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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-12792
SUMMIT PROPERTIES INC.
(Exact name of registrant as specified in its charter)
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MARYLAND 56-1857807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
212 SOUTH TRYON STREET
SUITE 500
CHARLOTTE, NORTH CAROLINA 28281
(Address of principal executive offices) (Zip Code)
(704) 334-9905
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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.
(1) Yes X No __
-
(1) Yes X No __
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of February 20, 1997, was $456,616,250.
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding as of February 20, 1997, was 23,072,136.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Proxy Statement for the Registrant's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days after the end of the year covered by this Form 10-K, are incorporated by
reference in Part III, Items 10, 11, 12 and 13, of this Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
1. Business.................................................... 3
2. Properties.................................................. 8
3. Legal Proceedings........................................... 10
4. Submission of Matters to a Vote of Security Holders......... 10
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 11
6. Selected Financial Data..................................... 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
8. Financial Statements and Supplementary Data................. 25
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 25
PART III
10. Directors and Executive Officers of the Registrant.......... 26
11. Executive Compensation...................................... 26
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 26
13. Certain Relationships and Related Transactions.............. 26
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 27
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PART I
ITEM 1. BUSINESS
THE COMPANY
Summit Properties Inc. ("the Company") is one of the largest developers and
operators of luxury garden apartment communities (the "Communities") in the
southeastern United States. The Company's current portfolio consists of 51
apartment Communities with 11,788 apartment homes, including Summit Foxcroft in
which the Company has a 75% managing general partner interest. The Company also
has nine apartment Communities with 2,716 apartment homes under construction or
in lease-up.
The Communities are located in six states throughout the southeastern United
States, as well as in Delaware, Ohio and Indiana. For the year ended December
31, 1996, the average physical occupancy rate of the Company's stabilized
Communities was 93.3%, and the average monthly rental revenue for these
Communities was $698 per apartment home. A Community is considered to be
stabilized at the earlier of its attainment of 93.0% physical occupancy or one
year from the completion of construction. The Company also manages approximately
7,520 apartment homes for unrelated third parties. The Company is a fully
integrated organization with multifamily development, construction, acquisition
and management expertise which employs approximately 560 individuals.
The Company's business is conducted principally through Summit Properties
Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"),
of which the Company is the sole general partner and an 84.8% economic owner.
The Company's third party management and certain construction and other
businesses are conducted through its subsidiaries, Summit Management Company, a
Maryland corporation (the "Management Company"), and Summit Apartment Builders,
Inc., a Florida corporation (the "Construction Company"). Except where otherwise
explicitly noted, the "Company" shall also hereinafter refer to the Operating
Partnership, the Management Company and the Construction Company.
The Company has chosen to focus its efforts in three high growth regions of the
southeast: the corridor connecting Atlanta, Charlotte and the Raleigh-Durham
area of North Carolina, (the "I-85 Corridor"), central and south Florida and the
Greater Washington, DC/Virginia area. In keeping with this strategy, the Company
has established city operating offices in Charlotte, North Carolina; Tampa,
Florida; Reston, Virginia; Atlanta, Georgia; Fort Lauderdale, Florida and
Raleigh, North Carolina. These city offices have direct responsibility for
selecting and overseeing new developments and for managing the Communities in
their geographic areas. This decentralized structure enables corporate
management to maintain tight controls and allows the Company to compete
effectively in its core markets, while efficiently allocating development and
acquisition capital to those markets that will yield the highest risk-adjusted
return.
OPERATING PHILOSOPHY
The Company seeks to maximize the economic return from its Communities by
optimizing the trade-off between increasing rental rates and maintaining high
occupancy levels. Consistent with this strategy, the Company is among the rental
rate leaders in its markets. Although this strategy may result in slightly lower
occupancy rates, the Company believes that the dynamic tension created by this
balancing strategy maximizes operating income at the property level and improves
growth in the Company's cash flow over the long term. Generally, the Company has
found that it is not maximizing property operating income per apartment home
when occupancies are above 95%.
Historically, the Company has been able to charge market leading rents to its
residents while maintaining high occupancy rates due to: the upscale features of
its Communities, the comprehensive service provided by its on-site management
and its favorable mix of apartment homes. The Company's geographic market focus
and decentralized structure further promote income growth.
Upscale Apartment Communities. Since its inception, the Company has been
dedicated to developing, acquiring and managing upscale apartment communities
designed to satisfy the aesthetic and lifestyle desires
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of its residents. The Communities are characterized by high-quality
construction, superior architecture and design and extensive resident amenities.
The Communities target middle to upper income professionals who are generally
attracted to these communities because of their interior and exterior ambiance,
floor plan design, community location and amenities. Because these professionals
often can afford to pay higher rents, the ability of the Company to raise rents
is constrained only by its markets and not the income of its residents. This
resident profile, the Company believes, results in rental growth potential and
risk-adjusted returns that are more favorable than those available in other
classes of apartment communities.
Dedication to Customer Service. The Company has long stressed the importance of
developing strong customer relationships with its residents. The Company's total
commitment to resident satisfaction is further evidenced by its "Sundown Policy"
which mandates a response by the appropriate Company employee to any resident
inquiry or complaint no later than "sundown" of the day on which the inquiry or
complaint was received. The Company has sought to provide its residents with
experienced, well-trained and attentive management staffs. Every Community
employee enters into a comprehensive training program when he or she is hired by
the Company. This training program ensures that employees have a clear
understanding of their job responsibilities, the high standards of performance
expected of them and the Company's operating philosophies. On-going Company
sponsored training following each employee's initial employment period further
enhances employee productivity. The Company believes that this training regimen
along with a proven hiring process has produced a higher quality management
staff, evidenced by higher resident satisfaction at the Communities and lower
employee turnover.
Mix of Apartment Homes. The Company has sought to respond to the desires of its
target customer base by adjusting the unit composition and features of the
Communities. There have been broad demographic changes in the Company's resident
mix over the past ten years. Today's renters are older, more affluent and,
accordingly, desire larger apartment homes with more amenities. The Company has
responded to these shifts by developing and acquiring Communities with a greater
proportion of large two and three bedroom units with extensive amenities.
Because these features are generally not present in older apartment communities,
the Company, especially through its development activity, believes it is more
competitively positioned to meet the desires of its target renter group than
some of its competitors with older apartment portfolios.
Market Focus. 93% of the Company's portfolio is located in its three core
markets: the I-85 Corridor, central and south Florida and the Greater
Washington, DC/Virginia area. This market focus has enabled the Company to
capitalize on the stronger than average growth in population, employment and
household formation experienced in these markets in the past several years.
Additionally, it allows the Company to gain better brand recognition and improve
operating efficiencies.
Decentralized Organizational Structure. The Company's operational structure
reflects its geographic market focus. The Company's decentralized format
provides each of its six city offices with operating accountability and control
over its respective market area. In addition, it capitalizes on specific market
knowledge which allows for superior site selection and valuation in connection
with the development of new communities, enhanced asset management and the
efficient allocation of capital to those development opportunities with the
greatest potential for financial performance.
1996 ACTIVITY
As of December 31, 1996, the Company had nine apartment Communities containing
2,716 apartment homes, with a budgeted cost of $201.5 million, under
construction. In 1996 the Company also completed development of four Communities
containing 1,061 apartment homes and acquired the remaining 75% interest in a
joint venture with 262 apartment homes.
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Properties Under Construction. The following provides summary information
regarding the nine Communities under construction as of December 31, 1996
(dollars in thousands):
TOTAL ESTIMATED ANTICIPATED
APARTMENT ESTIMATED COST TO COST TO CONSTRUCTION
COMMUNITY HOMES COSTS DATE COMPLETE COMPLETION
- ---------------------------------------- --------- --------- ------- --------- ------------
Summit on the River -- Atlanta, GA...... 352 $ 23,900 $20,496 $ 3,404 Q2 1997
Summit Russett -- Laurel, MD............ 314 22,100 17,729 4,371 Q2 1997
Summit Stonefield -- Yardley, PA........ 216 18,370 7,893 10,477 Q4 1997
Summit Sedgebrook I -- Charlotte, NC.... 248 15,640 3,520 12,120 Q4 1997
Summit Ballantyne I -- Charlotte, NC.... 246 16,800 4,138 12,662 Q4 1997
Summit Plantation II -- Plantation,
FL.................................... 240 22,000 6,217 15,783 Q4 1997
Summit Lake I -- Raleigh, NC............ 302 19,700 2,805 16,895 Q2 1998
Summit Fair Lakes I -- Fairfax, VA...... 370 32,900 6,790 26,110 Q4 1998
Summit New Albany -- Columbus, OH....... 428 30,100 3,778 26,322 Q1 1999
Other development and construction
costs................................. -- -- 12,791 --
-------- -------- ------- --------
2,716 $201,510 $86,157 $128,144
======== ======== ======= ========
The Company is optimistic about the operating prospects of the Communities under
construction even with the increased supply of newly constructed apartment homes
of comparable quality in many of its markets. As with any development project,
there are uncertainties and risks associated with the development of the
communities described above. While the Company has prepared development budgets
and has estimated completion and stabilization target dates based on what it
believes are reasonable assumptions in light of current conditions, there can be
no assurance that actual costs will not exceed current budgets or that the
Company will not experience construction delays due to the unavailability of
materials, weather conditions or other events. Similarly, market conditions at
the time these communities become available for leasing will affect the period
of time necessary to achieve stabilization and could result in achieving
stabilization later than currently anticipated.
GROWTH STRATEGIES
The Company's objective is to increase Funds from Operations per share and
distributions to stockholders through three core strategies: increasing cash
flow from existing Communities, development activity, and acquisitions of
additional Communities.
Increase Cash Flow From Existing Communities. The Company seeks to maximize the
economic return from its Communities by optimizing the trade-off between
increasing rental rates and maintaining high occupancy levels. Consistent with
this strategy, the Company is among the rental rate leaders in its markets. Even
though this strategy may result in slightly lower occupancy rates, the Company
believes that the dynamic tension created by this balancing strategy maximizes
operating income at the property level and improves growth in the Company's cash
flow over the long term. The Company's affluent resident profile, well-trained
property management staff and management information systems support this
strategy. For the year ended December 31, 1996, average rent per apartment home
for the Company's Communities that were stabilized during the comparable period
in 1995 increased 3.8%, and property operating income from these Communities
increased 3.1% for the same period. Average occupancy, rental revenue and
property operating
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income levels for the Company's Communities that were stabilized during the
comparable periods are as follows for the years set forth below:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ ------ ------
Average Physical Occupancy.................................. 93.1% 94.0% 93.3%
Average Monthly Rental Revenue per Apartment Home........... $ 714 $ 682 $ 650
Average Monthly Rental Revenue per Apartment Home Growth
Rate...................................................... 3.8% 4.9% 5.1%
Property Operating Income Growth Rate (1)................... 3.1% 6.6% 8.8%
Number of Communities....................................... 32 27 27
(1) Property Operating Income is defined as total rental and other property
revenues less property operating and maintenance expense (excluding
depreciation and amortization).
Development. Development of new communities has been the foundation of the
Company's growth. Since its founding, the Company has developed more than $1
billion of multifamily apartment communities, representing over 20,000 apartment
homes. Of its 51 Communities, 34 have been developed by the Company or its
predecessors. The Company attributes much of its historical cash flow growth to
the quality of the apartment Communities it has developed over the years. Where
favorable opportunities exist, the Company plans to continue to capitalize on
its extensive experience and proven reputation as a developer by developing new
Communities.
The Company is also conducting feasibility and other pre-development work for
nine new Communities. The Company either owns or holds options to purchase the
land for each of these potential developments (dollars in millions):
ANTICIPATED
APARTMENT DEVELOPMENT CONSTRUCTION
COMMUNITIES IN PRE-DEVELOPMENT HOMES BUDGETS START
- ----------------------------------------------------- --------- ----------- ------------
Summit Norcroft II -- Charlotte, NC.................. 54 $ 3.5 1Q97
Summit Governors Village -- Chapel Hill, NC.......... 242 16.8 2Q97
Summit Doral -- Miami, FL............................ 260 22.6 3Q97
Summit Weston -- Raleigh, NC......................... 365 25.1 3Q97
Summit Ballantyne II -- Charlotte, NC................ 154 10.7 1Q98
Summit Sedgebrook II -- Charlotte, NC................ 120 8.1 1Q98
Summit Lake II -- Raleigh, NC........................ 144 9.7 1Q98
Summit Pembroke -- Pembroke Pines, FL................ 300 25.8 1Q98
Summit Fair Lakes II -- Fairfax, VA.................. 160 14.5 4Q98
-------- ---------
1,799 $ 136.8
======== =========
For each of these potential communities, the Company is only in the
pre-development phase, and there can be no assurance that all or any one of
these communities will be completed. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Development Activity" for a
discussion of uncertainties and risks associated with the Company's development
activity.
Acquisitions. The Company also seeks to grow cash flow by acquiring existing
communities that have prospects for long-term growth in excess of industry
averages. The Company recently hired an acquisition specialist to support its
efforts in this area. The Company has recently acquired the following
Communities (dollars in thousands):
ACQUISITION APARTMENT PURCHASE
COMMUNITY DATE HOMES PRICE
- -------------------------------------------------------- ----------- --------- --------
Summit Portofino -- Broward County, FL.................. 1/6/97 322 $28,000
Summit Mayfaire -- Raleigh, NC.......................... 1/15/97 144 9,650
Summit Sand Lake -- Orlando, FL......................... 2/20/97 416 26,798
-------- -------
882 $64,448
======== =======
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Additionally, the Company has commenced a disposition program targeting those
Communities within its portfolio which do not align with the Company's long term
strategic plan and growth objectives. Currently two such Communities are subject
to Letters of Intent from qualified buyers. A third Community is in the initial
stages of marketing. These three Communities represent 2.5% of the Company's net
real estate assets. The Company does not expect to incur any losses related to
the sale of these Communities.
COMPANY HISTORY
The Company was formed in 1993 to continue and expand the multifamily
development, construction, acquisition, operation, management and leasing
businesses of Summit Properties, and its affiliated entities, which was founded
by the Company's Chairman of the Board, William B. McGuire, Jr., in 1972. In
1981, William F. Paulsen joined the Company as Chief Executive Officer and
shepherded the growth of its multifamily development and management activities.
The Company organized itself as a real estate investment trust and completed its
initial public offering (the "Initial Offering") of 10,000,000 shares of Common
Stock on February 15, 1994 and sold an additional 1,500,000 shares upon exercise
of the underwriters' over-allotment option on March 4, 1994. On June 2, 1995,
the Company completed a follow-on public offering of 4,000,000 shares of Common
Stock. A second follow-on public offering of 5,000,000 shares of the Company's
Common Stock was completed on August 7, 1996, with an additional 750,000 shares
sold upon exercise of the underwriters' over-allotment option on August 12,
1996.
The Company, a Maryland corporation, is a self-administered and self-managed
real estate investment trust (a "REIT"). The Company's Common Stock is listed on
the New York Stock Exchange under the symbol "SMT". The executive offices of the
Company are located at 212 South Tryon Street, Suite 500, Charlotte, North
Carolina 28281. The Company's telephone number is (704) 334-9905 and its
facsimile number is (704) 333-8340. The Company also maintains offices in
Atlanta, Georgia; Tampa, Florida; Reston, Virginia; Ft. Lauderdale, Florida and
Raleigh, North Carolina.
THE OPERATING PARTNERSHIP
The Operating Partnership was formed on January 14, 1994, and is the entity
through which principally all of the Company's business is conducted. The
Company controls the Operating Partnership as the sole general partner and as
the holder of an 84.8% economic and voting interest in the Operating
Partnership. As the sole general partner of the Operating Partnership, the
Company has the exclusive power to manage and conduct the business of the
Operating Partnership, subject to the consent of holders (including the Company)
of 85% of the units of partnership interest ("Units") in connection with a sale,
transfer or other disposition of all or substantially all of the assets of the
Operating Partnership, or any other transaction which would result in the
recognition of a significant taxable gain to the holders of Units. The Company's
general and limited partnership interests in the Operating Partnership entitle
it to share in 84.8% of the cash distributions from, and in the profits and
losses of, the Operating Partnership.
Each Unit of limited partnership interest may be redeemed by the holder thereof
for cash equal to the fair market value of a share of the Company's Common Stock
or, at the option of the Company, an equivalent number of shares of Common
Stock. The Company presently anticipates that it will elect to issue shares of
Common Stock in connection with redemptions of Units rather than paying cash.
With each redemption of Units for Common Stock, the Company's percentage
ownership interest in the Operating Partnership will increase. In addition,
whenever the Company issues shares of Common Stock for cash, the Company will
contribute any net proceeds therefrom to the Operating Partnership and the
Operating Partnership will issue an equivalent number of Units to the Company.
The Operating Partnership cannot be terminated, except in connection with a sale
of all or substantially all of the assets of the Company, for a period of 99
years without a vote of the limited partners of the Operating Partnership.
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ITEM 2. PROPERTIES
THE COMMUNITIES
The Company owns and manages through the Operating Partnership 51 Communities
consisting of 11,788 luxury garden apartment homes. Twenty-six of the
Communities have been completed since January 1, 1990 and, as of December 31,
1996, the average age of the stabilized Communities was approximately 7.8 years.
The average physical occupancy rate at the stabilized Communities was 93.3% and
94.5% for the years ended December 31, 1996 and 1995, respectively. The average
monthly rental revenue per apartment home at the stabilized Communities during
1996 and 1995 was $698 and $669, respectively.
The Company has targeted ten growth markets located in six states throughout the
Southeastern United States (Florida, Georgia, Maryland, North Carolina, South
Carolina and Virginia) as well as in Delaware, Indiana and Ohio as shown below:
NUMBER OF % OF TOTAL
NUMBER OF APARTMENT APARTMENT
CITY OR REGION COMMUNITIES HOMES HOMES
- ----------------------------------------------------- ----------- --------- -----------
Tampa/Sarasota, Florida.............................. 9 2,248 19.1%
Charlotte, North Carolina............................ 12 2,164 18.4
Raleigh/Central North Carolina....................... 9 1,697 14.4
Washington, DC....................................... 5 1,307 11.0
South Florida........................................ 4 1,197 10.2
Other................................................ 4 882 7.5
Atlanta, Georgia..................................... 3 877 7.4
Richmond, Virginia................................... 3 862 7.3
Indianapolis, Indiana................................ 1 314 2.7
Orlando, Florida..................................... 1 240 2.0
---------- -------- ---------
Total...................................... 51 11,788 100.0%
========== ======== =========
All of the Communities target middle to upper income apartment renters as
customers and have amenities, unit sizes and unit mixes consistent with the
desires of this resident population.
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The following table highlights certain information regarding the Communities:
AVERAGE AVERAGE AVERAGE
NUMBER OF YEAR APARTMENT OCCUPANCY OCCUPANCY
MARKET AREA/COMMUNITY LOCATION ZIP CODE APARTMENTS COMPLETED SIZE 1996 1995
- ------------------------------ ----------------- -------- ---------- --------- --------- --------- ---------
ATLANTA
Summit Glen................... Atlanta, GA 30342 242 1992 983 91.9 93.7
Summit Springs................ Norcross, GA 30093 312 1990 934 92.6 95.6
Summit Village................ Marietta, GA 30062 323 1991 984 91.8 95.0
---------- --------- --------- ---------
ATLANTA SUBTOTAL/WEIGHTED AVERAGE.......................... 877 966 92.1 94.9
CHARLOTTE
Summit Arbors................. Charlotte, NC 28202 120 1986 944 94.8 95.8
Summit Charleston............. Charlotte, NC 28212 214 1986 806 93.3 94.7
Summit Creek.................. Charlotte, NC 28210 260 1983 910 92.7 95.7
Summit Crossing............... Charlotte, NC 28210 128 1985 978 96.3 97.6
Summit Fairview............... Charlotte, NC 28226 135 1983 1,036 93.6 94.1
Summit Foxcroft(1)............ Charlotte, NC 28226 156 1979 940 93.4 96.6
Summit Green(2)............... Charlotte, NC 28262 300 1996 1,098 N/A N/A
Summit Hollow................. Charlotte, NC 28226 232 1978 949 94.5 95.3
Summit Norcroft............... Charlotte, NC 28269 162 1991 1,112 94.0 94.6
Summit Radbourne.............. Charlotte, NC 28269 225 1991 1,006 92.0 96.7
Summit Simsbury............... Charlotte, NC 28226 100 1985 874 93.6 95.3
Summit Touchstone............. Charlotte, NC 28226 132 1986 899 94.0 94.8
---------- --------- --------- ---------
CHARLOTTE SUBTOTAL/WEIGHTED AVERAGE........................ 2,164 969 93.7 95.6
INDIANAPOLIS
Summit River Crossing(2)...... Indianapolis, IN 46240 314 1996 1,086 N/A N/A
ORLANDO
Summit Fairways(2)............ Orlando, FL 32779 240 1996 1,304 N/A N/A
RALEIGH/CENTRAL NORTH CAROLINA
Summit Creekside.............. Hickory, NC 28601 118 1981 1,006 96.2 97.6
Summit Eastchester............ High Point, NC 27262 172 1981 947 96.1 97.5
Summit Highland............... Raleigh, NC 27612 172 1987 986 94.5 94.2
Summit Hill I................. Chapel Hill, NC 27514 204 1991 904 93.3 95.4
Summit Hill II(2)............. Chapel Hill, NC 27514 207 1996 1,023 N/A N/A
Summit Oak.................... Goldsboro, NC 27534 100 1982 918 96.7 97.3
Summit Old Town............... Winston-Salem, NC 27106 172 1979 954 90.9 95.5
Summit Sherwood............... Winston-Salem, NC 27106 190 1968 1,028 95.2 95.0
Summit Square................. Durham, NC 27707 362 1990 925 92.1 91.7
---------- --------- --------- ---------
RALEIGH/CENTRAL NORTH CAROLINA
SUBTOTAL/WEIGHTED AVERAGE.................................. 1,697 963 93.9 94.9
RICHMOND
Summit Breckenridge........... Glen Allen, VA 23060 300 1987 928 95.1 95.0
Summit Stony Point............ Richmond, VA 23235 250 1986 1,045 93.2 95.6
Summit Waterford.............. Midlothian, VA 23112 312 1990 995 91.4 95.2
---------- --------- --------- ---------
RICHMOND SUBTOTAL/WEIGHTED AVERAGE......................... 862 986 93.2 95.2
SOUTH FLORIDA
Summit Aventura(2)............ Aventura, FL 33108 379 1995 1,170 N/A N/A
Summit Del Ray................ Delray Beach, FL 33445 252 1993 968 91.5 93.2
Summit Palm Lake.............. W. Palm Beach, FL 33417 304 1992 919 96.7 94.1
Summit Plantation(3).......... Plantation, FL 33324 262 1995 1,283 N/A N/A
---------- --------- --------- ---------
SOUTH FLORIDA SUBTOTAL/WEIGHTED AVERAGE.................... 1,197 1,088 94.3 93.7
TAMPA/SARASOTA
St. Petersburg,
Summit Gateway................ FL 33716 212 1987 828 93.7 94.4
Summit Hampton................ Bradenton, FL 34210 352 1988 933 93.0 94.2
Summit Heron's Run............ Sarasota, FL 34232 274 1990 863 92.5 92.0
Summit Lofts.................. Palm Harbour, FL 33684 200 1990 1,045 90.8 90.7
Summit McIntosh............... Sarasota, FL 34232 212 1990 855 93.9 93.0
Summit Perico................. Bradenton, FL 34209 256 1990 911 93.5 94.4
Summit Providence............. Brandon, FL 33511 444 1991 952 93.0 92.2
Summit Station................ Tampa, FL 33624 230 1990 902 92.6 94.8
Summit Walk................... Tampa, FL 33618 68 1993 1,614 95.9 95.1
---------- --------- --------- ---------
TAMPA/SARASOTA SUBTOTAL/WEIGHTED AVERAGE................... 2,248 936 93.0 93.2
AVERAGE AVERAGE
RENT PER RENT PER
APARTMENT APARTMENT
MARKET AREA/COMMUNITY 1996 1995
- ------------------------------ --------- ---------
ATLANTA
Summit Glen................... $ 847 $ 823
Summit Springs................ 708 673
Summit Village................ 735 705
--------- ---------
ATLANTA SUBTOTAL/WEIGHTED AVER 756 726
CHARLOTTE
Summit Arbors................. 748 692
Summit Charleston............. 581 562
Summit Creek.................. 624 580
Summit Crossing............... 649 609
Summit Fairview............... 726 724
Summit Foxcroft(1)............ 643 600
Summit Green(2)............... N/A N/A
Summit Hollow................. 656 610
Summit Norcroft............... 805 800
Summit Radbourne.............. 786 770
Summit Simsbury............... 734 701
Summit Touchstone............. 677 639
--------- ---------
CHARLOTTE SUBTOTAL/WEIGHTED AV 687 656
INDIANAPOLIS
Summit River Crossing(2)...... N/A N/A
ORLANDO
Summit Fairways(2)............ N/A N/A
RALEIGH/CENTRAL NORTH CAROLINA
Summit Creekside.............. 566 517
Summit Eastchester............ 559 510
Summit Highland............... 703 693
Summit Hill I................. 687 653
Summit Hill II(2)............. N/A N/A
Summit Oak.................... 532 508
Summit Old Town............... 542 500
Summit Sherwood............... 526 487
Summit Square................. 763 745
--------- ---------
RALEIGH/CENTRAL NORTH CAROLINA
SUBTOTAL/WEIGHTED AVERAGE..... 635 604
RICHMOND
Summit Breckenridge........... 706 665
Summit Stony Point............ 724 692
Summit Waterford.............. 685 636
--------- ---------
RICHMOND SUBTOTAL/WEIGHTED AVE 704 662
SOUTH FLORIDA
Summit Aventura(2)............ N/A N/A
Summit Del Ray................ 852 870
Summit Palm Lake.............. 743 713
Summit Plantation(3).......... N/A N/A
--------- ---------
SOUTH FLORIDA SUBTOTAL/WEIGHTE 792 784
TAMPA/SARASOTA
Summit Gateway................ 626 611
Summit Hampton................ 630 598
Summit Heron's Run............ 653 632
Summit Lofts.................. 690 694
Summit McIntosh............... 684 655
Summit Perico................. 657 621
Summit Providence............. 659 658
Summit Station................ 619 594
Summit Walk................... 1,052 1,005
--------- ---------
TAMPA/SARASOTA SUBTOTAL/WEIGHT 663 644
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AVERAGE AVERAGE AVERAGE
NUMBER OF YEAR APARTMENT OCCUPANCY OCCUPANCY
MARKET AREA/COMMUNITY LOCATION ZIP CODE APARTMENTS COMPLETED SIZE 1996 1995
- ------------------------------ ----------------- -------- ---------- --------- --------- --------- ---------
WASHINGTON, DC
Fredericksburg,
Summit Belmont................ VA 22401 300 1987 881 90.2 93.9
Summit Meadow................. Columbia, MD 21045 178 1990 1,020 93.6 94.8
Summit Pike Creek............. Newark, DE 19711 264 1988 899 95.8 94.3
Summit Reston................. Reston, VA 22090 418 1987 854 93.9 95.5
Summit Windsor................ Frederick, MD 21701 147 1989 911 92.7 93.7
---------- --------- --------- ---------
WASHINGTON, DC SUBTOTAL/WEIGHTED AVERAGE................... 1,307 898 93.2 94.6
OTHER
Summit Blue Ash............... Blue Ash, OH 45242 242 1992 1,158 95.6 97.0
Summit Park................... Forest Park, OH 45240 316 1989 963 91.7 94.7
Summit Beacon Ridge........... Greenville, SC 29615 144 1988 1,046 91.9 95.4
Summit East Ridge............. Greenville, SC 29687 180 1986 959 92.0 93.5
---------- --------- --------- ---------
OTHER SUBTOTAL/WEIGHTED AVERAGE............................ 882 1,029 92.9 95.2
---------- --------- --------- ---------
Total Weighted Average........ 11,788 982 93.3% 94.6%
========== ========= ========= =========
AVERAGE AVERAGE
RENT PER RENT PER
APARTMENT APARTMENT
MARKET AREA/COMMUNITY 1996 1995
- ------------------------------ --------- ---------
WASHINGTON, DC
Summit Belmont................ 622 600
Summit Meadow................. 864 832
Summit Pike Creek............. 800 738
Summit Reston................. 917 866
Summit Windsor................ 681 675
--------- ---------
WASHINGTON, DC SUBTOTAL/WEIGHT 792 753
OTHER
Summit Blue Ash............... 769 735
Summit Park................... 602 575
Summit Beacon Ridge........... 653 632
Summit East Ridge............. 568 544
--------- ---------
OTHER SUBTOTAL/WEIGHTED AVERAG 649 622
--------- ---------
Total Weighted Average........ $ 698 $ 669
========= =========
(1) Summit Foxcroft is held by a partnership in which the Company is a 75%
managing general partner.
(2) Community was not stabilized for entire period.
(3) Community acquired April 1, 1996.
Each Community has many of the following features: swimming pools, tennis,
racquetball and volleyball courts, saunas, whirlpools, fitness facilities,
picnic areas, large clubhouses and convenient parking facilities. Most of the
apartment homes offer amenities that include spacious open living areas,
sunrooms, patios or balconies, sunken living rooms, fireplaces, built-in shelves
or entertainment centers, large storage areas or walk-in closets, vaulted
ceilings, ceiling fans and separate in-home laundry facilities or laundry
hook-ups. In addition to these physical amenities, each Community has its own
highly trained and experienced on-site management and maintenance staff to
ensure that courteous and responsive service is provided to its residents.
COMMUNITY MANAGEMENT
Each of the Communities is managed by the Company's property management staff.
The property management team for each Community includes supervision by a
regional vice-president and regional property manager, as well as on-site
management, maintenance personnel and an off-site support staff. Community
management teams perform leasing and rent collection functions and coordinate
resident services. All personnel are extensively trained and experienced and are
encouraged to continue their education through both Company-designed and outside
courses.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of the Communities is presently subject to any
material litigation nor, to the Company's knowledge, is any litigation
threatened against the Company or any of the Communities, other than routine
actions for negligence or other claims and administrative proceedings arising in
the ordinary course of business, some of which are expected to be covered by
liability insurance and all of which collectively are not expected to have a
material adverse effect on the business or financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
10
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the New York Stock Exchange (the
"NYSE") on February 8, 1994 under the symbol "SMT". The following table sets
forth the quarterly high and low sales prices per share reported on the NYSE.
1996 1995
------------------ ------------------
QUARTER HIGH LOW HIGH LOW
- -------------------------------------------------- ------ ------ ------ ------
January 1 through March 31........................ $21.25 $19.00 $19.13 $16.25
April 1 through June 30........................... 20.50 18.50 18.00 15.88
July 1 through September 30....................... 20.13 18.00 18.88 16.88
October 1 through December 31..................... 22.50 19.13 19.88 18.13
On February 20, 1997, the last reported sale price of the Common Stock on the
NYSE was $20.25. On February 14, 1997, there was 409 holders of record of
23,072,136 shares of the Company's Common Stock.
The Company declared a dividend of $.3875 per share of Common Stock for each of
the four quarters in 1996, which was paid on May 15, 1996 for the first quarter,
August 15, 1996 for the second quarter, November 15, 1996 for the third quarter,
and February 14, 1997 for the fourth quarter.
The Company declared a dividend of $.3775 per share of Common Stock for each of
the four quarters in 1995, which was paid on May 15, 1995 for the first quarter,
August 15, 1995 for the second quarter, November 15, 1995 for the third quarter,
and February 14, 1996 for the fourth quarter.
The Company issued 106,330 Units in the Operating Partnership in conjunction
with the purchase of the Summit Sedgebrook land while 9,474 Units in the
Operating Partnership were exchanged for 9,474 shares of the Company's Common
Stock during 1996. Such shares of the Company's Common Stock were issued in
reliance on an exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended, and the rules and regulations promulgated thereunder.
In light of the status of each recipient of Common Stock in such transactions as
a high net worth individual, management of the Company believes that it has
obtained sufficient information to reasonably conclude that each recipient of
Common Stock was either an "accredited investor" or, either alone or with his or
her representative, had knowledge and experience in financial and business
matters that he or she was capable of evaluating the merits and risks of owning
shares of the Company's Common Stock.
The Company intends to continue to make regular quarterly dividends to holders
of shares of Common Stock. Future dividends will be declared at the discretion
of the Board of Directors and will depend on actual cash flow of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code, and such
other factors as the Board of Directors may deem relevant. The Board of
Directors may modify the Company's dividend policy from time to time.
In March 1995, the Company put in place a dividend reinvestment program under
which holders of Common Stock may elect automatically to reinvest their
dividends in additional shares of Common Stock. To fulfill its obligations under
this program, the Company may either issue additional shares of Common Stock or
repurchase Common Stock in the open market.
11
12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and other
information on a consolidated historical basis for the Company and its
predecessors (the "Summit Entities") as of and for each of the years in the
five-year period ended December 31, 1996. This table should be read in
conjunction with the Consolidated Financial Statements of Summit Properties Inc.
and the Notes thereto included elsewhere herein.
SELECTED FINANCIAL DATA
SUMMIT PROPERTIES INC. (HISTORICAL) (1)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY
INFORMATION)
OPERATING INFORMATION:
Revenue
Rental..................................... $ 88,864 $ 70,773 $ 54,198 $ 45,561 $ 39,693
Property management(2)..................... -- -- 536 4,102 2,988
Interest and other......................... 5,625 4,221 3,700 3,779 4,393
--------- --------- --------- --------- ---------
Total............................... 94,489 74,994 58,434 53,442 47,074
--------- --------- --------- --------- ---------
Property operating and maintenance expense
(before depreciation and amortization)..... 35,226 28,012 21,502 18,991 17,306
Property management expenses(2).............. -- -- 366 2,799 2,453
Interest expense............................. 17,138 14,802 14,067 26,400 25,925
Depreciation and amortization................ 18,208 15,141 11,700 9,735 9,219
REIT formation costs......................... -- -- 457 -- --
General and administrative expense........... 2,557 1,949 1,756 1,375 1,973
Loss from equity investments................. 173 39 59 -- --
--------- --------- --------- --------- ---------
Total............................... 73,302 59,943 49,907 59,300 56,876
--------- --------- --------- --------- ---------
Income (loss) before extraordinary items and
minority interest of unitholders in
Operating Partnership...................... $ 21,187 $ 15,051 $ 8,527 $ (5,858) $ (9,802)
========= ========= ========= ========= =========
Net income (loss)............................ $ 16,948 $ 11,819 $ 14,032 $ (3,408) $ (9,802)
========= ========= ========= ========= =========
Income per share before extraordinary
items...................................... $ .92 $ .83 $ .64 N/A N/A
========= ========= ========= ========= =========
Net income per share......................... $ .90 $ .80 $ 1.28 N/A N/A
========= ========= ========= ========= =========
Dividends per share.......................... $ 1.55 $ 1.51 $ 1.29 N/A N/A
========= ========= ========= ========= =========
Weighted average shares outstanding.......... 18,915 14,754 10,992 N/A N/A
========= ========= ========= ========= =========
Weighted average shares and units
outstanding................................ 22,941 18,117 13,390 N/A N/A
========= ========= ========= ========= =========
OTHER INFORMATION:
Cash flow provided by (used in):
Operating activities....................... $ 41,176 $ 30,994 $ 17,525 $ 8,712 $ 4,475
Investing activities....................... (103,971) (63,734) (113,741) (2,092) (16,106)
Financing activities....................... 63,579 34,440 88,993 (9,141) 14,123
Funds from Operations(3)..................... $ 39,391 $ 30,148 $ 20,120 $ 3,777 $ (683)
Recurring capital expenditures............... $ 3,291 $ 2,180 $ 1,710 $ 1,050 $ 591
Funds Available for Distribution(4).......... $ 36,100 $ 27,968 $ 18,410 $ 2,727 $ (1,274)
Non-recurring capital expenditures(5)........ $ 2,973 $ 864 -- -- --
Total completed communities (at end of
period).................................... 51 46 32 27 26
Total apartment homes developed(6)........... 1,061 379 -- 320 788
Total apartment homes acquired............... 262 2,025 1,332 -- --
Total apartment homes (at end of
period)(7)................................. 11,788 10,465 8,061 6,729 6,409
Average monthly rental revenue per apartment
home(8).................................... $ 698 $ 669 $ 657 $ 617 $ 576
Average physical occupancy(9)................ 93.3% 94.5% 93.5% 93.1% 93.3%
12
13
DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
BALANCE SHEET INFORMATION:
Real estate, before accumulated
depreciation.......................... $704,779 $586,264 $439,025 $317,374 $313,634
Total assets............................ 634,991 533,252 397,945 297,670 309,239
Total long-term debt.................... 309,933 297,010 249,009 315,847 319,916
Stockholders' equity (deficiency)....... 257,214 175,454 115,525 (38,127) (28,825)
(1) For purposes of the Selected Financial Data, historical information is
presented both for the Company and its predecessors; provided that
historical financial information for its predecessors only includes
information relating to the Communities held by the Company immediately
following the Initial Offering and the entities which provided property and
general management services for those Communities.
(2) Consists of revenues and expenses from property management services provided
to Communities owned by unrelated third parties and by certain predecessor
partnerships prior to the Initial Offering. Since the Initial Offering,
these services have been performed by Summit Management Company, which is
accounted for under the equity method of accounting.
(3) The Company generally considers Funds from Operations to be an appropriate
measure of the performance of an equity REIT. Funds from Operations, as
defined by the National Association of Real Estate Investment Trusts
(NAREIT), represents net income (loss) determined in accordance with
generally accepted accounting principles (GAAP), excluding gains or losses
from sales of assets or debt restructuring, plus certain non-cash items,
primarily real estate depreciation, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for all periods
consisted only of real estate depreciation. Funds from Operations should
not be considered as an alternative to net income (determined in accordance
with GAAP), as an indication of the Company's financial performance, or to
cash flow from operating activities (determined in accordance with GAAP) as
a measure of liquidity. Funds from Operations is calculated as follows
(dollars in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Income (loss) before extraordinary items
and Minority Interest of unitholders
in Operating Partnership.............. $21,187 $15,051 $ 8,527 $(5,858) $(9,802)
Real estate depreciation................ 18,204 15,097 11,593 9,635 9,119
------- ------- ------- ------- -------
Funds from Operations................... $39,391 $30,148 $20,120 $ 3,777 $ (683)
======= ======= ======= ======= =======
(4) Funds Available for Distribution is defined as Funds from Operations less
recurring capital expenditures.
(5) Represents improvements made in conjunction with acquisitions, construction
of garages and other major non-recurring capital expenditures.
(6) Represents the total number of apartment homes in Communities completed and
owned by the Company during the period.
(7) Represents the total number of apartment homes in Communities completed and
owned by the Company at the end of the period.
(8) Represents the average monthly rental revenue per occupied apartment home at
Communities deemed to have achieved stabilized occupancy on the earlier of
the attainment of 93% physical occupancy or one year after the completion
of construction ("Stabilized Communities").
(9) Physical occupancy is defined as the number of apartment homes occupied
divided by the total number of apartment homes contained in the
Communities, expressed as a percentage, and reflects only Stabilized
Communities. Physical occupancy has been calculated using the average of
the midweek occupancy that existed during each week of the period.
13
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements including, without
limitation, statements relating to development activities of the Company within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company believes that
the expectations reflected in such forward-looking statements are based on
reasonable assumptions, the Company's actual results and performance of
development Communities could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include general economic conditions, local real estate conditions, construction
delays due to unavailability of materials, weather conditions or other delays
and those factors discussed in the section entitled "Development
Activity -- Certain Factors Affecting the Performance of Development
Communities" on page 23 of this Form 10-K.
OVERVIEW
The following discussion should be read in conjunction with the Consolidated
Financial Statements of Summit Properties Inc. and the Notes thereto appearing
elsewhere herein.
As of December 31, 1996, there were 26,434,920 Units outstanding of the
Operating Partnership, of which 22,409,638, or 84.8% were owned by the Company
and 4,025,282, or 15.2% were owned by other partners (including certain officers
and directors of the Company).
FORMATION OF THE COMPANY, THE INITIAL OFFERING AND SUBSEQUENT OFFERINGS
On February 15, 1994, the Company completed the Initial Offering and a business
combination involving entities under varying common ownership. On June 2, 1995,
the Company completed an offering of four million shares of Common Stock (the
"1995 Offering"). On August 7, 1996 the Company completed an offering of five
million shares of Common Stock and sold an additional 750,000 shares upon
exercise of the underwriters' over-allotment option on August 12, 1996 (the
"1996 Offering"). The net proceeds from the Initial Offering were used by the
Company to acquire a controlling interest in the Operating Partnership, which
was formed to succeed to interests in a portfolio of 27 Communities, comprising
a total of 6,729 apartment homes, to acquire Summit Stony Point comprising 250
apartment homes, and to acquire certain development, construction, management
and leasing businesses of the Company's predecessors (collectively, "Summit
Entities"). Summit Entities' third party management businesses were transferred
to Summit Management Company (the "Management Company"), in which the Operating
Partnership owns a 1% voting interest and a 99% economic interest. Summit
Apartment Builders, Inc. (the "Construction Company"), which was formed to
perform certain construction services for the Company, is wholly-owned by the
Management Company. The Company's interest in the Management Company and the
Construction Company is accounted for under the equity method of accounting. The
net proceeds from the 1995 and 1996 Offerings were used to repay debt and fund
development costs.
HISTORICAL RESULTS OF OPERATIONS
The Company's net income is generated primarily from the operations of its
apartment communities (the "Communities"). The changes in operating results from
period to period reflect changes in existing community performance as well as
increases in the number of apartment homes due to the acquisition and
development of Communities. Where appropriate, comparisons are made on a
"stabilized Communities," "acquisition Communities" and "Communities in
lease-up" basis in order to adjust for changes in the number of apartment homes.
A Community is deemed to be "stabilized" at the earlier of when it has attained
a
14
15
physical occupancy level of at least 93% or when construction has been completed
for one year. A summary of the Company's apartment homes for the years ended
December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
------ ------ -----
Apartment homes at the beginning of the year................ 11,286 8,061 --
Initial business combination................................ -- -- 6,729
Acquisitions................................................ 262 2,025 1,332
Developments which began rental operations during the
year...................................................... 906 1,200 --
------ ------ -----
Apartment homes at the end of the year...................... 12,454 11,286 8,061
====== ====== =====
The 1995 acquisitions were completed in the second quarter and consisted of
twelve apartment communities and a 75% interest in another apartment community,
all of which were owned by The Crosland Group Inc. and its affiliates (the
"Crosland Acquisition").
Results of Operations for the Years Ended December 31, 1996, 1995 and 1994
Income before minority interest of unitholders in the Operating Partnership and
extraordinary items increased from 1994 ($8.5 million) to 1995 ($15.1 million)
and from 1995 to 1996 ($21.2 million) primarily due to increased property
operating income at stabilized Communities, property operating income from
acquisition Communities and Communities in lease-up.
OPERATING PERFORMANCE OF THE COMPANY'S PORTFOLIO OF COMMUNITIES
The operating performance of the Communities is summarized below (dollars in
thousands):
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------- -----------------------------
1996 1995 % CHANGE 1995 1994 % CHANGE
------- ------- --------- ------- ------- ---------
Property revenues:
Stabilized communities(1)...... $66,974 $64,646 3.6% $53,566 $50,579 5.9%
Acquisition communities........ 16,993 8,716 95.0% 19,796 6,201 219.2%
Communities in lease-up(2)..... 9,580 767 1,149.0% 767 -- 100.0%
------- ------- ------- -------
Total property revenues.......... 93,547 74,129 26.2% 74,129 56,780 30.6%
------- ------- ------- -------
Property operating and
maintenance expense(3):
Stabilized communities......... 25,302 24,245 4.4% 20,206 19,277 4.8%
Acquisition communities........ 6,444 3,492 84.5% 7,531 2,225 238.5%
Communities in lease-up........ 3,480 275 1,165.5% 275 -- 100.0%
------- ------- ------- -------
Total property operating and
maintenance expense............ 35,226 28,012 25.8% 28,012 21,502 30.3%
------- ------- ------- -------
Property operating income........ $58,321 $46,117 26.5% $46,117 $35,278 30.7%
======= ======= ======= =======
Apartment homes, end of period... 12,454 11,286 10.3% 11,286 8,061 40.0%
======= ======= ======= =======
(1) Includes Communities which were stabilized during the entire period for each
of the comparable periods presented. The 1995 and 1994 comparison includes
Communities acquired during the initial business combination while the 1996
and 1995 comparison also includes the Communities acquired in 1994.
(2) Includes seven Communities in 1996, of which five had completed construction
as of December 31, 1996. Includes four Communities in 1995, of which one
had completed construction as of December 31, 1995.
(3) Before real estate depreciation and amortization expense.
15
16
OPERATING PERFORMANCE OF THE COMPANY'S STABILIZED COMMUNITIES
The operating performance of the Communities stabilized during the entire period
in each of the comparable periods presented is summarized below (dollars in
thousands except average monthly rental revenue):
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------- -----------------------------
1996 1995 % CHANGE 1995 1994 % CHANGE
------- ------- --------- ------- ------- ---------
Property revenues:
Rental......................... $63,556 $61,613 3.2% $50,971 $48,234 5.7%
Other.......................... 3,418 3,033 12.7% 2,595 2,345 10.7%
------- ------- ------- -------
Total property revenues.......... 66,974 64,646 3.6% 53,566 50,579 5.9%
------- ------- ------- -------
Property operating and
maintenance expense(1):
Personnel...................... 5,879 5,570 5.5% 4,640 4,520 2.7%
Advertising and promotion...... 680 561 21.2% 469 452 3.8%
Utilities...................... 3,041 3,034 0.2% 2,616 2,568 1.9%
Building repairs and
maintenance................. 5,657 5,290 6.9% 4,480 3,985 12.4%
Real estate taxes and
insurance................... 6,595 6,257 5.4% 5,077 4,931 3.0%
Property supervision........... 1,671 1,602 4.3% 1,326 1,272 4.2%
Other operating expense........ 1,779 1,931 (7.9)% 1,598 1,549 3.2%
------- ------- ------- -------
Total property operating and
maintenance expense............ 25,302 24,245 4.4% 20,206 19,277 4.8%
------- ------- ------- -------
Property operating income........ $41,672 $40,401 3.1% $33,360 $31,302 6.6%
======= ======= ======= =======
Average physical occupancy(2).... 93.1% 94.3% (1.2)% 94.0% 93.3% 0.8%
======= ======= ======= =======
Average monthly rental
revenue(3)..................... $ 714 $ 688 3.8% $ 682 $ 650 4.9%
======= ======= ======= =======
Number of apartment homes........ 8,061 8,061 6,729 6,729
======= ======= ======= =======
(1) Before real estate depreciation and amortization expense.
(2) Average physical occupancy is defined as the number of apartment homes
occupied divided by the total number of apartment homes contained in the
Communities, expressed as a percentage. Average physical occupancy has been
calculated using the average of the midweek occupancy that existed during
each week of the period.
(3) Represents the average monthly net rental revenue per occupied apartment
home.
Rental and other revenue increased from 1995 to 1996 due to higher rental rates
partially offset by a decrease in occupancy. The 3.6% property revenue growth
rate was lower than the prior year rate of growth primarily as a result of a new
supply of competing multi-family Communities in the markets in which the Company
operates. In 1997 the Company expects the rate of growth to be similar to the
growth rate in 1996 as the supply of new multi-family Communities continues to
increase balanced by the continued strength of the local economies in which the
Company operates. The Company believes its expectations relative to property
revenue growth are based on reasonable assumptions as to future economic
conditions and the quantity of competitive multi-family Communities in the
markets in which the Company does business. There can be no assurance that
actual results will not differ from these assumptions.
The increase in property operating and maintenance expenses from 1995 to 1996
was primarily due to increased insurance costs ($240,000 or a 40% increase),
higher advertising costs and higher building and repair costs. The increase in
insurance expense was due to higher insurance rates in the Company's Florida
markets, caused by the significant storm damages incurred in the past years by
the insurance industry. Included in the building repairs and maintenance cost
was a $148,000 or a 14% increase for replacement of carpets. Rental and other
revenue increased from 1994 to 1995 due to higher rental rates and increased
occupancy. The increase in property operating and maintenance expenses from 1994
to 1995 was due primarily to building repairs and maintenance expense.
Replacement carpets increased $196,000 or 28.6%, which was a
16
17
significant component of the building repairs and maintenance increase. As a
percentage of total property revenues, property operating and maintenance
expense was 37.8%, 37.5% and 38.1% for the years ended December 31, 1996, 1995
and 1994, respectively.
OPERATING PERFORMANCE OF THE COMPANY'S ACQUISITION COMMUNITIES
Acquisition Communities consist of Summit Plantation (262 apartment homes) in
1996 and the Crosland Acquisition Communities (2,025 apartment homes) in 1995.
Acquisition Communities in 1994 consist of five Communities (Summit Stony Point,
Summit Reston, Summit Hill I, Summit Creek and Summit Lofts). The operations of
these Communities are summarized as follows (dollars in thousands except average
monthly rental revenue):
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------- -----------------------
1996 1995 1995 1994
--------- -------- --------- --------
Property revenues:
Rental....................................... $16,401 $8,467 $19,109 $5,964
Other........................................ 592 249 687 237
------- ------ ------- ------
Total property revenues........................ 16,993 8,716 19,796 6,201
------- ------ ------- ------
Property operating and maintenance
expense(1)................................... 6,444 3,492 7,531 2,225
------- ------ ------- ------
Property operating income...................... $10,549 $5,224 $12,265 $3,976
======= ====== ======= ======
Average physical occupancy(2).................. 94.0% 96.1% 95.5% 94.7%
======= ====== ======= ======
Average monthly rental revenue(3).............. $ 672 $ 592 $ 643 $ 688
======= ====== ======= ======
Number of apartment homes:
1994 Acquisitions............................ -- -- 1,332 1,332
1995 Acquisitions............................ 2,025 2,025 2,025 --
1996 Acquisitions............................ 262 -- -- --
------- ------ ------- ------
Total number of apartment homes................ 2,287 2,025 3,357 1,332
======= ====== ======= ======
(1) Before real estate depreciation and amortization expense.
(2) Average physical occupancy is defined as the number of apartment homes
occupied divided by the total number of apartment homes contained in the
Communities, expressed as a percentage. Average physical occupancy has been
calculated using the average of the midweek occupancy that existed during
each week of the period.
(3) Represents the average monthly net rental revenue per occupied apartment
home.
The unleveraged yield, defined as property operating income over total
acquisition cost, for the year ended December 31, 1996 on the Crosland
Acquisition Communities was 10.7% compared to an annualized yield of 10.0% for
the period from acquisition (May 16, 1995, except Summit East Ridge which was
acquired June 22, 1995) to December 31, 1995.
As a percentage of total property revenues, property operating and maintenance
expense was 37.9%, 40.1% and 35.9% for the years ended December 31, 1996, 1995
and 1994, respectively.
OPERATING PERFORMANCE OF THE COMPANY'S COMMUNITIES IN LEASE-UP
The Company had seven Communities in lease-up with a total of 2,106 apartment
homes during the year ended December 31, 1996. A Community in lease-up is
defined as one which has commenced rental operations but has not achieved
stabilization as of the beginning of the period. Five of the seven Communities
had completed construction as of December 31, 1996. In order to evaluate the
impact of developments and lease-ups on the Company's operations, the amount of
interest expensed on Communities in development and lease-up is presented. The
results of operations of these seven Communities in lease-up for the last four
17
18
quarters, including interest expense incurred during construction and lease-up,
are summarized as follows (dollars in thousands except average monthly rental
revenue):
THREE MONTHS ENDED
-------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996
------------ ------------- -------- ---------
Property revenues:
Rental...................................... $3,317 $2,792 $1,756 $1,042
Other....................................... 241 213 135 84
------ ------ ------ ------
Total property revenues....................... 3,558 3,005 1,891 1,126
Property operating and maintenance
expense(1).................................. 1,192 1,003 762 523
------ ------ ------ ------
Property operating income..................... 2,366 2,002 1,129 603
Interest expense.............................. 1,775 1,400 999 662
------ ------ ------ ------
Property income (loss) after interest
expense..................................... $ 591 $ 602 $ 130 $ (59)
====== ====== ====== ======
Average monthly rental revenue(2)............. $ 873 $ 877 $ 876 $ 889
====== ====== ====== ======
Number of apartment homes completed........... 1,708 1,526 1,178 870
====== ====== ====== ======
Number of apartment homes leased.............. 1,481 1,345 1,041 681
====== ====== ====== ======
Number of apartment homes occupied............ 1,414 1,242 895 539
====== ====== ====== ======
(1) Before real estate depreciation, amortization and interest expense.
(2) Represents the average monthly net rental revenue per occupied apartment
home.
A summary of the five Communities (1,440 apartment homes) in lease-up which had
completed construction as of December 31, 1996 is as follows (dollars in
thousands):
% LEASED
NUMBER OF ACTUAL/ AVERAGE AS OF
APARTMENT TOTAL CONSTRUCTION ANTICIPATED OCCUPANCY DECEMBER 31,
COMMUNITY HOMES COST COMPLETION STABILIZATION 1996 1996
- --------------------------- --------- ------- ------------ ------------- --------- ------------
Summit Aventura............ 379 $31,255 Q4 1995 Q3 1996 78.8% 97.1%
Summit Hill II............. 207 11,383 Q2 1996 Q3 1996 75.1% 95.7%
Summit Green............... 300 18,552 Q2 1996 Q4 1996 60.1% 94.7%
Summit River Crossing...... 314 19,111 Q3 1996 Q4 1996 48.8% 94.6%
Summit Fairways............ 240 17,668 Q4 1996 Q3 1997 11.1% 48.8%
--------- -------
1,440 $97,969
========= =======
The remaining Communities in lease-up, Summit on the River and Summit Russett,
are still under construction, with completion anticipated in the second quarter
of 1997. As of December 31, 1996, the Company had leased: 48.3%, or 170 of the
352 apartment homes at Summit on the River, which opened in May 1996; and 15.0%,
or 47 of the 314 apartment homes at Summit Russett, which opened in November
1996. These two Communities are expected to represent a total investment upon
completion of approximately $46.0 million.
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OPERATING PERFORMANCE OF SUMMIT MANAGEMENT COMPANY
The operating performance of Summit Management Company and its wholly-owned
subsidiary, Summit Apartment Builders, Inc. is summarized below (dollars in
thousands):
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------- ---------------------------
1996 1995 % CHANGE 1995 1994 % CHANGE
------ ------ --------- ------ ------ ---------
Property management revenue.......... $4,706 $5,189 (9.3)% $5,189 $5,122 1.3%
Construction company income.......... 529 288 83.7% 288 264 9.1%
Other management company income...... 129 155 (16.8)% 155 149 4.0%
------ ------ ------ ------
Total revenue...................... 5,364 5,632 (4.8)% 5,632 5,535 1.8%
Property management expenses:
Operating.......................... 4,407 4,581 (3.8)% 4,581 4,512 1.5%
Depreciation....................... 110 120 (8.3)% 120 53 126.4%
Amortization....................... 278 274 1.5% 274 219 25.1%
Interest........................... 300 300 0.0% 300 262 14.5%
------ ------ ------ ------
Total property management
expenses........................ 5,095 5,275 (3.4)% 5,275 5,046 4.5%
Construction company expenses........ 442 437 1.1% 437 378 15.6%
------ ------ ------ ------
Total expenses..................... 5,537 5,712 (3.1)% 5,712 5,424 5.3%
------ ------ ------ ------
Net income (loss) of Summit
Management Company................. $ (173) $ (80) (116.3)% $ (80) $ 111 (172.1)%
====== ====== ====== ======
The decrease in property management revenue from 1994 to 1996 was the result of
a reduction in the average number of communities managed for third parties
partially offset by an increase in the average number of the Company's
Communities. Total average third party apartment homes under management were
7,919, 10,927 and 12,362 during each of the years ended December 31, 1996, 1995
and 1994, respectively. The decrease was primarily due to the termination of the
Management Company's contract to manage a portfolio of 4,050 apartment homes
effective October 1, 1995. This contract was terminated as a result of the
owner's decision to provide its own property management for these apartment
homes.
Property management fees include $2.3 million, $3.3 million and $3.9 million of
fees from third parties for the years ended December 31, 1996, 1995 and 1994,
respectively. Property management fees from third parties as a percentage of
total property management revenues were 48.1%, 62.9% and 73.0% for the years
ended December 31, 1996, 1995 and 1994, respectively. The Company expects third
party management revenue as a percentage of total property management revenues
to continue to decline as revenues from the Company's Communities continue to
increase.
Construction Company revenues and expenses increased in 1996 compared to 1995
primarily due to the increased number of construction projects. The increase in
construction projects was a result of the Company's decision to expand its
in-house construction operations in the state of Florida to cover the entire
geographic area in which the Company operates. All of the Construction Company's
income for the years ended December 31, 1996, 1995 and 1994 is from contracts
with the Company, except for the contract to build Summit Plantation (formerly
Plantation Cove). The company owned a 25% interest in the Plantation Cove joint
venture during construction.
OTHER INCOME AND EXPENSES
Interest income increased $97,000 to $558,000 in 1996 compared to 1995,
primarily due to interest earned on the proceeds from the 1996 Offering prior to
using the proceeds to fund development projects.
Development and other fees from related parties decreased in 1995 compared to
1994, primarily due to the development of Summit Plantation in 1994. The Company
held a joint venture interest in this Community until April 1, 1996, when the
Company acquired the remaining 75% interest.
Interest expense increased $2.3 million or 15.8% to $17.1 million in 1996
compared to 1995, primarily due to interest on debt related to the Company's
1995 acquisitions and an increase in interest expense related to the
19
20
Communities in lease-up, partially offset by the Company's repayment of debt in
connection with the 1995 and 1996 Offerings. The 1995 and 1996 Offerings
together resulted in aggregate net proceeds of approximately $163.0 million.
Interest expense increased $735,000 or 5.22% in 1995 compared to 1994, primarily
due to interest incurred in connection with the Company's 1994 and 1995
acquisitions and Communities in lease-up in 1995, substantially offset by the
Company's repayment of debt in connection with the 1995 Offering.
General and administrative expense increased in 1996 compared to 1995 and in
1995 compared to 1994 primarily due to increased compensation costs and
professional fees. The increase in compensation in 1996 includes the cost of the
Company's restricted stock grants and the cost of the Company's employee stock
purchase plan. As a percentage of revenues, general and administrative cost was
2.7%, 2.6% and 3.0% for the years ended December 31, 1996, 1995 and 1994,
respectively.
The extraordinary items in 1996 and 1995 resulted primarily from the write-off
of deferred financing costs in conjunction with the repayment of debt with the
proceeds from the 1996 and 1995 Offerings and with the proceeds of the $31.0
million unsecured debt financing received in August, 1996. The 1994
extraordinary item resulted from debt repayment related to the Initial Offering.
LIQUIDITY AND CAPITAL RESOURCES
In August 1996, the Company completed the sale of an additional 5.75 million
shares of Common Stock with net proceeds of $97.6 million. In addition, in
August 1996, the Company obtained $31.0 million of unsecured debt financing
consisting of a $15.0 million unsecured note with a four-year term and a $16.0
million unsecured note with a six-year term, which bear interest at 7.61% and
7.85%, respectively. Approximately $97.7 million of the proceeds from the
issuance of Common Stock and the unsecured debt financing were utilized to fully
repay the outstanding balance under the Company's revolving credit facility and
development loans. The remaining $30.9 million of the proceeds were used to fund
current development.
In November 1996, the Company replaced its $50 million revolving credit facility
with a new unsecured $150 million credit facility (the "Unsecured Credit
Facility"). The Unsecured Credit Facility has a three year term and currently
bears interest at LIBOR + 110 basis points based upon the Company's credit
rating of BBB- by Standard & Poors Rating Group. The interest rate can be
reduced in the event an upgrade of the Company's unsecured credit rating as
assigned by Standard & Poors Rating Group (which rating must be accompanied by
the comparable senior unsecured bond rating from one of Moody's, Duff & Phelps
or Fitch) as follows:
CREDIT RATING RATE
------------- ---------------
BBB-....................... LIBOR + 110
BBB........................ LIBOR + 95
BBB+....................... LIBOR + 80
The Unsecured Credit Facility provides $25 million for general working capital
purposes with the remaining $125 million available to finance new development
and acquisitions.
The Company's outstanding indebtedness at December 31, 1996 totaled $309.9
million. This amount includes approximately $193.3 million in fixed rate
conventional mortgages, $53.8 million of variable rate tax-exempt bonds, $31.0
million of unsecured notes, $9.4 million of tax exempt fixed rate loans, and
$22.4 million under the Unsecured Credit Facility.
20
21
The Company's outstanding indebtedness had an average maturity of 8.7 years as
of December 31, 1996. The aggregate maturities of all outstanding debt as of
December 31, 1996 for each of the years ended after December 31, 1996 were as
follows (in thousands):
1997............................................ $ 4,620
1998............................................ 4,902
1999............................................ 27,563
2000............................................ 20,501
2001............................................ 114,262
Thereafter...................................... 138,085
--------
$309,933
========
Of the significant maturities in the above table, $22.4 million relates to the
expiration of the Unsecured Credit Facility in 1999, $15.0 million and $16.0
million relate to the unsecured notes that mature in 2000 and 2002,
respectively; and $111.4 million relates to a mortgage loan balloon payment in
2001.
The Company's net cash provided by operating activities increased from $31.0
million for the year ended December 31, 1995 to $41.2 million for the same
period in 1996 primarily due to a $12.2 million increase in property operating
income, offset by a $2.3 million increase in interest expense. The increase in
interest expense was small relative to the increase in property operating income
due to the retirement of debt with the proceeds from the 1995 and 1996
Offerings.
Net cash used in investing activities increased from $63.7 million for the year
ended December 31, 1995 to $104.0 million for the same period in 1996 due to an
increase in development of Communities, higher capital expenditures on existing
properties and an increase in acquisition Communities.
Net cash provided by financing activities increased from $34.4 million for the
year ended December 31, 1995 to $63.6 million for the same period in 1996,
primarily due to an increase in offering proceeds, partially offset by higher
dividends and distributions to unitholders.
The Company expects to meet its short-term liquidity requirements generally
through its net cash provided by operations and borrowings under the Unsecured
Credit Facility. The Company believes that its net cash provided by operations
will be adequate to meet its operating requirements and to satisfy applicable
REIT dividend payment requirements in both the short-term and in the long-term.
Improvements and renovations at existing Communities are expected to also be
funded from property operations.
The Company expects to meet its long-term liquidity requirements, such as future
developments, debt maturities, acquisitions, renovations and other non-recurring
capital expenditures, with borrowings under its Unsecured Credit Facility,
through the issuance of long-term secured and unsecured debt securities and
additional equity securities of the Company, or in connection with the
acquisition of land or improved property, through the issuance of Units of the
Operating Partnership.
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22
The following table sets forth certain information regarding debt financing as
of December 31, 1996 and 1995 (dollars in thousands):
PRINCIPAL OUTSTANDING
INTEREST DECEMBER 31,
RATE AS OF MATURITY ----------------------
DECEMBER 31, 1996 DATE 1996 1995
----------------- -------- --------- ---------
FIXED RATE DEBT
MORTGAGE LOAN(1)........................ 5.88% 2/15/01 $122,950 $125,000
MORTGAGE LOAN(1)........................ 7.71% 12/15/05 29,653 30,000
MORTGAGE LOAN(2)........................ 8.00% 9/1/05 8,638 8,712
MORTGAGE NOTES
Summit Hollow I...................... 8.00% 11/1/18 2,286 2,326
Summit Hollow II..................... 7.75% 1/1/29 2,587 2,607
Summit Creekside..................... 8.00% 6/1/22 2,877 2,914
Summit Old Town...................... 8.00% 9/1/20 3,097 3,143
Summit Eastchester................... 8.00% 5/1/21 3,872 3,925
Summit Foxcroft...................... 8.00% 4/1/20 2,788 2,844
Summit Oak........................... 7.75% 12/1/23 2,585 2,615
Summit Sherwood...................... 7.88% 3/1/29 3,329 3,353
Summit Radbourne..................... 9.80% 3/1/02 8,683 8,758
TAX EXEMPT MORTGAGE NOTES
Summit Crossing...................... 6.95% 11/1/25 4,213 4,261
Summit East Ridge.................... 7.25% 12/1/26 5,156 5,207
-------- --------
TOTAL MORTGAGE DEBT............. 202,714 205,665
-------- --------
UNSECURED NOTES
Bank Note............................ 7.85% 8/3/02 16,000 --
Bank Note............................ 7.61% 8/3/00 15,000 --
-------- --------
TOTAL UNSECURED NOTES........... 31,000 --
-------- --------
TOTAL FIXED RATE DEBT........... 233,714 205,665
VARIABLE RATE DEBT
UNSECURED CREDIT FACILITY............... LIBOR + 110 11/18/99 22,357 4,396
TAX EXEMPT BONDS
Summit Belmont....................... 5.60% 4/1/07 11,850 11,900
Summit Hampton....................... 5.60% 6/1/07 12,700 12,800
Summit Pike Creek.................... 5.60% 8/15/20 13,262 13,545
Summit Gateway....................... 5.60% 7/1/07 7,300 7,700
Summit Stony Point................... 5.60% 4/1/29 8,750 8,895
-------- --------
TOTAL TAX EXEMPT BONDS............. 53,862 54,840
DEVELOPMENT LOANS REPAID IN 1996........ -- 32,109
-------- --------
TOTAL VARIABLE RATE DEBT........... 76,219 91,345
-------- --------
TOTAL OUTSTANDING INDEBTEDNESS................................. $309,933 $297,010
======== ========
(1) Mortgage Loans secured by fifteen Communities
(2) Mortgage Loan secured by two Communities
The London Interbank Offered Rate (LIBOR) at December 31, 1996 was 5.56%.
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ACQUISITIONS SUBSEQUENT TO YEAR END
The Company acquired three Communities subsequent to December 31, 1996. The
three acquisitions are summarized as follows (dollars in thousands):
FUNDED BY
--------------------------------------
ACQUISITION APARTMENT PURCHASE UNSECURED ISSUANCE ISSUANCE
COMMUNITY DATE HOMES PRICE CREDIT FACILITY OF UNITS OF SHARES
- ------------------------------------ ----------- --------- -------- --------------- -------- ---------
Summit Portofino -- Broward County,
FL................................ 1/6/97 322 $28,000 $ 21,187 $ 6,813
Summit Mayfaire -- Raleigh, NC...... 1/15/97 144 9,650 9,650 --
Summit Sand Lake -- Orlando, FL..... 2/20/97 416 26,798 2,700 $3,939 4,933
--------- ------- --------------- ------ -------
882 $64,448 $ 33,537 $3,939 $11,746
========= ======= =============== ====== =======
Concurrently with the purchase of Summit Portofino, the Company sold 315,029
shares of Common Stock to the public for cash. The Company used the net proceeds
of this sale to fund a portion of the purchase price. The Company issued 243,608
shares of Common Stock and 194,495 Units in the Operating Partnership in
conjunction with the purchase of Summit Sand Lake. In addition, the Company
assumed $15.2 million of debt in the purchase of Summit Sand Lake.
DEVELOPMENT ACTIVITY
The Company's developments in process at December 31, 1996 are summarized as
follows (dollars in thousands):
TOTAL ESTIMATED ANTICIPATED
APARTMENT ESTIMATED COST TO COST TO CONSTRUCTION
COMMUNITY HOMES COSTS DATE COMPLETE COMPLETION
- -------------------------------------------- --------- --------- ------- --------- ------------
Summit on the River -- Atlanta, GA.......... 352 $ 23,900 $20,496 $ 3,404 Q2 1997
Summit Russett -- Laurel, MD................ 314 22,100 17,729 4,371 Q2 1997
Summit Stonefield -- Yardley, PA............ 216 18,370 7,893 10,477 Q4 1997
Summit Sedgebrook I -- Charlotte, NC........ 248 15,640 3,520 12,120 Q4 1997
Summit Ballantyne I -- Charlotte, NC........ 246 16,800 4,138 12,662 Q4 1997
Summit Plantation II -- Plantation, FL...... 240 22,000 6,217 15,783 Q4 1997
Summit Lake I -- Raleigh, NC................ 302 19,700 2,805 16,895 Q2 1998
Summit Fair Lakes I -- Fairfax, VA.......... 370 32,900 6,790 26,110 Q4 1998
Summit New Albany -- Columbus, OH........... 428 30,100 3,778 26,322 Q1 1999
Other development and construction costs.... -- -- 12,791 --
--------- -------- ------- --------
2,716 $201,510 $86,157 $128,144
========= ======== ======= ========
In addition, the Company has a commitment to purchase a Community (Summit St.
Claire) currently under construction in Atlanta, Georgia for approximately $27.5
million. The 336 apartment home Community is expected to be purchased, after
reaching rental stabilization, in the fourth quarter of 1998.
Certain Factors Affecting the Performance of Development Communities
The Company is optimistic about the operating prospects of the Communities under
construction even with the increased supply of newly constructed apartment homes
of comparable quality in many of its markets. As with any development Community,
there are uncertainties and risks associated with the development of the
Communities described above. While the Company has prepared development budgets
and has estimated completion and stabilization target dates based on what it
believes are reasonable assumptions in light of current conditions, there can be
no assurance that actual costs will not exceed current budgets or that the
Company will not experience construction delays due to the unavailability of
materials, weather conditions or other events. Other development risks include
the possibility of incurring additional cost or liability resulting from defects
in construction materials and the possibility that financing may not be
available on favorable
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terms, or at all, to pursue or complete development activities. Similarly,
market conditions at the time these Communities become available for leasing
will affect the rental rates that may be charged and the period of time
necessary to achieve stabilization, which could make one or more of the
development communities unprofitable or result in achieving stabilization later
than currently anticipated. In addition, the Company is conducting feasibility
and other pre-development work for nine Communities. The Company could abandon
the development of any one or more of these potential Communities in the event
that it determines that market conditions do not support development, financing
is not available on favorable terms or other circumstances prevent development.
Similarly, there can be no assurance that if the Company does pursue one or more
of these potential Communities that it will be able to complete construction
within the currently estimated development budgets or that construction can be
started at the time currently anticipated.
CAPITALIZATION OF FIXED ASSETS AND PROPERTY IMPROVEMENTS
The Company has established a policy of capitalizing those expenditures relating
to acquiring new assets, materially enhancing the value of an existing asset, or
substantially extending the useful life of an existing asset. All expenditures
necessary to maintain a Community in ordinary operating condition (including
replacement carpets) are expensed as incurred.
Capitalized expenditures for the years ended December 31, 1996, 1995 and 1994
are summarized as follows (dollars in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Acquisition of Communities(1).............................. $ 21,913 $ 82,935 $ 75,921
Construction of Communities(2)............................. 88,064 58,104 26,694
Capitalized interest....................................... 4,266 3,110 686
Cost of acquiring existing Communities in conjunction with
the initial business combination......................... -- -- 1,469
Non-recurring capital expenditures:
Construction of garages.................................. 578 153 --
Access gates............................................. 138 -- --
New signage.............................................. 225 -- --
Water meters............................................. 201 -- --
Washer/dryer units....................................... 74 -- --
Major improvements....................................... 1,698 -- --
Improvements at acquisition.............................. -- 706 --
Other.................................................... 59 5 --
-------- -------- --------
Total non-recurring.............................. 2,973 864 --
-------- -------- --------
Recurring capital expenditures:
Exterior painting........................................ 1,131 810 980
Other.................................................... 2,160 1,370 730
-------- -------- --------
Total recurring.................................. 3,291 2,180 1,710
-------- -------- --------
$120,507 $147,193 $106,480
======== ======== ========
(1) Includes the assumption of $14.3 million, $52.6 million and $9.1 million of
debt in 1996, 1995 and 1994 respectively. In addition, includes conversion
of equity investment into fixed assets of $1.2 million in conjunction with
the purchase of Summit Plantation in 1996 and the issuance of 1.5 million
Units of the Operating Partnership with a value of $26.2 million in 1995.
(2) Includes the issuance of $2.1 million, $896,000 and $735,000 of Units in the
Operating Partnership for the acquisition of land in 1996, 1995 and 1994,
respectively.
Construction of Communities was funded primarily by development loans, equity
offering proceeds and borrowing under the credit facilities. Other additions and
improvements were funded primarily by Community operations and the credit
facilities.
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25
INFLATION
Substantially all of the leases at the Communities are for a term of one year or
less, which, coupled with the relatively high occupancy rates, may enable the
Company to seek increased rents upon renewal of existing leases or commencement
of new leases. The short-term nature of these leases generally serves to reduce
the risk to the Company of the adverse effect of inflation.
FUNDS FROM OPERATIONS
The Company generally considers Funds from Operations to be an appropriate
measure of performance of an equity REIT. Funds from Operations, as defined by
the National Association of Real Estate Investment Trusts (NAREIT), represents
net income (loss) determined in accordance with generally accepted accounting
principles (GAAP), excluding gains or losses from sales of assets or debt
restructuring, plus certain non-cash items, primarily real estate depreciation,
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for all periods consisted only of real estate depreciation. Funds
Available for Distribution is defined as Funds from Operations less recurring
capital expenditures funded by operations. Funds from Operations and Funds
Available for Distribution should not be considered as an alternative to net
income (determined in accordance with GAAP), as an indication of the Company's
financial performance, or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of liquidity.
Funds from Operations and Funds Available for Distribution are calculated as
follows (dollars in thousands):
PRO FORMA
1996 1995 1994 1994
----------- ----------- ----------- -----------
Net income............................... $ 16,948 $ 11,819 $ 9,271 $ 14,032
Minority Interest of unitholders in
Operating Partnership.................. 3,723 2,793 1,789 1,527
Extraordinary items...................... 516 439 -- (7,032)
Depreciation:
Real estate assets..................... 18,171 15,021 11,702 11,593
Summit Plantation...................... 33 76 -- --
----------- ----------- ----------- -----------
Funds from Operations.................... 39,391 30,148 22,762 20,120
Recurring capital expenditures........... (3,291) (2,180) (1,710) (1,710)
----------- ----------- ----------- -----------
Funds Available for Distribution......... $ 36,100 $ 27,968 $ 21,052 $ 18,410
=========== =========== =========== ===========
Weighted average shares and units
outstanding............................ 22,940,998 18,116,664 14,827,257 13,389,757
=========== =========== =========== ===========
The Pro Forma 1994 information is presented as if the Initial Offering had
occurred as of January 1, 1994.
The above Funds from Operations calculations in 1996, 1995, pro-forma 1994 and
historical 1994 reflect changes required by NAREIT for fiscal years beginning in
1996. The primary effect of the changes on the Company's calculation of Funds
from Operations was that amortization of financing cost is no longer added back
in arriving at Funds from Operations. Funds from Operations under the previous
calculation method would have been $40.5 million, $31.4 million, $23.9 million
and $21.3 million for the years ended December 31, 1996, 1995, pro-forma 1994
and historical 1994, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are contained on the pages indicated
on the Index to Financial Statements and Supplementary Data on page 30 of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission within 120 days after the
end of the year covered by this Form 10-K with respect to its Annual Meeting of
Stockholders to be held on May 13, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission within 120 days after the
end of the year covered by this Form 10-K with respect to its Annual Meeting of
Stockholders to be held on May 13, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission within 120 days after the
end of the year covered by this Form 10-K with respect to its Annual Meeting of
Stockholders to be held on May 13, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission within 120 days after the
end of the year covered by this Form 10-K with respect to its Annual Meeting of
Stockholders to be held on May 13, 1997.
26
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedule
The consolidated financial statements and financial statement schedule of the
Company and its predecessors (Summit Entities) are listed in the Index to
Financial Statements and Supplementary Data on page 30 of this Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.
(c) Exhibits
As noted below, certain of the exhibits required by Item 601 of Regulation S-K
have been filed with previous reports by the Company and are incorporated by
reference herein.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1.1**** Underwriting Agreement dated May 25, 1995
1.2*** Underwriting Agreement
3.1* Articles of Incorporation of the Company
3.2* Bylaws of the Company
10.1* Agreement of Limited Partnership of the Operating
Partnership
10.2** Registration Rights Agreement among the Company and the
Continuing Investors
10.3** Articles of Incorporation of the Management Company
10.4** Bylaws of the Management Company
10.5***** Summit Properties Inc. 1996 Non-Qualified Employee Stock
Purchase Plan
10.6* Option and Transfer Agreement among the Management Company,
William F. Paulsen and the Operating Partnership
10.7* Employment Agreement between the Company and William F.
Paulsen
10.8* Employment Agreement between the Company and William B.
McGuire, Jr.
10.9* Employment Agreement between the Company and Raymond V.
Jones
10.10* Employment Agreement between the Company and Keith H.
Kuhlman
10.11* Employment Agreement between the Company and David F. Tufaro
10.12* Employment Agreement between the Company and John C. Moore
10.12.1* Employment Agreement between the Company and Michael G.
Malone
10.12.2** Employment Agreement between the Company and Keith L. Downey
10.12.3** Employment Agreement between the Company and Christopher A.
Hughes
10.14** Omnibus Option Agreement dated as of December 1, 1993 among
the Operating Partnership and the Grantors named therein
10.15* Acquisition Agreement of Stony Point Community
10.16** Indemnification Agreement
10.17** Promissory Note from the Management Company to Old Summit
Management Company
10.18* Letter of Commitment to enter into the Mortgage Loan between
the Operating Partnership and Northwestern Mutual Life
Insurance Company
10.18.1** Promissory Note
10.18.2** Mortgage and Security Agreement and Financing Statement
10.19* Letter of Commitment to enter into the Credit Facility
10.19.1** Revolving Credit Agreement
10.19.2** Mortgage and Security Agreement and Financing Statement
10.20** Lock-Up Agreement
10.21** Assignment, Assumption and Option Agreement for Henderson
Place/McGuire Partners Limited Partnership
10.22** Option Agreement between the Operating Partnership and LMES
Limited Partnership
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28
10.23* Waiver of Rescission Rights and Contribution Agreement
10.24* Noncompetition Agreement between the Company and William F.
Paulsen
10.25* Noncompetition Agreement between the Company and William B.
McGuire, Jr.
10.26* Noncompetition Agreement between the Company and Raymond V.
Jones
10.27* Noncompetition Agreement between the Company and Keith H.
Kuhlman
10.28* Noncompetition Agreement between the Company and David F.
Tufaro
10.29* Noncompetition Agreement between the Company and John T.
Gray
10.30* Noncompetition Agreement between the Company and John C.
Moore
10.31* Noncompetition Agreement between the Company and Michael G.
Malone
10.32* Supplemental Representations and Warranties Agreement
10.33** Interest Rate Protection Agreement between the Company and
Morgan Stanley Capital Services Inc.
10.34*** $31,000,000 Loan Agreement from Wachovia Bank of North
Carolina, N.A.
10.35 $150,000,000 Credit Agreement
10.36 Employment Agreement between the Company and William B.
Hamilton
10.37 Noncompetition Agreement between the Company and William B.
Hamilton
21.1* Schedule of Subsidiaries of the Company
27.1 Financial Data Schedule
* Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-11, commission number 3390706 initially filed with the
Securities and Exchange Commission (the "Commission") on March 28, 1995.
** Previously filed as an exhibit to the Registrant's 1994 Form 10-Q filed
with the Commission on March 18, 1995.
*** Previously filed as an exhibit to the Registrant's 1996 Form 10-Q filed
with the Commission on October 28, 1996.
**** Previously filed as an exhibit to the Registrant's 1995 Form 10-K filed
with the Commission on April 1, 1996.
***** Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8, commission number 333-78, filed with the Commission on
January 4, 1996.
28
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Summit Properties Inc. certifies that it has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in Charlotte, North Carolina on February 24, 1997.
SUMMIT PROPERTIES INC.
/s/ William F. Paulsen
--------------------------------------
William F. Paulsen,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ WILLIAM B. MCGUIRE, JR. Chairman of the Board of February 24, 1997
- ----------------------------------------------------- Directors
William B. McGuire, Jr.
/s/ WILLIAM F. PAULSEN President, Chief Executive February 24, 1997
- ----------------------------------------------------- Officer and Director
William F. Paulsen (Principal Executive
Officer)
/s/ MICHAEL L. SCHWARZ Chief Financial Officer February 24, 1997
- ----------------------------------------------------- (Principal Financial
Michael L. Schwarz Officer and Principal
Accounting Officer)
Director February 24, 1997
- -----------------------------------------------------
John Crosland, Jr.
Director February 24, 1997
- -----------------------------------------------------
Henry H. Fishkind
/s/ JAMES H. HANCE, JR. Director February 24, 1997
- -----------------------------------------------------
James H. Hance, Jr.
/s/ NELSON SCHWAB, III Director February 24, 1997
- -----------------------------------------------------
Nelson Schwab, III
29
30
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company required to be included in
Item 14(a)(1) are listed below:
SUMMIT PROPERTIES INC.
PAGE
----
Independent Auditors' Report................................ 31
Consolidated Balance Sheets as of December 31, 1996 and
1995...................................................... 32
Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1995 and 1994.......................... 33
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994.............. 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994.......................... 35
Notes to Consolidated Financial Statements.................. 36
The following financial statement supplementary data of the
Company required to be included in Item 14(a)(2) is listed
below:
Schedule III -- Real Estate and Accumulated Depreciation.... 47
All other schedules are omitted because they are not applicable or not required.
30
31
INDEPENDENT AUDITORS' REPORT
Board of Directors
Summit Properties Inc.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of Summit
Properties Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of earnings, stockholders' equity, and cash flows of Summit
Properties Inc. and Predecessors (Summit Entities -- see Note 1), as more fully
described in Note 1, for each of the three years in the period ended December
31, 1996. Our audits also included the financial statement schedule listed in
the Index at Item 14. These financial statements and financial statement
schedule are the responsibility of the management of Summit Properties Inc. and
Predecessors. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Summit Properties Inc. as of
December 31, 1996 and 1995, and the results of operations and cash flows of
Summit Properties Inc. and Predecessors for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to the incorporation by reference of the above report in Registration
Statement Nos. 33-90704, 33-90706, and 33-93540 on Form S-3, and Registration
Statement Nos. 33-88202 and 333-78 on Form S-8 of Summit Properties Inc.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
January 24, 1997
(February 20, 1997 as to Note 13)
31
32
SUMMIT PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------
1996 1995
-------- --------
ASSETS
Real estate assets:
Land and land improvements................................ $102,605 $ 90,336
Buildings and improvements................................ 472,996 399,057
Furniture, fixtures and equipment......................... 43,021 36,336
-------- --------
618,622 525,729
Less: accumulated depreciation............................ (85,651) (67,884)
-------- --------
Operating real estate assets...................... 532,971 457,845
Construction in progress.................................. 86,157 59,300
Investment in real estate joint venture................... -- 1,235
-------- --------
Net real estate assets............................ 619,128 518,380
Cash and cash equivalents................................... 3,665 2,881
Restricted cash............................................. 4,121 4,188
Investment in Summit Management Company..................... 687 590
Deferred financing costs, net of accumulated amortization of
$2,441 and $1,914 in 1996 and 1995........................ 4,675 5,398
Other assets................................................ 2,715 1,815
-------- --------
Total assets................................................ $634,991 $533,252
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable............................................. $309,933 $297,010
Accrued interest payable.................................. 1,318 903
Accounts payable and accrued expenses..................... 7,257 7,850
Dividends and distributions payable....................... 10,244 7,699
Security deposits and prepaid rents....................... 3,196 2,651
-------- --------
Total liabilities................................. 331,948 316,113
-------- --------
Commitments
Minority interest........................................... 45,829 41,685
Stockholders' equity:
Common stock, $.01 par value -- 100,000,000 authorized,
22,409,638 and 16,500,789 shares issued and outstanding
in 1996 and 1995, respectively......................... 224 165
Additional paid-in capital................................ 342,872 247,064
Accumulated deficit....................................... (85,068) (71,775)
Unamortized restricted stock compensation................. (814) --
-------- --------
Total stockholders' equity........................ 257,214 175,454
-------- --------
Total liabilities and stockholders' equity.................. $634,991 $533,252
======== ========
See notes to consolidated financial statements.
32
33
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Rental............................................ $ 88,864 $ 70,773 $ 54,198
Other property income............................. 4,683 3,356 2,582
Property management............................... -- -- 536
Interest.......................................... 558 461 416
Development and other fees from related parties... 72 112 385
Other income...................................... 312 292 317
----------- ----------- -----------
Total revenues............................ 94,489 74,994 58,434
----------- ----------- -----------
Expenses:
Property operating and maintenance:
Personnel...................................... 8,368 6,640 5,033
Advertising and promotion...................... 1,417 698 504
Utilities...................................... 4,115 3,432 2,782
Building repairs and maintenance............... 7,547 6,116 4,456
Real estate taxes and insurance................ 8,823 6,965 5,552
Depreciation................................... 18,208 15,141 11,700
Property supervision........................... 2,240 1,848 1,430
Other operating expenses....................... 2,716 2,313 1,745
----------- ----------- -----------
53,434 43,153 33,202
Property management............................... -- -- 366
Interest.......................................... 17,138 14,802 14,067
General and administrative........................ 2,557 1,949 1,756
REIT formation costs.............................. -- -- 457
Loss (income) in equity investments:
Summit Management Company...................... 173 80 59
Real estate joint venture...................... -- (41) --
----------- ----------- -----------
Total expenses............................ 73,302 59,943 49,907
----------- ----------- -----------
Income before minority interest of unitholders in
Operating Partnership and extraordinary items..... 21,187 15,051 8,527
Minority interest of unitholders in Operating
Partnership....................................... (3,723) (2,793) (1,527)
----------- ----------- -----------
Income before extraordinary items................... 17,464 12,258 7,000
Extraordinary items, net of minority interest of
unitholders in Operating Partnership.............. (516) (439) 7,032
----------- ----------- -----------
Net income.......................................... $ 16,948 $ 11,819 $ 14,032
=========== =========== ===========
Per share data:
Income before extraordinary items................. $ 0.92 $ 0.83 $ 0.64
=========== =========== ===========
Net income........................................ $ 0.90 $ 0.80 $ 1.28
=========== =========== ===========
Dividends declared................................ $ 1.55 $ 1.51 $ 1.29
=========== =========== ===========
Weighted average shares........................... 18,914,674 14,754,337 10,991,734
=========== =========== ===========
See notes to consolidated financial statements.
33
34
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
UNAMORTIZED
ADDITIONAL RESTRICTED
COMMON PAID IN ACCUMULATED STOCK
STOCK CAPITAL DEFICIT COMPENSATION TOTAL
------- ----------- ------------ ------------ --------
Balance, December 31, 1993........... $ -- $ (2,006) $(36,121) $(38,127)
Capital distributions.............. -- -- (16,308) (16,308)
Dividends.......................... -- -- (15,987) (15,987)
Proceeds of public offering, net of
underwriting discount and
offering costs.................. 124 199,473 -- 199,597
Purchase of prior owner's
interest........................ -- -- (5,885) (5,885)
Issuance of stock.................. -- 60 -- 60
Adjustment for minority interest of
unitholders in Operating
Partnership..................... -- (21,857) -- (21,857)
Net income......................... -- -- 14,032 14,032
------- -------- -------- ------------ --------
Balance, December 31, 1994........... 124 175,670 (60,269) 115,525
Dividends.......................... -- -- (23,325) (23,325)
Proceeds of public offering, net of
underwriting discount and
offering costs.................. 40 65,897 -- 65,937
Proceeds from Dividend Reinvestment
Plan............................ -- 240 -- 240
Conversion of units to shares...... 1 1,013 -- 1,014
Issuance of stock grants........... -- 28 -- 28
Adjustment for minority interest of
unitholders in Operating
Partnership..................... -- 4,216 -- 4,216
Net income......................... -- -- 11,819 11,819
------- -------- -------- ------------ --------
Balance, December 31, 1995........... 165 247,064 (71,775) 175,454
Dividends.......................... -- -- (30,241) (30,241)
Proceeds of public offering, net of
underwriting discount and
offering costs.................. 58 97,576 -- 97,634
Proceeds from Dividend Reinvestment
and Employee Stock Purchase
Plans........................... -- 1,597 -- 1,597
Conversion of units to shares...... -- 167 -- 167
Exercise of stock options.......... -- 287 -- 287
Issuance of restricted stock
grants.......................... 1 1,015 -- $ (1,016) --
Amortization of restricted stock
grants.......................... -- -- -- 202 202
Adjustment for minority interest of
unitholders in Operating
Partnership..................... -- (4,834) -- -- (4,834)
Net income......................... -- -- 16,948 -- 16,948
------- -------- -------- ------------ --------
Balance, December 31, 1996........... $ 224 $342,872 $(85,068) $ (814) $257,214
======= ======== ======== ============ ========
See notes to consolidated financial statements.
34
35
SUMMIT PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- -------- ---------
Cash flows from operating activities:
Net income................................................ $ 16,948 $ 11,819 $ 14,032
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary items.................................... 516 439 (7,032)
Loss on equity method investments...................... 173 39 59
Depreciation and amortization.......................... 19,183 15,978 12,542
Decrease (increase) in restricted cash................. 235 575 (239)
Decrease (increase) in other assets.................... (866) (992) 582
Increase (decrease) in accrued interest payable........ 333 (47) (4,388)
Increase in accounts payable and accrued expenses...... 386 209 112
Increase in security deposits and prepaid rents........ 545 181 330
Minority interest of unitholders in Operating
Partnership.......................................... 3,723 2,793 1,527
--------- -------- ---------
Net cash provided by operating activities......... 41,176 30,994 17,525
--------- -------- ---------
Cash flows from investing activities:
Construction of real estate assets and land acquisitions,
net of payables........................................ (87,081) (52,499) (94,249)
Capitalized interest...................................... (4,266) (3,110) (686)
Recurring capital expenditures............................ (3,291) (2,180) (1,710)
Non-recurring capital expenditures........................ (2,973) (864) --
Purchase of Communities................................... (6,360) (5,081) --
Purchase of non-continuing investors' interests........... -- -- (20,834)
Investment in Summit Management Company................... -- -- (260)
Proceeds from investments................................. -- -- 3,998
--------- -------- ---------
Net cash used in investing activities:............ (103,971) (63,734) (113,741)
--------- -------- ---------
Cash flows from financing activities:
Debt proceeds............................................. 89,359 97,075 193,542
Debt repayments........................................... (90,783) (101,650) (269,021)
Dividends and distributions to unitholders................ (34,000) (26,157) (13,615)
Payment of financing costs................................ (515) (1,033) (5,202)
Offering proceeds, net of underwriters discount and
offering costs......................................... 97,634 65,937 199,597
Proceeds from Dividend Reinvestment and Employee Stock
Purchase Plans......................................... 1,597 268 --
Exercise of stock options................................. 287 -- --
Capital distributions..................................... -- -- (16,308)
--------- -------- ---------
Net cash provided by financing activities......... 63,579 34,440 88,993
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 784 1,700 (7,223)
Cash and cash equivalents, beginning of year................ 2,881 1,181 8,404
--------- -------- ---------
Cash and cash equivalents, end of year...................... $ 3,665 $ 2,881 $ 1,181
========= ======== =========
Supplemental disclosure of cash flow information -- Cash
paid for interest, net of capitalized interest............ $ 15,780 $ 13,762 $ 15,027
========= ======== =========
See notes to consolidated financial statements.
35
36
SUMMIT PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND FORMATION OF THE COMPANY
Summit Properties Inc. (the "Company") was initially organized as a Maryland
real estate investment trust on December 1, 1993 under the Maryland Real Estate
Investment Trust Act. The Company became a Maryland corporation under the
General Corporation Law of Maryland on January 13, 1994. On February 15, 1994,
the Company completed an Initial Public Offering ("Initial Offering"). In
connection with the Initial Offering, the Company consummated a business
combination involving the Partnerships (the "Property Partnerships") which owned
the 27 communities (the "Communities") and the affiliated entities which
provided development, construction, management and leasing services to each of
the Communities prior to the Initial Offering (collectively, "Summit Entities").
A portion of the proceeds from the Initial Offering was used to acquire an
economic and voting interest in Summit Properties Partnership, L.P. (the
"Operating Partnership"), which was formed to succeed to substantially all of
the interests of the Property Partnerships in the Communities and the operations
of Summit Entities (the "Formation"). The Company became the sole general
partner and the majority owner of the Operating Partnership upon completion of
the Initial Offering and, accordingly, reports its investment in the Operating
Partnership on a consolidated basis.
In June 1995, the Company completed the sale of 4 million shares of Common
Stock, ("1995 Offering"). In August 1996, the Company completed the sale of 5.75
million shares of Common Stock, ("1996 Offering"). The net proceeds of $65.9
million and $97.6 million from the 1995 and 1996 Offerings, respectively, were
used to repay mortgage debt and to fund current development projects.
Net income per share on a pro forma basis for the years ended December 31, 1996
and 1995 would not have changed materially assuming the 1996 Offering and 1995
Offering had occurred on January 1, 1996 and January 1, 1995, respectively.
2. BASIS OF PRESENTATION
For the period after the Initial Offering, the accompanying financial statements
include the consolidated accounts of the Company and the Operating Partnership.
For the period prior to the Initial Offering, the accompanying financial
statements reflect the combined accounts of Summit Entities.
In conjunction with the Initial Offering, construction, management and leasing
activities for third parties were transferred to Summit Management Company (the
"Management Company"). The Operating Partnership has a 99% economic interest in
the Management Company but controls only 1% of the voting stock. The remaining
99% of the voting stock is held by an executive officer of the Company, which
stock is subject to certain restrictions on transfer designed to ensure that the
holder of the Management Company's voting stock will have interests aligned with
those of the Company. Because of the Company's ability to exercise significant
influence, the Management Company is accounted for on the equity method of
accounting. Prior to the Initial Offering on February 15, 1994, these activities
were consolidated in the Statement of Earnings.
As a result of the Formation, the partners and owners of the entities comprising
the Summit Entities have either retained their existing ownership interests,
received shares of Common Stock or received limited partnership interests
("Units") in the Operating Partnership. Purchase accounting was applied to the
acquisition of all non-controlled interests in which cash consideration was
paid. The acquisition of all other interests was accounted for as a
reorganization of entities under common control and, accordingly, was reflected
at historical cost in a manner similar to that in pooling of interests
accounting.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The financial statements of the Company, for the periods ended
after the Initial Offering, have been adjusted for the minority interest of
unitholders in the Operating Partnership. Since Units can be exchanged for cash,
or at the option of the Company, for shares of Common Stock on a one-for-one
basis, minority interest of unitholders in the Operating Partnership is
calculated based on the weighted average shares of Common Stock and Units
outstanding during the period. For the purposes of this calculation, shares of
Common Stock issued at the date of the Initial Offering in exchange for
interests in entities included in Summit Entities are treated as if such
36
37
shares were outstanding at the beginning of the period. Shares of Common Stock
issued to the public in the Initial Offering are assumed outstanding from the
date of issuance.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE ASSETS AND DEPRECIATION -- Real estate assets are stated at
depreciated cost reduced for any estimated impairment in value of which there is
none.
Expenditures directly related to the acquisition, development and improvement of
real estate assets are capitalized at cost as land, buildings and improvements.
Improvements are broken down into recurring capital expenditures and
nonrecurring capital expenditures. Nonrecurring capital expenditures primarily
consist of the cost of improvements such as new garages, initial water meters,
major renovations and improvements made in conjunction with acquisitions. All
other improvements are deemed as recurring capital expenditures.
Ordinary repairs and maintenance, including carpet replacements and interior
painting, are expensed as incurred; major replacements and betterments are
capitalized and depreciated over their estimated useful lives. Depreciation is
computed on a straight-line basis over the useful lives of the properties
(buildings -- 40 years; land improvements -- 15 years; furniture, fixtures and
equipment -- 5 to 7 years).
The Financial Accounting Standard Board's Statement of Financial Accounting
Standard No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," became effective in 1996. FAS 121
established standards for determining when impairments on long-lived assets have
occurred and how impairment losses should be measured. The new standard had no
impact on the Company's financial statements in 1996.
RENTAL REVENUE RECOGNITION -- The Company leases its residential properties
under operating leases with terms generally one year or less. Rental revenue is
recognized on the accrual method of accounting as earned.
PROPERTY MANAGEMENT -- The Management Company provides property management
services for properties which it does not own. Revenue is recognized when
earned, as the services are provided.
CASH AND CASH EQUIVALENTS -- For purposes of the statement of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
RESTRICTED CASH -- Restricted cash is comprised primarily of resident security
deposits, bond repayment escrows and replacement reserve escrows.
DEFERRED FINANCING COSTS -- Deferred financing costs include fees and costs
incurred to obtain long-term financings and are amortized on the straight-line
method over the terms of the related debt. Such amortization is included in
interest expense in the accompanying consolidated statements of earnings.
INTEREST AND REAL ESTATE TAXES -- Interest and real estate taxes incurred during
the construction period are capitalized and depreciated over the lives of the
constructed assets. Interest capitalized was $4.3 million, $3.1 million and
$686,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
INCOME TAXES -- Prior to the Formation, the Company's operations were conducted
through a variety of partnerships. In accordance with partnership taxation, each
partner was responsible for reporting its share of taxable income or loss.
Accordingly, no provision has been made in the accompanying consolidated
financial statements for federal, state or local income taxes through February
15, 1994.
The Company elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), commencing with the taxable year ended December
31, 1994. As a result, the Company generally will not be subject to federal and
state income taxation at the corporate level to the extent it distributes
annually at least 95% of its taxable income, as defined in the Code, to its
stockholders and satisfies certain other requirements. Accordingly, no provision
has been made for federal and state income taxes in the accompanying
consolidated financial statements for the period subsequent to February 15,
1994.
Financial Accounting Standard No. 109, "Accounting for Income Taxes" requires a
public enterprise to disclose the aggregate difference in the basis of its net
assets for financial and tax reporting purposes. The carrying value reported in
the Company's consolidated financial statements exceeded the tax basis by
37
38
approximately $24.1 million and $28.5 million, as of December 31, 1996 and 1995,
respectively. The change between December 31, 1996 and 1995 was primarily due to
financial depreciation exceeding tax depreciation by approximately $5.7 million.
A portion of the Company's dividends is deemed as return of capital for
shareholder income tax purposes. The percentage of dividends that was return of
capital was 21%, 26% and 21% for each of the years ended December 31, 1996, 1995
and 1994, respectively.
PER SHARE DATA -- Earnings per share with respect to the Company for the years
ended December 31, 1996, 1995 and 1994 are computed based upon the weighted
average number of shares outstanding during the period.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. PROPERTY MANAGEMENT AND RELATED PARTY TRANSACTIONS
In conjunction with the Formation, construction, management and leasing
activities for third parties were transferred to the Management Company, which
is accounted for using the equity method of accounting. Prior to the Formation
on February 15, 1994, these activities were consolidated in the Summit Entities'
Statement of Earnings. The net assets of the Management Company are not
material, therefore no balance sheet information is presented.
The Management Company has a wholly-owned subsidiary, Summit Apartment Builders,
Inc., (the "Construction Company") which conducts certain construction
activities. The activities of the Construction Company are accounted for on a
consolidated basis with those of the Management Company. The net assets of the
Construction Company, Inc. are not material.
A summary of the Management Company operations for the years ended December 31,
1996, 1995, and 1994 is as follows (in thousands):
FEBRUARY 16, JANUARY 1,
1994 TO 1994 TO
TOTAL DECEMBER 31, FEBRUARY 15,
1996 1995 1994 1994 1994
------ ------ ------ ------------ ------------
Property management fees............... $4,706 $5,189 $5,122 $ 4,586 $ 536
Construction company income............ 529 288 264 264 --
Other management company income........ 129 155 149 149 --
------ ------ ------ ------------ ------------
Total revenues............... 5,364 5,632 5,535 4,999 536
Property management expenses:
Operating............................ 4,407 4,581 4,512 4,146 366
Depreciation......................... 110 120 53 53 --
Amortization......................... 278 274 219 219 --
Interest............................. 300 300 262 262 --
------ ------ ------ ------------ ------------
5,095 5,275 5,046 4,680 366
Construction company expenses.......... 442 437 378 378 --
------ ------ ------ ------------ ------------
Total expenses............... 5,537 5,712 5,424 5,058 366
------ ------ ------ ------------ ------------
Net income (loss) of Summit
Management Company................ $ (173) $ (80) $ 111 $ (59) $ 170
====== ====== ====== ============ ============
Interest and amortization expenses are related to the Management Company's
purchase from the Company of its rights to third party management contracts for
$2.5 million, payable over time under a promissory note
38
39
executed by the Management Company. Corresponding amounts of interest income and
amortization of deferred revenue (included in other income) are included in the
Company's operating results.
The Management Company provides management services to apartment communities in
which executive officers and certain directors of the Company are general
partners. The Management Company received management fees of approximately
$267,000, $294,000 and $1.0 million for the performance of such services for the
years ended December 31, 1996, 1995 and 1994, respectively.
Property management fees include $2.0 million, $3.0 million and $2.9 million of
fees from unrelated third parties in 1996, 1995 and 1994, respectively.
Construction Company income is earned from construction contracts with the
Company or from joint ventures in which the Company has an interest. Income from
contracts with the Company was $529,000, $311,000 and $154,000 for the years
ended December 31, 1996, 1995 and 1994 respectively. The Company has $1.3
million and $978,000 of construction contracts payable to the Construction
Company as of December 31, 1996 and 1995, respectively.
The Company's investment in the Management Company as of December 31, 1996 and
1995, reported on the equity method, includes the following (in thousands):
1996 1995
------- -------
Equity investment........................................... $ (32) $ 121
Note receivable............................................. 2,500 2,500
Deferred gain on sale of third party contract rights........ (1,781) (2,031)
------- -------
$ 687 $ 590
======= =======
5. NOTES PAYABLE
Notes payable consist of the following (in thousands):
INTEREST PRINCIPAL OUTSTANDING
RATE AS OF DECEMBER 31,
DECEMBER 31, ----------------------
1996 1996 1995
------------ --------- ---------
FIXED RATE DEBT
- -----------------
Mortgage Loan..................................... 5.88% $122,950 $125,000
Mortgage Loan..................................... 7.71% 29,653 30,000
Mortgage Loan..................................... 8.00% 8,638 8,712
Mortgage Notes.................................... 7.75%-9.80% 32,104 32,485
Tax Exempt Mortgage Notes......................... 6.95%-7.25% 9,369 9,468
-------- --------
Total Mortgage Debt....................... 202,714 205,665
Unsecured Note.................................... 7.85% 16,000 --
Unsecured Note.................................... 7.61% 15,000 --
-------- --------
Total Fixed Rate Debt..................... 233,714 205,665
VARIABLE RATE DEBT
- --------------------
Unsecured Credit Facility......................... LIBOR + 110 22,357 4,396
Tax Exempt Bonds.................................. 5.60% 53,862 54,840
Development Loans Repaid in 1996.................. -- 32,109
-------- --------
Total Variable Rate Debt.................. 76,219 91,345
-------- --------
Total Outstanding Indebtedness...................... $309,933 $297,010
======== ========
The London Interbank Offered Rate (LIBOR) at December 31, 1996 was 5.56%.
MORTGAGE LOANS -- The 5.88% fixed rate Mortgage Loan requires monthly principal
and interest payments on a 24-year amortization schedule with a balloon payment
due at maturity in February, 2001. The Company has
39
40
an option to extend the final maturity date for a period of up to two years at
an interest rate equal to the then current year treasury rate plus a
predetermined spread.
The 7.71% fixed rate Mortgage Loan requires monthly principal and interest
payments on a 25-year amortization schedule with a balloon payment due at
maturity in December, 2005.
The 8.00% Mortgage Loan requires monthly principal and interest payments on a
30-year amortization schedule with a balloon payment due at maturity in
September, 2005.
MORTGAGE NOTES -- The Mortgage Notes bear interest at fixed rates ranging from
7.75% to 9.80% and require monthly interest and principal payments over the life
of the notes. The weighted average interest rate and debt maturity at December
31, 1996 for these nine Mortgage Notes were 8.43% and 20.6 years, respectively.
TAX EXEMPT MORTGAGE NOTES -- The Tax Exempt Mortgage Notes bear interest at
fixed rates ranging from 6.95% to 7.25% and require monthly interest and
principal payments over the life of the notes. The weighted average interest
rate and debt maturity at December 31, 1996 for these two mortgage notes were
7.12% and 29.5 years, respectively.
UNSECURED NOTES -- In August 1996, the Company obtained $31.0 million of
unsecured debt financing consisting of a $16.0 million note with a six-year term
and a $15.0 million note with a four-year term (collectively, the "Unsecured
Notes"). The notes require quarterly interest only payments until the end of the
respective terms.
UNSECURED CREDIT FACILITY -- The Company obtained a $150 million unsecured
credit facility (the "Unsecured Credit Facility") on November 18, 1996 to
replace a $50 million secured credit facility. The Unsecured Credit Facility has
a three-year term and currently bears interest at LIBOR + 110 basis points. The
interest rate can be reduced based upon an upgrade in the Company's unsecured
credit rating. The Unsecured Credit Facility provides $25 million for general
working capital purposes with the remainder available to finance development
projects and acquisitions. The Unsecured Credit Facility is repayable monthly on
an interest-only basis with the balance of all principal and accrued interest
due no later than November 18, 1999.
The Unsecured Credit Facility and the Unsecured Notes require the Company to
comply with certain affirmative and negative covenants including the
requirements: (i) that the Company maintain its qualification as a REIT; (ii)
that the ratio of unencumbered assets to debt equal or exceed 150%; (iii) that
the ratio of debt to assets not exceed 60%; (iv) that the maximum secured debt
not exceed $350 million or 40% of assets; (v) that the Company maintain a debt
service ratio of not less than 1.75 to 1; and (vi) that the Company maintain a
ratio of adjusted funds flow, as defined, to debt of greater than .15 to 1.
VARIABLE RATE TAX EXEMPT BONDS -- The effective interest rate of the Variable
Rate Tax Exempt Bonds was 4.99% for the year ended December 31, 1996. These
bonds bear interest at various rates set by a remarketing agent at the demand
note index plus 0.50%, set weekly, or the lowest percentage of prime which
allows the resale at a price of par. The bonds contain covenants which require
that the Company lease or hold for lease 20% (or 25% under certain state or
local requirements) of the apartment homes for moderate-income residents. The
bonds require maintenance of letters of credit or surety bonds (credit
enhancements) aggregating $55.6 million. The credit enhancements on four of the
five tax exempt bonds ($46.6 million of debt) provide for a principal
amortization schedule which approximates a 25-year term during the term of the
credit enhancement.
Real estate assets with a net book value of $297.8 million serve as collateral
for the various debt agreements.
40
41
The aggregate maturities of all debt for each of the years ending December 31
are as follows (in thousands):
FIXED RATE FIXED RATE FIXED RATE TAX EXEMPT UNSECURED
MORTGAGE MORTGAGE UNSECURED VARIABLE CREDIT
LOANS NOTES NOTES RATE BONDS FACILITY TOTAL
---------- ---------- ---------- ---------- --------- --------
1997.................... $ 3,091 $ 519 $ -- $ 1,010 $ -- $ 4,620
1998.................... 3,287 560 -- 1,055 -- 4,902
1999.................... 3,497 604 -- 1,105 22,357 27,563
2000.................... 3,718 653 15,000 1,130 -- 20,501
2001.................... 112,407 705 -- 1,150 -- 114,262
Thereafter.............. 35,241 38,432 16,000 48,412 -- 138,085
-------- ------- ------- ---------- ------- --------
$161,241 $41,473 $31,000 $ 53,862 $22,357 $309,933
======== ======= ======= ========== ======= ========
EXTRAORDINARY ITEMS -- The 1996 extraordinary item resulted from the write-off
of deferred financing costs on development loans repaid with the proceeds from
the 1996 Offering and with the proceeds of the $31.0 million Unsecured Notes.
The extraordinary item is net of $110,000 which was allocated to the minority
interest of the unitholders in the Operating Partnership, calculated on the
weighted average number of units outstanding.
The 1995 extraordinary items resulted from the write-off of deferred financing
costs on variable rate mortgage debt repaid with the proceeds from the 1995
Offering and with the proceeds of the $30 million Mortgage Loan, and from the
write-off of deferred financing costs related to the refunding of two variable
rate tax exempt bonds. The extraordinary items are net of $100,000 which was
allocated to the minority interest of the unitholders in the Operating
Partnership, calculated on the weighted average number of units outstanding.
In conjunction with the debt repayment related to the Initial Offering in 1994,
the Company incurred prepayment penalties of $4.3 million on certain mortgage
indebtedness, expenses of $2.5 million associated with the write-off of deferred
financing costs related to mortgages satisfied with proceeds of the Initial
Offering, and the write-off of accrued interest and mortgages payable that was
not required to be repaid of $15.4 million. These extraordinary items are net of
$1.5 million which was allocated to the minority interest of the unitholders in
the Operating Partnership, calculated on the weighted average units outstanding.
6. MINORITY INTEREST
Minority interest consists of the following at December 31 (in thousands):
1996 1995
------- -------
Minority interest of unitholders in Operating Partnership... $46,202 $42,042
Minority interest in one operating Community................ (373) (357)
------- -------
$45,829 $41,685
======= =======
Operating Partnership Units can be exchanged for cash, or at the option of the
Company, for shares of Common Stock on a one-for-one basis. Accordingly,
minority interest of Unitholders in the Operating Partnership is calculated
based on the shares of Common Stock and Units outstanding at December 31, 1996
and 1995, respectively. Operating Partnership Units as a percentage of total
Units and shares outstanding was 15.2% and 19.3% at December 31, 1996 and 1995,
respectively.
7. CROSLAND ACQUISITION
During the second quarter of 1995, the Company completed an acquisition of 12
apartment communities and a 75% interest in another apartment community, which
were owned by The Crosland Group, Inc. and its affiliates (the "Crosland
Acquisition"). The Crosland Acquisition added a total of 2,025 apartments to the
Company's portfolio and was accounted for using the purchase method of
accounting. The costs of the Crosland Acquisition have been allocated on the
basis of the fair values of the assets acquired and liabilities assumed (See
Note 10-D).
The following summary of unaudited pro forma results of operations presents
information as if the Crosland Acquisition had occurred at the beginning of each
fiscal year. In addition, the year ended December 31, 1994
41
42
information is presented as if the Company's Initial Offering had occurred at
the beginning of 1994. The pro forma information for the years ended December
31, 1995 and 1994 is provided for informational purposes only and is not
indicative of results which would have occurred or which may occur in the future
(in thousands, except per share amounts):
1995 1994
------- -------
Net revenues................................................ $80,239 $71,298
Income before extraordinary items........................... 12,129 8,965
Net income.................................................. 11,703 8,965
Earnings per share:
Income before extraordinary items......................... .82 .72
Net income................................................ .79 .72
8. COMMITMENTS
The estimated cost to complete nine development projects currently under
construction was approximately $128.1 million at December 31, 1996. Anticipated
construction completion dates of the projects range from the second quarter of
1997 to the first quarter of 1999.
The Company has a commitment to purchase a Community being constructed in
Atlanta, Georgia for approximately $27.5 million. The Company expects the
purchase to close in the fourth quarter of 1998 after the Community reaches
rental stabilization.
The Company rents office space in several locations. Rental expense for the
years ended December 31, 1996, 1995 and 1994 amounted to $109,000, $125,000 and
$123,000 ($376,000 in 1996, $405,000 in 1995 and $377,000 in 1994 including
amounts recorded at the Management Company). Future minimum rental payments for
the next five years for those operating leases (including the Management
Company) that have initial or remaining non-cancelable lease terms in excess of
one year are as follows (in thousands):
YEARS ENDED DECEMBER 31:
------------------------
1997........................................................ $ 395
1998........................................................ 402
1999........................................................ 407
2000........................................................ 131
2001........................................................ 72
Thereafter.................................................. 2
------
$1,409
======
The Company has employment agreements with six executive officers. Five of these
agreements will expire on February 15, 1999 unless otherwise extended, and may
be terminated by the officer after giving 180 days prior written notice, without
breaching such agreements. One of these agreements provided for an original term
through February 16, 1996, and has been automatically extended until such time
as terminated pursuant to the terms of such executive officers' employment
agreement.
Each of the executive officers and the Chairman of the Board have
non-competition agreements with the Company which prohibit them, without the
prior written consent of the Board of Directors, from competing with the Company
for a period of the latter of (1) one year from the termination of their
employment with the Company, or (2) any period during which such individuals
receive severance payments.
The Company is obligated to redeem each Unit of interest in the Operating
Partnership at the request of the holder thereof for cash equal to the fair
market value of one share of Common Stock, except that the Company may elect to
acquire each Unit presented for redemption for one share of Common Stock. The
Company presently anticipates that it will elect to issue Common Stock in
connection with such redemption, rather than pay cash.
42
43
9. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN
The Company has a defined contribution plan pursuant to Section 401(k) of the
Internal Revenue Code which covers all employees with one year or greater
service. The Company's contributions are equal to one-half of each employee's
contribution up to a maximum of 3% of each employee's compensation. Aggregate
contributions of approximately $223,000, $191,000 and $189,000 were made for the
years ended December 31, 1996, 1995 and 1994, respectively.
STOCK OPTION PLAN
In 1994, the Company established the 1994 Stock Option Plan ("the Plan") under
which 1,000,000 shares of the Company's Common Stock are reserved for issuance.
The Plan provides that the option price shall not be less than the fair market
value of the shares at the date of grant. The options vest in three or five
annual installments on the anniversaries of the date of grant except for shares
granted to independent directors of the Company, which vest on the date of
grant.
A summary of changes in common stock options for the three years ended December
31, 1996 is as follows:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
Year ended December 1994
- -----------------------------
Granted................................................... 482,500 $19.13
Forfeited................................................. (52,600) 19.00
-------
Outstanding at December 31, 1994....................... 429,900 19.14
Year ended December 1995
- -----------------------------
Granted................................................... 130,000 17.13
Forfeited................................................. (20,800) 19.72
-------
Outstanding at December 31, 1995....................... 539,100 18.64
Year ended December 1996
- -----------------------------
Granted................................................... 28,000 19.30
Exercised................................................. (15,073) 19.04
Forfeited................................................. (53,381) 19.22
-------
Outstanding at December 31, 1996....................... 498,646 18.60
=======
Exercise prices for options outstanding as of December 31, 1996 ranged from
$17.13 to $20.75. The weighted average remaining contractual life of those
options is 7.5 years.
As of December 31, 1996, 1995 and 1994 options to purchase 283,228, 132,784 and
9,000 shares of Common Stock were exercisable, respectively. The weighted
average exercise price for the shares exercisable as of December 31, 1996, 1995
and 1994 was $18.36, $19.03 and $19.83, respectively.
The estimated weighted average fair value of options granted were $2.10 per
share in 1996 and $1.61 per share in 1995. The Company applies Accounting
Principal Board Opinion No. 25 and related interpretations in accounting for its
stock options. Accordingly, no compensation cost has been recognized for its
stock options. Had compensation cost for the Company's stock options been
determined based on the fair value at the grant dates, consistent with the
method of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", the Company's net income and net income per share for
the years ended December 31, 1996 and 1995 would have changed to the pro forma
amounts indicated below (dollars in thousands except per share amounts):
1996 1995
------- -------
Pro forma net income........................................ $16,898 $11,808
Pro forma net income per share.............................. .89 .80
43
44
The fair value of options granted during 1996 and 1995 were estimated on the
date of grant using the Binomial option-pricing model with the following
weighted-average assumptions: dividend yields ranging from 7.80% to 8.82%,
expected volatility of 16%, risk free interest rate of 6.52%, and expected lives
of 10 years.
In addition, the Plan provides for the issuance of stock grants to employees.
The Company granted 56,046 shares of restricted stock grants under the Plan in
January, 1996. The market value of the restricted stock grants, net of shares
subsequently retired, totaled $1.0 million, which was recorded as unamortized
restricted stock compensation and is shown as a separate component of
stockholders' equity. Unearned compensation is being amortized to expense over
the five year vesting period. Unrestricted stock grants of 1,639 shares were
issued in the year ended December 31, 1995. The Company recognized $223,000 and
$28,000 of expense in the statement of earnings in the years ended December 31,
1996 and 1995, respectively, relative to the stock grants.
EMPLOYEE STOCK PURCHASE PLAN
In 1996, the Company established a non-qualified employee stock purchase plan.
The plan allows Company employees to purchase up to $100,000 per year of the
Company's Common Stock. The price of the shares of the Common Stock purchased
will be the lesser of 85 percent of the closing price of such shares either on
(a) the first day of each six month purchase period, or (b) the last day of each
six month purchase period. Total shares issued under the plan in 1996 were
44,362 with a market value of $871,000. An additional 41,493 shares with a
market value of $908,000 were issued in January, 1997 under the plan. The
Company recognized $151,000 of expense in the statement of earnings in the year
ended December 31, 1996 relative to the employee stock purchase plan.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended December 31,
1996, 1995 and 1994 are as follows:
A. The Company issued 106,330 Units of the Operating Partnership, valued at
$2.1 million at issuance, for the purchase of land in the first quarter
of 1996.
B. In 1996 the Company issued 52,086 (net of 3,960 shares issued but
subsequently retired) of restricted stock grants valued at $1.0 million.
C. On April 1, 1996, the Company acquired its joint venture partner's
interest in the Summit Plantation (formerly Plantation Cove) apartment
community. The Company paid $6.4 million in cash for the remaining 75%
interest in this joint venture, which is now owned entirely by the
Company. The recording of the purchase is summarized as follows (in
thousands):
Fixed assets................................................ $ 21,913
Current assets.............................................. 202
Deferred charges............................................ 95
Debt assumed................................................ (14,347)
Current liabilities assumed................................. (288)
Minority interest........................................... (1,215)
--------
Net cash paid............................................... $ 6,360
========
44
45
D. In the second quarter of 1995, the Company completed its Crosland
Acquisition. The Company purchased the communities by assuming debt,
issuing approximately 1.5 million Operating Partnership Units, assuming
certain liabilities and current assets, and the payment of cash. The
recording of the purchase is summarized as follows (in thousands):
Fixed assets................................................ $ 82,935
Restricted cash............................................. 1,427
Other assets................................................ 93
Debt assumed................................................ (52,576)
Current liabilities assumed................................. (996)
Minority interest........................................... 388
Value of units issued....................................... (26,190)
--------
Net cash paid............................................... $ 5,081
========
E. A $9.1 million tax-exempt bond was assumed with the purchase of the
Stony Point Community in 1994.
F. The Company transferred certain third party property management
contracts to the Management Company in exchange for a promissory note of
$2.5 million in 1994. To record the transaction, the Company recorded the
promissory note and included in other liabilities $2.5 million of
deferred revenue to be amortized over the estimated lives of the
contracts.
G. The Company accrued a dividend and distribution payable of $10.2
million, $7.7 million and $5.5 million at December 31, 1996, 1995 and
1994, respectively.
H. Purchase accounting was applied to the acquisition of non-continuing
investors' interests for which cash consideration was paid resulting in
an increase of $14.9 million in the historical cost basis of the related
real estate assets in 1994.
I. The Company issued 45,359 Units of interest in the Operating Partnership
(valued at $896,000) for the purchase of land in 1995.
J. The Company issued 38,500 Units of interest in the Operating Partnership
(valued at $735,000) for the purchase of land in 1994.
11. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by management
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data and develop
the related estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and cash equivalents, rents receivable, accounts payable, accrued expenses,
security deposits, other liabilities, tax-exempt bond indebtedness and the
credit facility are carried at amounts which reasonably approximate their fair
values at December 31, 1996.
Fixed rate mortgage debt and unsecured notes with a carrying value of $233.7
million has an estimated aggregate fair value of $229.3 million at December 31,
1996. Rates currently available to the Company for debt with similar terms and
maturities were used to estimate the fair value of this debt.
The fair value estimates presented herein are based on information available to
management as of December 31, 1996. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively re-valued for purposes of these financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
45
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12. GEOGRAPHIC CONCENTRATION
The Company's completed Communities are concentrated in three major markets:
NUMBER APARTMENT
OF HOMES --
APARTMENT % % OF
MARKET HOMES OF PORTFOLIO REVENUES
- ------ --------- ------------ --------
I-85 Corridor (Raleigh, NC to Atlanta, GA).............. 5,062 43% 42%
Washington, DC/Virginia................................. 2,169 19% 21%
Central/South Florida................................... 3,685 31% 31%
Other................................................... 872 7% 6%
--------- ------------ --------
11,788 100% 100%
========= ============ ========
13. SUBSEQUENT EVENTS
On January 6, 1997, the Company purchased Summit Portofino (formerly Portofino
Place), a 322 apartment community located in Broward County, Florida. Summit
Portofino, built in 1995, was purchased for $28.0 million in cash. Concurrently
with the purchase, the Company sold 315,029 shares of Common Stock to the public
for cash to fund a portion of the purchase.
On January 15, 1997, the Company purchased Summit Mayfaire (formerly The
Mayfaire), a 144 apartment community located in Raleigh, North Carolina. Summit
Mayfaire, built in 1995, was purchased for $9.65 million in cash.
On February 20, 1997, the Company purchased Summit Sand Lake (formerly The
Vining at Sand Lake), a 416 apartment community located in Orlando, Florida.
Summit Sand Lake, built in 1995, was purchased for $26.8 million. The Company
issued the seller 243,608 shares of Common Stock and 194,495 Units in the
Operating Partnership, assumed $15.2 million in debt and paid the remaining $2.7
million balance in cash.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years 1996 and 1995 are as follows (in
thousands):
YEAR ENDED DECEMBER 31, 1996
-------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
Revenues.................................................. $21,430 $23,062 $24,771 $25,226
Income before minority interest of unitholders in
Operating Partnership and extraordinary items........... 4,237 4,345 5,740 6,865
Minority interest of unitholders in Operating
Partnership............................................. (828) (850) (974) (1,071)
Extraordinary items....................................... -- -- (516) --
Net income................................................ 3,409 3,495 4,250 5,794
Income per share:
Income before extraordinary items....................... 0.21 0.21 0.24 0.26
Net income.............................................. 0.21 0.21 0.21 0.26
YEAR ENDED DECEMBER 31, 1995
-------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
Revenues.................................................. $15,891 $17,872 $20,267 $20,964
Income before minority interest of unitholders in
Operating Partnership and extraordinary items........... 2,804 3,345 4,479 4,423
Minority interest of unitholders in Operating
Partnership............................................. (458) (635) (846) (854)
Extraordinary items....................................... -- (63) -- (376)
Net income................................................ 2,346 2,647 3,633 3,193
Income per share:
Income before extraordinary items....................... 0.19 0.20 0.22 0.22
Net income.............................................. 0.19 0.19 0.22 0.19
46
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SUMMIT PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
GROSS AMOUNT AT WHICH
INITIAL COSTS COSTS CARRIED AT CLOSE OF PERIOD
------------------------- CAPITALIZED -------------------------------------
BUILDINGS SUBSEQUENT BUILDINGS
RELATED AND TO AND
COMMUNITY ENCUMBRANCES LAND IMPROVEMENTS(6) ACQUISITION LAND IMPROVEMENTS(6) TOTAL(1)
--------- ------------ ------- --------------- ----------- -------- --------------- --------
Atlanta, GA
Summit Glen............. $ (2) $ 3,652 $ $ 11,732 $ 3,693 $ 11,691 $15,384
Summit Springs.......... (2) 2,575 11,974 2,667 11,882 14,549
Summit Village.......... (2) 3,212 13,132 3,653 12,691 16,344
Charlotte, NC
Summit Arbors........... -- 780 5,066 33 780 5,099 5,879
Summit Charleston....... (2) 1,094 6,129 1,095 6,128 7,223
Summit Creek............ -- 1,430 9,125 154 1,430 9,279 10,709
Summit Crossing......... 4,213 768 5,174 58 768 5,232 6,000
Summit Fairview......... -- 404 4,299 536 4,167 4,703
Summit Foxcroft......... 2,788 925 3,797 178 925 3,975 4,900
Summit Green............ -- 1,970 16,582 1,970 16,582 18,552
Summit Hollow I & II.... 4,873 1,470 7,463 290 1,472 7,751 9,223
Summit Norcroft......... (2) 1,072 7,063 1,253 6,882 8,135
Summit Radbourne........ 8,683 1,395 12,607 53 1,395 12,660 14,055
Summit Simsbury......... (3) 650 4,570 58 650 4,628 5,278
Summit Touchstone....... (3) 766 5,568 77 766 5,645 6,411
Greenville, SC
Summit Beacon Ridge..... -- 1,053 5,691 1,154 5,590 6,744
Summit East Ridge....... 5,156 900 6,303 97 910 6,390 7,300
Indianapolis, IN
Summit River Crossing... -- 2,562 16,549 2,562 16,549 19,111
Ohio
Summit Blue Ash....... (2) 2,033 11,712 2,170 11,575 13,745
Summit Park........... -- 1,680 10,603 1,921 10,362 12,283
Orlando, FL
Summit Fairways....... -- 2,819 14,849 2,819 14,849 17,668
Raleigh/Central, NC
Summit Creekside........ 2,877 414 3,614 35 414 3,649 4,063
Summit Eastchester...... 3,872 912 4,699 124 912 4,823 5,735
Summit Highland......... -- 1,374 6,214 1,374 6,214 7,588
Summit Hill I........... -- 1,224 8,500 27 1,224 8,527 9,751
Summit Hill II.......... -- 1,474 9,909 1,474 9,909 11,383
Summit Oak.............. 2,585 400 3,065 25 400 3,090 3,490
Summit Old Town......... 3,097 774 4,693 64 774 4,757 5,531
Summit Sherwood......... 3,329 1,102 4,863 46 1,106 4,905 6,011
Summit Square........... (2) 2,757 14,986 3,775 13,968 17,743
DEPRECIABLE
ACCUMULATED DATE OF DATE LIVES
COMMUNITY DEPRECIATION CONSTRUCTION ACQUIRED YEARS
--------- ------------ ------------ -------- -----------
Atlanta, GA
Summit Glen............. $ (2,117) 5/90-8/92 4/90 5-40 years
Summit Springs.......... (3,225) 12/88-4/90 12/88 5-40 years
Summit Village.......... (2,921) 9/89-1/91 8/89 5-40 years
Charlotte, NC
Summit Arbors........... (318) 1986(5) 5/95 5-40 years
Summit Charleston....... (2,270) 10/85-12/86 7/85 5-40 years
Summit Creek............ (959) 1983(5) 9/94 5-40 years
Summit Crossing......... (342) 1985(5) 5/95 5-40 years
Summit Fairview......... (1,844) 3/82-3/83 3/82 5-40 years
Summit Foxcroft......... (288) 1979(5) 5/95 5-40 years
Summit Green............ (428) 1/95-6/96 12/94 5-40 years
Summit Hollow I & II.... (552) 1976(5) 5/95 5-40 years
Summit Norcroft......... (1,560) 2/90-3/91 12/89 5-40 years
Summit Radbourne........ (675) 1991(5) 5/95 5-40 years
Summit Simsbury......... (294) 1985(5) 5/95 5-40 years
Summit Touchstone....... (358) 1986(5) 5/95 5-40 years
Greenville, SC
Summit Beacon Ridge..... (1,713) 1/88-7/88 1/88 5-40 years
Summit East Ridge....... (388) 1986(5) 6/95 5-40 years
Indianapolis, IN
Summit River Crossing... (334) 3/95-9/96 10/94 5-40 years
Ohio
Summit Blue Ash....... (1,893) 1/92-5/92 1/91 5-40 years
Summit Park........... (2,998) 4/88-4/89 1/88 5-40 years
Orlando, FL
Summit Fairways....... (100) 9/95-12/96 8/95 5-40 years
Raleigh/Central, NC
Summit Creekside........ (258) 1981(5) 5/95 5-40 years
Summit Eastchester...... (356) 1981(5) 5/95 5-40 years
Summit Highland......... (2,270) 3/86-1/87 11/85 5-40 years
Summit Hill I........... (880) 1991(5) 6/94 5-40 years
Summit Hill II.......... (292) 11/94-6/96 6/94 5-40 years
Summit Oak.............. (220) 1982(5) 5/95 5-40 years
Summit Old Town......... (347) 1979(5) 5/95 5-40 years
Summit Sherwood......... (360) 1968(5) 5/95 5-40 years
Summit Square........... (3,138) 3/89-8/90 2/89 5-40 years
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GROSS AMOUNT AT WHICH
INITIAL COSTS COSTS CARRIED AT CLOSE OF PERIOD
------------------------- CAPITALIZED -------------------------------------
BUILDINGS SUBSEQUENT BUILDINGS
RELATED AND TO AND
COMMUNITY ENCUMBRANCES LAND IMPROVEMENTS(6) ACQUISITION LAND IMPROVEMENTS(6) TOTAL(1)
--------- ------------ ------- --------------- ----------- -------- --------------- --------
Richmond, VA
Summit Breckenridge..... -- 812 11,700 812 11,700 12,512
Summit Stony Point...... (4) 1,638 13,041 286 1,638 13,327 14,965
Summit Waterford........ (2) 1,568 14,265 1,949 13,884 15,833
South Florida
Summit Aventura......... -- 6,367 24,923 6,368 24,922 31,290
Summit Del Ray.......... (2) 3,120 14,772 5,402 12,490 17,892
Summit Palm Lake........ (2) 4,949 16,764 5,083 16,630 21,713
Summit Plantation....... -- 3,428 18,485 0 3,428 18,485 21,913
Tampa/Sarasota, FL
Summit Gateway.......... (4) 1,738 10,235 2,256 9,717 11,973
Summit Hampton.......... (4) 2,577 12,009 2,972 11,614 14,586
Summit Heron's Run...... (2) 3,154 10,429 3,192 10,391 13,583
Summit Lofts............ -- 1,800 7,337 582 1,800 7,919 9,719
Summit McIntosh......... -- 1,862 10,047 1,942 9,967 11,909
Summit Perico........... (2) 1,588 11,616 2,174 11,030 13,204
Summit Providence....... (2) 3,043 16,841 3,391 16,493 19,884
Summit Station.......... -- 1,688 10,062 1,989 9,761 11,750
Summit Walk............. -- 568 237 5,392 983 5,214 6,197
Washington, DC
Summit Belmont.......... (4) 974 10,944 984 10,934 11,918
Summit Meadow........... (2) 2,313 8,397 2,539 8,171 10,710
Summit Pike Creek....... (4) 1,132 10,895 1,259 10,768 12,027
Summit Reston........... -- 5,434 26,255 403 5,434 26,658 32,092
Summit Windsor.......... (2) 644 6,297 969 5,972 6,941
------- -------- -------- -------- -------- --------
Total $94,038 $154,462 $369,602 $102,606 $515,496 $618,102
======= ======== ======== ======== ======== ========
DEPRECIABLE
ACCUMULATED DATE OF DATE LIVES
COMMUNITY DEPRECIATION CONSTRUCTION ACQUIRED YEARS
--------- ------------ ------------ -------- -----------
Richmond, VA
Summit Breckenridge..... (4,021) 7/85-5/87 6/85 5-40 years
Summit Stony Point...... (1,568) 1986(5) 2/94 5-40 years
Summit Waterford........ (3,229) 1/89-6/90 11/88 5-40 years
South Florida
Summit Aventura......... (965) 6/94-12/95 12/93 5-40 years
Summit Del Ray.......... (2,016) 1/92-2/93 1/92 5-40 years
Summit Palm Lake........ (3,196) 3/90-2/92 1/90 5-40 years
Summit Plantation....... (453) 1/94-7/95(5) 4/96 5-40 years
Tampa/Sarasota, FL
Summit Gateway.......... (2,856) 1/86-1/87 12/85 5-40 years
Summit Hampton.......... (4,089) 11/86-3/88 10/86 5-40 years
Summit Heron's Run...... (2,449) 7/89-10/90 6/89 5-40 years
Summit Lofts............ (835) 1990(5) 10/94 5-40 years
Summit McIntosh......... (2,514) 7/89-6/90 1/89 5-40 years
Summit Perico........... (2,687) 1/89-2/90 8/88 5-40 years
Summit Providence....... (4,168) 9/88-2/91 4/88 5-40 years
Summit Station.......... (2,074) 10/89-9/90 9/89 5-40 years
Summit Walk............. (665) 4/92-2/93 4/92 5-40 years
Washington, DC
Summit Belmont.......... (3,621) 1/86-5/87 1/86 5-40 years
Summit Meadow........... (2,025) 8/89-8/90 2/89 5-40 years
Summit Pike Creek....... (3,436) 11/86-2/88 4/86 5-40 years
Summit Reston........... (2,785) 1987(5) 4/94 5-40 years
Summit Windsor.......... (1,681) 8/88-8/89 3/95 5-40 years
---------
$ (85,031)
=========
(1) The aggregate cost for federal income tax purposes at December 31, 1996 is
$559.0 million.
(2) Encumbered by fixed rate mortgages of $153 million.
(3) Encumbered by fixed rate mortgage of $8.6 million.
(4) Collateral for $55.6 million of letter of credit which serves as collateral
for $53.9 million in tax exempt bonds.
(5) Property purchased by Company. Date reflects date construction completed.
(6) Includes furniture, fixtures and equipment.
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49
SCHEDULE III
SUMMIT PROPERTIES INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
(DOLLARS IN THOUSANDS)
A summary of activity for real estate assets and accumulated depreciation is as
follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
REAL ESTATE ASSETS(1):
Balance at beginning of year............................. $524,772 $407,707 $313,698
-------- -------- --------
Acquisitions............................................. 21,913 82,935 75,921
Improvements............................................. 4,780 2,560 1,710
Developments............................................. 66,637 31,570 --
Step-up in basis and other costs related to Initial
Offering.............................................. -- -- 16,378
-------- -------- --------
93,329 117,065 94,009
-------- -------- --------
Balance at end of year................................... $618,102 $524,772 $407,707
======== ======== ========
ACCUMULATED DEPRECIATION(1):
Balance at beginning of year............................. $ 66,978 $ 51,957 $ 40,367
Depreciation............................................. 18,053 15,021 11,590
-------- -------- --------
Balance at end of year................................... $ 85,031 $ 66,978 $ 51,957
======== ======== ========
(1) Includes only apartment communities and does not include fixed assets used
in property development, construction and management of apartment
communities.
49