as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. The methodology used by the Company when calculating FFO may differ from that of the other equity REIT's and, therefore, may not be comparable to such other REIT's. In addition, FFO does not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments. FFO is calculated for the periods presented as follows (dollars in thousands):
Three Months ended March 31, ------------------------------- 1997 1996 ----------- ---------- Net income $ 2,895 $ 194 Depreciation (including depreciation related to joint ventures) 8,836 6,637 Amortization of intangibles and costs associated with workforce acquired 1,748 111 Minority interest (283) (8) Gains on sales of properties (5,409) - ----------- ---------- Funds from operations $ 7,787 $ 6,934 =========== ========== Funds from operations per share $ .26 $ .26 =========== ========== Cash flows provided by (used for): Operating activities 4,668 5,923 Investing activities 17,396 (3,685) Financing activities (23,454) (6,294) Weighted Average: Shares 25,420,444 25,392,952 Units 4,810,885 977,832 ----------- ---------- 30,231,329 26,370,784 =========== ==========
Same-store Multifamily Communities - ---------------------------------- The Company defines same-store apartment communities as those that are fully stabilized for the two most recent years. The operating performance of the 25 communities aggregating 8,467 units which are considered same-store is summarized below (dollars in thousands).
Three Months Ended March 31, ------------------------------------- 1997 1996 %Change ------- ------- ------- Revenues $16,025 $15,724 1.91% Expenses 6,528 6,718 (2.82%) ------- ------- Net operating income $ 9,497 $ 9,006 5.44% ======= ======= Average monthly rent per unit $680 $657 Average occupancy 92.5% 93.8% Total capital expenditures(1) $577 $581
(1) Represents capital expenditures of a recurring nature which are appropriately capitalized. -17- C. Funds from Operations:- Continued --------------------- Same-store Multifamily Communities - ---------------------------------- FFO for the same-store communities increased 5.4% in the first quarter of 1997 compared to 1996. Growth in same-store multifamily revenues was almost 2% when compared to the prior year period. Rent growth accounted for most of the increase but lower occupancies reduced this increase. Occupancy at March 31, 1997 was 94.8%. Same-store Retail Properties - ---------------------------- The following summarizes the five retail centers:
Three Months Ended March 31, ------------------------------------- 1997 1996 %Change ------- ------- ------- Revenues $ 2,622 $ 2,758 (4.93%) Expenses 1,041 1,038 .31% ------- ------- Net operating income $ 1,581 $ 1,720 (8.10%) ======= ======= Occupancy 90.6% 94.1%
As previously reported, the Company continues its efforts to divest itself of the retail portfolio and reinvest the proceeds in multifamily communities. The Company has sold two wholly-owned retail centers, Banks Crossing and Greentree Plaza, and divested of its investment in the Brookwood Village Mall Joint Venture (See Notes to Consolidated Financial Statements). Proceeds from these sales are earmarked for acquisitions or development of multifamily assets which, over time, management believes will generate higher FFO growth. D. Liquidity and Capital Resources: -------------------------------- The Company's net cash with respect to investing activities increased approximately $21 million in 1997 compared to 1996 principally due to net proceeds of $26.6 million from the sale of real estate assets. The Company's net cash used in financing activities increased approximately $17.2 million in 1997 compared to 1996 due to the repayment of approximately $15.7 million in borrowings on the credit agreement with BankBoston and Mellon Bank in the first quarter of 1997. Historically, operations, debt financing and sales of assets have been the sources of capital employed by the Company. Operating cash flows are earmarked for the payment of dividends as well as capital expenditures of a recurring nature. Debt financing and proceeds from asset sales have been used to finance acquisitions, development, and rehabilitation of apartment communities. The Company's policy is to pay dividends to investors as a percentage of Funds from Operations ("FFO"). For the past three years, the Company has paid between 85% and 88% of FFO in dividends, retaining the rest for recurring capital expenditures and working capital. The Company expects to increase both FFO and dividends in the future but will strive to gradually reduce the payout ratio so as to utilize some internally generated funds for growth. On May 13, 1997 the Board approved a dividend increase from $.225 per share to $.2325 per share payable on August 15, 1997 to the shareholders of record on August 1, 1997. Dividends paid were $.225 in the first quarters of 1997 and 1996. The Company has a policy to maintain leverage at or below 50% of reasonably estimated fair value of assets. By employing moderate leverage ratios, the Company can continue to generate sufficient cash flows to operate its business as well as sustain dividends to shareholders. Debt as a percentage of fair value of real estate assets as estimated by management was approximately 43% at March 31, 1997. Additionally, the Company's debt service coverage is 2.4 to 1. -18- D. Liquidity and Capital Resources:- Continued -------------------------------- The Company conservatively manages both interest rate risk and maturity risk. With regard to the interest rate risk, the Company entered into a five year fixed interest rate swap agreement in 1995 with a bank for a $40 million notional contract, thereby fixing variable rate exposure on that amount at 6.06%. The Company will continually reassess its rate exposure relative to debt levels and will execute additional interest rate protection as circumstances dictate. Through the use of the swap, the Company has hedged interest rate risk on approximately 56% of its variable rate debt as of March 31, 1997 and has 11% of total indebtedness as unhedged variable rate debt. As to maturity risk, the Company's debt has weighted average maturities of 11 years. The Company has adequate sources of liquidity to meet its current cash flow requirements including dividends, capital improvements as well as planned acquisitions. E. Business Conditions/Risks: -------------------------- The Company believes that favorable economic conditions exist in substantially all of its real estate markets. For the Company's stabilized apartment communities, physical occupancy was 94.8% as of March 31, 1997 which is similar to current market occupancies. The Company continues to maintain competitive rental rates by providing superior services combined with well-maintained assets which sets the Company apart from its competition. Through intense asset management efforts, the Company expects to realize solid performances from the real estate assets, however, no assurances can be made in this regard. The Company's real estate investments are subject to some seasonal fluctuations resulting from changes in utility consumption and seasonal maintenance expenditures. Future performance of the Company may be impacted by unpredictable factors which include general and local economic and real estate market conditions, variable interest rates, environmental concerns, energy costs, government regulations and federal and state income tax laws. The requirements for compliance with federal, state and local regulations to date have not had an adverse effect on the Company's operations, and no adverse effects are anticipated in the future. The Company is also involved in certain legal actions and claims in the ordinary course of its business. It is the opinion of management and its legal counsel, that such litigation and claims should be resolved without material effect on the Company's financial position or results of operations. -19- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ----------- Item 1. Legal Proceedings Response: None Item 2. Change in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other Information Response: None Item 6. Exhibits and Reports on Form 8-K Response: None -20- SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Berkshire Realty Company, Inc. ------------------------------ (Registrant) BY: /s/ Marianne Pritchard --------------------------------------------- Marianne Pritchard, Senior Vice President and Chief Financial Officer of Berkshire Realty Company, Inc. DATE: -21- -----END PRIVACY-ENHANCED MESSAGE-----