-----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, RcB8uxkPvrJfJh4MH3fa1+r9w1FP6V5emHiWw7dfqsWeGwq0tbp6qjAPymI7tlVA AfMIQpcuc9mccP1pJ/VJ3g== 0001029869-97-001325.txt : 19971117 0001029869-97-001325.hdr.sgml : 19971117 ACCESSION NUMBER: 0001029869-97-001325 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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 SEC ACT: SEC FILE NUMBER: 001-10660 FILM NUMBER: 97722086 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 1 BERKSHIRE REALTY COMPANY, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 ----------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------ to ------------ 1-10660 Commission file number --------------------------------------------- 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 September 30, December 31, 1997 1996 ------------ ----------- (Unaudited) Real estate assets: (Note 3) Multifamily apartment complexes, net of accumulated depreciation $538,936,747 $430,936,889 Retail center, net of accumulated depreciation - 11,064,630 Investments in unconsolidated joint ventures (Note 4) 20,512,712 36,036,723 Mortgage loans and other loans receivable, net of purchase discounts (Note 5) 2,309,683 4,094,241 Land and construction-in-progress 5,732,119 4,035,820 Land held for future development 6,154,965 2,331,988 Property held for sale, net of valuation reserve (Note 3) 16,027,837 30,556,482 ------------ ------------ Total real estate assets 589,674,063 519,056,773 Cash and cash equivalents 9,059,234 7,015,953 Mortgage-backed securities, net ("MBS") (Note 6) 7,995,983 9,232,956 Escrows 11,910,915 11,096,213 Deferred charges and other assets 11,596,264 10,940,879 Intangible assets, net of amortization (Note 2) 25,739,272 12,327,039 ------------ ------------ Total assets $655,975,731 $569,669,813 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Credit agreements (Note 7) $118,410,000 $136,060,000 Mortgage notes payable (Notes 3 and 7) 179,627,929 149,805,607 Repurchase agreement (Note 7) 8,000,000 9,300,000 Tenant security deposits and prepaid rents 3,577,189 2,443,716 Accrued real estate taxes, other liabilities and accounts payable 14,081,953 11,797,967 ------------ ------------ Total liabilities 323,697,071 309,407,290 ------------ ------------ Minority interest in operating partnership (Note 8) 57,898,385 36,608,607 Commitments and Contingencies (Note 8) Shareholders' equity: Series 1997-A Convertible Preferred stock, ("Preferred Shares") $0.01 par value; 60,000,000 shares authorized, 2,737,000 issued (Note 9) 27,370 - Common stock ("Shares"), $0.01 par value; 140,000,000 Shares authorized and 26,320,336 and 25,899,866 Shares issued, respectively 263,203 258,998 Additional paid-in capital 292,977,204 239,446,270 Accumulated deficit (16,179,428) (14,308,277) Loan receivable - officer (Note 11) (964,999) - Less common stock in treasury at cost (506,497 Shares) (1,743,075) (1,743,075) ------------ ------------ Total shareholders' equity 274,380,275 223,653,916 ------------ ------------ Total liabilities and shareholders' equity $655,975,731 $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 (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------------- ------------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Revenue: Rental $26,785,357 $24,511,073 $76,493,968 $65,106,795 Management fees and reimbursements (Note 2) 940,321 - 2,208,725 - Other interest income 418,575 276,112 955,918 722,215 Interest income from MBS 187,879 225,722 592,910 728,979 Interest from mortgage loans (Note 5) 84,076 320,756 252,579 1,365,527 ----------- ----------- ----------- ----------- Total revenue 28,416,208 25,333,663 80,504,100 67,923,516 ----------- ----------- ----------- ----------- Expenses: Property operating 6,616,841 6,511,091 18,545,668 15,495,294 Repairs and maintenance 2,034,623 1,834,648 5,531,085 4,799,347 Real estate taxes 2,445,342 2,120,795 7,163,713 6,436,509 Property management fees to an affiliate (Notes 2 and 10) 47,466 1,190,521 866,771 3,142,998 Property management operations 1,463,113 319,958 3,618,844 976,764 General and administrative (Note 2) 1,170,175 946,238 3,321,934 2,581,552 Corporate taxes 80,137 89,648 249,139 263,429 Professional fees 51,712 34,195 156,710 150,787 Interest (Note 7) 5,975,959 5,796,867 17,461,212 14,714,314 Costs associated with the Advisor Transaction (Note 2) - - 1,200,000 - Amortization of intangible assets (Note 2) 3,258,049 336,192 4,784,506 784,448 Depreciation and amortization 8,500,562 7,964,529 24,079,513 20,950,314 Provision for losses on real estate investments (Note 3) 1,850,000 7,500,000 1,850,000 7,500,000 Non-recurring charges - 287,059 - 287,059 Asset management fees to an affiliate (Note 10) - - - 392,636 ----------- ----------- ----------- ----------- Total expenses 33,493,979 34,931,741 88,829,095 78,475,451 ----------- ----------- ----------- ----------- Loss from operations (5,077,771) (9,598,078) (8,324,995) (10,551,935) Minority interest in operating partnership 917,013 795,967 1,488,214 857,541 Joint venture net income (loss), net of minority interest (Note 4) 110,058 434,503 (308,886) 1,050,508 ----------- ----------- ----------- ----------- Loss before gains on sales and extraordinary item (4,050,700) (8,367,608) (7,145,667) (8,643,886) Gains on sales of properties, net of minority interest (Note 3) - 996,322 5,364,707 996,322 ----------- ----------- ----------- -----------
(Continued) -3- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------------------- ------------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Loss before extraordinary item (4,050,700) (7,371,286) (1,780,960) (7,647,564) Extraordinary item, net of minority interest (Note 7) (90,191) (150,781) (90,191) (150,781) ------------ ------------ ------------ ----------- Net loss (4,140,891) (7,522,067) (1,871,151) (7,798,345) Income allocated to preferred shareholders (85,531) - (85,531) - ----------- ----------- ----------- ----------- Net loss allocated to common shareholders (4,226,422) (7,522,067) (1,956,682) (7,798,345) =========== =========== =========== =========== Per share: Loss before extraordinary item $ (.16) $ (.29) $ (.07) $ (.30) =========== =========== =========== =========== Net loss $ (.16) $ (.30) $ (.07) $ (.31) =========== =========== =========== =========== Weighted average Shares 25,738,248 25,393,299 25,547,631 25,393,072 =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements. -4- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 1997 (Unaudited)
Additional Series 1997-A Convertible Paid-in Preferred Stock at par Common Stock at par Capital ---------------------- ------------------------ ---------- No.of Shares Amount No.of Shares Amount ------------ ------ ------------ ------ Balance, December 31, 1996 - $ - 25,393,369 $258,998 $239,446,270 Net loss - - - - - Issuance of Preferred shares 2,737,000 27,370 - - 65,825,630 Stock option grants (Note 10) - - - - 16,938 Issuance of common stock (Note 10) - - 86,956 870 999,130 Conversion of Units to common shares - - 332,796 3,328 4,125,505 Stock purchase loan-net (Note 10) - - - - - Proceeds from the exercise of stock warrants - - 718 7 8,459 Dividends (17,444,728) --------- ------- ---------- -------- ------------ Balance, September 30, 1997 2,737,000 $27,370 25,813,839 $263,203 $292,977,204 ========= ======= ========== ======== ============ Loan Treasury Accumulated Receivable- Stock Deficit Officer at cost Total ----------- ---------- ----------- ------------- Balance, December 31, 1996 $(14,308,277) $ - $(1,743,075) $223,653,916 Net loss (1,871,151) - - (1,871,151) Issuance of Preferred shares - - - 65,853,000 Stock option grants (Note 10) - - - 16,938 Issuance of common stock (Note 10) - - - 1,000,000 Conversion of Units to common shares - - - 4,128,833 Stock purchase loan-net (Note 10) - (964,999) - (964,999) Proceeds from the exercise of stock warrants - - - 8,466 Dividends - - - (17,444,728) ------------ --------- ----------- ------------ Balance, September 30, 1997 $(16,179,428) $(964,999) $(1,743,075) $274,380,275 ============ ========= =========== ============
The accompanying notes are an integral part of the financial statements. -5- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, ---------------------------------- 1997 1996 ----------- ----------- Operating activities: Net loss $(1,871,151) $(7,798,345) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,079,513 20,950,314 Amortization of intangible assets and costs related to workforce acquired 5,984,506 784,448 Provision for losses on real estate investments 1,850,000 7,500,000 Joint venture net (income) loss 308,886 (1,050,509) Distributions received from joint ventures - 1,050,509 Gains on sales of properties (5,364,707) (996,322) Non-employee stock option plan 16,938 - Stock purchase loan forgiveness 35,001 - Discount amortization (111,764) (398,226) Minority interest in operating partnership (1,488,214) (857,541) Write-off of deferred financing costs 36,512 150,781 Amortization of deferred financing costs 1,114,021 679,691 Increase in escrows and other assets (1,918,207) (5,266,280) Increase in accrued real estate taxes, other liabilities and accounts payable 2,283,986 3,529,465 Increase in tenant security deposits and prepaid rents 1,133,473 490,667 ----------- ----------- Net cash provided by operating activities 26,088,793 18,768,652 ----------- ----------- Investing activities: Cost to acquire properties (69,954,881) (34,529,783) Land acquisition and construction in progress (7,332,131) (10,889,164) Proceeds from sale of properties 38,757,165 11,209,673 Recurring capital expenditures (3,577,568) (2,899,807) Rehabilitation and non-recurring capital expenditures (9,688,021) (9,110,896) Distributions from the sale of joint venture asset 7,980,345 - Distributions received from joint ventures in excess of earnings 1,481,560 1,014,101 Contributions to joint venture (2,584,561) - Proceeds from the payoff of mortgage loans - 7,016,547 Principal collections on MBS 1,250,097 1,988,719 Principal collections on mortgage loans 1,883,198 750,550 Escrows for construction and replacement (372,692) (5,033,055) Cost to acquire workforce and intangibles (559,239) (447,679) ----------- ----------- Net cash used for investing activities (42,716,728) (40,930,794) ----------- ----------- Financing activities: Net proceeds from the issuance of preferred stock 65,853,000 - Advances under credit agreements 7,400,000 48,970,000 Payments on credit agreements (25,050,000) - Payment on repurchase agreement (1,300,000) (1,650,000) Payment of financing costs (354,509) (985,253) Principal payments on mortgage notes payable (7,059,652) (8,212,625) Proceeds from the exercise of stock warrants 8,466 5,884 Dividends (17,444,728) (17,140,367) Distributions to minority interest (3,381,361) (1,108,570) ----------- ----------- Net cash provided by financing activities 18,671,216 19,879,069 ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,043,281 (2,283,072) Cash and cash equivalents, beginning of period 7,015,953 11,142,710 ----------- ----------- Cash and cash equivalents, end of period $ 9,059,234 $ 8,859,638 =========== ===========
-6- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Nine Months Ended September 30, ---------------------------------- 1997 1996 ----------- ------------ Supplemental disclosure of non-cash financing and investing activities: Property contributed by minority interest $36,298,716 $80,817,180 Cash to minority contributors (1,310,354) (18,796,019) Debt assumed from minority contributors (24,588,414) (41,306,073) ----------- ----------- Increase in minority interest for unrelated parties $10,399,948 $20,715,088 =========== =========== Units related to intangible assets acquired (Note 2) $18,837,500 $13,000,000 =========== =========== Conversion of Units to Shares $ 4,128,833 $ - =========== =========== Debt assumed in conjunction with property acquired via exchange of joint venture asset $ 5,719,237 $ - =========== =========== Properties acquired via exchange of joint venture asset $ 8,230,763 $ - =========== =========== Debt assumed in conjunction with property acquisition $ 6,574,323 $ - =========== =========== Reclassification of construction in progress to multifamily apartment complexes $ 1,812,855 $ 5,291,353 =========== ===========
Theaccompanying notes are an integral part of the financial statements. -7- 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 Consolidated 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 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 September 30, 1997 and the results of its operations for the three and nine months ended September 30, 1997 and 1996 and cash flows for the nine months ended September 30, 1997 and 1996. The results of operations for the nine months ended September 30, 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 a company affiliated with certain officers and directors which provided 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") with a value of approximately $17.6 million. At the time of the contribution, the Property Manager managed 57 apartment communities, including the Company's 35 assets, and employed approximately 85 professionals, excluding site employees. As a result of this transaction, the Company no longer pays management fees and reimbursements for the management operations of its multifamily portfolio. In addition, the Company receives management fees and reimbursements associated with 22 third-party management contracts acquired. Those contracts are primarily with partnerships affiliated with certain directors and officers of the Company. The Company continues 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, Continued -8- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 2. Property Manager Transaction - Continued among other things, a review of the existing contractual arrangements with a company affiliated with certain officers and directors, identification of the employees, office space, computer systems and software, policies and procedures and other business documentation required. 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 3-year period. As a result of communication between the Company and the staff of the Securities and Exchange Commission ("SEC"), the Company has agreed with the SEC to adopt a shorter life for the assets acquired related to the Property Manager and Advisor transactions. Effective with its filings for the third quarter of 1997, the Company will amortize the intangible assets acquired on the straight-line basis over 3 years, rather than the 10 and 15 year lives which was originally adopted. The effect on income before extraordinary items of this change in accounting estimate is approximately $2.3 million or $.09 per share as of September 30, 1997. 3. Multifamily and Retail Property As of September 30, 1997, the Company had investments in 49 properties in 8 states consisting of 46 multifamily apartment communities having 14,990 units and 3 retail centers with a total of 479,805 square feet of leasable space. One retail center (160,342 square feet) is owned through a joint venture investment. Continued -9- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 3. Multifamily and Retail Property - Continued The following summarizes the carrying value of the Company's multifamily apartment communities, retail center and property held for sale (in thousands):
September 30, December 31, 1997 1996 ------------ ----------- Land $ 86,073 $ 76,525 Buildings and improvements 485,657 419,932 Appliances, carpeting and equipment 101,469 82,971 -------- -------- Total multifamily and retail property 673,199 579,428 Accumulated depreciation (118,234) (106,870) -------- -------- $554,965 $472,558 ======== ========
Acquisitions Year-to-date, the Company has acquired 12 multifamily apartment communities containing 2,807 apartment units for a total consideration of approximately $125.0 million. The Company paid cash of approximately $77.0 million, assumed debt of approximately $37.0 million and issued Operating Partnership Units with a value of approximately $11.0 million. On January 1, 1997, the Company acquired Westchester Apartments, a 345-unit apartment community located in Silver Spring, Maryland, for $16.1 million. The Company paid cash of $856,243, assumed debt of approximately $11.4 million and issued 388,333 Operating Partnership Units, 50,000 of which will be issued January, 1998, with a value of approximately $3.8 million. 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. On May 13, 1997, in conjunction with the exchange of Brookwood Village, the Company acquired Polos West Apartments and Sunchase Apartments for an aggregate price of approximately $13.9 million (See Note 4). Polos West is a 200-unit garden style apartment community located in Winter Garden, Florida, a suburb of Orlando. In conjunction with the acquisition of this asset, the Company assumed $5.7 million in debt which matures December, 2003. The debt agreement requires monthly principal and interest payments at a rate of 7.45% along with monthly real estate tax escrow funding. Sunchase is a 168-unit garden style apartment community located in Bradenton, Florida. In the third quarter of 1997, the Company acquired a package of four multifamily apartment communities from the same seller for approximately $27.4 million. The Company paid cash of approximately $1 million, assumed debt of approximately $19.8 million and issued 582,930 Operating Partnership Units, 67,660 of which will be issued in January, 1998, with a value of approximately $6.6 million. The mortgage notes require monthly installments of principal and interest and mature at various dates through 2023. Interest rates on the notes are at 7.5%. The apartment communities which were acquired are summarized as follows:
Date of Number Property Name Acquisition Location of Units ------------- ----------- --------------------- -------- The Cove 7/22/97 Glen Burnie, Maryland 181 Lighthouse 7/22/97 Glen Burnie, Maryland 120 Berkshires by the Chesapeake 7/22/97 Millersville, Maryland 144 Lamplighter 9/22/97 Glen Burnie, Maryland 168 --- 613 ===
Continued -10- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 3. Multifamily and Retail Property - Continued On September 26, 1997, the Company acquired four multifamily apartment communities for an all-cash purchase price of approximately $60.3 million. The Company used a significant portion of the proceeds from the issuance of 2,737,000 shares of Series 1997-A Convertible Preferred Stock (the "Preferred Stock") to acquire these properties. The apartment communities which were acquired are summarized as follows: Number Property Name Location of Units ------------- -------- -------- Huntington Lakes Dallas, Texas 405 Huntington Brook Dallas, Texas 320 Huntington Ridge Irving, Texas 232 Sweetwater Ranch Dallas, Texas 312 ----- 1,269 ===== On September 29, 1997, the Company acquired Summer Place Apartments for an all-cash purchase price of $7 million. Summer Place is a 212-unit apartment community located in Addison, Texas. The Company used a portion of the proceeds from the Preferred Stock to acquire the property. Development In the first quarter of 1997, the Company completed the construction of 96- units as an additional phase to Brookfield Trace, an existing apartment 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 September 30, 1997, the Operating Partnership has invested approximately $5.7 million of construction costs. In the first quarter of 1997, the Company purchased a parcel of land in Greenville, South Carolina for approximately $3.0 million. The Company also owns two other parcels of land located in Dallas, Texas and Greenville, South Carolina. Development plans are under consideration for these sites. Dispositions On January 15, 1997, the Company sold Howell Commons Apartments, a 348-unit apartment community located in Greenville, South Carolina for $13.0 million. The property had a depreciated cost basis of approximately $6.4 million and resulted in a gain on sale of approximately $5.4 million, net of minority interest. 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. It is the intention of the Company to use the proceeds from the sales of its retail properties and reinvest those proceeds into multifamily properties. On March 25, 1997, the Company sold Banks Crossing, a 243,660 square foot retail center in Fayetteville, Georgia for approximately $13.8 million which was its carrying value. Continued -11- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 3. Multifamily and Retail Property - Continued On August 6, 1997, the Company sold Crossroads Shopping Center for cash of $12 million which was its carrying value. Crossroads is a 211,186 square foot retail center located in Atlanta, Georgia. In December, 1996, the Company sold Greentree Plaza. In accordance with the purchase and sale agreement, the Operating Partnership, as seller, was required to escrow funds at closing. During the second quarter of 1997, all conditions of the agreement were satisfied and, as a result, approximately $59,000, net of minority interest, was recorded as a gain on sale of properties. Impairment of Long-Lived Assets In the third quarter of 1997, the Operating Partnership has recorded a provision for losses of approximately $1.8 million on Tara Crossing. The provision represents the difference between the carrying value and the estimated fair value of the asset less estimated cost to sell. The Company began actively marketing this asset for sale in the third quarter of 1997 and has reclassified this asset to assets held for sale. 4. Investments in Unconsolidated Joint Ventures The Company holds a 50% interest in the remaining assets of Brookwood Village Joint Venture and a 50.1% interest in Spring Valley Partnership. In May, 1997, Brookwood Village Joint Venture exchanged Brookwood Village, a retail center located in Birmingham, Alabama. In May 1997, the Company and its joint venture partner exchanged Brookwood Village for cash and the two multifamily apartment complexes (Polos West and Sunchase) valued at approximately $32.4 million. Each joint venture Partner received 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. See Note 3 for information on the two multifamily properties acquired. Condensed combined financial statements for the Joint Ventures are as follows: CONDENSED COMBINED BALANCE SHEETS
Assets September 30, December 31, 1997 1996 ------------ ------------ (Unaudited) Property at cost $ 53,901,744 $114,358,875 Less accumulated depreciation (15,524,853) (40,173,598) ------------ ------------ 38,376,891 74,185,277 Other assets 3,368,024 2,774,699 ------------ ------------ Total assets $ 41,744,915 $ 76,959,976 ============ ============ Liabilities and Partners' Equity Liabilities $ 655,953 $ 4,858,639 ------------ ------------ Partners' equity: The Company 20,512,712 36,036,723 Joint venture partner 20,576,250 36,064,614 ------------ ------------ Total partners' equity 41,088,962 72,101,337 ------------ ------------ Total liabilities and partners' equity $ 41,744,915 $ 76,959,976 ============ ============
-12- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 4. Investments in Unconsolidated Joint Ventures - Continued CONDENSED COMBINED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------------------- ------------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ----------- Revenue $1,685,345 $3,384,151 $7,531,330 $9,770,685 roperty operating expenses (823,248) (1,432,364) (3,854,979) (4,582,340) Depreciation (580,957) (981,893) (2,273,436) (2,904,780) Provision for loss - - (1,472,096) - Loss on sale (19,880) - (686,760) - ---------- ---------- ----------- ---------- Net income (loss) $ 261,260 $ 969,894 $ (755,941) $2,283,565 ========== ========== =========== ========== Allocation of net income (loss): The Company $ 130,861 $ 485,591 $ (377,012) $1,143,224 Joint venture partner 130,399 484,303 (378,929) 1,140,341 ---------- ---------- ----------- ---------- $ 261,260 $ 969,894 $ (755,941) $2,283,565 ========== ========== =========== ==========
5. Mortgage Loans and Other Loans Receivable As of September 30, 1997, the Company held one mortgage loan with a principal balance of approximately $3.0 million and a discount of $649,000. The mortgage loan is collateralized by a 120-unit apartment complex in Palm Bay, Florida. The loan receivable, which had a principal balance of approximately $1.1 million and was personally guaranteed by an unaffiliated party, was paid off in the third quarter of 1997. 6. Mortgage-Backed Securities (MBS) At September 30, 1997, the Company's MBS portfolio had an approximate market value of approximately $8.3 million and gross unrealized gains of $323,000 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 portfolio until maturity. At December 31, 1996, the Company's MBS portfolio had an approximate market value of $9.8 million against a carrying value of approximately $9.2 million and gross unrealized gains of $616,000. Continued -13- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 7. Credit Agreements and Mortgage Notes Payable At September 30, 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 September 30, 1997:
Contract Contract Start End Interest Borrowings Date Date(a) Rate Amount ---------- -------- -------- -------- ----------- Revolver 9/02/97 11/02/97 (1) 6.155% $28,965,000 Fixed 11/22/95 11/20/05 6.997% 50,000,000 Fixed 9/20/96 9/20/03 7.540% 13,345,000 ----------- $92,310,000 ===========
The following summarizes the Company's borrowings on the Credit Agreement with the BankBoston and Mellon Bank as of September 30, 1997:
Contract Contract Start End Interest Borrowings Date Date(a) Rate Amount ---------- -------- --------- -------- --------- LIBOR contract 5/28/97 10/27/97 (2) 7.1563% $13,000,000 LIBOR contract 6/24/97 10/29/97 (2) 7.1563% 8,700,000 LIBOR contract 3/31/97 10/29/97 (2) 7.1563% 4,400,000 ----------- $26,100,000 ===========
(1) On November 2, 1997, the Company repriced the revolver to a new maturity of December 3, 1997 at a rate of 7.28% per annum. (2) On November 10, 1997, the Company paid down these contracts with a portion of the proceeds from the sale of 10 million shares of common stock (the "Offering") (See Note 12). Effective July 16, 1997, the interest rate on the Company's $28.4 million revolving credit line with BankBoston and Mellon Bank was reduced from 175 basis points over LIBOR to 150 basis points over LIBOR. The following summarizes the Company's borrowings on the Repurchase Agreement collateralized by MBS as of September 30, 1997:
Contract Contract Start End Interest Date Date(a) Rate Amount ------- -------- -------- ------ Repurchase Agreement 9/19/97 11/14/97 5.65% $8,000,000
(a) On November 14, 1997, the Company paid down this borrowing with a portion of the proceeds from the Offering (See Note 12). 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 September 30, 1997. Continued -14- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 7. Credit Agreements and Mortgage Notes Payable - Continued 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 interest rate exposure relative to debt levels and will execute additional interest rate protection as circumstances dictate. On September 30, 1997, the Company paid off a mortgage note collateralized by Hunters Glen Apartments, a property currently owned by the Company, which had a principal balance of $5.5 million as of the payoff date. The mortgage note required interest at a rate of 9% and had a maturity date of March, 2000. The payoff required a prepayment premium of $53,679, net of minority interest, and necessitated the write-off of deferred costs of $36,512, net of minority interest. Proceeds from the Credit Agreement with BankBoston and Mellon Bank were used to pay off the debt. 8. Minority Interest Minority interest in the Operating Partnership consists of the following at September 30, 1997 (in thousands): Balance, beginning of year $36,609 Value of Units issued to Minority Unitholders: Affiliated parties 18,837 Unrelated parties 10,400 Conversion of Units to Shares (4,129) Distribution to Unitholders (3,381) Minority income allocation (438) ------- Balance at September 30, 1997 $57,898 ======= On March 19, 1997, an additional 109,091 Operating Partnership Units were issued in conjunction with the March 1, 1996 acquisition 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. 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 an additional 109,091 Units representing $1.2 million in value to BCLP which has been expensed as a cost associated with the Advisor Transaction. Subsequent to September 30, 1997, the second Share price benchmark was achieved and the Operating Partnership issued an additional 100,000 Units representing $1.2 million in value to BCLP which will be expensed as a cost associated with the Advisor Transaction in the fourth quarter of 1997. Continued -15- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 9. Shareholders' Equity On September 25, 1997, the Company sold 2,737,000 shares of Series 1997-A Cumulative Preferred stock (the "Preferred Shares"), $.01 par value, to affiliates of Westbrook Partners, LLC at $25.00 per share and will pay a preferred dividend of 9%. Holders of Preferred shares are entitled to receive, if declared by the Board, preferential quarterly cash dividends. Each Preferred Share is convertible at the option of the holder beginning September 19, 1998 into 2.1044 shares of Common Stock, based on a conversion price of $11.88 per share of common stock, subject to certain adjustments as defined in the agreement. In the event of the Company's termination as a REIT, each holder of Preferred Shares will have the right to require the Company to redeem any or all of such holders Preferred Shares at a redemption price per share equal to 115% of the sum of the stated value ($25.00) and all accrued and unpaid dividends. The terms of the Preferred Shares provide that it will rank prior to any other series of preferred stock, prior to Common Stock and prior to any other class or series of capital stock of the Company with respect to the payment of dividends, the right to redemption and the distribution preference in the event of a change in ownership or the liquidation, dissolution or winding up of the Company. 10 . Related Party Transactions In addition to property management fees, the following is a summary of fees and reimbursements to an affiliate for the nine months ended September 30 (in thousands): 1997 1996 ----- ------ Costs reimbursements related to the operation of the Company's properties $ 231 $1,234 Fees and reimbursements for administrative services $ 984 $ 513 As a result of the Property Manager transaction as described in Note 2, the Company no longer reimburses an affiliate for services related to multifamily property operations. 11. 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. 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. Continued -16- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 11. Stock Plans - Continued 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 520,300 $10.75 - $11.00 --------- Balance September 30, 1997 1,144,300 ========= Options exercised - ========= Options available for grant at September 30, 1997 355,700 ========= 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 were 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 granted 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 a change of control of the Company, any then outstanding principal and interest due shall be forgiven. 12. Subsequent Events Public Offering In the fourth quarter of 1997, the Company completed an offering (the "Offering") of ten million shares of common stock providing net cash proceeds of approximately $103.2 million. The Company will use the proceeds to fund $32.1 million to acquire a portfolio of 18 apartment communities in the greater Baltimore area and the related management operations of the Questar Companies (the Questar Transaction); to repay $63 million in variable rate debt and the remainder for general corporate purposes. The Company has filed a Registration Statement and Prospectus on October 7, 1997 and a Prospectus Supplement dated November 4, 1997 describing the Offering. Acquisition of Properties In the fourth quarter of 1997, the Company acquired the Questar Portfolio with a portion of the proceeds from the Offering for approximately $167 million. The Company paid cash of 2, assumed debt of approximately $145 and issued Operating Partnership Units with a value of approximately $20 million. Dividend Declaration On November 13, 1997, the Board approved a dividend of $.2325 per share payable on February 15, 1998 to the shareholders of record on February 1, 1998. -17- 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. At the time of the contribution, the Property Manager managed 57 apartment communities, including the Company's 35 assets, and employed approximately 85 professionals, excluding site employees. As a result of this transaction, the Company no longer pays management fees and reimbursements for the management operations of its multifamily portfolio. In addition, the Company receives 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 continues 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 are amortized over the expected periods to be benefitted (See Note 2 to the Consolidated Financial Statements for details). On September 25, 1997, the Company sold 2,737,000 shares of the Company's Series 1997-A Cumulative Preferred stock (the "Preferred Shares") which provided net proceeds of approximately $65.9 million (See Note 9 to the Consolidated Financial Statements). 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 an additional 109,091 Units representing $1.2 million in value to BCLP which has been expensed as a cost associated with the Advisor Transaction. Subsequent to September 30, 1997, the second Share price benchmark was achieved and the Operating Partnership issued an additional 100,000 Units representing $1.2 million in value to BCLP which will be expensed as a cost associated with the Advisor Transaction in the fourth quarter of 1997. 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 and nine months ended September 30, 1997 and 1996. Net loss for the nine months ending September 30, 1997 decreased by approximately $5.9 million when compared to the same period in 1996 primarily as a result of a gain of approximately $5.4 million, net of minority interest, on the sale of Howell Commons Apartments in January, 1997. -18- Income and Expenses: Rental income and property operating expenses, including repairs and maintenance and real estate taxes increased for the three and nine month periods ended September 30, 1997 primarily due to increased weighted average apartment units. Rental revenues for the nine months ended September 30, 1997 increased approximately $11.4 million or 17% over the prior year and property operating expenses, including repairs and maintenance and real estate taxes, increased approximately $4.5 million or 17% for the same periods. Average apartment units increased 21% between 1996 and 1997. Detail of the Company's apartment unit growth for the nine months ended September 30, 1997 is set forth below: 1997 1996 ---- ---- Apartment Units: Beginning of period 12,435 9,433 Acquired 2,807 2,817 Sold (348) (223) Completed developments 96 72 ------ ------ End of period 14,990 12,099 ====== ====== Weighted Average Units 12,871 10,647 ====== ====== Percent increase 21% Property management operations began in 1997 in conjunction with the Property Manager transaction as described in Note 2 to the Consolidated Financial Statements. As a result, the Company incurs expenses for the property management operations staff which includes salaries, benefits and other overhead expenses. 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 and nine months ended September 30, 1997 and 1996 (dollars in thousands):
Nine Months Ended Three Months Ended September 30, September 30, ------------------------- ------------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Weighted Average Debt Outstanding Fixed Rate $220,694 $177,734 $223,211 $204,351 Variable Rate 72,805 73,540 66,456 96,869 -------- -------- -------- -------- Total $293,499 $251,274 $289,667 $301,220 ======== ======== ======== ======== Weighted Average Interest Rates Fixed Rate 7.70% 7.65% 7.60% 7.62% Variable Rate 6.61% 6.67% 6.59% 6.60%
Depreciation and amortization increased for the three and nine month periods ending September 30, 1997 compared to 1996 due to an increased property asset base. Provision for losses on real estate investments decreased from 1996 to 1997. The Company, as a result of its strategic decision to divest of its retail investments, has actively marketed the assets for sale and, as a result, has recorded provisions for losses which represents the difference between carrying value and estimated fair value less cost to sell (See Note 3 to the Consolidated Financial Statements for details). -19- Joint venture net income decreased for the three and nine month periods ending September 30, 1997 compared to 1996 primarily due to the sale of Brookwood Village in the second quarter of 1997 (See Note 4 to the Consolidated Financial Statements for details). Gains on sales of properties represent a $5.4 million gain, net of minority interest, being recorded in 1997 due to the sale of Howell Commons Apartments in the first quarter of 1997. In the third quarter of 1996, the Company recognized a $1 million gain on the sale of Pointe West Apartments. Extraordinary items, net of minority interest, in both periods represents costs associated with the retirement of debt. See Note 7 to the Consolidated Financial Statements. C. Funds from Operations (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:
Quarter Ended Nine Months Ended September 30, September 30, ------------------------------- --------------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ------------- Loss from operations $(5,077,771) $(9,598,078) $(8,324,995) $(10,551,935) Joint venture net operating income 431,861 977,018 1,840,677 2,597,019 Amortization of intangible assets 3,258,049 336,192 4,784,506 784,448 Costs associated with advisor transaction - - 1,200,000 - Depreciation 8,492,659 7,950,701 24,054,732 20,917,523 Provision for losses 1,850,000 7,500,000 1,850,000 7,500,000 Non-recurring charges - 287,059 - 287,059 Income allocated to preferred shareholders (85,531) - (85,531) - ---------- ---------- ----------- ----------- Funds from operations $8,869,267 $7,452,892 $25,319,389 $21,534,114 ========== ========== =========== =========== Funds from operations per share\Unit $ .28 $ .26 $ .81 $ .78 ========== ========== =========== =========== Weighted Average: Shares 25,738,248 25,393,299 25,547,631 25,393,072 Units 6,080,590 3,280,517 5,630,483 2,241,607 ---------- ---------- ---------- ---------- 31,818,838 28,673,816 31,178,114 27,634,679 ========== ========== ========== ==========
-20- Nine Months Ended September 30, --------------------------- 1997 1996 ------- ------- Cash flows provided by (used for): Operating activities 26,089,000 18,769,000 Investing activities (42,717,000) (40,931,000) Financing activities 18,671,000 19,879,000 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):
Quarter Ended Nine Months Ended September 30, September 30, ---------------------------------- ---------------------------------- 1997 1996 % Change 1997 1996 % Change ------- ------- -------- -------- -------- -------- Revenues $16,763 $16,232 3.3% $49,244 $47,826 3.0% Expenses 6,601 6,639 (0.6)% 19,612 19,936 (1.6)% ------- ------- ------- ------- Net operating income $10,162 $ 9,593 5.9% $29,632 $27,890 6.2% ======= ======= ======= ======= Average occupancy 95.1% 94.9% 93.9% 94.1% Average monthly rent per unit $689 $668 $683 $661
Growth in same-store multifamily revenues was 3.3% for the 1997 third quarter when compared to the 1996 third quarter. This growth was almost entirely driven by increases in average rents of 3.0% as well as a modest increase in occupancies. Year-to-date, revenues are up 3.0% which is a combination of 3.3% rent growth offset by a slight decline in occupancies. Expenses for the quarter ended September 30, 1997 and for the nine months ended September 30, 1997 when compared to the comparable prior year periods are down 0.6% and 1.6%, respectively. Same-store Retail Properties The following summarizes the three retail centers:
Quarter Ended Nine Months Ended September 30, September 30, ---------------------------------- ---------------------------------- 1997 1996 % Change 1997 1996 % Change ------- ------- -------- -------- -------- -------- Revenues $1,447 $1,602 (9.7)% $4,314 $4,632 (6.8)% Expenses 616 527 17% 1,850 1,712 8.1% ------ ------ ------ ------ Net operating income $ 831 $1,075 (22.7)% $2,464 $2,920 (15.6)% ====== ====== ====== ====== Average occupancy 91.2% 93.0% 92.2% 92.4%
Same-store net operating income from the retail portfolio dropped $456,000 to $2,464,000 year-to-date when compared to the 1996 nine month period. The drop in NOI is primarily the result of retenanting at Tara Crossing Shopping Center in Atlanta, Georgia which, as previously mentioned, is under contract for sale. D. Liquidity and Capital Resources: The Company's net cash provided by operating activities increased from $18.8 million in 1996 to $26 million in 1997 primarily due to increased property net operating income. The Company's net cash used for investing activities increased approximately $1.7 million in 1997 compared to 1996 due to increased net proceeds from the sale of real estate assets of approximately $27.4 million offset by cash used in the acquisition of real estate assets increasing approximately $36.5 million. -21- The Company's net cash provided by financing activities decreased approximately $1.2 million in 1997 compared to 1996 due to net borrowing activity on the Company's credit agreements fluctuating by approximately $66.6 million. The Company's decrease in net borrowing activity was significantly offset by net proceeds of approximately $65.9 million from the sale of Preferred Shares on September 25, 1997. Operating cash flows are earmarked for the payment of dividends as well as capital expenditures of a recurring nature. Debt financing, proceeds from asset sales and stock offerings have been used to finance acquisitions, development, and rehabilitation of apartment communities. In the fourth quarter of 1997, the Company completed an offering (the "Offering") of ten million shares of common stock providing net cash proceeds of approximately $103.2 million. The Company will use the proceeds to fund $32.1 million to acquire a portfolio of 18 apartment communities in the greater Baltimore area and the related management operations of the Questar Companies (the Questar Transaction); to repay $63 million in variable rate debt and the remainder for general corporate purposes. The Company has filed a Registration Statement and Prospectus on October 7, 1997 and a Prospectus Supplement dated November 4, 1997 describing the Offering. For the past three years, the Company has paid between 85% and 88% of funds from operations ("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 August 14, 1997 the Board approved a dividend of $.2325 per share payable on November 15, 1997 to the shareholders of record on November 1, 1997. Dividends paid were $.225 in the third 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 total market capitalization was approximately 40% at September 30, 1997. Additionally, the Company's debt service coverage is 2.3 to 1. 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. As of September 30, 1997, the Company has fixed or hedged debt of 90% of total debt. As to maturity risk, the Company's debt has weighted average maturities of approximately 11 years. The Company has adequate sources of liquidity to meet its current cash flow requirements including dividends, capital improvements and development underway. 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 96.5% as of September 30, 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 -22- 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. F. Forward-Looking Statements This report may contain forward-looking statements relating to activities of the Company within the meaning of federal securities laws. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there are certain factors that might cause a difference between actual results and those forward-looking statements. G. Recently Issued Accounting Pronouncements Financial Accounting Standards Board Statement No. 128 ("FAS 128") "Earning Per Share" is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company intends to adopt the requirements of this pronouncement in its financial statements for the year ending December 31, 1997. FAS 128 specifies the computation, presentation and disclosure requirements for net income per share. FAS 128 also requires the presentation of diluted net income per share which the Company was not previously required to present under generally accepted accounting principles. Financial Accounting Standards Board Statement No. 129 ("FAS 129") "Disclosure of Information about Capital Structure" is effective for financial statements issued for periods ending after December 31, 1997. FAS 129 establishes standards for disclosure of information about securities, liquidation preference of preferred stock and redeemable stock. Financial Accounting Standards Board Statement No. 130 ("FAS 130") "Reporting Comprehensive Income" is effective for fiscal years beginning after December 15, 1997, although earlier application is permitted. The Company intends to adopt the requirements of this pronouncement in its financial statements for the year ending December 31, 1998. FAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. FAS 130 requires that all components of comprehensive income shall be reported in the financial statements in the period in which they are recognized. Furthermore, a total amount for comprehensive income shall be displayed in the financial statement where the components of other comprehensive income are reported. The Company was not previously required to present comprehensive income or the components thereof in its financial statements under generally accepted accounting principles. Financial Accounting Standards Board Statement No. 131 ("FAS 131") "Disclosures about Segments of and Enterprise and Related Information" is effective for financial statements issued for periods beginning after December 15, 1997. FAS 131 requires disclosures about segments of an enterprise and related information regarding the different types of business activities in which an enterprise engages and the different economic environments in which it operates. The Company does not believe that the implementation of FAS 128, FAS 129, FAS 130 or FAS 131 will have a material impact on its financial statements. -23- BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings Response: None Item 2. Change in Securities (a) None (b) On September 25, 1997, the Company sold 2,737,000 shares of the Company's Series A Cumulative Preferred Stock, $.01 par value, and will pay a dividend of 9%. This stock ranks senior to the Company's Common Stock. Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: On June 23, 1997, the Company filed a proxy statement with the Securities and Exchange Commission. Item 5. Other Information Response: A prospectus supplement with respect to the Public Offering was filed on November 5, 1997. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Response: None (b) Reports on Form 8-K A report on Form 8-K dated October 15, 1997 was filed which included information regarding Items 1, 2, 5 and 7 on the Form 8-K. Included in Item 7 were financial statements, pro forma information and exhibits. The report was filed in connection with the Company's Private Placement, public offering and pending acquisition of eighteen multifamily properties in Baltimore, Maryland. A report on Form 8-K dated October 15, 1997 was filed which included information regarding Item 7 on Form 8-K which included exhibits. The exhibits were filed in connection with the prospectus supplement to the prospectus included with the Company's Registration Statement. A report on Form 8-K dated October 24, 1997 was filed which included information regarding Item 5 on Form 8-K. The report was filed with respect to the Company's press release dated October 23, 1997. -24- 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: November 14, 1997 -25- EX-27 2 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 9-MOS DEC-31-1996 JAN-1-1997 SEP-30-1997 1 9,059,234 7,995,983 0 0 0 49,246,451 707,908,137 (118,234,074) 655,975,731 17,659,142 306,037,929 0 65,853,000 208,527,275 57,898,385 655,975,731 0 80,504,100 0 0 70,188,555 0 17,461,212 (7,145,667) 0 (7,145,667) 5,364,707 (90,191) 0 (1,956,682) (.07) 0 -INCLUDES ESCROWS, GOODWILL, DEFERRED CHARGES AND OTHER ASSETS. -INCLUDES COST OF APARTMENT COMPLEXES AND RETAIL CENTERS AS WELL AS INVESTMENT IN JOINT VENTURES, MORTGAGE LOANS RECEIVABLE AND LAND AND CONSTRUCTION IN PROGRESS. -INCLUDES CREDIT AGREEMENTS, MORTGAGE NOTES AND REPURCHASE AGREEMENTS. -INCLUDES PAR VALUE OF COMMON STOCK, PAID IN CAPITAL, RETAINED EARNINGS LESS COMMON STOCK IN TREASURY. -REPRESENTS MINORITY INTEREST. -INCLUDES JOINT VENTURE NET LOSS OF $308,886 AND MINORITY INTEREST SHARE OF NET LOSS OF 1,488,214. -REPRESENTS GAIN ON SALE OF PROPERTIES.
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