UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended: Commission File Number: 0-20707
September 30, 2003
COLONIAL REALTY LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 63-1098468
(State of organization) (IRS Employer
Identification Number)
2101 Sixth Avenue North 35203
Suite 750 (Zip Code)
Birmingham, Alabama
(Address of principal executive offices)
(205) 250-8700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES _x_ NO ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12-b-2).
YES x NO
---- ----
COLONIAL REALTY LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets as of
September 30, 2003 and December 31, 2002 3
Consolidated Condensed Statements of Income and Comprehensive
Income for the Three and Nine Months Ended
September 30, 2003 and 2002 4
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended September 30, 2003 and 2002 5
Notes to Consolidated Condensed Financial Statements 6
Report of Independent Auditors 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II: OTHER INFORMATION
Item 2. Changes in Securities 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBITS 23
COLONIAL REALTY LIMITED PARTNERSHIP
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
--------------------
(Unaudited)
September 30, December 31,
2003 2002
----------- -----------
ASSETS
Land, buildings, & equipment, net $ 1,885,949 $ 1,947,072
Undeveloped land and construction in progress 116,331 82,520
Cash and equivalents 3,591 6,236
Restricted cash 1,873 1,481
Accounts receivable, net 8,581 10,395
Prepaid expenses 4,188 7,560
Notes receivable 1,789 1,307
Deferred debt and lease costs 24,406 23,157
Investment in partially owned entities 33,842 36,265
Other assets 13,133 13,780
----------- -----------
$ 2,093,683 $ 2,129,773
----------- -----------
LIABILITIES AND PARTNERS' EQUITY
Notes and mortgages payable $ 1,155,475 $ 1,262,193
Accounts payable 16,891 16,749
Accrued interest 15,199 13,974
Accrued expenses 19,872 6,516
Tenant deposits 3,162 3,201
Unearned rent 2,866 7,736
Other liabilities 4,737 4,497
----------- -----------
Total liabilities 1,218,202 1,314,866
----------- -----------
Redeemable units, at redemption value - 10,419,556 and 11,159,027 units
outstanding at September 30, 2003 and December 31, 2002, respectively 375,417 366,156
General partner -
Common equity - 26,115,773 and 22,850,480 units outstanding at
September 30, 2003 and December 31, 2002, respectively 236,537 186,263
Preferred equity ($175,000 liquidation preference) 168,433 168,669
Limited partners' preferred equity ($100,000 liquidation preference) 97,406 97,406
Accumulated other comprehensive income (loss) (2,312) (3,587)
----------- -----------
Total partners' equity 500,064 448,751
----------- -----------
$ 2,093,683 $ 2,129,773
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
COLONIAL REALTY LIMITED PARTNERSHIP
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per unit data)
---------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue:
Minimum rent $ 66,349 $ 63,912 $ 197,083 $ 186,987
Percentage rent 743 589 1,923 1,728
Tenant recoveries 9,587 10,266 30,152 30,499
Other property related revenue 4,547 4,754 16,295 13,513
Other non-property related revenue 1,282 1,600 3,989 5,253
--------- --------- --------- ---------
Total revenue 82,508 81,121 249,442 237,980
--------- --------- --------- ---------
Operating Expenses:
Property operating expenses:
General operating expenses 6,312 5,891 17,995 16,545
Salaries and benefits 3,949 3,818 11,453 11,433
Repairs and maintenance 8,953 8,346 26,038 23,268
Taxes, licenses, and insurance 7,567 6,234 23,393 21,052
General and administrative 4,936 3,405 15,001 11,682
Depreciation 20,480 18,231 60,059 52,880
Amortization 1,958 2,173 5,897 6,272
--------- --------- --------- ---------
Total operating expenses 54,155 48,098 159,836 143,132
--------- --------- --------- ---------
Income from operations 28,353 33,023 89,606 94,848
--------- --------- --------- ---------
Other income (expense):
Interest expense (16,925) (16,820) (50,685) (47,805)
Income from investments 36 585 127 986
Loss on hedging activities (9) (4) (326) (12)
Gains from sales of property 3,917 615 6,272 32,727
Other (505) -- (156) --
--------- --------- --------- ---------
Total other income (expense) (13,486) (15,624) (44,768) (14,104)
--------- --------- --------- ---------
Income from continuing operations 14,867 17,399 44,838 80,744
--------- --------- --------- ---------
Income from discontinued operations 39 514 303 1,809
Gain on disposal of discontinued operations 575 6,069 10,154 6,069
--------- --------- --------- ---------
Income from discontinued operations 614 6,583 10,457 7,878
--------- --------- --------- ---------
Net income 15,481 23,982 55,295 88,622
--------- --------- --------- ---------
Dividends to preferred unitholders (5,942) (6,109) (18,243) (18,329)
Preferred unit issuance costs -- -- (4,451) --
--------- --------- --------- ---------
Net income available to common unitholders $ 9,539 $ 17,873 $ 32,601 $ 70,293
--------- --------- --------- ---------
Net income available to common unitholders
allocated to general partner (95) (179) (326) (703)
--------- --------- --------- ---------
Net income available to common unitholders
allocated to limited partners $ 9,444 $ 17,694 $ 32,275 $ 69,590
--------- --------- --------- ---------
Net income per common unit - Basic:
Income from continuing operations $ 0.25 $ 0.34 $ 0.63 $ 1.89
Income from discontinued operations 0.02 0.20 0.30 0.24
--------- --------- --------- ---------
Net income per common unit - Basic $ 0.26 $ 0.53 $ 0.93 $ 2.13
--------- --------- --------- ---------
Net income per common unit - Diluted:
Income from continuing operations $ 0.24 $ 0.33 $ 0.63 $ 1.87
Income from discontinued operations 0.02 0.20 0.30 0.24
--------- --------- --------- ---------
Net income per common unit - Diluted $ 0.26 $ 0.53 $ 0.93 $ 2.11
--------- --------- --------- ---------
Average units outstanding:
Basic 36,422 33,426 34,998 33,043
Diluted 36,695 33,709 35,220 33,312
STATEMENTS OF COMPREHENSIVE INCOME
--------- --------- --------- ---------
Net income available to common unitholders $ 9,539 $ 17,873 $ 32,601 $ 70,293
Other comprehensive income (loss)
Unrealized income (loss) on cash flow hedging activities 556 (939) 1,274 (1,717)
--------- --------- --------- ---------
Comprehensive income $ 10,095 $ 16,934 $ 33,875 $ 68,576
--------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
COLONIAL REALTY LIMITED PARTNERSHIP
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
-------------------
Nine Months Ended
September 30,
----------------------
2003 2002
---------- ---------
Cash flows from operating activities:
Net income $ 55,295 $ 88,622
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 66,189 60,198
Income from unconsolidated subsidiaries (127) (986)
Gains from sales of property (16,426) (38,796)
Other -- 1,043
Decrease (increase) in:
Restricted cash (392) 720
Accounts receivable 1,814 (358)
Prepaid expenses 3,372 2,203
Other assets (6,911) (8,698)
Increase (decrease) in:
Accounts payable 142 (5,208)
Accrued interest 1,225 1,764
Accrued expenses and other 9,959 7,750
--------- ---------
Net cash provided by operating activities 114,140 108,254
--------- ---------
Cash flows from investing activities:
Acquisition of properties -- (150,808)
Development expenditures (35,516) (39,908)
Tenant improvements (10,931) (17,487)
Capital expenditures (11,672) (10,158)
Proceeds from (issuance of) notes receivable, net (482) 11,113
Proceeds from sales of property, net of selling costs 41,572 113,628
Distributions from unconsolidated subsidiaries 3,108 2,499
Capital contributions to unconsolidated subsidiaries (558) (4,783)
--------- ---------
Net cash used in investing activities (14,479) (95,904)
--------- ---------
Cash flows from financing activities:
Principal reductions of debt (124,624) (71,866)
Proceeds from additional borrowings 186,470 151,285
Net change in revolving credit balances (166,009) (55,773)
Cash contributions from the issuance of preferred units 120,482 --
Redemption of preferred units (125,000) --
Cash contributions 96,021 40,103
Capital distributions (87,499) (83,519)
Other, net (2,147) (885)
--------- ---------
Net cash used in financing activities (102,306) (20,655)
--------- ---------
Decrease in cash and equivalents (2,645) (8,305)
Cash and equivalents, beginning of period 6,236 10,127
--------- ---------
Cash and equivalents, end of period $ 3,591 $ 1,822
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
COLONIAL REALTY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The consolidated financial statements of Colonial Realty Limited
Partnership have been prepared pursuant to the Securities and Exchange
Commission ("SEC") rules and regulations. The following notes, which represent
interim disclosures as required by the SEC, highlight significant changes to the
notes to the December 31, 2002 audited consolidated financial statements of
Colonial Realty Limited Partnership and should be read together with the
financial statements and notes thereto included in the Form 10-K/A filed on
October 10, 2003.
Note 1 -- Organization and Business
Colonial Realty Limited Partnership ("CRLP") is the operating
partnership of Colonial Properties Trust ("the Trust"), an Alabama real estate
investment trust whose shares are traded on the New York Stock Exchange. The
Trust was originally formed as a Maryland real estate investment trust on July
9, 1993 and reorganized as an Alabama real estate investment trust under a new
Alabama REIT statute on August 21, 1995. The Trust is is a fully integrated,
self-administered and self-managed REIT, which means that it is engaged in the
acquisition, development, ownership, management and leasing of commercial real
estate property. The Trust's activities include ownership and operation of a
diversified portfolio of properties located in the Sunbelt region of the United
States, consisting of 40 multifamily apartment communities, 23 office properties
and 45 retail properties, as of September 30, 2003.
Note 2 -- Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include CRLP, Colonial Properties
Services Limited Partnership (in which CRLP holds 99% general and limited
partner interests), and Colonial Properties Services, Inc. ("CPSI"). CPSI is a
taxable REIT subisidiary of the Trust that is not entitled to a dividends paid
deduction and is subject to federal, state and local income taxes. CPSI provides
property development, leasing and management for third-party owned properties
and administrative services to CRLP. CRLP generally reimburses CPSI for payroll
and other costs incurred in providing services to CRLP. All inter-company
transactions are eliminated in the accompanying consolidated financial
statements. Entities in which CRLP owns, directly or indirectly, a fifty percent
or less interest and does not control are reflected in the consolidated
financial statements as investments accounted for under the equity method. Under
this method the investment is carried at cost plus or minus equity in
undistributed earnings or losses since the date of acquisition.
Use of Estimates
The preparation of consolidated condensed financial statements in
conformity with accounting principles generally accepted in the United States
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liablities and disclosure of contingent assets
and liablities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
Unaudited Interim Statements
The consolidated financial statements as of and for the three and nine
months ended September 30, 2003 and 2002 and related footnote disclosures are
unaudited. In the opinion of management, such financial statements reflect all
adjustments necessary for a fair presentation of the results of the interim
periods. All such adjustments are of a normal, recurring nature.
Reclassifications
Certain reclassifications have been made to the previously reported
2002 statements in order to provide comparability with the 2003 statements
reported herein. These reclassifications have no impact on partners' equity or
net income.
Recent Pronouncements of the Financial Accounting Standards Board
("FASB")
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 rescinds SFAS 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Accounting Principles Board Opinion 30, will now be used to classify those
gains and losses. SFAS 64 amended SFAS 4, and is no longer necessary because
SFAS 4 has been rescinded. SFAS 44 and the amended sections of SFAS 13 are not
applicable to CRLP and therefore have no effect on CRLP's financial statements.
SFAS 145 is effective for fiscal years beginning after May 15, 2002 with early
application encouraged. The adoption of SFAS 145 on January 1, 2003 has not had
a material effect on CRLP.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 (FIN
45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34.
FIN 45 clarifies the requirements of SFAS 5, Accounting for Contingencies,
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure provisions of the Interpretation are
effective for financial statements for periods that end after December 15, 2002.
However, the provisions for initial recognition and measurement are effective on
a prospective basis for guarantees that are issued or modified after December
31, 2002, irrespective of a guarantor's year end. See Note 15, Guarantees and
Other Arrangements of CRLP's 2002 Annual Report on Form 10-K/A, for additional
discussion of CRLP's financial guarantees as of December 31, 2002. The initial
adoption of this standard did not have an impact on the financial condition or
results of operations. Management does not believe the provisions of this
standard will have a material impact on future operations of CRLP.
On January 15, 2003, FASB completed its redeliberations of the project
related to the consolidation of variable interest entities which culminated with
the issuance of FASB Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities (VIEs). FIN 46 states that if a business enterprise has a
controlling financial interest in a VIE, the assets, liabilities and results of
the activities of the VIE should be included in the consolidated financial
statements of the business enterprise. This Interpretation explains how to
identify VIEs and how an enterprise assesses its interests in a VIE to decide
whether to consolidate that entity. FIN 46 also requires existing unconsolidated
VIEs to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. VIEs that effectively
disperse risks will not be consolidated unless a single party holds an interest
or combination of interests that effectively recombines risks that were
previously dispersed. This Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to VIEs in which an
enterprise obtains an interest after that date. On October 8, 2003, the FASB
deferred the effective date for pre-existing VIEs to the period ending after
December 15, 2003. As a result, CRLP will adopt FIN 46 for pre-existing
transactions in the fourth quarter of 2003.
CRLP has identified certain relationships that it deems reasonably
possible are VIEs in which it holds a significant variable interest. CRLP deems
that it is reasonably possible that its investments in partially owned entities
are VIEs. CRLP's maximum exposure to loss is limited to the carrying value of
CRLP's investments in those entities, which is $33.8 million as of September 30,
2003. In addition to these VIEs, CRLP considers its relationship with four other
entities to be potential VIEs. These other entities are more fully discussed in
Note 15 of CRLP's 2002 Annual Report on Form 10-K/A and Note 8 herein, and
primarily relate to the commitment to fund development through a mezzanine
financing commitment and other guarantees. The maximum exposure related to these
other entities is limited to the amount of the funding commitment and other
guarantees and is $11.6 million as of September 30, 2003, which results in a
total maximum exposure to CRLP attributable to all potential VIEs in the
aggregate amount of $45.4 million. CRLP is currently evaluating the
consolidation provisions of FIN 46 and does not anticipate consolidation of its
potential VIEs will be required for the agreements entered into prior to
December 31, 2002. For the funding commitment entered into in April 2003, as
discussed in Note 8 herein, CRLP has evaluated the arrangement and has
determined that the relationship is a VIE. However, under the consolidation
provisions of FIN 46, consolidation of the VIE is not required.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150). SFAS 150 establishes how an issuer classifies and measures certain free
standing financial instruments with characteristics of both liabilities and
equity and requires that such instruments be classified as liabilities. SFAS 150
was effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003 for those existing financial instruments subject
to the provisions of SFAS No. 150. CRLP has not entered into any financial
instruments within the scope of SFAS 150 since May 31, 2003. CRLP has evaluated
the impact of this pronouncement on financial instruments in place prior to May
31, 2003 and determined that no reclassification or restatement of current
financial instruments is required.
Note 3 -- Capital Structure
At September 30, 2003, the Trust controlled CRLP as the sole general
partner and as the holder of 71.5% of the common units of CRLP and 63.6% of the
preferred units (the "Series C Preferred Units" and "Series D Preferred Units").
The limited partners of CRLP who hold common units or "redeemable units", are
those persons (including certain officers and directors) who, at the time of the
Initial Public Offering, elected to hold all or a portion of their interest in
the form of units rather than receiving shares of common stock of the Trust, or
individuals from whom CRLP acquired certain properties, who elected to receive
units in exchange for the properties. Redeemable units represent the number of
outstanding limited partnership units as of the date of the applicable balance
sheet, valued at the closing market value of the Trust's common shares. Each
redeemable unit may be redeemed by the holder thereof for either one share of
common stock of the Trust or cash equal to the fair market value thereof at the
time of such redemption, at the option of the Trust. Additionally, in 1999, CRLP
issued $100 million of Series B Cumulative Redeemable Perpetual Preferred Units
("Series B Units") in a private placement, that are exchangeable for Series B
Preferred Shares of the Trust after ten years at the option of the holders of
the Series B Units.
The Board of Trustees of the Trust manages CRLP by directing the
affairs of the Trust. The Trust's interests in CRLP entitle it to share in cash
distributions from, and in the profits and losses of, CRLP in proportion to the
Trust's percentage interest therein and entitle the Trust to vote on all matters
requiring a vote of the limited partners.
Note 4 -- Dispositions
On September 12, 2003, CRLP sold 2100 International Park, a 28,250
square foot office building located in Birmingham, Alabama, within the
International Park office complex. The total sales price was $3.0 million, which
was used to repay a portion of the borrowings under CRLP's unsecured line of
credit. Additionally, CRLP sold certain outparcels of land adjacent to Colonial
University Village in Auburn, Alabama, Colonial Promenade Trussville in
Birmingham, Alabama and Colonial Center Heathrow in Orlando, Florida for total
proceeds of approximately $6.4 million. Of this amount, $5.9 million was used to
repay a portion of the borrowings under the Company's unsecured line of credit
and $0.5 million will be used to support CRLP's future investment activities.
Note 5 -- Net Income Per Unit
The following table sets forth the computation of basic and diluted
earnings per unit:
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(amounts in thousands, except per unit data)
Numerator:
Net income $ 15,481 $ 23,982 $ 55,295 $ 88,622
Less: Preferred distributions (5,942) (6,109) (18,243) (18,329)
Less: Preferred unit issuance costs 0 0 (4,451) 0
------------- ------------- ------------- -------------
Income available to common unitholders $ 9,539 $ 17,873 $ 32,601 $ 70,293
------------- ------------- ------------- -------------
Denominator:
Denominator for basic net income per share -
weighted average units 36,422 33,426 34,998 33,043
Effect of dilutive securities:
Trustee and employee stock options,
treasury method 273 283 222 269
------------- ------------- ------------- -------------
Denominator for diluted net income per share -
adjusted weighted average units 36,695 33,709 35,220 33,312
------------- ------------- ------------- -------------
Basic net income per unit $ 0.26 $ 0.53 $ 0.93 $ 2.13
------------- ------------- ------------- -------------
Diluted net income per unit $ 0.26 $ 0.53 $ 0.93 $ 2.11
------------- ------------- ------------- -------------
Options to purchase 80,000 common shares of the Trust at a weighted
average exercise price of $34.97 per share were outstanding during 2003, but
were not included in the computation of diluted net income per unit because the
options' exercise price was greater than the average market price of the Trust's
common shares and, therefore, the effect would be antidilutive.
Note 6 -- Income (Loss) from Discontinued Operations
During the quarter ended September 30, 2003, CRLP sold one office
property for proceeds of approximately $3.0 million. During the first quarter of
2003, CRLP sold one retail property and one multifamily property for proceeds of
approximately $30.9 million. In accordance with SFAS No. 144 Accounting for the
Impairment on Disposal of Long-Lived Assets, net income and gain (loss) on
disposition of real estate for properties sold, in which CRLP does not maintain
continuing involvement, are reflected in the consolidated statements of income
as "discontinued operations" for all periods presented. Below is a summary of
the operations of the properties sold during 2002 and 2003 that are classified
as discontinued operations:
Three Months Ended Nine Months Ended
(amounts in thousands) September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------------------------- --------------------------
Property revenues:
Base rent $ 77 $ 1,004 $ 838 $ 3,627
Percentage rent - (5) (16) 15
Tenant recoveries (6) 124 55 455
Other property revenue (1) 57 50 167
-------------------------- --------------------------
Total property revenues 70 1,180 927 4,264
Property operating and maintenance expense 21 367 391 1,409
Depreciation 9 283 226 999
Amortization 1 16 7 47
-------------------------- --------------------------
31 666 624 2,455
Income from discontinued operations before net gain
on disposition of discontinued operations 39 514 303 1,809
Net gain on disposition of discontinued operations 575 6,069 10,154 6,069
-------------------------- --------------------------
Income from discontinued operations $ 614 $ 6,583 $ 10,457 $ 7,878
========================== ==========================
Note 7 -- Segment Information
CRLP is organized into, and manages its business based on the
performance of three separate and distinct operating divisions: Multifamily,
Office, and Retail. Each division has a separate management team that is
responsible for acquiring, developing, managing, and leasing properties within
each division. The applicable accounting policies of the segments are the same
as those described in the "Summary of Significant Accounting Policies" in CRLP's
2002 Annual Report. The pro rata portion of the revenues, net operating income
(NOI), and assets of the partially-owned entities and joint ventures that CRLP
has entered into are included in the applicable segment information.
Additionally, the revenues and NOI of properties sold that are classified as
discontinued operations are also included in the applicable segment information.
In reconciling the segment information presented below to total revenues, income
from continuing operations, and total assets, investments in partially-owned
entities and joint ventures are eliminated as equity investments and their
related activity are reflected in the consolidated financial statements as
investments accounted for under the equity method and discontinued operations
are reported separately. Management evaluates the performance of its segments
and allocates resources to them based on divisional NOI. Divisional NOI is
defined as total property revenues, including unconsolidated partnerships and
joint ventures, less total property operating expenses (such items as repairs
and maintenance, payroll, utilities, property taxes, insurance, advertising).
Divisional information and the reconciliation of total divisional revenues to
total revenues, total divisional NOI to income from continuing operations and
minority interest, and total divisional assets to total assets, for the three
and nine months ended September 30, 2003 and 2002, and for the periods ended
September 30, 2003 and December 31, 2002 is presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ---------------------------
(in thousands) 2003 2002 2003 2002
---------------- ---------------- ------------- ------------
Revenues:
Divisional Revenues
Multifamily $ 25,002 $ 24,876 $ 73,996 $ 79,685
Office 22,709 21,563 70,547 53,717
Retail 37,571 37,541 113,857 113,211
---------------- ---------------- ------------- ------------
Total Divisional Revenues: 85,282 83,980 258,400 246,613
Partially-owned subsidiaries (3,946) (3,537) (11,800) (9,707)
Unallocated corporate revenues 1,242 1,858 3,769 5,338
Discontinued operations revenues (70) (1,180) (927) (4,264)
---------------- ---------------- ------------- ------------
Total Consolidated Revenues: $ 82,508 $ 81,121 $ 249,442 $237,980
---------------- ---------------- ------------- ------------
NOI:
Divisional NOI
Multifamily $ 15,328 $ 16,349 $ 45,815 $ 52,287
Office 15,759 15,831 49,793 38,273
Retail 25,680 25,772 78,466 78,249
---------------- ---------------- ------------- ------------
Total Divisional NOI: 56,767 57,952 174,074 168,809
Partially-owned subsidiaries (2,198) (2,141) (6,678) (5,565)
Unallocated corporate revenues 1,242 1,858 3,769 5,338
Discontinued operations NOI (49) (813) (536) (2,855)
General and administrative expenses (4,936) (3,405) (15,001) (11,682)
Depreciation (20,480) (18,231) (60,059) (52,880)
Amortization (1,958) (2,173) (5,897) (6,272)
Other (35) (24) (66) (45)
---------------- ---------------- ------------- ------------
Income from operations 28,353 33,023 89,606 94,848
---------------- ---------------- ------------- ------------
Total other expense (13,486) (15,624) (44,768) (14,104)
---------------- ---------------- ------------- ------------
Income from continuing operations $ 14,867 $ 17,399 $ 44,838 $ 80,744
---------------- ---------------- ------------- ------------
(in thousands) September 30, December 31,
Assets: 2003 2002
---------------- ----------------
Divisional Assets
Multifamily $ 622,423 $ 645,840
Office 589,476 594,795
Retail 894,590 906,555
---------------- ----------------
Total Divisional Assets: 2,106,489 2,147,190
Partially-owned subsidiaries (115,712) (116,375)
Unallocated corporate assets (1) 102,906 98,958
---------------- ----------------
$ 2,093,683 $ 2,129,773
---------------- ----------------
(1) Includes CRLP's investment in partially-owned entities of $33,842 as of
September 30, 2003, and $36,265 as of December 31, 2002.
Note 8 -- Investment in Partially Owned Entities and Other Arrangements
At September 30, 2003, CRLP had investments in nine partially owned
entities. CRLP accounts for these investments in partially owned entities using
the equity method. The following table summarizes the investments in partially
owned entities as of September 30, 2003 and December 31, 2002:
(in thousands)
Percent September 30, December 31,
Owned 2003 2002
---------- ------------------ ---------------
Multifamily:
CMS/Colonial Joint Venture I 15.00% $ 1,964 $ 2,142
CMS/Colonial Joint Venture II 15.00% 724 735
------------------ -------------
2,688 2,877
Office:
600 Building Partnership, Birmingham, AL 33.33% (13) (23)
Retail:
Orlando Fashion Square Joint Venture, Orlando, FL 50.00% 18,251 19,465
Parkway Place Limited Partnership, Huntsville, AL 45.00% 10,498 11,375
Colonial Promenade Madison, Huntsville, AL 25.00% 2,362 2,464
Highway 150, LLC, Birmingham, AL 10.00% 53 85
------------------ -------------
31,164 33,389
Other:
Colonial/Polar-BEK Management Company,
Birmingham, AL 50.00% 18 41
NRH Enterprises, LLC, Birmingham, AL 20.00% (15) 26
E-2 Data Technology, Birmingham, AL 50.00% 0 (45)
------------------ -------------
3 22
-------------------- ---------------
$ 33,842 $ 36,265
==================== ===============
During April 2003, CRLP entered into an agreement with an unrelated
third party in connection with the third party's development of a $19.4 million
multi-family property in Charlotte, North Carolina. CRLP has agreed to loan
approximately $3.3 million, which represents 17.0% of the development costs, to
the third party during the development of the property. Under the agreement, the
balance of the loan matures in April 2005. At September 30, 2003, CRLP has
funded $0.2 million to the unrelated third party. CRLP has a right of first
refusal to purchase the property should the third party elect to sell.
Note 9 -- Financial Instruments: Derivatives and Hedging
CRLP's objective in using derivatives is to add stability to interest
expense and to manage its exposure to interest rate movements or other
identified risks. To accomplish this objective, CRLP primarily uses interest
rate swaps and caps as part of its cash flow hedging strategy. Interest rate
swaps designated as cash flow hedges involve the receipt of variable-rate
amounts in exchange for fixed-rate payments over the life of the agreements
without exchange of the underlying principal amount. During the quarter ended
September 30, 2003, such derivatives were used to hedge the variable cash flows
associated with existing variable-rate debt and existing lines of credit.
CRLP has entered into several different hedging transactions in an
effort to manage its exposure to changes in interest rates. The following table
summarizes the notional values, fair values and other characteristics of CRLP's
derivative financial instruments at September 30, 2003. The notional value at
September 30, 2003 provides an indication of the extent of CRLP's involvement in
these instruments at that time, but does not represent exposure to credit,
interest rate, or market risk.
Fair Value
Interest At September 30, 2003
Product Type Notional Value Rate Maturity (in thousands)
- --------------------------------- ----------------------- ------------- ------------- -----------------------
Interest Rate SWAP, Cash Flow $30.2 - $27.7 million 5.932% 1/01/06 $ (2,553)
Interest Rate SWAP, Cash Flow $50.0 million 2.113% 1/02/04 (140)
Interest Rate CAP, Cash Flow $21.1 million 6.850% 6/29/04 -
Interest Rate CAP, Cash Flow $17.9 million 6.850% 7/06/04 -
Interest Rate CAP, Cash Flow $30.4 million 11.200% 6/30/06 8
Interest Rate CAP, Cash Flow $17.1 million 4.840% 4/1/04 -
Interest Rate CAP, Cash Flow $27.0 million 4.840% 4/1/04 -
Interest Rate CAP, Cash Flow $8.7 million 4.840% 4/1/04 -
CRLP does not use derivatives for trading or speculative purposes.
Further, CRLP has a policy of only entering into contracts with major financial
institutions based upon their credit ratings and other factors. When viewed in
conjunction with the underlying and offsetting exposure that the derivatives are
designed to hedge, CRLP has not sustained a material loss from those instruments
nor does it anticipate any material adverse effect on its net income or
financial position in the future from the use of derivatives.
At September 30, 2003, derivatives with a fair value of $2.7 million
were included in other liabilities. The change in net unrealized gains/losses of
$0.6 million in the quarter ending September 30, 2003 for derivatives designated
as cash flow hedges is a component of partners' equity. Hedge ineffectiveness of
$9,240 on cash flow hedges was recognized in other income (expense) during the
quarter ended September 30, 2003.
Note 10 --Registration Statement
In connection with a review of a Registration Statement filed with the
SEC, the staff of the SEC had commented on certain matters applicable to our
Annual Report on Form 10-K for the year ended December 31, 2002. The comments
included a request for information concerning the allocation of the purchase
price of operating properties to tangible and intangible assets under Statement
of Financial Accounting Standard No. 141, Business Combinations. Management has
responded to the SEC with respect to these comments and CRLP and the Trust made
10-K/A filings on October 10, 2003. CRLP and the Trust expects no further
adjustments to the financial statements will be made. Please refer to CRLP's and
the Trust's 10-K/A filings as of October 10, 2003 for additional information.
Note 11 -- Subsequent Events
Distribution
On October 23, 2003, a cash distribution was declared to partners of
CRLP in the amount of $0.665 per unit, totaling $24.3 million. The distribution
was declared to partners of record as of November 3, 2003, and was paid on
November 10, 2003.
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of
Colonial Properties Trust:
We have reviewed the accompanying consolidated condensed balance sheet
of Colonial Realty Limited Partnership (the "Partnership") as of September 30,
2003, and the related consolidated condensed statements of income for the three
and nine-month periods ended September 30, 2003 and 2002, and the consolidated
condensed statements of cash flows for the nine-month periods ended September
30, 2003 and 2002. These financial statements are the responsibility of the
Partnership's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying consolidated condensed financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2002, and the related consolidated statements of
income, partners' equity, and cash flows for the year then ended (not presented
herein); and in our report dated January 17, 2003, except for Notes 3 and 17, as
to which the date is September 13, 2003, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated condensed balance sheet as of December
31, 2002, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
November 7, 2003
COLONIAL REALTY LIMITED PARTNERSHIP
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following discussion and analysis of the consolidated financial
condition and consolidated results of operations should be read together with
the consolidated financial statements of Colonial Realty Limited Partnership and
notes thereto contained in this Form 10-Q. This report on Form 10-Q contains
certain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our, and our
affiliates, or the industry's actual results, performance, achievements or
transactions to be materially different from any future results, performance,
achievements or transactions expressed or implied by such forward-looking
statements. A number of important factors could cause actual results to differ
materially from those indicated by the forward-looking statements, including,
but not limited to, the risks described in our 2002 Annual Report on Form 10-K/A
filed with the Securities and Exchange Commission on October 10, 2003. Such
factors include, among others, the following:
o National, regional and local economic and business conditions that
will, among other things, affect:
o Demand for multifamily, office and retail properties,
o The ability of the general economy to recover timely from the
current economic downturn,
o Availability and creditworthiness of tenants,
o The level of lease rents, and
o The availability of financing for both tenants and us;
o Adverse changes in the real estate markets, including, among other
things:
o Competition with other companies, and
o Risks of real estate acquisition and development (including
the failure of pending developments to be completed on time
and within budget);
o Actions, strategies and performance of affiliates that we may not
control or companies in which we have made investments;
o Ability to obtain insurance at a reasonable cost;
o Ability of our general partner to maintain its status as a REIT for
federal and state income tax purposes;
o Governmental actions and initiatives; and
o Environmental/safety requirements.
General
As used herein, the terms "CRLP", "we", "us", "our" and "Operating
Partnership" refer to Colonial Realty Limited Partnership, a Delaware limited
partnership, and its subsidiaries and other affiliates, including, Colonial
Properties Services Limited Partnership and Colonial VRS L.L.C. or, as the
context may require, Colonial Realty Limited Partnership only. As used herein,
the term "Company" or "the Trust" includes Colonial Properties Trust, an Alabama
real estate investment trust, and one or more of its subsidiaries and other
affiliates, including CRLP, Colonial Properties Services Limited Partnership and
Colonial Properties Services, Inc. or, as the context may require, Colonial
Properties Trust only.
We are the operating partnership of the Trust, which is a
self-administered equity real estate investment trust (a "REIT") that owns,
develops and operates multifamily, office and retail properties in the Sunbelt
region of the United States. The Trust is a fully-integrated real estate
company, which means that it is engaged in the acquisition, development,
ownership, management and leasing of commercial real estate property. The
Trust's activities include full or partial ownership of a diversified portfolio
of 108 properties as of September 30, 2003, located in Alabama, Florida,
Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Texas, and
Virginia, development of new properties, acquisition of existing properties,
build-to-suit development, and the provision of management, leasing, and
brokerage services for commercial real estate.
As of September 30, 2003, we owned or maintained a partial ownership in
40 multifamily apartment communities containing a total of 14,380 apartment
units (the "multifamily properties"), 23 office properties containing a total of
approximately 5.2 million square feet of office space (the "office properties"),
45 retail properties containing a total of approximately 15.3 million square
feet of retail space (the "retail properties"), and certain parcels of land
adjacent to or near certain of these properties (the "land"). The multifamily
properties, the office properties, the retail properties and the land are
referred to collectively as the "properties". As of September 30, 2003, the
multifamily properties, the office properties, and the retail properties that
had achieved stabilized occupancy were 94%, 91% and 88% leased, respectively.
Critical Accounting Policies and Estimates
Refer to our 2002 Annual Report on Form 10-K/A for a discussion of our
critical accounting policies, which include real estate development, principles
of consolidation, revenue recognition, valuation of receivables, and accounting
policies for derivatives. During the nine months ended September 30, 2003, there
were no material changes to these policies.
In connection with a review of a Registration Statement filed with the
SEC, the staff of the SEC had commented on certain matters applicable to our
Annual Report on Form 10-K for the year ended December 31, 2002. The comments
included a request for information concerning the allocation of the purchase
price of operating properties to tangible and intangible assets under Statement
of Financial Accounting Standard No. 141, Business Combinations. Management has
responded to the SEC with respect to these comments and CRLP and the Trust made
10-K/A filings on October 10, 2003. CRLP and the Trust expects no further
adjustments to the financial statements will be made. Please refer to CRLP's and
the Trust's 10-K/A filings as of October 10, 2003 for additional information.
Results of Operations -- Three Months Ended September, 2003 and 2002
Revenue -- Total revenue from continuing operations increased by $1.4
million, or 1.7%, for the third quarter of 2003 when compared to the third
quarter of 2002. Revenues generated by properties that were acquired, developed,
or re-developed during the first half of 2002 and 2003 increased $2.4 million
during the third quarter of 2003 when compared to the third quarter of 2002.
However, the increase in revenues generated by properties that were acquired,
developed, or re-developed was offset by a decrease in revenues from properties
disposed in which CRLP maintains a continuing interest, of $0.3 million during
the third quarter of 2003 when compared to the third quarter of 2002. The
remaining decrease primarily relates to a decrease of $1.0 million of lease
buyouts within our office division during the third quarter of 2003 as compared
to the third quarter of 2002.
Same-property revenue decreased by $1.0 million, or 1.4%, for the third
quarter of 2003 when compared to the third quarter of 2002. This decrease is
primarily related to a decrease of $1.0 million of lease buyouts that occurred
in our office division in the third quarter of 2003 as compared to the third
quarter of 2002.
Operating Expenses -- Total operating expenses from continuing
operations increased by $6.1 million, or 12.6%, for the third quarter of 2003
when compared to the third quarter of 2002. Operating expenses related to
properties that were acquired, developed, or re-developed during the first half
of 2002 and 2003 increased $1.9 million during the third quarter of 2003 when
compared to the third quarter of 2002. However, the increase in operating
expenses related to properties that were acquired, developed, or re-developed
was offset by a decrease in operating expenses from properties disposed in which
CRLP maintains a continuing interest of $0.2 million during the third quarter of
2003 compared to the third quarter of 2002. The remaining increase is primarily
attributable to an increase of $0.5 million in real estate taxes, $0.4 million
in repairs and maintenance expenses at our existing properties, $1.4 million in
depreciation expense and $1.5 million in general corporate overhead expenses.
Same-property operating expenses (including depreciation and
amortization) increased by $1.8 million, or 4.5%, for the third quarter of 2003
when compared to the third quarter of 2002. The increase is primarily associated
with increases of $0.5 million in real estate taxes, $0.2 million in insurance
expense, $0.4 million in repairs and maintenance expenses, and $1.0 million in
depreciation expense, offset by a decrease of $0.3 million of amortization
expense.
Other Income and Expense -- Interest expense increased by $0.1 million,
or 0.6%, for the third quarter of 2003 when compared to the third quarter of
2002. CRLP has taken advantage of the current low interest rate environment by
replacing a portion of its floating rate debt with long-term unsecured fixed
rate financing, which will allow CRLP to take advantage of future investment
opportunities as the economy begins to recover.
Additionally, gains on sales of property from continuing operations
increased $3.3 million in the third quarter of 2003 when compared to the third
quarter of 2002. In the third quarter of 2003, CRLP sold one office property for
proceeds of approximately $3.0 million, which has been classified as
discontinued operations in accordance with SFAS No. 144. Additionally, we sold
various parcels of undepreciated property with proceeds of approximately $6.4
million which were adjacent to our current operating properties and have been
classifed as continuing operations in accordance with SFAS No. 144. In the third
quarter of 2002, CRLP sold two office assets and one retail assets for proceeds
of approximately $20.4 million. See Liquidity and Capital Resources for further
discussion.
Results of Operations -- Nine Months Ended September 30, 2003 and 2002
Revenue -- Total revenue from continuing operations increased by $11.5
million, or 4.8%, for the nine months ended September 30, 2003 when compared to
the nine months ended September 30, 2002. Revenues generated by properties that
were acquired, developed, or re-developed during the first half of 2002 and 2003
increased $20.3 million during the nine months ended September 30, 2003 when
compared to the nine months ended September 30, 2002. However, the increase in
revenues generated by properties that were acquired, developed, or re-developed
was offset by a decrease in revenues from properties disposed in which CRLP
maintains a continuing interest, of $5.5 million during the nine months ended
September 30, 2003 when compared to the nine months ended September 30, 2002.
The remaining decrease primarily relates to several factors. Our multifamily
properties have experienced increases in move-in concessions, which is a
function of the continued decline in apartment fundamentals over the past year.
We believe the decline is attributable to a declining employment growth and a
robust single family housing market driven by lower interest rates. In addition,
we have experienced decreases in other non-property related revenue which
primarily consist of a $0.2 million decrease in management and development fees,
offset by an increase in other property related revenue as a result of an
increase of $1.3 million in lease buyouts during the nine months ended September
30, 2003.
Same-property revenue decreased by $3.8 million, or 1.8%, for the nine
months ended September 30, 2003 when compared to the nine months ended September
30, 2002. This decrease is primarily related to an increase in move-in
concessions in our multifamily properties during the nine months ended September
30, 2003 as a result of a slowdown in the U.S. economy during the last year, a
decrease in overall physical occupancy percentage within our retail division,
and a decrease of $1.2 million in lease buyouts during the nine months ended
September 30, 2003 compared to the nine months ended September 30, 2002.
Operating Expenses -- Total operating expenses from continuing
operations increased by $16.7 million, or 11.7%, for the nine months ended
September 30, 2003 when compared to the nine months ended September 30, 2002.
Operating expenses related to properties that were acquired, developed, or
re-developed during the first half of 2002 and 2003 increased $11.5 million
during the nine months ended September 30, 2003 when compared to the nine months
ended September 30, 2002. However, the increase in operating expenses related to
properties that were acquired, developed, or re-developed was offset by a
decrease in operating expenses from properties disposed in which CRLP maintains
a continuing interest of $3.1 million during the nine months ended September 30,
2003 compared to the nine months ended September 30, 2002. The remaining
increase is primarily attributable to an increase of $0.6 million in real estate
taxes, $1.3 million in repairs and maintenance expenses, $3.2 million in
depreciation expense at our existing properties and an increase of $3.3 million
in general corporate overhead expenses.
Same-property operating expenses (including depreciation and
amortization) increased by $4.0 million, or 3.4%, for the nine months ended
September 30, 2003 when compared to the nine months ended September 30, 2002.
The increase is primarily associated with increases of $1.4 million in repairs
and maintenance expenses, $0.7 million in real estate taxes, and $2.8 million in
depreciation expense, offset by a decrease of $0.7 million of amortization
expense.
Other Income and Expense -- Interest expense increased by $2.9 million,
or 6.0%, for the nine months ended September 30, 2003 when compared to the nine
months ended September 30, 2002. The increase in interest expense is primarily
attributable to an increase in the percentage of total fixed rate debt to total
debt outstanding at September 30, 2003 as compared to September 30, 2002. At
September 30, 2003, CRLP's fixed rate debt represented 88.1% of the total
outstanding debt as compared to 80.6% at September 30, 2002. CRLP has taken
advantage of the current low interest rate environment by replacing a portion of
its floating rate debt with long-term unsecured fixed rate financing, which will
allow CRLP to take advantage of future investment opportunities as the economy
begins to recover.
Additionally, gains (losses) on sales of property from continuing
operations decreased $26.5 million during the nine months ended September 30,
2003 when compared to the nine months ended September 30, 2002, as a result of
CRLP selling 11 operating properties and certain parcels of land during the nine
months ended September 30, 2002 for proceeds of approximately $118.9 million, as
compared to selling three operating properties and certain parcels of land
during the nine months ended September 30, 2003 for proceeds of approximately
$43.1million. See Liquidity and Capital Resources for further discussion.
Liquidity and Capital Resources
Recent Financing Transactions
On April 4, 2003, CRLP completed a $125.0 million public debt offering
of unsecured senior notes. The notes, which mature in April 2013, bear a coupon
rate of 6.15%, and were priced to yield an effective rate of 6.18% over the ten
year term. We used the net proceeds of the offering to repay a portion of the
outstanding balance on our unsecured line of credit.
On April 30, 2003, the Trust issued $125.0 million or 5,000,000
depositary shares, each representing 1/10 of a share of 8.125% Series D
Cumulative Redeemable Preferred Shares of Beneficial Interest of the Trust. The
depositary shares may be called by the Trust on or after April 30, 2008 and have
a liquidation preference of $25.00 per depositary share. The depositary shares
have no stated maturity, sinking fund or mandatory redemption and are not
convertible into any other securities of the Trust. Pursuant to the partnership
agreement, the Trust contributed the net proceeds of the foregoing transaction
to CRLP in exchange for preferred units of CRLP. The net proceeds of the
offering were approximately $120.7 million and were used to redeem the Trust's
$125.0 million 8.75% Series A Preferred Shares on May 7, 2003. Upon redemption
of the Series A preferred shares, we deducted the original issuance costs of
Series A preferred shares of $4.5 million from net income available to common
unitholders, in accordance with the SEC's clarification of Emerging Issues Task
Force (EITF) Abstracts, Topic No. D-42 "The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock".
On June 2, 2003, the Trust issued $75.2 million or 2,110,000 of its
common shares at $35.65 per share in a public offering, in which Merrill Lynch &
Co. acted as underwriter. The net proceeds from the offering to the Trust, after
deducting offering expenses, were $72.5 million. Pursuant to the partnership
agreement, the Trust contributed the net proceeds of the foregoing transaction
to CRLP in exchange for units of general partnership interest in CRLP. CRLP
intends to use the net proceeds of the offering for general company purposes,
which may include the development, redevelopment and acquisition of properties.
Pending one or more such uses, CRLP used the net proceeds from this offering to
repay a portion of the outstanding balance on its unsecured line of credit.
Short-Term Liquidity Needs
Our short-term liquidity requirements consist primarily of funds
necessary to pay for operating expenses directly associated with our portfolio
of properties (including regular maintenance items), capital expenditures
incurred to lease our space (e.g., tenant improvements and leasing commissions),
interest expense and scheduled principal payments on our outstanding debt, and
quarterly distributions that we pay to our common and preferred unitholders. In
the past, we have primarily satisfied these requirements through cash generated
from operations. We believe that cash generated from operations and borrowings
under our unsecured line of credit will be sufficient to meet our short-term
liquidity requirements; however, factors described below and elsewhere herein
may have a material adverse effect on our cash flow.
The majority of our revenue is derived from tenants under existing
leases our our properties. Therefore, our operating cash flow is dependent upon
the rents that we are able to charge to our tenants, and the ability of these
tenants to make their rental payments. We believe that the diversified nature of
the properties in which we typically invest - multifamily, office and retail
properties - provides a more stable revenue flow in uncertain economic times, in
that our diversified property types generally do not have the same economic
cycles and while one property type may be experiencing difficulty, the other
property types may be maintaining their strength.
The current economic downturn in the United States has negatively
impacted our operations. In particular, the Sunbelt region has experienced a
slowdown in its economy. The industry slowdowns, higher unemployment rates,
reduced demand for apartment homes and declines in household formations
resulting from the economic slowdown, particularly in the Sunbelt region in
which we operate, have adversely impacted our business. Although each of our
three business segments has been adversely impacted by the decline in the
economy, our multifamily properties, which rely heavily on short-term leases,
have been most affected. Any continuation or worsening of current economic
conditions generally and in our principal market areas may continue to have a
negative impact on our results of operations and financial condition.
Our current development pipeline is comprised of two new developments
and three redevelopments, including one mixed-use project and four retail
properties. The aggregate cost of these projects (including costs incurred in
prior years on these projects ) is expected to be approximately $126.4 million.
As of September 30, 2003, we have funded approximately $48.8 million on these
projects and we intend to fund the remaining $77.6 million through draws on our
unsecured line of credit.
We regularly incur significant expenditures in connection with the
re-leasing of our office and retail space, principally in the form of tenant
improvements and leasing commissions. The amounts of these expenditures can vary
significantly, depending on negotiations with tenants and the willingness of
tenants to pay higher base rents over the life of the leases. We also incur
expenditures for certain recurring capital expenses. During the third quarter of
2003, we incurred approximately $2.8 million related to tenant improvements and
leasing commissions, and approximately $4.8 million of recurring capital
expenditures. We expect to pay for future re-leasing and recurring capital
expenditures out of cash from operations.
The current quarterly distribution on our partnership units is $0.665
per unit. We also pay regular quarterly distributions on our preferred units.
The maintenance of these distributions is subject to various factors, including
the discretion of the Trust's Board of Trustees, the Trust's ability to pay
dividends under Alabama law, the availability of cash to make the necessary
dividend payments and the effect of REIT distribution requirements, which
require at least 90% of the Trust's taxable income to be distributed to
shareholders.
Long-Term Liquidity Needs
Our long-term liquidity requirements consist primarily of funds
necessary to pay for the principal amount of our long-term debt as it matures,
significant non-recurring capital expenditures that need to be made periodically
at our properties, development projects that we undertake and costs associated
with acquisitions of properties that we pursue. Historically, we have satisfied
these requirements principally through the most advantageous source of capital
at that time, which has included the incurrence of new debt through borrowings
(through public offerings of unsecured debt and private incurrence of secured
and unsecured debt), sales of common and preferred stock through the Trust, our
general partner, capital raised through the disposition of assets, and joint
venture capital transactions. We believe these sources of capital will continue
to be available in the future to fund our long-term capital needs; however,
factors described below and elsewhere herein may have a material adverse effect
on our access to these capital sources.
Our ability to incur additional debt is dependent upon a number of
factors, including our credit ratings, the value of our unencumbered assets, our
degree of leverage and borrowing restrictions imposed by our current lenders. We
currently have investment grade ratings for prospective unsecured debt offerings
from three major rating agencies - Standard & Poor's (BBB-), Moody's (Baa3) and
Fitch (BBB-). If we experienced a credit downgrade, we may be limited in our
access to capital in the unsecured debt market, which we have historically
utilized to fund investment activities, and the interest rate we are paying
under our existing credit facility would increase.
Our general partner's ability to raise funds through sales of common
stock and preferred stock is dependent on, among other things, general market
conditions for REITs, market perceptions about the Trust and the current trading
price of the Trust's stock. We will continue to analyze which source of capital
is most advantageous to us at any particular point in time, but the equity
markets may not be consistently available on terms that are attractive.
Over the last few years, we have maintained our asset recycling
program, which allows us to maximize our investment returns through the sale of
assets that have reached their maximum investment potential and reinvest the
proceeds into opportunities with more growth potential. During 2002, we sold
eight multifamily properties, two office properties, one retail property and
partial interests in two retail properties and generated proceeds of
approximately $138.6 million. During the first quarter of 2003, we sold one
multifamily property and one retail property and generated proceeds of
approximately $30.9 million. During the second quarter of 2003, we sold certain
outparcels adjacent one of our properties, which generated proceeds of
approximately $2.1 million. During the third quarter of 2003, we sold one office
property and certain outparcels adjacent to our propeties, which generated
proceeds of approximately $9.4 million. Proceeds of $39.8 million from these
sales transactions during 2003 were used to repay a portion of the borrowings
under our unsecured line of credit and the remaining $2.6 million will be used
to support our future investment activities. Our ability to generate cash from
asset sales is limited by market conditions and certain rules applicable to our
general partner. Our ability to sell properties in the future to raise cash will
be limited if market conditions make such sales unattractive.
As of September 30, 2003, we have an unsecured bank line of credit
providing for total borrowings of up to $320 million. This line of credit
agreement bears interest at LIBOR plus a spread calculated from a pricing grid
based our unsecured debt ratings. Based on our current debt ratings, the spread
was 105 basis points. The line of credit is renewable in November 2005, and
provides for a one-year extension. The line of credit agreement includes a
competitive bid feature that will allow us to convert up to $160 million under
the line of credit to a fixed rate, for a fixed term not to exceed 90 days. The
credit facility has an outstanding balance of $42.3 million at September 30,
2003. The floating weighted average interest rate of this short-term borrowing
facility, including the competitive bid balance, was 1.78% at September 30,
2003, which has been swapped to a fixed rate of 2.11% plus the spread..
At September 30, 2003, our total outstanding debt balance was $1.16
billion. The outstanding balance includes fixed-rate debt of $1.02 billion, or
88.1% of the total debt balance, and floating-rate debt of $144.5 million, or
11.9% of the total debt balance. Our total market capitalization as of September
30, 2003 was $2.7 billion and our ratio of debt to market capitalization was
42.1%. We have certain loan agreements of that contain restrictive covenants,
which among other things require maintenance of various financial ratios. At
September 30, 2003, we were in compliance with these covenants.
Financial Instruments: Derivatives and Hedging
Our objective in using derivatives is to add stability to interest
expense and to manage our exposure to interest rate movements or other
identified risks. To accomplish this objective, we primarily use interest rate
swaps and caps as part of our cash flow hedging strategy. Interest rate swaps
designated as cash flow hedges involve the receipt of variable-rate amounts in
exchange for fixed-rate payments over the life of the agreements without
exchange of the underlying principal amount. During the quarter ended September
30, 2003, such derivatives were used to hedge the variable cash flows associated
with existing variable-rate debt and existing lines of credit.
We have entered into several different hedging transactions in an
effort to manage our exposure to changes in interest rates. The following table
summarizes the notional values, fair values and other characteristics of our
derivative financial instruments at September 30, 2003. The notional value at
September 30, 2003 provides an indication of the extent of our involvement in
these instruments at that time, but does not represent exposure to credit,
interest rate, or market risk.
Fair Value
Interest At September 30, 2003
Product Type Notional Value Rate Maturity (in thousands)
- --------------------------------- ----------------------- ------------- ------------- -----------------------
Interest Rate SWAP, Cash Flow $30.2 - $27.7 million 5.932% 1/01/06 $ (2,553)
Interest Rate SWAP, Cash Flow $50.0 million 2.113% 1/02/04 (140)
Interest Rate CAP, Cash Flow $21.1 million 6.850% 6/29/04 -
Interest Rate CAP, Cash Flow $17.9 million 6.850% 7/06/04 -
Interest Rate CAP, Cash Flow $30.4 million 11.200% 6/30/06 8
Interest Rate CAP, Cash Flow $17.1 million 4.840% 4/1/04 -
Interest Rate CAP, Cash Flow $27.0 million 4.840% 4/1/04 -
Interest Rate CAP, Cash Flow $8.7 million 4.840% 4/1/04 -
We do not use derivatives for trading or speculative purposes. Further,
we have a policy of only entering into contracts with major financial
institutions based upon their credit ratings and other factors. When viewed in
conjunction with the underlying and offsetting exposure that the derivatives are
designed to hedge, we have not sustained a material loss from those instruments
nor do we anticipate any material adverse effect on our net income or financial
position in the future from the use of derivatives.
During April 2003, we terminated our $50.0 million reverse interest
rate swap agreement on our medium-term notes and received $2.3 million, which
will be amortized over the remaining life of the original swap agreement.
Additionally, we terminated two of our $50.0 million interest rate swap
agreements, with an interest rate of 1.615% and 1.637%, on our unsecured line of
credit, as a result of the unsecured line of credit being reduced to a level
below the $150.0 million hedged. At September 30, 2003, our outstanding balance
on our unsecured line of credit was $42.3 million.
Other Arrangements
During April 2003, we entered into an agreement with an unrelated third
party in connection with the third party's development of a $19.4 million
multi-family property in Charlotte, North Carolina. We have agreed to loan
approximately $3.3 million, which represents 17.0% of the development costs to
the third party during the development of the property. Under the agreement, the
balance of the loan matures in April 2005. At September 30, 2003, we had funded
approximately $0.2 million to the unrelated third party. We have a right of
first refusal to purchase the property should the third party elect to sell.
Inflation
Leases at our multifamily properties generally provide for an initial
term of nine months to one year and allow for rent adjustments at the time of
renewal. Leases at the office properties typically provide for rent adjustments
and the pass-through of certain operating expenses during the term of the lease.
Leases at the retail properties typically provide for the pass-through to
tenants of certain operating costs, including real estate taxes, common area
maintenance expenses, and insurance. All of these provisions permit us to
increase rental rates or other charges to tenants in response to rising prices
and, therefore, serve to minimize our exposure to the adverse effects of
inflation.
An increase in general price levels may immediately preceed, or
accompany, an increase in interest rates. At September 30, 2003, our exposure to
rising interest rates was mitigated by the existing debt level of 42.1% of our
total market capitalization, the high percentage of fixed rate debt (87.5%), and
the use of interest rate swaps to effectively fix the interest rate on $50.0
million through January 2004, and approximately $30.0 million through January
2006. As it relates to the short-term, increases in interest expense resulting
from increasing inflation is anticipated to be less than future increases in
income before interest.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As of September 30, 2003, we had approximately $144.5 million of
outstanding floating rate mortgages. We also had approximately $42.3 million
outstanding under floating rate credit facilities that has been swapped to a
fixed rate through the use of a hedging agreement. We do not believe that the
interest rate risk represented by our floating rate debt is material as of
September 30, 2003, in relation to our $1.2 billion of outstanding total debt,
our $2.1 billion of total assets and $2.7 billion total market capitalization as
of that date.
If market rates of interest on our variable rate debt increase by 1%,
the increase in annual interest expense on our variable rate debt would decrease
future earnings and cash flows by approximately $1.4 million. If market rates of
interest on our variable rate debt decrease by 1%, the decrease in interest
expense on our variable rate debt would increase future earnings and cash flows
by approximately $1.4 million. This assumes that the amount outstanding under
our variable rate debt remains approximately $144.5 million, the balance as of
September 30, 2003. If market rates of interest increase by 1%, the fair value
of our total outstanding debt would decrease by approximately $59.0 million. If
market rates of interest decreased by 1%, the fair value of our total
outstanding debt would increase by approximately $59.0 million. This assumes our
total outstanding debt remains at $1.2 billion, the balance as of September 30,
2003.
As of September 30, 2003, we had no material exposure to market risk
(including foreign currency exchange risk, commodity price risk or equity price
risk).
Item 4. Controls and Procedures.
As of the end of the period covered by this report, our management,
including the Chief Executive Officer and the Chief Financial Officer of the
Trust, carried out an evaluation of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15 of the rules promulgated under
the Securities and Exchange Act of 1934, as amended. Based on this evaluation,
the Chief Executive Officer and the Chief Financial Officer of the Trust
concluded that the design and operation of these disclosure controls and
procedures are effective. There have been no changes in our internal controls
over financial reporting identified in connection with such evaluation that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
COLONIAL REALTY LIMITED PARTNERSHIP
PART II -- OTHER INFORMATION
Item 2. Changes in Securities.
The Trust from time to time issues common shares of beneficial interest
("Common Shares") pursuant to its Dividend Reinvestment and Share Purchase Plan,
its Non-Employee Trustee Share Option Plan, its Non-Employee Trustee Share Plan,
and its Employee Share Option and Restricted Share Plan, in transactions that
are registered under the Securities Act of 1933, as amended (the "Act").
Pursuant to CRLP's Third Amended and Restated Agreement of Limited Partnership,
each time the Trust issues Common Shares pursuant to the foregoing plans, CRLP
issues to the Trust, its general partner, an equal number of Units for the same
price at which the Common Shares were sold, in transactions that are not
registered under the Act in reliance on Section 4(2) of the Act. During the
quarter ended September 30, 2003, CRLP issued 233,121 Units in such transactions
for an aggregate of approximately $7.2 million.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
12. Ratio of Earnings to Fixed Charges
15. Letter re: Unaudited Interim Financial Information
31.1 CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 CFO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) During the period covered by this report CRLP filed the following
reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COLONIAL REALTY LIMITED PARTNERSHIP,
a Delaware limited partnership
By: Colonial Properties Trust,
its general partner
Date: November 13, 2003 By: /s/ Howard B. Nelson, Jr.
-------------------------
Howard B. Nelson, Jr.
Chief Financial Officer
(Duly Authorized Officer
and Principal Financial Officer)
Date: November 13, 2003 /s/ Kenneth E. Howell
-----------------------
Kenneth E. Howell
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)